The 2020-21 Budget: Reinventing the Department of Business Oversight

The 2020-21 Budget: Reinventing the Department of Business Oversight Summary Key Entities Involved In Consumer Financial Service Protection. Various entities are involved in consumer protection related to financial products and services. For example, the Department of Business Oversight (DBO) licenses a wide range of financial service providers, such as banks, money transmitters, and broker-dealers. Additionally, at the federal level, the Consumer Financial Protection Bureau takes enforcement action against financial product and service providers engaged in unfair, deceptive, or abusive acts or practices (UDAAPs). Governor’s Proposal. The Governor proposes budget trailer legislation to make various changes related to DBO, such as changing its name to the Department of Financial Protection and Innovation (DFPI), providing it with authority to take enforcement actions against financial service providers for UDAAP violations and register providers of consumer financial services. Under the proposal, the department’s two main funds would be merged to form a new fund—the Financial Protection Fund (FPF)—and the regulation of industrial banks would be modified. The Governor’s budget proposes $10.2 million from FPF and 44 positions in 2020-21, increasing to $19.3 million annually and 90 positions in 2022-23 to support DFPI’s implementation of these changes and related activities. Assessment. The concept of improving consumer protection related to financial products and services has merit. However, the Governor’s proposal raises several key questions related to the (1) appropriate role for DFPI, (2) preferred approach to funding DFPI and its new proposed activities, (3) regulation of industrial banks, and (4) process that should be used for making policy choices. We also find that the specific choices the Legislature makes could affect the amount and timing of the funding needed by the department. Finally, we find that the Governor’s proposed funding approach fails to acknowledge key uncertainties, such as the level of workload associated with the various proposed new activities. Recommendations. We recommend that the Legislature consider the Governor’s proposed statutory changes through the legislative policy process. This would allow the changes to be vetted by the policy committees that have expertise on the specific issues that are raised. In addition, this would better position the Legislature to determine which policies should be established in statute and which could be left to the regulatory process. To the extent the Legislature allows DFPI to use the regulatory process, we recommend that the Legislature not authorize the department to use the emergency regulation process. Depending on the choices the Legislature makes, we recommend it adjust the funding it provides accordingly. Regardless of its choices, we recommend that the Legislature take a more incremental approach to providing funding for DFPI. In particular, we recommend that the Legislature reject the funding requested for positions that are not needed in the budget year, and that the Legislature fund some activities on a limited-term, pilot basis. This more incremental approach would improve legislative oversight over DFPI and ensure that it is appropriately resourced for its new responsibilities. GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 26, 2020 analysis full gutter 2020-21 BUDGET BACKGROUND As summarized below, various state and abuses by large banks, unlawful debt collection federal entities have responsibilities for protecting practices, and misconduct by providers and California consumers of financial products and servicers of student loans. services. Other State Departments. Various other Department of Business Oversight (DBO). state departments also regulate providers of DBO was created on July 1, 2013, with the merger financial products and services. For example, the of the Department of Financial Institutions and Department of Insurance licenses title companies the Department of Corporations pursuant to the that administer real estate settlement services. Governor’s Reorganization Plan No. 2 of 2012. Additionally, the Department of Real Estate licenses The department serves as California’s primary certain lenders and brokers. These departments regulator of financial service providers, products, have authority to take enforcement actions against and professionals. DBO is composed of two their licensees when they engage in unlawful main licensing divisions. The Division of Financial practices. Institutions (DFI)—which is supported primarily by Federal Consumer Financial Service the Financial Institutions Fund—licenses financial Protection Efforts. The federal government also institutions, including banks, credit unions, and has an important role in protecting consumers of money transmitters. The Division of Corporations financial products and services. Notably, in 2010, (DOC)—which is supported by the State Congress passed the Dodd-Frank Wall Street Corporations Fund—licenses various other financial Reform and Consumer Protection Act (commonly entities, including investment advisors, securities known as Dodd-Frank). Dodd-Frank created a new broker-dealers, and student loan servicers. entity—the Consumer Financial Protection Bureau California Department of Justice (DOJ). Under (CFPB)—and gave it responsibility for ensuring the direction of the Attorney General, DOJ has consumer protection in the financial sector at the broad enforcement authority to bring legal cases federal level. Along with this, Dodd-Frank prohibited against entities—including financial product and providers of consumer financial products or service providers—that engage in unfair, deceptive, services from engaging in any unfair, deceptive, or or unlawful business practices under state and abusive acts or practices (UDAAPs), and gave the federal laws. For example, in recent years, DOJ has CFPB authority to take enforcement actions related successfully brought cases related to mortgage to UDAAPs. GOVERNOR’S PROPOSAL The Governor has expressed concern that the funding related to these changes. Under the federal government has pulled back in the area of Governor’s proposal, DBO would be renamed the consumer protection in the last few years and has Department of Financial Protection and Innovation indicated that the state could benefit from a more (DFPI). We describe the various proposed changes robust system of consumer financial protection. in greater detail in this section. Accordingly, the Governor’s budget plan includes Proposed Budget Trailer Legislation various policy and budgetary changes in the area of consumer financial protection. First, the Governor Change DBO’s Authority. The Governor proposes budget trailer legislation to expand DBO’s proposes budget trailer legislation to authorize authority, restructure the department and its main DFPI to carry out various new responsibilities and funds, and modify the regulation of industrial banks. activities. Under the Governor’s proposal, these Second, the proposed budget includes additional various statutory changes would be referred to 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET as the California Consumer Financial Protection consumers to register with the department. Law (CCFPL). Specifically, the proposed language The department indicates that it anticipates authorizes DFPI to: registering all providers of consumer financial products or services that are not currently • Perform Broad Range of Activities Related registered with or licensed by DBO or another to UDAAPs. The proposal authorizes state department. These providers are known DFPI to take enforcement actions (such as as new covered persons or NCPs. Under the assessment of administrative penalties and proposed language, DFPI would have the filing of civil lawsuits) against any provider of authority to require registrants to file various financial products or services to California reports, submit to background checks, and consumers, small businesses, nonprofits pay registration fees, which the department or family farms for UDAAPs. The proposal may set by regulation. Additionally, the authorizes the department to define UDAAPs, department could specify rules of conduct for as well as proscribe rules aimed at preventing these entities by regulation. UDAAPs, through the regulatory process. Finally, the proposal generally prevents the Restructure Department and Its Main Funds. courts from enjoining DFPI’s enforcement In addition, the Governor proposes to restructure orders in order to prevent them from taking the department in ways that would effectively effect. eliminate the distinction between its two licensing • Conduct Certain Additional Activities. divisions—DFI and DOC. The proposed language The proposal grants the department explicit also merges the two main funds that support authority to engage in various activities, such the department—the State Corporations Fund as (1) studying and reporting on markets and Financial Institutions Fund—into a new fund for financial services, (2) implementing known as the Financial Protection Fund (FPF). (The outreach and education programs to department’s two other small funds—the Credit underserved customers and communities, Union Fund and the Local Agency Deposit Security and (3) implementing initiatives to promote Fund—would remain separate.) innovation, competition, and consumer access Modify Regulation of Industrial Banks. The within financial services. Governor’s proposed budget trailer legislation also • Possess Broad Regulatory Authority changes the requirements for entities to qualify as Related to Existing Consumer Protection industrial banks, which are financial institutions Laws. In addition to the regulatory authority that typically provide more limited services than described above, the proposal authorizes traditional banks and are subject to different DFPI to (1) promulgate regulations interpreting regulatory requirements than traditional banks. and implementing a wide range of existing For example, unlike traditional banks, industrial California laws related to consumer protection banks do not necessarily take deposits. Under and (2) examine entities for compliance with current law, only entities involved exclusively in those regulations. The proposed language financial activities can control an industrial bank. specifies that, when DFPI and another The proposed language instead only requires department have joint authority over these that entities controlling industrial banks be consumer protection laws, DFPI shall consult predominately engaged in financial activities. with the relevant departments at certain Provide Emergency Regulation Authority. The points during the process of promulgating proposed language provides DFPI with the authority regulations. to promulgate emergency regulations to implement • Require Financial Service Providers the CCFPL. As a result, regulations to implement to Register. The Governor’s proposal the above changes would go into effect on a authorizes DFPI to require entities providing shorter time line and be subject to less up-front financial products or services to California public input. www.lao.ca.gov 3 analysis full gutter 2020-21 BUDGET Additional Funding to materials and web tools to educate Support New Activities consumers and conduct outreach to schools and universities on financial education. The Governor proposes $10.2 million and 44 positions—increasing to $19.3 million annually Figure 1 displays the activities that the and 90 positions in 2022-23—for DFPI from the proposed positions are anticipated to undertake. proposed FPF. These additional resources are The administration indicates that the resources to intended to support the implementation of the support these activities would be derived from two CCFPL. In addition, the funding would allow the different sources within the new FPF. Initially, the department to establish the following new offices: department plans to use funds from settlements of previous enforcement actions to support these • Financial Technology Innovation Office. activities. (These settlement funds are currently Research new innovative technologies and in the State Corporations Fund and Financial trends and encourage innovation related to Institutions Fund which would be consolidated financial industries into the proposed FPF.) On an ongoing basis, the • Market Monitoring, Consumer Research, department plans to fund these activities from Insights and Analytics Office. Provide registration fees DFPI would be authorized to reports on a variety of topics, such as market collect under the Governor’s proposal, as well as trends and consumer behavior. future settlement funds. • Targeted Consumer Outreach and Education Office. Develop educational Figure 1 Positions Proposed to Implement the Consumer Financial Protection Law 2023‑24 and Activity 2020‑21 2021‑22 2022‑23 ongoing Enforcement 9 12 16 16 Supervision of NCPs 7 15 26 26 Targeted Consumer Outreach and Education Office 5 9 9 9 Financial Technology Innovation Office 4 4 4 4 Market Monitoring, Consumer Research, Insights and Analytics Office 3 6 6 6 Legal 3 6 8 8 Information Technology 3 6 6 6 Communications 2 2 2 2 Human Resources 2 4 4 4 Business Operations 2 3 3 3 New Executive for Consumer Financial Protection Regulation 1 1 1 1 New Executive to Oversee Securities and Franchise Regulation 1 1 1 1 New Ombudsman 1 1 1 1 Fiscal Management 1 2 3 3 Totals 44 72 90 90 NCPs = new covered persons. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET ASSESSMENT We think that the concept of improving that the federal government—particularly CFPB— consumer protection—particularly in the area of has been pulling back from consumer protection financial products and services—has merit. This under the current presidential administration. As is because financial products and services can be a result, according to the administration, the state complex and consumers can be vulnerable to being cannot rely on the federal government to ensure the taken advantage of by financial service providers. financial protection of Californians. However, the Additionally, financial products and services directly federal government could change its approach over affect the financial well-being of Californians. time, particularly if there is a change in presidential Accordingly, a robust system of consumer administrations. This raises the question of whether protection can help protect California consumers California’s long-term policy choices should be as they access these products and services, driven by the current federal approach. and this can enhance their economic security. The administration further argues that, However, in reviewing the Governor’s proposal, we regardless of the federal government’s approach, identified three main issues that merit legislative the state should take a greater role in ensuring consideration. First, the proposal raises various Californians are protected in the area of financial key policy and process questions (such as how services since the state can focus more heavily broad of an authority should be provided to the on issues of local or regional concern. While we department). It will be important for the Legislature agree that the state can better target its own efforts to consider these questions and determine whether to areas it prioritizes, the Legislature will want various aspects of the proposal align with its to weigh whether that additional focus provides priorities. Second, the answers to these key policy sufficient value to justify the state’s efforts in such and process questions will inform the level of areas. For example, the Legislature may want resources required to implement specific changes to ask the department to report on the scale of adopted by the Legislature. Third, we note that consumer complaints about UDAAPs that went there is significant uncertainty about the level of unaddressed during the time period when the ongoing need for additional resources. We describe federal government was taking a more proactive each of these issues in greater detail below. enforcement approach. This information would help the Legislature assess the extent to which the PROPOSAL RAISES VARIOUS need for more robust consumer financial protection KEY POLICY AND PROCESS efforts depends on the approach taken by the federal government. QUESTIONS What, If Any, UDAAP Authority Should DFPI The Governor’s proposal raises several key Have? The Legislature will want to consider policy and process questions for the Legislature whether to expand the state’s financial protection to consider. Specifically, these questions relate to efforts by providing DFPI authority to take action the (1) appropriate role for DFPI and breadth of its against financial product and service providers for authority, (2) preferred approach to funding DFPI UDAAP violations as proposed by the Governor. and its new proposed activities, (3) regulation of Alternatively, the Legislature could consider taking a industrial banks, and (4) process that should be different approach, such as by relying more heavily used for making policy choices. on DOJ’s existing authority to bring legal cases against entities that engage in unfair, deceptive, Role and Authority of DFPI or unlawful business practices. The administration argues that DFPI should have UDAAP authority, What Should DFPI’s Role Be Relative to so it can fulfill the objective of serving as a state the Federal Government? The administration agency dedicated to consumer financial protection. indicates that a key rationale for its proposal is www.lao.ca.gov 5 analysis full gutter 2020-21 BUDGET Additionally, the administration states because would be by giving DFPI this joint authority. The DOJ’s scope is broad and not specifically focused Legislature will want to consider what authority on financial products and services, it may overlook to provide DFPI with respect to licensees of financial services violations due to resource other state departments and whether to specify constraints and competing priorities. However, if how departments should work together when the Legislature wanted DOJ to more actively pursue they share authority. Furthermore, the proposed financial product and service providers for UDAAP language would authorize DFPI to promulgate violations, it could direct the department to do so regulations related to consumer protection in areas and provide it with resources dedicated to such of statute that overlap with the jurisdictions of work. other departments. Under the Governor’s proposal, To the extent the Legislature decides to provide when overlap does take place, DFPI would be DPFI the authority to take action against UDAAP required to consult with the other departments violations, it would be important to determine the: that have jurisdiction at certain points during the regulatory development process. The Legislature • Entities Affected by UDAPP Authority. will also want to consider which entity should be The Legislature will want to consider which held accountable in areas where DFPI and another entities DPFI could take action against for department have joint jurisdiction. UDAAP violations. The Governor’s proposal What Activities Should DFPI Engage In? As would not only provide the department with previously discussed, the Governor’s proposal this authority over all providers of financial would grant the department explicit authority to products and services to consumers, but engage in various activities, such as (1) reporting also small businesses, nonprofits, and family on markets for financial services, (2) implementing farms. Notably, in practice, this would not only outreach and education programs to underserved increase DPFI’s authority over unregulated customers and communities, and (3) implementing entities, but also its existing licensees (and initiatives to promote innovation, competition, and licensees of other state departments, as customer access within financial services. These described below). activities may or may not align with the Legislature’s • Scope of UDAAP Authority. The Legislature policy priorities for the department. Moreover, there will also want to consider the scope of the could be other areas that would merit additional authority that should be granted to the specificity—such as further defining what is meant department. For example, the Governor’s by initiatives to promote innovation and what proposed budget trailer legislation would specific outcomes the Legislature expects to provide DFPI with administrative and civil achieve with these efforts. penalty authority to enforce UDAAP violations, Should DFPI Have Authority to Register which it currently only has in some areas. NCPs? We find that there are likely trade-offs Additionally, the proposal would generally related to requiring registration. Specifically, prevent the courts from enjoining DFPI’s resources would be needed to register these orders. (The administration indicates it may entities. These resources would largely be funded revise this portion of the CCFPL, but the through fees paid by regulated entities, the costs of nature of these revisions is not yet clear.) which could be passed on to the public in the form What Should DFPI’s Role Be Relative to of higher prices for financial services and products. Other State Regulatory Departments? The However, the department indicates that registration proposed language would authorize DFPI to take would serve some key purposes, such as enabling action against licensees of other state departments it to require annual reporting and take administrative for UDAAP violations. However, the language is actions to facilitate its enforcement efforts. This not clear which department takes precedence ultimately could result in benefits to consumers if disagreements arise between departments, of financial services and products. Given these and it is not clear what additional value there trade-offs, the Legislature will want to consider 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET whether it would like to give DFPI the authority to comfortable with this funding approach or would require entities to register. Additionally, it will want prefer an alternative approach. to consider whether the requirements placed on Should Funds Be Consolidated? The registrants align with the Legislature’s preferred Legislature will also want to consider whether it level of oversight over them. For example, the is comfortable with the administration’s proposal Legislature is currently considering a bill—SB 908 to merge the department’s two main funds—the (Wieckowski)—that would require debt collectors to State Corporations Fund and Financial Institutions be licensed, which is generally considered to be a Fund. According to the department, the proposed higher level of oversight than registration. consolidation would provide it with greater flexibility Under the Governor’s proposal, the department in the allocation of resources across activities estimates that it would require roughly 9,000 and better reflect the proposed structure of the NCPs to register and that the large majority of department, which would eliminate any distinction these NCPs—roughly 7,000—would be debt between the licensing divisions. While consolidation collectors. Some of the other types of entities that may have these benefits, the increased flexibility are anticipated to be required to register include could come at the expense of some level of franchise brokers (500 entities) and non-merchant transparency and assurance that funds derived providers of retail sales financing (360 entities). from one group of licensees are used exclusively to support their regulation. Additionally, the Legislature Funding of DFPI’s Activities may want to consider whether it makes sense to What Source of Revenues Should Support retain the department’s two other small funds if it Proposed Activities? As previously mentioned, the is merging the two larger funds. Specifically, we administration anticipates funding the first three years are not aware of a clear policy rationale for having of the proposed activities from settlement funds. a separate fund for credit unions, but not separate Under current law, however, there are limitations on funds for any other types of entities that the the use of these funds. As a result, the department department licenses or registers. has had difficulty using these funds—resulting in Regulation of Industrial Banks the balance of unused funds that currently totals roughly $140 million. As an alternative to the How Should Industrial Banks Be Regulated? Governor’s proposal, the Legislature could dedicate The proposed language would change the these settlement funds to other activities, such requirements for entities to qualify as industrial as those that would more directly benefit existing banks, with the intent of making it easier for licensees whose fees supported the enforcement entities—such as financial technology companies activities that generated the settlement revenues. For (known as Fintech companies)—that are not example, it could authorize these funds to be used exclusively engaged in financial activities to secure to offset some costs of licensing and enforcement an industrial bank charter in California. According activities. Accordingly, the Legislature will want to to the administration, absent a change, some weigh whether the funds should support DFPI, as California-based entities will choose to seek proposed, or if there are alternative uses it would charters in other states, such as Utah, that may prioritize. impose fewer requirements on industrial banks. We On an ongoing basis, the administration plans note, however, that the Legislature has had some to fund its proposed activities from new fees on concerns about providing certain types of entities— NCPs as well as future settlement revenues (rather such as major national retailers like Walmart—with than increases in fees on existing licensees). To the the ability to secure industrial bank charters. As extent that settlement revenues are not sufficient such, the Legislature has placed limitations on the to fund the non-NCP specific activities proposed, companies that can obtain them. Accordingly, it costs could fall disproportionately on the NCPs will be important for the Legislature to consider rather than existing licensees under this approach. whether to make changes to the regulation of The Legislature will want to consider whether it is industrial banks. www.lao.ca.gov 7 analysis full gutter 2020-21 BUDGET Process for Making Policy Choices we note the proposed language authorizes the and Determining Details department to use the emergency regulation process. This is significant because the emergency Should Changes Be Made in Policy Process regulation process greatly reduces public input or Budget Trailer Legislation? The Governor prior to regulations taking effect. Accordingly, proposes implementing the CCFPL through the emergency rulemaking process is typically budget trailer legislation rather than through reserved for cases where immediate action is the legislative policy process. In our view, the needed to avoid serious harm to the public peace, legislative policy process is a more appropriate health, safety, or general welfare. In our view, the venue for considering the types of significant department has not made a compelling argument policy changes that are proposed as part of the that the immediate harms are sufficient to justify CCFPL. This is because, under the legislative policy this truncated process that limits up-front public process, proposals are heard in policy committees input. Instead, we find that it is more appropriate with a greater focus on the policy issues under for DFPI to go through the regular rulemaking consideration. The administration indicates that process in cases where the Legislature is it is proposing the CCFPL through budget trailer comfortable with allowing DFPI to implement policy legislation because the proposal has a large through regulations. This would provide for more fiscal component. However, we do not find this robust public input prior to the rules taking effect. to be a compelling argument for a few different reasons. First, many policy changes that have fiscal POLICY AND PROCESS DECISIONS components are considered through the policy WILL AFFECT FUNDING DECISIONS process. Moreover, the proposal uses only special funds and thus will not affect the larger architecture We find that the Legislature’s ultimate policy of the state budget, making it less critical that decisions regarding the proposed statutory it be heard by budget committees. Finally, the changes could affect the level of additional policy aspects of the proposal—which make resources DFPI needs. For example, if the fundamental changes to the state’s approach to Legislature decides not to have DFPI register all financial regulation—are far more significant than its the NCPs—either because it does not find that fiscal aspects—which would allocate $10.2 million registration provides sufficient value or because it of the $222 billion proposed in the Governor’s would prefer to instead license some or all of these 2020-21 budget. entities—the workload associated with registering Should Key Details Be Specified in Statute these NCPs would be less than assumed in the or Determined by Department? The proposed Governor’s budget. Additionally, if the Legislature language would provide DFPI authority to determine does not provide DFPI the authority to implement many key details—such as which entities to emergency regulations, this could delay the need register, the levels of the fees to charge them, and for certain resources. what constitutes an abusive practice—through the regulation process. This means that DFPI and PROPOSED FUNDING APPROACH the administration—rather than the Legislature— FAILS TO ACKNOWLEDGE would make these key policy choices. Accordingly, the Legislature may want to consider whether to UNCERTAINTY provide more specific guidance in statute rather Uncertain Level of Ongoing Workload in than relying on the regulation process. Many Areas. We find that there is uncertainty Should Regulations Be Adopted Through regarding the level of ongoing workload in many Regular or Emergency Rulemaking Process? areas of the Governor’s proposal. This is in large Even in cases where the Legislature is comfortable part because the activities and many of these allowing DFPI and the administration to make key functions are new, so it is difficult to predict how policy choices through the regulation process, much work will be involved. For example, there 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET is some uncertainty regarding the number of For example, in 2020-21, the Governor proposes registrants that the department will have, which 44 positions, growing to 72 in 2021-22 and 90 in would affect registration workload. Furthermore, 2022-23. It is unclear why these out-year increases there is uncertainty regarding the level of workload in staffing need to be approved in 2020-21 given that will be involved in taking enforcement actions that they will not be needed until future years against these licensees because it is not clear and the level of uncertainty described earlier. how frequently these entities would violate the Furthermore, approving only the resources needed CCFPL. We note the department estimates that in the budget year would provide the Legislature the enforcement workload will be similar to the with an opportunity to revisit the appropriate workload it has related to the California Financing amount of support to provide the department Law Program—which requires the licensing for its new proposed activities with the benefit and regulation of finance lenders and brokers of additional information on the department’s making and brokering consumer and commercial implementation. loans. However, this is a different program that is Effectiveness of Some Efforts Unclear. The governed by different laws and has fewer regulated Governor proposes resources for new research entities. Moreover, the uncertainty is compounded and outreach activities through the establishment because key aspects of the CCFPL would be of the Financial Technology Innovation Office; established through regulations that have yet to be Market Monitoring, Consumer Research, Insights created. For example, final determinations about and Analytics Office; and the Targeted Consumer which entities to register and what constitutes Outreach and Education Office. The concept of an abusive practice—key determinates of future these new activities is promising because there workload—would not be finalized until the could be value in collecting and disseminating completion of the regulation process under the information on financial services. However, there administration’s proposal. Accordingly, the overall is uncertainty regarding what they will achieve workload associated with the CCFPL is highly in practice. Accordingly, if the Legislature is uncertain. comfortable supporting them in concept, it may Given Uncertainty, Inadequate Rationale wish to understand how effective they are in for Funding Out-Year Increases. The Governor practice before committing to providing ongoing proposes to ramp-up staffing over a few years. funding for them. RECOMMENDATIONS Consider Proposed Changes Through be established in statute and those that could be left to the regulatory process. To the extent Policy Process and Weigh Trade-Offs the Legislature allows DFPI to use the regulatory As described earlier, the proposed budget trailer process, we recommend that the Legislature not legislation raises a number of substantial policy authorize the department to use the emergency questions. Given the number and significance regulation process. of the policy questions raised, we recommend As the Legislature makes its policy choices, that these changes be considered through the we recommend that it consider the key trade-offs legislative policy process. This would allow the we identified in our assessment of the Governor’s changes to be vetted by the policy committees that proposal. For example, it will be important for the have expertise on the specifics of the issues that Legislature to weigh whether the additional costs are raised. In addition, this would better position that could be passed on to consumers generate the Legislature to determine which policies should benefits to consumers that outweigh those costs. www.lao.ca.gov 9 analysis full gutter 2020-21 BUDGET Adjust Funding to Reflect to the Legislature to request them. This approach Policy and Process Choices would enhance legislative oversight by requiring the department to report back to the Legislature on its Once the Legislature makes its policy progress implementing the CCFPL. Furthermore, determinations through the policy process, the it would help ensure that the department is budget process could be used to provide the appropriately resourced for its activities, since appropriate funding levels to implement the the department will have more information on key approved changes. Specifically, we recommend workload drivers—such as the number of NCPs the Legislature adjust the funding provided to the that are subject to registration—when it returns to department to reflect the specific policy choices request additional funding. it makes. For example, if the Legislature rejects Provide Some Resources on Limited-Term the language authorizing DFPI to register NCPs, it Basis to Pilot New Activities. We recommend would want to eliminate the associated funding for that the Legislature provide the department with that activity. some resources on a limited-term basis, such as where there is uncertainty about the effectiveness Take Incremental Approach to of the activities being proposed. For example, if Providing Funding the Legislature would like to fund the Financial Do Not Fund Out-Year Increases Given Technology Innovation Office, Market Research Uncertain Workload. Given the uncertainty Office, and Consumer Outreach and Education regarding the level of ongoing workload for DFPI Office, we recommend approving the funding for to implement the CCFPL, we recommend the them on a pilot basis by authorizing three year Legislature take an incremental approach. As part limited-term funding. This should provide the of this, we recommend rejecting the proposed Legislature with additional information on the out-year funding increases, because there is effectiveness of these efforts—and whether they are no reason they need to be approved at this meeting any goals identified by the Legislature— time. Instead, to the extent that the DFPI needs before it commits to funding them on an ongoing additional resources in future years, it can return basis. LAO PUBLICATIONS This report was prepared by Helen Kerstein, and reviewed by Drew Soderborg and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that 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. 10 LEGISLATIVE ANALYST’S OFFICE