Analysis of the 2007-08 Budget Bill: Transportation
The Department of Motor Vehicles (DMV) is responsible for protecting the public interest in vehicle ownership by registering vehicles and promoting public safety on California’s 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 $903 million for support of DMV in 2007-08. This represents an increase of $19 million, or 2 percent, above estimated current-year expenditures. This increase is mostly the result of increases for employee compensation, the second-year funding of a multiyear information technology (IT) modernization project, and higher credit card processing fees for Internet-based customer transactions. The budget proposes a staffing level of 8,280 personnel for 2007-08, which is a slight decrease compared to the current year.
About $483 million (53 percent) of the department’s total support will come from the Motor Vehicle Account (MVA) and $349 million (39 percent) from the Motor Vehicle License Fee Account. The remaining support will be funded primarily from the State Highway Account and reimbursements.
Federal regulations implementing this act are expected to be delayed until July or August of 2007. Several key implementation issues hinge on these federal requirements. Also, there is no federal plan to fund the costly mandate. Nonetheless, the administration has indicated that it may request funding for implementation of the act as part of the spring revision process. Given the current lack of information regarding federal requirements for this program and its related funding, as well as growing opposition to the act in other states, we recommend the state go slowly for now, and limit spending to planning activities.
In 2005, federal legislation, known as the Real ID Act, was signed into law. The act mandates states to modify driver licenses and identification cards to meet federal standards. It also requires the states to follow certain procedures in the issuance of these documents. The law stems from the recommendations of the 9/11 Commission, and is intended to strengthen national security by making it more difficult for terrorists to gain access to certain services. Under the act, a state may choose not to meet the federal requirements; however, its citizens would not be able to use the state-issued driver license and identification cards for federal purposes, such as receipt of federal services, or air travel.
Federal Real ID Requirements Still Unknown. The federal regulations for the Real ID Act were originally expected to be released in January 2007. The department now expects the regulations to be released in July or August. This new release date leaves states little time to implement the act by the federal statutory deadline of May 2008. Based on our discussions with the department, it seems virtually impossible for California--or any other state--to comply with the act by that deadline, especially in light of the delayed regulations.
Until the state receives federal direction on a variety of related issues, it is not possible to design a program that complies with the law. Some of the key issues that hinge on the federal regulations include issues related to the issuance of Real ID compliant cards to existing cardholders, the information verification process, and card security features. We briefly discuss these issues below.
Issuance of Real ID Compliant Cards. Under the act, all Californians who currently hold a driver license or identification card would be required to get a new Real ID compliant card. Most, if not all, of the 25 million cardholders will be required to visit a DMV field office to verify their identity and legal presence before obtaining the new cards. This will significantly increase the volume of customers in DMV field offices. One major implementation question that needs to be addressed in the federal regulations is how long states will have to issue the new card. The time frame for issuing the cards will make a significant difference in the complexity as well as the cost of Real ID implementation. If, for example, states are required to reenroll current licensed drivers over a five-year period, the demand for personnel and physical space would be greater (due to the increased volume of customers to process) than if the existing cardholders are reenrolled over a ten-year period. Based on DMV’s projections, the process of issuing new cards to existing cardholders is the most expensive aspect of Real ID compliance, accounting for nearly 60 percent of the estimated total cost. The department’s preliminary estimate of about $300 million assumes a five-year period to issue the new cards to existing California cardholders.
Real ID Verification Processes. Among other things, the act requires states to verify the authenticity of each applicant’s identification documents, such as birth certificates, social security numbers, and passports, with the issuing agency. It also requires states to verify that the applicant does not already possess a driver license issued by another state or territory. This verification will be accomplished through the establishment and use of five national verification systems. Based on DMV estimates, this is the second most costly aspect of Real ID (estimated to cost about $150 million), due largely to the amount of computer programming required to adapt and synchronize new and existing systems to form the national databases. We would note that there is a high level of uncertainty in this estimate because of the lack of detail available as to how these systems will be configured. Depending on the federal requirements and the technology required to meet those requirements, the cost could be higher or lower. Our discussions with the department indicate that the national databases are not likely to be established and fully operational by the May 2008 deadline. Some examples of significant unresolved fiscal and policy issues related to the verification process include (1) whether federal agencies will be allowed to charge states transaction fees for the required verification of federal information and (2) what documents will be required of noncitizen applicants for purposes of determining lawful status.
Card Security Features. The act requires states to incorporate certain security features into the Real ID card to prevent tampering or counterfeiting. It is anticipated that the federal regulations will detail the specific requirements. One of the most significant unresolved issues related to the card security features is whether the regulations will require all states to use the same security features, or grant states the flexibility to use multiple security technologies to achieve a given standard. If the states are granted flexibility, this would reduce the costs of Real ID implementation to the extent that some states already meet or exceed the federal standard. According to the department, there is also a possibility that the federal regulations would require states to use a special material (polycarbonate) in the production of the driver license and identification cards instead of the lower-cost material assumed in its preliminary cost estimate. The department estimates this would add about $200 million to the overall cost.
The federal requirements on these and other issues will have a significant impact on the amount of time required to implement the act, as well as the overall cost to carry out its requirements. The bottom line is that until the federal regulations are promulgated, the Legislature has no way of assessing the fiscal effect of the act on California.
Still No Federal Funding on Horizon. While the actual cost of Real ID will depend on the final regulations, early estimates suggest it will be costly to implement. The DMV’s preliminary estimate indicates it could costs as much as $500 million for the additional staff, facilities, and technological improvements required to implement the act in California. (This estimate assumes the state is allowed to use the lower-cost material currently used to produce the cards, rather than polycarbonate.) A survey by the National Governors Association, the National Conference of State Legislatures, and the American Association of Motor Vehicle Administrators concluded that Real ID will cost more than $11 billion to implement nationwide.
At present, there is no federal plan to fund Real ID. It is our understanding, based on discussions with the department, that the federal Office of Management and Budget is currently developing an estimate of the measure’s cost and will be making recommendations to the federal administration on whether and how to finance Real ID. Absent federal funding, the mandate will place significant pressure on state coffers, and potentially the MVA. The Legislature and Governor would likely need to increase fees, such as the driver license and vehicle registration fees to fund the program and maintain viability of the MVA. Assuming Real ID costs $500 million to implement over the next five years, the driver license fee, for example, would have to increase by about $16 (going from the current $27 to about $43) to cover the costs. (For more discussion on the MVA,
please see our analysis of the MVA fund condition in the “Crosscutting Issues” section of this chapter.)
No Authority Exists to Implement Real ID; Enabling Legislation Required. Real ID implementation will require statutory changes to conform state law to the federal act and regulations. In December 2006, the department issued a report pursuant to the 2006-07 Budget Act describing the status of Real ID. The report indicates that the administration has already started to develop legislation to address the known requirements of the act. Some of the issues identified by the report as requiring statutory changes include the following:
Documentation of the Applicant’s Principal Residence. The act requires that driver license/identification card applicants provide their address of principal residence. California law currently does not provide for documenting the address of principal residence.
Verification of Document Authenticity. The act requires states to verify all documents presented as part of the driver license and identification card application process. Current state law only requires DMV to verify social security numbers and legal presence, but not birth certificates or other documents as required by federal law.
Period of Validity of Driver License and Identification Cards. The act limits the term of a driver license or identification 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. California identification cards issued to senior citizens are valid for ten years.
These are just a few examples of the issues that will require legislative action. It is reasonable to expect that additional issues requiring legislation will be identified when the final federal regulations are released.
State Should Go Slow on Real ID Implementation. Real ID is a federal mandate. Unless Congress amends or repeals the law, California will essentially be required to comply. While the budget does not request additional funds to implement the act, the administration has indicated that it may request funds as part of the spring revision process. Given the magnitude of the effort required to comply with the federal mandate, we think the state should continue to take steps to prepare for implementation as previously directed by the Legislature. For example, the department should continue the multiyear project to modernize its IT system and implement strategies to reduce in-person transactions in field offices. However, it is unlikely that California or other states will be able to meet the May 2008 deadline. At this time, the Legislature lacks key information regarding what the federal government would ultimately require. Additionally, it is unclear whether the federal government intends to cover any of the mandate’s costs. Moreover, the future of Real ID is uncertain. At the time this analysis was prepared, one state legislature had already passed a resolution refusing to implement the act, and at least four other state legislatures had pending bills expressing their opposition as well.
The budget provides $8.7 million for the Department of Motor Vehicles to continue planning and upgrading its information technology systems in anticipation of Real ID implementation. Without prejudice to the proposal, we recommend that the Legislature reject the request pending additional information on the department’s current-year spending for Real ID, and the federal regulations. (Reduce Item 2740-001-0044 by $8.7 million.)
2006-07 Budget Act and Actions to Date. As part of the 2006-07 budget, the administration requested $18.8 million to begin planning and upgrading its IT infrastructure for implementation of the Real ID Act. The Legislature approved the funding request. However, it adopted budget control language limiting use of the funds. Specifically, the department activities were limited to (1) enhancing its Internet capability to reduce required visits to field offices for nondriver license related transactions, and strengthen the security of the Internet-based programs and (2) planning for Real ID, and upgrading its IT systems to protect the privacy and integrity of data and accommodate any new requirements on the department.
Of the $18.8 million provided in the current year, $9.4 million was immediately made available to address increased demands on the department’s IT systems. The remaining $9.4 million was not to be available until after January 1, 2007, pending receipt and review of a report to the Legislature describing how the first one-half of the appropriation was spent, and how the department intends to use the remainder of the money. At the time this analysis was prepared, the report had not been submitted. The department has indicated that it intends to submit the report to the Legislature in February.
Governor’s Budget. The budget proposes to retain $8.7 million of the $18.8 million to cover ongoing Real ID-related costs in 2007-08. According to the department, this request has three components: (1) establishment of a Real ID Program organization within DMV, (2) expansion of the name field in the department’s information database, and (3) movement of certain transactions from DMV field offices to the department’s Internet Web site.
Reject Request Pending Receipt and Review of Report. The purpose of the report to the Legislature is to determine whether the department has complied with the parameters placed on the appropriation. Also, at the time the funding was provided, it was the Legislature’s expectation that the federal regulations would have been released so that future funding decisions could be evaluated in the context of the total program requirements. Absent the report on the department’s current-year spending, and information on the federal regulations, the request for 2007-08 is premature. For this reason, and without prejudice to the administration’s proposal, we recommend a reduction of $8.7 million pending receipt of the additional information.
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2007-08 Budget Analysis