The 2025-26 Budget

Business, Consumer Services and
Housing Agency Reorganization

Summary

In this post, we provide background on state agencies in California government in general; the Business, Consumer Services and Housing (BCSH) Agency in particular; and the process for reorganizing state government. Next, we describe our understanding, based on discussions with the administration and available information at this time, of the Governor’s intent to reorganize BCSH. We conclude by providing key considerations for the Legislature when evaluating the Governor’s proposal when it is received in the Spring.

Background

State Agencies

California’s Agencies Perform a Number of Functions. The primary purpose of a state agency is to provide policy leadership and direction to the departments and other entities (such as boards and offices) under its purview. Agencies seek to improve coordination among departments on common programs or in common policy areas and oversee joint planning and departments’ budget development. Each agency is led by a cabinet-level Secretary, who serves as a direct advisor to the Governor.

Agencies Vary in Size and Number of Departments They Oversee. California has seven agencies, which collectively oversee more than 100 departments, boards, commissions, and other entities. Figure 1 shows that these seven agencies and the entities under their supervision vary significantly by budget and staffing size. The Health and Human Services Agency is the largest state agency in terms of state funding (about $115 billion in the current-year enacted budget), whereas the Transportation Agency has the most positions (about 43,000). Conversely, the Labor and Workforce Development Agency has the smallest state budget (about $2.1 billion in 2024-25), while the Environmental Protection Agency and BCSH have the smallest number of authorized positions (about 8,100 positions at each).

BCSH Agency

BCSH Oversees Various Entities. BCSH is comprised of dozens of departments, boards, panels, commissions, and offices. These entities encompass a wide array of program and subject areas, from housing to horse racing to hair care. However, most perform a similar function: the licensing and regulation of various occupations and businesses, as well as the provision of services to consumers (such as consumer education and complaint response). Other BCSH entities and programs perform other functions, such as administering housing-related federal disaster relief funds, providing financing for affordable housing projects, and conducting research and providing statewide guidance on homelessness in the state.

Some BCSH Entities Have Different Functions but Focus on a Common Policy Objective. Some BCSH entities share a common, overarching policy objective—such as housing or consumer services—but they have different functions or use different policy tools to achieve those objectives. For example, the Department of Real Estate (DRE) provides occupational licensing of real estate agents and mortgage brokers, the California Housing Finance Agency administers financing programs for qualified first-time home buyers, and the Civil Rights Department enforces state anti-discrimination laws in housing and related services. Although each serve different primary purposes, together, these entities seek to facilitate a functioning state housing market that serves all Californians.

BCSH’s Budget. Figure 2 shows that the Governor’s 2025-26 proposed budget would provide $3 billion (all funds) for BCSH, of which $531 million is General Fund. Special funds provide a significant share of funding for BCSH’s business- and consumer services-related functions. These funds typically receive revenue through the licensing and regulatory processes. In recent years, the Legislature has provided significant General Fund support to BCSH (particularly the Department of Housing and Community Development [HCD]) for housing and homelessness programs, but these funds largely have been temporary and one time in nature.

Current Agency Structure Largely the Result of an Earlier Reorganization. BCSH was established in (more or less) its current form as a result of a state government reorganization in 2013. At that time, the administration’s stated goal was to improve coordination and efficiency—and reduce perceived duplication—among departments and programs that it described as “scattered” across state government. This goal was achieved by grouping government entities with similar missions and functions together. Specifically, to create BCSH, state policy makers merged parts of two now-defunct agencies—Business, Transportation, and Housing (BTH) and State and Consumer Services—and moved several independent boards and commissions (primarily those with licensing and regulatory functions) under the BCSH agency “umbrella.” (Transportation and State Services went elsewhere.)

State’s Reorganization Process

Government reorganizations can be implemented in a few different ways. The Legislature can make minor or major changes in the structure and organization of state entities through the legislative process. Alternately, the Governor may propose changes through the budget process. Historically, though, most major state reorganizations have gone through a formal executive reorganization process, as described below.

Executive Branch Reorganization Process. Through Article V, Section 6 of the California Constitution, the Legislature authorizes the Governor to reorganize the functions of state agencies through the executive branch reorganization process. In establishing this process, the Legislature stated that the Governor should determine if such changes are necessary to accomplish one or more broad purposes, such as to reduce expenditures, increase efficiency, or eliminate duplications of effort. Between 1968 and 2020, Governors submitted 37 reorganization plans through this process. The executive reorganization process can be used to transfer, consolidate, or eliminate agencies and programs. The process can also be used to establish new agencies to perform the functions of existing entities.

The major statutory steps required in the executive branch reorganization process include:

• Submission of Plan for Statutory Drafting. Before initiating the reorganization process, the Governor must provide a copy of the reorganization plan to Legislative Counsel for statutory drafting. The statutory drafting is undertaken to reflect the form and language suitable for enactment in statute and to ensure that the plan clearly and specifically expresses its nature and purpose.

• Submission of Plan for Independent Review. At least 30 days before submitting a reorganization plan to the Legislature, the Governor must submit the plan to the Little Hoover Commission—an independent state oversight agency tasked with reviewing and making recommendations to the Governor and Legislature on state operations and any proposed government reorganization plan. As a public body, the work of the commission is subject to the Bagley-Keene Open Meeting Act and the plan becomes public record.

• Review by Legislative Committees. Once the Governor submits the plan to the Legislature, (1) the Little Hoover Commission has 30 days to issue a report reviewing the plan and (2) the Legislature has 60 days to consider the proposal. Upon receipt, the plan is referred to policy committees of each house of the Legislature. The committees study and report on the plan no later than ten days prior to the end of the 60-day period.

• Legislative Action on Plan. Either house can reject the proposal by majority vote—but not until its policy committee has issued a report or the report’s deadline has passed. The Legislature can only vote to approve or reject the plan, it cannot amend it. If neither house rejects the reorganization plan during the 60-day period, it goes into effect on the 61^st day.

• Legislature Can Change Aspects of the Plan After the Fact. The Legislature can effectively “amend” a reorganization plan by passing a bill or bills that would make desired changes, if the reorganization itself takes place. For example, in the 2011-2012 session, when the BCSH reorganization was considered, legislation was enacted rejecting certain portions of that reorganization plan. Specifically, Chapter 138 of 2012 (AB 1458, Buchanan) and Chapter 137 of 2012 (AB 1019, Buchanan) included provisions to reject changes made by the reorganization plan to certain independent entities. Notably, these acts include provisions rendering them inoperative if the reorganization itself was rejected. As with all bills, such changes would require the Governor’s signature (or a legislative override).

Proposal

Proposes to Split BCSH Into Two Agencies. The Governor’s 2025-26 budget proposal does not currently include any statutory changes or funding to effectuate the reorganization. As a result, our comments are based on our current understanding of the Governor’s proposal, which could evolve over the coming months. As we understand it, BCSH would become two agencies: the Consumer Protection Agency and the Housing and Homelessness Agency. Each agency would be led by a Secretary, who would be a member of the Governor’s cabinet. The administration indicates that the departments and other entities currently within BCSH would be placed into one of these two new agencies. Details on which agency each department and entity would be assigned to will be included in the reorganization plan. In addition, the administration indicates that HCD potentially could be restructured as part of a reorganization process, with more information to be included in the reorganization plan.

Administration Indicates Reorganization Will Improve State’s Focus on Key Issues. In our discussions with the administration, staff indicate that, as currently constituted, BCSH is covering too many disconnected issues and programs—horse racing oversight as well as homelessness, for example. As a result, the Secretary and agency staff are tracking too many distinct policy areas. This, in turn, is limiting the agency’s ability to have a clear focus on its main missions: consumer services and housing/homelessness. The administration believes that creating two agencies would allow for more focused leadership in those areas and improve program delivery.

Effect of Reorganization on Entities With Both Housing and Consumer Services Goals Not Yet Determined. We do not yet have a clear sense of the administration’s plans for BCSH entities that serve both housing and consumer services purposes, such as DRE, which regulates real estate professionals and developers in the state. Agency staff indicate that they are considering options to maintain institutional relationships (such as through formal interagency agreements) between these types of entities after separation.

Proposes to Pursue Reorganization Through Executive Branch Process. The Governor’s Budget Summary indicates the administration intends to write a reorganization plan and submit it to the Little Hoover Commission by spring 2025. The administration then intends to forward the plan to the Legislature 30 days later. Figure 3 shows the time line based on our discussions with the administration and current law.

Indicates an Approved Reorganization Would Be Phased in Over Multiple Years. While the statutory time line would allow the reorganization plan to be approved by summer 2025 (2025-26 budget year), the administration intends for actual implementation to occur over several years. The administration indicates a phased-in approach would be pursed to minimize disruptions to current initiatives overseen by the agency (such as certain housing/homelessness grant programs). Details on the implementation time frame will be included in the reorganization plan. To the extent the plan would require funding or other changes in the budget year, administration staff have suggested that the Legislature could see a budget change proposal at the May Revision.

Key Considerations for the Legislature

There are many issues for the Legislature to consider in determining whether to approve or reject the Governor’s proposal. At the time of this analysis, however, specific details regarding various aspects of the proposal have not been provided by the administration, which can make it difficult for the Legislature to adequately review their merits. To assist the Legislature, we developed a broad framework for considering the proposal that builds upon our assessment of prior reorganization plans and best practices identified from other government agencies. Specifically, we identify a series of key questions that we recommend the Legislature consider using when evaluating the Governor’s reorganization proposal, which are summarized in Figure 4 and discussed next in more detail.

Is the Reorganization Based Upon a Compelling Policy Rationale? A reorganization should be consistent with an underlying policy rationale to address a problem that has been clearly identified. On the one hand, a case can be made that BCSH is charged with too broad a mission with too many disparate issue areas—and that a split into two agencies could allow the administration to have more focused attention at the cabinet level. (This was an underlying rationale for peeling off transportation from BTH and giving it its own agency 12 years ago.) Almost by definition, breaking apart any agency, however, would allow it to focus more on a smaller set of issues. A key question for the Legislature thus is at what point does a bifurcation make an agency become too siloed and impede its ability to engage in cross-departmental and cross-functional work—the rationale for agencies in the first place? Presumably, the administration will provide its analysis of this question in the forthcoming reorganization plan, which the Legislature can then evaluate and determine if it agrees or not.

Does the Reorganization Align With Legislative Priorities? A reorganization should be consistent with the priorities that the Legislature has set for the state or government function. Historically, the state largely has left funding and policy matters regarding housing and homelessness to local jurisdictions. In response to the state’s housing and homelessness crisis, however, in recent years, the Legislature has increased its focus on these issues—both through state funding (such as for homelessness-related grants) and the policy process. Creating an agency dedicated to housing and homelessness thus could reflect the Legislature’s state-level priorities to the extent the Legislature intends to maintain a robust ongoing role in overseeing these issues. On the other hand, were the Legislature to desire to reduce its budgetary and policy involvement with these issues in the coming years, having an agency focused just on housing and homelessness may be less reflective of the Legislature’s long-term focus and priorities.

Would the Reorganization Make Programs More Effective? A reorganization should result in programs becoming more effective and the public receiving improved government services. Given that the administration has not provided specific and complete details regarding its proposal, it is difficult at this at this time to determine whether the plans would achieve this goal. It will be important for the administration to indicate how the proposed reorganization will assist the various departments and programs in achieving their intended goals and objectives and what impact they will have on the level of service provided to the public.

Would the Reorganization Improve Efficiency? Reorganizations often involve consolidating functions under one department or combining agencies so as to eliminate fragmented, duplicative, or overlapping governmental functions. Addressing these issues improves efficiency by allowing programs to use fewer resources or improve the quality of services provided within existing resources (including providing a service to the public in a more timely manner). The Governor’s proposal, however, would split an agency into two, resulting in the need for two Secretaries and presumably two sets of support staff in charge of budget review and various administrative functions. The Governor’s proposal thus has the potential to result in fewer efficiencies. The Legislature will need to study the administration’s plan to identify whether there are reasons to believe other efficiencies will be created by the proposed reorganization. For example, currently, state programs addressing homelessness are spread across BCSH and other agencies (most notably, the Health and Human Services Agency, which has programs targeting youth and other populations). Does the Governor’s proposed reorganization have the potential to improve coordination and integration among these programs?

Would the New Structure Improve Accountability? A reorganization should result in a government structure where the Legislature and the public can easily identify the person or entity responsible for managing a program. Clearly establishing who is responsible for a program would better enable the Legislature and the public to hold that person or entity accountable for meeting clearly defined outcome-orientated goals and performance standards. At this time, however, it is unclear whether simply creating a smaller agency would improve transparency and accountability.

Is the Reorganization Well Planned? Reorganization can result in significant complexities—such as the need to shift employees and equipment to new locations, create information technology systems, and reclassify positions and responsibilities. Accordingly, it is important that a reorganization be well planned. Given that the administration has not provided details on its reorganization proposal, it is unclear at this time whether the administration is fully prepared to address such complexities. In the coming weeks/months, the Legislature will want to make sure that the administration provides a detailed implementation plan for each proposal.

Other Considerations. The above criteria are ones we think the Legislature should consider when evaluating any reorganization proposal. In addition, the Governor’s proposed timing and sequencing of this particular reorganization raises oversight issues for the Legislature. In particular, the administration intends to make public a plan by spring 2025 and, consistent with statute, provide the Legislature an opportunity to review and decide on the plan by mid- to late-summer 2025. The administration has indicated, however, that in between that time period—at the May Revision—it may ask the Legislature for funding and authorization to begin implementing the plan. Given the timing, the Legislature could review the reorganization plan this year and then the budget year could be used to carefully put together funding proposals and plans that match the Legislature’s and administration’s final vision. This more deliberative, sequential approach should not significantly affect implementation timing given our understanding that the administration is looking to phase in the proposed reorganization over a multiyear period.