LAO Analysis of the 1997-98 Budget Bill
Transportation Departmental Issues, Part 2

  1. Department of California Highway Patrol (2720)
    1. Workers' Compensation Costs Still Significant
    2. Legislature Should Determine Policy On Use of State Highway Account Funds
    3. Expansion of Statewide Radio System Premature
  2. Department of Motor Vehicles (2740)
    1. Computer Improvements Behind Schedule
    2. DMV Should Revise Financial Responsibility Proposal
    3. DMV Should Address Vehicle Registration Evasion
    4. Policy Proposals Lack Detail and Require Legislation

Department of the

California Highway Patrol


The California Highway Patrol (CHP) is responsible for ensuring the safe, lawful, and efficient transportation of persons and goods along the state's highway system and to provide protective services and security for state employees and property. To carry out its responsibilities, the department administers four programs: (1) Traffic Management, (2) Regulation and Inspection, (3) Vehicle Ownership Security, and (4) Protective Services. These four programs are funded primarily with Motor Vehicle Account funds.

The budget proposes $851 million to support CHP in 1997-98. This is approximately $59 million or about 7.4 percent above estimated current-year expenditures. The increase is primarily the result of the following augmentations: (1) $5.6 million for telecommunications equipment, (2) $4.3 million for the full-year cost of traffic officer positions and to upgrade 28 officer positions to sergeants, (3) $1.4 million to regulate commercial motor carrier activities previously regulated by the Public Utilities Commission, and (4) $1.1 million to reestablish the Salvage Vehicle Inspection Program.

The budget also proposes a reduction of $1.6 million in expenditures due to the termination of the California Motorcyclist Safety Program, and the Hazardous Waste Transport Vehicle and Container Inspection and Certification Program.

Workers' Compensation Costs Still Significant

We recommend that the California Highway Patrol (CHP), jointly with the Department of Personnel Administration (DPA), report on (1) steps DPA will take in its negotiations with the State Compensation Insurance Fund to lower CHP's administrative costs and (2) the feasibility of changing the payment methodology and adding performance measures to the master agreement, as well as the feasibility of contracting out as a pilot project.

Workers' compensation laws require employers to pay for the cost of treating job-related injuries sustained by their employees. As a self-insured agency, CHP pays directly for all the costs associated with treating injuries sustained by traffic officers while on duty. Workers' compensation expenditures account for a significant amount of CHP's annual budget. Workers' compensation costs reduce CHP's ability to use its resources for core activities, such as traffic enforcement.

Figure 11 shows workers' compensation costs to CHP since 1990-91. From 1990-91 through 1995-96, the department paid about $230 million in compensation expenditures. As the figure shows, costs peaked in 1992-93 reaching $42.2 million. Since that time, workers' compensation costs have dropped and average about $37 million a year. Changes in workers' compensation laws in part explain the decrease in costs in 1993-94.

Key Components of Workers' Compensation Costs. The CHP's workers' compensation costs are made up of several components. Medical costs account for the largest portion of total costs. In 1995-96, medical costs accounted for 38 percent ($13.7 million out of $36.2 million) of total workers' compensation expenditures. Besides receiving full medical payments to treat their injuries, traffic officers are eligible to receive salary payments for up to one year if an injury requires them to be away from regular work duties. (This benefit is referred to as "4800.5 time" as it is provided under Labor Code Section 4800.5.) Other cost components include: (1) temporary disability payments that provide a salary if the injury continues for more than one year, (2) permanent disability payments that provide a monetary award to compensate an employee for sustaining a permanent injury that diminishes the employee's ability to compete in the labor market, and (3) vocational rehabilitation payments that provide an injured employee with up to $16,000 for rehabilitation treatment or courses that will enable the injured employee to return to work. In 1995-96, CHP paid a total of $5 million for 4800.5 time benefits, and $10.7 million for temporary and permanent disabilities and vocational rehabilitation costs.

Administrative costs are another important component in CHP's total workers' compensation exposure. In 1995-96, administrative costs totaled 18 percent ($6.4 million) of CHP's workers' compensation expenditures.

Expenditures Driven by Number of Claims. Total workers' compensation expenditures are determined in large part by the number and types of injury claims. The higher the incident of injuries, and the more serious the nature of the injuries, costs are correspondingly higher.

CHP Takes Action to Curb Workers' Compensation Costs. As a result of a 1992 internal audit, CHP took several steps to lower its workers' compensation costs. For example, CHP staff developed an Occupational Safety Manual and provided staff training on injury management. In 1995, the department also eliminated its mandatory physical performance testing and fitness program, in order to eliminate injuries sustained as a result of preparation and participation in physical performance tests.

Despite Lower Number of Claims, Administrative Costs Increase. Our review shows that in the past three years, CHP has reduced the number of claims opened each year from 5,779 in 1994 to 4,938 in 1996. As the number of claims decreases, one might expect total costs to drop also. This is not the case, however. Our review shows that while all other costs have remained stable, costs charged to CHP to administer its workers' compensation claims have increased.

As required by law, CHP contracts with a third party administrator, the State Compensation Insurance Fund (SCIF), to process, adjust, and manage all claims. The contract is executed under a Master Agreement which is negotiated and managed by the Department of Personnel Administration (DPA). The current Master Agreement will expire on June 30, 1998.

Currently, SCIF charges a $103 monthly fee for each open claim, and an additional $68 fee for claims that are being litigated. (A claim is open for as long as SCIF has to provide a workers' compensation benefit.) As shown in Figure 12, SCIF fees have increased by 68 percent, from $3.8 million in 1993-94 to $6.4 million in 1995-96. Based on payments through December 1996, we estimate SCIF fees to stay at about $6.5 million for the current year. This increase is attributable to two factors. First, in 1995, SCIF changed its charging methodology under the current Master Agreement with DPA from a percentage of the total medical payments to a flat fee for every open claim. Second, SCIF purchased new database equipment and charged the cost back to state agencies. Prior to this equipment purchase, SCIF charged $94 per claim compared to the current $103, a 10 percent increase since 1995.

Master Agreement With SCIF Should Be Assessed. Because current law requires CHP to contract with SCIF, it does not have much flexibility in reducing its claims administrative costs, apart from reducing the number of claims. However, current law also allows SCIF to charge CHP different rates/fees than other state agencies. As DPA negotiates with SCIF for a new contract during the budget year, we think that this is one option that ought to be explored. In our review of DPA's budget, we have recommended that it report to the Legislature on the steps DPA will take in its negotiations with SCIF to lower the state's administrative costs (see Item 8380).

Additionally, we recommend that CHP, jointly with DPA, report at budget hearings on the feasibility of the following:

Legislature Should Determine Policy On Use of State Highway Account Funds

The budget proposes $55.5 million from the State Highway Account (SHA) to support the California Highway Patrol's Commercial Vehicle Inspection program for 1997-98. The department also proposes a loan of $12.8 million from SHA for the same purpose in the current year. We recommend the enactment of legislation to specify the appropriate funding mix of Motor Vehicle Account and SHA funds for this program.

The CHP operates and staffs 15 truck inspection stations throughout the state. Trucks are weighed and inspected to promote truck safety, to ensure that registration/weight fees are collected, and to protect the highways from excessive truck weights. Approximately 300,000 trucks are inspected on an annual basis and 600,000 safety violation citations are issued. For 1997-98, the budget proposes $55.5 million for the operation of the inspection stations. State Highway Account Provides Up to 40 Percent of Cost. Up until 1991, Motor Vehicle Account (MVA) revenues were used to fully fund CHP's operation of the truck inspection program. Beginning in 1992, SHA funds have been used to provide partial funding for this activity. Typically, SHA funds contribute between 20 and 40 percent of the program's total costs.

Current-Year SHA Loan Requested and Budget-Year Costs to Be Paid Solely From SHA. For the current year, the Legislature decided that SHA ought to pay 40 percent of the costs of the truck inspection operations despite a request by CHP to shift more of the cost from MVA to SHA. As we discussed in the Crosscutting Issues section of this chapter, because of the condition of MVA, the department proposes a loan of $12.8 million from SHA for 1996-97 truck inspections. However, no repayment terms are specified.

For 1997-98, the budget proposes to shift all costs totaling $55.5 million to SHA. This is not consistent with legislative direction for the current year. (See MVA writeup in Crosscutting Issues section.)

Legislature Should Determine Funding Mix. Generally, in the past, SHA funds have been used for highway construction and maintenance, and MVA funds for vehicle and driver regulation activities. Because truck weight fees are deposited into SHA, using SHA to pay for part of the cost of the truck inspection program is reasonable. However, what the appropriate funding mix of MVA and SHA ought to be is a decision that the Legislature should make. Without that determination, as the MVA condition worsens, it is very likely that SHA funds will be called upon to fund not only CHP's truck inspection program, but potentially other traffic enforcement and management functions, such as the operation of traffic management centers.

Accordingly, we recommend enactment of legislation to specify on an ongoing basis the statutorily appropriate funding mix of MVA and SHA funds for CHP's truck inspection program. For the budget year, we offer the following options.

The Legislature ought to decide on an option that is consistent with its priorities for MVA and SHA funds.

Expansion of Statewide Radio System Premature

We recommend that the Legislature reduce by $1.4 million the California Highway Patrol's (CHP) request to expand its radio system because the expansion is premature and CHP is withdrawing this request. (Reduce Item 2720-001-0044 by $1,407,000).

The CHP originally requested $1.4 million to purchase telecommunications equipment for a statewide radio system to expand CHP's existing radio communications network. After discussions with CHP regarding the timing of the proposal and its feasibility, CHP now indicates that it is withdrawing the request because the telecommunications project is not feasible at this time. Accordingly, we recommend that $1.4 million be deleted.

Department of Motor Vehicles


The Department of Motor Vehicles (DMV) is responsible for protecting the public interest in vehicle ownership by registering vehicles and for promoting public safety on California's roads and highways by issuing driver licenses. Additionally, the department licenses and regulates vehicle-related businesses such as automobile dealers and driver training schools, and also provides revenue collection services for state and local agencies.

The budget proposes total expenditures of $564 million for support of DMV in 1997-98. This is an increase of $29 million, or 5.3 percent, above estimated current-year expenditures. The majority of the increase is due to costs to implement new legislation, primarily legislation that requires proof of financial responsibility (liability insurance) prior to vehicle registration, and legislation that transfers commercial trucking regulation from the Public Utilities Commission to DMV and the California Highway Patrol (CHP).

Computer Improvements Behind Schedule

We withhold recommendation on $5.1 million to continue various information technology projects because the projects have slipped behind schedule and the Department of Motor Vehicles has not been able to provide a revised work schedule, nor has the department identified the scope and cost of the work to be performed in 1997-98.

Since 1994, when DMV abandoned its ambitious but flawed computer redevelopment project, the department has been pursuing a new project to improve its information technology systems. The process began in 1994-95 with an independent consultant evaluation, and in 1996-97 the Legislature provided $5.8 million for three projects to begin implementing the consultant's recommendations. The Legislature provided these funds for only one year, however, with funding in subsequent years contingent upon continued progress and success in meeting targets. Schedule, Scope, and Cost Uncertainties. For 1997-98, DMV requests $5.1 million to fund these three projects for a second year. However, two of the projects--rewriting outdated computer programs, and replacing custom database software with industry standard software--have slipped several months behind schedule. At the time this analysis was written, DMV was still preparing to solicit contractors to perform the necessary work for these projects, and the department was unable to provide a schedule of work to be performed in 1997-98. The third project--business process reengineering, an effort to streamline departmental functions for higher efficiency--is on schedule, but DMV has not yet identified the scope of work for 1997-98 or the cost, which may range between $2 million to $3.5 million.

Withhold Recommendation. We believe that the Legislature should not provide additional funding for these projects without information on their schedule, scope, and costs for 1997-98. Accordingly, we withhold recommendation on the department's request pending receipt of this information. With the assistance of contractors that DMV plans to hire in February, the department should be able to develop this information for the budget year. This information will allow the Legislature to determine if a second year of funding is warranted and hold DMV accountable for its planned accomplishments.

DMV Should Revise Financial Responsibility Proposal

We recommend that the Legislature reject the Department of Motor Vehicle's (DMV) proposal for $19 million to implement new financial responsibility legislation because it does not consider less costly alternatives. We further recommend that, prior to budget hearings, DMV submit a revised proposal based upon less costly alternatives. (Reduce Item 2740-001-0044 by $19 million.)

Chapter 1126, Statutes of 1996 (AB 650, Speier) requires that vehicle owners provide proof of financial responsibility (liability insurance) prior to renewing a vehicle registration, effective January 1, 1997. The DMV will require that vehicle owners submit insurance information with their vehicle registration renewal application. The department will reject applications that lack complete insurance information; however, it will not validate the authenticity of the insurance information in order to prevent fraudulent reporting. In order to implement Chapter 1126 in 1997-98, DMV requests $19 million and 562 personnel-years. These costs are primarily for field office staff time to explain the new requirement to vehicle owners, and for data entry of insurance information.

Concerns With Department's Proposal. While Chapter 1126 will certainly increase the department's workload, the $19 million request is based upon a large number of questionable assumptions, such as the percent of vehicle owners that will submit incomplete insurance information, and the time--in number of minutes--that field staff will spend discussing the requirement with vehicle owners. Because these numerous assumptions cannot be validated or tied directly to current DMV experience, we are unable to determine whether the requested increase is appropriate to the requirements of the new legislation.

More importantly, however, we believe that the legislation could be implemented at much lower cost and greater convenience to vehicle owners if DMV were to receive insurance information directly from insurance companies via electronic data transfer. Electronic data transfer would also increase the effectiveness of Chapter 1126, as it would virtually eliminate fraudulent insurance information. Currently, DMV uses electronic data transfer to receive smog check information from inspection stations, and several other states receive insurance information through electronic data transfer.

Recommendation. We recommend that the Legislature reject the department's current proposal, because it does not consider less costly alternatives. We further recommend that DMV submit a new proposal for implementing Chapter 1126 that considers electronic communication and other options to minimize cost. Finally, we recommend that any funds that the Legislature provides to implement Chapter 1126 be provided on a one-year basis, thus requiring DMV to justify its costs based on actual experience in order to receive funds for 1998-99 and subsequent years.

DMV Should Address Vehicle Registration Evasion

We find that there are increasing incentives for vehicle owners to evade vehicle registration, due to requirements that have to be met before they can register their vehicles. We recommend that, as part of a revised plan to implement Chapter 1126, the Department of Motor Vehicles should develop a plan to increase compliance with vehicle registration requirements.

California uses the vehicle registration process to serve a number of purposes in addition to the basic function of identifying vehicle ownership. In order to register vehicles, most owners must prove that their vehicles meet pollution standards, pay 2 percent of the vehicle value as an in-lieu property tax (with revenues accruing mainly to local governments), and pay local fees to support roadside callbox, abandoned vehicle abatement, and air quality programs. In addition, DMV can reject vehicle registration applications for owners that have not paid outstanding traffic citations, and new legislation (Chapter 1126) also requires vehicle owners to provide proof of insurance prior to registration. Using the vehicle registration process in this manner encourages compliance with these requirements because of the importance of vehicle ownership and operation for most persons; vehicle owners cannot evade the prerequisite requirements without losing the ability to operate their vehicles legally. However, as the number of prerequisites linked to vehicle registration increases, owners' incentives to not register their vehicles--in order to evade the other requirements and costs--rise correspondingly. The DMV agrees that nonregistration increases when new requirements are added, but it has not estimated the total number of unregistered drivers or the number that it has lost with each new requirement.

Revenue Loss. When drivers fail to register their vehicles, state and local governments lose revenue. Each 1 percent drop in vehicle registration reduces Motor Vehicle Account (MVA) revenues by about $8 million, while local governments lose about $27 million in revenues from the Motor Vehicle License Fee Account. Because DMV does not know the number of unregistered vehicles, it cannot estimate the amount of lost revenue.

New Financial Responsibility Requirements May Increase Evasion. The DMV believes that approximately 30 percent of California drivers currently lack insurance. Now that Chapter 1126 requires proof of insurance in order to register a vehicle, some of these drivers will obtain insurance, but others will fail to register their vehicles rather than pay the additional cost of insurance. The department assumes, for the purposes of estimating MVA revenues, that vehicle registration will drop 1 percent (see our discussion on the MVA fund condition in the Crosscutting Issues section of this chapter). However, because of the large number of uninsured drivers and the high cost of insurance, the potential increase in nonregistration resulting from Chapter 1126 may be much higher than 1 percent.

DMV Should Combat Nonregistration. Adding prerequisite requirements to vehicle registration has been an effective way for the state to enforce certain laws and collect revenue. However, the increasing number of requirements, including the new financial responsibility requirement of Chapter 1126, may result in more drivers failing to register their vehicles. We therefore recommend that DMV, as part of a revised proposal to implement Chapter 1126, present to the Legislature (1) an estimate of the total number of unregistered drivers and the related lost state and local revenue, and (2) a plan to combat nonregistration, registration sticker theft, and other attempts to evade vehicle registration requirements.

Policy Proposals Lack Detail and Require Legislation

We recommend that the Legislature reject three proposals contained in the proposed budget because, while they have minor budgetary effects, detail is lacking and they are contingent upon enactment of legislation. (Increase Item 2740-001-0044 by $478,000.)

The proposed DMV budget includes three policy proposals intended to transfer DMV responsibilities to the private sector. The proposals are:

Reject Proposals in Budget. None of these proposals has a significant budget impact, but implementation would require statutory changes. The proposed legislation should reflect the fiscal changes. Accordingly, we recommend that the Legislature delete these three proposals and restore $478,000 to the department's budget. The higher departmental cost will be more than offset by the $750,000 fee revenue from continued licensing of automobile salespersons.

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