LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Department of Corporations (2180)

The Department of Corporations (DOC) is responsible for protecting the public from unfair business practices and fraudulent or improper sales of financial products and services. The department fulfills its responsibility through the licensing and examination activities of 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 $31 million and 281 personnel-years (PYs) in 2005-06. This is $1.8 million, or 6.2 percent, more than estimated current-year expenditures and 19 additional PYs. The increase is due to budget proposals to add examiners, continue and expand an online filing program, and continue an investment fraud education pilot program.

Grant Funding for Investment Fraud Education Comes to an End

Because of questionable benefits, we recommend that the Legislature delete $400,000 to continue an investment fraud education program previously supported with grant funds. The Department of Justice currently publishes a guide to help prevent financial fraud. (Reduce Item 2180-001-0067 by $400,000.)

Proposal. The Seniors Against Investment Fraud (SAIF) program trains senior citizen volunteers to provide investment fraud information to other seniors. For four years, DOC has received $400,000 in annual grant funds from the Office of Emergency Services (previously the Office of Criminal Justice Planning) to implement the program. These funds will no longer be available after the current year. As a result, the department requests an augmentation from its regulatory revenues to continue this program.

Definitive Impact Difficult to Demonstrate. A survey analysis of the program reveals that it is difficult to draw definitive conclusions about the program's direct benefits on reducing investment fraud. The survey indicates that the proportion of people who experienced investment fraud was not different between those familiar with SAIF and those who were not. On the other hand, the SAIF-familiar group did experience reduced financial losses and no recent fraud attempts. The analysis notes, however, the possibility that the SAIF-familiar group included people who were already more savvy about investment fraud. Thus, their preexisting experience, rather than their familiarity with this program, could explain the reduced financial losses.

Chosen Methods of Advertising Not Particularly Effective. In addition, a significant portion—more than 20 percent—of the proposal would be for newspaper and radio advertising. The survey indicates modest effects from newspaper advertising in building program familiarity and insignificant effects from radio. These modes of advertising are not particularly effective compared to television, which is significantly more expensive and not part of the proposal.

Department of Justice Program Addresses Investment Concerns. The Department of Justice (DOJ) also administers programs to reduce senior citizen fraud through its Bureau of Medical Fraud and Elder Abuse. Specifically, the bureau partners with the Crime and Violence Prevention Center (also part of DOJ) and the Association for the Advancement of Retired Persons to publish an elder abuse guide that includes a section on financial fraud.

Analyst's Recommendation. Given the lack of proven effectiveness of the SAIF program and DOJ's existing efforts in this area, we recommend that the Legislature not approve DOC's request for $400,000 in funding.

Online Filing Program Double-Budgets Some Equipment Replacement

We recommend that the Legislature reduce the request by $40,000 to account for the double-budgeting of server replacement. (Reduce Item 2180-001-0067 by $40,000.)

Electronic Filings. In 2001-02, DOC implemented a pilot project known as California Electronic Access to Securities Information (Cal-EASI). This project (1) scans images of investment licensees' filings into electronic format and (2) allows the most frequently filed form to be submitted online with credit card payment of the filing fee. This automates access for depart ment employees in different locations around the state, eliminates the need for duplicative databases, reduces processing time, and also enhances public access to confirm licensing.

Reduce Proposal for Overbudgeting. The DOC proposes to continue current funding of $465,000 on a permanent basis for the existing components of Cal-EASI. In addition, the department has a separate proposal to expand Cal-EASI to include two more filings at a cost of $203,000 in the budget year ($174,000 on a one-time basis). The proposal to make the pilot program permanent includes funding (based on a four-year cycle) for replacing servers. At the same time, the expansion proposal includes $40,000 to replace current servers. This double-budgets replacement costs for the first set of servers from the pilot program. Thus, we recommend that the Legislature reduce the one-time equipment allocation in the expansion proposal by $40,000 to account for the double-budgeted servers.

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