Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Department of Corporations (2180)

The Department of Corporations (DOC) is responsible for protecting the public from unfair business practices and fraudulent or improper sale of financial products and services. The department fulfills its responsibility through its investment and lender-fiduciary programs. The DOC is supported by license fees and regulatory assessments, which are deposited in the State Corporations Fund.

The budget proposes total expenditures of $23.5 million and 275.4 personnel-years (PYs) in 2001-02. This is $0.9 million, or 3.7 percent, less than estimated current-year expenditures and 4.4 fewer PYs.

State Corporations Fund Balance Very High

We recommend that the Department of Corporations report prior to budget hearings on (1) its fees and assessments, (2) proposed options for reducing or eliminating some of them, and (3) State Corporations Fund condition projections based on each option. We further recommend that upon evaluating this information, the Legislature enact legislation to change the fees and/or assessments.

As noted above, DOC is supported by license fees and assessments charged to regulated companies. Pursuant to Chapter 328, Statutes of 1998 (SB 1589, Committee on Budget and Fiscal Review), DOC suspended certain filing fees, effective July 1, 1998 through June 30, 2000, to reduce the surplus in the State Corporations Fund. These fees were reinstated for 2000-01. However, as shown in Figure 1, the fund balance remains very high. In the budget year, proposed revenues are $32.1 million, while proposed expenditures are $23.5 million. This would leave an end-of-year fund balance of $38 million, or 162 percent of proposed expenditures. Typically, we recommend a prudent fund balance of around three months, or 25 percent, of annual expenditures. For DOC, this level of reserves would total $5.9 million, or $32.1 million less than the indicated fund balance at the end of 2001-02.

According to the department, DOC is considering options for permanently reducing or eliminating some investment filing fees to reduce fund reserves. Given the size of the fund balance, we recommend that DOC report on the following prior to budget hearings:

• The level or rate of fees and assessments charged, including how much revenue is derived from each.
• Proposed options for reducing or eliminating some fees and/or assessments, the benefits and drawbacks of each option, and a recommendation.
• Five-year projections of the fund condition for each proposed option.

We further recommend that upon evaluating this information, the Legislature enact legislation to change the fees and/or assessments.