California's $321 Billion Budget Approval Hinges on Housing Bill Amid $12 Billion Deficit

California Governor Gavin Newsom has made his approval of the state's proposed $321 billion budget contingent on the passage of key legislation aimed at streamlining housing and infrastructure development. The standoff comes as the state grapples with a projected $12 billion deficit for the upcoming fiscal year, which begins July 1. Lawmakers approved the budget on Friday, June 27, but it includes a provision that renders it inoperative unless the demanded housing bills are also enacted.

The core of the governor's demand centers on reforms to the California Environmental Quality Act (CEQA), specifically through Senate Bill 131 and Assembly Bill 130. These bills seek to grant broad exemptions from environmental reviews for new housing and other construction projects in already developed areas. Newsom's spokesperson, Izzy Gardon, stated that the governor's signature is "contingent on finalizing legislation to cut red tape and unleash housing and infrastructure development across the state — to build more, faster."

This last-minute push has ignited significant resistance, even from within the Democratic supermajority, drawing criticism from labor and environmental groups. Lorena Gonzalez, head of the California Labor Federation, voiced concerns over the proposed legislation's impact on wage standards for construction workers. Democratic State Senator Sasha Renée Pérez called the attempt to force through such significant legislation "incredibly inappropriate and hurtful."

To address the $12 billion shortfall, the budget relies heavily on borrowing, tapping into state reserves, and some scaled-back cuts to programs like Medi-Cal for undocumented immigrants. While less severe than initially proposed, new enrollment for undocumented adults in Medi-Cal will be frozen starting January, and a $30 monthly premium will be introduced for some in July 2027. The budget also includes a $750 million loan for struggling Bay Area transit agencies and an expansion of the state’s film tax credit.

The "poison pill" clause means the entire budget could fail if the housing bills are not passed by the June 30 deadline, a situation not seen since 2009. Governor Newsom expressed optimism that the situation would resolve, calling the proposed housing reforms "extraordinary." However, the ongoing internal party conflict and the looming federal funding uncertainties add complexity to California's fiscal future.