(This material is for discussion purposes only and has not been
approved by the Legislative or Executive Committees or the Board of
Should C.A.R. sponsor legislation to impose additional restrictions on
accumulation of DRE operating reserves or additional restrictions on loans
from those funds?
Options: 1. Sponsor legislation to reduce DRE's
allowable reserves to six months worth of operating budget.
2. Sponsor legislation to apply the so-called "poison pill" of B&P
10226.5 to loans to other special fund accounts.
3. Do Nothing
As part of the budget bill of 2009, the legislature loaned $500,000 from
DRE operating reserves to Department of Justice to start up a new
foreclosure consultant registration program. The loan did not trigger the
so-called "poison pill" statute and roll back license fees because the
recipient was another special fund and not the state's general fund.
The $500,000 transfer to DOJ's special foreclosure consultant enforcement
fund represents about 2.25% of DRE’s available reserves.
The Poison Pill. After a budget crisis during the Wilson
administration, the Governor and legislature "raided" the reserves of the
special fund agencies (including DRE) to balance the budget's general fund.
C.A.R. objected on the principle that using license fees to balance the
general fund is double taxation on real estate licensees. In addition, the
raid endangered the budget of the regulator, requiring a license fee
increase at a later date. A subsequent lawsuit eventually forced a refund
of the raided funds, but the damage had been done and soon thereafter DRE
had to seek a fee increase. The administration needed C.A.R.'s sign-off to
get legislative approval of the fee increase.
The price of a compromise was a two part "poison pill" in statute that said
license fees would be rolled back to 1982 levels if either a raid by
the general fund occurred, or if reserves were accumulated in excess of 6
months worth of budget. The roll-back was to discourage transfers; the
reserve limit was designed to keep reserves from growing large enough to be
an attractive target.
The next time the legislature wanted to transfer funds out of the special
fund, they didn't just take it -- they "borrowed" it with a promise to
repay. In actual fact, much of the loan has been repaid. When C.A.R.
protested the movement of the money, we were told that it was a "loan" and
not covered by the existing prohibition on transfers. C.A.R.
subsequently sponsored legislation to amend the poison pill to cover
loans to the general fund as well as transfers.
The last change made in the area was an increase in allowable reserves from
6 months to 18 months. The change came at DRE’s request, with C.A.R.'s
assent, in order to allow DRE to save up for a new computer system.
-The Latest "Raid." On 7/28/09 AB 1xxxx (Evans) was chaptered. It is
the hard fought annual budget bill, and had been amended and voted upon a
few days before. It contained many special provisions that didn’t get any
daylight prior to passage.
- In September 2009, DRE discovered that Sec. 74 of the bill contained a
$500,000 loan to the Department of Justice as start up money for the
foreclosure consultants’ registration program created by AB 180
- The $500,000 transfer to DOJ's special foreclosure consultant enforcement
fund represents about 2.25 percent of DRE's available reserves, which were
$22,178,974 as of July 1, 2009. Adding the outstanding $10.9 million
general fund loan as an asset, DRE's reserves were $33,078,974 at the
beginning of 2009-2010 fiscal year. In theory, the general fund loan will
be repaid if DRE needs it. Thus, from an operational perspective, the
$500,000 transfer to DOJ's special enforcement fund should have little or
no significant fiscal impact on DRE.
- The Bass bill didn’t contain a funding source, and didn't change the DRE
licensee exemption for licensees acting within scope of license, so C.A.R.
had tracked it as a "watch file;" and DRE only watched it as well. It was
the late amendment to the budget bill that created the loan.
- Once they discovered the loan, DRE was concerned about both the loss of
reserve funds and that it might trigger the so-called "poison pill" of
B&P 10226.5 and roll back the recently set fee structure. Language was
actually prepared for use in hijacking a bill to repeal the transfer.
However, after examination, the administration disapproved of a legislative
fix. The implication of telling DRE to stand down is that the Governor was
aware of the deal, or at least is not prepared to unwind what was
- The rationale for the "no poison" conclusion is that (1) the bill is loan
to a special fund (a new DOJ program) and NOT to the general fund; and, (2)
the bill also says "notwithstanding any other law" which arguably exempts
the transfer from the poison pill anyway.
Note: With very rare exceptions, almost any statute is subject to change by
the legislature, and the current legislature cannot bind future
legislatures with a restriction that they cannot undo. The poison pill
statute has always been a deterrent and an early warning device rather than
an absolute prohibition.
Reducing allowable reserves. When the poison pill was first
put into law, it was part of a two-pronged strategy. Recognizing that
any language prohibiting transfers can always be changed by a subsequent
act of the legislature, C.A.R. also limited the amount of reserves that
could be built up within DRE. The original amount was set at six months;
which had been the threshold for budget "raids." Some years later,
DRE sought C.A.R.'s assent to an increase to eighteen months, so as to
allow enough reserves to pay for upgrading computer systems. DRE currently
has about one year of reserves.
C.A.R. could sponsor a change in the statute to reduce the amount of
Pro: Having no, or minimal, reserves makes it hard for the
legislature to appropriate or encumber them for unrelated purposes. Not
having the money is the only sure way to keep it from being transferred.
Con: Requiring limited reserves forces the DRE to more frequently
adjust license fees to stay within the reserve cap. "Yo-yo" fee changes
results in both increased costs for the department, and leads to confusion
in the licensee population. Perhaps even worse, the inability to
accumulate bigger reserves will make it harder for DRE to engage in capital
projects like updated computer systems or electronic exam projects.
Should C.A.R. sponsor a change in the statute to reduce the amount of
Changing the Poison Pill statute to include loans to other special
funds. The problem of raids on special fund (i.e. those created by
license fees and not the general revenue stream of the state) reserves has
evolved over the years and C.A.R. has responded with changes in the
Originally, the legislature simply transferred money out of the special
funds into the general fund of the state. The first poison pill
statute prohibited such a transfer and used it as the trigger for a
rollback of license fees. The next version of a budget raid side-stepped
the statue by structuring the transfer as a loan to the general fund.
C.A.R. responded by changing the statute to say that "transfer" included a
loan to the general fund. The most recent scheme was a loan from one
special fund (DRE) to another (DOJ foreclosure consultant registry) that
never went through the general fund.
C.A.R. could sponsor legislation to change the statute to include
any loan, including to other special funds.
Pro: This approach is consistent with earlier responses - when there
is an "end run" of the statute, the statute is modified to apply to it.
Even if it is not a complete defense to transfers, it will deter the
schemes we have seen in the past.
Con: No matter how the statute is changed, there is no guarantee
that the legislature will not simply make the transfer anyway by and either
trigger the license fee rollback, or draft a bill that says "not
withstanding Business and Professions Sec. 10226.5…"
Should C.A.R. sponsor legislation to modify the poison pill statute to
include all loans?
Should C.A.R. take any additional action on the poison pill statute, so
long as no transfer is made that threatens to trigger the DRE fee