Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Department of Corporations (2180)

The Department of Corporations (DOC) is responsible for protecting the public from unfair business practices and fraudulent or improper sale of financial products and services. The department fulfills its responsibility through its investment and lender-fiduciary programs. The DOC is supported by license fees and regulatory assessments, which are deposited in the State Corporations Fund.

The budget proposes total expenditures of $35 million and 291.8 personnel-years (PYs) in 2002-03. This is $9 million, or 34 percent, more than estimated current-year expenditures and 16.4 additional PYs. The increase is mainly due to a $10 million request for statewide public education regarding investment and lending fraud.

Staff for Investment and Lending Fraud Pilot Are Premature

We recommend deletion of $1,571,000 and 24 positions for additional call center and enforcement staff related to the proposed public education and outreach program. (Delete $1,571,000 from Item 2180-001-0067.)

The budget proposes $10 million and 25 one-year limited-term positions to implement the Statewide Outreach on Predatory Practices (STOPP) program, which would target investment and lending fraud. According to the department, the purpose of the program is to make consumers aware of (1) DOC's responsibilities, (2) the extent of fraud and abuse in the investment and lending industries, and (3) where to get information and submit complaints. This pilot program would include the following four components:

• Public Education--$8.1 Million. Fair exhibits, mass mailings, and statewide television commercials, with focus groups and surveys before and after broadcast of the television commercials to measure the impact on public awareness of investment and lending fraud.
• Establish an Outreach and Education Office--$0.4 Million. Administer STOPP, develop brochures
• and public service announcements, organize outreach events, and contact community organizations.
• Establish a Call Center--$0.8 Million. Consolidate existing resources for responding to consumer complaints and increase staff for the greater number of calls expected because of the publicity campaign.
• Additional Enforcement Staff--$0.7 Million. Handle a greater number of investigations predicted to result from increased consumer complaints.

The DOC indicates that it may use results from the one-year pilot program to request ongoing funding.

Additional Call Center and Enforcement Staff Premature. The DOC currently has five staff members who respond to 40,000 consumer phone complaint calls per year. As a result of the proposed public education campaign, the department expects the number of phone calls to increase permanently by about 50 percent to 60,000 annually, with a corresponding increase in enforcement workload. Thus, the proposal includes $851,000 and 7 additional positions to handle additional consumer complaints and $720,000 and 17 positions for additional enforcement workload.

The DOC's proposal is similar to a consumer education and outreach program recently implemented by the Office of the Patient Advocate in the Department of Managed Health Care (DMHC). The DMHC program includes airing television commercials to publicize the existence of the office, developing and distributing various brochures, sponsoring regional consumer education efforts, and conducting seminars with consumer advocacy groups.

As noted above, DOC requests additional call center and enforcement staff based on a predicted increase in consumer complaints due to the proposed television advertising. However, according to DMHC, it did not experience an increase in call volume when its television commercials aired last fall. Like the DOC proposal, the DMHC commercials sought to educate the public about consumer-related issues and the department's role in addressing them. Thus, we do not anticipate that DOC will experience a significant increase in call volume. As a result, we believe that DOC's current request for additional staff is premature. Instead, the department should gauge the impact of STOPP on call volume for one year before requesting additional positions for call center or enforcement workload. Consequently, we recommend deletion of $1,571,000 and 24 positions for call center and enforcement costs.