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Department of Motor Vehicles: Overstated Costs for Registration Information Have Resulted in Inequitable Charges to Customers July 1997 96116 California State Auditor

Department of Motor Vehicles - California State Auditor

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Page 1: Department of Motor Vehicles - California State Auditor

Department ofMotor Vehicles:Overstated Costs for RegistrationInformation Have Resulted inInequitable Charges to Customers

July 199796116C

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Page 2: Department of Motor Vehicles - California State Auditor

Printed copies of this report can be obtained by contacting:

California State AuditorBureau of State Audits660 J Street, Suite 300

Sacramento, California 95814

Permission is granted to reproduce reports.

Page 3: Department of Motor Vehicles - California State Auditor

CALIFORNIA STATE AUDITOR

MARIANNE P. EVASHENKCHIEF DEPUTY STATE AUDITOR

BUREAU OF STATE AUDITS660 J Street, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019

KURT R. SJOBERGSTATE AUDITOR

July 2, 1997 96116

The Governor of CaliforniaPresident pro Tempore of the SenateSpeaker of the AssemblyState CapitolSacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its auditreport concerning the costs related to the fees the Department of Motor Vehicles (department) chargesfor vehicle registration information. This report concludes that in fiscal year 1989-90, the departmentoverstated its costs for providing registration and licensing information and has used these costs toestablish inequitable fees. Further, because it has not reassessed its costs or revised its fee scheduleduring the last seven years, the department cannot ensure that its current fees are fair or that they coverthe department’s costs to deliver information. The report also identifies a few instances when thedepartment did not comply with the law when providing registration and licensing information.

Respectfully submitted,

KURT R. SJOBERGState Auditor

Page 4: Department of Motor Vehicles - California State Auditor

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Page 5: Department of Motor Vehicles - California State Auditor

Audit Highlights . . .

Our review of fees chargedfor providing informationproducts revealed that thedepartment:

þ Used flawed methods thatresulted in overstatedcosts and higher-than-necessary fees.

þ Has subsidized its costsof providing informationto government customersthrough fees charged toprivate entities.

þ Generated $16.5 millionannually in profits fromsales to private entitiespurchasing less thanone-third of allinformation products.

SummaryResults in Brief

In fiscal year 1989-90, the Department of Motor Vehicles(department) overstated its costs for providing information tocustomers. This miscalculation resulted in the department�s

charging unreasonable, inequitable fees for information servicesproducts. Further, because it has not reassessed its costs orrevised its fee schedule during the last seven years, thedepartment cannot ensure that its current fees are fair or thatthey cover the department�s costs to deliver registration andlicensing information.

The department fulfills a variety of responsibilities in additionto supplying customers with registration information. Theseresponsibilities include regulating the issuance and retention ofdriver�s licenses, protecting the public interest in vehicle andvessel ownership, and providing personal identification servicesto drivers and nondrivers. While carrying out these functions,the department acquires and compiles registration and licensinginformation in its database. The California Vehicle Code allowsthe department to sell this information but requires it to chargefees that are sufficient to at least cover the cost of providing theinformation. The department�s Office of Information Services(OIS), now called the Information Services Branch, has been theunit primarily responsible for managing the delivery of thisinformation to customers.

Our review focused on the department�s process for establishingthe fees it charges for registration and licensing information andon whether the department bases those fees upon actual costs.During our review, we noted the following issues that haveaffected the fees the department charges its customers:

• The department used flawed methods in fiscal year 1989-90to calculate its costs to create and maintain its database. Asa result, the department significantly overestimated its coststo provide registration and licensing information to itscustomers. Because the department overstated these costs,the fees the department charged some customers werehigher than necessary. Moreover, because the departmenthas not updated this calculation of costs or its fee schedule,the department cannot assure the fairness of its fees, nor canit properly identify or manage product profitability.

Page 6: Department of Motor Vehicles - California State Auditor

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Page 11: Department of Motor Vehicles - California State Auditor

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Page 27: Department of Motor Vehicles - California State Auditor

Appendix A

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July 2, 1997 96116

Sally Reed, DirectorDepartment of Motor Vehicles2415 First AvenueSacramento, California 95818

Subject: Additional Issues Related to the Department’s Cost Model

Dear Ms. Reed:

As part of our audit report titled “Department of Motor Vehicles: Overstated Costs for RegistrationInformation Have Resulted in Inequitable Charges to Customers,” we reviewed the cost model thatthe Department of Motor Vehicles (department) uses to allocate costs to products, sections, andunits, including the Office of Information Services (OIS), now referred to as the Information ServicesBranch. In addition to identifying the topics we discuss in our audit report, we found other issuesthat require your attention. Specifically, the department needs to reconsider the method by which itallocates expenditures from other divisions to its Investigation Units and the way it assigns to thedepartment’s revenue-generating products certain expenditures incurred by the Program and PolicyAdministration Division. This letter discusses these matters in detail.

In fiscal year 1995-96, the department included the Investigation Units as a product in its cost modelso that the department could identify separately the costs of conducting investigations. Because theInvestigation Units provide a regulatory service for driver’s licenses, identification cards, vehicle andvessel registrations, and other departmental products, we do not believe that the department shouldtreat the units as a product in the cost model. By including these units as a product in the model, thedepartment inappropriately charged overhead costs from other divisions to the Investigation Unitseven though these other divisions do not contribute to investigative activities. As a result, thedepartment is overstating the overhead costs assigned to the Investigation Units and understatingcosts it assigned to other products. If it plans to continue using its cost model to track the costs ofconducting investigations, the department should modify its procedures to ensure that it allocates tothe Investigation Units only those activities and related expenditures that directly or indirectlycontribute to the Investigation Units’ functions.

Page 28: Department of Motor Vehicles - California State Auditor

Sally Reed, DirectorDepartment of Motor VehiclesJuly 2, 1997Page 2

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Another issue that requires the department’s attention is the way in which the department allocatesits costs of performing investigations to the products that benefit from these investigations.Generally, the department’s practice is to allocate expenditures incurred each fiscal year to itsrevenue-generating products or to sections, such as the Information Services Branch, that have suchproducts. However, in fiscal year 1995-96, the department did not distribute to any of itsrevenue-generating products the costs allocated to the Investigation Units. According to the costaccounting manager, in the past the department allocated such costs to its revenue-generatingproducts; however, this method resulted in unreasonably high costs for several products. We believethat the department should assign these costs to products that benefit from activities performed bythe Investigation Units. However, before including the costs of conducting investigations in thecomputation of individual costs, the department must develop a reasonable, equitable method ofassigning the investigative costs to the products.

Finally, we determined that in fiscal year 1995-96 the department allocated certain costs incurred byits Program and Policy Administration Division to all of the revenue-generating products, sections,and units in its cost model rather than to the specific group of products that benefit from the activitiesassociated with the costs. As a result, the department is understating the costs of some productswhile overstating the costs of others. According to the cost accounting manager, the departmentdoes not currently have a direct allocation method by which it can allocate these costs to a specificgroup of products. However, to ensure that it distributes costs incurred by the Program and PolicyAdministration Division to those products that benefit from the activities performed by the division,the department needs to develop a reasonable, equitable method of allocating costs to the products.

Although the issues described above may not materially affect costs allocated to the InformationServices Branch, the improper handling of these costs may have an impact on the actual costscomputed for other products, sections, and units included in the cost model. Therefore, thedepartment should modify its methodology with respect to how it allocates the costs forthe Investigation Units and the Program and Policy Administration Division.

Please inform us by September 1, 1997, of the corrective action you have taken regarding theseissues.

Sincerely,

KURT R. SJOBERGState Auditor

Page 29: Department of Motor Vehicles - California State Auditor

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June 30, 1997

Kurt R. SjobergState AuditorBureau of State Audits660 “J” Street, Suite 300Sacramento, CA 95814

Dear Mr. Sjoberg:

Thank you for the opportunity to comment on the Bureau of StateAudits’ (BSA) draft audit report entitled “Department of Motor Vehicles:Overstated Its Costs for Registration Information, Resulting in InequitableCharges to Customers.”

Before responding to the audit findings it is important to state thatthe Department of Motor Vehicles is one of the most effective and wellmanaged departments in the State. They successfully license and registerover 26 million motor vehicles, license 20 million motorists and collectapproximately 5 billion dollars annually on behalf of state and localgovernment. The department continues to be committed to provide betterservices to the motoring public.

Although the Business, Transportation and Housing Agencyappreciates the efforts of BSA to improve the process by which thedepartment provides requesters of information with driver license andvehicle registration information, I am concerned that the tone of the draftaudit report is not consistent with the relative significance of the auditfindings. I am also concerned that the auditors may not have fullyconsidered all of the information provided to them during the course of thefieldwork. Of particular concern, is the fact that implementation of yourrecommendations could increase taxes and fees charged to the public andcould result in increased profits for information vendors and insurancecompanies.

Alcoholic Beverage Control Department of Housing & Office of Real Estate AppraisersDepartment of State Banking Community Development Stephen P. Teale Data CenterDepartment of Corporations Department of Motor Vehicles Office of Traffic SafetyCalifornia Highway Patrol Department of Real Estate Department of Transportation (Caltrans)California Housing Finance Agency

STATE OF CALIFORNIA980 9th Street, Suite 2450Sacramento, 95814-2719

(916) 323-5401FAX (916) 323-5402

BUSINESS, TRANSPORTATION AND HOUSING AGENCY

DEAN R. DUNPHYSecretary

*The California State Auditor�s comments on this response start on page 43.

*

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Mr. SjobergJune 30, 1997Page 2

Attached please find responses to the recommendations of the draftaudit report. Again, thank you for the opportunity to comment on auditfindings of the BSA.

Sincerely,

DEAN R. DUNPHYSecretary

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DEPARTMENT OF MOTOR VEHICLES RESPONSETO DRAFT AUDIT REPORT

CHAPTER 1

Recommendation 1Update the unit cost calculations using guidelines similar to those we describe inAppendix B.

ResponseAlthough we concur that the unit cost calculations for information provided to customersshould be updated with complete data for the database creation and maintenance costcomponent, the guidelines recommended in Appendix B of the draft report are alsomissing critical elements needed to update the database. For example, the recommendedmethodology uses Type Transaction Codes (TTC) activity associated with creating andupdating the records in the database relative to total TTC activity. However, this timemeasurement does not include other personnel time needed to complete customertransactions related to the TTC that created the database. Furthermore, the recommendedmethodology does not include other costs, such as those associated with salvagecertificate processing, mandatory driver license actions, parking citation entries, liensales, license eligibility work performed in the Consolidated Processing Area, and vehicleregistration and driver license automation development work which ensures databaseaccuracy and functionality.

The department will perform a reevaluation of its costing methodology to ensure that itincludes all relevant cost information. However, because the cost methodologyrecommended by the State Auditor does not include several cost elements and, therefore,might not generate revenues necessary to cover the costs of the information provided, itsimplementation could require charges to local government entities including lawenforcement and increased costs in the form of taxes and fees for the general public.

Recommendation 2Compile reliable volume data to use in its unit cost calculations by implementing asystem to track and report the number and type of records provided to private andgovernment requesters and the method used to provide the records.

ResponseWe believe this recommendation was reached as a result of the auditors misunderstandingof the purpose for which summary data and trend analysis information is gathered andused by the department. Reliable volume data used for costing purposes is obtained bythe department through more sophisticated tracking methods and verifications whichwere disclosed to the auditor during the course of the fieldwork.

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Recommendation 3Establish fees sufficient to cover actual costs and provide for a limited profit margin.

ResponseFees the department charges for information include a profit margin sufficient to complywith requirements under the law. Vehicle Code, Section 1811, is clear in its instructionthat the department may sell information at a charge sufficient to pay at least the entireactual cost to the department of that information and that the charges are to be determinedby the director. Furthermore, case law in 1984 (Shippen v DMV) has established that thedepartment is permitted to charge more for information services products than their actualcost. However, Vehicle Code, Section 1812, prohibits the department from charging forthe information given to local government entities such as law enforcement. Therefore,the law permits, and we believe public policy supports, charges in excess of cost in orderto support these needs. The department is guided by the value of the informationprovided and the need to cover the cost of providing the information. Reducing the feesand therefore the profits currently charged could shift the costs from fee payingcustomers, such as insurance companies, to the general public through increased fees fordriver licenses and vehicle registrations.

Recommendation 4Reassess and update its unit costs on a periodic basis to ensure that they represent thecurrent activities and related costs of providing information, and the department shouldmodify its fee schedule accordingly.

ResponseAs noted in the department’s response to the previous recommendation, the departmentbelieves that fees should be set to cover costs and avoid charges to law enforcement orincreases in fees charged to the general public. However, the department will reassessand update its unit costs where appropriate and will continue to adhere to its fee schedulewhen charging customers for information.

Recommendation 5In addition, the Legislature should consider whether it is reasonable and equitable for thepublic to continue subsidizing the department’s costs of providing information togovernment agencies.

ResponseAs noted above, in Vehicle Code, Section 1812, the Legislature has directed thedepartment to provide information to government agencies without charge. The cost ofthat service must be borne by someone. The department has determined that such serviceshould be subsidized by for-profit requesters of information. Since information servicesrevenue is currently deposited in the Motor Vehicle Account, any shortfall precipitated byreducing fees would necessarily be made up by vehicle owners and licensed drivers.

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Recommendation 6If the Legislature determines that it is not reasonable or equitable for the public tosubsidize these costs, the department should modify its calculations of unit costs toinclude total records provided rather than total records sold.

ResponseThe “public” referred to in the audit report consists of for-profit requesters of informationnot the general public consisting of holders of driver licenses and owners of motorvehicles. The department will respond to any legislative direction on this issue.However, the department would oppose measures to dramatically reduce costs forrequesters of information at the expense of local government and the general public.

Chapter 2

Recommendation 1To ensure that it protects the confidential information in its records, the departmentshould make certain that it complies with the law before releasing any information.

ResponseThe department acknowledges that in the case noted in the audit report, it did not retainsufficient documentation to show that the requirements of the law were met. The specificinstance is one deficiency in the 50 to 70 requests for information studied by the auditorsand is not representative of the department’s normal business practices. The departmentis committed to ensuring the privacy of all confidential information and endeavors toensure public protection and compliance with law by a series of administrative,regulatory, technological, and contractual control measures. The department will reviewits controls and procedures for safeguarding information and, in the future, will ensurethat information is released only when all requirements have been met.

Recommendation 2The department should develop and implement procedures to identify and recover all itscosts of providing registration and licensing information and revise the applicableregulations to address the fee it should charge when providing statistical information.

ResponseThe provision of statistical information is a minor part of the department’s business and isnot specifically addressed in statute. The department currently has plans to modify thefees for providing statistical information; however, the modification plan does not takethe form recommended by the auditors.

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Recommendation 3To minimize its costs and the fees it charges customers, the department should developprocedures that ensure it uses cost-effective methods when providing registration andlicensing information.

ResponseIt is the department’s practice to provide the most current information available to itscustomers. Therefore, it is necessary to run programs for each customer so as to includeall updated records. However, the department acknowledges that it could run the zipcode report program once a year and provide that report to customers who specify thatthey are not in need of the most current information.

Recommendation 4The department should adhere to its fee schedule when charging customers forregistration information.

ResponseThe department does adhere to its fee schedule for information for which specific feeshave been established. For information not covered in either the fee schedule or statute,the department will review fees to ensure that they are appropriate.

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