Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Department of Motor Vehicles (2740)

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

The budget proposes total expenditures of $680.6 million for support of DMV in 2001-02. This represents an increase of $18.5 million, or 2.8 percent, above estimated current-year expenditures.

About $344 million (51 percent) of the department's total support will come from the Motor Vehicle Account and $269 million (40 percent) from the Motor Vehicle License Fee Account. The remaining support will be funded primarily from the State Highway Account and reimbursements.

Fraud Persists in Driver License Program

Over the past several years, evidence of potentially widespread fraud in the Department of Motor Vehicles' (DMV's) issuance of driver licenses has come to the attention of the Legislature. Despite attempts to curb this fraud through legislation and administrative measures, recent reports indicate that the problem persists. The department now requests an additional $13.3 million for driver license fraud prevention and investigation. While we believe that new efforts are needed, we find that the department's proposal fails to justify the particular solutions identified over various alternatives. Accordingly, we recommend that the Legislature delete the proposed augmentation at this time, and direct the department to develop and present at the May Revision a fuller and more cohesive solution that takes into account additional information expected to become available this spring. (Reduce various items by $13.3 million.)

The California Driver License (CDL) is statutorily recognized as the primary form of identification used in the state. Besides conveying evidence of one's driving privilege, the CDL is commonly used to cash checks, secure credit, obtain social services, register to vote, and perform various other financial, governmental, and legal transactions that require certain evidence of one's identity. It is therefore critical that the integrity of the license as a positive form of identification be protected. Unfortunately, the value and importance of the CDL have made it a popular target for fraud.

Different Types of Fraud. There are three main types of fraud connected with driver licenses:

• Ineligible Persons Securing a License. Some persons cannot legally obtain a driver license because they do not meet certain criteria (such as age or residency requirements). They may nevertheless seek to secure a license from DMV by using falsified documents or otherwise hiding their ineligibility.
• Establishing Fictitious Identity or Multiple Identities. Individuals may fraudulently obtain one or more licenses with fictitious identities or aliases in order to hide a criminal past or to engage in criminal activity. This can effectively shield a criminal from law enforcement.
• Identity Theft. In some cases, an individual will fraudulently secure a driver license in the name of another person with the intent of victimizing that person. The impostor uses the license to obtain loans, cash checks, or otherwise purchase benefits in the name of the victim. The victim becomes aware of the problem when unexpected bills arrive or, in extreme cases, when an impostor's criminal activity results in a warrant for the victim's arrest. It takes an average of two years and much effort for a victim to restore his or her credit rating.

The full extent of these types of fraud is unknown. Estimates for the total number of fraudulent licenses range well over 100,000 per year.

Fraud Facilitated by Lax DMV Procedures. Although it is unrealistic to expect that fraud could be entirely prevented, lax procedures by DMV have made fraud relatively easy to commit. The main entry points for fraud are:

• Insufficient Document Review. The DMV staff must be able to authenticate a wide range of documents in connection with driver license issuance. However, according to DMV, staff have received almost no formal training in comparing photos and signatures in such documents. Moreover, until several months ago DMV did not verify social security numbers (which must be provided under state law) with the Social Security Administration. As a result, many counterfeit documents have been accepted by DMV, leading to the issuance of fraudulent CDLs.
• Failure to Positively Identify License Applicants. A common means of identity theft is for the impostor to request a "replacement" license from DMV. The impostor gives the name and other pertinent information of an unwitting victim, and requests that a new license be generated with the impostor's new photograph. Since DMV keeps on file the photographs that appear on all issued licenses, staff could expose the impostor by comparing the file photograph for the "old" license against the person requesting the replacement license. However, until recently DMV, citing time constraints, seldom made use of this resource. In addition, although the department obtains thumb prints for all license holders, it does not make use of these records to verify the identity of applicants for replacement licenses.
• Inadequate Oversight of DMV Staff. Fraud prevention relies to a large extent on the efforts of DMV staff who review license applications and issue licenses. The adoption of various fraud prevention procedures by DMV is undermined to the extent that individual DMV staff do not follow those procedures and supervisors fail to provide adequate oversight. Our review has found that many staff feel pressure to expedite transactions. Some staff react to this pressure by ignoring certain procedures, such as retrieving file photographs, in order to save several minutes. In addition, some staff have received bribes to issue licenses fraudulently, such as by accepting documents they know to be counterfeit or intentionally ignoring a mismatch between an applicant's photograph and the file photograph. Legislative hearings in 1997, a report in 1998, and a variety of news reports have highlighted persistent fraud activities carried out by DMV employees. Although the department made various efforts to respond to this fraud (investigating over 800 employees since 1997), recent news reports indicate that the problem persists. Our review finds that resources for DMV internal investigation are also limited. Of 225 investigators on staff, 13 are assigned to employee fraud. Moreover, DMV procedures for screening new applicants for employment and monitoring staff are weak. For instance, DMV does not conduct a background check on an employee who is transferred from a "nonsensitive" position to a "sensitive" position involving driver license records.

While there are other entry points for fraud, we believe that the three listed above account for the substantial majority of fraudulent licenses issued by DMV.

Recent Efforts to Address Fraud. A series of newspaper reports in September and October 2000 drew attention to the problems with driver license and vehicle registration fraud at DMV. In response, the Senate Transportation Committee held an interim hearing in November which investigated the extent and cause of fraud, and which sought to identify opportunities to mitigate these problems. As a result of the hearing, legislation has been introduced to address certain facets of DMV's license issuance procedures, such as its use of thumb prints and license photographs to verify identity. Further, the Legislature recently requested an audit of DMV's license issuance procedures by the Bureau of State Audits (BSA). In addition, DMV has instituted a number of procedural changes such as requiring that social security numbers be verified with the Social Security Administration and requiring that file photographs be matched against persons requesting a replacement license. The department has also convened an antifraud task force, and has undertaken a pilot project with the state Department of Justice (DOJ) to determine the adequacy of DMV's thumb print database for verifying identity.

Department Requests $13.3 Million for Reforms. The department now requests $13.3 million in the budget year to expand its fraud prevention activities. Specifically, the department requests:

• $7.7 Million for "Biometric" Verification. The department requests funding for contracts and equipment to electronically verify thumb prints and facial features for driver license applicants. The measurement of a person's physical characteristics to authenticate one's identity is know as biometric verification. The department proposes to use computers to match the thumb print and facial features of an applicant seeking a replacement or renewal license with the thumb print and photograph on file for the requested driver license number. According to the department, reviewing proposals, awarding the contract, and implementing the system could take several years.
• $3.8 Million and 21 Positions for Other Verification Activities. Because the biometrics proposal will take some years to implement, the department also proposes to immediately expand its manual verification of photographs and documents. Essentially, DMV's new procedures require (1) retrieval of the file photograph when an applicant for a replacement or renewal license lacks acceptable identification, and (2) inspection of identification documents by two DMV staff.
• $1.2 Million and 12 Positions for Investigators. The department proposes to increase the number of investigators for field office "interdiction" activities. Currently, the department has ten investigators assigned to these activities. Responsibilities include investigating suspicion of fraud by license applicants and employees, and spot-checking documents.
• $592,000 (and an Additional $700,000 in 2002-03) for Surveillance Systems. The department requests funding to increase video surveillance systems in field offices. These systems have been used to monitor the activities of customers and, to a lesser extent, employees at DMV offices. They also monitor DMV offices after hours. The proposal would upgrade equipment at some offices, and add equipment to some of the offices that lack it.

In sum, the DMV's proposal attempts to address problems with confirming the identity of license applicants, and, to a lesser extent, monitoring DMV employees and improving document verification. We believe that the proposal contains a number of elements which, taken individually, might be useful to address specific facets of DMV's license fraud problems. However, we conclude that the elements of the proposal taken together are not sufficiently comprehensive and integrated. Specifically, we have the following two concerns.

Proposal Insufficiently Developed. The largest component of the proposal involves biometric verification of a person's physical characteristics—namely facial features and thumb prints. By using computer technology to make these comparisons, the department can avoid the human error inherent in having DMV clerks visually confirm identity.

Biometric technology is changing rapidly, and it is not clear whether the best approach would be to compare thumb prints, fingerprints, facial characteristics, or some other feature or combination of features. Moreover, the department notes that its proposal is only a first step, and that to more fully combat fraud, additional data-searching capabilities will have to be added. Estimates for the expanded system range up to $50 million, and the time required to fully implement such a system and obtain necessary data files could exceed a decade. In addition, the use of biometric technologies raises legal and privacy issues. It is unclear, for example, whether DMV is statutorily authorized to use biometric data to combat crimes not directly related to the Vehicle Code. In summary, while we believe that biometrics holds promise for DMV's efforts to combat fraud, we believe that the current proposal is insufficiently developed, raising questions that require further review.

Proposal Does Not Address Employee Oversight Issues. The budget proposal also fails to adequately address employee oversight. While DMV continues to develop procedures and policies that combat fraud, it is unclear how DMV plans to ensure that its employees actually observe those procedures and policies. As noted earlier, recent reports have highlighted how DMV employees sometimes ignore procedures to save time or commit fraud. We believe it will be necessary for DMV to improve its screening of employees for sensitive positions, as well as its identification of and response to employee misconduct. Further, the extent and adequacy of the department's proposal to improve employee training is not clear.

Impacts on Privacy and Efficiency Should Be Considered. In addition to the concerns discussed above, we note that DMV's response to its fraud problems raises policy questions about the potential trade-off between fraud prevention and customer convenience. The department notes in its proposal that some of its reforms have increased the time required to perform certain transactions. The Legislature has expressed concern about wait times for DMV customers, expressing in statute its intent that average wait times should not exceed 30 minutes. The projected benefits of DMV's fraud prevention activities will need to be weighed against their effect on customer convenience, including lengthened wait times and intrusions on privacy.

A More Integrated and Comprehensive Approach Needed. For the reasons discussed above, we cannot determine the degree to which DMV's proposal can be expected to reduce license fraud. Given the multifaceted nature of the license fraud problem, we believe that an appropriate response would be to draw together a comprehensive, integrated set of solutions. We believe such a response should include:

• Legislation That Addresses Identified Need for Statutory Revisions. The subjects of such legislation might include DMV's authorization to use biometric data; restrictions on the public availability of personal data and documents, including birth certificates; penalties for driver license fraud and identity theft; and the screening of applicants for DMV employment.
• Administrative Policies and Procedures Carried Out by DMV. These should ensure that driver license applicants are "positively identified," that documents are reliably authenticated, and that the activities of DMV employees are appropriately monitored.
• Personnel and Equipment. The DMV must be provided with a level of staff and appropriate equipment to ensure that it can perform its responsibilities effectively and efficiently. The appropriate level of support for fraud activities, however, can only be determined after resolving the statutory and administrative questions raised above.

Recommendation: New Investments in Fraud Prevention Should Await Audit and Pilot Results. As noted above, several studies currently under way should be able to provide a fuller evaluation of DMV's problems with license fraud. An audit by BSA is expected to examine the extent and nature of these problems, evaluate the appropriateness of DMV's recent reforms, and recommend administrative, statutory, and budgetary solutions. In addition, a pilot project by DMV and the state DOJ is expected to evaluate how different biometric solutions (involving facial recognition and fingerprint technologies) might be able to reduce fraud.

Both of these projects are expected to be completed this spring. We believe it is prudent to await the results of those projects before investing in a particular reform package. Accordingly, we recommend that the Legislature (1) delete the proposed augmentation at this time, and (2) direct DMV to develop and provide at the May Revision a comprehensive reform package that responds to the fraud issues listed above. The reform package should take into account findings from the BSA audit, DOJ pilot, and other available information. The package should include budget proposals, legislative proposals, and further administrative changes, as appropriate.

Unused Computer Terminal Replacement Funds Should Be Redirected

Over the past three fiscal years, the department has received $3.5 million to replace computer terminals in its field offices. At the time this analysis was prepared, the department had not begun the replacement. We recommend that the funding be redirected to the Department of Motor Vehicles' financial system replacement project and new funding for that project be reduced by a like amount. (Reduce various items by $3.5 million.)

The DMV performs a number of vehicle-related transactions at its 170 field offices throughout the state. Most of these transactions, including driver license issuance, vehicle registration and renewal, and occupational licensing, take place at computer terminals operated by DMV staff.

The department conducted a study in 1997 and 1998 which indicated that the field office terminals were "old, wearing out, and technologically obsolete." It noted that the terminals were failing with increasing frequency; replacement parts were no longer available; and the vendor would not renew the maintenance contract past 1998. The report maintained that equipment failures would cause business disruptions. The report concluded "It is imperative that replacement [of the terminals] start in July 1998 . . . ."

In the May Revision of the Governor's 1998-99 budget proposal, DMV requested a total of $3.5 million over three years to replace the terminals. It cited the study as justification for the budget request. The requested funds were approved by the Legislature, and were included in the 1998-99, 1999-00, and 2000-01 budgets.

Terminals Not Replaced; Funds Remain. Discussions with the department indicate that, as of January 2001, DMV still had not expended the funds to replace its field office terminals. The department informed us that it has reevaluated its needs, and is considering using the appropriated funds to purchase different equipment than that which was identified in its original budget request.

Funds Should Be Directed to Other Activities. Because the department has not made use of the funding provided to it for replacement terminals, we believe the funds should be redirected to the department's current activities. Specifically, we recommend that DMV redirect these funds to the replacement of its administrative and financial systems, which is currently under way. Doing so will reduce the department's request of $8.1 million to complete this project in the budget year by a like amount. Accordingly, we recommend that the Legislature reduce DMV's budget request by $3.5 million.

Department Should Report on Terminal Needs. Judging from the department's continued use of its old terminals two and one half years past the "imperative" replacement date specified in its 1998 report, it appears that the department's evaluation of its terminal needs was severely flawed. Moreover, the 1998 report is now significantly out of date.

Accordingly, we recommend that the Legislature adopt the following supplemental report language to direct the department to provide a new report on its field office terminal needs. Any new effort to replace the terminals should be based on information detailed in that report.

Item 2740-001-0044—Department of Motor Vehicles

On or before January 10, 2002, the Department of Motor Vehicles (DMV) shall provide the Legislature with a report that evaluates the department's use of computer terminals in its field offices. The report shall (1) describe the department's current equipment, (2) evaluate its suitability for the tasks for which it is used, and (3) recommend actions, including terminal replacement if warranted, which the department believes are necessary to ensure the reliability and efficiency of DMV's legislatively mandated activities.

Replacement Office Should Be Procured by Capital Outlay, Not Lease With Purchase Option

We recommend the South Sacramento replacement office be procured by state capital outlay, not by lease with purchase option with a private developer.

(Please see discussion in the "Capital Outlay" chapter.)