California lawmakers reached a tentative agreement on the state budget Tuesday night, contingent on Gov. Gavin Newsom’s demand that the Legislature pass a housing reform proposal.

The last-minute negotiations over the spending plan, which goes into effect on July 1, highlight the political challenge of overhauling longstanding environmental regulations to speed up housing construction in a Democratic-controlled state.

Despite pressure from the governor and national criticism of a law that reform advocates claim stifles California’s ability to build, the party has been unwilling to do more than tweak the California Environmental Quality Act or approve one-time exemptions.

The proposal is one of several policies that Newsom and Democratic lawmakers are expected to introduce in the coming days as part of the $321.1-billion budget. The agreement reflects the Legislature’s opposition to the governor’s proposed cuts to reduce a $12 billion budget deficit expected in the coming year, citing uncertainty about the scope of the state’s financial issues.

“We appreciate the strong partnership with the legislature in reaching this budget agreement,” said Izzy Gardon, Newsom’s spokesperson. “The governor’s signature is contingent on finalising legislation to cut red tape and unleash housing and infrastructure development across the state — to build more, faster.”

The agreement follows weeks of discussions about how to offset the deficit caused by California’s overspending and begin to address even larger financial problems expected in the future, including potential federal policy changes.

To cover the shortfall, the tentative agreement relies heavily on borrowing money, tapping into state reserves, and shifting funding around. By reducing and delaying many of the governor’s proposed cuts, the budget maintains a practice at the state Capitol of sparing state programmes from immediate pain while avoiding dealing with California’s long-term budget problems.

Assembly Republican Leader James Gallagher (R-Yuba City) said the budget agreement glosses over the state’s financial issues.

“We’re in this situation because of overspending,” Gallagher explained. “We’ve made long-term commitments to programmes that Democrats have championed, and now, just like everybody warned, the money is not there to support them all, and they don’t want to cut back their programme that they helped expand.”

The cuts that lawmakers and the governor ultimately agreed on will limit the expansion of state-sponsored healthcare to undocumented immigrants and reinstate asset limit tests for Medi-Cal enrollees. The final agreement, however, results in less savings for the state than Newsom had proposed.

The plan reinstates cost-of-living adjustments for child-care workers, which the governor had sought to eliminate, and rejects his proposal to limit overtime hours for in-home carers.

Democrats in the Legislature successfully advocated for an additional $500 million in funding for Homeless Housing, Assistance, and Prevention grants. The governor initially opposed giving more money to counties, which he has chastised for failing to demonstrate results for the billions of dollars in state funding they have received to combat homelessness.

Assembly Budget Chair Jesse Gabriel (D-Encino) disputed the claim that the Legislature hasn’t done “real belt-tightening.” Lawmakers are attempting to strike a balance between compassion and fiscal responsibility before making drastic cuts to safety nett programmes that Californians rely on, he said.

“That is the balance that we are trying to strike here with this budget of being responsible, of focusing on the work that we need to do regardless, but also understanding that there is a pretty high delta of uncertainty for a lot of reasons,” Gabriel told the crowd.