Real Estate Fraud Prosecution Trust Fund Program

December 2010 Real Estate Fraud Prosecution Trust Fund Program Chapter 942, Statutes of 1995 (SB 535, Hughes) L E G I S L A T I V E A N A L Y S T ’ S O F F I C E REAL ESTATE FRAUD PROSECUTION TRUST FUND PROGRAM Current law requires the Legislative Analyst’s Office (LAO) to report annually to the Legislature certain information related to real estate fraud cases in counties that participate in the Real Estate Fraud Prosecution Trust Fund Program. The report must also include information on the types of expenditures made by the law enforcement agencies of those counties. Our review found that, by 2009-10, 21 counties had reported data indicating their participation in the program at an annual statewide cost of about $10 million, with significant variation in expenditures from county to county. In this report, we further analyze this data and offer recommendations to clarify a 10 percent cap on administrative costs incurred in the program as well as to modify the current program reporting requirements. Background. In 1995, the Legislature enacted Chapter 942, Statutes of 1995 (SB 535, Hughes), which created the Real Estate Fraud Prosecution Trust Fund Program. Initially, the program allowed counties to establish a fee of up to $2 for the filing of certain real estate documents with the county. These new revenues were dedicated to support local law enforcement activities to fight real estate fraud. Beginning in 2009, counties are allowed to charge a fee of up to $3 for these purposes when these documents are filed. Counties that opt into the program are required to deposit any fee revenues into a Real Estate Fraud Prosecution Trust Fund for use by local police, sheriffs, and district attorneys to “deter, investigate, and prosecute real estate fraud crimes.” Local law enforcement agencies get 40 percent and district attorneys get 60 percent of program allocations from the fund. In counties where the district attorney exclusively does the investigation, 100 percent of the funding would go to that office. Under the state law, district attorneys are required to provide an annual report to the county board of supervisors and the LAO on (1) the number of complaints of real estate fraud that have been filed and other measures of program performance and outcomes; (2) information related to the condition of their Real Estate Fraud Prosecution Trust Fund; and (3) information on the administrative costs of operating the programs, including the payment of salaries and other expenses. Chapter 531, Statutes of 2005 (AB 901, Ridley- Thomas) further amended state law to require the county board of supervisors to submit those annual reports to the LAO. It further required the LAO to annually compile this information and report this data to the Legislature. Program Data for 2008-09 and 2009-10 The information compiled is based on data for 2008-09 and 2009-10 reported by district attorneys in the counties that have opted into the program. At the time this report was prepared, our office received 18 reports from district attorneys for 2008-09 and 21 reports for 2009-10. Based on anecdotal information, it is our understanding that as many as 27 counties may be participating in the Real Estate Fraud Prosecution Trust Fund Program. This suggests that some counties may not be aware of their obligation to report on the program or have decided not to comply with the reporting requirement. LegisLative anaLyst’s Office 2 Not all of the reports that were submitted in 2008-09 included all of the reporting components required under Chapter 942. Of the 18 reports received for 2008-09, 17 district attorneys provided information on program performance statistics and all 18 provided information related to the condition of their Real Estate Fraud Prosecution Trust Fund. However, only five provided information on their administrative costs. For 2009-10, 21 district attorneys complied with all three reporting requirements. Summary of Program Statistics. Figures 1 and 2 show the program statistics for each of the reporting counties for fiscal years 2008-09 and 2009-10. These figures show data on the number of real estate cases investigated and filed, the number of convictions, the number of victims, and the total aggregated monetary loss to victims of real estate fraud. Figure 1 Real Estate Fraud Prosecution Program Statistics (2008‑09, Dollars in Millions) Number of Cases Cases Victims in Total Aggregated Investigated Filed Convictions Filed Cases Monetary Loss Alameda 53 34 31 192 $23 Butte 7 3 — 21 32 El Dorado 19 4 3 21 17 Fresno 150 28 14 73 25 Merced 24 8 3 70 5 Orange 154 11 1 72 100 Riverside 63 23 11 108 77 Sacramento 26 22 8 48 2 San Bernardino 213 55 36 204 3 San Diego 124 39 28 539 63 San Francisco 34 26 1 26 14 Santa Clara 85 22 16 175 121 Santa Cruz 50 30 15 45 53 Solano 90 16 6 68 28 Stanislaus 64 19 4 102 42 Tulare 27 9 6 44 7 Ventura 90 12 10 11 2 Totals 1,273 361 193 1,819 $614 LegisLative anaLyst’s Office 3 Figure 2 Real Estate Fraud Prosecution Program Statistics (2009‑10, Dollars in Millions) Number of Cases Cases Victims in Total Aggregated Investigated Filed Convictions Filed Cases Monetary Loss Alameda 81 42 18 214 $15 Butte 4 1 — 1 — Contra Costa 22 14 5 31 1 El Dorado 32 4 2 24 2 Fresno 39 24 6 64 11 Marin 10 6 1 11 3 Merced 39 3 3 46 5 Orange 309 36 15 621 90 Riverside 65 23 8 103 73 Sacramento 17 13 3 37 1 San Bernardino 114 31 59 120 2 San Diego 175 44 52 570 73 San Francisco 17 32 — 32 23 Santa Barbara 19 4 2 80 17 Santa Clara 79 25 13 597 45 Santa Cruz 75 45 8 60 55 Shasta 49 5 1 8 4 Solano 120 22 2 126 63 Stanislaus 69 13 6 61 19 Tulare 27 22 9 39 2 Ventura 141 16 6 39 19 Totalsa 1,503 425 219 2,884 $523 a numbers may not total due to rounding. Summary of Local Revenues and Expenditures. As shown in Figures 3 and 4 (see next page), revenues and expenditures for each of the reporting counties vary. Revenues vary because the volume of real estate documents filed with the county and the revenue received for these transactions are different in each county. Expenditure variation could be due, in part, to the volume of cases investigated and filed. Expenditures may also vary because of case workload. For example, according to some district attorneys, a complex case involving a single defendant who may have defrauded several victims using different real estate fraud schemes is likely to require the use of more investigative resources. LegisLative anaLyst’s Office 4 Figure 3 Real Estate Fraud Prosecution Program Trust Fund Revenues and Expenditures (2008‑09, in Thousands) Trust Fund Trust Fund Trust Fund Carry-In Balance Revenues Expenditures alameda $726 $439 $1,500 Butte — 80 19 el Dorado 250 64 209 fresno 642 349 821 Merced 344 58 4 Orange — 306 15 Riverside 157 608 1,600 sacramento 622 369 141 san Bernardino 770 739 1,600 san Diego 2,019 621 1,000 san francisco 94 80 150 santa Barbara — 89 60 santa clara — 546 1,260 santa cruz 1 53 46 solano 52 127 280 stanislaus 5 347 330 tulare — 156 268 ventura — 174 378 Totals $5,682 $5,205 $9,681 Some counties reported that their expenditures exceeded the revenues generated by the fees paid for recording real estate documents. In these instances, funds from other sources were used to make up the difference. In other counties, where expenditures exceeded revenues and other monies were not used to make up the difference, counties reported that program costs were supplemented by fund balances that were rolled over from previous years. LegisLative anaLyst’s Office 5 Figure 4 Real Estate Fraud Prosecution Program Trust Fund Revenues and Expenditures (2009‑10, in Thousands) Trust Fund Trust Fund Trust Fund Carry-In Balance Revenue Expenditures alameda $314 $657 $232 Butte 62 65 10 contra costa 837 489 466 el Dorado — 103 190 fresno 169 421 421 Marin 94 119 72 Merced 398 70 169 Orange 291 1,252 1,187 Riverside 22 948 1,140 sacramento 324 389 491 san Bernardino 73 740 1,533 san Diego 591 1,220 1,258 san francisco 25 89 110 santa Barbara 33 80 85 santa clara — 741 1,519 santa cruz 8 86 94 shasta — 80 106 solano 43 181 228 stanislaus 27 191 337 tulare — — 284 ventura — 252 421 Totals $3,311 $8,173 $10,353 Expenditures made by each of the reporting counties for salaries and benefits and operating and support costs for 2008-09 and 2009-10 are shown in Figures 5 and 6 (see next page). Total expenditures to investigate real estate fraud for the five counties that reported in 2008-09 ranged from $60,000 in Santa Barbara County to $1.5 million in Alameda County as shown in Figure 5. Total costs to investigate real estate fraud for the 21 counties that reported in 2009-10 ranged from $10,000 in Butte County to $1.5 million in San Bernardino County as shown in Figure 6. LegisLative anaLyst’s Office 6 Figure 5 Real Estate Fraud Prosecution Program Expenditure Details (2008‑09, in Thousands) Salaries and Operation and Total Benefits Support Costs Expenditures alameda $1,300 $195 $1,495 sacramento 132 9 141 santa Barbara 53 7 60 santa clara 1,240 20 1,260 ventura 366 12 378 Figure 6 Real Estate Fraud Prosecution Program Expenditure Details (2009‑10, in Thousands) Salaries and Operation and Total Benefits Support Costs Expenditures alameda $232 — $232 Butte 10 — 10 contra costa 431 $25 456 el Dorado 164 26 190 fresno 356 65 421 Marin 38 34 72 Merced 165 4 169 Orange 1,123 64 1,187 Riverside 779 361 1,140 sacramento 429 62 491 san Bernardino 1,371 162 1,533 san Diego 1,158 100 1,258 san francisco 110 — 110 santa Barbara 77 8 85 santa clara 1,403 116 1,519 santa cruz 94 — 94 shasta 88 18 106 solano 215 14 229 stanislaus 335 2 337 tulare 256 28 284 ventura 379 42 421 Unclear if Counties are Exceeding 10 Percent Administrative Cap. Current law places a 10 percent cap on the amount of fee revenue that can be used for administrative costs. Based on anecdotal information and data that we have received, it is uncertain if counties are complying uniformly with the legislative requirement that the amount a county deducts for administrative costs not exceed 10 percent of the total fees paid for filing real estate documents with the county. LegisLative anaLyst’s Office 7 Current law does not define “administrative costs.” As a result, it is unclear what ad- ministrative costs the legislation is seeking to cap. Also, the legislation does not require counties to report to the LAO information about administrative costs that would allow us to assess if counties are exceeding the administrative cap. Conclusion Given the findings above, we recommend that the Legislature take the following ac- tions: Clarify Administrative Costs. If the intent of the Legislature is to limit counties’ ad- ministrative costs for operating the Real Estate Fraud Prosecution Trust Fund Program, it may wish to adopt legislation that would better ensure compliance with this require- ment. Specifically, the Legislature may wish to define administrative costs and require counties to report on the amount spent for administrative costs. Modify Current Reporting Requirements. The Legislature should consider eliminat- ing any further reporting by local authorities to the LAO and the requirement that the LAO report this information to the Legislature. Based on our assessment, we believe that compiling and reporting this information every year would do little to enhance legisla- tive oversight of these local government activities in the future. Oversight of the program would continue at the local level. County board of supervisors would continue to collect the same data locally to determine the effectiveness of the program as required by state law. If the Legislature chooses, however, to have the local district attorneys continue to re- port to the LAO, we would recommend the following two actions: (1) that the Legislature provide our office with the flexibility to report only when our analysis of the data indi- cates that there are significant issues for legislative consideration, and (2) that the Legis- lature direct the Department of Real Estate to conduct outreach to the counties regarding this program and its reporting requirements. Based on anecdotal information, it is our understanding that as many as 27 counties may be participating in the program. Yet, as we noted earlier, we only received reports from 18 counties for the 2008-09 reporting period and 21 reports for the 2009-10 reporting period. This suggests that some counties may be unaware of the statutory reporting requirement. this report was prepared by Russia chavis under the supervision of farra Bracht. the Legislative analyst’s Office (LaO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature. to request publications call (916) 445-4656. this report and others, as well as an e-mail subscription service, are available on the LaO’s website at www. lao.ca.gov. the LaO is located at 925 L street, suite 1000, sacramento, ca 95814. LegisLative anaLyst’s Office 8