Table of Contents

1. Department of Insurance(0845)
1. No Information on Department's Budget Changes
2. California State Lottery Commission (0850)
1. Amend the Lottery Act to Establish Legislative Oversight
2. Budget Should Be Submitted For Legislature's Review
3. Department of Consumer Affairs (1110-1600)
1. Legislature Makes Changes In Boards and Programs
2. Cleanup of Cemetery Industry Continues
3. Legislature Should Freeze Current Contract Pending Demonstration of Improved Performance
4. Augmentation for Call Center Unnecessary
5. Various Augmentations Not Justified
1. Attorney General Rate Increase Should Be Accommodated Within Existing Resources
2. Board of Barbering and Cosmetology Augmentations Inappropriate
3. General Fund Augmentations for Athletic Commission Not Justified
6. Augmentation Requests for Sunset Boards Are Premature
4. Department of Fair And Housing (1700)
1. Audit Indicates Permanent Positions Not Justified
5. Energy Resources Conservation And Development Commission (3360)
1. New Energy Programs Under Electricity Industry Restructuring
   

Insurance is the only interstate business that is regulated entirely by the states, rather than the federal government. In California, the Department of Insurance is responsible for regulating insurance companies, brokers, and agents in order to protect businesses and individuals 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 $112.3 million--$91.1 million state operations and $21.2 million local assistance--to support the department in 1997-98. This is $16.3 million, or 13 percent, less than estimated current-year expenditures.

According to the Governor's budget, this decrease has occurred in three program areas--a $10.6 million reduction in the regulation of insurance companies and insurance producers, mainly in rate regulation and special programs (state operations); a $2 million reduction in fraud control (local assistance); and a $3.7 million reduction in earthquake recovery fund management (local assistance). As discussed below, however, the estimated expenditures for state operations in the current year vary substantially from the amount appropriated by the Legislature in the 1996-97 Budget Act and there is no explanation in the Governor's budget or from the department regarding the proposed reduced expenditures in the budget year.

No Information on Department's Budget Changes

Current Year Inconsistencies With Legislative Appropriations. The 1996-97 Budget Act included $94.3 million for the general operations (excluding payments on lawsuit settlements) of the Department of Insurance. This amount was scheduled in the budget act for various program areas under the department. According to information from the department, the total estimated expenditures in the current year are the same as the budgeted amount but there are significant changes in expenditures by program area. Figure 5 compares the budget act schedule for expenditures to the department's planned expenditures.

Figure 5
Department of Insurance 1996-97 Expenditures Budget Authorization Compared to Planned Expenditures
(In Thousands)
Scheduled Program	1996-97 Budget Act	Department Expenditure Plan	Difference from Budget Act Authorization
Regulation of Insurance Companies and Insurance Producers	$70,792 a	$72,965	$2,174
Fraud Control	20,554	20,021	-533
Tax collection and audit	1,641	--	-1,641
Administration	19,846	20,259	413
Distributed Administration	-19,846	-20,259	-412
Reimbursements	-710	-710	--
Totals	$92,276	$92,276	--
a Includes $623,000 from Item 0845-002-0217.

The Governor's budget includes only a summary statement indicating that changes in the current year include consolidation of office space, reduced fees paid to the Attorney General, reduction in travel, and elimination of vacant positions (the budget indicates elimination of 89 positions but does not indicate the number that were vacant). According to the Governor's budget, these actions resulted in a $4.5 million reduction in the department's budget. The administration, however, has not advised the Legislature of the specific revisions in the proposed expenditures or the programmatic implications of these changes. Furthermore, the changes as shown in Figure 5, are not allowed under Control Section 26.00 of the 1996-97 Budget Act without first notifying the Legislature. This control section specifies limits on intraschedule transfers and requires notification to the Legislature for any transfers over $2/td>00. We are not aware of any such notification to the Legislature. Consequently, it is not clear what authority the department used to modify its current year budget.

In view of the administrative actions discussed above, the department should provide the Legislature complete details of the proposed changes, the programmatic implications of each change, and the authority they used to make these budget changes in the current year. In addition, the Legislature included language in the 1996-97 Budget Act indicating legislative intent that insofar as possible budget reductions were not to disproportionately affect the provisions of consumer services by the department. Therefore, the department should also address how all budget changes affected consumers services. This information should be available before the Legislature considers the budget-year request.

Proposed Changes in Budget Year Unexplained. The Governor's budget proposes a reduction of $2.1 million in the department's ongoing regulatory program, sustains the elimination of the tax collection and audit program, and provides increases of about $50,000 each in fraud and administration. The budget also reflects elimination of the 89 positions that were administratively eliminated in the current year. Unlike other departments, the Department of Insurance has not submitted budget change proposals describing the need for or effect of these changes, nor does the Governor's budget document describe any changes to the program. Consequently, the Legislature does not have any information to assess the effects of the department's proposed 1997-98 budget. We recommend that the Legislature not approve the department's budget request until this information is available for review.

Summary. In summary, the Department of Insurance has revised its budget and program in the current year without advising the Legislature in accordance with requirements in the budget act. In addition, the budget proposed for 1997-98 includes budget changes that have not been identified for legislative consideration. We recommend that the Legislature not approve the department's budget until complete information on the department's changes in the current year and budget year are available for legislative review.

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 least 34 percent made available for public education, and no more than 16 percent for administrative costs. Figure 6 shows the distribution of these funds since 1985-86. It shows 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 $2 billion in the current and budget years, a decrease of about 13 percent from 1995-96.

The current-year decline in lottery revenues is due to the loss of two products--the on-line game of Keno and instant ticket (Scratchers) vending machines. Both these products were found to be illegal under state law, and the lottery removed them from play in summer 1996. Despite the use of a new game--Hot Spot--as a replacement for Keno, the combined loss of Keno and vending machine sales caused a $207 million decrease in 1996-97 revenues through December 1996, a drop of 15 percent from the same prior period.

The budget shows estimated current- and budget-year administrative expenses, including game costs and retailer commissions, of $320 million each year. This amount is right at the 16 percent maximum level of estimated annual revenues. This is $33 million (9.3 percent) less than 1995-96 administrative expenditures. Education's share of lottery sales revenues since 1985-86 has varied from 33 percent to 35 percent.

Figure 6
Distribution of Lottery Revenue
(In Millions)
Year	Administration	Education a	Winning Payouts	Totals b
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
1995-96	353	811	1,128	2,292
1996-97c	320	680	1,000	2,000
1997-98c	320	680	1,000	2,000
a Amounts do not reflect distribution of unclaimed prizes or interest to education. According to the Lottery Act, these items are not considered as 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.

Amend the Lottery Act to Establish Legislative Oversight

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 (which currently has two vacancies) 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.

Administrative Budget. Figure 7 shows the CSL's administrative expenses and staffing levels since 1985-86. The figure shows that the CSL has spent from 11.5 percent to 17.5 percent of sales revenues on administrative expenses during the Lottery's 11-year operating history. The figure also shows that staffing has varied from a high of 1,244 positions down to the current level of 855 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.

Figure 7
Lottery Operating Budget
(Dollars in Millions)
	Salaries	Other a	Advertising	Game Costs	Retailer Commissions	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
1995-96	47	43	44	71	148	353	15.4	894
1996-97c	44	35	42	68	131	320	16.0	855
1997-98c	44	35	42	68	131	320	16.0	855
a Includes contracted and professional services.
b Not available.
c Estimate.

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 1.5 percent. This overspending resulted in a loss of $20 million for education.

Procurement Contracts. Currently, the commission can also enter into and amend costly information technology contracts without any independent oversight. For example, in 1995-96 the commission terminated and subsequently reinstated a contract with High Integrity Systems, Inc. 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. Furthermore, the commission has entered into several other contracts--one for as much as $244 million--and continuously amended contracts, in one case up to 121 percent of the original contract amount, without any external review.

More recently (January 1997), the commission chose to extend, at an estimated cost of $170 million, an existing $203 million contract with G-TECH Corporation for operation of the lottery on-line gaming system. If this and other information technology contracts have not been handled effectively, funding for schools has been adversely affected. For example, the existing on-line gaming system contract was scheduled to expire in 1998, leaving the commission sufficient time to take the project out to bid. In fact, the lottery had begun soliciting bids but abruptly halted the competitive process once the commission chose, without any significant external oversight, to accept the unsolicited G-TECH extension offer. Because the lottery never completed the competitive bid process, it is impossible to determine if extending the G-TECH contract was cost effective. In our view, this latest decision further substantiates the need for legislative oversight of the commission's activities.

Establish Legislative Oversight. Given the magnitude of the commission's administrative expenditures and their impact on education funding, we continue to 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 CSL, like other state agencies, to prepare and submit information technology project planning documents and contracts to the administration for review. We believe that these amendments would be consistent with the intent of the act.

Budget Should Be Submitted For Legislature's Review

Governor Vetoes Legislative Oversight. In our 1996-97 Analysis of the Budget Bill (see page G-15),we recommended that the Legislature add an informational item displaying the lottery's budget in the 1996-97 Budget Act and adopt budget act language requiring the lottery budget to appear as an informational item in the annual budget bill. The Legislature adopted our recommendation, but the Governor vetoed both the informational item and language. The only action taken by the administration was the signing of a memorandum of understanding (MOU) between the commission and the Department of Information Technology (DOIT) for DOIT to assist the commission with future information technology contracts. The DOIT's role, however, is purely advisory and the MOU does not provide for administration approval of information technology contracts as is required for other state agencies. Furthermore, our review indicates that DOIT did not play a significant role in the recent extension of the G-TECH contract. Thus, the commission continues to operate without any meaningful external oversight.

We again recommend that the Legislature hold hearings on the commission's proposed 1997-98 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. With this action, the Legislature will have some degree of oversight on the lottery in the budget year. 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.

The Department of Consumer Affairs (DCA) is responsible for promoting consumer protection while supporting a fair and competitive marketplace. The department includes 30 regulatory boards, seven bureaus, and two programs that license and regulate over 2 million practitioners from various occupations and professions. The seven bureaus and two programs are statutorily under the direct control of the department. The 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 $303 million in 1997-98. This is $6.9 million, or 7 percent, less than estimated expenditures in the current year. This decrease is due mainly to the end of $6.4 million in one-time costs in the current year, supported by special fund loans (Contractors' License Fund and Tax Preparers Fund), for enforcement workload related to the Cemetery Act.

Legislature Makes Changes In Boards and Programs

Three Boards Reorganized as Bureaus. Legislation enacted in 1994 (Chapter 908, Statutes of 1994, [SB 2036, McCorquodale]) put in place a procedure and schedule for the Legislature to assess the effectiveness of and need for state involvement in the 32 areas regulated by various boards. Through this sunset review process, legislative action to date is to allow the statutes that authorize the Board of Barbering and Cosmetology, Board of Guide Dogs for the Blind, and Board of Landscape Architects to sunset on July 1, 1997. As a consequence, the regulatory authorities and resources of these boards will become bureaus under the direct control of the department effective July 1, 1997.

Cleanup of Cemetery Industry Continues

Background. As mentioned above, all the duties and responsibilities of the Cemetery Board were assumed by the department in October 1995. Since that time, the department has been investigating charges of embezzlement, fraud, and mishandling of human remains. The base appropriations of the board (about $400,000 and four positions) were transferred to the department.

Current-Year Efforts. The 1996-97 Budget Act and Chapter 38, Statutes of 1996 (AB 597, Speier) authorized $6.4 million in one-time funding--financed from loans from the Contractors' License Fund (two loans) and the Tax Preparers Fund--in 1995-96 and the current year for the department to pay for cleanup of the cemetery industry. With this funding, the department initiated criminal investigations in southern California and took over financial management of ten cemeteries under state conservatorship. These loans are to be repaid over three years, with the first payment to be made in the budget year. Chapter 964, Statutes of 1996 (AB 2234, W. Murray), increased interment and cremation fees to pay for these activities and to repay the loans. The fees are scheduled to return to their original levels once the loans are repaid (but no later than April 1, 2003).

The department was scheduled to release a report by January 31, 1997 detailing the results of these enforcement efforts, including the number of investigations completed and criminal suits brought against licensees.

Proposed Ongoing Activities. The department is requesting $880,000 as an annual baseline budget level--more than double the board's historical annual budget--to complete enforcement actions initiated in the current year and for ongoing and routine regulation of the industry. Specifically, the budget proposes, among other permanent program elements, the following enforcement staff and activities:

• Three investigative certified public accountants to conduct routine financial audits on each regulated business once every five years (about 13 audits each year per auditor) and special audits as needed ($175,000 and three positions).
• Two inspectors to conduct annual on-site inspections of the 323 privately owned cemeteries and crematoriums regulated by the state ($74,000 and two positions).
• Two investigators (sworn peace officers) to conduct law enforcement-related investigative activities as needed ($94,000 and 1.6 positions).
• One manager and one office technician to oversee the ten cemeteries under state conservatorship ($110,000 and two positions).

Funding Concerns. In general, the department's proposed level of regulation appears reasonable. We have several concerns, however, about the department's ability to provide funding for these activities. For example, the department's fund condition analysis indicates that by 2001-02 the reserve in the Cemetery Fund will equal approximately one week of program operating expenses. In general, regulatory agencies should maintain a prudent reserve of about three months funding. Furthermore, despite the 1996-97 Budget Act requirement that the department repay the second Contractors' License Fund loan over three years (beginning in the budget year) and the Chapter 38 requirement that the first Contractors' License Fund loan be repaid no later than January 1, 2001, information available at the time this Analysis was written indicates that the department is proposing to extend all loan repayments over six years (to 2002-03). For these reasons, we recommend that DCA advise the Legislature at budget hearings (1) on its plan to ensure adequate funding for the proposed enforcement activities and (2) under what authority it has extended the Contractors' License Fund loan repayment schedule.

Legislature Should Freeze Current Contract Pending Demonstration of Improved Performance

Background. Under Chapter 641, Statutes of 1993 (SB 500, Hill), the DCA is one of four departments entering the fourth year of a performance budgeting pilot project. The pilot project involves the department's administrative divisions, and the seven bureaus (including the three boards scheduled to sunset on July 1, 1997) and two programs under the statutory control of the Director. None of the remaining independent regulatory boards are included in the pilot project. During the first three years of the pilot, the Legislature approved budget contracts that gave the DCA various operational flexibilities. (See our analysis of the Department of Finance in this section of the Analysis for an overview of the status of the statewide pilot.)

1997-98 Budget Proposal Includes New Flexibilities. Expenditures for the divisions, bureaus, and programs under performance-based budgeting are expected to be $157 million, a 2 percent increase over estimated current-year expenditures. The budget bill includes language that would, among other things, give the DCA discretion to (1) increase or decrease 1997-98 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 1996-97 Budget Act. In addition, the budget bill contains several new flexibilities that would grant relief from administrative and statutory controls over items such as out-of-state travel and prepayment of vendor contracts.

Analyst's Recommendation. The DCA has not been able to provide evidence of significant performance improvements due to the existing flexibilities. Furthermore, the DCA has justified the new flexibilities primarily on the basis that the flexibilities have been granted to other departments in the pilot program. Thus, we believe that it is premature to grant new flexibilities to the department. With respect to relief from administrative controls (except for those which may be tied to budget act control sections), we see no reason for the Legislature to adopt budget act language to exempt a department from administratively established rules. The administration can grant these exemptions on their own initiative. Therefore, we recommend that in lieu of adopting the proposal for new flexibilities, the Legislature renew the current-year budget contract for 1997-98 and consider changes only when DCA can demonstrate significant performance improvements as the result of statutory exemptions provided through its current budget contract.

Augmentation for Call Center Unnecessary

The budget proposes $880,000 from the General Fund and 13.5 positions for the department to offset costs associated with answering calls to its toll-free inquiry/complaint (800 number) telephone line that the department claims are not directly related to department programs. The department established the combination automated and live operator call center in 1994 to handle telephone inquiries and complaints from consumers and department licensees. The department indicates that approximately 30 percent of telephone calls coming into the center concern matters not under DCA's jurisdiction, such as landlord/tenant issues, vehicle registration and driver's license renewals inquiries, and personal credit questions.

According to DCA, because call center operators are tied-up with non-jurisdictional calls, department licensees and consumers of business activities regulated by the department experience service delays. Available information, however, does not indicate that callers are experiencing extraordinary delays in service. In fact, the department's December 1996 year-end report on its participation in the performance-based budgeting pilot indicates that, despite growth in call volume and increases in caller time on hold, consumer satisfaction with service delivery was excellent. Furthermore, we believe that several options exist for the department to reduce operator workload associated with handling nonjurisdictional calls. For example, the call center currently offers recorded landlord/tenant information. The department should consider expanding recorded information programs for other frequently asked nonjurisdictional questions. In addition, the department should explore (as called for in its own report) further automation of the call center so that overall operator workload is reduced.

Given the department's report of customer satisfaction along with the options that exist for reducing costs associated with answering non-jurisdictional calls, we believe an augmentation to the call center is not justified. Furthermore, because the majority of the calls that are not directly related to department programs appear to fall under the jurisdiction of special fund agencies and because the DCA itself is a special fund agency, we believe this activity is not a General Fund responsibility. Accordingly, we recommend that the Legislature delete $880,000 under Item 1111-001-0001.

Various Augmentations Not Justified

Attorney General Rate Increase Should Be Accommodated Within Existing Resources

Costs Should Be Absorbable. The Attorney General hourly rate increase should not require each board, bureau, and program to increase their base budgets. For example, the proposed augmentations represent only between 0.04 percent and 0.51 percent of all individual expenditures for the programs requesting the adjustment. An increase of this magnitude should be absorbable within existing funds. This is especially true given that the budget amount for Attorney General costs is an estimate of potential need for legal services and is not based on specific cases and associated hourly legal services requirements. Consequently, we can find no analytical basis to recommend that the Legislature provide the DCA the additional funds for legal services costs. Thus, we recommend that the Legislature delete $370,000 included in the budget under various items for Attorney General hourly rate increases.

Board of Barbering and Cosmetology Augmentations Inappropriate

• Workload adjustment for citation appeals ($257,000 and 5.5 positions).
• Workload adjustment for examination administration ($240,000 and 11 positions).
• Distribution of board publications ($118,000).
• Toll-free telephone line ($53,000).

Board to Be Restructured as a Bureau. As mentioned above, the Board of Barbering and Cosmetology is scheduled to sunset at the beginning of the budget year, with its functions handled by a bureau within the DCA. Consequently, the activities and program costs in this regulatory area are subject to possible modification. Thus, we believe it would be premature to approve any of the proposed augmentations. Furthermore, the department should realize savings associated with the elimination of the board structure. Therefore, if these activities are priority concerns, the department can work within its current resources and any savings due to economies of scale associated with merging the board into the department to fund them. In addition, because the new bureau will be under performance-based budgeting, the department should have greater budget flexibility to accommodate the expenditures for these projects within existing resources. For these reasons, we recommend that the Legislature delete $668,000 and 16.5 positions from Item 1111-010-0702.

General Fund Augmentations for Athletic Commission Not Justified

• Initiate direct state regulation of amateur boxing ($97,000 and two positions).
• Conduct closed hearings for professional boxing applicants who test positive for the AIDS virus ($26,000).

Amateur Boxing Self-Regulation Should Continue. As allowed under current law, the regulation of amateur boxing has been delegated to nonprofit organizations since 1986. The commission is now proposing to discontinue this practice and have the state assume this regulatory activity. During the ten years of self-regulation, there have been no identified chronic problems with self-regulation of amateur boxing or any significant risk to the state from delegating this responsibility. Because self-regulation appears to be working well, we believe that the commission should not bring this activity back under state responsibility. Therefore, we recommend that the Legislature delete $97,000 and two positions included in the budget for this activity.

Additional Hearings Unnecessary. Chapter 376, Statutes of 1996 (AB 2472, Hoge and Miller), requires that all individuals applying for a professional boxer license (or renewal of a license) must show proof of testing negative for the AIDS virus. Under this legislation, applicants who test positive have the right to request a closed hearing to appeal license denials. The commission does not have any experience under this new requirement. The commission, however, estimates that it will require $26,000 annually in travel and per diem costs to accommodate an estimated five requests per year for closed hearings. Instead of augmenting their budget, the commission should be able to accommodate these requests in the same manner that other protest hearings are handled--at regularly scheduled commission meetings (which are held every six weeks). Furthermore, the administration advised the Legislature when the legislation was under consideration that costs for this program would be minor and absorbable. Given that there appears to be no need to schedule extra hearings, we recommend that the Legislature delete $26,000.

Based on these factors, we recommend that the Legislature delete $123,000 and two positions under Item 1140-001-0001.

Augmentation Requests for Sunset Boards Are Premature

As summarized in Figure 8, the budget proposes several augmentations--totaling $2.3 million and five positions--for five boards currently undergoing sunset review.

Program Modifications Possible. As mentioned above, over a period of three years all the boards within the department will undergo sunset review. Under this process, the Legislature is currently reviewing and analyzing the effectiveness and need for each of the boards listed in Figure 8. Based on this review, the Legislature may choose, once final recommendations are made by the joint review committee at the end of February 1997, to completely eliminate the regulatory activities of these boards, sunset these boards into bureaus within the department, modify their programs, or retain them in their existing form.

Figure 8
Sunset Boards Augmentation Requests
(Dollars in Thousands)
Proposal	Amount		Positions
Contractors' State License Board
Workload adjustment to increase underground economy enforcement program	$371		3
Baseline adjustment for increases in operating expenses	327		--
Workload adjustment for enforcement cases	322		--
Update examinations	180		--
Subtotals	($1,200)		(3)
Board of Registration for Engineers and Land Surveyors
Distribution of board publication	$140		--
Clerical support	50		1
Subtotals	($190)		(1)
Board of Pharmacy
Public education program	$263		1
Vehicle replacement	245		--
Subtotals	($508)		(1)
Structural Pest Control Board
Update Examination	$196		--
Distribution of board publication	66		--
Cost increase of interagency agreement with the Department of Pesticide Regulation	65		--
Subtotals	($327)		--
Veterinary Medical Board
Workload adjustment for enforcement cases	$72		--
Examination administration	25		--
Subtotals	($97)		--
Totals	$2,322		5

Until the Legislature takes action to resolve the status of each of these boards, we believe it would be premature to approve any of the proposed augmentations. Based on our review, there is no apparent urgent need for any of the augmentation requests listed in Figure 8.

Therefore, we recommend that the Legislature delete $2.3 million and five positions included in the budget for the boards under sunset review as shown in Figure 6. If the Legislature takes final action under the sunset review of any of these boards prior to completion of budget hearings, legislative consideration of the proposed augmentations or other adjustments to their respective budgets would be warranted

The budget proposes expenditures of $18.7 million ($14.7 million General Fund and $4 million federal funds) for support of DFEH in 1997-98. This represents a General Fund increase of $2.5 million (20 percent) over estimated current-year General Fund expenditures. The increase is the result of an augmentation for additional staff to investigate employment discrimination complaints.

Audit Indicates Permanent Positions Not Justified

The budget proposes $2.5 million from the General Fund for the department to add 42 positions to investigate employment discrimination complaints. The proposal would bring the department's staffing level to 295 personnel years. The department has grown significantly in recent years, as staff has increased by 41 percent since the 1994-95 level.

Background. In 1995-96, the department's budget was augmented by $2.5 million and 41 positions for a similar purpose--investigation of employment discrimination complaints. This augmentation 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. We had expressed concerns that the department had not justified the augmentation. Our findings indicated that the number of cases at risk of missing the one-year deadline for moving to the prosecution stage was already declining without the additional positions. Additionally, DFEH staff indicated that around one-half of the backlogged cases were probably not meritorious. For 1996-97, the Legislature deleted funding for 11 of the 41 positions added in 1995-96 and provided $1.9 million in funding for the remaining 30 positions as two-year limited-term positions to work off the backlog beginning in the current year.

The budget-year request would add another 42 positions on a permanent basis--positions which would be in addition to the existing 30 two-year, limited-term positions approved by the Legislature in 1996-97.

In response to our findings and concerns over the department's complaint processing procedures, the Legislature adopted language in the 1996-97 Budget Act requiring the Bureau of State Audits (BSA) to conduct a comprehensive fiscal and performance audit of the department.

Audit Indicates Improvements Are Needed. The January 1997 audit report by the BSA indicates that the department has several inefficient complaint processing procedures and case management practices. For example, the audit suggests that the department can improve complaint processing time by developing a team approach to case management, conducting abbreviated investigations upon initial receipt of complaints, and correcting data and inventory errors in its existing case management information system. In addition, the audit report concludes, among other things, that any request for permanent staff is inappropriate given that the department is unable to provide reliable workload projections and indicators.

Analyst's Recommendation. In view of the concerns over the department's managements practices--reinforced by the BSA audit--and the 30 two-year, limited-term positions provided by the Legislature in 1996-97, we find no basis for adding another 42 permanent positions to the department. Therefore, we recommend that the Legislature delete the requested $2.5 million and 42 permanent positions. If upon implementing the changes recommended in the audit and improving its complaint processing procedures the department finds that additional positions are needed to manage workload, it could submit a request for the Legislature's consideration in future budgets. Until these actions are taken, however, increasing the number of staff is not warranted.

The budget proposes commission expenditures of $118.8 million from various state and federal funds in 1997-98. This is $50.4 million or 74 percent more than current-year estimated expenditures. The increase includes $66.8 million for two programs--Public Interest Research, Development and Demonstration Program and the Public Interest Renewable Resource Technology Program--established by Chapter 854, Statutes of 1996 (AB 1890, Brulte). This legislation provides for a restructuring of the California electricity industry. This increase is offset by reductions in spending for (1) various energy projects and assessments ($11.5 million) and (2) the Katz School Bus program ($5.2 million).

New Energy Programs Under Electricity Industry Restructuring

The budget proposes a total of $66.8 million in expenditure authority for the commission for the two programs established by the Legislature in Chapter 854. In addition, language has been included in the budget bill to (1) extend the availability of funds for these programs by one year (to two years) and (2) modify current requirements in the Public Contract Code concerning proposal solicitation and contract procedures.

Under Chapter 854, the Legislature took steps to deregulate electrical generation in California. Coupled with these actions, the Legislature established programs for renewable electricity generation, public interest research, development and demonstration activities, energy efficiency, and low-income programs. Funding for these programs is collected from investor-owned utilities by the state Public Utilities Commission. The moneys are then transferred to the Energy Commission for administration and implementation of the programs. The expenditure of the funds are dependent on legislative action.

Public Interest Research, Development and Demonstration Program. The budget proposes $21.1 million expenditure authority for this program. This amount includes $794,000 to add seven positions and technical support to implement and administer the program. The commission indicates that the request for this level of additional staff is based on redirection of existing staff and contract support, on an as needed basis beginning in the current year. The commission, however, has not identified what staffing level will be required in the budget year and thereafter.

The commission indicates that beginning January 1, 1998, at least $62.5 million will be collected annually from the ratepayers of investor-owned utilities to finance this program. The commissions timetable for implementing this program calls for it to: (1) develop a plan by June 30, 1997; (2) streamline requirements for solicitation, contractor selection, and contract negotiations by March 16, 1997; and (3) prepare and conduct solicitations July 1997 through April 1998. Projects would be awarded January 1998 through June 1998. The commission indicates that this timetable will require modifications of current proposal solicitation and contracting requirements. As mentioned above, the budget bill contains language to modify these requirements for this program and the program discussed below.

Public Interest Renewable Resource Technology Program. The budget includes $45.7 million for this program. The commission indicates that about three staff positions and contract support will be redirected to plan and implement this program. The commission, however, has not identified what staffing level will be required in the budget year or thereafter. A total of $540 million is expected to be collected from ratepayers of investor-owned utilities over the five-year period ending December 31, 2001. The commission's timetable for this program involves (1) planning and implementing the program July 1997 through January 1998, (2) administering the program and awarding contracts and grants January 1998 through December 2001, and (3) closing out the program by June 2002.

No Information on Program Plans or Implementation. The commission has not developed a plan or established criteria for selecting and awarding projects under these programs. We believe that the Legislature should have available a well-defined program--including details of the commission's implementation, administration, and development plan--with clearly defined criteria and priority-setting procedures before the commission is given expenditure authority to embark on these programs. In addition, for the renewable resource technology program, Chapter 854 requires the commission to submit a report to the Legislature by March 31, 1997 with recommendations regarding market-based mechanisms to allocate available funds for programs.

Based on the lack of program information and the legislative requirement for the forthcoming March 31 report, we recommend that the Legislature not approve the $66.8 million requested for these new programs, or the budget bill language, until the necessary information is available for legislative review.