$321.1B California budget deal reached—Of course it comes with a catch

Sacramento, California – California lawmakers reached a tentative agreement on a $321.1 billion state budget late Tuesday, narrowly avoiding a July 1 deadline—but only by tying the deal to one of Gov. Gavin Newsom’s most controversial priorities: a housing reform bill that would cut through long-standing environmental regulations.

At the center of the agreement is Newsom’s insistence on overhauling the California Environmental Quality Act (CEQA), a decades-old law often blamed for slowing down desperately needed housing construction across the state. The governor has said he won’t sign the budget unless lawmakers send him a CEQA reform bill, effectively making housing policy a prerequisite for resolving the state’s $12 billion budget shortfall.

The CEQA reform—expected to emerge from legislation authored by Sen. Scott Wiener (D-San Francisco)—would reduce the number of building projects requiring full environmental review and streamline the process for preparing environmental impact reports. The measure is still being drafted and must be passed by Monday to ensure the budget goes into effect.

This maneuver reflects a high-stakes calculation: that the urgency of the housing crisis justifies rewriting environmental law. Newsom, who campaigned in 2018 on ambitious housing goals, has struggled to deliver results. Pressure has mounted—not just from within California, but from national figures like columnist Ezra Klein, who has criticized the state’s regulatory paralysis in his book Abundance.

The broader budget deal attempts to close the deficit without inflicting immediate pain on social programs. Lawmakers avoided some of the deeper cuts proposed by Newsom in May, instead relying on reserves, borrowing, and funding shifts. For example, the budget maintains cost-of-living increases for child-care workers and restores cuts to in-home caregiver hours, while also boosting homelessness grants by $500 million.

But not all safety-net programs were spared. Medi-Cal, the state’s health insurance program for low-income residents, will see new limits. Undocumented adults will have to begin paying modest premiums starting in 2027, and full dental coverage for that population will be eliminated—though not until mid-2026. The state will also withdraw coverage for costly specialty drugs like those used for weight loss.

Republicans slammed the plan as a shell game. The budget also preserves a $750 million expansion of the California Film and Television Tax Credit—a priority for the powerful Hollywood industry—as well as a delayed $3.4 billion Medi-Cal loan repayment.

Though the budget temporarily averts deeper financial pain, both lawmakers and analysts acknowledge it’s a stopgap. UCLA forecasts predict slower economic growth fueled by the so-called “Trump effect,” with tariffs and immigration enforcement chilling key sectors. California may face deficits of up to $24 billion annually starting next year, prompting expectations of a special session this fall.

The CEQA reforms—yet to be finalized—remain a political gamble. If passed, they could signal a seismic shift in how California approaches housing, balancing environmental stewardship with the urgent need for homes. If they fail, the budget itself could be thrown into uncertainty just days before it’s due to take effect.