February 6, 2018

The 2018-19 Budget

Department of Consumer Affairs

The Department of Consumer Affairs (DCA) includes 38 boards, bureaus, commissions, and programs. Through these entities, DCA licenses approximately 3 million individuals in roughly 250 professional categories, such as doctors, acupuncturists, and cosmetologists. In addition, DCA licenses certain businesses, such as auto repair facilities. As part of its regulatory responsibilities, DCA also investigates complaints and disciplines violators of licensing requirements. Additionally, DCA provides certain services to its boards and bureaus, including staff training, consumer education and outreach, and legal and audit services.

The Governor’s budget proposes $634 million from various funds for support of DCA in 2018‑19, which is a decrease of $44 million, or about 6 percent, from the current-year estimated expenditures. This reduction is due primarily to the Bureau of Real Estate (CalBRE)—which is currently within DCA—becoming a separate department within the Business, Consumer Services, and Housing Agency beginning July 1, 2018 (as discussed below). DCA is entirely supported by fees and other regulatory assessments.

Transfer of Department of Real Estate

LAO Bottom Line. The Governor’s budget proposes to reduce 11 positions and $1.3 million annually (Real Estate Fund) for DCA beginning in 2018‑19 to reflect the transfer of CalBRE out of DCA. We recommend the Legislature require that DCA report at spring budget hearings on the reasons for the difference between the charges that have been paid by CalBRE for DCA services ($5.7 million in 2017‑18) and the much smaller proposed reduction to DCA’s budget. We further recommend that the Legislature require DCA to begin tracking and reporting information on the use of DCA services by boards and bureaus to better assess whether there are widespread differences between the charges paid by entities and the services they are receiving.


Real Estate Moved Out of DCA in Part Due to Concerns About DCA Pro Rata. Chapter 828 of 2017 (SB 173, Dodd) removed CalBRE from DCA and established it as the Department of Real Estate (DRE) under the Business, Consumer Services, and Housing Agency beginning in the budget year. (Prior to 2013, CalBRE was a separate department, but it was moved under DCA as part of the Governor’s Reorganization Plan No. 2.) A main rationale for Chapter 828 was a concern about the high and quickly growing charges that CalBRE was being assessed for services provided by DCA, known as pro rata. Notably, a committee analysis of the bill cited that CalBRE’s pro rata charges had grown from $1.8 million in 2013‑14 to $5.2 million in 2016‑17, resulting in pressure on CalBRE to either raise fees or reduce other services.

Concerns About DCA’s Pro Rata Have Been Longstanding. DCA reports that it allocates the costs of many of its services—such as training, legal, fiscal, human resources, and publications—proportionally among its boards and bureaus based on the number of authorized positions at each entity. However, for other DCA services—such as the use of some investigative services, correspondence, and professional examination development services—DCA allocates costs based on measures of usage by the boards and bureaus. In the past, concerns have been raised through the Legislature’s sunset review process that DCA’s methods of allocating pro rata might not result in a fair allocation of costs among the boards and bureaus, including that some entities might be paying for services they are not receiving. In response to these concerns, the Legislature passed Chapter 395 of 2014 (SB 1243, Lieu), which required DCA to report annually by July 1 on the pro rata calculation of administrative expenses. Chapter 395 also required DCA to conduct a study of its current system for prorating administrative expenses. In compliance with Chapter 395, DCA contracted with a consulting firm to prepare the required report, which the department submitted to the Legislature in July 2015. The report recommended that the department explore several alternative approaches to calculating pro rata, including activity-based costing, which more directly ties charges to the use of services such as by charging hourly rates. However, the report also noted that moving to a system such as activity-based costing is hampered due to DCA’s lack of past client usage and workload data and systems to capture such data. To date, DCA does not appear to have made significant modifications to its process for distributing its administrative costs.

Governor’s Proposal

The Governor’s budget for 2018‑19 proposes to reduce 11 positions and $1.3 million annually from the Real Estate Fund for DCA to reflect the transfer of CalBRE out of DCA to become DRE. It also provides DCA with $1 million in reimbursement authority in 2018‑19 to enable it to provide some administrative services to DRE during its transition to becoming its own department. The budget proposal also provides additional resources to DRE to support its human resources, budget, and legislative needs as a separate entity, as well as to reimburse DCA for its services during the transition.

LAO Assessment

Appears CalBRE Was Overpaying for DCA Services. In 2017‑18, CalBRE is scheduled to pay $5.7 million in pro rata charges for DCA services. However, the budget proposal only reflects a reduction of DCA’s budget of $1.3 million. According to DCA, the $4.4 million difference between what CalBRE was paying in pro rata and the reduction in the department’s budgeted amount will likely be spread across the other boards and bureaus. On the one hand, the $1.3 million reduction to DCA’s budget could be an accurate reflection of the ongoing reduction in workload for DCA associated with the removal of CalBRE, but this would suggest that CalBRE was paying for substantially more services from DCA than it was receiving. In turn, it is likely that some other boards and bureaus were paying for fewer services than they were receiving. On the other hand, it is possible that $1.3 million does not fully reflect the ongoing reduction in workload for DCA and that the department’s budget should be reduced further. We note that, at the time of this analysis, the administration had not been able to fully explain the reason for the large difference between the pro rata charges CalBRE was scheduled to pay and the reduction in the budgeted expenditure authority for DCA with the removal of CalBRE from the department.

Unclear How Widespread Cross-Subsidization Is Across Other DCA Entities. As mentioned previously, many of DCA’s expenses are spread across the boards and bureaus based on the number of positions at these entities. In some cases, however, an entity’s actual use of these DCA services might not be proportional to the number of authorized positions at the entity. For example, a larger entity may have high position counts—and thus might pay large amounts towards DCA’s expenses—but it might use less of these services than a smaller entity if its larger size allows it to conduct more functions in-house with its own staff. To the extent that position counts do not accurately reflect the services provided, it would lead to some cross-subsidization—that is, some boards and bureaus paying for more services than they receive and others paying for fewer services. However, data on actual use of many DCA services is generally not available. Thus, it is difficult to determine the level of cross-subsidization that is occurring across entities within DCA.

LAO Recommendation

Require DCA to Report at Budget Hearings. We recommend that the Legislature require DCA to report at spring budget hearings on the reasons for the disparity between the pro rata charges paid by CalBRE and the reduction to DCA’s budgeted expenditure authority with the removal of CalBRE from the department. This should provide the Legislature with more information on the reason for the difference and help it determine whether $1.3 million is a sufficient reduction to DCA’s budget given the reduction in DCA’s responsibilities. Accordingly, we recommend the Legislature withhold action on the Governor’s proposal until such information is provided by DCA.

Require DCA to Track Data on Client Usage and Workload. We recommend that the Legislature require DCA to begin capturing data on past client usage and workload for its main service segments such as human resources, budget, training, and legislative support. We further recommend that the Legislature adopt supplemental reporting language requiring DCA to begin reporting this data annually starting no later than January 10, 2020. These reports would allow the Legislature to better assess the level of cross subsidization that is occurring more broadly across DCA and determine whether the use of alternative cost allocation methodologies, such as hourly charges, are warranted for more of DCA’s services. We think that requiring the collection of this information is reasonable given that other departments—such as the Department of General Services—already track this type of information and use it to bill clients on an hourly basis for legal, fiscal, and human resources-related services.