LAO 2006 Budget Analysis: Transportation

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

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 Californiaís streets and highways by issuing driver licenses. Additionally, DMV licenses and regulates vehicle-related businesses such as automobile dealers and driver training schools, and also collects certain fees and tax revenues for state and local agencies. The department operates 215 facilities, which include customer service field offices, telephone service centers, commercial licensing facilities, a headquarters, and driver safety and investigations offices.

The budget proposes total expenditures of $818†million for support of DMV in 2006-07. This represents an increase of $47†million, or 6†percent, above the estimated current-year expenditures. About one-half of the increase is for various cost adjustments to the departmentís vehicle registration and driver licensing programs. Another $18†million in additional expenditures is requested to implement a vehicle registration suspension program, to replace the departmentís fee payment system, and to relocate several field offices. The budget proposes a staffing level of 8,267 personnel for 2006-07, which is essentially identical to the current year.

About $439†million (54†percent) of the departmentís total support will come from the Motor Vehicle Account and $317†million (39†percent) from the Motor Vehicle Licensing Fee Account. The remaining support will be funded primarily from the State Highway Account and reimbursements.

Registration Suspension Program Will Not Be in Place on Time

It is highly unlikely that the Department of Motor Vehicles (DMV) will meet the October 1, 2006 deadline to implement a program to suspend registration of uninsured vehicles, given DMVís outdated computer system and a late start on program development. To reduce additional delay, we recommend approving the departmentís proposal for $9.3†million to contract with a private vendor to implement this program. We further recommend that DMV report at budget hearings on the estimated costs of taking over duties for the registration suspension program from the vendor in 2009-10.

Chapter†920, Statutes of 2004 (SB 1500, Speier), requires (1)†insurance companies to electronically report all private passenger automobile liability insurance policies to DMV and (2)†DMV to establish a vehicle registration suspension program for vehicle owners who fail to provide evidence of financial responsibility within 30 days of registering their vehicles. The law also requires DMV to start suspending registration of uninsured vehicles beginning January 1, 2006. However, subsequent legislation, Chapter†76, Statutes of 2005 (SB 62, Committee on Budget and Fiscal Review), allows the department to delay program implementation until October 1, 2006. As of January 2006, the requirement for insurance companies to electronically report policy status to DMV had largely been met. The department, however, was only in the early stages of developing a suspension program.

Implementing a registration suspension program entails tracking the insurance status of over 25†million vehicles annually, mailing an estimated 5.5†million letters notifying vehicle owners of inadequate insurance records, assessing fees for late registrations, and suspending registration for vehicle owners who do not provide proof of insurance within 45 days of notification. Preparing to meet these requirements necessitates a series of actions by the department. Specifically, DMV must procure new database and telecommunications infrastructure. In addition, it must design, develop, and test software that tracks vehicle registration status, generates notices of suspension, and issues appropriate fees for late registration. Furthermore, DMV must hire and train additional personnel to staff call centers to accommodate increased call volumes resulting from the suspension program.

Indecisiveness Over Implementation Plan Led to Delay. The departmentís indecision over how to implement the registration suspension program has caused significant delays in bringing the program online. Specifically, DMV has vacillated between two methods to implement the program: an in-house strategy utilizing DMV staff and a contract-out solution relying on a private vendor.

In February 2005, DMV proposed a vendor-based approach which foresaw the program being implemented by July 1, 2006. For various reasons, however, the department reversed its approach in May 2005 and committed to an in-house method using DMV staff to implement the program. This solution was approved by the Legislature and the 2005-06 budget appropriated $4†million to DMV for nine additional staff to begin work on the program and update the departmentís telecommunications infrastructure. In July 2005, the department advised the Legislature that it was reversing its approach yet again. Deciding that the in-house method would not be able to meet the October 1, 2006 program start date required by statute, DMV adopted its current method of first using a private vendor to establish the program and then taking over the programís administration using DMV staff in 2009-10.

Vacillation between methods in February through July 2005 has led to delays in completing program development milestones. Discussions with the department indicate that as of January 2006, the project is two months behind schedule in selecting a vendor to implement the suspension program. Vendor selection will not occur until late April, leaving only five months for a vendor to design, develop, and test the system, in addition to ensuring that it is sufficiently staffed to handle call volumes resulting from the new suspension program. Given the amount of work required of the vendor once a contract is awarded, it is highly unlikely that the program will be implemented by October 1, 2006.

Budget-Year Proposal Warranted. For 2006-07, DMV requests $9.3†million, which includes authority for one position and $9†million for contract services. Our review shows that contracting with a vendor would likely be the fastest way to get the program online. Even with this approach, however, DMV is unlikely to meet the statutory deadline. Given the Legislatureís intent that the registration suspension program be implemented as soon as possible, we recommend approval of the departmentís budget-year proposal to contract with a vendor to implement the program.

Vendor-Based Solution Likely to Have Additional Costs. The department estimates the cost of establishing the registration suspension program by a private vendor would be $42†million through 2008-09. Our review shows that the estimate does not take into account costs that DMV would incur when preparing to assume full program administration responsibilities in 2009-10 as currently planned. Depending on how the vendorís contract is specified, these costs could include procurement of equipment and hiring and training DMV staff to administer the program in-house. By contracting out the set up and initial administration of the suspension program, DMV delays rather than avoids many of these costs. We estimate these costs to be at least a few million dollars.

Recommend Department Report on Costs of Program Takeover. The eventual takeover of the programís administration will result in significant costs that were not included in the departmentís proposal. Accordingly, we recommend that the department report at budget hearings on its plan for resuming full administration of the suspension program. Specifically, DMV should present to the Legislature timelines and estimated start-up costs associated with taking over the program from the vendor in 2009-10.

Real ID Act of 2005 Will Significantly Increase DMV Costs

Requirements under the federal Real ID Act, which will become effective in mid-2008, underscore the necessity for the Department of Motor Vehicles (DMV) to successfully update its aging computer and database infrastructure, as well as hire staff to handle additional workload. We recommend that DMV report at budget hearings on anticipated workload requirements to implement the act, how the department plans to meet these requirements, and the potential costs related to the actís implementation.

The federal Real ID Act of 2005 requires that beginning in May 2008 persons who live or work in the United States possess a federally approved ID card in order to participate in a range of federally regulated activities, including air travel, collection of Social Security payments, and receipt of federal services. The law requires that state-issued driver licenses and ID cards meet minimum federal regulations, including verification of applicantsí identity and legal status, as well as implementation of antifraud security features. Under the Real ID Act, federal agencies are prohibited from accepting state-issued driver licenses and ID cards unless these documents are determined by the U.S. Secretary of Homeland Security to meet the minimum standards.

The act permits states to issue driver licenses and ID cards that are not in compliance with the federal requirements, such as driver licenses that are issued to motorists who are not legal U.S. residents. However, these documents must have a ďunique design or color indicatorĒ so that federal agencies and law enforcement can identify them as unacceptable for federal purposes.

The Secretary of Homeland Security is responsible for developing detailed regulations to implement the lawís provisions. These regulations will likely not be issued until late 2006. States have until May 2008 to comply with the new requirements.

Impact on DMV Operations Will Be Significant. The department reports that there are currently 24†million driver licenses and ID cards issued in the state. Each year, DMV processes approximately eight million driver licenses through renewals and new license applications. Given this volume, the department has identified several components of the Real ID Act that will have significant impacts on its operations. Together, these provisions will result in significant costs to improve DMVís aging computer and database infrastructure, and to provide additional staffing to respond to increased workload. The impact of the provisions on the departmentís costs are summarized in Figure†1 and are discussed in detail below.


Figure 1

Potential Impact of Real ID Act of 2005 on DMV Costs


Maintain Electronic Copies of Identity Source Documents

   Significant computing and database infrastructure updates and purchases.

Verify the Authenticity of Identity Source Documents

   Significant staffing augmentation necessary.

Verify an Applicantís Current Address

   Possibly significant mailing costs or computer update costs, depending on how DMV implements the requirement.

Increase Storage Capacity for Name and Address Records

   Driver license database modification.

Communicate With Other States to Verify Driver License Status

   Improvements to computing and database infrastructure.

   Additional staffing to communicate (by phone or e-mail) with states that are not ready to provide electronic verification.

Issue Driver Licenses and ID Cards for No More Than Eight Years

   Staffing augmentation may be necessary.

Annually Reissue New Licenses and ID Cards for Temporary Residents

   Significant staffing augmentation may be necessary.

Redesign Driver Licenses and ID Cards

   Potential increase in card production costs, at least initially, due to potentially smaller pool of eligible vendors.


Maintaining Electronic Copies of Identity Source Documents. The department does not currently have the capability to electronically scan and retain copies of identity source documents, such as birth certificates and immigration documents presented by driver license and ID card applicants. The federal act requires that the state scan and maintain retrievable electronic copies of these documents for at least ten years. This means that scanning devices will have to be purchased for each of DMVís 168 field offices and that the department will have to update its computing and database infrastructure in order to capture, store, and retrieve these copies.

Verifying the Authenticity of Identity Source Documents. The act requires all identity source documents be verified for their authenticity. There are a multitude of state and local agencies that issue birth documents throughout the country. Currently, there is no national database that centralizes this information. As a consequence, DMV staff will have to manually verify (likely by phone or e-mail) over one million source documents annually that are submitted with original driver license and ID card applications. This additional workload would likely require a significant augmentation in staff. (This workload could be considerably larger if the federal act requires DMV to verify identity source documents of existing license and ID cardholders, as discussed later in this piece.)

Verifying an Applicantís Current Address. At present, DMV only checks that an applicantís stated address exists within the U.S. Postal Service database, not that an applicant actually resides at that address. The department has a few options for verifying an applicantís address in accordance with federal law. One option would be to delay issuing licenses and ID cards until an applicant returns a signed address verification form received through certified mail sent to their residential address. This option would add cost and delay to the driver license and ID card issuing process. Another option, which the department is considering, would be to electronically verify applicantsí addresses using a credit bureau database or like resource. This option would allow DMV to issue driver licenses and ID cards to applicants at the field office. However, it would require modifying field office computers to connect with a credit bureau or address verification service, in addition to paying for access to such a resource.

Increasing Storage Capacity for Name and Address Records. The DMV anticipates that states would likely be required to adopt a federal standard in storing the name and address records of driver license and ID cardholders. The departmentís driver license database would need to be modified to accommodate longer name and address records.

Communicating With Other States to Verify Driver License Status. Under the act, no state can issue a license to a driver previously licensed in another state until it verifies that the previous license has been cancelled by the issuing state. However, there is currently no national database that would facilitate such immediate confirmation. If this requirement is to be met electronically, it would require DMV and other states to update their respective computing infrastructure to enable this type of connectivity. As this approach depends on the readiness of other states, it is doubtful that it will be met electronically by 2009. Thus, a significant staffing augmentation will likely be necessary to accommodate this new licensing requirement by manually (likely by phone or e-mail) contacting other states.

Issuing Driver Licenses and ID Cards for No More Than Eight Years. The act limits the term of a license or ID card to no more than eight years. Currently, state law allows drivers with good records to renew their licenses for up to two renewal cycles by mail, or as long as 15 years, before they must renew their license in person. Similarly, California ID cards issued to senior citizens are valid for ten years. These long periods between in-person renewals help keep down field office workload.

If the federal program requires that all driver license renewals occur in a field office, DMV estimates that there will be at least 1.3†million additional office visits per year resulting from more frequent in-person renewals. By reducing the term of ID cards for seniors by two years, these volumes would also increase accordingly. These additional office visits will add to DMVís workload and necessitate an increase in staffing.

Annually Reissuing New Licenses and ID Cards for Temporary Residents. Current state law requires that DMV limit the term of initial driver licenses or ID cards for temporary legal residents to their term of stay for the first five years. (These residents include foreign students and individuals on work visas.) After a temporary legal resident has been a licensed driver for five years, however, state law allows these applicants to renew their licenses using the standard five-year renewal cycle. The Real ID Act would require DMV to issue temporary legal resident licenses and ID cards in most cases for a term of no more than one year, renewable annually. Given the large number of temporary legal residents in the state, this would pose significant workload on DMVís driver license and ID card issuing program.

Redesigning Driver Licenses and ID Cards. The state currently contracts with a vendor for the production of driver licenses and ID cards. The departmentís current contract expires in June 2006, but may be extended for up to two years. Depending on how different the federal actís license and ID card requirements are from the stateís current design and security standards, there could be higher card production costs (at least initially). In addition, these requirements could potentially limit the number of vendors able to produce driver licenses and ID cards for the state in the initial phase of the actís full implementation.

Key Issue Yet to Be Resolved. According to DMV, one key issue has yet to be resolved with the Department of Homeland Security. Specifically, it has not yet been determined whether persons who hold a valid state driver license or ID card at the time the act becomes effective (in 2008) would be allowed to retain those documents until they expire, or whether all licenses and ID cards would be considered null and void at that point. The latter would result in DMV having to issue new licenses and ID cards to the entire driving and ID card holding population (about 24†million). This would necessitate a significant one-time increase in support costs to handle the large workload. To the extent the final regulations allow for a phasing-in of the federally approved driver license and ID cards, the impact on DMVís licensing workload would be significantly less. Thus, the method through which the act is implemented will have a significant impact on the departmentís operations.

Recommend Department Report on Status of Federal Regulations and Costs. The regulations for the Real ID Act will likely not be adopted until late 2006. The DMV has been working with the U.S. Department of Homeland Security to stay informed on the development of these requirements. Given the short timeline to the actís full implementation, DMV should begin taking steps to meet those requirements it knows will be included in the final regulations and which necessitate changes in current state practices. However, the Governorís budget does not include funding for any activities to implement the act.

The department reports that it is currently in the stage of assessing the improvements needed in its field operations and computing infrastructure to meet the federal actís requirements. It is likely that DMV will submit spring finance letters to start work on these projects in the budget year.

Accordingly, we recommend that DMV report at budget hearings on how it plans to meet these federal requirements and, to the extent possible, provide the Legislature with estimates of the associated costs. Specifically, the department should report on actions it is taking in the current year and actions it plans to take in 2006-07. In addition, the department should provide an estimate of costs it anticipates in future years to satisfy the requirements of the Real ID Act.

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