Analysis of the 2005-06 Budget Bill Legislative Analyst's Office February 2005

Department of Insurance (0845)

In California, the Department of Insurance (DOI) is responsible for regulating insurance companies, brokers, and agents in order to protect businesses and consumers who purchase insurance. Currently, there are about 1,300 insurers and 268,000 brokers and agents operating in the state.

The budget proposes total expenditures of $194 million for DOI in 2005-06. This is $6.1 million, or 3.2 percent, more than estimated current-year expenditures. The Insurance Fund, which supports DOI operations, derives its revenues from regulatory assessments and fees.

Insurance Fund Precariously Balanced

The department's expenditures have generally outpaced revenues in the last several years. As a result, the Insurance Fund is projected to end the budget year with a 7 percent balance—less than one month's expenditures. To reduce personal services costs in the current year, the department has instituted a hiring slowdown.

Expenditures Consistently Exceed Revenues. After relative stability from 2000-01 through 2003-04, DOI's expenditures are estimated to rise nearly $21 million, or 12 percent, in the current year to $189 million. Figure 1 shows the recent history of the Insurance Fund. The current-year increase is due mainly to the following:

• Mostly one-time expenditures of fraud investigation funds—$12.1 million.
• Employee compensation and retirement increases—$4.1 million.

During this period, fee and assessment revenues have not kept pace, nearly always lagging behind expenditures. This is despite two general fee increases in consecutive fiscal years—5 percent effective November 2002 and another 10 percent effective January 2004. The exception to the revenue-expenditure imbalance was 2003-04, which included the second fee increase, as well as a one-time $21 million infusion from unanticipated revenues and a General Fund loan repayment. As Figure 1 demonstrates, the revenue bump in 2003-04, followed by higher annual revenues due to the fee increases, would have sustained the fund on a more long-term basis had estimated expenditures not surged ahead of revenues again beginning in the current year.

Department Has Instituted a Hiring Slowdown. Because of the expenditure-revenue mismatch, the department has instituted a hiring slowdown for the current year. With certain exceptions under the department's policy, vacant positions must be held open for 90 days before being filled. This is to reduce personal services costs. According to the department, this delay policy would not be applied to any requested positions approved by the Legislature in the 2005-06 budget.

Proposed Budget Continues Expenditure Growth. Despite this situation, DOI's proposed budget includes a 3 percent increase in expenditures, which is in addition to the current-year's 12 percent jump. The 2005-06 increase includes $6.2 million for information technology projects plus various workload and policy proposals. As a result, the projected fund balance would be just 7 percent—less than one month—of expenditures at the end of the budget year. Furthermore, the department's proposed expenditures do not account for (1) expected retirement contribution increases or (2) pay/benefit increases that may be negotiated through collective bargaining.

The department's forecast beyond the budget year includes sustained expenditures at approximately the current-year level of $189 million (also excluding pay and benefit changes), with an ongoing $9.5 million revenue increase from existing fee and assessment sources beginning in 2006-07. It is unclear at this time, however, to what degree this additional revenue will materialize. For instance, DOI assumes an additional $3.4 million from exam fees, while acknowledging that vacancies have reduced billable hours for exams. Under the above assumptions, however, the department would maintain the 7 percent year-end balance for the next few years, with approximately equal revenues and expenditures. This outlook leaves the Insurance Fund precariously balanced even under the best-case scenario.

Because of the fund's current position, we recommend rejecting some nonessential proposals, as discussed below.

Recommend Rejecting Nonessential Proposals

We recommend that the Legislature delete $2.8 million and three positions for nonessential proposals due to the condition of the Insurance Fund. (Reduce Item 0845-001-0217 by $2.8 million.)

Due to the condition of the Insurance Fund discussed above, we recommend deleting $2.8 million in nonessential proposals. These proposals could be considered again once (1) the department realizes the expected revenue increases in future years and (2) the Insurance Fund balance stabilizes at a level higher than one-month's expenditures.

Our recommended action would delete the following requests:

• Consolidation of Management Information Data—$2 Million. The DOI proposes $2 million and two two-year limited-term positions to implement a unified management information system. This includes $1.3 million for software customization and project management. By consolidating department data, this proposal would allow DOI staff to pull together regulatory and enforcement information on the insurance industry for internal analysis and reporting purposes. Currently, information technology staff must design queries of multiple data systems for ad hoc reporting. While not ideal, the current practice can continue in the short term.
• Technology Refresh—$0.7 Million. The budget proposes an ongoing augmentation of $729,000 to replace department computers, servers, and printers on a regular cycle of three to five years, depending on the equipment. Desktop computers are enjoying longer lives, and the department has not completed a business analysis of printer needs to determine an appropriate level of funding. This type of request can be deferred to a later year.
• Community Investment Program—$0.1 Million. The DOI requests $110,000 and one position for its California Organized Investment Network (COIN) program, which matches insurance companies with investment opportunities in low-income communities. Insurance companies receive tax credits for investing in qualified projects. The COIN currently has three staff. This proposal would restore a position lost in recent reductions. With the current fund condition, this program could maintain current operations for another year without the augmentation.

Online Credit Card Payment Efficiencies Should Be Reverted

We recommend that the Legislature delete $200,000 requested for credit card charges because licensing efficiencies from online filing fully offset this cost. (Reduce Item 0845-001-0217 by $200,000.)

The DOI requests $200,000 to cover costs for the fees it pays to credit card companies for licensing transactions to apply, renew, or schedule exams. The department does not charge applicants a fee to pay by credit card. To date, the department has absorbed these costs, which grew from just $17,000 in 2002-03 to $122,000 in 2003-04. The department notes that greater use of online application and payment generates efficiencies. Specifically, online filing and scheduling has reduced processing time from six to eight weeks down to two to three weeks. According to the department, these efficiencies fully offset the cost of credit card charges. Yet, the department plans to redirect the savings to reduce backlogs in other work. These savings in staff time, however, should be used to cover the credit card costs. Consequently, we recommend the Legislature delete this request. If the department desires to address other workload, it should submit a proposal for the Legislature's consideration in the spring.