Dominating the news this week was California Gov. Gavin Newsom’s Wednesday announcement that the state’s budget is facing a $12 billion dollar deficit. Newsom announced the deficit while outlining his nearly $322 billion state spending plan for the upcoming fiscal year.
In January, the governor’s administration projected a nearly balanced budget with a $363 million cushion and $7.9 billion revenue surplus. Citing recent federal policy impacts, this projection has reversed into a $16 billion downturn over two fiscal years.
The largest driver of the shortfall is a $10 billion reduction in capital gains revenue, followed by a $3.5 billion drop in wage-based income tax revenue and a $2.5 billion decline in corporate profits.
Newsom’s administration is proposing a mix of solutions that address both the current and out-year impacts, reflecting a strategy of front-loading fiscal responsibility.
The ball is now in the California State Legislature’s court, where it has until midnight June 15 to pass a budget. For the next few weeks, the budget committees in the Assembly and Senate will analyze the administration’s spending blueprint, make adjustments that reflect their own priorities, and propose a spending plan for the state.
This plan must be approved by both houses of the state legislature and signed by Newsom. Post-budget, there will be a series of “trailer bills,” which are policy bills that reflect what’s in the budget.
On a related note, on February 25 a California Legislative Analyst Office (LAO) report on the Department of Financial Protection and Innovation (DFPI) fund condition indicates that the Financial Protection Fund will become insolvent toward the end of 2025-26 and face growing deficits in future years.
This is due, in part, to programmatic expenditures for new programs enacted by the legislature that are not yet up and running and collecting fees. Newsom has proposed budget trailer bill language to address that gap by increasing assessment fees and the hourly exam rate for entities regulated by the DFPI.
The credit union assessment fee is not increasing, but the hourly exam rate increase will apply to credit unions.
In other news, Newsom has proposed his 2025 reorganization plan aimed at splitting the existing California Business, Consumer Services, and Housing Agency into two distinct state agencies: the California Housing and Homelessness Agency and the Business and Consumer Services Agency.
On May 13, the California State Assembly convened a joint hearing of the Business and Professions Committee and the Housing and Community Development Committee to discuss the plan. One hour later, the Little Hoover Commission hosted a business meeting in which public comments were accepted.
The Assembly meeting featured two panels, each comprising leadership from the proposed new agencies. The first panel included Tamika Moss, secretary of the Business, Consumer Services, and Housing Agency, along with directors from various departments, including consumer affairs, cannabis control, and the DFPI. Moss emphasized the urgency of the reorganization, stating it is a critical opportunity to align state government with the pressing challenges Californians face today.
The hearing concluded with a commitment to hold more discussions and public input, which would allow stakeholders to weigh in on proposed changes.
In conclusion, the “suspense file” hearing has been moved to May 23. Credit union leaders across California can stay tuned for the outcomes of bills on the suspense file.
