September 14, 2009

Legislative Committee

(This material is for discussion purposes only and has not been approved by the Legislative or Executive Committees or the Board of Directors)

Issue:
Should C.A.R. sponsor legislation to impose additional restrictions on accumulation of DRE operating reserves or additional restrictions on loans from those funds?

Action:
Optional

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
4. Other

Status/Summary:
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.

Discussion

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 (Bass).
- 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 done.
- 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 reserves.

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 reserves?

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 statute.

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 authority?