Increasing Oversight of the State Litigation Deposit Fund

Increasing Oversight of the State Litigation Deposit Fund GABRIEL PETEK LEGISLATIVE ANALYST JANUARY 2021 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary Department of Justice (DOJ) Primarily Responsible for State Litigation. DOJ is the primary entity that represents the State of California in litigation. This includes pursuing legal proceedings against individuals or entities that violate state laws. Such proceedings can be resolved in various ways, including requiring payments to the state in exchange for the state ending its pursuit of legal action (these payments are also known as litigation proceeds). Litigation Proceeds Deposited in Litigation Deposit Fund (LDF). The LDF is a state special fund created to receive certain litigation proceeds. The fund primarily supports payments to individuals and entities harmed by those breaking the law, as well as transfers to DOJ special funds to support DOJ litigation-related costs. As shown in the figure below, the amount of money in the LDF at the end of the year has grown significantly over the past decade—reaching $633 million at the end of 2019-20. This is because funds remain in the LDF until DOJ decides to make an allocation. The LDF was created to hold monies in trust, and thus is not reflected in or considered as part of the state budget. Instead, state law places the fund under the control and administration of DOJ and only requires quarterly reporting to the Legislature. LDF Fund Balance Grew Steadily Over the Past Decade (In Millions) $700 600 500 400 300 200 100 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 LDF = Litigation Deposit Fund. www.lao.ca.gov 1 analysis full gutter AN LAO REPORT Limited Opportunity for Oversight of LDF. We find that current state law and DOJ practices related to the fund limit the opportunity for the Legislature to conduct effective oversight of the LDF. Specifically, there is: • Little meaningful information provided on the LDF. • Little transparency on the level of resources available for transfer to the state General Fund, DOJ special funds, or other funds. • Little incentive for DOJ to transfer LDF funds to the special funds that support its self-initiated litigation as these funds are included in the annual budget process and subject to greater oversight. • Limited opportunity for ongoing legislative oversight over legal workload initiated by DOJ. • Significant flexibility for DOJ in determining the use of legislatively appropriated funding over time. Given that DOJ is primarily responsible for allocation decisions that it could directly benefit from, it is important that the Legislature has the opportunity and necessary information to conduct oversight to ensure these litigation proceeds are used consistent with its priorities and state law. Recommendations to Increase Oversight of LDF and Use of Litigation Proceeds. To address the above concerns, we offer several recommendations to increase legislative oversight of the LDF and how LDF funds transferred to DOJ special funds are used. Specifically, we recommend: • Requiring DOJ to transfer all eligible funds—which we estimate to be around $628 million as of the end of September 2020—from the LDF to the appropriate DOJ special funds, rather than continuing to allow DOJ to retain funds in the LDF. • Requiring LDF allocations occur within a specified amount of time, which would ensure the Legislature receives timely information on the total level of litigation proceeds potentially available for use and prevent the re-accumulation of funds in the LDF. • Reconsidering existing state law requiring an automatic transfer from the LDF-supported Antitrust Account to the state General Fund when monies in the account exceed $3 million, thus providing the Legislature with more choices on how Antitrust Account monies may be used. • Requiring increased LDF reporting, such as information on the costs and litigation proceeds associated with each resolved case and how proceeds may be used. • Increasing oversight of the use of LDF monies transferred to DOJ special funds, such as by requiring robust annual reports by each DOJ litigation section or unit supported by litigation proceeds. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION The Department of Justice (DOJ), under the special fund created to receive such payments (also direction of the Attorney General, is the primary known as litigation proceeds). The fund primarily entity that represents the State of California in supports payments to individuals and entities litigation. This includes initiating investigations harmed by those breaking the law as well as and pursuing legal proceedings against individuals litigation-related costs. or entities that do not comply with state laws. In this report, we (1) provide background on Such proceedings can be resolved in various the LDF and how it is administered, (2) review the ways, including requiring payments to the state in Legislature’s oversight of the LDF and the use of exchange for the state ending its pursuit of legal litigation proceeds, and (3) make recommendations action. The Litigation Deposit Fund (LDF) is a state to facilitate increased legislative oversight. BACKGROUND DOJ Primarily Responsible for State Services. The Division of Legal Services is responsible for most of DOJ’s litigation Litigation activities. In 2019-20, about half of DOJ’s Attorney General Designated as State’s budget—$508 million—supported this division. As Chief Law Officer. The California Constitution shown in Figure 1, the largest share of the budget designates the Attorney General as the state’s comes from reimbursements—generally from state chief law officer and specifies various duties for agencies receiving DOJ legal services. About the Attorney General. One duty is to prosecute $64 million (or 13 percent) comes from special violations of state law when the Attorney General funds including litigation proceeds. believes state law is not being adequately enforced. In addition, state law generally requires Figure 1 the Attorney General to represent state agencies and their employees in judicial proceedings. Unless DOJ Division of Legal Services Supported by Several Fund Sources specifically exempted by state law (as is the case for the University of California Board of Regents 2019-20 and the California Department of Transportation), Federal Funds state agencies must generally obtain written Reimbursements consent from the Attorney General before using Special Funds in-house counsel (meaning their own legal staff) or contracting with outside counsel. Additionally, statute authorizes the Attorney General to investigate and prosecute violations of certain $508 Million state laws. For example, the Attorney General is authorized to enforce state laws prohibiting unlawful, unfair, or fraudulent business practices as well as false or misleading advertising. General Fund DOJ Division of Legal Services Responsible for Most DOJ Litigation. The agency of the Attorney General—the California DOJ—consists DOJ = Department of Justice. of three major divisions: Legal Services, Law Enforcement, and California Justice Information www.lao.ca.gov 3 analysis full gutter AN LAO REPORT The Division of Legal Services is further divided flexibility over litigation workload initiated by state into three subdivisions—Civil Law, Criminal Law, agencies. This is because decisions on whether and Public Rights. About 40 percent of the funding to pursue legal action are either determined by provided to the Division of Legal Services in the state agency, or in partnership with the state 2019-20 supported the Division of Civil Law; while agency. This means DOJ cannot fully control such the Divisions of Criminal Law and Public Rights workload. were each supported by about 30 percent of the DOJ Self-Initiated Litigation Process total funding. Each of these subdivisions then has its own subsections or units. For example, This report focuses on a portion of DOJ’s the Division of Public Rights includes an Antitrust self-initiated workload, specifically, when DOJ Section, Consumer Law Section, and Environment chooses to take legal action against an individual Section. or entity for violating state laws. The process for DOJ Litigation Initiated in Two Major Ways. pursuing such legal action consists of the four key There are two primary ways DOJ litigation can be steps below. initiated. Specifically, litigation can be initiated by: Determining Whether to Initiate a Case. DOJ first determines whether to initiate (or file) • State agencies can request DOJ initiate a case. This includes identifying whether there legal action, defend or represent them in is a violation of state law, investigating the legal actions filed by others, or provide legal potential violation, and determining whether there advice. DOJ typically bills state agencies for is significant public impact. To the extent DOJ their costs. Currently, DOJ charges $220 per determines that there is sufficient proof, DOJ will hour for attorney services, $205 per hour for initiate a case. paralegal services, and $195 per hour for analyst services. State agencies generally Determining How to Initiate a Case. If DOJ decides to file a case, the department then pay for these costs from their own budgets determines how and when to file the case in state which can consist of General Fund and/ court. DOJ has flexibility to determine which state or special fund dollars, such as licensing laws it claims are being violated. For example, fee revenue. Such payments are reflected in situations where a case can be pursued as a as reimbursements to DOJ’s budget. To violation of multiple state laws, DOJ may choose the extent additional resources are needed, to pursue the case under only some of the laws state agencies (and DOJ) will seek additional for strategic reasons. This is because the state funding or increased expenditure authority law(s) under which a case is pursued provides a from the Legislature. framework for how DOJ is able to prosecute the • DOJ can self-initiate legal actions, as well case and what relief and remedies can be sought. as defend or represent the state as a whole For example, DOJ might initiate a case against a in actions filed by others. These costs business for bid rigging (a type of price fixing) as are generally paid for from DOJ’s budget a violation of the state’s unfair competition laws, through General Fund dollars or special anti-trust laws, or both. A legal document filed funds, including litigation proceeds. To the with the court to initiate a case will specify the extent additional resources are needed, DOJ specific pieces of state law DOJ believes have will seek additional funding or increased been violated, how these laws have been violated, expenditure authority from the Legislature. and what remedies or relief are being sought (such DOJ Has Flexibility Over Litigation Workload. as attorney fees or civil penalties). In certain cases, DOJ has flexibility over its litigation workload, DOJ may choose to work with other litigants, such particularly with respect to self-initiated litigation, as other states or district attorneys. This can also within existing resources. This is because DOJ is impact how and when the case is pursued as the sole decision-maker on which cases it pursues agreement from all parties is generally required. based on its priorities. In contrast, DOJ has less 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Resolving Cases. DOJ can resolve cases by consistently with state law and the agreements. dropping them, reaching agreement (or settling) In certain cases where an agreement or state law outside of court, or through a court decision provides flexibility in the use of litigation proceeds, after a trial. Settling the case or obtaining a court DOJ will determine how the proceeds can be decision after winning a trial typically results in used unless the Legislature and the administration a legal agreement dictating terms that must be choose to dictate more specifically how such fulfilled by the entity sued by DOJ. For example, monies are to be used. For example, state law the entity may be required to stop behaving in was adopted in 2020 that dictated the use of a particular manner, provide restitution, and/or $331 million in National Mortgage Settlement pay a civil penalty. The terms required by a court litigation proceeds. Specifically, $300 million for decision are generally tied to remedies permitted housing counseling and mortgage assistance and by the state laws found to have been violated. $31 million for tenant defense in landlord-tenant In contrast, DOJ has significant flexibility when disputes. settling cases—particularly if DOJ is not working LDF with other litigants—as the specific terms are generally whatever DOJ and the entity that was Litigation Proceeds Deposited in LDF Absent sued agree to based on their respective interests. Specific State Laws. Litigation proceeds are To the extent that agreements require deposited into the LDF in cases where the state payments, the agreements generally specify when is a party to the legal action and no other state and how the payments are to be made and how statutes specifically provide for (1) the handling the payments are to be used. For example, an and investing of the money and (2) how any agreement may detail specific amounts that must earned interest is distributed. (The state generally go to a particular entity (such as DOJ) or be used earns interest from the investment of monies that for particular purposes (such as enforcement of are held prior to allocation.) Monies in the LDF are environmental protection laws or housing-related allocated for use in two major ways: grants). The level of detail, however, can vary by • Court-ordered payments as documented case. For example, a legal agreement might only in legal agreements to individuals or entities specify the broad purposes the funds can be (such as state agencies) harmed by the used for. In cases where there is not a lot detail, actions of the entity that was sued. DOJ has some flexibility in determining how the money can be used. For example, DOJ can • Transfers to various special funds—most determine that the monies related to a specific notably to DOJ special funds to cover current case could be used by the state to enforce both and future litigation costs. (As we discuss in unfair competition laws and false claims laws— more detail below, these special funds may rather than just unfair competition laws. The use also receive funding from other sources as of payments can also be governed by the specific well.) state laws that were alleged or determined to have State law requires that any monies remaining been violated. For example, payments related to in the LDF that are not needed to satisfy violations of the state’s unfair competition laws court-ordered payments as documented in legal must be used for the enforcement of consumer agreements or to support DOJ’s litigation costs be protection laws. However, when DOJ receives transferred to the state General Fund no later than such funding, it has flexibility in determining the July 1 of each fiscal year. specific activities that are funded to enforce LDF Deposits and Allocations Vary Over consumer protection laws. Time. Deposits of litigation proceeds into the Overseeing Compliance With Legal LDF, as well as the amount of funds actually Agreements. DOJ generally oversees compliance allocated from the LDF, vary over time. Deposits with the legal agreements, including ensuring were generally in the hundreds of millions of litigation proceeds are received and used dollars annually over the past decade—but ranged www.lao.ca.gov 5 analysis full gutter AN LAO REPORT significantly from $779 million in 2012-13 to records for the fund—including records of individual $69 million in 2019-20. As shown in Figure 2, deposits and allocations. State law also authorizes total LDF allocations also fluctuated over the DOJ to make allocation decisions whenever, and past decade. (As we discuss below, not all LDF to whomever, it deems appropriate as long as deposits are allocated in the year that they are the decisions are consistent with the terms of received.) Most allocations are generally payments underlying legal agreements or state law. Until such made to those claiming harm (such as individuals allocations are made, monies remain in the LDF or government entities), which ranged from fund balance. Only a transfer to one of its special $625 million in 2014-15 to $23 million in 2019-20. funds—the Legal Services Revolving Fund (LSRF) Transfers to the General Fund, DOJ special funds (discussed in more detail below)—requires approval that fund litigation, and other DOJ and non-DOJ by the Department of Finance (DOF). special funds (such as the Aliso Supplemental DOJ Required to Provide Quarterly Reports. Environmental Project Fund) ranged from While the LDF is not considered annually as part $451 million in 2012-13 to $21 million in 2009-10. of the state budget, DOJ is required to provide As shown in Figure 3 on the next page, of the total quarterly reports to the Chair of the Joint Legislative amount transferred, the amount transferred to the Budget Committee, the Chairs of the Assembly and General Fund was comparatively low—ranging Senate fiscal committees, and the Director of DOF. from $62 million in 2011-12 to a little more than These reports generally include the beginning and $4,000 in 2015-16. ending fund balance for the LDF, the number of LDF Fund Balance Growing Over Time. As deposits received and amount of interest earned, shown in Figure 4 on the next page, the LDF fund allocations to those claiming harm, and the amount balance—or the amount of money remaining in the used for DOJ litigation costs (represented by the fund at the end of the year after all revenues have amount transferred to certain DOJ special funds). been received and all allocations have been made—has grown Figure 2 significantly and relatively steadily over the past decade. At the end LDF Allocations Fluctuate Over the Past Decade of 2019-20, the fund balance was (In Millions) $633 million. This is an increase of $900 $189 million (or 43 percent) over the last five years and $376 million Payments to Claimants 800 Transfers (or 146 percent) over the last ten 700 years. As we discuss below, DOJ determines when allocations are 600 made from the LDF. Funds remain in the LDF fund balance until 500 allocated. 400 DOJ Responsible for 300 Administering LDF. Because the LDF was created to hold 200 monies as a trust fund, it is not reflected in or considered part 100 of the state budget, similar to other state funds with this status. 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 State law places the fund under the control and administration LDF = Litigation Deposit Fund and DOJ = Department of Justice. of DOJ. Specifically, state law requires DOJ maintain accounting 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT DOJ Special Funds Figure 3 Receiving LDF Revenues Small Amounts of LDF Revenues Transferred to State General Fund LDF Revenues Primarily (In Millions) Transferred to Five DOJ Special Funds. LDF revenues are primarily $500 transferred annually to four Other Special Funds 450 DOJ Special Fundsa DOJ special funds: the Unfair State General Fund Competition Law (UCL) Fund, the 400 False Claims Act (FCA) Fund, the 350 Antitrust Account, and the Public 300 Rights Law Enforcement Special Fund (PRLESF). A fifth DOJ special 250 fund—the LSRF—receives less 200 regular transfers. As discussed above, state law can specify what 150 types of litigation proceeds shall 100 be transferred into these funds 50 and provides guidelines for how such proceeds are to be used. We 2009-10 2010-11 2011-12 2012-13b 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 discuss each of the five special funds in more detail below. a Reflects the five DOJ special funds routinely receiving LDF transfers: Unfair Competition Law Fund, the False Claims Act Fund, the Antitrust Account, the Public Rights Law Enforcement Special Fund, and the Legal Services Revolving Fund. • UCL. State law requires the b Significant increase attributable to a $369 million transfer to the National Mortgage Special Deposit Fund. state’s share of litigation LDF = Litigation Deposit Fund and DOJ = Department of Justice. proceeds from cases related to unlawful, unfair, or fraudulent business practices, Figure 4 as well as false or misleading advertising, be deposited into LDF Fund Balance Grew Steadily Over the Past Decade the UCL. LDF transfers are (In Millions) the primary revenue source $700 for the UCL. Proposition 64 (2004) amended state law to 600 require the UCL to exclusively support the enforcement of 500 consumer protection laws by the Attorney General. 400 • FCA. State law requires the state’s share of litigation 300 proceeds from cases related to knowingly presenting or 200 facilitating a fraudulent claim for payment be deposited into 100 the FCA. LDF transfers are the primary revenue source 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 for the FCA. These funds are used by the Attorney General LDF = Litigation Deposit Fund. to investigate and prosecute www.lao.ca.gov 7 analysis full gutter AN LAO REPORT false claims. FCA funds used to support and environmental laws—be deposited into certain activities qualify the state for federal the PRLESF. LDF transfers are the primary funds. Specifically, federal law requires state revenue source for the PRLESF. These Medicaid Fraud Control Units investigate funds must support the investigation and fraudulent payments and act on complaints of prosecution of any laws the Public Rights abuse and neglect of patients in facilities paid Division has enforcement authority over. by Medicaid. State funding—such as FCA • LSRF. The Legislature established the LSRF funds—supporting such activities can draw primarily for the deposit of payments to DOJ down significant federal funds. For example, from state agencies who were billed for DOJ in 2019-20, this unit is estimated to receive legal services. Such reimbursements are the $34 million in federal funds. primary revenue source for this fund. LDF • Antitrust Account. State law created transfers, when made, generally represent the Antitrust Account to receive litigation only a small portion of LSRF revenues. Funds proceeds for violations of federal and/or transferred from the LDF are to be used for state antitrust laws, such as anticompetitive certain investigation and litigation activities business mergers. LDF transfers are the taken on behalf of state agencies employing primary revenue source for the Antitrust DOJ legal services. Account. State law requires that any monies As shown in Figure 5, tens of millions of dollars in excess of $3 million be transferred to the are transferred from the LDF annually into these General Fund. DOJ special funds—ranging from nearly $20 million • PRLESF. State law requires litigation proceeds in 2009-10 to $78 million in 2015-16. The largest from a wide range of violations of state transfers tended to go to the UCL and the FCA. law—such as anti-discrimination, tobacco, Transfers to these two funds accounted for at Figure 5 Annual Transfers From LDF to Five DOJ Special Funds Fluctuate (In Millions) $90 Legal Services Revolving Fund 80 Public Rights Law Enforcement Special Fund Antitrust Account 70 False Claims Act Fund 60 Unfair Competition Law Fund 50 40 30 20 10 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 LDF = Litigation Deposit Fund and DOJ = Department of Justice. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT least half of the total transferred to the above DOJ Figure 6 special funds each year over the past decade. Not all of the special funds, however, received transfers LDF Transfers Generally Benefit DOJ Public Rights Division every year. Specifically, both the PRLESF and LSRF did not receive transfers in certain years. Transfers Generally Benefit Public Rights Criminal Division. As shown in Figure 6, most LDF transfers to the above funds support DOJ’s Public Rights Division. This is because this division is generally tasked with safeguarding and protecting Californians’ rights broadly, meaning that many LDF-related cases fall within its jurisdiction. In 2019-20, around $54 million in transferred litigation proceeds supported DOJ litigation workload. Of this amount, $48 million (or nearly 90 percent) Public Rights supported the Public Rights Division. The remaining amount supported the Division of Criminal Law. (We note that both of these divisions also receive LDF = Litigation Deposit Fund and DOJ = Department of Justice. funding from other fund sources, such as the General Fund.) At least 15 DOJ litigation sections or units received Figure 7 support from LDF transfers in 2019-20. (We note a couple DOJ Sections and Units Supported by LDF Litigation other sections or units, such Proceeds Also Receive Support From Other Fund Sources as the Charitable Trust Section, 2019-20 also received funds from the Federal and LDF in recent years prior to Other Funds State General Fund 2019-20.) All of the 15 units are subdivisions of the Public Rights Division, except for the Bureau of Medi-Cal Fraud and Elder Abuse, which is a unit in the Criminal Law Division. As shown in Figure 7, these sections and units generally Legal Services Unfair Competition receive support from other Revolving Funda Law Fund funds as well—including a total of $36 million from the General Fund in 2019-20. The level and Public Rights Law mix of funding for these various Enforcement Special Fund Antitrust False Claims Act Fund sections and units can vary Account annually based on DOJ funding decisions. For example, the a Reflects legal services costs billed back to state agencies. There were no LDF transfers to the Legal Services Revolving Fund in 2019-20. Antitrust Section received around DOJ = Department of Justice and LDF = Litigation Deposit Fund. $5 million more in support from the UCL in 2019-20 than in prior years, while primary support for www.lao.ca.gov 9 analysis full gutter AN LAO REPORT the Privacy Enforcement and Protection Unit shifted the fund. Additionally, the state budget reflects a from the PRLESF to the UCL in 2019-20. A more specific appropriation from these funds to support detailed breakdown of funding by fund source for DOJ. When DOJ would like to change the level of each section or unit is provided in the Appendix of spending from these special funds, the Legislature this report. must review and approve such requests as part Legislature Has Greater Oversight of These of the annual budget process. This helps the Funds. Except for the LSRF, these DOJ special Legislature exercise oversight of expenditures funds receiving LDF transfers are not trust funds from these funds. While the request for additional and thus are included and considered as part of the spending authority from these funds may reflect annual state budget process. Accordingly, annual anticipated LDF revenues, the Legislature does budget documents provided to the Legislature not receive information on the LDF when reviewing include fund condition statements reflecting requests from these special funds as part of the revenues, expenditures, and the overall health of annual budget process. LIMITED OPPORTUNITY FOR OVERSIGHT OF LDF Through our review of the LDF and DOJ, we summarizing the total amount paid to claimants as find that current state law and DOJ practices well as line items for each transfer from the LDF. related to the fund limit the opportunity for the Without additional information, it is difficult for Legislature to conduct effective oversight of the the Legislature to assess and draw conclusions LDF. Figure 8 provides a summary of our specific about DOJ litigation activities. For example, it is findings, which we discuss in more detail below. unclear how many legal cases are being resolved, Little Meaningful Information Provided on when these cases were initiated, how much has LDF. The Legislature only receives the statutorily been spent on these cases, and which cases have required quarterly reports submitted by DOJ. litigation proceeds that are being transferred to However, these reports generally provide limited the various DOJ special funds. To the extent that information. For example, the reports generally the Legislature received such information, it would provide only two line items related to revenue— be able to actively monitor how effectively DOJ is one summarizing the total amount deposited and using state resources in pursuing litigation. It would one summarizing the total amount of interest also facilitate discussions of how litigation proceeds earned during the period. Similarly, with regard to should be used in the future, similar to how it expenditures, the report only includes one line item reviews other state funds. Lack of Transparency on Figure 8 Level of Resources Available Summary of LAO Findings for Transfer. DOJ has significant discretion over the timing of 9 transfers to the General Fund, its Little Meaningful Information Provided on Litigation Deposit Fund (LDF) special funds, or other funds, even 9 Lack of Transparency on Level of Resources Available for Transfer in cases where state law and/ or legal agreements require their 9 Lack of Incentive to Transfer LDF Funds to Department of Justice (DOJ) transfer. Additionally, DOJ exerts Special Funds decision-making authority over 9 transfers to these funds (such as Little Opportunity for Ongoing Legislative Oversight Over DOJ Self-Initiated Workload how much to transfer) with little legislative or other oversight, with 9 DOJ Has Significant Flexibility Over Use of Appropriated Funding Over Time one exception. The only exception 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT is that DOF must approve any transfers to the rather than benefiting the General Fund as intended LSRF. However, state law specifies DOJ’s written by state law. request for an LSRF transfer is deemed approved if Little Opportunity for Ongoing Legislative DOF does not take action within 30 days of receipt Oversight Over DOJ Self-Initiated Workload. of the request. Unlike DOJ litigation workload initiated by state DOJ has used this discretion to limit annual agencies, there is little ongoing legislative oversight transfers to its special funds to the amount that of DOJ’s self-initiated workload supported by LDF it estimates will be spent each year from those litigation proceeds. State agencies, who are billed funds to support DOJ litigation activities. This for DOJ legal services, have an incentive to monitor means that such special funds sometimes appear legal costs—such as by monitoring how much barely solvent, even though additional funds could time and resources are used on cases and how potentially be transferred from the LDF. Instead, cases are resolved—because they are ultimately these funds remain in the LDF fund balance. responsible for paying such costs. State agencies However, since the quarterly reports do not include also have the incentive and opportunity to discuss information on how the funds in the LDF balance the status and approach on cases with DOJ on an may be used, there is a lack of transparency on ongoing basis. This external oversight, along with the total level of resources potentially available discussions with DOJ over the litigation workload, for transfer to each of DOJ’s special funds. This helps control costs and ensures funding is used in can make it difficult for the Legislature to make a cost-effective and productive manner. budget-related decisions, such as whether litigation In contrast, self-initiated workload is generally proceeds retained in the LDF fund balance can be pursued based on DOJ priorities with little external used to support DOJ litigation costs supported oversight. This means that such workload is not as by other fund sources or whether the Legislature rigorously evaluated. It also increases the risk that would like to direct DOJ to increase its enforcement costs associated with such workload could grow of existing or new laws. unnecessarily quickly and that funding is not used Lack of Incentive to Transfer LDF Funds to maximize state benefit. to DOJ Special Funds. Because of the lack of This oversight is particularly important as DOJ transparency on the level of resources available decisions in self-initiated cases impact the deposit for transfer, DOJ generally has little incentive to of monies into the LDF. As discussed above, DOJ transfer LDF litigation proceeds to its special has significant flexibility in determining how legal funds. This is because retaining the funds in actions are pursued and resolved. This establishes the LDF makes it difficult for the Legislature and the legal framework that dictates the monetary administration to determine whether funds are payments (or other remedies) that DOJ can seek available for other budget purposes. This could and where received payments could be transferred. include authorizing loans or transfers to the General For example, if DOJ chooses to pursue a case Fund, replacing existing General Fund support with solely under the state’s unfair competition laws, litigation proceeds, and/or increasing enforcement the state’s share of litigation proceeds must be or other activity on a one-time or ongoing basis. deposited into the UCL unless otherwise specified Keeping funds in the LDF thus increases the in the legal agreement. If a case is pursued as likelihood that the funds will remain available to violations of multiple state laws and/or the legal fund DOJ litigation activities based on its priorities. agreement does not include specific payment Additionally, state law requires any monies in requirements, DOJ can have control over how excess of $3 million in the Antitrust Account be litigation proceeds are split between funds. As a transferred to the General Fund. By retaining the result, DOJ influences how much is deposited in funds in the LDF to ensure the Antitrust Account the LDF and whether those deposited funds may fund balance remains below that threshold, DOJ be transferred to the General Fund, DOJ special retains the monies for future litigation activities funds, or elsewhere. Limited legislative oversight makes it difficult for the Legislature to ensure that www.lao.ca.gov 11 analysis full gutter AN LAO REPORT cases are being pursued and resolved consistent amount of flexibility is necessary to ensure DOJ with its priorities. For example, while the Legislature is able to quickly respond to violations as they might want DOJ to prioritize pursuing cases in ways occur to mitigate their negative impact, it could that create General Fund revenues, DOJ could be make it difficult to track how DOJ is using provided pursuing cases in ways that benefit the special resources over time. funds that support its work. For example, DOJ received approval to DOJ Has Significant Flexibility Over Use establish a new Healthcare Rights and Access of Appropriated Funding Over Time. DOJ Section within the Public Rights Division as part is generally required to request and justify of the 2020-21 budget. The budget included augmentations for self-initiated workload supported $6.9 million—$3.7 million from the Antitrust by its special funds as part of the budget process. Account and $3.2 million from the UCL—to support These budget requests may seek funding for a this new section. Prior to approval of this request, particular section or unit (such as the Consumer however, the department began redirecting in Law or Antitrust Section) and/or purpose (such as 2019-20 $1.8 million from the UCL to support this implementation of a specific new law). However, section that would otherwise have been available the annual budget bill allocates funding to DOJ’s for other cases within the Public Rights Division. three major divisions (such as the Division of This flexibility means that while the Legislature Legal Services) rather than to specific purposes may approve a funding increase to address or individual sections or units (such as Consumer a specifically identified purpose (including Law within the Public Rights Division). This means implementing legislation), the funding may not that, over time, DOJ can—without legislative continue to be used for that purpose in the long approval—shift resources budgeted for one run—particularly as litigation priorities or needs purpose to another or budgeted to a particular change over time. Without regular oversight of section/unit to another so long as the resources such workload, it is difficult to ensure that funding remain within the same division. This provides DOJ continues to be used consistent with legislative with significant flexibility in the type, number, and priorities. mix of cases it pursues annually. While a certain LAO RECOMMENDATIONS In order to address the concerns discussed requirement would apply to all funds that DOJ has above, we recommend that the Legislature any decision-making authority over. As a result, the increase its oversight of the LDF and how LDF only monies that would remain in the LDF would be funds transferred to DOJ special funds are used. Figure 9 provides Figure 9 a summary of our specific Summary of LAO Recommendations recommendations. 9 Require DOJ to Transfer All Require Department of Justice (DOJ ) to Transfer All Eligible Funds From Eligible Funds From LDF Fund Litigation Deposit Fund (LDF) Fund Balance Balance. We recommend the 9 Require LDF Allocations to Occur Within a Specified Amount of Time Legislature require DOJ to transfer all eligible litigation proceeds 9 Reconsider Automatic Transfer From Antitrust Account to the General Fund from the LDF fund balance to the appropriate special funds (such as 9 Require Increased LDF Reporting the UCL) rather than continuing 9 to allow DOJ to retain funds Increase Oversight of Use of LDF Funds Transferred to DOJ Special Funds in the LDF fund balance. This 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT those pending allocation to specific individuals or a case is finalized or after payment is received. To narrowly defined purposes, as well as funds tied to the extent the allocations do not occur within the cases that are awaiting final resolution. designated time period, DOJ would need to justify Under our recommendation, we estimate most why the allocations did not occur. of the total $635 million fund balance as of the end Our recommendation would prevent the of September 2020 would be transferred—primarily re-accumulation of a large LDF fund balance. It to DOJ special funds. Of this amount, we estimate would also permanently eliminate DOJ’s ability to that $628 million would likely be transferred, with avoid making LDF transfers to DOJ special funds most being transferred to either the UCL or the moving forward. Additionally, legislative oversight FCA as shown in Figure 10. Requiring this transfer would increase as DOJ’s discretion over LDF funds would ensure that all proceeds are appropriately would be drastically reduced. This is because the categorized for use pursuant to state law. For only funds left in the LDF fund balance should be example, a transfer to the UCL would ensure those those ineligible for transfer for which there is little monies are used consistent with state law requiring DOJ decision-making authority (such as payments that such funds be used for consumer protection to harmed individuals). Oversight would also purposes. This would also increase legislative increase as timely transfers of litigation proceeds oversight of the LDF as these monies would to special funds would ensure the Legislature be transferred to funds that could be regularly receives timely information on the total level of reviewed and appropriated as part of the budget litigation proceeds potentially available for use. As process. these funds are regularly reviewed as part of the Additionally, we recommend the Legislature budget process, the Legislature’s ability to provide direct DOJ to report on the amount transferred that oversight would substantially increase. faces additional restrictions on its use—such as monies required Figure 10 by legal agreements to be used Two DOJ Special Funds Primary Recipients of Most for purposes narrower than existing statutory requirements Funds Eligible for Transfer From LDF Fund Balance on the fund. This would help As of End of September 2020 (In Millions) the Legislature determine how the litigation proceeds could (or Multiple DOJ Fundsa should) be used once they are Other in the special funds. This could PRLESF include identifying the appropriate Antitrust Account level of funding to provide to DOJ and whether funds are available for other purposes (such as $628 Million UCL transfer to the General Fund). FCA Require LDF Allocations to Occur Within a Specified Amount of Time. We recommend the Legislature direct DOJ to make future LDF allocations— both payments and transfers— a Includes funds eligible to be distributed to more than one of DOJ's special funds supporting within a specified amount of time. litigation activities. For example, the Legislature DOJ = Department of Justice; LDF = Litigation Deposit Fund; UCL = Unfair Competition Law Fund; FCA = False Claims Act Fund; and PRLESF = Public Rights Law Enforcement Special Fund. could direct DOJ to complete LDF allocations within three months after a legal agreement resolving www.lao.ca.gov 13 analysis full gutter AN LAO REPORT Reconsider Automatic Transfer From Such information would allow for greater and Antitrust Account to the General Fund. We more meaningful oversight over of the LDF and recommend the Legislature reconsider whether DOJ’s administration of the fund. For example, monies above $3 million in the Antitrust Account this would help the Legislature ensure that LDF should automatically be transferred to the General monies are appropriately being transferred out. It Fund. As the Antitrust Account is the only DOJ would also help the Legislature monitor the types special fund with such a requirement, removing and number of cases being pursued and the level this requirement could eliminate incentive for DOJ of state benefit achieved from these legal actions. to pursue litigation under other state laws—such The Legislature would also have the ability to use as UCL-related laws—that do not have similar this information to inform budgetary decisions and constraints. It could also remove the incentive to determine whether additional changes to state to negotiate specific terms in legal agreements law are necessary to improve the effective use of that make antitrust litigation proceeds generally litigation proceeds. unavailable for use. It also could provide the Increase Oversight of Use of LDF Funds Legislature with greater ability to specifically Transferred to DOJ Special Funds. We choose how to use such funds. For example, recommend that the Legislature increase its the Legislature might want to allow Antitrust oversight over DOJ’s self-initiated workload Account revenues to accumulate to ensure there supported by LDF funds transferred to DOJ special are sufficient revenues to address fluctuations in funds. We recognize that some flexibility and litigation proceeds received annually—such as discretion is needed for DOJ to adapt to changing if a large number of ongoing cases are complex business and other practices over time, to quickly and require a long time to resolve. Removing this pursue cases that have the potential for public requirement does not eliminate the Legislature’s harm, and to strategically pursue cases to achieve ability to subsequently transfer monies from this the best outcome. However, oversight is needed fund—or other DOJ special funds—to the General to ensure DOJ priorities align with statewide policy Fund. Instead, it provides the Legislature with more and budgetary priorities. As the Legislature has choices on how Antitrust Account monies may be the responsibility for appropriating funding annually used. to reflect such priorities, the Legislature is best Require Increased LDF Reporting. We equipped to conduct oversight to ensure that recommend the Legislature require increased funding is being used in a cost-effective manner quarterly reporting on the LDF to ensure more consistent with state priorities and that appropriate meaningful information is provided to facilitate levels of funding are provided. increased oversight. Specifically, the increased At a minimum, we recommend the Legislature reporting should, at minimum, include the following: increase its oversight by requiring DOJ provide robust annual reports by each litigation section or • Fiscal terms and/or statewide benefit unit supported by litigation proceeds. Information associated with any new litigation proceeds required to be provided for each section/unit in received. these reports could include: • Costs and litigation proceeds associated with each resolved case. • A general description of the estimated • Cases associated with each special fund workload associated with any new cases transfer. potentially investigated or litigated. • A list of litigation proceeds that are ineligible • A list of all cases in progress and the amount for transfer along with an explanation for why of DOJ staff hours and other costs spent on they are ineligible. them. • Breakdown by case of what litigation proceeds • A list of investigations or cases dismissed or remain in the LDF fund balance and the resolved as well as the total amount spent and reasons they remain in the balance. the state benefit achieved from such cases. 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT • Fund source(s) for which all costs have or will level of funding needed to support DOJ litigation be supported. workload as well as the appropriate sources for • An estimate of the average amount of litigation such funding. For example, the Legislature could proceeds for the year. decide to provide the Consumer Law Section with 75 percent of funding for the section from Such annual reporting would help the Legislature the UCL and 25 percent from the General Fund monitor how cost-effectively DOJ uses budgeted in one year based on its anticipated workload. In resources to support its litigation workload. It another year, the Legislature could determine that would also help the Legislature determine whether the section should be fully supported by the UCL broader policy changes or actions are needed to instead. Budgeting in this manner could maximize control litigation costs, ensure monies are spent the availability of General Fund resources for other cost-effectively, and potentially intervene if DOJ statewide priorities, while ensuring DOJ activities litigation choices are not in line with legislative are not constrained by statutory restrictions on any priorities. Finally, this information could help inform of the DOJ special funds receiving LDF transfers. the Legislature’s decisions on the appropriate CONCLUSION The LDF receives and allocates tens of millions productive manner consistent with state law, legal of dollars in litigation proceeds annually and has agreements, and legislative priorities. This can accumulated hundreds of millions of dollars in its include ensuring that the state maximizes the use balance with limited oversight. Given that DOJ is of litigation proceeds and reducing the need for primarily responsible for allocation decisions that General Fund resources, which can be redirected it could directly benefit from, it is important that to other state priorities. The recommendations laid the Legislature has the opportunity and necessary out in this report offer the Legislature a menu of information to conduct oversight to ensure these potential key actions that could be taken to ensure litigation proceeds are used in a cost-effective and there is meaningful oversight of the LDF. www.lao.ca.gov 15 analysis full gutter AN LAO REPORT APPENDIX Summary of DOJ Sections/Units Receiving LDF Support in 2019-20 (In Millions) State General Antitrust Federal and Fund UCL FCA Account PRLESF LSRFa Other Funds Total Division of Public Rights Antitrust $5.9 $6.8 — $5.7 — — — $18.3 Children’s Justice 0.5 — — — $2.7 — — 3.2 Civil Rights Enforcementb 8.4 — — — — — — 8.4 Worker’s Rights and Fair Labor 0.8 — — — 0.8 — — 1.6 Consumer Protection 4.0 11.8 — — — — — 15.8 Mortgage Fraud — 0.2 — — — — — 0.2 Privacy Enforcement and Protection — 0.7 — — — — — 0.7 False Claims — — $8.3 — — — — 8.3 Energy — 1.8 — — — — — 1.8 Corporate Fraud/Responsibility — — — — 2.5 — — 2.5 Environment 3.6 4.5 — — — $3.5 — 11.6 Healthcare Rights and Access 1.7 1.8 — — — — — 3.5 Land 5.5 — — — — 6.6 $0.2 12.3 Natural Resources 0.6 — — — 0.3 23.2 0.1 24.2 Subtotals ($31.0) ($27.5) ($8.3) ($5.7) ($6.3) ($33.2) ($0.3) ($112.3) Division of Criminal Law Medi-Cal Fraud and Elder Abuse $4.9 — $6.0 — — — $33.7 $44.7 Subtotals ($4.9) (—) ($6.0) (—) (—) (—) ($33.7) ($44.7) Grand Totals $35.9 $27.5 $14.3 $5.7 $6.3 $33.2 $34.0 $156.9 a Reflects legal services costs billed back to state agencies. There were no LDF transfers to the LSRF in 2019-20. b Civil Rights Enforcement did not receive LDF revenues in 2019-20, but has in the past. DOJ = Department of Justice; LDF = Litigation Deposit Fund; UCL = Unfair Competition Law Fund; FCA = False Claims Act Fund; PRLESF = Public Rights Law Enforcement Special Fund; and LSRF = Legal Services Revolving Fund. 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Anita Lee 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. 17 LEGISLATIVE ANALYST’S OFFICE