LAO Analysis of the 1996-97 Budget Bill
Business and Labor Part I

Department of Insurance (0845)

Insurance is the only interstate business that is regulated entirely by the states, rather than the federal government. 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 1,500 insurers and 264,000 brokers and agents operating in the state.

The budget proposes total expenditures of $117.9 million to support the DOI in 1996-97. This is $15.2 million, or 11 percent, less than estimated current-year expenditures. This decrease is due mainly to the end of $9.4 million in one-time costs in the current year for conducting Proposition 103 rate rollback hearings. This decrease is partially offset by a $1.5 million increase in the California Residential Earthquake Recovery Fund pursuant to Ch 899/95 (SB 395, Rosenthal), which established a program to retrofit high-risk residential homes to minimize earthquake damage.

Report Needed on Status of Rate Rollback Hearings

We recommend that the department report to the Legislature prior to budget hearings on the status and the results of current-year expenditures and the funding mechanism for Proposition 103 rate rollback hearings.

The 1995 Budget Act appropriated $9.4 million from the Insurance Fund for the DOI to conduct Proposition 103 rate rollback hearings. In May 1995, the department indicated that there were approximately 158 insurance companies that had not complied with the rate rollbacks required under Proposition 103. The Legislature provided $9.4 million-- on a one time basis--to contract for professional services to conduct hearings in 1995-96. To pay for the cost of conducting these hearings, the Insurance Commissioner planned to raise fees charged to all insurance companies by 62 percent. These fees were to become effective February 1, 1996. In a letter dated January 31, 1996, however, the Commissioner advised the Legislature that he was rescinding this fee increase. The Commissioner stated that in lieu of this fee increase he was ". . . working closely with key representatives of the insurance industry to develop alternative methods of supporting the Department's appropriation levels." In view of this recent development, we recommend the department advise the Legislature, prior to budget hearings, on the status of this new proposal.

We requested specific information from the department on the status and results of these expenditures. At the time this analysis was prepared, however, the department had not provided any information regarding the use or results of spending the $9.4 million appropriation.

In order for the Legislature to have the information it needs to review these expenditures, the department should provide the Legislature prior to budget hearings at least the following information:

Upon receipt of this information we will review it and, as appropriate, make recommendations to the Legislature.

Workload Measures Should Be
Submitted Before New Positions Approved

We recommend that the Legislature not approve any new positions--a total of 33 positions are requested--for the department until final workload measures and standards are submitted for legislative review. We also recommend that the Legislature postpone action on the department's budget until these workload measures and standards are submitted to the Legislature.

In the Supplemental Report of the 1993 Budget Act, the Legislature directed the Insurance Commissioner to report to the chairs of the fiscal committees in both houses and to the Joint Legislative Budget Committee by December 15, 1993, workload measures that provide information on the level of annual work, by activity, and workload standards that provide productivity or "work rates" for the department's staff. This information is essential in order to determine an appropriate level of staffing and budget for the department. It is also critical in evaluating proposals to add positions--such as the budget's proposal to add 33 positions in administration for fiscal services, business management, and accounting functions.

The department did not fulfill this requirement in 1993. Subsequently, the Legislature required the report in the 1994 Supplemental Report, and when the department failed to comply again, the requirement was included again in the 1995 Supplemental Report. To date, the department has failed to comply with this reporting requirement.

At the time this analysis was prepared, the department indicated that workload measures and standards will be submitted to the Legislature in February 1996. Lacking these measures and standards, the Legislature does not have sufficient information to properly assess either the department's request for additional staff or the overall staffing level of the department. Therefore, we recommend that the Legislature not approve any of the 33 proposed positions until this report is submitted for legislative review. We also recommend that the Legislature postpone action on the department's 1996-97 budget until after the workload report is submitted so that the Legislature will have the information it needs to assess the appropriate staffing levels for the department.

Of the 33 proposed positions for the budget year, ten positions are proposed for the License Bureau's telephone answering capabilities. Later in this analysis, we recommend that these ten positions not be approved by the Legislature, regardless of the workload measures and standards report.

Augmentation for Conservation
and Liquidation Office Not Justified

We recommend that the Legislature reduce Item 0845-002-0217 by $803,000 because the department has not substantiated the need to increase costs for this program given the projected reduction in the program's workload. (Reduce Item 0845-002-0217 by $803,000.)

The budget proposes $803,000 from the Insurance Fund for the Conservation and Liquidation Office (CLO) to increase its operations in conserving and liquidating failed insurance companies, or estates, with low or no assets. This proposal represents an $803,000, or 129 percent, increase over current-year expenditures.

Background.The CLO has jurisdiction over 70 estates, with assets totaling $409 million. The CLO also has jurisdiction over 45 estates with low/no asset value. The Chief Executive Officer is charged with ensuring that the office's management of each conserved estate is consistent with the office's fiduciary responsibility. When the CLO conserves an estate with assets, the management of this conservation is funded through the assets of the estate. The management of conserved estates without assets is funded by the Insurance Fund. The 1995-96 Budget Act appropriated $623,000 from the Insurance Fund for the management of 45 estates with low/no assets.

Inconsistencies in Department's Workload Estimates.The department does not show consistent workload indicators to justify the $803,000 augmentation. As of July 1, 1995, there were 45 low/no asset estates under conservatorship. The CLO expects to close ten of these estates and place eight more estates of failed insurance companies under conservatorship during the year, leaving 43 low/no asset estates under the CLO management at the end of 1995-96. The department estimates that the $623,000 contained in the 1995 Budget Actwill cover this level of activities.

In the budget year, the CLO expects that another eight insurance companies with low/no assets will fail and require conservatorship by the department. These new estates coupled with the CLO's expectation of closing 20 estates currently under conservatorship would leave 31 estates under conservatorship at the end of 1996-97. Although the number of estates under conservatorship is declining, the department proposes to more than double the CLO's expenditures--from $623,000 in the current year to $1.4 million in 1996-97. The department has not substantiated the need to increase administrative costs by any amount, let alone a 129 percent increase.

Consequently, we recommend that the $803,000 proposed augmentation be deleted from Item 0845-002-0217.

Automated Telephone System Should Be Approved Without New Positions

We recommend that the Legislature delete $425,000 and ten positions because additional positions to answer telephones are not justified given the installation of an automated telephone answering system. (Reduce Item 0845-001-0217 by $425,000.)

The budget proposes $495,000 for the department to implement automated telephone answering capabilities for its Licensing Bureau. Of this amount, $70,000 is for the department to contract for voice messaging and interactive voice response (IVR) capability. The other $425,000 is to add ten positions to the bureau to manually handle incoming telephone calls.

Description of Current Problem. The Licensing Bureau is a unit within the department that is responsible for licensing and monitoring the activities and fiscal condition of all insurance companies, brokers, and agents operating within the state. These activities are conducted for the purpose of protecting and informing California insurance consumers. As part of this responsibility, the bureau handles license-related telephone inquiries from the public. Currently, one supervisor and three agents handle these inquiries. The department indicates that 93 percent of the incoming telephone calls from the public do not "get through" to bureau staff because the telephone lines are busy.

Proposed System.The department proposes to install an IVR system that will enable more telephone inquiries to be answered. The department expects that the IVR will provide access to information to over 60 percent of the incoming telephone inquiries without first receiving a busy signal. Also, the department indicates that "piloting" the use of the IVR technology will help determine how the IVR can help the bureau meet its program goals of answering 95 to 100 percent of the public inquiries with no one receiving a busy signal. Thus, the system itself will result in significant improvement to the program's current low response rate to telephone inquiries withoutadditional staff.

We share the department's concern that current telephone access to the bureau is unresponsive to public inquiries. The department indicates that with the installation of the IVR as proposed, it will have the ability to expand or reduce IVR response capability with minimal cost or staff resources. Also, this will allow the department to be in a position to assess the need for staff to manually answer the telephone. The department, therefore, should install the IVR system--which should greatly improve the current situation--and after gaining experience with the IVR, assess whether or not additional staff are needed to manually answer the telephone. Consequently, we recommend the Legislature delete $425,000 and ten positions under Item 0845-001-0217. This would leave $70,000 in the budget for the department to install the IVR system.

Augmentation for Newsletter Not Necessary

We recommend that the Legislature not approve an augmentation of $191,000 for the department to publish an insurance newsletter because the department can redirect funds on a priority basis within its current operating budget for this purpose. (Reduce Item 0845-001-0217 by $191,000.)

The budget proposes $191,000 for the department to produce and distribute a quarterly newsletter to insurance companies. According to the department, this newsletter will contain information about the licensing process, fee adjustments, and other legal changes affecting California's insurance agents and brokers. The department indicates that the newsletter was discontinued by the former administration on a priority basis to reduce costs.

It is certainly appropriate for the department to reestablish the newsletter if it believes it is a priority activity. However, the need for an augmentation to the department's budget for this purpose has not been justified. For example, the department has not identified any problem that the newsletter is meant to address, so the expected benefit of the newsletter is unclear. Also, current law does not require the department to publish this newsletter. Moreover, the department's proposed operating budget totals over $30 million. Thus, the department certainly has the resources available to finance the $191,000 for the newsletter on a priority basis within its existing resources. Therefore, we recommend that the Legislature delete $191,000 under Item 0845-001-0217.

We would also note that current law specifies that the amount of fees utilized for the purpose of publishing a newsletter must be shown as a separate line item in the department's annual budget.

California State Lottery Commission (0850)

The California State Lottery (CSL) was created by the Lottery Act, an initiative statutory and constitutional amendment approved by the voters in 1984. The CSL began operations in October 1985. Revenues from lottery sales are deposited in the State Lottery Fund and are continuously appropriated to the California State Lottery Commission by Section 8880.61 of the Government Code. The commission's 1996-97 preliminary budget is displayed in the Governor's Budget for informational purposes only.

The act provides that lottery proceeds are to be distributed annually as follows: 50 percent of lottery revenue returned to the public in the form of winnings, at least34 percent made available for public education, and no more than 16 percent for administrative costs. Figure 4 (see page 16) shows the distribution of these funds since 1985-86. It indicates that lottery revenues reached a high of $2.6 billion in 1988-89 and a low of about $1.4 billion in 1991-92. The commission estimates annual revenues of about $2.2 billion in the current and budget years, an increase of 2.7 percent from 1994-95. The allocation to education in those two years is based on the required 34 percent minimum level.

The budget shows estimated current- and budget-year administrative expenses, including game costs and retailer commissions, of $356 million each year. This amount is right at the 16 percent maximum level of estimated annual revenues. This represents an increase of $19.9 million over 1994-95 administrative expenditures. Since the commission began operations, revenues from sales have increased by $459 million, or 26 percent, while administrative costs have increased by $153 million, or 75 percent. Education's share of lottery sales revenues since 1985-86 has varied from 33 percent to 35 percent.

Amend the Lottery Act to Establish Legislative Oversight

We recommend that the Legislature amend the Lottery Act to provide for legislative oversight and appropriation of the California State Lottery Commission's administrative expenses.

The Lottery Act provides the commission certain flexibilities not normally granted to state agencies, such as the continuous appropriation of lottery funds for administrative expenses without external review and the right to establish its own procurement policies. Specifically, under provisions of Section 8880.61 of the Government Code, funding for the commission's support budget is exempt from the annual budget review process. In lieu of the regular legislative budgetary review, the five-member commission approves all funding decisions. This budget independence has allowed the commission to spend an average of about $300 million annually on administration without oversight by the Legislature or the administration.

Figure 4
Distribution of Lottery Revenue
(In Millions)
Year Administration Educationa Winning
1985-86 $203 $617 $886 $1,766
1986-87 209 490 693 1,392
1987-88 277 784 1,046 2,107
1988-89 323 992 1,314 2,628
1989-90 339 900 1,240 2,479
1990-91 323 747 1,062 2,132
1991-92 238 451 669 1,358
1992-93 281 597 880 1,758
1993-94 304 663 964 1,931
1994-95 336 755 1,075 2,166
1995-96c 356 757 1,113 2,225
1996-97c 356 757 1,113 2,225
a Amounts do not reflect distribution of unclaimed prizes or interest to education. According to the Lottery Act, these items are not considered as any part of the 34 percent that is required to be allocated to the benefit of public education.
b Estimated sales revenues only (does not include interest income).
c Estimate.

Administrative Budget. Figure 5 shows the CSL's administrative expenses and staffing levels since 1985-86. The figure indicates that the CSL has spent from 11.5 percent to 17.5 percent of sales revenues on administrative expenses during the Lottery's ten-year operating history. The figure also indicates that staffing has varied from a high of 1,244 positions down to the current level of 884 positions. Because the lottery budget is not submitted for review, it is not possible to know if these lottery administrative expenditures are consistent with the act's objective of maximizing education's share of sales revenues.

The total level of annual spending (close to $300 million) for administration of the lottery and the impact that any overspending has on the amount allocated to education warrants legislative oversight of the commission's budget. An example of the potential impact on education is the year (1991-92) the commission overspent its 16 percent limit by one and a half percent. This overspending resulted in a loss of $20 million for education.

Figure 5
Lottery Operating Budget
(Dollars in Millions)
Salaries Othera Advertising Game Costs Retailer
Totals Percentage of Sales Positions
1985-86 $20 $25 $24 $44 $90 $203 11.5% --b
1986-87 31 44 39 24 70 209 15.0 1,091
1987-88 37 55 54 25 105 277 13.1 1,138
1988-89 41 59 60 27 135 323 12.3 1,162
1989-90 45 68 73 23 130 339 13.7 1,244
1990-91 46 73 61 23 121 323 15.1 1,190
1991-92 43 38 41 35 81 238 17.5 1,007
1992-93 40 49 48 40 105 281 16.0 926
1993-94 43 52 42 51 115 304 15.7 920
1994-95 44 43 47 64 141 336 15.5 880
1995-96c 46 51 49 65 146 356 16.0 884
1996-97c 46 51 49 65 146 356 16.0 884
a Includes contracted and professional services.
b Not available.
c Estimate.

Procurement Contracts. Currently, the commission can also enter into and amend costly information technology contracts without any independent oversight. For example, the commission terminated and subsequently reinstated a contract with High Integrity Systems, Inc. (HISI) for an automated instant ticket gaming system. The contract was reinstated after both parties sued one another. The cost to litigate and settle the case was $7.2 million, which represents money that otherwise could have gone to education. In recent years, the commission has entered into several other information technology contracts--one for as much as $274.5 million--and continuously amended contracts, in one case up to 207 percent of the original contract amount, without any external review. If these information technology contracts have not been handled effectively, funding for schools has been adversely affected.

Establish Legislative Oversight. Given the magnitude of the commission's administrative expenditures and their impact on education funding, we believe that it is important to establish legislative oversight of the Lottery's operations. Such external oversight could help improve the efficiency and effectiveness of the lottery's administrative activities. Consequently, we recommend that the Legislature amend the Lottery Act to provide for accountability through legislative and executive branch oversight. The Lottery Act can be amended with a two-thirds vote of the Legislature, provided that the changes are to further the act's purpose.

Specifically, we recommend that the Legislature amend the Lottery Act to (1) require legislative appropriation in the Budget Act for the CSL's administrative expenditures within the 16 percent spending limit, effective for the 1997-98 fiscal year and (2) require the CSL, like other state agencies, to prepare and submit information technology project planning documents and contracts to the administration for review.

Budget Should Be Submitted for Legislature's Review

We recommend that the Legislature hold hearings on the commission's proposed 1996-97 budget and add an informational item to the Budget Bill, identifying the planned budget-year administrative expenditures, similar to the informational item for the Public Employees' Retirement System.

In order to give the Legislature a degree of oversight on the state lottery in the budget year, we recommend that the Legislature hold hearings on the commission's proposed 1996-97 budget and add an informational item to the Budget Bill identifying planned budget-year expenditures for administration, similar to the informational item for the Public Employees' Retirement System. In order for the Legislature to take this action, the commission should submit budget information concerning planned expenditures and staffing in the budget year. The commission should send this information to the Legislature in advance of budget hearings to allow sufficient time for legislative review.

Department of Consumer Affairs (1110-1600)

The Department of Consumer Affairs (DCA) is responsible for promoting consumer protection while supporting a fair and competitive marketplace. The department includes 32 regulatory boards, four bureaus, and two programs that license and regulate over 2 million practitioners from various occupations and professions. The four bureaus and two programs are statutorily under the direct control of the department. As of January 1, 1996, Ch 381/95 (AB 910, Speier) placed all duties and responsibilities of the Cemetery Board and the Board of Funeral Directors and Embalmers under the direct control of the department until legislation is enacted to consolidate or otherwise restructure these boards. The remaining regulatory boards are independent and administered by appointed consumer and industry representatives.

Expenditures for the support of the department and its constituent boards are expected to total $310.4 million in 1996-97. This is $2.6 million, or nearly 1 percent, more than estimated expenditures in the current year. The largest increase, supported by a General Fund loan, is for workload related to the Cemetery Board.

Cemetery and Funeral Boards. As mentioned above, Chapter 381 transferred all duties and responsibilities of the Cemetery Board and the Board of Funeral Directors and Embalmers to the Director as of January 1, 1996. This action was taken due to the Legislature's long-standing concerns over the activities of these two boards. The Cemetery Board, however, delegated its responsibilities to the department through a Memorandum of Understanding in October 1995. The board made this decision because it had insufficient resources to investigate an emerging scandal in the cemetery industry involving embezzlement, fraud, and mishandling of human remains. The department assumed responsibility for the duties of the Board of Funeral Directors and Embalmers in January, as required by Chapter 381. The base appropriations of the two boards have also been transferred to the department.

Third Year of Performance Based Budgeting

We withhold recommendation on the department's performance budget for 1996-97 pending receipt of the department's proposal for a new performance contract.

Background.Under Ch 641/93 (SB 500, Hill), the DCA is one of four departments entering the third year of a performance budgeting pilot project. The pilot project involves the department's administrative divisions, and the four bureaus and two programs under the statutory control of the Director. In addition, all activities related to the Cemetery Board and Board of Funeral Directors and Embalmers are now under performance budgeting. None of the remaining independent regulatory boards are included in the pilot project. During the first two years of the pilot, the Legislature approved budget contracts that gave the DCA various operational flexibilities.

1996-97 Budget Proposal. Expenditures for the divisions, bureaus, and programs under performance-based budgeting are expected to be $154 million, a 1 percent increase over estimated current-year expenditures. The Budget Bill includes language that gives the DCA discretion to (1) increase or decrease 1996-97 spending by up to 15 percent among the activities under performance budgeting as long as expenditures do not exceed the total budgeted amount and (2) administratively establish positions without Department of Finance approval. This budget language is similar to language in the 1995 Budget Act.

New Approach. The department has made various changes in its approach to performance-based budgeting over the past two years. For example, the department is currently redesigning its measurement tool for assessing the condition of consumer markets because the DCA concluded that the original approach was not providing useful or reliable information.

Contract Proposal Not Available. At the time this analysis was written, the department had not presented its proposal for a performance budget contract nor indicated what flexibilities it will be seeking beyond those contained in the Budget Bill. The final contract for 1996-97 is expected to be included in the Budget Bill and/or budget trailer bill.

The DCA should submit its proposal to the Legislature prior to budget hearings and in sufficient time to allow adequate legislative review. Once the proposal is received, we will review it and make recommendations to the Legislature as appropriate. Accordingly, we withhold recommendation on the funding request for the DCA's divisions, bureaus, and programs pending receipt of the department's performance budget proposal.

Proposed Augmentations Unnecessary
Under Performance-Based Budgeting

We recommend that the Legislature delete $151,000 and 1.5 positions because the department should accommodate these costs under the performance-based budgeting program. (Reduce Item 1111-001-702 by $151,000.)

The budget proposes two augmentations totaling $151,000 and 1.5 positions for the divisions within the performance-based budgeting pilot project:

As mentioned above, under the existing performance-based budgeting contract and the provisions in the Budget Bill, the DCA has the flexibility to increase or reduce the budgets of participating administrative divisions, bureaus, and programs by up to 15 percent. This provision provides the DCA with the ability to quickly react to and implement necessary program changes in the bureaus and programs without delay.

One reason the Legislature approved the DCA's spending flexibility was to reduce the DCA's reliance on the budget change proposal process. We believe that the department should use this flexibility to accommodate the new activities identified above. Furthermore, since the total amount of the proposed augmentations is about 0.1 percent of all expenditures in the performance-based budgeting programs, accommodating these costs within existing resources should not be a problem. Therefore, we recommend that the Legislature delete $151,000 and 1.5 positions included in the budget for activities under performance budgeting.

Ten-Fold Budget Increase for Cemetery Act Workload

We withhold recommendation on the level of funding that should be authorized from special funds and the number of positions for the budget year for Cemetery Act workload, pending receipt of a revised plan from the department that identifies (1) options to reduce expenditures in the budget year and (2) work that has been accomplished in the current year. Further, we recommend that the Legislature fund any Department of Consumer Affairs workload related to the Cemetery Act through loans from special funds rather than from the General Fund.

In past years, the Cemetery Board has had a budget of about $400,000 and four positions. When the department took over the board's functions mid-year, about $200,000 remained in the current-year budget. In addition to this $200,000, the department has requested $2.6 million--financed from loans from the General Fund ($1.9 million) and the Tax Preparers Fund ($705,000)--in the current year to pay for greatly expanded Cemetery Act regulatory activities (including 35 limited-term positions). These funds would be used to initiate criminal investigations in southern California and to provide financial management of 11 cemeteries under state conservatorship. The department should, prior to budget hearings, advise the Legislature on the current status of and expenditures on these activities.

The budget proposes expenditures of $4.2 million and 29 limited-term positions for the department's Cemetery Act workload in 1996-97--a ten-fold increase over historic spending levels. The department plans to use $399,000 from the Cemetery Fund for a portion of those costs, and the remaining $3.8 million would come from a General Fund loan. The department is proposing an increase in interment and cremation fees to repay this loan.

Department's Plan. In an effort to address the problems in the cemetery industry, the DCA is planning an aggressive investigation and prosecution strategy. This plan includes the following for 1996-97:

Alternatives to the Department's Proposal. The DCA's concern about problems in the industry is justified and its desire to restore consumer confidence in this industry is commendable. We believe, however, that the DCA should evaluate less costly alternatives to the current proposal. For example, the DCA could:

Accordingly, we withhold recommendation on the level of funding for Cemetery Act activities until the department advises the Legislature of (1) options to reduce expenditures and (2) the status of current-year activities.

Use Special Funds, Not General Fund, for Loans.The level of funding needed for the DCA's activities related to the Cemetery Act is dependent on the DCA's response to the above alternatives. Regardless of the amount of funding, however, the General Fund should not be the source of any loan. Several special funds under the DCA's authority have healthy reserves that can be loaned in lieu of General Fund monies. For example, the Governor's Budget indicates that, as of June 30, 1997, reserve balances in funds such as the Contractors' License Fund, the Board of Registered Nursing Fund, and the Accountancy Fund will be $23 million, $6.8 million, and $5.4 million, respectively.

The use of special funds for loans within the DCA is consistent with current practice. For example, Control Section 14.00 of the annual Budget Act gives the Director of Consumer Affairs authority under certain conditions to loan between funds. Given the availability of these Consumer Affairs funds and the current condition of the General Fund, we believe the use of special funds, such as these, is preferable. Therefore, we recommend that any loans provided for the DCA's activities under the Cemetery Act come from special funds under the DCA rather than the General Fund.

Finally, the Budget Bill does not stipulate any terms for loan repayment by the DCA. The department has indicated that it will raise fees and repay the loan in three annual installments at the state's Pooled Money Investment Account rate. We recommend that the Legislature adopt Budget Bill language that directs the DCA to repay any loan in three years at the Pooled Money Investment Account rate.

Department of Fair Employment and Housing (1700)

The Department of Fair Employment and Housing (DFEH) enforces laws that promote equal opportunity in housing, employment, public accommodations, and that protect citizens from hate violence. Specifically, the DFEH has responsibility for enforcing the state's main equal opportunity law, the Fair Employment and Housing Act, and resolving complaints in a timely manner.

The budget proposes expenditures of $16.2 million ($12.7 million General Fund) for support of the DFEH in 1996-97. This represents a reduction of $573,000 (3 percent) from estimated current-year expenditures.

Workload Justification for Added Positions Not Provided

We recommend that the Legislature delete $2.5 million to eliminate 41 positions added in the 1995 Budget Act because the department has not justified these positions. (Reduce Item 1700-001-001 by $2.5 million.)

The Legislature approved a General Fund augmentation of $2.5 million and increased staffing by 41 positions for the DFEH in the current year. This represented a 25 percent increase in General Fund expenditures and a 21 percent increase in staff. The augmentation request was based on the premise that additional staff could reduce the backlog in employment discrimination cases and process these cases within the statutorily required one-year period to move a case to prosecution.

When the Department of Finance presented this proposal to the Legislature in the May revision of the 1995 Budget Bill, we raised the following issues:

We have asked the department to provide current information on the number of cases, the impact on its workload of receiving the $2.5 million augmentation in the current year, and workload measures to substantiate the need to continue the level of staffing. This information has not been submitted. Based on the lack of any information that justifies the need to continue the expenditure of $2.5 million for the additional 41 staff positions, we recommend that the Legislature delete this amount from the department's budget request for 1996-97.

Department of Corporations (2180)

The Department of Corporations 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 three major programs: the investment, lender-fiduciary, and health care programs. The department is supported by license fees and regulatory assessments, which are deposited in the State Corporations Fund.

The budget proposes total expenditures of $34.1 million in 1996-97, which is $1 million, or 3 percent, less than estimated current-year expenditures. This decrease is due mainly to a $2.4 million reduction to reflect a decline in regulatory activities in the lender-fiduciary program. This reduction is largely offset by a $2 million augmentation proposed for a health care service plan enrollee complaint program and to increase the frequency of medical surveys of health care service plans.

Augmentation to Implement New Program Not Needed

We recommend that the Legislature delete $1.4 million and 19 positions because the basis for this augmentation has not been justified. (Reduce Item 2180-001-0067 by $1.4 million.)

The budget proposes $1.4 million and 19 positions for the department to establish a toll-free complaint/inquiry (800 number) telephone line to respond to enrollee inquiries and complaints regarding their health plans. This program--established pursuant to Ch 789/95 (SB 689, Rosenthal)--is part of the department's Health Care Division, which is responsible for monitoring the activities of health care service plans to ensure that they meet their statutory responsibilities in providing appropriate health care services to their enrollees.

Current-Year Appropriation. Chapter 789 appropriates $1.4 million for the department to implement the provisions of this act including the establishment of the "800 number" program. The department estimates that it will spend $1.2 million of this appropriation in the current year. Consequently, the department will have $200,000 remaining from this source in the budget year for the "800 number" program.

Budget-Year Augmentation Not Justified.The department is requesting an additional $1.4 million and 19 positions for the program in the budget year. We have several concerns with the department's proposed augmentation. First, the department indicates its workload related to consumer telephone calls will increase dramatically in 1996-97. For example, the department estimates that the establishment of the 800 number line will increase the number of enrollee calls received by the department from 800 per month to 10,000 per month, and the total number of complaints filed each month from 180 to 1,000 per month. In arriving at this assumption, the department states that it surveyed health care service plans and then did a "basic extrapolation" to arrive at this projected increase in workload. However, the department has not provided a methodology for this extrapolation, nor a basis for its assumptions in concluding that the survey would result in such a significant increase to the department's workload over the course of one year.

Second, the department already appears to have adequate additional resources to implement the program. The department will spend Chapter 789 funds in the current year to get the program off the ground, and still have $200,000 remaining in 1996-97. Furthermore, the department has permanently redirected 18 positions from within its current budget resources for support of the program. The department has not shown why an additional19 positions are needed.

Given the resources already dedicated to the 800 line, the department already has the means to properly operate the program. During the budget year, the department should evaluate the program to determine whether more or less resources are needed on an ongoing basis. As part of this evaluation, the department should consider other options for addressing the workload, such as an automated voice messaging telephone system that could handle some enrollee telephone inquiries in lieu of staff resources.

Thus, we recommend the use of current budget resources until the department has had experience with and has evaluated the 800 number program. Therefore we recommend that the Legislature delete $1.4 million under Item 2180-001-0067.

Office of Savings and Loan (2340)

The Office of Savings and Loan is responsible for protecting the savings and investments of the public by licensing and regulating state-chartered savings and loan associations. It is supported by the Savings Association Special Regulatory Fund. Revenues to the fund are derived from annual assessments of the individual associations.

The budget proposes total expenditures of $441,000 for this office in 1996-97. This is $96,000, or about 18 percent, less than estimated current-year expenditures. This level of support would spend all remaining funds in the Special Regulatory Fund in 1996-97. (The office has not collected assessments since 1993-94.) Consequently, there will be no funds to support the office after the budget year.

State-Chartered Savings and Loan Program

In recent years there have been dramatic changes in the savings and loan industry. In response to the thrift failures in the 1980s, the federal government passed legislation in 1989--the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)--that resulted in a significant reduction in the number of state-chartered savings and loans. This occurred for various reasons:

In California, the number of state-chartered associations has declined from 130 in 1989-90 to 8 in the current year. The decline in assessment revenues that support state regulatory activities (which are based on an association's asset size) has been even greater, as a proportionally higher number of the large associations ceased to be state-chartered. We have been advised that fees are no longer assessed because the regulatory fund balance has been sufficient to support the current level of office operations, which includes three positions--an administrator, an examiner, and an executive assistant.

State Program Should Be Terminated

We recommend enactment of legislation terminating the state-chartered savings and loan program as of January 1, 1997. We also recommend that the Legislature provide six months funding (a reduction of $220,000) for the office to phase out the program by January 1, 1997.

Our analysis of the developments discussed above indicates that there is neither a need for--nor an overriding benefit from--the continuation of the state-charter program. For the associations, a state charter is no longer a significant benefit because the FIRREA removed most economic advantages of being licensed by the state, and it is not necessary for important operational aspects, such as maintaining deposit insurance. Furthermore, there is no need or benefit to the state to continue a regulatory program that has been, for all practical purposes, supplanted by the federal government. This has occurred because, under the FIRREA, federal regulators (the Office of Thrift Supervision and the Federal Deposit Insurance Corporation) examine regularly all savings and loan associations--including those that are state-chartered--for compliance with all applicable federal laws and regulations.

As a result of these developments, it is unclear what regulatory function the office serves. The office no longer conducts examinations of the associations or audits them to protect consumers' savings/investments. Rather, the one remaining examiner for the office respondsto industry activity through such duties as reviewing corporate filings and answering questions from the industry or investors. In effect, the state is no longer regulating or monitoring the savings and loan industry.

For these reasons, we recommend termination of the state-chartered savings and loan associations program. Existing state-chartered associations could convert to another charter authorized to operate in the state--such as a federally chartered savings and loan association, a state-chartered thrift, or a federally or state-chartered bank. According to regulators, these conversions can usually be completed within three to four months.

We recommend that the Legislature enact legislation to terminate the state-chartered savings and loan program, effective January 1, 1997. This would give the associations six months to convert from state-chartered businesses, and the state six months to close out operations. Therefore we also recommend that the Legislature provide six-months funding (a reduction of $220,000) for the office in the budget year, consistent with phasing out the program by January 1, 1997.

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