SACRAMENTO, CA – Facing a $14 billion budget gap, California risks plunging its mental health system back into fiscal uncertainty, a new Steinberg Institute report warns, citing decades of unstable funding and missed commitments.
The report traces how the origins of California’s behavioral health system—built on uneven political support and volatile revenue streams—have repeatedly expanded during times of investment, only to be weakened during financial downturns.
Much of today’s system depends on the Behavioral Health Services Act, which is funded by a special tax on residents earning more than $1 million annually.
While the act has helped fund critical programs—from mobile crisis teams to mental health clinics and housing support—it relies heavily on stock market performance.
When the economy dips, so do revenues, leaving counties with fewer resources to provide essential care.
This warning comes as lawmakers in Sacramento hash out a plan to close the state’s multibillion-dollar budget gap.
So far, Gov. Gavin Newsom and legislative leaders have proposed cuts to infrastructure and workforce development programs while sparing behavioral health funding from the chopping block.
But the Steinberg Institute cautions that deeper cuts could still be on the table—especially if high-income tax revenues fall or if political priorities shift after Newsom leaves office in 2027.
The act, according to the report, does more than just provide a financial lifeline for local services.
It plays a key role in helping counties draw down federal Medicaid matching funds—dollars that significantly expand their ability to provide behavioral health care.
A drop in funding could make it harder to qualify for these federal matches, triggering a domino effect that jeopardizes crisis services, outpatient treatment and programs for people experiencing homelessness.
To stabilize the system, the state has launched Vision 2030, a long-term initiative to reduce incarceration, hospitalization and homelessness among people with behavioral health conditions.
Lawmakers have also convened a workgroup to explore how to manage the ups and downs of revenue from the act.
But the Steinberg Institute says these efforts, while important, may not be enough to shield the system from economic shocks.
Adding to the uncertainty are looming threats at the federal level.
Proposed cuts to Medicaid could total $800 billion, according to the Congressional Budget Office—potentially stripping health coverage from up to 16 million Americans.
Since Medi-Cal, California’s version of Medicaid, is the state’s largest funder of mental health and substance use services, any reduction in federal support would hit local programs hard.
This sense of fragility isn’t new, according to the report.
In the 1960s, the federal government pledged to move the country away from large mental institutions and toward community-based clinics with the Community Mental Health Act.
But only half of the promised clinics were built, and the program never received long-term funding.
In California, plans to reinvest savings from closing state hospitals were sharply scaled back when then-Gov. Ronald Reagan vetoed key funding.
Just a decade later, the 1978 passage of Proposition 13—a sweeping property tax cut—slashed local revenues.
The state temporarily adjusted its funding formulas to assist counties, but long-term instability remained.
In the early 1990s, lawmakers implemented the 1991 Realignment, redirecting sales tax and vehicle license fees to counties for mental health services.
While the policy created a dedicated revenue stream, it wasn’t linked to rising demand.
In 1995, counties took on responsibility for Medi-Cal’s specialty mental health care services.
But the money allocated by the state didn’t keep pace with the growing need.
Additional legislation requiring private insurers to cover mental health care helped ease the strain, but enforcement was inconsistent, and many individuals still turned to public programs that were already underfunded.
Today’s mental health safety net, according to the Steinberg Institute, is supported by a fragile patchwork of responsibilities and funding streams.
Without steady and committed support, the state’s progress in mental health—particularly in diverting people from jails and emergency rooms—is at risk of unraveling, it argues.
“Every time our focus fades, services shrink, and our most vulnerable Californians pay the price,” said Karen Larsen, CEO of the Steinberg Institute.
“We are now at another inflection point.”
With budget decisions looming and federal policy in flux, the coming months may determine whether California strengthens its behavioral health safety net—or repeats a history of retreat in times of crisis.
