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Finance and LAO warn federal policy changes could sharply affect California revenues and services
Summary
Committee heard officials describe potential effects of proposed federal cuts, executive orders and trade policy on Medi‑Cal, infrastructure funding and the state's economy.
Senate Budget Committee members pressed Department of Finance and Legislative Analyst Office officials for an assessment of how potential federal policy changes could affect state revenues and programs.
Chair Wiener listed federal risks — executive orders and memos from the White House, broad proposals to alter Medicaid, changes to federal infrastructure matching, mass deportation risks and tariffs on major trading partners — and asked Finance and LAO for a sense of possible impacts. LAO analyst Gabe Petek and Finance staff said each of those items could have "significant" impacts. Finance staff emphasized California receives over $100 billion in federal funding annually, and that a large share of Medi‑Cal is financed by federal payments (roughly 60% of Medi‑Cal spending is federal funds at times), so reductions in federal Medicaid support could create large budget holes. They warned that cuts would cascade to local jurisdictions and households and could increase inflationary pressure.
Officials described drills and contingency work undertaken after an OMB memo and other federal signals earlier in the month: agencies are assessing where funds are reimbursed versus advanced, identifying programs dependent on federal reimbursements and modeling potential impacts. The administration said some short‑term measures and litigation options may be pursued, and a prior special session was cited as positioning the state to litigate federal overreach. But both Finance and LAO underscored state limits: "There's no way that the state can backfill these lost federal dollars," Finance said.
Committee members probed potential sectoral impacts — Medi‑Cal eligibility changes, workforce impacts from deportations, loss of IIJA/IRA infrastructure funds and tariff effects on construction and the tech sector — and asked what contingency planning is under way. Officials said they are tracking these developments closely, running scenarios that emphasize timing (reimbursed vs. anticipated funds) and noting potential consequences for local governments and service delivery.
The LAO recommended that the Legislature maintain momentum on deficit‑reduction and program review in light of rising downside risks.
What remains unresolved: exact fiscal exposures depend on federal actions and on how quickly funds already obligated can still be disbursed. The administration and LAO are preparing more granular analyses for the committee.
