Organizational Structure
		One purpose for putting the licensing boards in a department 70 years ago was to increase administrative efficiency and reduce independence. But the organizational structure today is more confused than ever.
		The relationship between the department and the boards is shaped by the boards compositions, the director's authority, funding mechanisms and the functions of the boards.
		The scrutiny of the sunset review process has provided great value, but the fundamental organizational problems remain.

Organizational Structure

Finding 3: The organizational structure of the Department of Consumer Affairs has evolved in ways that do not provide the best possible protection for California consumers.

The Department of Consumer Affairs' organizational chart reveals a tortured history. For decades professional licensing organizations that were created in the name of consumer protection were considered to be captured by the professions they regulated -- subtly protecting business by restricting market entrants and limiting enforcement efforts.

One purpose for putting the boards within a department 70 years ago was to increase administrative efficiency and reduce the independence of the boards.

But today the organizational structure is more confused than ever. The boards remain largely independent. The department has leaned increasingly harder on the licensing programs to pay for its overhead and consumer programs unrelated to the fee-based regulators. The relationship between the department and the boards is often strained and occasionally adversarial.

The Legislature's Sunset Review efforts have clearly prodded boards to be more consumer oriented. But public scrutiny has not been medicine enough to cure the organizational ills engendered by more than a century of evolving organizational missions and loyalties.

Balkanized Governance

A former director of the Department of Consumer Affairs describes the organization as Balkanized -- plagued by turf battles and unclear lines of authority. On a different occasion, the same former director described the department as the Winchester Mystery House, assembled over time -- a board here, a program there and never comprehensively remodeled.

As described in more detail in the Background section of this report, the department's origins lie in the independent and profession-specific regulatory boards that were established one at a time over the years. In 1929, the Department of Professional and Vocational Standards was created to centralize administrative functions, but that centralization never really materialized. In more recent years, new regulatory programs were placed directly under the department.

In 1970, the department was remade into the Department of Consumer Affairs. The law reorganized the department to provide a one-stop complaint process for consumers and expand public membership on the professional boards. The director was given discretion to consolidate the board's investigative and auditing personnel into the Division of Investigation and to create the Division of Consumer Services to take on the duties of a consumer counsel.

Today, the department houses 28 semi-autonomous boards and nine bureaus or programs that report to the director. In terms of budgets and staffing, about half of those resources rest with the boards and the other half with the bureaus and programs under the department's control.

In 1993-94, the department reorganized and centralized many of the functions of the regulatory programs under the department's control. Five new divisions were created -- licensing, consumer information, complaint mediation, enforcement, communications and education. The reorganization, according to the director, improved efficiency by "centralizing the performance of similar functions historically performed separately by the bureaus and the programs under its authority."⁽³¹⁾ The director characterized the reorganization as another part of the department's continuing evolution from an "umbrella" agency to an executive branch department that provides direction and performs "administrative and regulatory functions for an increasing number of occupations and professions."

The boards, however, were immune from the reorganizational changes, except for one reform. The department established a deputy director to coordinate efforts between the director and the boards. The deputy works directly with the appointed board members to make sure they understand their loyalty is to the consumer, not the profession. The deputy director also organizes training on conflict of interest regulations, contracting and other provisions in the Government Code, as well as regulatory procedures. The deputy director also attends meetings of the boards.

Reorganized, But Not Resolved

By definition, for the department to reorganize those regulatory efforts under its control means the department could only complete half of the job. Many of the underlying problems that existed when the department was first created in 1929 and recreated in 1970 remain, as was described to the Commission in testimony by the Center for Public Interest Law:

It is unclear why the Legislature would direct DCA to "facilitate the proper functioning of the free enterprise market economy" but then place it over 40 semi-autonomous occupational licensing agencies -- many of which are deliberately designed to limit "the proper functioning of the free enterprise market economy" without consumer benefit. And we fail to understand why the Legislature would charge DCA with "fostering competition" without also giving the DCA director sufficient authority to interfere with the cartel-like function of its boards which serve to suppress competition, limit consumer choice in the marketplace and artificially inflate the price of the services performed."

There are four central and interrelated issues that define the relationship between the department and the boards, and as a result define the problems and potential solutions to the department's organizational architecture: board composition, the authority of the director, funding, and the scope of the boards.

1. Board Composition

As early as 1961, the Legislature began to add non-professional members to the regulatory boards in order to dilute professional bias. This trend accelerated in more recent years to the point that all trade-type boards have public majorities and the medical-type boards have greater public representation than in the past. The issue of board composition has most recently been examined by the Legislature's sunset review process. In most cases, the Joint Legislative Sunset Review Committee has concluded that non-professional representationis adequate, although the committee has recommended some adjustments.⁽³²⁾

While adding public members appears to have given the boards greater consumer orientation, few analysts believe the reform by itself has converted the boards into vigorous enforcers of the public interest. One recent director took the next step of scrutinizing nominees, and orienting new appointees to their role as consumer guardian. He then maintained those relationships to have influence over board decisions.

In addition to the consumer benefits of having public members on the boards, changing board composition might also be a way to strengthen the relationship between the boards and the department. In recent years, a deputy director has served as a liaison to the boards. The next step in the evolution would be to give the director an ex officio position on each of the boards, allowing for more direct and public influence over such important board decisions as selecting an executive officer, setting standards and establishing enforcement strategies.⁽³³⁾

2. Director's Authority

While the statute makes the director the chief consumer protector in the State, the director has little legal authority over the regulatory boards that form the front line for much of that consumer protection. All directors have had the power of persuasion over the boards, and some directors have exercised that power with considerable ambition. One recent director, for instance, targeted board executive officers that he did not think were making the grade, and lobbied the boards to replace those executives.

The director also has administrative control over board budgets, which can increase the director's persuasiveness even on non-budgetary issues. And by statute, boards must submit new rules and regulations to the director for approval. Under the law, the director has 30 days to disapprove the regulations on the grounds that they are injurious to the public health, safety or welfare. Should the director veto proposed regulations, the board can override the director with a unanimous vote.⁽³⁴⁾

The problem with this provision is its limitations. It explicitly exempts from a director's veto rules and regulations related to examinations and qualifications of licensure -- two areas that the boards have used to limit market entrants. In addition, many of the actions that the boards take are not rules and regulations, but rather case-by-case decisions concerning complaints and investigations. Finally, the law does not include management decisions by the board, including the selection or retention of an executive officer. As a result, the director has no say in board decisions that are most likely to determine the intensity of the board's consumer protection efforts.

The state Constitution provides that each board has the right to hire an executive officer -- which is why directors have had to lobby board members if they wanted to influence the hiring or firing of an executive. In a few cases, the Legislature has found a way to give the director some role in the selection process without impinging on the board's constitutional prerogative. In those cases, the director may approve or disapprove the board's selection of an executive officer.

3. Funding

Virtually all of the money that the department spends -- $306 million in the 1997-98 budget year -- comes from special fees charged to professions and businesses regulated by the department or one of the boards. The department historically received a relatively small contribution from the General Fund -- $1.2 million in fiscal year 1991-92, the last year it received an appropriation -- to pay for general consumer-related programs.

The department now funds all of its administrative functions by tapping the revenue collected by its regulatory bureaus and by assessing an overhead charge to the regulatory boards. As early as 1937 the department had the authority to assess the boards for services it provided.⁽³⁵⁾ The current fee is based on the department's assessment of how much it costs to provide centralized services for the boards, pro-rated for the board's authorized number of personnel years. In some cases, the pro-rata charge amounts to 13 percent of a board's budget and in 1996-97 came to $8 million.⁽³⁶⁾

The Legislative Analyst believes the funding system reduces accountability and the ability of the boards to control their own budgets.⁽³⁷⁾ And the policy implications of the financial arrangement go even further.

• Shadow Budgeting. The administrative assessment functions as a sort of budgeting sleight-of-hand. Department officials are candid about the fact that since the department gets no General Fund revenue that it must rely on the pro-rata administrative fees to finance general consumer protection functions unrelated to specific programs.



• Monopoly Service Provider. The boards pay for centralized administrative services whether or not they use them. Some boards, for instance, do their own personnel work -- even though they are paying the department to do it. At the very least this engenders duplicative bureaucracies. But it also prevents the boards (now captive customers) from choosing how to best meet basic business needs.



• Melded Costs. Even if boards and bureaus are using all of the services provided by the department, there is no clear connection between the actual charge and the actual service. Personnel costs, for instance, are higher for units with greater turnover than for those with stable workforces. Since the assessments are not based on the actual services as they are rendered, boards do not experience -- and as a result, do not consider -- the costs or savings that come from good management.

The considerable distance between the assessment or "chargeback" and the actual cost of providing service was described to the Commission in testimony by the Center for Public Interest Law:

The precise basis of the calculation of this chargeback is a mystery to most DCA executive officers, and varies depending upon the service provided. But an unscientific survey of several boards indicates that the chargeback consumes approximately 5 to 13 percent of their annual budgets. DCA also has access to revenue generated by its bureaus, which operate under the direct jurisdiction of the DCA Director. To fund activities related to its more general consumer protection mandate, DCA is forced to cross-subsidize from its chargeback revenues.⁽³⁸⁾

Representatives from the Center argue that because the special fund is charged to all practitioners, all practitioners can pass those costs onto consumers. That means that consumers and not the businesses or professionals are actually paying for the regulatory programs. But even if that argument were supported by a consensus of economists, the center concedes that the department's budget is built on a questionable legal foundation:

To the extent that California law expressly earmarks the licensing and other fees collected by an occupational licensing agency for specific and direct use by that agency to fund its licensing and standards setting and enforcement activities, is DCA acting improperly if it charges more than the actual cost of service provided and uses excess chargeback monies for generalconsumer protection activities unrelated to that particular board?⁽³⁹⁾

This financial arrangement has allowed the department to pursue some general consumer protection activities. It has coerced some of the boards to rely more on the department -- reducing the autonomy that consumer advocates have railed against. And in some instances it may have reduced the cost of individual services through economies of scale.

But it also has produced considerable resentment. It has allowed policy makers to avoid the issue of funding general consumer protection activities. And it has not rationally resolved the issue of which functions are best performed by the boards and which by the department.

A separate funding issue concerns the actual fee. Most of the fees are set in statute. For some regulatory programs, a fee range is specified in statute -- giving the board or the department the ability to raise fees if, for instance, they are needed to increase enforcement efforts. Some professions have blocked legislative efforts to increase fees. And while containing the cost of government is an important goal, department officials and consumer advocates believe that a primary motivation on the part of the professions has been to prevent the regulators from expanding enforcement efforts.⁽⁴⁰⁾

The fees should be high enough to cover the fee-related activities. The courts, however, have found it to be illegal for special fees, when aggregated, to exceed the cost of funding the related activities, or for those fees to be diverted to other uses.

The State maintains separate funds for each of the fees. As the Commission has observed in previous studies, this arrangement complicates the State's budgeting process -- and tends to limit the activities of the individual consumer protection units. The use of special funds, the Commission has observed, "tends to fix artificial limits on the scope of regulatory and enforcement programs and influence decisions in specific disciplinary cases. Rather than developing a program based on actual needs, the tendency is to build the program around the amount of fees collected."⁽⁴¹⁾

Since boards and programs must spend whatever it costs to examine and license applicants, the discretionary portion of the budget is the enforcement end of the spectrum. A number of large states have averted these problems by setting fees based on the historical cost of providing the service and then appropriating the funds needed to do the appropriate level of consumer protection.

4. Board Functions

The boards' primary functions are to license members of a profession, investigate complaints and take enforcement actions against violators. For years, analysts have attempted to change the scope of board functions to either encourage greater efficiency or to bolster their consumer protection record.

As can be seen in the department's recent renovation, organizational architects believe that centralizing common functions yields efficiency.

The effectiveness argument is based on the belief that licensing requirements created by the boards have been too strict and the enforcement efforts too weak. Centralizing either set of functions would reduce the chances that the professions will control the regulatory process.

Depending on how the functions are arranged, the scope of the boards could span the continuum from completely self-contained as they were historically, to a very limited or even advisory role in which they review standards used for licensing and review enforcement actions taken against individual professionals or businesses.

The argument for narrowly defining the boards' enforcement functions is that boards with professional members should not determine which complaints are investigated or which cases should proceed to revocation or suspension hearings. Those are issues of law. Rather, the boards should review decisions made by administrative law judges to ensure that subject-specific regulations were correctly interpreted and applied to individual cases.

Even when it was the Department of Vocational and Professional Standards, the individual boards looked to the department to do some functions, including some investigations.

But over the years, efforts to consolidate more board functions and dilute board autonomy have been largely unsuccessful. In 1967, the Little Hoover Commission urged better consolidation of administrative services. And in 1979, the Commission recommended that enforcement functions be consolidated.

Defining Goals for Structural Reform

Some policy analysts -- and previous Little Hoover Commission reviews -- have asserted that centralizing functions would bring the economies of scale to the department while reducing the bias of boards toward the professions they regulate. Similar economies might be expected by collapsing similar boards -- such as consolidating the health-related boards into a single healing arts board.

The research and analysis on this issue, however, is not unanimous. A 1991 report by the Auditor General, for instance, concluded that few additional financial benefits would come from further consolidating functions of the regulatory boards it reviewed. The conclusions were based in large part on the fact that many of the smaller boards already rely on the Department of Consumer Affairs or the Department of General Services to perform administrative functions such as budgeting or personnel.⁽⁴²⁾

Researchers at the University of Southern California reviewed medical and nursing boards throughout the nation and concluded that centralizing administrative functions actually reduces disciplinary actions. The analysis, however, showed that increasing public membership on regulatory boards increases disciplinary actions.

Perhaps more importantly, the study showed that centralized investigative units yielded more disciplinary actions, as did more investigative staff regardless of how the personnel was organized. The researchers found the results counter-intuitive, but from a broader perspective they are not that surprising. Centralizing personnel or budgeting may or may not make the boards more efficient, but centralizing those functions should not be expected to make them more aggressive consumer guardians.⁽⁴³⁾

Distilled, the previous analyses and reform efforts suggest two important goals that should be used to guide future efforts to craft a better consumer protection organization:

• Case-by-case efficiency. Historically organizational architects relied on economies of scale through centralization to yield efficiency. Those potential gains must now be weighed against the flexibility, accountability and innovation obtained through decentralization. As a result, the most efficient degree of centralization changes from organization to organization and sometimes manager to manager. The best business solution may depend how well technology is employed to gather, store, manage and disseminate information.



• Outcome-based effectiveness. One way to increase effectiveness is through accountability. Traditionally the boards have been accountable to the professions paying the fees. The issue is how to change the structure to make the agencies accountable to the consumers, or at least the consumer representatives in the executive and legislative branch. One means to that end would be to benchmark boards according to desired outcomes, while reducing their direct dependence on the professional fees that allow them to perform their duties.

How these principles are transferred onto an organizational chart depends on one's perspective. All of the board executive officers consulted by the Commission believe their agencies are now responsible consumer protection entities and that the reform most needed is to reduce or eliminate the assessment for services they do not use.

Many former directors believe the answer is to give the director more control over the boards. Most consumer advocates would increase scrutiny of the boards and decrease their autonomy.

One recent director recommends consolidating administrative and investigative functions at the department, leaving the boards with the tasks that benefit from having a plural body and subject expertise -- setting standards and reviewing enforcement actions that have been heard by administrative law judges. The Little Hoover Commission made a similar recommendation in 1967.

The Center for Public Interest Law believes the director should have "sufficient statutory authority to expose and eliminate unnecessary and/or ineffective licensing barriers, and to encourage the establishment of relevant licensing and continuing competence requirements for the protection of the public." The Center would give the director the authority to issue an "order to show cause" that a board's activities are the minimum necessary to preserve public health and safety. And the authority would cut the umbilical link between the fees paid by the professions and the boards' budgets.

In some ways that oversight is now being conducted by the Joint Legislative Sunset Review Committee. The Committee's scrutiny has revealed that some boards are doing a good job protecting the public's interest, which can be interpreted to mean that the performance of many boards could be improved without structural reforms. The director of the department testified:

There is reason to believe that many of the boards are looking at their operations and especially their enforcement priorities more closely than they did in past years. The certainty of a critical sunset review and the risk of being terminated has given them added reason for self-examination -- a reason to revisit the reason for existence, and how well they are performing⁽⁴⁴⁾

The Committee, however, also revealed that some boards had serious performance problems that were the direct result of leaving consumer protection to industry-oriented, nearly autonomous and nearly invisible boards.

The range of reform options is wide, and the examination of those options has appropriately begun with the Legislature's board-by-board review to determine which boards should continue at all. But at a minimum, any reforms should seek to resolve the following structural problems:

• Clarify the authorities between the board members and the director. By creating a deputy director for board relations, the department has tried to enhance policy coordination and streamline administrative procedures. The department also has initiated efforts to ensure board members know their customer is the consumer.⁽⁴⁵⁾ But the director's relationship is still defined most by bureaucratic veto power, and the California's consumer advocate still does not have explicit control over -- or even a vote on -- the regulatory boards.



• Allow for the right level of centralizing functions. It is intuitive that centralizing similar functions performed by a number of agencies can create efficiencies by reducing duplication and from economies of scale. But there also are problems with large bureaucracies. They become hard to manage, bloated and do not have a record for being customer-service oriented. And finally, technology can change the economies of scale -- raising and lowering them for different functions. In other words, the right level of centralization depends on a variety of factors -- including the competency of the individual units or the centralized unit. Given the variables, it is difficult envisioning the right decision being made in legislation or even in an annual budget process. Increasingly, these decisions are managerial in nature, and can be left to managers and appointees -- provided performance is publicly measured.



• Untangle the funding strings. The purpose of special funds is to create a revenue stream for a government function that serves specific individuals or a portion of the population. The only real limitation is that the fee does not exceed the cost of performing the identified function -- there is no requirement that dollar for dollar the money has to be kept separate. Currently the boards use the special funds to reinforce their independence and the regulated professions use those special funds to exert indirect fiscal control over the boards.

Summary

The organizational issues facing the State's consumer protection infrastructure are paramount, and the positions of the various interest groups are entrenched. The problems are old and few solutions are new. Still, as the financing of the regulatory programs devolves, as the Legislature plays a more active oversight role, as directors do what they can to build relationships within the existing walls, and as the department's bureau-based reorganization is tested, new opportunities are emerging to strengthen the department's structural weaknesses.

Recommendation 3: The boards should be transformed from nearly autonomous units into policy-making bodies that set regulations and review enforcement actions -- allowing licensing, enforcement and administrative activities to be coordinated and eventually consolidated within the department.

• This change should begin with the formal involvement of the department director in the activities of every board by having a seat on each board, even if that seat were routinely staffed by a proxy.



• The Governor and the Legislature should enact legislation providing the director of the department with the authority to approve the selection of new board executive officers. The legislation also should formalize the director's role in orienting and training new board members to their task as guardians of the consumers' interests.



• Fees collected from regulated professions should be aggregated into one special professional regulation fund that is then distributed among the boards and the department. This would untie the fiscal relationship between the regulated and the regulator, it would prevent regulated professions from starving enforcement efforts, and it would erode the popular concept that boards exist for the purpose and the benefit of the professions



• The department's assessment on boards for administrative services should be disaggregated by the services provided, allowing the boards to select which services they want to pay for while encouraging them to "purchase" those services as soon as the department can perform them more cost-effectively than the boards.