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2010

Other Budget Issues

Further Detail

Background

Program. The Office of Administrative Law (OAL) ensures that state agencies comply with the Administrative Procedures Act (APA). The office carries out this responsibility by reviewing regulations proposed by the state’s regulatory agencies, as well as determining whether other forms of regulation proposed by state agencies (such as an order, bulletin rule, or guideline) are valid. In addition, in the underground regulations program, OAL investigates whether certain rules should be subject to the APA. The office also is charged with publishing and continuously updating the official copies of adopted regulations, known as the California Code of Regulations.

Budget. The OAL’s 2009-10 budget is $1.6 million from the General Fund and $1.2 million from the Central Service Cost Recovery Fund.

Governor’s Proposal

Switch to Fee-for-Service. The Governor proposes to eliminate what would otherwise be OAL’s General Fund appropriation ($1.7 million) and Central Service Cost Recovery Fund appropriation ($1.1 million) for 2010-11 and replace them with a $2.8 million appropriation from the newly created Regulatory Oversight Revolving Fund (fund). This will shift OAL to a fee-for-service model, in which OAL would directly bill regulation-issuing departments for its costs.

Move OAL Into State and Consumer Services Agency. In the May Revision, the administration also proposes to move OAL into the State and Consumer Services Agency (SCSA). The administration explains that this move would allow OAL to use some of SCSA's administrative services to perform the billing tasks that a fee-for-service system would require.

LAO Comments

Fee-for-Service Makes Sense and Would Reduce General Fund Costs. The Governor’s proposal to link the specific activities of OAL to the departments promulgating regulations has merit. Not all departments need to issue regulations every year. Linking OAL’s funding to departments that issue regulations, some of which are funded through special funds, would better link the activities to the funding, and should help reduce General Fund costs. We note, however, that the proposed fee-for-service mechanism would increase costs for General Fund departments that issue regulations and perhaps for non-General Fund department that issue regulations frequently.

Some Details Need to Be Addressed. While we feel that the overall approach makes sense, there are a few details that need to be addressed:

• Will certain administrative expenses and expenses that are not easily captured by the fee-for-service program (such as the underground regulations responsibilities of OAL) be captured as overhead and included in the fee-for-service model? We believe this would be appropriate as an initial funding decision in 2010-11. The Legislature might wish to ask the administration in future years whether this fee-for-service mechanism has been successful.
• How will the transition to this funding mechanism work? Will OAL have to be loaned a small amount of General Fund moneys to cover the costs during the early part of the fiscal year—until payments from departments start to be recovered? (Some reimbursement departments, such as the State Personnel Board, routinely receive such loans.)

Move into SCSA Unnecessary. We find that moving OAL to SCSA is unnecessary. Moving a department that reviews administrative regulations to an agency that itself issues regulations and manages departments that issues regulations creates a potential conflict of interest. Further, OAL could enter into an interagency agreement for fee-for-service billing with a state entity—potentially with SCSA or the Department of General Services—and still achieve the same goals with less potential for a conflict.

Recommendation

Approve Fee-for-Service Model. We recommend that Legislature approve the proposed switch of funding for OAL to a fee-for service model, thereby saving $1.7 million in General Fund costs. The Legislature would need to direct the administration to address certain details regarding the funding transition.

Reject Move to Agency. We recommend the Legislature reject the proposed move of OAL into SCSA. Instead, the Legislature should direct OAL to enter into an interagency agreement for fee-for-service billing if OAL cannot fulfill those duties within existing resources.