General Government

Consumer Affairs (1110-1600)

The Department of Consumer Affairs is responsible for promoting consumer protection while supporting a fair and competitive marketplace. The department includes 28 semiautonomous regulatory boards and nine bureaus and programs that regulate various professions. The nine bureaus and programs are statutorily under the direct control of the department. The 28 regulatory boards are administered by appointed consumer and industry representatives.

Expenditures for the support of the department and its constituent boards are expected to total $359 million in 1998-99, a 16.5 percent increase from the current year, which is primarily a result of the transfer of approximately $65 million in special fee revenue to fund the Smog Check program. Included in the total are $1.7 million in expenditures from the General Fund, a 115 percent increase. The increase in funding from the General Fund is the result of the department's request for a $900,000 augmentation for the call center--a toll-free inquiry/complaint system which handles telephone inquires/complaints from consumers and licensees.

Smog Check Program

We recommend that the Legislature not approve funds requested for the Smog Check program until the department provides a complete report to the Legislature, detailing the current status of all of its components (including the implementation strategy for the low-income repair assistance and high-polluting vehicle purchase programs and implementation of remote sensing technology). We withhold recommendation on the requested $68 million to implement legislation adopted in 1997, pending receipt and review of the requested report.

Current Smog Check Program

The Legislature adopted legislation establishing the first Smog Check program in 1982. The original framework for a statewide biennial inspection program was implemented in 1984 by the department's Bureau of Automotive Repair. Under this program, both smog (emission) testing and needed vehicle repairs were permitted at any privately owned smog test-and-repair station.

The 1990 federal Clean Air Act amendments required a somewhat different smog check program in states with the most polluted urban areas, including California. As a result, California was directed in 1992 to adopt a program that would have required vehicles to be tested and repaired at different stations. In response to this directive, the state, after negotiating with the federal government, adopted a "hybrid" program in 1994. The new program is designed to meet the federal clean air requirements by focusing on the highest-polluting vehicles and the smoggiest areas. The program is funded through a variety of fees, and the annual budget totals approximately $89 million.

Several bills adopted during 1996 and 1997 amended the Smog Check program. The new laws:

Budget Proposal. The budget contains two proposals, detailed in Figure 3, to implement the recent changes to the Smog Check program. Essentially, the department has grouped the program changes into two different categories based on the funding source. We discuss below the funding and implementation problems associated with these two components.
Figure 3
Department of Consumer Affairs

Smog Check Proposals

(Dollars in Thousands)
DCA Division/


Repair Assistance

and Purchase

Enhanced Smog Check








Enforcement $2,253 25.0 $2,627 25.0
Operations/Engineering 4,366 24.4 1,081 4.0
Office of Information Services -- -- 424 3.0
Administration 442 6.0 1,064 10.8
Consumer Education and Awareness 684 1.0 -- --
Department of Motor Vehicles -- -- 100 --
Repair Assistance and Vehicle Purchase 55,000 -- -- --
Call Center 1,510 32.7 3,402 53.0
Totals $64,255 89.1 $8,698


aIncludes $4.5 million redirected from existing ufnds appropriated for remote sensing.

Vehicle Repair Assistance and Purchase Programs

This request is for $64.3 million in funding from the High Polluter Repair or Removal Account to implement (1) a repair assistance program for low-income motorists and (2) a vehicle purchase program for motorists who own high polluting vehicles. (We address $62.8 million of the total proposal in this discussion and the remaining $1.5 million in the next section on the request for augmentations to the department's call center.)

Low-Income Repair Assistance. The department is authorized to offer qualifying motorists a low-income repair assistance program beginning March 1, 1998. Qualifying motorists are those automobile owners (1) whose income is at or below 175 percent of the federal poverty level and (2) who make a co-payment equal to the repair cost limit (set by the department at either $250 or not more than $200, depending on the level of participation in the program). The program is to be funded by smog impact fee revenue (a $300 fee collected when an out-of-state vehicle is registered in California for the first time).

According to the department, a method to verify the income level for potential participants has not been developed and there is no date certain when the method would be developed. Consequently, it is uncertain as to when this program will be operating or how the funds will be used in the budget year. In view of this situation, we recommend the Legislature withhold action until the department is able to provide information on the method to be used for income verification and an implementation plan for this proposal.

High Polluting Vehicle Purchase Program. The department is also authorized to establish a program to purchase high polluting vehicles at a price equal to the market value of the vehicle, not to exceed $800. Based on information from the department, it is clear that the department is not ready to implement this program. For example, the department is still in the process of determining how the purchased vehicles will be disposed of and what costs may be associated with vehicle disposal. According to the department, there could be a relatively high cost associated with disposal of the vehicles. If this is the case, then the state will not be able to purchase as many vehicles. Additionally, the department is still developing guidelines for determining which vehicles should be targeted for purchase and at what price.

Enhanced Smog Check

This request totals $8.7 million from the Vehicle Inspection and Repair Fund (VIRF). This amount includes $4.5 million redirected from existing appropriations that were provided for the remote sensing element of Smog Check and a $4.2 million augmentation from the VIRF. This request is to address those 1996 and 1997 program changes and associated workload that are funded solely from the VIRF. For purposes of our discussion, we will refer to this proposal as the Enhanced Smog Check. (We address $5.3 million of the total proposal in this discussion, and the remaining $3.4 million in the next section on the request for augmentations to the department's call center.)

Previous Redirections From Remote Sensing. It is our understanding that the department has previously redirected funding from the remote sensing component to other areas within the Smog Check program. During the 1997-98 budget hearings, the administration asked the Legislature to provide an augmentation to the referee services component of the Smog Check program. At that time the department indicated funds could no longer be redirected from the remote sensing component because the redirection of funds "....has reduced the ability of the....State to meet mandates established by the Federal Clean Air Act...." The proposed budget-year redirection of $4.5 million is inconsistent with the department's position last spring. Without the proposed redirection, the remote sensing budget for 1998-99 would total $14.5 million.

Additionally, the department's justification for the proposed redirection is that the remote sensing technology is not yet accurate enough to warrant full implementation. It is not clear what level of accuracy is necessary, how the department will determine this accuracy level or when the technology will provide this accuracy. Given these issues, the department needs to provide the Legislature information regarding the desired accuracy level that remote sensing needs in order to be fully implemented and a time frame of when that accuracy level will be achieved.

Consequently, we recommend that the department provide the Legislature an update on the status of the remote sensing component of Smog Check, including the needed funding, before the Legislature considers redirecting any funds from this element of the program.

Current-Year Expenditure Controls

The department has mandated a hiring freeze and other expenditure controls during the current year to generate savings within the VIRF to implement various legislative mandates. The department's stated goal is to obtain $4 million in "savings" from authorized VIRF expenditures to fund the new mandates. Included in this $4 million "savings" is a $2 million redirection from remote sensing.

We recommend the department provide a detailed report to the Legislature prior to budget hearings addressing the current-year expenditure controls and hiring freeze. The report should include, at a minimum, a listing of which positions have been held vacant; which expenditures, by program area, have been curtailed or postponed; and which remote sensing activities have been curtailed or postponed.

Department of Motor Vehicle Fee Collections

Under Chapter 802, Statutes of 1997 (AB 208, Migden), owners of vehicles that are four model years old or newer must pay a $4 annual smog abatement fee but are not required to have their vehicle smog checked until the vehicle is more than four years old.

The smog abatement fee is to be collected at the time the vehicle owner registers (initial registration and each renewal) the vehicle with the Department of Motor Vehicles (DMV). The DMV is to deposit these fees daily in the VIRF. The proceeds from this fee are estimated to total $12 million per year.

It is our understanding that because the DMV has not made the necessary changes to its computer systems, it is unable to collect the fee. Furthermore, under a Governor's Executive Order, the DMV will not make the needed modifications until it has successfully completed changes to its computer systems to meet year 2000 requirements. According to DMV, this work will not be complete until late 1998 and fee revenue will not begin to be collected until January 1, 1999. Therefore, only about $6 million would be collected in the budget year. The Governor's budget for the Smog Check program, however, anticipates receiving a combined total of $18 million in the current year and budget year. Thus, the department will not receive most of the anticipated fee revenue.

At the time this Analysis was prepared, the department--along with the Department of Finance and the DMV--was attempting to secure alternative funds to replace the smog abatement fees that will not be collected. The departments were also investigating the feasibility of collecting the first year of smog abatement fee revenue in arrears. Prior to budget hearings, the department should provide the Legislature an update on the status of the smog abatement fee collections and any impact lost collections will have on the overall Smog Check program.

Call Center Augmentations Not Justified

We recommend the Legislature delete the proposed augmentations totaling $6.1 million and 109.7 positions for the department's call center because the department has not justified the need at this time for these augmentations. (Reduce various items by a total of $6.1 million and 109.7 positions.)

The department has requested a total $6.1 million augmentation and 109.7 positions for the call center. The augmentations are spread across three different programs (as detailed in Figure 4) and essentially triple the size of the call center.

The department operates a toll-free inquiry/complaint (800 number) telephone line to handle telephone inquiries and complaints from consumers and department licensees. The department established the combination automated and live operator call center in 1994 and has since expanded the center to respond to inquiries received via the Internet. The call center currently has a staff of 50 permanent positions and is entirely supported by special fund revenue.
Figure 4
Department of Consumer Affairs

Proposed Augmentation for Call Center

(Dollars in Thousands)
Program Proposed


Fund Source Proposed


Smog Check $4,912 Various 85.7
Barber and Cosmetologists 292 Special funds 5.0
Nonjurisdictional workload 900 General Fund 19.0
Totals $6,104 109.7

General Fund Call Center Augmentation

The budget proposes a General Fund augmentation of $900,000, on the basis that it is needed to offset costs associated with answering calls and inquiries concerning matters not under the department's jurisdiction. These include landlord/tenant issues, vehicle registration and driver's license renewals, and collection agency practices. The department indicates that approximately one-third of telephone calls and one-half of Internet inquires concern matters not under the department's jurisdiction.

According to the department, because call center operators are tied-up with nonjurisdictional 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 1997 year-end report on its participation in the performance-based budgeting pilot indicates that in 1996-97 the call center:

Thus, it appears that the department is able to not only handle the center workload, but is also consistently improving customer service.

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 and improved service along with the options that exist for reducing costs associated with answering nonjurisdictional calls, we believe an augmentation to the call center is not justified. Accordingly, we recommend that the Legislature delete $900,000 under Item 1111-001-0001.

Barbering and Cosmetology Workload

When the Barbering and Cosmetology program was structured as a board, the board and the department entered into a memorandum of understanding (MOU) for the call center to handle the program's workload. The MOU was initiated at the beginning of 1995-96. It provides for three dedicated positions in the call center and requires the Barbering and Cosmetology program to reimburse the department for work performed, based on call volume. In addition, when the Barbering and Cosmetology program was organized as a board, it operated its own call center, which was funded out of $80,000 budgeted for communications expenses. At that time, the board responded to over 250,000 calls annually.

The current workload identified by the department is only 120,000 calls annually. Thus, the current budget for Barbering and Cosmetology activities should be sufficient to handle the call center workload. We therefore, recommend that the Legislature not approve any additional funds for the Barbering and Cosmetology call center workload, as it is unclear that the current funding is insufficient for the program needs. (Reduce Item 1111-001-0069 by $292,000 and five positions.)

Smog Check Augmentation

The proposed call center augmentation includes $4.9 million and 85.7 positions to handle projected Smog Check program workload growth resulting from the implementation of various pieces of legislation adopted in 1996 and 1997. This request is directly related to the Smog Check program changes (repair assistance, vehicle purchase, and Enhanced Smog Check) discussed earlier. As we mentioned in the previous section, the department has not finalized implementation plans for these changes.

Thus, the requested increase in call center staff to handle to smog check workload is highly speculative. Given this uncertainty, the department cannot at this time, be assured there will be any new workload in 1998-99, let alone an increase which would nearly triple the workload of the call center. Thus, we believe that it is premature to authorize this level of expansion. Should the department experience a significant increase in workload at the call center, the flexibility exists within the department under performance-based budgeting to shift personnel and funds to accommodate such a need. (Reduce Item 1111-001-0421 by $3.4 million and Item 1111-001-0582 by $1.5 million.)

Other Issues

Barbering and Cosmetology Augmentations Unnecessary

We recommend the deletion of proposed augmentations for the Barbering and Cosmetology program because these costs should be accommodated within current resources using the flexibilities given to the department under performance based budgeting. (Reduce Item 1111-001-0069 by $737,000 and 18.3 positions.)

The budget proposes the following augmentations totaling $737,000 and 18.3 positions for the board:

Workload adjustment for citation appeals ($372,000 and seven positions).

Workload adjustment for examination administration ($236,000 and 11.3 positions).

Distribution of board health and safety rules ($129,000).

In past years, the Legislature has provided these augmentations on a one-time, limited-term basis. This action was taken as a result of the uncertainty surrounding the board's transition into the department as a bureau.

Board Was Restructured as a Bureau. The Board of Barbering and Cosmetology sunsetted on June 30, 1997. The program functions of the board were restructured as a bureau within the department, effective July 1, 1997. Consequently, the activities and functions in this regulatory area should be evaluated by the department for inclusion in existing departmental administrative structures, such as the case management branch and the office of examination resources. We believe it is inappropriate for the department to continue to evaluate the needs of the Barbering and Cosmetology program as if it were a stand alone board. Also, because this is now a bureau under the department's performance-based budgeting approach, the department (1) has greater flexibility to accommodate any new expenditures from existing resources and (2) the ability to realize savings associated with the elimination of the board structure. These economies would certainly not be realized under the budget proposal, which would result in expenditures in this program area increasing from the $7.8 million in 1996-97 (the last year as a board) to the $9 million proposed for the budget year. Thus, we recommend that the Legislature delete $737,000 and 18.3 positions from Item 1111-010-0702.

State Funding for Bureau of Home Furnishings and Thermal Insulation Laboratory Upgrades Inappropriate

We recommend the Legislature delete a $221,000 augmentation to fund a rent increase ($86,000) and structural upgrades ($194,500) for the Bureau of Home Furnishings and Thermal Insulation Laboratory because improvements to a privately owned building should not be funded with state dollars. (Reduce Item 1111-001-0752 by $221,000.)

The Governor's budget contains $281,000 from special funds for improvements to the testing laboratory operated by the Bureau of Home Furnishings and Thermal Insulation. The laboratory is located in North Highlands in a rented building, and the current lease expires in 1998. The proposed augmentation would provide for a rent increase (however, the new lease agreement has not been finalized), electrical wiring, plumbing, and other structural upgrades. Since the laboratory is located in a rented building, we believe providing permanent improvements to a private building is an inappropriate use of state funding. Instead, these improvements should be the responsibility of the owner. Any improvements that are needed specifically for the state program should be amortized through the state's lease payment. Thus, we recommend the Legislature delete the $221,000 related to this work.

Of the amount requested, $60,000 is for the purchase and installation of ventilation hoods for health and safety purposes. These hoods are movable and would be state property. This portion of the request is appropriate, and we recommend the Legislature approve the related $60,000.

Implementation Plan for Chapter 401, Statutes of 1997 Not Complete

We recommend deletion of the proposed $326,000 increase in reimbursement authority for the implementation of Chapter 401, Statutes of 1997 (SB 780, Kelley) since the department is to provide an estimate of ongoing costs at a later date. (Reduce reimbursements under Item 1111-010-0702 by $326,000.)

Chapter 401 amended the Private Investigators Act and the Private Security Services Act relating to: (1) fee structures; (2) new, technologically advanced licensee identification cards; and (3) synchronization of licensee firearm and license renewal cycles. The department indicates that the new licensee identification cards and synchronization of the license renewals will result in one-time and ongoing costs and has requested a one-time increase in reimbursement authority totaling $326,000. The department, however, has also indicated that the ongoing costs, as yet unidentified, will be included in a proposal to be submitted at an unspecified future date. Consequently, we recommend the Legislature not approve this request. When the department develops the necessary budget information to implement Chapter 401, a revised proposal would warrant legislative consideration. (Reduce Item 1111-010-0702 by $326,000.)

Private Postsecondary and Vocational Education Program

We withhold recommendation on the $6.6 million proposed for the department to assume the responsibilities of the Council for Private Postsecondary and Vocational Education pursuant to Chapter 78, Statutes of 1997 (AB 71, Wright), pending receipt of an implementation plan.

Chapter 78 transferred the regulatory responsibilities of the Council for Private Postsecondary and Vocational Education (hereafter referred to as program) to the department effective January 1, 1998. In addition, Chapter 78 makes structural changes to the program. The department is requesting $6.6 million and 79.5 positions to implement Chapter 78. This is the same funding level previously authorized for this program when the authority for operation was within the council.

The department just recently assumed responsibility for the program and has not yet identified the workload involved with administering the changes mandated by Chapter 78, nor has the department identified the savings, if any, that should occur as a result of the transfer. The department is proposing to adjust the budget, if necessary, in the 1999-00 budget proposal.

We withhold recommendation on this proposal and the department should provide an implementation plan to the Legislature before the budget hearings begin. The plan should include, at a minimum, what the department plans to accomplish in the first 18 months of program operation; a time-line of implementation; and a revised first-year cost estimate reflecting initial savings from the transfer.

Department Should Report on Status of Year 2000 Modifications

The department should, prior to budget hearings, submit a report to the Legislature on the status of modifying critical information technology systems to accommodate the year 2000 change.

The Consumer Affairs System (CAS) is the primary computer system operated by the department. The CAS issues, tracks, and maintains business and individual occupational licenses (initial and renewals); and records and tracks complaints, investigations, and administrative, civil, and criminal sanctions against licensees. Additionally, the CAS operations collect approximately $241 million in revenue annually.

The department has identified the CAS as being "mission critical" for the department's operation. This designation--mission critical--means that operation of the CAS supports the department's main function, which is licensing and enforcement. According to the department, if the CAS is not modified on time to be year 2000 compliant, the department will: (1) experience a delay in issuing licenses; (2) be unable to collect licensing revenue, conduct enforcement actions or determine the validity of existing licenses; and (3) pass on erroneous information to other state systems with which the CAS shares information.

The department has indicated that (1) the CAS failure date (the date when the department can no longer be completely confident the system is functioning properly) was January 1, 1998, and (2) the system will not be completely reliable until December 31, 1998. The department also has indicated that a "work around" or temporary fix has been implemented to keep the CAS functioning until December 31, 1998. Based on the available information, it is unclear as to the extent of the work around and whether the work around is sufficient to keep the CAS functioning.

Given the importance of the CAS and the uncertainty of the reliability of the "work around," the department should, prior to budget hearings, submit a report to the Legislature on the status of modifying all information technology systems to be year 2000 compliant. The report should address the current operations of the department, including licensing, enforcement, and cashiering; and identify if any of these operations are compromised or limited as a result of year 2000 operational problems with the CAS.

Fair Employment and Housing (1700)

The Department of Fair Employment and Housing (DFEH) enforces laws that promote equal opportunity in housing, employment and public accommodations, and that protect citizens from hate violence. Specifically, 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 $19.2 million ($15.2 million from the General Fund and $4 million federal funds) for support of DFEH in 1998-99. This represents a General Fund increase of $1.7 million (13 percent) over its estimated current-year expenditures.

Management Improvements Required Before Consideration of Further Staffing Increases

We recommend the Legislature not approve the department's request for a $1,250,000 augmentation and 21 new positions because of the need for management improvements. Further, we recommend the Legislature adopt supplemental report language directing the department to submit to the Legislature by November 1, 1998, a report on its progress in implementing management changes, the specific performance improvements realized from each change, and other changes/improvements to be implemented. (Reduce Item 1700-001-0001 by $1,250,000.)

The Governor's budget proposes $1.25 million from the General Fund for the department to add 21 additional positions to investigate employment discrimination complaints. This is the same proposal that was denied by the Legislature in 1997-98. The current proposal would bring the department's staffing level to 295 personnel-years, an increase of 56 percent since 1993-94. The issues associated with this proposal are the same as were addressed by the Legislature last year.

Background. In the 1995-96 Budget Act, the Legislature augmented the department's budget 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 within the statutorily required one-year period to move a case to prosecution. At that time we expressed concerns that the department had not justified the augmentation, that the number of cases at risk of missing the one-year deadline was already declining without the additional positions and that, according to the department, about one-half of the backlogged cases were probably not meritorious. The augmentation, however, was approved.

In the 1996-97 Budget Act, the Legislature deleted funding for 11 of the 41 positions added in 1995-96 and converted the remaining 30 positions to two-year limited-term positions to work off the backlog. In response to concerns about the department's management 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.

In the 1997-98 Budget Act, the Legislature converted the remaining 30 limited-term positions to permanent status. At the same time, because of continued concern over workload management, the Legislature denied one-half of the department's new augmentation request for $2.5 million and 42 positions. Thus, the Legislature again increased the department's resources--this time by $1.25 million and 21 positions.

Management Improvements Needed. A continuing theme in the Legislature's review of this department's budget is its management of workload. This was a concern last year when the Legislature reduced the department's augmentation request. The department has not provided any information to substantiate the need to overturn the Legislature's action last year. Given the funding and management history of this department, we recommend that instead of again increasing the department's budget and staff, the department should fully use existing positions and concentrate their efforts on improving the management of workload.

The BSA report called for in the 1996-97 Budget Act was completed in January 1997. The report identified 15 areas in which the department's performance was deficient, and made recommendations for specific improvements. The department has indicated that it intends to make management improvements in response to the BSA report. As these changes are implemented, the department should be able to identify the specific improvements that result. After all necessary management improvements are in place and the department has gained sufficient experience under these improvements, the need for additional staff may warrant the Legislature's consideration. Until changes are made and performance improvements clearly demonstrated, however, the Legislature should not provide additional staff.

Recommendation. Based on the issues discussed above, we recommend the Legislature delete the request for $1.25 million and 21 positions. Further, we recommend the Legislature adopt supplemental report language directing the department to submit to the Legislature by November 1, 1998, a report on its progress in implementation of management changes, the specific performance improvements realized from each change, and other changes/improvements to be implemented. Such a report will permit the Legislature to then evaluate any ensuing budget increase requests in light of management's performance improvement. After its ability to effectively manage its staff and workload has been demonstrated, a need for additional staff can be more accurately assessed.

Alcoholic Beverage Control (2100)

The Department of Alcoholic Beverage Control (ABC), established by constitutional amendment in 1954, administers the Alcoholic Beverage Control Act (Act). Under the Act, the ABC has the exclusive authority to (1) license and regulate the manufacture, sale, purchase, possession, and transportation of alcoholic beverages in California; (2) collect licensing fees; and (3) deny, suspend, and revoke licenses.

The Governor's budget proposes $34.5 million for support of the ABC in 1998-99 from the Alcohol Beverage Control Fund ($33.6 million) and reimbursements ($869,000). This represents a 3.3 percent increase from the previous year. Included in this amount is $1.5 million for local assistance, which is the same as the current year.

Alcoholic Beverage Control Fund Condition-- Longer Term Solution Warranted

We recommend the Legislature enact trailer bill legislation allowing the Alcoholic Beverage Control (ABC) to increase license fees in an amount higher than proposed by the Governor in order to generate revenues adequate to sustain the ABC's current enforcement efforts.

As mentioned above, the ABC is funded from the Alcohol Beverage Control Fund. The majority of revenues to this fund are received from issuing 61 different types of manufacturer, importer, retail, and wholesale liquor licenses. The ABC currently monitors over 70,000 licensees. Estimated net revenues to the fund in 1997-98 are $29.4 million. Net revenues are projected to increase in the budget year to $33.1 million, as a result of a fee increase proposed by the Governor.

Proposed Fee Increase. Based on current- and budget-year expenditures, the ABC will face a fund deficit at the end of the budget year. To address this problem, the Governor is proposing to increase enforcement fees (through trailer bill legislation) to raise an additional $5.2 million in annual revenues. The higher fees would range from $60 to $80 and would be assessed on 31 license categories that require the greatest amount of enforcement activities by the ABC. The proposed fee increase is based on the assumption that ABC's expenditures will remain at the 1997-98 level through fiscal year 1999-00. Spending, however, is likely to grow--if only to account for the effects of inflation. For comparison purposes, the department's expenditures over the past four years have increased an average of 3.5 percent. If ABC's expenditures continue to increase at the same rate, our analysis indicates that the department would incur a $1 million deficit in four years (2001-02). Consequently, at its current program level, the proposed fee increase would provide only a very short-term solution.

Assuming expenditures increase at the recent rates, our analysis indicates that the ABC would need to generate at least an additional $7.8 million annually, rather than the $5.2 million proposed by the Governor. We believe that this is a more appropriate level of authorized resources in order to sustain the level of current enforcement efforts. Consequently, we recommend that the Legislature enact trailer bill legislation allowing the ABC to increase license fees to generate additional revenues of at least $7.8 million annually. To provide a degree of flexibility, the legislation should not limit the ABC to a specific fee amount, but rather give the ABC authority to increase fees up to a maximum amount.

Request for Nondocumented Alien Workload Premature

We recommend that the Legislature delete $928,000 and 21.5 positions proposed for the projected increased workload resulting from the Alcoholic Beverage Control (ABC) undertaking efforts to verify citizenship of all licensees, because the ABC has not yet developed an implementation strategy and plan for this verification. (Reduce Item 2100-001-0081 by $928,000.)

Based on a provision of the 1996 federal Personal Responsibility and Work Opportunity Reconciliation Act (which denies professional and commercial licensure to certain immigrants), the ABC has determined that all current licensees and license applicants must be screened to determine if they are ineligible for licensure. The Governor's budget contains $928,000 and 21.5 positions to perform this verification. The bulk of the total augmentation would be limited to two years ($736,366 and 17.5 positions), with the remaining $191,634 and 4 positions ongoing.

The ABC indicates that the administration is currently developing the policy, procedures, and processes necessary to perform the verification of licensee citizenship status. The ABC also anticipates that there could be substantial costs associated with this workload. However, the ABC has not yet completely identified these costs. Given the lack of a plan to undertake this verification and the uncertainty of the resource level needed, we recommend the Legislature delete the request. When the ABC develops an implementation plan with associated costs and staffing, a proposal would warrant legislative consideration.

Department of Industrial Relations (8350)

The mission of the Department of Industrial Relations (DIR) is to protect the workforce of California, improve working conditions, and advance opportunities for profitable employment. These responsibilities are carried out through three major programs: the adjudication of workers' compensation disputes; the prevention of industrial injuries and deaths; and the enforcement of laws relating to wages, hours, and working conditions. In addition, the department regulates self-insured workers' compensation insurance plans, provides workers' compensation payments to injured workers of uninsured employers and other special categories of employees, offers conciliation services in labor disputes, and conducts and disseminates labor force research.

The budget proposes expenditures totaling $229 million for the department in 1998-99, which is 4.6 percent more than the estimated expenditures for the current year. The request includes $147 million from the General Fund, a 6 percent increase over 1997-98.

The Targeted Industries Partnership Program Should Not Be Funded From General Fund

We recommend that the Legislature delete the proposed $2.4 million General Fund augmentation for the Targeted Industries Partnership Program to (1) replace funds currently received from the Employment Development Department and (2) expand the program to the restaurant industry because this would not be a cost-effective expenditure of General Fund money. (Reduce Item 8350-001-0001 by $2,407,000.)

Background. Since November 1992 the DIR has teamed with the Employment Development Department (EDD) and the U.S. Department of Labor to coordinate the enforcement of federal and state labor laws in the garment and agricultural industries because of widespread violations of workplace safety, wage, and hour laws. This effort, the Targeted Inspection Partnership Program (TIPP), was initially funded as a two-year pilot program. Until 1996-97, state funding for these programs had been from the Industrial Relations Unpaid Wage Fund (UWF). In 1996-97 EDD agreed to provide additional funding for TIPP through 1998-99 from the Benefit Audit Fund (BAF) which is funded by collection of fraudulent unemployment insurance overpayments. In July 1997, however, EDD notified DIR that because of reductions in unemployment claims and fraudulent claims collections, the BAF was anticipated to have a deficit of $3.3 million in 1999 and EDD would not fund TIPP in 1998-99 and thereafter.

In the current year, the budget for TIPP is for 39 positions funded by $1.7 million from BAF and $0.9 million from the UWF. The proposal for the budget year includes $1.8 million from the General Fund to replace BAF funding and an additional $0.6 million and 9.5 personnel-years (PYs) to expand the program to the restaurant and other industries believed to operate in the underground economy.

Benefit of Replacing EDD Funds With General Funds Is Unclear. Based on DIR data, TIPP inspections have resulted in a significant level of assessments against employers in the garment and agricultural industries, but only a small amount of the assessments have been collected. Over the four-year period 1993 through 1996, TIPP assessed a total of $20.5 million in penalties and collected only $3.3 million. The data, however, also indicate that there appears to have been improvements in some aspects of working conditions in the targeted industries. For example, comparing the 1996 data to 1994 data, the percent of firms inspected and cited for violations in several areas, such as minimum wage requirements and for not having workers' compensation insurance, has declined.

On the other hand, the percent of firms found to not be registered with the state has increased significantly as has those cited for serious Occupational and Safety Health Administration (CAL OSHA) violations. Furthermore, even though there have been declines in the percentage of inspected firms cited for violations, there are still many firms receiving citations. In 1996, 43 percent of the firms inspected were cited for minimum wage violations and 72 percent were cited for serious CAL OSHA violations. These data certainly indicate that the state needs to continue inspections in these industries. What is not clear is what results the Legislature could expect by providing $1.8 million from the General Fund to replace EDD funds.

In 1996-97 the Legislature augmented TIPP by $ 1.7 million and increased the staffing level from 15 to 39. The source of funds for this increase was reimbursements from EDD. At that time, the DIR justified the expansion using EDD funds on the basis that the increased effort would result in $1.8 million in collections from assessments for various employment and tax law violations. On this basis the increased effort would have essentially paid for itself. This apparently has not been the case. As mentioned above, EDD has notified the DIR that it will not fund TIPP in the budget year and thereafter. The withdrawal of funding was apparently based on EDD's conclusion that TIPP spending was not a cost-effective expenditure of funds. If true, its not clear why the state would want to substitute General Fund money for this purpose. Consequently, we recommend the Legislature delete the requested $1.8 million and 39 positions. This would leave the TIPP program funded at the pre-EDD level of about $1 million from the UWF and 15 staff.

Expansion of TIPP. In addition to requesting $1.8 million from the General Fund to replace EDD money, the department requests an additional $0.6 million and 9.5 PYs to expand the program to the restaurant industry and other industries believed to be heavily represented in the underground economy. We recommend the Legislature not fund this expansion because the department has not provided information that would justify additional staff for this purpose. If the DIR believes inspections are necessary in the restaurant or other industries, it could schedule these inspections on a priority basis using existing resources. Once the DIR has gained experience and knowledge of problems and workload for such an effort, along with how effective these inspection are, a proposal for additional staff may warrant legislative consideration. At this time, however, we recommend that the Legislature delete the $610,000 and 9.5 PYs.

Joint Enforcement Strike Force Should Also Not Be Funded by General Fund

We recommend the Legislature reject the department's request for a $1.2 million augmentation from the General Fund to continue the Joint Enforcement Strike Force because it has not proven to be a cost-effective mechanism for enforcing payroll tax laws. (Reduce Item 8350-001-0001 by $1,173,000.)

The Joint Enforcement Strike Force (JESF) was statutorily established in 1994 as the successor to a federally funded program to increase tax collections in the underground economy. The participants in the strike force include EDD, DIR, and the Department of Consumer Affairs. The DIR's participation in JESF has been reimbursed by EDD ($1.2 million in 1997-98), but on a year-to-year basis. In July 1997, EDD notified the DIR that, as with the TIPP program, money from BAF would not be available for JESF after 1997-98. An important purpose of JESF is collection of unpaid taxes that are avoided by cash payments in the underground economy. However, JESF has demonstrated that it can not do this cost-effectively. For example, in 1996, the cost of DIR's participation in the JESF program was $1.2 million, but only $450,000 was collected. Since JESF is not cost effective, the General Fund should not be used to backfill EDD funding. The DIR can continue to enforce the wage and hour laws for which it is responsible using its existing resources. Accordingly, we recommend the Legislature not approve the proposed augmentation.

Eliminate Managed Care Unit

We recommend the Legislature delete $222,000 and 3.3 personnel-years for the Managed Care Unit within the Division of Workers' Compensation because there is little workload and insufficient fee revenue to support the program. (Reduce Item 8350-001-0001 by $222,000, delete Item 8350-001-0132, and transfer the balance in the Workers' Compensation Managed Care Fund to the General Fund.)

Background. In 1993-94 the Managed Care Program (MCP) was established as part of workers' compensation reform legislation adopted in 1993. Under this program private and not-for-profit health care providers apply to the state for eligibility to become a health care organization (HCO) that, upon certification, may contract with employers to provide managed care for employees with injuries covered by workers' compensation claims. The applicant is assessed an application fee and, if certified, is charged an annual fee based on enrollment. The MCP was intended to be self-funding. In 1994-95 the Workers' Compensation Managed Care Fund received a loan of $1.7 million to provide cash for MCP's initial operations.

Lack of Workload. In 1994-95, the Managed Care Unit (MCU) was funded based on an estimate there would be about 50 HCO applicants in that year. In fact, only 18 organizations have applied for HCO certification in the four years the program has been operating, and only three of those applications have been received since 1995. Moreover, there are only ten organizations currently certified. The primary purpose of the MCU is to evaluate and certify HCO applicants, yet it is apparent that there is virtually no workload to justify maintaining this organization. The premise upon which this program was founded--that the managed care approach could be translated to the workers' compensation field--has not proven out. It makes little sense, then, to continue to budget for this unit.

In addition, only $52,000 of certification fees were received in 1996-97. The Governor's budget estimates only $68,000 will be collected in 1997-98 and shows no money in the fund by June 30, 1998. This historical revenue stream makes it unlikely that $222,000 in fee revenues will be realized in 1998-99 as estimated in the Governor's budget.

Given this situation, we recommend funding for the MCU be deleted from the department's support budget, the program be terminated, and any unexpended balance remaining in the Workers' Compensation Managed Care Fund be transferred to the General Fund in partial repayment of the loan that was provided to fund the MCP's start up costs. Any workload involved in winding up the program can be handled by the department's other staff and budget.

Reduce Requested Increase for Rent

We recommend the Legislature delete the $4,110,000 augmentation for building rent costs because the budget overestimates the rental costs the department will incur when it moves into new state office buildings in San Bernardino, Los Angeles, Oakland, and San Francisco. (Reduce Item 8350-001-0001 by $4,111,000.)

The department proposes an augmentation of over $4.1 million for increased rent when it moves into new state office buildings in San Bernardino, Los Angeles, Oakland, and San Francisco. It includes one-time moving costs of $1 million, and increased rent in 1998-99 of $0.6 million each at San Bernardino, Oakland, and Los Angeles, and $1.3 million in San Francisco.

The new buildings will be managed by the Department of General Services (DGS) which will charge the department rent based on the amount of lease-payment bond costs due on the respective buildings plus the cost of operation and maintenance. The amount in the budget is based on the full cost of annual lease-payment bond costs. The Governor's budget, however, indicates that the lease-payment bonds for San Francisco and Los Angeles will not be sold in the budget year. In these buildings, therefore, the department will be paying only the operation and maintenance cost in 1998-99. In addition, in Oakland and San Bernardino, the department based its estimates on higher rental rates than DGS is actually proposing to charge. The result is that the department will actually have a $1 million reduction in building rental costs in 1998-99. Thus, there is no need for an augmentation and the DIR can absorb the moving costs of $1 million from the total reduction in rental costs. Consequently, we recommend the Legislature delete the requested $4,110,000 augmentation.

Wage Law Enforcement on Public Works Contracts

We recommend the Legislature delete $191,000 and 2.5 positions requested for enforcement of prevailing wages because under recent legislation the department's workload should decrease rather than increase. (Reduce Item 8350-001-0001 by $191,000.)

The DIR is charged with enforcement of statutes requiring the payment of prevailing wages on public works contracts. Recently enacted legislation has changed the responsibilities of prime and subcontractors in complying with these laws, and has extended the statute of limitations for filing suits in cases of dispute. The budget includes an increase of $191,000 and 2.5 two-year limited-term positions because of a workload increase it anticipates as a result of this new legislation.

Background. Effective the first of this year, several statutes in the Labor Code were amended by Chapter 757, Statutes of 1997 (SB 1328, Brulte). The act requires a prime contractor to include in its contract with a subcontractor, language requiring that prevailing wages be paid. It also requires the prime contractor to obtain an affidavit from subcontractors affirming that prevailing wages were, in fact, paid. It further requires the subcontractor to keep accurate payroll records of wages paid to workers at its principal office and to produce certified copies when requested. If a prime contractor is aware of a wage law violation and fails to take timely corrective action to halt or rectify the subcontractor's violation, the prime contractor will be liable for penalties imposed by DIR. The legislation further provides that the prime and subcontractor are jointly liable for any violations of the public works law and extends from 90 to 180 days the period after completion of the project or acceptance of the work within which the DIR may initiate a suit against the prime and subcontractor.

Workload Should Not Increase. In effect, this law (1) provides additional legal imperatives for both the prime contractor and subcontractors to comply with wage laws, (2) shifts wage law enforcement burden on to the prime contractor (with penalties for failure to do so), and (3) provides additional time for DIR to complete its investigative work when its intervention is required. As a result of this shift of responsibilities and increased liability for both the prime and subcontractor, we do not see DIR's workload increasing (in fact, some workload may decrease). Further, the additional time for investigative work should result in a more effective use of existing staff. Consequently, we recommend the Legislature not approve this request for $191,000 and 2.5 additional staff positions.

Department of Food and Agriculture (8570)

The California Department of Food and Agriculture (department) promotes and protects the state's agriculture industry through marketing and industry inspections; develops California's agricultural policies; assures accurate weights and measures in commerce; and provides financial oversight to county, district, and citrus fairs.

The 1998-99 Governor's Budget includes $198 million for the department, a 2 percent increase from estimated current-year expenditures. The budget total includes General Fund expenditures of $67 million, an increase of more than 5 percent from the current year.

Food Safety Program Not Defined

We recommend deletion of the requested $991,000 from the General Fund and eight positions for various food safety program augmentations until the department can present a comprehensive food safety plan to the Legislature for review. (Reduce Item 8570-001-0001 by $991,000.)

The budget proposes $991,000 from the General Fund (and eight positions) to support various activities related to food safety, as described below.

Cheese Surveillance Program ($389,000 and Four Positions). Currently, the department is responsible for ensuring the safety of all milk and dairy foods from farm origin to the point of final consumption. The department and the Department of Health Services (DHS) work cooperatively to respond to disease outbreaks related to dairy foods. This proposal would augment the current inspection and monitoring program to target imported and illegally manufactured cheeses.

Field Sanitation ($332,000 and Two Positions). The department currently conducts quality assurance inspections of fresh fruits and vegetables. This funding would support the review of field sanitation practices and procedures for fresh fruits and vegetables. Currently, the department is developing, in conjunction with private industry, preventive and remedial sanitation measures to reduce the risk of produce contamination.

Agricultural Waste ($106,000 and One Position). This augmentation is requested to address the potential of food contamination from agricultural waste.

Education and Training ($164,000 and One Position). This augmentation would provide resources to work with the private sector to establish a public-private partnership for food safety education, develop support materials, educate professional and high-risk groups, continue a long range planning process, and establish regular training and informational seminars.

Program Lacks Comprehensive Plan. The above augmentations are components of what the department refers to as the "Food Safety Program." An initial augmentation of $418,000 and four positions to enhance food safety measures relating to the production of animal products was approved by the Legislature in the 1997-98 Budget Act. The budget proposal would significantly expand the department's current food safety activities. We are concerned that the department is requesting the Legislature to incrementally increase activities in this area without having the benefit of a comprehensive plan that identifies the goals and objectives of the program. Such a plan would also include an anticipated implementation schedule, staffing and budget requirements, and expected results of the program.

Based on available information, the department currently has no such plan for either the current-year or budget-year components of the food safety program. Until the Legislature has this type of program information, it cannot assess the appropriateness of the requested amount or what to expect as a result of providing the requested funds.

The department has apparently recognized the need to develop a comprehensive plan. In the department's strategic plan (published July 1, 1997), the department has begun some degree of planning for the food safety program. The department identifies eight objectives relating to food safety. Four of these objectives appear to directly relate to the department developing a comprehensive food safety program:

Coordination of Statewide Food Safety Responsibilities. It is especially important that the department delineate its program goals because it is not the primary state agency responsible for food safety. The DHS has jurisdiction for inspection of all food products. The DHS maintains oversight of the processed food industry through a fee-based inspection program, conducts epidemiologic investigations of disease outbreaks, assists county investigators when disease outbreaks occur, consults with members of the various health professions, and operates a regulatory food safety section.

The two departments have, in the past, cooperatively responded to disease outbreaks that can be linked to raw agricultural products. This activity has included joint investigations of suspected contamination at the farm level and coordinated inspections of the raw and minimally processed food product industries. Given the department's responsibility for and knowledge of the agricultural industry in California, this type of coordination is appropriate. Expanding the food safety program within Food and Agriculture without first clearly defining the program goals and objectives and coordinating this effort with the DHS, however, could lead to a program that duplicates and/or conflicts with the role of the DHS as the lead state agency responsible for food safety issues.

The program planning effort discussed above is important in order for the Legislature and the administration to assure that any increase in the food safety area is effective and cost efficient. The department should, in coordination with the DHS, expedite the development of this information. Pending completion of this effort and submittal of the results to the Legislature, we recommend the Legislature not approve the additional $991,000 and eight positions requested.

Domestic Parcels Inspection Program

We withhold recommendation on the $1,874,000 from the General Fund and 26.3 personnel-years requested for continuation and augmentation of the Domestic Parcels Inspection Program until the pilot program report, due March 1, 1998, has been submitted and reviewed.

The budget includes $1,874,000 from the General Fund and 26.3 personnel-years (PYs) for continuation and augmentation of the Domestic Parcels Inspection Program. This proposal would essentially double the size of the current pilot program.

The inspection program was initiated in the 1996-97 Budget Act when the Legislature approved $895,000 from the General Fund and 14.6 PYs for a two-year pilot program. The program was initiated to provide inspection of domestic parcels for agricultural pests. The program currently includes eight dog teams--each team consists of one handler/biologist, one seasonal assistant, and one dog--that are deployed in the Los Angeles basin and the San Jose metropolitan area.

The teams inspect 44 private parcel facilities, considered high risk based on historical interceptions. Dog teams visit each facility a minimum of once per week to search packages for agricultural products. The department estimates that this level of coverage provides inspection of 15 percent to 17 percent of the parcels entering the state through the 44 facilities.

The department is due to submit a report to the Legislature on March 1, 1998, evaluating the effectiveness of the domestic parcels inspection pilot program. Pending review of the report, we withhold recommendation on the $1,874,000 request.

Agricultural Export Program Augmentation Not Necessary

We recommend that the Legislature delete a $464,000 augmentation from the General Fund for the Agricultural Export Program and a one-time equipment purchase for the department's chemical laboratory. The export program activities should be undertaken within current department resources and the equipment purchase should be funded through laboratory service fees. Reduce Item 8570-001-0001 by $464,000.

The budget proposes $464,000 from the General Fund for two positions and one-time equipment costs for the department to expand its efforts to relax international trade restrictions on the state's agricultural exports (specifically relating to chemical residues) by participating in meetings conducted by a subsidiary of the United Nations. This augmentation to the Agricultural Export Program would provide two additional staff to work with California agricultural exporters and participate in international meetings on establishing food product chemical residue limits. Included in the proposal is $180,000 for purchase of a mass spectrometer for the department chemistry lab.

The Agricultural Export Program, established in 1985, provides technical assistance and support to California agricultural exporters by coordinating trade missions, participating in trade shows; maintaining a comprehensive database, which includes market reports and trade statistics; and providing information to aid California exporters in gaining access to foreign markets.

The export program currently participates in many international events. Should the department determine that participation in the United Nations subsidiary meetings is a priority, the department can allocate existing personnel and funding. However, the workload presented by the department does not warrant an augmentation.

Therefore, we recommend that the department fund these activities from its existing resources. We also recommend that the laboratory equipment purchase be made from fee revenue generated by laboratory services provided to the agricultural industry.

Marketing Campaign Not Necessary

We recommend that the Legislature delete a request for $82,000 from the General Fund for a new marketing campaign because this should be the responsibility of the agricultural industry and not the General Fund. (Reduce Item 8570-001-0001 by $82,000.)

The department is requesting $82,000 a year for a two-year period to develop a California Food and Agricultural Campaign. The marketing campaign would consist of a "California Grown" logo and associated advertising to distinguish California agricultural products from others in the marketplace. The department would establish a fee to be paid by program participants to provide funding after the two-year start up period.

Currently, there are 46 marketing programs that represent 40 different agricultural commodities produced in California. Approximately 62 percent of the agricultural economy in California is represented by these marketing programs. These programs are entirely self-supporting and function at no cost to the state. According to the department, research and promotion are the major functions of marketing programs--including promotions in both domestic and global markets. If the agricultural industry believes a "California Grown" marketing program would be beneficial to selling its products, the industry could develop the program independent of the state. In addition, if the industry believes the state should participate, the industry should pay the state the costs of developing and managing a marketing program for agricultural products. In either case, this should not be a General Fund expense. Consequently, we recommend the deletion of the requested $82,000.

Laboratory Contract Cost Increase

We recommend that the Legislature delete a $1,110,000 General Fund augmentation for the department's contract for services from the California Veterinary Diagnostic Laboratory System because the department has not justified the higher contract costs. Reduce Item 8570-001-0001 by $1,110,000.

The budget contains a $1,110,000 General Fund augmentation to the department budget to increase the contract costs for services provided by the California Veterinary Diagnostic Laboratory System. The laboratory was established in 1918 and was operated as a program within the department until 1987-88 when the University of California (UC) at Davis took over responsibility for management of the laboratory. The laboratory employees are UC employees and are covered by UC personnel policies, including salary adjustments. The department contracts with the laboratory to provide diagnostic services for its animal disease control program.

In the 1997-98 budget the department requested a $509,000 augmentation to fund salary increases granted to employees at the laboratory by the UC. The Legislature denied this augmentation. Additionally, the Legislature adopted supplemental report language directing the department not to approve an increase in the annual contract costs for operation of the laboratory without prior legislative approval and to forward a copy of the annual contract costs to the Legislature by December 31 of each year.

Budget Proposal. Instead of identifying the proposed $1.1 million augmentation as a change to the department's budget, the administration simply made a "baseline adjustment." Therefore, although the department's budget is increased by $1.1 million, the Governor's budget does not identify or explain this change.

Legislature Needs Workload and Cost Increase Detail. The department has provided limited information that identified two main reasons for the requested augmentation: cost increases generated by the UC and increasing workload. However, the department has not provided workload detail or the basis for the cost increase. Lacking any information substantiating the need for an additional $1.1 million, we recommend that the Legislature not approve this request. If the department provides adequate justification for the requested increase, a proposal to increase the contract cost may warrant review by the Legislature.

Fair Political Practices Commission (8620)

The Fair Political Practices Commission (FPPC) was established in 1974 to implement and administer the Political Reform Act (PRA), an omnibus measure designed to improve the elections process in California for candidates for state and local office. The act (1) established rules for the disclosure of money received and spent by candidates seeking political office, (2) required state ballot pamphlets to have useful and understandable information, (3) established lobbyist activity disclosure regulations, and (4) required the disclosure of assets of public officeholders and barred conflicts of interest with their official decision making. The California Political Reform Act of 1996 (CPRA), established by Proposition 208, among other provisions established specific limits on the amount and source of campaign contributions and established voluntary campaign spending limits for candidates.

The provisions of the PRA and CPRA are carried out by four state agencies, including the FPPC (the other agencies are the Secretary of State, Department of Justice, and the Franchise Tax Board). The FPPC adopts regulations, establishes procedures to monitor compliance, and provides advice to officeholders regarding the requirements of the PRA and CPRA. The FPPC also investigates alleged violations of the laws and imposes sanctions on violators.

The PRA provided a $1 million annual appropriation to the FPPC. The CPRA provided an additional $500,000 annual appropriation to the commission. By law, the amounts are to be adjusted each year for changes in the cost of living. The PRA further provides that the Legislature shall provide such additional amounts as may be necessary to the FPPC and other state agencies to carry out the political reform laws.

The budget proposes total expenditures of $6 million for the FPPC in 1998-99. This is almost exactly the same amount the commission is estimated to spend in the current year.

Court Ruling on Proposition 208 Brings Spending Plan into Question

Because a federal court recently ordered the Fair Political Practices Commission (FPPC) to halt enforcement of the California Political Reform Act of 1996 (CPRA), we withhold recommendation on $1.2 million and 22 personnel-years for the support of commission activities to carry out the law. We recommend that the FPPC report at budget hearings on the status of that and other pending legal cases related to the CPRA and, if necessary, submit a revised budget request.

In November 1996, California voters approved Proposition 208, the initiative ballot measure enacting the CPRA. The 1997-98 Budget Actincluded $1.2 million and about 22 personnel-years for the FPPC's legal, enforcement, technical assistance, and administrative divisions to implement the CPRA. The budget limited the terms of the new positions and the related funding until December 31, 1998, because of the uncertainty as to whether the CPRA would withstand pending legal challenges to its constitutionality. The proposed 1998-99 budget for the FPPC includes a request for $790,000 to continue the 22 personnel-years for CPRA-related activity for the duration of the budget year.

Court Invalidated New Law. About the time the proposed FPPC budget was submitted to the Legislature, however, a federal district court ruled that the campaign contribution limits in the measure were unconstitutional. The court indicated that some other provisions of the law may be legal. Accordingly, the court enjoined the FPPC from enforcing any part of the CPRA for now and ordered the FPPC to file a petition before the California Supreme Court to determine whether some portions of the law could be legally separated and allowed to take legal effect at a later date. The FPPC is appealing the federal court decision.

As a result, it is highly uncertain at this time what staffing and funding the FPPC will need, and for what purposes, to carry out the CPRA in the budget year. If the FPPC were to prevail in its appeal and succeeded in overturning the recent court ruling, it may be appropriate for the Legislature to approve the 1998-99 budget request as submitted. If the court injunction were to stand, or if new rulings affecting enforcement of the law were to be issued as a result of four other pending legal challenges to the CPRA, the request should be modified.

Some Staffing and Funds Needed. The FPPC has indicated that, even if the recent court injunction were to stay in effect during the entire budget year, it will need some level of staffing and funding to challenge the federal court decision and to simultaneously carry out the federal court's mandate to pursue related legal issues before the California Supreme Court.

Analyst's Recommendation. Under these circumstances, we believe the Legislature should wait until later in the budget process to determine the 1998-99 budget appropriation for the FPPC. Thus, we withhold recommendation at this time on the $1.2 million and 22 personnel-years provided in the FPPC's budget proposal for CPRA-related activity. We further propose that the FPPC report to the Legislature at budget hearings regarding the status of ongoing litigation over the CPRA and, given the standing of the legal matter at that time, submit a revised request as necessary for funding and staffing in the budget year

Board of Equalization (0860)

The Board of Equalization (BOE) is one of California's major tax collection agencies. The BOE collects state and local sales and use taxes and a variety of business and excise taxes and fees, including those levied on gasoline, diesel fuel, cigarettes, and hazardous wastes. The BOE is responsible for allocating tax proceeds to the appropriate local jurisdiction(s). The BOE also oversees the administration of the property tax by county assessors and assesses property owned by public utilities. The BOE is also the final administrative appellate body for personal income and bank and corporate taxes, as well as for the taxes it administers.

The 1998-99 Governor's Budget proposes approximately $300 million in support of the board's operations, $184.6 million of this total is from the General Fund. The total proposed budget is less than a 2 percent increase from the current year and includes a $1.6 million ($1.2 million from the General Fund) augmentation for merit salary adjustments. Again, this year the BOE is one of three departments that receives an augmentation for merit salary adjustments. The others are the Franchise Tax Board and the Department of Corrections.

Request for Funding to Implement Legislation Is Premature

We recommend the Legislature delete the proposed increase in reimbursement authority for the Board of Equalization (BOE) to implement Chapter 702, Statutes of 1997 (SB 110, Dills) because the BOE has not approved an implementation plan for this legislation. (Reduce Item 0860-501-0995 by $4,177,000.)

The budget proposes $4.2 million in increased reimbursement authority and 85.5 positions to implement Chapter 702. Chapter 702 contains two major provisions, the first requires the BOE to issue a "use tax direct payment permit" that will allow the purchasing taxpayer to self-assess and pay state and local use tax directly to the BOE rather than relying on the information provided by the selling taxpayer. The second provision, and the most significant in terms of potential workload, requires the BOE to allocate use tax revenue separate from sales tax revenue. Currently, use tax and sales tax revenue are pooled for allocation. Under Chapter 702, use tax revenues would have to be separated from sales tax revenue (not currently done by the BOE) and then allocated to the appropriate jurisdiction.

We recommend that the Legislature delete the proposed augmentation. The BOE has not determined how to implement Chapter 702. In fact, at a recent meeting the BOE disapproved a similar proposal in the current year. It is our understanding that the BOE is reconsidering how to implement Chapter 702 and what additional workload and associated costs, if any, may be required. Consequently, at this time, it is not clear either when the BOE will begin implementing Chapter 702 or what additional costs and staffing levels, if any, will be required. Until this information is available to the Legislature, it is premature to authorize the expenditure of nearly $4.2 million and the hiring of 85.5 positions. Once the BOE has established an implementation plan, a proposal for the necessary funds and staff would warrant legislative consideration.

The BOE Audit Programs

The Legislature adopted language in the Supplemental Report of the 1997-98 Budget Act directing the BOE to report on its audit program. The purpose of the reporting requirement was to provide the Legislature with information to evaluate the effectiveness of the BOE's audit programs.

The reporting requirement was implemented as a result of issues we raised during 1997-98 budget hearings concerning the BOE's calculation of (1) its benefit-cost ratio on audit spending and (2) the impact on revenues of changes in nonaudit-related programs. The report has been submitted. We are in the process of reviewing it, and we will, if appropriate, make recommendations to the Legislature during budget hearings.

Franchise Tax Board (1730)

The Franchise Tax Board (FTB) is one of the state's major tax collecting agencies. The FTB's primary responsibility is to administer California's Personal Income Tax and Bank and Corporation Tax laws. The FTB also administers the Homeowners' and Renters' Assistance Programs and the Political Reform Act audit program. In addition, the FTB administers several nontax programs including collection of child support and motor vehicle registration delinquencies, collection of court-ordered payments, and collection of student loan delinquencies. A three-member board--consisting of the Director of Finance, the Chair of the State Board of Equalization, and the State Controller--oversees the FTB. An executive officer is charged with administering the day-to-day operations of the FTB.

The 1998-99 Governor's Budget proposes $384 million in support of the FTB, a 2.2 percent increase over the current year. The majority of FTB's operations are funded from the General Fund. The total proposed General Fund support is $358.2 million. Included in the budget is a $2.3 million merit salary adjustment. Again this year, the FTB is one of three departments to receive an augmentation for merit salary adjustments. The others are the Board of Equalization and the Department of Corrections.

Augmentation for Workload Growth Not Justified

We recommend the Legislature delete the proposed $3 million General Fund augmentation and 65.8 positions to address projected growth in tax return processing because the Franchise Tax Board has been unable to justify the need for these positions. (Reduce Item 1730-001-0001 by $2,992,000.)

The budget proposes a $3 million General Fund augmentation (65.8 positions) to the FTB for expected workload growth in income tax return processing. We have several concerns with this request. First, in the current year the FTB received a similar augmentation (totaling $5.3 million and 96.1 two-year limited-term positions) to accommodate workload growth in return processing. Instead of using this augmentation for the purposes approved by the Legislature, however, the FTB is holding 51 of the limited-term positions vacant and using the funds associated with these positions to fund other, permanent positions. The FTB indicates that this action was taken in order to meet their salary savings requirement. The FTB budget, however, includes only a four percent salary savings requirement which is lower than most state agencies. Thus, it is not clear why the FTB would have to arbitrarily hold any positions open.

Additionally, the FTB did not experience the level of growth in personal income tax returns expected in the previous year. Thus, the augmentation received for the previous year should be sufficient to accommodate at least some of the board's processing needs in the budget year.

Given the many issues surrounding the agency's request, we recommend that at this time the Legislature delete the proposed augmentation.

Separate Preprinted Labels for Tax Returns

We recommend the Legislature delete the proposed $1.2 million General Fund augmentation to provide a separate preprinted label to taxpayers because taxpayers can provide the necessary information on their tax returns. (Reduce Item 1730-001-0001 by $1,231,000.)

The budget proposes $1.2 million from the General Fund and four positions to implement Chapter 685, Statutes of 1997 (SB 458, Peace). This legislation prohibits all state agencies from sending any outgoing United States mail to an individual that contains personal information (including social security numbers) unless that information is contained within sealed correspondence and cannot be viewed from the outside.

Currently, the FTB sends out personal income tax booklets and forms with a pre-printed address label that the taxpayer then places on their tax forms when submitting them to the FTB. These pre-printed address labels contain the taxpayer's social security number or their taxpayer identification number.

To modify the current practice to conform with Chapter 685, the FTB proposes to eliminate the social security or taxpayer identification number from the pre-printed address label and instead include a second pre-printed label in an envelope attached to the outside of the tax booklet. Taxpayers would then remove the preprinted label from the envelope for use on their tax returns. The FTB indicates that to implement this change would require an additional $1.2 million from the General Fund and four positions in the budget year. Approximately $1 million dollars would be annual ongoing costs.

The FTB processes approximately 14 million personal income tax returns annually. Of those, approximately 40 percent are received without a preprinted label. There are no data to indicate that the FTB experiences a higher error rate on returns that are sent in without a preprinted label. In addition, the FTB currently has verification procedures in place to catch incorrectly entered numbers.

Given this, we recommend that the FTB simply not print the confidential numbers on the address label and rely on taxpayers to enter the numbers themselves. If this process results in the FTB receiving a significantly larger number of returns with incorrect or illegible social security numbers, the need for this proposal could be revisited. At this time, however, we recommend that the Legislature reduce Item 1730-001-0001 by $1,231,000.

Department Expects to Miss Critical Failure Date for Year 2000 Implementation

The department should report to the Legislature on the status of modifying critical information technology systems to accommodate the year 2000 change.

The FTB indicates that the Taxpayer Identification System and Return Validation System are "mission critical" information technology systems for the department's operation. This designation "mission critical" means that operation of the systems support the department's main function, which is collection of tax revenue. According to the FTB, if the systems are not modified on time to be year 2000 compliant, the FTB will experience a delay in processing returns, collecting revenues and issuing refunds. Additionally, the FTB indicates that because of the processing functions of the systems and the size of the system databases (the Taxpayer Identification data base stores approximately 14 million accounts) there is not a viable contingency plan if the systems become nonfunctional due to noncompliance with the year 2000 modifications.

The FTB indicates the first failure date for both systems is April 15, 1998 and that the systems won't be remediated until July 1998 (taxpayer identification) and September 1998 (return validation). The FTB has also indicated that failure of these systems would negatively affect other nontax functions (child support collections, Department of Motor Vehicles delinquent registration collection, and court-ordered debt collections) by providing incorrect data. Since the FTB shares information with other entities (Board of Equalization, Employment Development Department, and Department of Corrections) any errors or malfunctions in the computer systems at the FTB also may cause those systems to fail.

In view of this situation, the FTB should report to the Legislature on the status of modifying all information technology systems to be year 2000 compliant. The report should address the current operations of the FTB since its "mission critical" systems are not projected to be year 2000 compliant before the failure dates.

Franchise Tax Board Tax Audit Program

The Legislature adopted language in the Supplemental Report of the 1997-98 Budget Actdirecting the FTB to report on its audit program. The purpose of the reporting requirement was to provide the Legislature with information to evaluate the effectiveness of the department's audit programs.

The reporting requirement was implemented as a result of issues we raised during 1997-98 budget hearings concerning the FTB's calculation of (1) its benefit-cost ratio on audit spending and (2) the impact on revenues of changes in nonaudit-related programs. The report has been submitted. We are in the process of reviewing it, and we will, if appropriate, make recommendations to the Legislature during budget hearings.

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