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Prepared by Precision Advocacy
This week’s update focuses on California’s health, climate, and budget policy landscape, with major federal and state actions carrying direct implications for Orange County programs and residents.
New federal rules governing Medicaid provider taxes and the Department of Health Care Services’ H.R. 1 implementation plan together signal substantial changes to Medi-Cal financing and eligibility that could affect CalOptima Health, county safety-net providers, and hundreds of thousands of local beneficiaries.
At the same time, the Legislative Analyst’s Office has released a series of reviews of the governor’s budget proposals on Proposition 4 climate bond spending, Cap-and-Invest revenues, and natural resources programs, each highlighting fiscal constraints that will shape the availability of state funding for transportation, coastal resilience, wildfire prevention, and environmental projects relied upon by Orange County jurisdictions.
This report summarizes those developments, identifies county-specific impacts, and outlines the engagement needed in the months ahead to protect local investments and services.
CMS Final Rule on Medicaid Provider Taxes
On January 29, the Centers for Medicare & Medicaid Services (CMS) finalized the rule “Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Tax Loophole,” implementing provisions of H.R. 1 that restrict states from using provider taxes to shift Medicaid (Medi-Cal in California) costs to the federal government. The rule prohibits states from imposing higher tax rates on Medi-Cal business than on non-Medi-Cal business and targets structures that have allowed states to draw down additional federal matching funds without contributing a genuine state share. CMS estimates these arrangements currently generate $24 billion annually for states and that closing the loophole will save the federal government more than $78 billion over ten years.
Implications for California’s MCO Tax. California is among the most affected states because its Managed Care Organization (MCO) tax relies on one of the largest Medi-Cal-to-commercial differentials in the country, $274 per member per month for Medi-Cal enrollment versus $1.75 per member per month for commercial enrollment. Federal regulators determined that this design effectively allows the state to tax Medi-Cal plans, reimburse them with federal dollars, and retain surplus funds for unrelated priorities, contrary to the intent of federal law requiring states to finance at least 40% of Medicaid costs. The final rule requires California to either redesign the tax to meet federal uniformity standards or identify alternative state funding.
Transition Timelines. CMS established phased compliance dates based on prior waiver approvals:
- California and other states with recent MCO approvals (within two years of April 3, 2026) must comply by December 31, 2026.
- States with older MCO approvals have until the end of fiscal year 2027.
- Hospital and nursing-facility taxes have until the end of fiscal year 2028.
CMS confirmed that California’s current MCO tax may remain in place through the end of 2026, consistent with the governor’s budget assumptions, but no federal match will be available for non-compliant structures after that date.
Impact on CalOptima and Counties. For CalOptima Health and other County Organized Health Systems (COHS), the rule creates substantial budget exposure. MCO-tax revenue underpins California’s Medi-Cal provider rate increases, behavioral health continuum expansion, CalAIM Enhanced Care Management and Community Supports, and directed payments to public hospitals and clinics. If the tax cannot be restructured, the state will need to replace billions in annual revenue with General Fund dollars or reduce Medi-Cal payments. Any reduction in MCO-tax-supported funding would directly affect network stability and services for seniors, people with disabilities, and individuals experiencing homelessness.
What Comes Next. Over the next year California must pursue one of two paths - develop a federally compliant, broadly redistributive tax that treats Medi-Cal and non-Medi-Cal business comparably, or create an alternative financing strategy to replace lost federal matching funds.
Active engagement by Orange County and CalOptima will be critical to ensure the state response preserves local Medi-Cal investments and avoids shifting new liabilities to counties.
DHCS H.R. 1 Implementation Plan
The Department of Health Care Services (DHCS) released its H.R. 1 Implementation Plan in late January in response to sweeping federal Medicaid changes that significantly alter both who qualifies for Medi-Cal and how often eligibility must be proven. DHCS makes clear at the outset that these changes are not discretionary for the state and that, even with careful implementation, California should expect substantial coverage loss driven primarily by new administrative requirements rather than changes in underlying eligibility.
DHCS estimates that as many as 1.8 to 2 million Medi-Cal members could lose coverage over the multi-year implementation period, with the most disruptive provisions taking effect beginning in January 2027. The department anticipates that coverage losses will not occur all at once but will build as work requirements, six-month renewals, and immigration-related eligibility changes phase in. A central theme of DHCS’ plan is that the state’s primary leverage lies in how these requirements are implemented, particularly the degree to which automation, data sharing, and proactive outreach can prevent eligible individuals from falling off coverage due to paperwork or missed deadlines.
The plan is organized around a set of guiding principles that reflect lessons learned during the unwinding of pandemic-era continuous coverage. DHCS emphasizes automation as the most effective protection against unnecessary disenrollment, committing to maximize ex parte renewals and data matching before requesting information from beneficiaries. The department also underscores the importance of clear, multilingual communication, simplified renewal processes, extensive training for county eligibility workers, and phased implementation that aligns outreach with statutory effective dates.
A major focus of the plan is the introduction of work and community engagement requirements for Medi-Cal expansion adults beginning January 1, 2027. For the first time, most able-bodied adults ages 19 to 64 enrolled through the Affordable Care Act (ACA) expansion will be required to document at least 80 hours per month of work, education, job training, or community service, unless they qualify for an exemption. DHCS acknowledges that a large share of this population is already working or otherwise exempt but cautions that verifying compliance at scale presents a significant operational challenge. The department plans to rely heavily on wage data, participation in other safety-net programs, education records, and other data sources to automatically verify compliance or exemptions. Manual verification is intended to be a last resort. Even so, DHCS projects that roughly 60% of the expansion population may still be asked to respond to verification requests at some point, and that approximately 1.4 million people could ultimately lose coverage due to non-response or inability to navigate the new requirements.
Compounding these risks, H.R. 1 also requires six-month eligibility renewals for the same expansion population starting in 2027, replacing the current annual renewal cycle. DHCS expects this change to significantly increase churn, as more frequent renewals raise the likelihood of missed notices or incomplete paperwork. While the department intends to apply existing ex parte processes to six-month renewals and introduce a streamlined renewal form, it nevertheless anticipates additional coverage losses over time, particularly among individuals with unstable housing, fluctuating income, or limited access to technology.
The plan also addresses changes to federally funded eligibility for certain immigrant populations, which take effect in October 2026. Under H.R. 1, many lawfully present immigrants who have historically qualified for full-scope Medi-Cal with federal matching funds, such as refugees and asylees, will no longer be eligible for that funding. DHCS proposes transitioning these individuals to restricted-scope Medi-Cal, covering only emergency and pregnancy-related services, unless the state elects to fully backfill the cost. DHCS frames this as one of the most difficult policy consequences of H.R. 1, noting the long-standing nature of coverage for these populations and the significant General Fund costs that would be required to maintain full-scope benefits.
Additional changes addressed in the plan include shorter retroactive coverage periods beginning in 2027 and the eventual imposition of cost sharing for certain expansion adults starting in 2028. While DHCS does not expect retroactive coverage limits to drive disenrollment, it warns that individuals may face greater medical debt exposure. For cost sharing, DHCS signals its intent to keep copayments nominal, prohibit denial of services for inability to pay, and protect access to essential services.
Throughout the document, DHCS repeatedly underscores the central role of counties as the front-line implementers of Medi-Cal eligibility. The department acknowledges that counties will experience substantial increases in workload, call volume, and case complexity, and that successful implementation will depend on sustained training, clear guidance, system improvements, and adequate resources. DHCS commits to ongoing coordination with counties, managed care plans, providers, and community partners, as well as a broad communications strategy using Coverage Ambassadors, community-based organizations, ethnic media, and direct member outreach.
In sum, the DHCS Implementation Plan frames H.R. 1 as a structural shift that introduces significant instability into Medi-Cal eligibility and enrollment. While the department outlines an aggressive strategy to minimize harm through automation, outreach, and phased implementation, it is explicit that substantial coverage losses are unavoidable under the new federal framework. The plan positions DHCS, counties, and stakeholders in a defensive posture, focused on preserving coverage where possible and preventing eligible Californians from losing access to care solely because of administrative barriers.
Legislative Analyst’s Office (LAO) Comments on the Governor’s Prop 4 Budget Proposal
Proposition 4 Spending Plan. The LAO’s review of the governor’s Proposition 4 proposal focuses on the second year of implementation for the $10 billion climate resilience bond approved by voters in 2024. For 2026-27, the governor proposes appropriating $2.1 billion, about one-fifth of total bond authority, across water, wildfire, biodiversity, clean energy, parks, extreme heat, and climate-smart agriculture. Unlike the prior year, the administration abandons a multiyear allocation schedule in favor of year-by-year appropriations, responding to legislative concerns about oversight and departmental capacity.
Overall, the LAO finds the proposed spending plan reasonable and consistent with bond requirements. The timing of allocations generally reflects realistic expectations about state and local capacity to deliver projects, and the administration’s proposed budget control section could reduce administrative friction by allowing departments to pool bond funds for large, multi-agency or landscape-scale projects. However, the LAO notes that the control section lacks formal legislative reporting, limiting transparency into how often and how extensively these flexibilities are used.
A central theme of the LAO’s analysis is legislative discretion. While most Proposition 4 funds flow through existing programs, the governor proposes significant funding for new or loosely defined activities, such as transmission financing, fire training facilities, defensible space assistance, and climate education facilities, where bond language leaves room for interpretation. The LAO does not identify specific legal or policy violations but emphasizes that approving these allocations without further statutory direction effectively delegates major policy decisions to the administration. As a result, the LAO encourages the Legislature to use budget hearings and trailer bill language to clarify priorities, narrow eligible uses, or set expectations—particularly given that previously authorized Proposition 4 funds remain largely unspent as agencies work through emergency rulemaking and program startup.
Orange County Potential Impacts. Proposition 4 remains one of the most tangible near-term funding sources for Orange County projects related to water resilience, wildfire mitigation, coastal protection, extreme heat, and parks. However, the governor’s shift to one-year appropriations and the LAO’s observation that much previously appropriated funding remains unspent suggest slower rollout and tighter oversight. For Orange County agencies, this means longer timelines between project concept and funding award, and a greater premium on shovel-ready proposals.
The LAO notes that coastal resilience has one of the lowest proposed allocation rates in the early years of Proposition 4, largely due to administrative and rulemaking delays at the State Coastal Conservancy. For Orange County coastal cities and flood control agencies, this implies that large-scale shoreline protection, living shoreline, or erosion projects may not see meaningful bond funding until later budget years.
Proposition 4 includes funding for defensible space, fuel reduction, and wildfire risk mitigation - areas where counties play a key implementation and coordination role. The LAO highlights that some of these programs overlap with General Fund proposals (such as CalFire inspection staffing), meaning Orange County could face a patchwork of state-led and bond-funded initiatives. Coordination with CalFire and regional conservancies will be critical to avoid duplication and ensure county priorities are reflected.
The LAO emphasizes that several Proposition 4 allocations fund new or loosely defined activities. Absent legislative guidance, the administration will shape program design. For Orange County, this raises uncertainty about eligibility criteria, matching requirements, and geographic targeting, particularly for multi-benefit climate and infrastructure projects.
LAO Comments on the Governor’s Cap-and-Invest Budget Proposal
Cap-and-Invest Expenditure Plan. The governor’s 2026-27 Cap-and-Invest Expenditure Plan is the first to implement the new statutory framework adopted in 2025 that extended the program through 2045 and restructured how Greenhouse Gas Reduction Fund (GGRF) revenues are allocated. Under this new structure, auction revenues flow through a tiered allocation system that prioritizes fixed statutory commitments, such as the manufacturing sales tax exemption, high-speed rail, and core state operations, before funding discretionary climate and transportation programs.
Within this framework, the administration proposes allocating roughly $1.6 billion in discretionary GGRF funds in 2026-27. The dominant feature of the plan is the use of GGRF to backfill General Fund costs for CalFire ($1.25 billion total), reflecting the state’s broader effort to manage ongoing structural deficits by shifting costs off the General Fund. The plan also sets aside $250 million for activities identified in SB 840 intent language, but notably deprioritizes or eliminates funding that had been assumed for transit and other climate programs in prior multiyear agreements. Instead, the governor proposes using $115 million in GGRF (plus additional special funds) to create a new light-duty zero-emission vehicle (ZEV) incentive program.
The LAO finds that while much of the proposal aligns with recent legislative direction, particularly the CalFire backfill, it raises concerns about abandoning previously planned transit investments and introducing a new ZEV program during a period of fiscal stress. Given projected multiyear deficits and revenue volatility, the LAO recommends the legislature treat GGRF as a flexible budget tool and direct it toward the state’s highest overall priorities, not just climate programs. Consistent with this approach, the LAO urges rejecting the proposed ZEV incentive program and reconsidering whether some transit commitments should be partially restored to avoid disruptions to local and regional capital projects.
Orange County Potential Impacts. The governor’s proposal to deprioritize previously assumed GGRF funding for transit and instead redirect discretionary funds to CalFire backfill and a new ZEV incentive program would create risk for local and regional transportation projects. Local agencies statewide may have already programmed anticipated GGRF dollars into capital plans or used them to leverage federal funds. For Orange County Transportation Authority and local transit operators, this raises the possibility of project delays, re-scoping, or the loss of matching funds if expected state support does not materialize.
The LAO recommends that GGRF be viewed as a flexible tool to support core state priorities, rather than a dedicated climate investment stream. If the legislature adopts this policy, it could pose a significant long-term risk to the County. Orange County jurisdictions pursuing cap-and-invest funding for projects in housing, mobility, or air quality would face increased competition as climate dollars are diverted to cover state operational expenses. Consequently, the predictability and security of future discretionary allocations to counties will decrease, making these funds more susceptible to cuts during budget deficit years.
The governor’s proposed new light-duty ZEV incentive program would not directly flow through counties and is unlikely to generate a meaningful fiscal or programmatic benefit for Orange County governments. The LAO’s recommendation to reject this program further suggests that counties should not assume new GGRF-funded local grant opportunities will emerge in the near term.
LAO Comments on the Governor’s Natural Resources Budget Proposals
Natural Resources, Environmental Protection, and Agriculture Budget Framework. This LAO report provides a cross-cutting framework rather than a program-by-program critique, situating the governor’s natural resources and environmental budget within what the office characterizes as a precarious fiscal environment. Although the January budget proposal is nominally balanced, the LAO warns that it assumes continued strong revenues despite elevated stock-market risk and acknowledges projected multiyear structural deficits in the range of $20 billion to $35 billion annually. Against this backdrop, even relatively modest new spending decisions carry significant trade-offs.
The LAO credits the administration with adopting a restrained approach for 2026-27, with limited new spending and an emphasis on near-term health and safety risks. Proposed funding levels for natural resources, environmental protection, and agriculture decline sharply from prior years as one-time General Fund surpluses and bond funding taper off. At the same time, the LAO flags unresolved issues such as unapproved vacant position eliminations and steep reductions in federal funding that affect departmental capacity.
To guide legislative decision-making, the LAO offers a framework for evaluating new proposals. It urges prioritizing activities that address immediate public health and safety risks or prevent irreversible harm, such as dam safety, wildfire response capacity, flood protection, and invasive species control, while rejecting or deferring initiatives that advance longer-term policy goals but are not time sensitive. Even for proposals funded by special funds or bonds, the LAO stresses that opportunity costs remain real, particularly because some special funds could otherwise be used to mitigate the General Fund deficit.
The report ultimately encourages the legislature to begin confronting structural budget imbalances now rather than deferring difficult choices. For environment-related programs, this means reassessing the mix of ongoing commitments, scrutinizing new initiatives regardless of fund source, and ensuring remaining resources are tightly focused on the state’s most critical priorities, especially as climate-driven risks continue to intensify while fiscal capacity contracts.
Orange County Potential Impacts. The LAO documents steep year-over-year declines in proposed funding for natural resources departments, driven by the exhaustion of one-time funds and reduced federal support. For Orange County, this could have downstream effects - slower permitting timelines, fewer technical assistance resources, and reduced state participation in collaborative projects involving flood control, habitat restoration, and coastal management.
Should the legislature adopt the LAO’s recommendation that it approve only proposals addressing immediate health and safety risks, discretionary state support for longer-term goals, such as park expansion, climate adaptation planning, or non-emergency habitat projects, will be harder to secure unless framed around near-term risk reduction (flooding, wildfire, dam safety, or public health).
The administration’s proposed increased reliance on special funds, fees, and bonds rather than the General Fund, means that counties may be expected to shoulder greater upfront planning costs or provide stronger matching funds to remain competitive for state dollars. For Orange County agencies, this elevates the importance of aligning capital planning with state bond and special fund eligibility rather than assuming ongoing General Fund partnership.
Upcoming Hearings
Agendas are typically posted on the committee websites in the Assembly and Senate a few days prior to the hearings. To view hearings after they take place, you may access them in the Assembly or Senate media archives where they are generally available within a few hours of committee adjournment.
Wednesday, February 18, 2026, 9:00 a.m.
Assembly Budget Subcommittee No. 7 on Accountability and Oversight
State Capitol, Room 126
Homeless Housing and Prevention Program
Funding Accountability
Wednesday, February 18, 2026, 10:00 a.m.
Assembly Insurance
State Capitol, Room 437 Oversight Hearing: Department of Insurance: Sustainable Insurance Strategy: Present and Future
Wednesday, February 18, 2026, 1:30 p.m.
Assembly Utilities and Energy
State Capitol, Room 437
Oversight Hearing: Assessing Progress in Developing Clean Energy
Wednesday, February 18, 2026, 1:30 p.m.
Senate Health
1021 O Street, Room 1200 Informational Hearing: Kratom and 7-Hydroxymitragynine: Public Health Concerns and Regulatory Challenges
Grant Opportunities
Below is a list of the latest grant opportunities released by the state. All opportunities for local jurisdictions may be found here.
Application deadline: 3/6/26 17:00
Title: Ocean Acidification, Hypoxia, and Harmful Algal Bloom Solicitation
State Agency / Department: Ocean Protection Council
Match Funding? No
Estimated Total Funding: $6,000,000
Funding Method: Reimbursement
Governor’s Press Releases
Below is a list of the governor’s press releases beginning February 5.
February 9: Governor Newsom statement on court win to identify federal agents
February 9: What they’re saying: strong support for Governor Newsom’s $200M ZEV program
February 6: Governor Newsom proclaims Ronald Reagan Day
February 6: California celebrates 129 new CHP officers ready to protect and serve the Golden State
February 6: Governor’s Office demands Kristi Noem learn to Google before sending stupid letters: California works with ICE to deport criminals
February 6: Governor Newsom announces funding for LA fire survivors to access pre-built housing to further speed recovery and maintain neighborhood character
February 5: Governor Newsom welcomes the world to Super Bowl LX
February 5: Governor Newsom proclaims Black History Month
February 5: Governor Newsom announces the commitment of over 160 lenders to extend mortgage relief for LA fire survivors
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