Analysis of the 2007-08 Budget Bill: General Government

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 $34 million and 277 positions in 2007-08. This is $553,000, or 2 percent, more than estimated current-year expenditures. The increase is due to budget requests to address increased workload in the Broker/Dealer and Investment Advisers Program, and the Lender Fiduciary Program.

State Corporations Fund: Legislative Oversight Needed

We withhold recommendation on the department’s budget pending a report at budget hearings because the department has not submitted a statutorily required report on its fees to the Legislature and the proposed fund balance in the State Corporations Fund exceeds the requirements of current law.

The DOC collects fees and assessments, as well as penalties and fines from the businesses it regulates. These revenues are deposited into the State Corporations Fund to support the activities of the department. Generally, revenues that are not required to support the department in a given year are maintained in the fund. This is referred to as the reserve or fund balance. In past years, due to an imbalance between revenues and expenditures, the State Corporations Fund experienced relatively large reserves. For example, on June 30, 2001, the fund had a reserve of $27 million, which represented 117 percent of its actual expenditures ($24 million) in 2000-01. As a general rule of thumb, we consider a 5 percent fund balance to be a prudent reserve.

Chapter 118, Statutes of 2001 (SB 742, Escutia), among other things, required DOC to reduce or suspend its fees to achieve no more than a 25 percent fund balance in the State Corporations Fund by June 30, 2007. The act also required the department to submit a report to the Legislature by November 1—each year from 2002 through 2007—providing a status update on the fees reduced, and the revenue and fund balance through the 2006-07 fiscal year.

DOC Not in Compliance With State Law. Our review indicates that the department has not complied with the requirements of Chapter 118. First, the budget proposes a 2006-07 fund balance of $15 million and a 2007-08 fund balance of about $11 million for the State Corporations Fund. This equates to 45 percent and 31 percent, respectively, of the total proposed expenditures for those years, rather than the 25 percent maximum allowed under current law. Second, the department has not provided the Legislature with the latest status report on its fees and fund balance as required. For these reasons, we withhold recommendation on the department’s budget pending a report at budget hearings on how it proposes to meet the current law requirements in 2007-08. Specifically, the department should report on how it intends to reduce the fees to a level that complies with state law.

Absent a reduction in fees, the Legislature may wish to reduce the fund balance by transferring some of the 2006-07 carryover balance to the General Fund. For example, as in the past, the Legislature has required the department to transfer any fines and penalties it collects to the General Fund. In 2003-04, $45 million was transferred from the State Corporations Fund to the General Fund, and in 2004-05 (the last year in which there was a transfer) the amount transferred to the General Fund was $1.5 million.

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