The State Treasurer has a number of responsibilities related to the management of the state's financial assets. These responsibilities include:
The Governor's budget proposes expenditures totaling $22.5 million for the Treasurer's Office in 2000-01, which represents a decrease of 47 per-cent from the current-year's expenditures. The request includes $9.9 mil-lion from the General Fund, a 51 percent decrease from 1999-00. This decrease is a result of a one-time payment in the current year of $14 million for a state-mandated investment reporting requirement by local authorities. The ongoing annual cost beginning in the budget year for this program is $3 million.
We recommend the Legislature delete $186,000 from the General Fund request for increases in facility rent because we find no analytical basis for granting an adjustment to the Treasurer's Office that has been denied to virtually all other state agencies. (Reduce Item 0950-001-0001 by $186,000.)
The Governor's budget includes a request to increase facilities operations funding by $186,000. The proposed additional funds will be used to offset higher rental costs set by the Department of General Services.
The request is based on cost increases the office indicates have occurred since around 1996-97.
Our review found that only the Treasurer's Office and four other agencies--the State Library and the Departments of Industrial Relations, Fair Employment and Housing, and Justice--received budget augmentations for rental increases in state buildings. Presumably, all other state departments will absorb the rent increases.
We can find no analytical basis for granting an augmentation to pay for rent increases for these five departments when other departments and agencies are not provided such funds. We note that the administration's own budgeting guidelines indicate that departments will not receive funding for such price increases. Consequently, we recommend the Legislature delete $186,000 under Item 0950-001-0001.
We discuss this issue in greater detail in our analysis of the Department of Finance's budget in this chapter.
We recommend that the Legislature enact trailer legislation making local compliance with the investment report mandate optional, because the requirement (1) costs significantly more than the Legislature anticipated and (2) no longer appears necessary to promote local oversight. (Delete Item 0950-295-0001 for a savings of $3,342,000.)
In the aftermath of the Orange County bankruptcy, the Legislature sought to increase the level of local investment oversight by imposing various investment reporting requirements on local governments. Specifically, Chapter 783, Statutes of 1995 (SB 564, Johnston) requires local agencies to prepare:
description of all the investments held by the agency or managed by contracted parties, the investments' current market value, and a statement as to whether the portfolio is in compliance with the investment policy and will meet local cash flow needs for the next six months. Pursuant to a request by the Legislature, we submitted a report in January examining the need to continue this mandate. Our report found that the ongoing cost of the investment report mandate is more than 20 times greater than the Legislature anticipated when enacting the requirement. In addition, given the significant changes to the legal, financial market, and professional standards governing local investment practices, we found that the reporting mandate no longer appears necessary to promote local oversight.
For these reasons, we see no basis for the state to continue to mandate the form and substance of local investment reports. While the Legislature may wish to leave the language describing the local investment reports in statute as a guide for local officials, we recommend the state mandate be eliminated. Enacting this change in trailer legislation this year would eliminate the need for the $3,342,000 proposed for local government reimbursement under Item 0950-295-0001.
Should the Legislature wish to provide a modest enhancement to local governments' existing strong incentives to oversee local investments, we recommend the Legislature consider enacting legislation requiring local investment officials to annually report to their local governing board on the extent to which their investment oversight and reporting practices meet the fiduciary and prudent investor standard in state law, and conform with the standards recommended by the Governmental Accounting Standards Board and major professional public finance associations. Such legislation would impose a state mandate, however, the cost of the mandate would be minimal.
In addition, should the Legislature wish to provide financial assistance to local governments to facilitate efforts to upgrade local investment monitoring
and reporting, the Legislature may wish to consider providing funding for one-time technology grants.
The Department of General Services (DGS) is responsible for providing a broad range of support services to state departments and performing management and oversight activities related to these services. It provides these services through three programs: statewide support, building regulation, and real estate services.
The Governor's budget proposes total expenditures of $734 million from various funds (including $55.6 million from the General Fund) to support the activities of DGS in 2000-01. This is $13.3 million, or 1.8 per-cent, above estimated current-year expenditures.
Building Regulation Services. Proposed budget-year expenditures for these services are $30.6 million, or $0.4 million more than the estimated current-year level. The major change in this program budget is the addition of 2.8 personnel-years and $253,000 for handicapped accessibility plan checking by the Division of the State Architect.
Real Estate Services. Proposed budget-year expenditures for these services are $325.1 million, or $8 million more than the estimated current-year level. Major increases are:
for operation and maintenance staff and costs for various state facilities.
Statewide Support Services. Expenditures for statewide support services are $364 million in the budget year, representing an increase of $3.1 million, or less than 1 percent, over estimated current-year expenditures. The amount includes several small increases and reductions to programs. The largest request is $15.3 million for local assistance proposed to upgrade 9-1-1 telephone system switching equipment in the current and budget years.
We recommend deletion of 2.8 personnel-years and $253,000 for the Division of the State Architect because there is insufficient documentation that the positions are needed. (Delete $253,000 and 2.8 personnel-years from Item 1760-001-0006.)
The Division of the State Architect reviews plans for buildings constructed with state funds and public schools for compliance with handicapped accessibility regulations. The division's actual and estimated plan checking workload is shown in Figure 1.
|Department of General Services Division of State Architect Access Compliance Workload |
|Budget Year||Number of Projects Checked|
The division bases its estimates for 1999-00 and 2000-01 on an assumption that the construction value of all plans it will review in 1999-00 and 2000-01 will be $2.8 billion, the average cost of each project will be the same as it was in 1998-99 ($662,000), and the time to check each project will be the same as in 1998-99 (4.4 hours per project). The division provides no information to substantiate these assumptions. It does not show why the total construction value of projects to be checked would increase, and why the average project cost and time to check the plans would be the same as in 1998-99. In the absence of such information, we recom-mend the Legislature delete funding for these additional positions.
The capital outlay program managed by the department's Real Estate Services Division has more than doubled in the last five years. A number of projects funded in this period have not been completed in accordance with schedules approved by the Legislature. We recommend the Legislature adopt supplemental report language directing the department to adopt project delivery goals and report annually on its performance.
The DGS manages most of the state's general capital development program. With some exceptions, it is the builder of most of the state's offices and institutional buildings. The DGS program is managed by the Real Estate Services Division (RESD). The capital outlay program managed by RESD has more than doubled in the last five years and a number of projects have not been completed in accordance with schedules approved by the Legislature. This raises questions about the reasons for the delays, and what steps can be taken to keep projects on schedule.
How Is the Real Estate Services Division Doing? To understand how well RESD has been able to meet schedules approved by the Legislature, we looked at the division's June 30, 1999 Quarterly Status Report (received September 15, 1999). The phase of each project we examined was the latest one for which funding had been appropriated. For most projects this was the construction phase, but for many, only earlier phases--such as working drawings or preliminary plans--had been funded. We compared the original schedule established for that phase of the work with the current schedule provided by DGS. In this way we could see if completion of a phase had been delayed, and by how much. Our findings are summarized in Figure 2. It shows that three-fourths of the projects have been delayed more than three months, and one-fourth of the projects are experiencing a delay of more than a year.
The data displayed above are based on schedules prepared by RESD at the time the Legislature was asked to appropriate funds. These schedules were based on RESD's knowledge of the project and the process required to complete these projects. Although some delays in the schedule may have been out of DGS's control, it is clear that there is room for improvement in the department's meeting of schedules.
|Department of General Services Project Completion Delays a|
|Project Completion Delay||Number||Percent|
|Less than 3 months||61||24%|
|3 to 5 months||51||20|
|6 to 11 months||76||30|
|12 to 17 months||25||10|
|18 months or more||37||15|
|a Compares the original and current schedules for latest funded phase of 250 major capital outlay projects.|
Recommendation. We recommend the Legislature adopt supplemental report language directing the department to submit a report to the Legislature annually on November 1 identifying project delivery improvement goals, its record for meeting schedules during the past year, reasons specific phases of project work were not completed on time, and steps it is taking to improve performance.
We recommend the Legislature delete $267,000 for maintenance and repairs because the request includes capital outlay projects that have not been justified and an unnecessary infrastructure study. Further, we withhold recommendation on the $460,000 balance of the request pending receipt of information justifying the need for and cost of the remaining projects. (Delete $267,000 from Item 1760-001-0666[a].)
The budget proposes expenditures of $727,000 for maintenance and repairs at the San Francisco state building occupied by the Public Utilities Commission (PUC). (The same amount is proposed in the commission's budget for transfer to the Service Revolving Fund.) These repairs were identified in a $1.9 million five-year maintenance plan developed by the DGS. No information has been provided on the proposed projects other than a list of projects in the maintenance plan. The proposed projects include (1) $165,000 for upgrading the building security system and elevators (the security system proposal is a three-year $508,000 project); (2) regular maintenance, such as window leak repairs; and (3) a $102,000 infrastructure study to identify other repairs needed to comply with current codes.
We recommend deletion of the $165,000 for building upgrades and the $102,000 for the infrastructure study. The security system upgrade, if justified, should be requested as a capital outlay project. The infrastructure study is unnecessary because it is not required as a matter of course to continually renovate buildings to comply with code changes. No issues or concerns have been identified that would warrant undertaking this study. Thus, we recommend that the Legislature delete $267,000 from the request. (We recommend corresponding reductions in the PUC budget under Item 8660.)
The Department of General Services was required by the Legislature to submit a master plan for the Public Safety Radio Network by December 1, 1999, but the department has not provided the report.
In response to a budget proposal in the 1999-00 Governor's Budget last year, the Legislature adopted supplemental report language directing DGS to provide a master plan describing the administration's plan for the maintenance and operation of the microwave network supporting the state's public safety radio network. The Legislature directed the department to include the following in the master plan:
of the plan.
The supplemental report language directed DGS to submit the master plan to the Legislature by December 1, 1999. At the time this analysis was completed, the Legislature had not received the report. According to DGS, the report is still under review within the administration.
The budget proposes $1.8 million for design of a new public safety radio network, which is projected to take 15 years to implement and cost $3.5 billion to complete. We withhold recommendation on the proposal pending (1) receipt and review of the microwave master plan, which was due on December 1, 1999; and (2) information on how the department will address a number of uncertainties in its implementation plan.
The budget requests $1.8 million from the DGS Service Revolving Fund to begin design work for a new public safety radio network, known as the Public Safety Radio Integrated Systems Management (PRISM) Project, in the budget year. The request is the first of a multiyear effort with projected total costs of $3.5 billion.
The Proposal. The proposal calls for the state to invest over a 15-year period in an integrated radio system which will provide both voice and data communications to state public safety agencies. Figure 3 displays the implementation phases and the associated costs by phase. Funding for the project would be provided in the budgets of ten different departments for payment to the DGS Service Revolving Fund. The ten departments are:
|Public Safety Radio Integrated Systems Management Project|
|(Dollars in Millions)
|Phase||Length(In Years) a||Cost of Phase||Cost to Operate Current Systems||Total Costs|
|Phase I--Design network||2 a||$3||$141||$144|
|Phase II--Conduct pilot||3||92||123||215|
|Phase III--Statewide implementation||11||2,419||726||3,145|
|a Phases I and II will overlap in 2001-02.|
As the figure indicates, the administration plans to seek $2.5 billion over the next 15 years to build and implement the PRISM system. Because the new system will be implemented in phases, the Legislature will be asked to continue to fund the existing radio system until full implementation is realized in 2015. The projected cost to continue the existing system is about $1 billion over the 15-year period. Thus, the total cost of the proposal over the next 15 years would be $3.5 billion, and the $1.8 mil-lion proposed for the initial design work in the budget year is only a very small portion of the total cost.
Current Public Safety Network. The state's public safety radio network consists of separate public safety radio communications systems used by the ten departments identified above. Each of these departments has its own radio systems and uses distinctly different radio frequencies which do not consistently communicate with one another during incidents requiring mutual aid. In addition, some of these public safety systems are 25 years old and do not incorporate modern technological advances.
Strategic Plan and Cost Benefit Analysis Completed. In response to these communication system deficiencies, the ten departments began a strategic planning process in 1994 to review the capabilities of the existing radio systems. Based on that review, the departments developed long-term strategies for consolidating the current voice and data radio systems into an integrated public safety system for the state. After completion of this strategic planning effort, the state conducted a cost-benefit analysis examining the alternatives for an integrated state radio system. The result of that analysis is reflected in this proposal.
Current Public Safety Microwave Network to Be Part of PRISM. We understand that the proposed PRISM network will use the state's current microwave network as one of its components to provide radio communications. In fact, the microwave network will act as one of the main infrastructure components for the new system. Thus, improving and maintaining the state's microwave network will be necessary during the next 15 years.
We have an number of concerns regarding the administration's PRISM proposal which we discuss below.
Microwave Master Plan Needed. As we indicated earlier, the administration's master plan for the public safety radio microwave network has not yet been presented to the Legislature. In our view, it will be important for the Legislature to review the master plan to understand the department's long-term plans for the state's current microwave network, how the current network will enhance the investment in PRISM, and the future funding requirements for maintaining and enhancing the current microwave network.
Implementation Strategies Are Uncertain. With a 15-year implementation plan and the expectation of annual multimillion dollar investments, we think that the administration needs to advise the Legislature how it plans to implement the PRISM system. These strategies need to encom-pass how the new radio system will be "rolled-out," how the old radio system will be phased-out, and how new technologies will be phased-in.
Implementation Strategy Should Allow Reduced Funding for Current System. Under the administration's plan, both the old and new systems would be maintained during the entire 15 years of implementation. We are concerned that full funding over the entire 15 years for the old system may not be necessary. It is unclear whether the administration has considered implementation strategies that would allow portions of the old system to be discontinued or shut down earlier than others, thus reducing costs of operating the old system sooner and providing the opportunity to redirect those funds to the new system.
Implementation Strategy Should Set Priorities and Contingencies in Case Funding Not Available. In our discussions with DGS, it was unclear if the implementation strategies accounted for the possibility that full funding may not be available over 15 years. For example, state revenues could become tighter at some point in the future because of an economic downturn or a change could occur in the funding priorities of the Legislature or Governor. It is also unclear from our discussions with DGS whether funds provided in the earlier years of implementation would yield any usable products should funding not be available in later years.
We believe that DGS should develop implementation strategies that set clear priorities and contingencies in the event future funding is not available. Ideally, DGS would develop components of the system that could operate independently of future components and would build upon the investments of previous years. This could be achieved, for example, through implementation strategies that bring the new system online by department or geographic region.
Implementation Plan Should Be Able to Incorporate New Technological Advances. The Legislature needs to be assured that technological advances in the communications industry can be readily incorporated in the state's public safety radio network, and that those advances will enhance and benefit the previous years' investment. Communications technology is one of the most rapidly advancing industries in the world today. Satellite technology, in particular, has changed the way that people communicate. We believe that it is appropriate to assume that future improvements in satellite technology will have application in the public safety communications systems. It is not clear that these possibilities have been considered by DGS and, if they have, at what point during the 15 years they could be incorporated to enhance the investment achieved from the previous years.
Analyst's Recommendation. For these reasons, we withhold recommendation on the proposal pending (1) receipt and review of the micro-wave master plan, which was due on December 1, 1999; and (2) information from DGS on how it will address uncertainties in the department's implementation plan for PRISM, including:
We recommend that the Legislature reject the proposal for $3.3 million in the current year and $2.4 million in the budget year to build a new public school construction Web site because information proposed for the Web site is already available on individual departments' Web sites which could be easily linked with minimal or no cost. (Reduct Item 1760-001-0001 by $2.4 million.)
The budget requests $3.3 million in the current year and $2.4 million in the budget year to develop and implement an Internet Web site which would provide information on school construction. It is estimated that the project cost over six years will be $8 million. The Web site would include information from the three state departments involved in public school construction.
Background. Currently, three state departments--DGS (through the Division of State Architect and the Office of Public School Construction), the Department of Education (SDE), and the Department of Toxic Substances Control (DTSC)--provide oversight of local school construction. Figure 4 displays the oversight roles of each department. Each department has its own set of forms and internal processes to accomplish its oversight activities listed in Figure 4.
|State's Oversight Roles in School Construction|
|Department of General Services, Office of Public School Construction||
|Department of General Services, Division of State Architect||
|Department of Education||
|Department of Toxic Substances Control||
Each department maintains a separate Web site. In general, these Web sites provide information on school construction specific to that department. The total annual cost for support of the three departments' existing Web sites is $425,000.
According to these departments, there are several problems with these current Web sites. For example, school districts have difficulties in easily obtaining information on how the state school construction process operates (basically, the process flow among the three departments). Also, they maintain that it is difficult to obtain information on the status of particular construction approvals.
Project Proposal. The DGS proposes to develop a new interactive Web site, incorporating the existing information from the three departments. The Web site will consist of:
Data Already Available. During our review of this budget request, we examined the Web sites of each of these departments and found that much of the information proposed for the new site is already available on the existing Web sites. For example, SDE's Web site allows school districts to print out forms, identify consultants for each county, print out current publications, and view current regulations. The DGS's Office of Public School Construction Web site also allows school districts to print out forms and regulations, and it allows Internet users to find out, through an interactive query facility, the status of school construction approvals.
Given that most of the information is already available and accessible, we do not believe that an additional expenditure of $8 million is warranted, especially when compared to the relatively minor costs of operating the existing Web sites. In addition, the existing Web sites could easily be linked together at minimal or no costs. For this reason we recommend that the request be denied.
We are aware that many concerns have been raised in the past with respect to the oversight and the overall burdensome process related to school construction projects. This proposal, however, does not address those concerns.
The state's telecommunications network has experienced a number of problems over the last year. We recommend that the Department of General Services report during budget hearings on the status of the network problems, the network contract, and progress made towards reducing the risk of disruptions in the future.
The budget includes $30.8 million for DGS to support the state's telecommunications system, which is essentially the same spending level as in the current year.
The CALNET System. In 1996, DGS began the divestiture of the state's telecommunications operations, known as CALNET, and the procurement of telecommunications services from another firm. CALNET, which was developed in the early 1990s was never fully accepted by state departments as DGS had planned. As a result, it never generated the revenues anticipated and, in fact, experienced losses over several years. Because CALNET was losing money, the state decided to sell off its hardware and procure these services from a vendor without owning the equipment. In January 1997, DGS released its strategic plan for providing statewide telecommunications services, known as the California Integrated Information Network (CIIN). The plan included moving to a privately owned and operated network, which would involve a contract with a vendor which could cost up to $500 million over five years.
The CIIN Contract. Shortly after the release of the CIIN strategy, the state began the procurement process for the new telecommunications contract. In December 1998, the administration signed a contract with Pacific Bell (PacBell)/MCI to provide voice and data communication services to state and local entities. The annual contract amount is estimated to be about $100 million.
State agencies began to utilize the new telecommunications service in January 1999. The conversion of voice communications has been completed and has experienced very few problems.
Frame-Relay Network Experiences Major Problems. The second component to be converted to the CIIN contract was the state's "frame-relay" network which provides the data communications for the state's information technology systems. The conversion of the frame-relay network was also started in January 1999 but was halted in April 1999 due to the severity of the network problems being reported by several departments throughout the state. The operations of a number of the state's major departments, including the Departments of Motor Vehicles and Health Services, were severely disrupted by these outages, and delays occurred in providing services during the months of March through July 1999.
In response to the reported problems, DGS hired an Independent Validation and Verification (IV&V) contractor to assess the problems and provide recommendations to the state for improving the situation. The key findings were:
State Has Taken Actions to Remedy the Problems. Because the focus of the CIIN contract was on selling off state-owned hardware, the state did not pay full attention during contract negotiations to some contract provisions that would have provided the state greater protection and re-dress of performance problems. For example, the state can only terminate the contract during the fourth quarter of a year after performance has not been achieved for three consecutive quarters. This means that services dependent upon technology would have to be disrupted for virtually an entire year before the administration can terminate the contract.
In spite of this contract deficiency, once the outage problems became apparent, DGS took a number of immediate actions to remedy them, most importantly addressing the problems directly with Pacific Bell (PacBell). The DGS established a communications procedure, problem identification and correction procedure, and implementation process which provided the state the opportunity to make all decisions concerning conversions to the PacBell network.
In addition, it is our understanding that DGS has reached agreement with PacBell and MCI to renegotiate the contract. The department has also hired another consulting firm to help develop, as part of the new contract, improved "service level agreements"--measurable and time-specific statements of service that a contractor is responsible for maintaining.
PacBell has also put a number of changes in place to address the IV&V report's findings. Specifically, it has revised its operational procedures to ensure that all equipment is fully configured to provide uninterrupted service, upgraded a number of components in the network to be more "state of the art," installed backup telephone circuits in case the primary circuit is disrupted, and increased coordination with the state on all activities.
What Can the State Do to Decrease Its Vulnerabilities in the Future?
We think that DGS deserves credit for aggressively addressing the problems with CIIN. We also believe, however, that there are additional steps that the state can take as it reexamines the contract that may reduce the risk of future disruptions.
Specifically, we believe that the state can:
Establish a "Network Policy Board." The CIIN contract was designed to allow any California governmental entity (state or local) to receive reasonably priced telecommunications services through the contract. However, DGS, in consultation with the state's two major data centers and the Department of Information Technology, is the primary entity establishing the network policies. Since this contract was constructed to allow services to many entities, the state should consider establishing a policy board which would be responsible for advising on contract issues and statewide telecommunications policies. The board should have a broader representation of stakeholders such as city and county representatives and representatives from other state-level entities such the Public Employees' Retirement System. This would ensure that the policies for telecommunications could meet the needs of a broader set of users.
Analyst's Recommendation. Although DGS has taken important steps to correct network problems, given the importance of the state's telecommunications network in delivering services to the public, we think that the Legislature should maintain close oversight of CIIN and any future contracts. Thus, we recommend that DGS report to the Legislature during budget hearings on the status of network problems, the CIIN contract, and the progress the state has made in decreasing the risk of disruptions in the future.
We recommend that the Legislature deny the request for $2.1 million to create an electronic business center, because the proposal lacks specificity as to its scope and future phases, and the information proposed for a new Web site is already available, making the proposed new site unnecessary. (Reduce Item 1760-001-0001 by $2.1 million.)
The budget proposes $2.1 million from the General Fund for creation of an "e-business center" to provide government services to businesses electronically. The budget indicates that this request represents the first phase of a five-year proposal which will result in costs of up to $90 mil-lion.
For the budget year, the request proposes to implement Phase I, which consists of:
The request also states that DGS will acquire consulting services to complete all of the Phase I tasks.
Data Already Available. The proposal indicates that the Phase I Web site will incorporate into one Web site the existing state government Web sites, although it does not describe what specific information will be available. Forms and information that departments have currently on their individual Web sites will be available from this one Web site. Since the information is already available, and the cost for maintaining that information is already currently part of baseline budgets, it is unclear why additional funds beyond a minimal amount would be needed to link the sites together for activities that are already funded. In addition, to the extent that the administration's intent is to make contacts between businesses and government easier or more efficient, there should be reduced costs to government agencies. This proposal, however, does not recognize any such savings.
Long-Term Proposal Lacks Detail on Scope and Future Plans. The proposal contains very limited information about its overall objectives and scope. It does not define what benefits government and business will receive from a projected investment of up to $90 million. In addition, it does not outline what will be accomplished in the phases of the project or the costs of future phases.
Analyst's Recommendation. Given the fact the information proposed for the new Web site is already available and the proposal lacks specificity, we do
not believe that an additional expenditure of $2.1 million is warranted. For these reasons, we recommend that the request be denied.
The State Controller is responsible for (1) the receipt and disbursement of public funds, (2) reporting on the financial condition of the state and local governments, (3) administering certain tax laws and collecting amounts due the state, and (4) enforcing unclaimed property laws. The Controller is also a member of various boards and commissions, including the Board of Equalization, the Franchise Tax Board, the Board of Control, the Commission on State Mandates, the State Lands Commission, the Pooled Money Investment Board, and assorted bond finance commit-tees.
The Governor's budget proposes expenditures of $109 million ($72.3 million from the General Fund) to support the activities of the State Controller in 2000-01. This amount is an increase of $8 million, or 7.9 per-cent, above estimated current-year expenditures. This includes requested funding for the Controller's main budget bill item (Item 0840) and for two information technology projects within a separate budget bill item (Item 0841) titled the State Controller's Statewide Information Technology Projects.
Budget Request. The budget proposes a number of augmentations for support of the Controller's activities in 2000-01. The major proposals include the following:
The budget proposes additional resources to (1) meet the projected ongoing workload of processing unclaimed property and (2) research the potential additional workload that would result from reducing the backlog of notifications to potential owners of unclaimed property. We recommend approval of funding to meet the ongoing workload needs. In addition, we recommend the Legislature consider two alternative approaches to addressing the backlog of notifications.
As indicated above, the budget proposes augmentations totaling $1.1 million for the Bureau of Unclaimed Property. The first request is $839,000 to handle ongoing workload. The second requests relief from budget bill language that places restrictions on the notification of owners of unclaimed property. Related to this second request is $150,000 and two permanent positions to handle anticipated workload resulting from lifting the restrictions. Finally, the budget requests $72,000 and one limited-term position to study the potential workload impact from reducing the backlog of unclaimed property notices waiting to be sent out.
Background. Since 1959, banks and other institutions have been required by law to remit unclaimed property to the state. Examples of such property include bank accounts, safe deposit box contents, stocks, and the proceeds of insurance policies. Property is deemed to be unclaimed when an account has remained dormant for three years and efforts by the institution holding the account to locate the owner have been unsuccessful. The unclaimed property is then transmitted to the State Controller, who maintains records of all such property and attempts to identify the owners. Because the state is essentially holding unclaimed property in trust until a legal owner is identified, a portion of unclaimed property funds is returned annually to claimants. In general, the Controller (1) sends notifications to apparent owners and (2) processes the resultant claims.
According to the State Controller's Office, the state currently holds in excess of $2.6 billion in unclaimed property belonging to approximately five million individuals and organizations. Historically, the state receives about $300 million annually in unclaimed property funds pending efforts by the Controller to locate the owners. Annually, the state pays out about $150 million of these funds to approximately 117,000 claimants. The Governor's budget assumes the state General Fund will receive net revenues of $170 million from unclaimed property in 1999-00, but will drop to $71.2 million in 2000-01, based on implementation of the proposed changes.
1997 Law Change. Prior to 1997 the Controller was required to notify the apparent owner of any account valued at $25 or more. Since 1997, the Controller has been required to request the Franchise Tax Board (FTB) to match the social security number from an unclaimed property account, if one has been provided, to the address for the apparent owner of the account. If that address is different than the one originally provided to the Controller and the account is valued at $50 or more, a notice to the apparent owner must be sent to the new address.
Restrictions on Notification. Beginning in 1992-93, budget act language has restricted the amount of funds that the Controller could spend on mailed notices. The 1999-00 Budget Act essentially limited these expenditures to $15,000.
Increased Unclaimed Property Claims. The budget proposes $839,000 and authority to use 15.5 existing unfunded positions to meet projected ongoing workload demands. According to the Controller's Office, increased awareness of California's Unclaimed Property Program though national news releases, television talk shows, audits, and the creation of the Controller's Office Internet site have resulted in a 168 percent increase in claims workload. The Controller's Office projects another 50 percent increase based on the experience in comparable states after the introduction of an interactive Internet site for searching unclaimed property. The number of unclaimed property reports from holders has also increased by 30 percent since 1995-96. Without additional resources, the Controller must redirect staff to claims processing and away from updating owner account information, limiting the public's ability to search for unclaimed property.
Backlog of Notifications to Potential Owners of Unclaimed Property. Currently, there is a significant backlog of notifications that must be processed. This backlog began in 1990-91.
The actual number of notifications to be sent depends on which law is applied to the backlog. If the 1997 law, which requires notification in cases where there is an FTB address match to a social security number, is applied to the entire backlog, 476,000 notices must be processed. If the pre-1997 law is applied to only the backlog that occurred prior to 1997, then an unknown number of notices would be mailed. This application of law could substantially increase the number of notifications that must be processed and therefore increase the number of resultant claims.
Impact of Notification Requirements. There is a direct relationship between the number of notifications made by the Controller and the number of claims filed by legal owners of unclaimed property, and, consequently, the amount of money paid out to claimants. Reducing the backlog would accelerate, for a time, the filing of claims by legal owners of property transferred to the state.
There are a number of alternatives the Legislature may wish to consider when addressing the backlog of unclaimed property:
The 1997 law requires notification if the FTB matches a new address to an apparent owner of an account valued at $50 or more. The Controller estimates that retroactive application of the 1997 notification requirements would result in 123,000 claims over a five-year period. Processing this additional workload would require seven limited-term positions in addition to the two permanent positions required to process an estimated 18,000 annual claims. The cost of processing the backlog under these conditions is $371,000 annually for five years and $134,000 annually thereafter.
The Controller estimates that application of the 1997 law for all accounts (valued at $50 or more) received in 1997 and later, combined with application of the pre-1997 law (accounts of $25 or more), would result in 202,000 claims over a five-year period. The increase in claims is due to the pre-1997 requirement that notification be made to all apparent owners with accounts valued at $25 or more, regardless of a new FTB address match. The actual number of accounts falling into this category is unknown. The Controller estimates that the number of claims resulting from this application of law is around 202,000. To process this backlog, the Controller would require more than the seven limited-term positions. Exactly how many additional positions would be needed is unknown due to the uncertainty surrounding the number of accounts and resulting claims that would result.
What Should the Legislature Do? We believe the public is not well served by the current situation because statute requires the Controller to audit holders of unclaimed property, but the Controller is not authorized to seek out the owners of that property. This is especially important because private "heir finders" can purchase account information from the Controller and then charge a premium to identify unclaimed property to potential owners.
At a minimum, funding for the new permanent positions to begin notifications in the budget and future years should be approved in order to keep the backlog from growing. If the Legislature wishes to eliminate the backlog (and, thus, potentially find the owners of unclaimed property more quickly), the application of the pre-and post-1997 notification requirements would reach the largest number of apparent owners. While the exact number of accounts in this category is unknown, the Controller has estimated the number of resultant claims to be 202,000.
The Governor's proposal for a limited-term position to research the workload effect of addressing the backlog is not necessary because the Controller knows the level of funding needed to process any given number of claims per year. Given this information, the Controller could be funded at the level of 202,000 claims on a limited-term basis and submit a deficiency letter for the budget year should the number of claims be higher than estimated.
Addressing the notification backlog could result in a reduction in General Fund revenues from unclaimed property beyond the amount already assumed in
the Governor's budget. However, given the projected General Fund surplus, dependence on unclaimed property revenues is less significant this year
providing an opportunity for the Legislature to consider an aggressive approach in returning unclaimed property to its rightful owners.
The Secretary of State, a constitutionally established office, has statutory responsibility for examining and filing financial statements and corporate-related documents for the public record. The Secretary, as the chief elections officer, also administers and enforces election law and campaign disclosure requirements. In addition, the Secretary of State appoints notaries public, registers auctioneers, and manages the state's archival function.
The budget proposes total expenditures of about $78 million for the Secretary of State in 2000-01. This is $7.1 million, or 10 percent, more than estimated current-year expenditures. Expenditures from the General Fund total about $33 million, a decrease of $3.7 million, or 10 percent, compared to estimated current-year expenditures.
The lower General Fund expenditures is primarily because less money is needed than in 2000-01 to pay for programs the state mandates upon local government, particularly those establishing rules regarding elections.
The overall net increase in expenditures for the Secretary of State's office is due primarily to an increase in spending from the Business Fees and the Business Reinvestment funds. Legislatively enacted changes in the schedule of business fees are expected to generate additional fee revenue. These additional resources would be combined with previously accumulated fee revenues to finance a proposed information technology project to improve the office's business-related filing operations.
We recommend that the Secretary of State report at budget hearings regarding: (1) why direct savings from the Calvoter project are not offsetting ongoing state costs for the new voter registration tracking system, (2) what steps the state should take to improve its financial return from the project, and (3) how the $3.5 million state loan for the computer system can be deemed paid given the statutory language authorizing the project.
Removal of "Deadwood" From Voter Rolls Required. Chapter 5, Statutes of 1996 (SB 1313, Mountjoy) requires county registrars of voters to periodically verify the residence of voters and remove from the rolls those who have moved outside that county. The legislation was intended to reduce the cost to the state and to local governments of conducting elections by reducing the printing and mailing of official elections materials to so-called "deadwood"--households listed on voter rolls with an invalid, duplicate registration.
Last month, the Secretary of State reported that 1.5 million duplicate registrations were removed in advance of the November 1998 and March 2000 elections due to the requirements of Chapter 5. Based on the ballot pamphlet costs of $1.20 per registered voter for the March 2000 ballot cited by the Secretary of State, we estimate that Chapter 5 will result in state savings of more than $1.8 million for the March 2000 election. In addition, county governments will enjoy significant additional savings on the costs of mailing local ballot materials.
Calvoter Project Initiated. Chapter 913, Statutes of 1995 (AB 1701, McPherson) directed the Secretary of State to establish a statewide computer system comprised of voter registration data to facilitate the removal of duplicate registration of voters. The Secretary of State contended at the time that this project could also save the state and the counties millions of dollars annually by paring "deadwood" from the voter rolls. For example, change-of-address information filed with the Department of Motor Vehicles is being used to alert a county registrar of voters when a registered voter has moved out of that county and is no longer eligible to vote there. The Secretary of State also cited other potential benefits from creating an automated voter registration tracking system, including a reduced risk of voter fraud.
Chapter 913 provided a $3.5 million loan from the General Fund to the Secretary of State to develop the voter registration tracking system and specified that the loan be repaid out of state savings on printing and mailing costs made possible through the new system. The loan is repayable with interest by December 31, 2000, but no procedure or penalty is specified in the law in the event of its nonpayment.
Additional General Fund appropriations not subject to repayment have been provided to the Secretary of State's office for implementation and ongoing operation of the system. According to a Post-Implementation Report (PIER) on the Calvoter project released in November 1999, about $7 million will have been spent on the Calvoter system by the end of the current fiscal year. About $1.2 million is provided in the 2000-01 budget plan for ongoing state support for the Calvoter system.
Project Results Reported. The original Feasibility Study Report outlining the project specified that the new computer system was to have been deployed in all California counties as of November 1997. Full deployment was delayed until the following year because county election officials needed more time to help implement the new computer system.
The PIER indicates that the Secretary of State was unable to access some state and federal data sources that had been sought in order to dis-cover duplicate voter registrations. However, the report does indicate that the Secretary of State was generally successful in resolving the complex technological problem of establishing a system linking the Secretary of State's voter registration system with county election voter registration systems across the state.
The PIER prepared by the Secretary of State's office states that the Calvoter project resulted in a reduction in the state's costs of printing and mailing ballot pamphlets by approximately $1.2 million per election. The basis for this savings estimate was not identified in the report.
Financial Returns So Far Do Not Offset Project Costs. Chapter 913, the law authorizing the Calvoter project, directed the Secretary of State to provide reports to the Legislature and the Director of Finance every six months to account for the number of duplicate voter registrations eliminated and the savings that directly accrued to the state as a result of the new computer system.
In its December 1999 report, the Secretary of State indicated that 525,574 duplicate registrations were eliminated as of the end of 1999 by the Calvoter system. Based on the Secretary of State's standard assumption that each duplicate registration costs $1.20 in state funds for printing and mailing an unneeded ballot pamphlet, we estimate that the total state savings achieved in the March 2000 election will be about $630,000, about half of the $1.2 million per election in savings cited by the PIER and about half of the ongoing, annual cost to the state for operating the Calvoter system.
Other Savings Cannot Count Against Loan. In his report last month on the results of the Calvoter project, the Secretary of State suggested that savings resulting from the Chapter 5 requirements for paring voter rolls should be counted toward repayment of the $3.5 million loan for the Calvoter project. The Secretary of State indicated that, if Chapter 5-related savings from the November 1998 and March 2000 elections are counted, along with anticipated savings from the November 2000 election, he deems the loan to have been paid off in its entirety.
However, the state law authorizing the Calvoter project specifies that only voter registrations eliminated directly by the new computerized voter registration system should be counted toward repayment of the loan. The measure further states that duplicate voter registrations removed as a result of other state laws are not to be counted toward repayment of the loan. Only recently has the Secretary of State's office indicated to the Legislature that the state's financial return from the Calvoter project was being diminished because of the Chapter 5 requirements.
The PIER report prepared by the Secretary of State's office does not outline any further steps to improve the state's financial return on its $7 million investment to date in the Calvoter project. Nor does the report indicate how the $3.5 million loan will be repaid by the end of this year.
Analyst's Recommendation. The release of the PIER formally concluded the implementation of the Calvoter project, but left a number of important issues unresolved. Accordingly, we recommend that the Secretary of State report at budget hearings regarding: (1) why direct savings from the Calvoter project are not offsetting ongoing state costs for the new voter registration tracking system, (2) what steps the state should take next to improve its financial return from the project, and (3) how the $3.5 million state loan for the computer system can be deemed paid given the statutory language authorizing the project.
We withhold recommendation on a request by the Secretary of State for $8.6 million to upgrade the office's computerized systems for managing corporate and other public records because the project has not yet been approved by the appropriate state agencies.
Business Programs Automation. The proposed budget for the Secretary of State would provide about $8.6 million from two related business fee funds for the first phase of the Business Programs Automation project. The budget request indicates that the project would address significant problems in the corporate and other business registration programs for which the Secretary of State is responsible. Those problems include inefficient processing of corporate filings and backlogs of tens of thousands of documents, difficulty in responding to requests for public records and information, and potentially serious mistakes in record keeping.
Advance review and approval by specified state agencies is ordinarily required under state administrative rules before funding can be budgeted for a new information technology project. This project has not received all of the necessary reviews and approvals. Nonetheless, the Department of Finance included funding for this project in the proposed state budget plan, along with budget bill language providing that the funds could not be spent until those required approvals were obtained.
Analyst's Recommendation. Without prejudice to the possible merit of this project, we withhold recommendation on the $8.6 million funding request and recommend that the budget bill language be deleted.
We believe it is premature to appropriate funds for this project until the appropriate state agencies have settled on a specific procurement process, agreed upon the scope and timetable for the project, and determined the exact funding needed to proceed during the budget year. If those steps are accomplished before the Secretary of State's budget is heard in subcomittee, the Legislature would have the information it needs to make a sound decision on the merits of the project. If those steps have not been completed by budget hearings, we would recommend that the Legislature not approve the project at this time.
We recommend that net General Fund support for the Secretary of State's office be reduced by $2.6 million to account for new revenues from registration of domestic partnerships and the expedited handling of corporate documents. We also recommend approval of the full funding and positions sought to implement these two new fee-supported programs. (Reduce Item 0890-001-0001 by $2.6 million, adjust amount payable from Business Fees Fund under 0890-001-0001 Schedule (e) and 0890-001-0228 by the same amount.)
New Fee-Based Programs. The proposed budget for the Secretary of State implements several programs required by state legislation, including Chapter 588, Statutes of 1999 (AB 26, Migden) to allow certain couples to register as domestic partners. The budget plan would provide $147,000 from the General Fund in the 2000-01 fiscal year to implement the program. The Secretary of State's budget request estimates that the registration fees for domestic partnerships would generate $100,000. However, the budget request for the Secretary of State does not take this estimated revenue into account.
The spending plan also includes a separate request for $923,000 in the budget year to implement Chapter 999, Statutes of 1999 (SB 408, Alpert). This legislation allows the Secretary of State to collect special handling fees of up to $1,000 from corporations that are willing to pay for expedited processing of corporate filings. Last year, the Secretary of State's office estimated that the measure would generate $2.5 million in revenues for the state. However, the additional revenue projected to result from Chapter 999 is not taken into account in the Secretary of State's budget request.
Analyst's Recommendation. We recommend approval of the positions and funding requested by the Secretary of State to fully implement both the domestic partnership and the expedited document-handling programs. However, we believe it is appropriate to offset the General Fund costs of operating the Secretary of State's office with the new revenues expected to be generated by these programs. These changes should have no effect on the implementation of the Secretary of State's new or existing programs.
We have been advised by the Secretary of State's office that there are technical concerns with the requirement in Chapter 999 that fees generated under the new law be accounted for as reimbursements of expenditures. Thus, we recommend the adoption of budget bill language that would allow these fees to be budgeted in the same fashion as other business fee revenues. The budget bill language would state:
Provision X. Notwithstanding Section 12208(d) of the Government Code, special handling fees may be accounted for as expenditures from the Secretary of State's Business Fees Fund.