Performance audit, Registrar of Contractors

              A REPORT
TO THE
ARIZONA LEGISLATURE
Debra K. Davenport
Auditor General
Registrar of
Contractors
Performance Audit Division
APRIL• 2003
REPORT NO. 03 – 02
Performance Audit
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five
senators and five representatives. Her mission is to provide independent and impartial information and specific
recommendations to improve the operations of state and local government entities. To this end, she provides financial
audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and
conducts performance audits of school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Senator Robert Blendu, Chair Representative John Huppenthal, Vice Chair
Senator Gabrielle Giffords Representative Tom Boone
Senator Peter Rios Representative Ken Clark
Senator Thayer Verschoor Representative Ted Downing
Senator Jim Weiers Representative Steve Yarbrough
Senator Ken Bennet (ex-officio) Representative Jake Flake (ex-officio)
Audit Staff
Shan Hays, Manager and Contact Person
Ryan Curtis, Team leader Chris Horton
Mathew Carlile
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44 th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553 -0333 • FAX (602) 553 -0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
April 3, 2003
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Israel Torres, Director
Registrar of Contractors
Transmitted herewith is a report of the Auditor General, A Performance Audit and Sunset Review
of the Registrar of Contractors pursuant to a May 14, 2002, resolution of the Joint Legislative
Audit Committee. The performance audit was conducted as part of the Sunset review process
prescribed in A.R.S. §41-2951 et seq. I am also transmitting with this report a copy of the Report
Highlights for this audit to provide a quick summary for your convenience.
As outlined in its response, the Registrar of Contractors agrees with most of the findings and
recommendations, but states that it will not implement two recommendations related to its use of
state vehicles. First, the agency states that it will not return all vehicles to the Department of
Administration that are not used efficiently because its staff need an adequate pool of vehicles
available to perform their duties. However, maintaining its own large pool of vehicles at the
agency is costly, and other more efficient transportation options exist. Second, the agency states
that it will not monitor the use of vehicles through detailed mileage logs. Keeping detailed
mileage logs would help prevent misuse and better ensure efficient vehicle use.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on April 4, 2003.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Registrar of Contractors pursuant to a May 14, 2002, resolution of the
Joint Legislative Audit Committee. This audit was conducted as part of the Sunset
review set forth in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
Arizona is one of 12 states that has a central regulatory body that regulates nearly all
aspects of the construction industry. Created in 1931, the Registrar of Contractors
(agency) regulates commercial and residential contractors. It issues licenses, per-forms
inspections related to workmanship complaints, and investigates statutory vio-lations
such as contracting without a license. As of January 2003, it reports having
over 41,000 active contractors’ licenses.1 To help consumers make informed deci-sions
about contractors, the agency provides information to the public on licensees,
including complaint histories. The agency also administers the Residential
Contractors’ Recovery Fund, which reimburses consumers for up to $30,000 in finan-cial
losses resulting from a residential contractor’s actions.
Consumer protection can be enhanced (see pages 9
through 13)
The agency needs to address three matters that limit the degree of protection it pro-vides
to consumers.
􀁺􇩆 First, the agency needs to ensure that problem contractors, such as those with
serious or multiple complaints, are disciplined. The majority of contractors do
not have complaints filed against them. However, contractors who do have com-plaints
filed against them can avoid disciplinary action by addressing the com-plaints
before the complaints progress to an administrative hearing. Although
this may satisfy the consumer, it can allow a problem contractor to continue to
operate. The agency needs to develop criteria for determining when to pursue
disciplinary action.
􀁺􇩓 Second, the agency does not report information to the public regarding the
nature of valid complaints against contractors. This information can be impor-page
i
1 One contractor may hold more than one license, therefore, this number does not represent the number of contractors.
Office of the Auditor General
SUMMARY
page ii
State of Arizona
tant to consumers when choosing a contractor. Without it, consumers are
unaware if a valid complaint concerned issues such as minor quality workman-ship
problems or more serious issues such as breach of contract or project
abandonment. The agency recently began reporting the total number of com-plaints
against a contractor, including cases where the agency did not find that
the contractor had committed a violation. Because contractors can fix problems
before an inspection happens, inspectors often cannot confirm complaints, and
consumers were unaware that a problem may have existed because the agency
did not report unconfirmed complaints.
􀁺􇩆 Finally, for several years, the agency performed “courtesy inspections”
designed to help resolve workmanship disputes between contractors and their
customers informally. In fiscal year 2002, the agency performed about 1,100 of
these inspections. During the audit, the agency discontinued this practice when
auditors informed the agency that it does not have the statutory authority to con-duct
informal complaint resolution. If the agency wishes to resume courtesy
inspections, it needs to seek statutory authority from the Legislature and develop
procedures for making the results available to all consumers.
Some Recovery Fund changes needed (see pages 15
through 21)
The Registrar of Contractors needs to change some aspects of the way it manages
the Residential Contractors’ Recovery Fund. The Legislature established the Fund to
assist consumers who suffer financial loss due to the actions of a licensed residen-tial
contractor. The Fund pays about 500 claims per year. The agency has maintained
the Fund on a pay-as-you-go basis, maintaining a sufficient cash balance to pay
claims as they come in. Although the Fund has been able to pay all claims as it
received them, it does not have enough assets to pay for all its liabilities, which
include instances where consumers have suffered losses for which they have not yet
filed a claim. Similar to casualty insurance companies, which are required to main-tain
sufficient reserves to cover claims that have not yet been reported, the Fund is
statutorily required to maintain adequate claims reserves. To establish required
claims reserves, the agency needs a $5.7 million increase in the Fund’s assets. To
resolve this situation, the agency needs to do the following:
􀁺􇩈 Hire a qualified actuary—The Fund’s obligations include claims actually
received from consumers and claims that consumers will file in the next 2
years—the length of time that consumers have to file a claim after their loss
occurs. Statutes require that the agency base these anticipated future claims on
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Office of the Auditor General
actuarial projections. However, the agency has relied on its auditor, a Certified
Public Accountant (CPA), to make the projections. These projections have con-sistently
and significantly underestimated the Fund’s anticipated claims. Further,
the agency uses the same CPA to perform projections and to audit the Fund’s
financial position, which could impair the CPA’s independence in auditing the
Fund’s financial statements. To establish proper reserves, the agency should
use a qualified actuary for the projections.
􀁺􇩁 Assess residential contractors an additional amount to make up the deficit—The
money in the Fund comes mainly from annual assessments paid by residential
contractors. To return the Fund’s fund balance to an appropriate level based on
the CPA’s most recent projections, the agency would need to levy an estimated
additional $220 assessment from each of the 26,000 contractors currently par-ticipating
in the Fund. The actual assessment could differ if the new actuarial
estimates change the size of the Fund’s deficit.
Two other changes would improve additional aspects of the Fund’s management.
One change involves discontinuing the outside CPA’s preparation of agency finan-cial
statements in nonaudit years. Statutes require that the agency have an exami-nation
of the Fund every 3 years, and the agency has hired an independent CPA to
perform the examination. The agency pays the CPA to compile financial statements
in nonaudit years as well, but CPAs already on the current staff can also complete
this task.
In addition, the Legislature should consider modifying the statute that limits the
Fund’s administrative expenses. Statutes limit the agency’s administrative expenses
to 10 percent of the Fund’s fund balance in any fiscal year. However, the Fund has
been in deficit for several years, and therefore, this approach does not work. Even if
the Fund achieves its minimum required balance of $200,000, this would only allow
an insufficient amount of $20,000 for the Fund’s administrative expenses. In fiscal
year 2002, the Fund’s operating expenses were approximately $534,000. Other sim-ilar
funds’ administrative cost limits are linked to percentages of the funds’ revenues.
Therefore, the Legislature should consider limiting the Fund’s administrative
expenses in a similar manner. However, because the Fund’s revenues are likely to
change significantly due to fee increases, an interim change may be necessary
before the Legislature makes a more permanent change to this statute.
The agency’s vehicle usage is inappropriate and ineffi-cient
(see pages 23 through 25)
The Registrar of Contractors should end its practice of providing take-home vehicles
to many of its employees and should eliminate inefficiently used vehicles. The
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State of Arizona
agency leases 65 vehicles from the Department of Administration (DOA) and assigns
nearly all of them to its employees for take-home use. During the audit, 61 of the
agency’s 145 staff had personally assigned take-home vehicles. However, this use
violates state law, is a constitutionally prohibited use of state resources, and should
be eliminated. In addition to ending the use of take-home vehicles, the agency
should also eliminate vehicles that are inefficiently used. Approximately one-third of
the agency’s vehicles are driven less than 10,000 miles per year and can be returned
to DOA. Other vehicles may also fall below this efficient-use guideline after the
agency eliminates inappropriate personal use. The agency should closely monitor
vehicle use to identify inefficiently used vehicles that could also be eliminated. By
eliminating vehicles, the agency will save resources, as well as provide monies to
support the General Fund.
pagev
Office of the Auditor General
TABLE OF CONTENTS
continued
1
9
9
9
10
11
13
15
15
16
18
19
21
23
23
24
25
Introduction & Background
Finding 1: Consumer protection can be enhanced
Agency inspects workmanship and investigates violations
Agency should discipline problem contractors
Agency should continue efforts to better inform consumers
Agency stopped unauthorized, unreported courtesy inspections
during audit
Recommendations
Finding 2: Some Recovery Fund changes needed
Fund protects consumers financially
Fund resources do not cover all liabilities
Agency should hire a qualified actuary
Other modifications needed to improve fund management
Recommendations
Finding 3: Agency’s vehicle use is inappropriate and
inefficient
Take-home vehicles are inappropriate
Many state vehicles not used efficiently
Recommendations
page vi
State of Arizona
TABLE OF CONTENTS
Sunset Factors
Agency Response
Figures:
1 Statutory Requirements to Receive a
Contracting License
2 Arizona Registrar of Contractors Office Locations
3 Recovery Fund’s Year-End Fund Deficit
Years Ended June 30, 1985, through June 30, 2002
4 Percentage Difference Between
Actual Payments and Estimated Payments
from the Recovery Fund
Fiscal Years 1993 through 2001
Tables:
1 Fees for and Number of Licenses by Contractor Type
As of January 2003
2 Operating Funds
Schedule of Revenues, Expenditures, and Changes in
Fund Balance
Years Ended June 30, 2000, 2001, and 2002
(Unaudited)
3 Residential Contractors’ Recovery Fund
Schedule of Revenues, Expenses, and Changes
in Net Assets
Years Ended June 30, 2000, 2001, and 2002
(Unaudited)
27
2
5
17
19
3
6
7
concluded
page1
Office of the Auditor General
INTRODUCTION
& BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Registrar of Contractors pursuant to a May 14, 2002, resolution of the
Joint Legislative Audit Committee. This audit was conducted as part of the Sunset
review set forth in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
Purpose and responsibilities
The Legislature created the Registrar of Contractors (agency) in 1931 (Laws 1931,
Chapter 2) to regulate construction contractors. Arizona is one of 12 states that has
a central regulatory body that regulates nearly all aspects of the construction indus-try.
Other states leave this regulation to local government or share the regulatory
responsibilities among multiple state agencies. Further, the extent of regulation varies
significantly. Some states limit regulation to certain trades such as plumbing or elec-trical
work. Other states only regulate construction projects with costs that exceed
several thousand dollars.
The agency issues both commercial and residential contracting
licenses and a dual license that allows a contractor to work on
commercial and residential properties. Within the commercial,
residential, and dual license categories are several license clas-sifications
ranging from general contracting to more than 100
specialty trade classifications such as home painting, roofing, or
tiling.
The Governor appoints the Registrar to oversee the agency’s
day-to-day operations and the administration of the Residential
Contractors’ Recovery Fund. The agency’s primary responsibilities include the fol-lowing:
􀁺􇩌 Licensing—Statutes and administrative rules establish licensing requirements
for contractors. All contractors must be licensed with some exceptions, such as
“handymen” who limit themselves to jobs valued at less than $750, including
Mission
To promote quality construction by Arizona
contractors through a licensing and regu-latory
system designed to protect the
health, safety, and welfare of the public.
page2
State of Arizona
cost of materials and labor. The agency issues licenses to contracting entities,
including construction firms and individuals who own contracting businesses as
sole proprietors. Entities must have a designated “qualifying party,” to manage
the construction aspects of the entity (see Figure 1 for licensing requirements).
Figure 1 Statutory Requirements to Receive a Contracting License
Experience
License Bond
Other Business
Requirements
Examination
License Fees
Public Posting
The Arizona Registrar of Contractors grants licenses to contracting entities. Each con-tracting
entity must designate a “qualifying party” who manages the construction
aspect of the entity. The licensure requirements are as follows:
Source: Auditor General staff analysis of A.R.S. §§32-1101 through 32-1170.03.
􀁺􇩔 The qualifying party must have worked in the
trade in which licensure is sought for at least 4
years, including 2 of the last 10 years.
􀁺􇩂 Bond amount depends on the applicant’s expected
amount of business.
􀁺􇩔 The applicant needs a surety bond, a cash bond, or
a certificate of deposit.
􀁺􇩆 For most licenses, the qualifying party must pass an
exam on knowledge of their trade and an exam on
business management skills.
􀁺􇩁 Applicant must pay an initial biennial license fee
(see Table 1, page 3).
The applicant must comply with state requirements
associated with operating a business such as:
􀁺􇩔 Transaction privilege tax number from the
Department of Revenue.
􀁺􇩗 Worker’s compensation insurance.
􀁺􇩁 A.R.S. §32-1104(B) requires the agency to publicly
post the names of first-time applicants for 20 days to
give the public an opportunity to voice concerns
about the prospective contractor.
􀁺􇩔 The agency can waive part of the posting period for
previously licensed applicants.
page3
1 One contractor may hold more than one license; therefore, this number does not represent the total number of contrac-tors.
Office of the Auditor General
The agency typically reviews and approves licenses within 4 days after receiv-ing
a complete application. After the required posting period is completed, the
agency may issue the license. As of January 2003, the agency reports having
over 41,000 active contractors’ licenses, as shown in Table 1.1
􀁺􇨠 Inspections—In addition to licensing contractors, the agency inspects licensed
contractors’ workmanship. The agency has 29 inspectors who are required to
be certified through the International Conference of Building Officials and must
have at least 2 years experience managing construction projects. Currently, the
agency performs various types of inspections including workmanship complaint
inspections as well as inspections related to Recovery Fund claims. The agency
reported handling over 10,000 complaints during fiscal year 2002. The inspec-tor
may require the contractor to fix the problem after validating a complaint.
Consumers or contractors may appeal inspectors’ decisions to the Office of
Administrative Hearings (OAH). OAH reports receiving over a total of 1,600
cases generated from the Registrar of Contractors during fiscal year 2002.
􀁺􇩉 Investigations—The agency has 26 staff who investigate statute violations such
as allegations of unlicensed contracting, abetting an unlicensed contractor,
Biennial Fee
Contractor Type Initial Renewal Number
General
Residential $ 445 $290 6,659
Commercial 890 580 5,340
Dual 1 1,105 860 1,739
Subtotal 13,738
Specialty
Residential 320 240 12,444
Commercial 645 490 10,191
Dual 1 815 730 4,972
Subtotal 27,607
Total 41,345
1 Contractors who hold a dual license are authorized to work on both commercial and
residential projects.
Source: Auditor General staff analysis of the Registrar of Contractors’ administrative rules, agency reports, and
license database as of January 2003.
Table 1 Fees for and Number of Licenses by Contractor Type
As of January 2003
page4
The agency has 11
offices state-wide.
State of Arizona
unlawful advertising, and providing false information on a license application. In
addition, investigators may perform background checks on license applicants.
Further, the agency has the authority to investigate fraudulent acts that any con-tractor
commits. Investigators must have previous training as investigators and
nearly all have law enforcement experience. In fiscal year 2002, the agency
reports that it received 2,900 cases that involved allegations of unlawful activi-ties.
􀁺􇩒 Residential Contractors’ Recovery Fund—The agency administers the
Residential Contractors’ Recovery Fund, which provides financial relief to con-sumers
who suffer a loss due to a licensed residential contractor’s actions. All
residential contractors must either self-insure through large surety bonds or
cash deposits or pay special fees to participate in the Fund. Consumers who
wish to file a claim must do so within 2 years after the loss occurred. A consumer
may recover a maximum of $30,000 per residence. Total claims against any one
license may not exceed $200,000. If the agency pays a consumer for a claim, it
suspends the contractor’s license until the contractor repays the full amount of
the claim plus interest at the rate of 10 percent per year. The Fund’s seven staff
determine the eligibility and validity of Recovery Fund claims, process claims for
payment, and seek reimbursement from contractors who have had valid claims
paid against them. The agency’s Attorney General representative provides legal
assistance in cases where claim eligibility or amounts are in dispute and when
the agency is seeking reimbursement to the Fund from contractors who have
had claims paid against them.
Staffing and budget
As of January 1, 2003, the agency was appropriated 138 full-time equivalents (FTE)
and had five vacancies. In addition, the Residential Contractors’ Recovery Fund had
7 FTE paid by residential contractors’ fund participation fees. As of January 1, 2003,
the Fund had one vacant position. The agency’s staff operate out of 11 locations
state-wide including the Phoenix central office (see Figure 2 on page 5).
As illustrated in Table 2 (see page 6), the agency generated approximately $10.5 mil-lion
in fiscal year 2002 from licensing fees, fines, and interest. Revenues from
licenses increased from approximately $6.5 million in fiscal year 2000 to more than
$10.2 million in fiscal year 2002. The agency had significantly reduced license fees in
1998, and since then, license fees have steadily increased, but are still lower than
they were in 1998. The agency deposits 90 percent of its license revenues in its oper-ating
funds to provide its services and remits the remaining 10 percent to the General
Fund along with all its revenues from administrative penalties and interest. In fiscal
year 2002, the agency remitted approximately $1.2 million to the General Fund.
page5
Office of the Auditor General
The agency administers the Residential
Contractors’ Recovery Fund (Fund) separately
from its operating funds. In addition to new or
renewal licensing fees, residential contractors pay
fund participation fees, which amount to $300 for
the initial year and $150 for the renewal years.
Although the agency collected $3.5 million for the
Fund in fiscal year 2002, the Fund has a deficit of
approximately $5.5 million for fiscal year 2002 as
shown in Table 3 (see page 7). This deficit
includes all unpaid claims, including estimated
liabilities. Finding 2 (see pages 15 through 21)
provides additional information on the Fund and
recommendations for addressing the deficit.
Audit scope and methodology
This audit focused on the Registrar of
Contractors’ efforts to protect consumers, its
management of the Residential Contractors’
Recovery Fund, and the appropriateness of
agency staff taking agency cars home. This
report includes findings and recommendations in
the following three areas:
􀁺􇨠 The Registrar of Contractors should increase the level of its consumer protec-tion.
􀁺􇩔 The Registrar of Contractors needs to change some aspects of the way it man-ages
the Residential Contractors’ Recovery Fund to resolve a large deficit and
to better protect consumers.
􀁺􇩔 The Registrar of Contractors needs to discontinue providing take-home vehicles
to its employees and eliminate inefficiently used vehicles.
Auditors used a variety of methods to study the issues addressed in this report:
􀁺􇩔 To determine the extent to which the agency protects the public, auditors inter-viewed
agency staff, the State Ombudsman—Citizen’s Aide, legislative staff
members, and the agency’s Attorney General representative. Auditors also
reviewed internal agency documents presented by agency staff. For example,
auditors reviewed a sample of the agency’s recent special investigation files to
determine the types of cases that the agency’s Investigations Department
􀁺􇩐Phoenix
(Headquarters)
Glendale
􀁺􇨀
􀁺􇩍
Mesa
Tucson
􀁺􇩓
Sierra Vista
􀁺􇩙
Yuma
􀁺􇨀
􀁺􇩌Lake
Havasu
Kingman
􀁺􇩐 Prescott
􀁺􇩆
Flagstaff
􀁺􇩓
Showlow
􀁺􇩆
Figure 2 Arizona Registrar of Contractors
Office Locations
Source: The Arizona Registrar of Contractors.
page6
State of Arizona
Table 2 Operating Funds 1
Schedule of Revenues, Expenditures, and Changes in Fund Balance
Years Ended June 30, 2000, 2001, and 2002
(Unaudited)
2000 2001 2002
Revenues:
Licenses 2 $6,489,426 $8,144,321 $10,239,970
Fines, forfeits, and penalties 231,292 288,766 275,056
Interest 43,941 53,142 27,123
Other 16,248 14,184 12,731
Total revenues 6,780,907 8,500,413 10,554,880
Expenditures: 3
Personal services and employee-related 4,665,270 5,197,756 5,651,820
Professional and outside services 48,662 32,701 65,311
Travel 223,560 414,775 435,294
Other operating 1,073,172 1,315,532 1,342,693
Equipment 646,954 530,542 140,632
Total expenditures 6,657,618 7,491,306 7,635,750
Excess of revenues over (under) expenditures 123,289 1,009,107 2,919,130
Other financial uses:
Net operating transfers out 4 835,120 808,795 832,610
Remittances to the State General Fund 5 833,033 1,038,377 1,210,397
Total other financial uses 1,668,153 1,847,172 2,043,007
Excess of revenues over (under) expenditures
and other financing uses (1,544,864) (838,065) 876,123
Fund balance, beginning of year 6,038,308 4,493,444 3,655,379
Fund balance, end of year $4,493,444 $3,655,379 $ 4,531,502
1 This schedule excludes the financial activity of the Cash Bond Fund since the Registrar is only a custodian of these monies. In
addition, it excludes the financial activity of the Residential Contractors’ Recovery Fund, which is reported separately in Table 3
(see page 7).
2 Increases in recent years result from the agency steadily increasing fees since 1998, when the agency significantly reduced
fees.
3 Includes administrative adjustments from the prior year.
4 Consists primarily of operating transfers to the Office of Administrative Hearings for services it provided.
5 As a 90/10 agency, the agency remits all of its interest, administrative penalties, and 10 percent of all other revenues to the
State General Fund.
Source: Auditor General staff analysis of the Arizona Financial Information System Revenues and Expenditures by Fund, Program,
Organization, and Object and Trial Balance by Fund reports for the years ended June 30, 2000, 2001, and 2002.
page7
Office of the Auditor General
Table 3 Residential Contractors’ Recovery Fund
Schedule of Revenues, Expenses, and Changes in Net Assets
Years Ended June 30, 2000, 2001, and 2002
(Unaudited)
2000 2001 2002
Revenues:
Initial and renewal fees earned 1 $ 3,456,692 $ 3,648,725 $ 3,467,083
Civil penalties 9,000 800 9,475
Total operating revenues 3,465,692 3,649,525 3,476,558
Loss expense:
Current-period claims 2 2,769,892 3,100,130 3,979,222
Adjustment for prior periods 3 (375,747) 990,696 780,813
Repayments and recoveries 4 (466,855) (256,845) (290,447)
Net loss expense 1,927,290 3,833,981 4,469,588
Net operating revenues 1,538,402 (184,456) (993,030)
Other operating expenses:
Personal services and employee-related 344,042 382,573 392,484
Professional and outside services 5,500 8,500 6,461
Equipment 88,670 67,070 61,910
Other 83,114 73,731 73,464
Total other operating expenses 521,326 531,874 534,319
Net operating profit (loss) 1,017,076 (716,330) (1,527,349)
Other income:
Interest 290,309 413,484 228,085
Increase (Decrease) in net assets 1,307,385 (302,846) (1,299,264)
Restricted net asset deficit, beginning of year 5 (5,193,756) (3,886,371) (4,189,217)
Restricted net asset deficit, end of year 5 $(3,886,371) $(4,189,217) $(5,488,481)
1 Amounts are fees assessed on each individual applicant for a residential contractor license in accordance with A.R.S.
§32-1132.
2 Amounts are awards for damages resulting from a contractor’s violation of statutes. Awards are limited to $20,000 per
claim and $100,000 per contractor. As of September 1, 2002, limits were increased to $30,000 per claim and $200,000
per contractor.
3 Amounts are adjustments of estimated losses reported as expenses in prior years.
4 Amounts are reimbursements from contractors seeking to have suspended licenses reinstated after payments were
made from the Fund on their behalf.
5 Amounts for 2000 and 2001 were previously reported as fund equity and have been restated as net assets for
comparability purposes.
Source: Auditor General staff analysis of the Arizona Registrar of Contractors Residential Contractors’ Recovery Fund
Financial Statements for the year ended June 30, 2000, audited by an independent Certified Public Accountant,
and Residential Contractors’ Recovery Fund Financial Statements for the years ended June 30, 2001 and 2002,
compiled by an independent Certified Public Accountant.
addressed. Auditors also reviewed state statutes and administrative rules to
determine the legal basis for various agency procedures. Finally, auditors
reviewed the agency’s Web site as well as other regulatory agencies’ Web sites
to determine whether the agency should provide the nature of valid complaints
against licensed contractors on its Web site.
􀁺􇩔 To determine whether the agency appropriately estimates potential liabilities and
maintains adequate assets in the Recovery Fund, auditors reviewed state laws,
accounting standards, and Recovery Fund policies and procedures. In addition,
auditors reviewed Recovery Fund accounting practices, internal management
reports, contracts for financial services, and financial statements since 1985,
and literature regarding other similar funds to evaluate the agency’s manage-ment
of the Fund. Auditors also reviewed working papers related to the
Recovery Fund that were prepared by the agency’s contracted Certified Public
Accountant. Further, auditors consulted with representatives of international and
regional actuarial organizations and the Arizona Department of Insurance to
identify recommendations for improvement.
􀁺􇨠 To determine whether agency vehicle use is efficient and appropriate, auditors
reviewed the State Constitution and pertinent statutes and rules regarding the
legality of providing take-home vehicles to agency employees. In addition, audi-tors
reviewed agency vehicle reports and documents provided by the
Department of Administration and interviewed agency and Department of
Administration staff.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Registrar and his staff for
their cooperation and assistance throughout the audit.
page8
State of Arizona
Consumer protection can be enhanced
The agency inspects contractor workmanship when consumers file complaints and
investigates violations of its statutes such as contracting without a license, but the
agency needs to address three matters that limit the degree of protection that it pro-vides
to consumers. First, the agency needs to ensure that problem contractors,
such as those with serious or multiple complaints, are disciplined. Second, the
agency should report more complaint information to the public to better protect con-sumers.
Finally, if the agency wishes to resume its recently discontinued practice of
conducting “courtesy inspections” to informally resolve disputes between contrac-tors
and customers, it needs to obtain the necessary statutory authority and take
steps to make this information available to the public.
Agency inspects workmanship and investigates violations
The agency performs inspections of contractors’ workmanship when consumers file
complaints and investigates violations of its statutes such as contracting without a
license, abetting an unlicensed contractor, unlawful advertising, and providing false
information on a license application. According to its fiscal year 2002 performance
measures, the agency reduced the average number of days it takes between receiv-ing
a workmanship complaint to conducting a jobsite inspection from 37 days in fis-cal
year 2000 to 17 days. Additionally, 79 percent of complainants reported that the
agency provided excellent service. Further, related to investigating allegations of vio-lations
of its statutes, the agency reports that in fiscal year 2002, it took an average
of 8 days to complete an investigation once receiving an allegation. This was
reduced from an average of 18 days in fiscal year 2000.
Agency should discipline problem contractors
The agency should ensure that problem contractors, such as those with serious or
multiple complaints, are disciplined. A large majority of contractors, regardless of the
page9
Office of the Auditor General
FINDING 1
volume of work they perform, have not had complaints filed against them in the past
2 years. However, contractors who do receive complaints can avoid discipline by
addressing problems before their disciplinary hearing date, and can therefore com-mit
multiple violations and go undisciplined. The agency needs to develop criteria for
identifying and disciplining problem contractors.
Most contractors never receive complaints—Only about 8 percent of all
licenses have had complaints filed against them in the past 2 years. Further, only a
few ever receive multiple complaints against their license in a 2-year period. For
example, during the time period from September 2000 through September 2002,
only 490 licenses had three or more complaints filed against them.
Contractors who commit violations may avoid discipline—When an
inspector confirms a complaint, the agency sends the contractor an order to correct
the violation. If the contractor corrects the problem at any time prior to a disciplinary
hearing, the complainant may tell the agency to close the complaint. When a com-plaint
is closed in this manner, the contractor is not disciplined for the violation. This
process allows contractors to commit multiple violations but never receive discipline.
While the complainant may be satisfied, this process fails to protect future con-sumers
who may hire such a contractor.
Agency can do more to ensure problem contractors receive disci-pline—
The agency can keep complaints open regardless of whether or not the orig-inal
complainant has dropped the complaint, but rarely does so. Keeping a com-plaint
open ensures that a contractor faces a disciplinary hearing. Additionally, the
agency has the authority to summarily suspend a contractor’s license for very seri-ous
problems that imminently threaten public safety, such as failing to meet basic
electrical or plumbing standards. However, the agency has not established criteria for
when it should use summary suspensions, and agency officials could not recall the
last time the agency issued a summary suspension.
The agency should establish criteria for when it should pursue disciplinary action.
Criteria should consider such factors as the severity of an individual complaint, the
amount of money likely needed to correct problems, or the number of previously
received complaints. For example, the agency could establish criteria to help inspec-tors
identify individual workmanship violations that are serious enough to warrant
license suspension, revocation, or other discipline.
Agency should continue efforts to better inform con-sumers
The agency could better protect consumers by reporting more complaint information
to the public through its phone center and on its Web site.
page10
Contractors can avoid
discipline.
State of Arizona
Nature of complaints is not readily available—Currently, the agency reports
the number of complaints each contractor has received in the past 2 years through
its phone center and on its Web site. However, because the agency does not cur-rently
record information about the nature of complaints on its database, it does not
report this information. Instead, consumers who wish to know the nature of com-plaints
must visit one of the agency’s 12 offices and review complaint files them-selves.
This information can be important to consumers when choosing a contractor.
Without this information, a consumer is unaware if a valid complaint concerned
issues such as minor quality workmanship problems or more serious issues such as
breach of contract or project abandonment. Having to visit one of the agency’s
offices to obtain such information can significantly inconvenience consumers, espe-cially
in rural areas. The agency reports that in fiscal year 2002, it received nearly
230,000 inquiries to its phone center and over 248,000 hits on its Web site. Other
state regulatory agencies make the nature of valid complaints available by telephone
and on their Web sites. For example, the Board of Technical Registration, the Board
of Psychologist Examiners, and the Arizona Medical Board all offer an explanation of
the violation that led to a licensee’s discipline. According to agency staff, the agency
would need to add this information to its database before it could easily share it with
the public, and it has the resources to do so, but this would be a difficult and time-consuming
process.
Agency should report all complaints—Prior to the audit, the agency did not
report the number of unconfirmed complaints to the public but recently began to do
so. Prior to this change, if an inspector did not find that a contractor had committed
a violation, the complaint was classified as unconfirmed, and the agency did not
report the number of unconfirmed complaints to the public. Reporting this informa-tion
is important because contractors can fix problems before an inspection, and as
a result, inspectors often cannot confirm complaints. Without reporting the number
of unconfirmed complaints, members of the public would be unaware that a problem
may have ever existed and therefore, this practice deprived the public of useful infor-mation
when choosing a contractor. Agencies such as the Arizona Medical Board
report to the public the number of unsubstantiated complaints. In February 2003, the
agency began publicly reporting all complaints, including cases where an inspector
could not identify that a contractor committed a violation.
Agency stopped unauthorized, unreported courtesy
inspections during audit
During this audit, the agency stopped conducting informal “courtesy inspections”
that it did not have statutory authority to perform. The agency would like to begin con-ducting
these inspections again. However, it first needs to obtain statutory authority
and should make the inspections more valuable to consumers in general.
page11
Office of the Auditor General
Courtesy inspections
are not authorized by
statute.
Courtesy inspections were informal, unreported efforts to resolve
disputes—Courtesy inspections were an informal step to resolve disputes
between contractors and consumers. According to the agency, they began in the
1980s because contractors wanted a method of resolving workmanship issues with-out
receiving formal complaints. Either the contractor or the consumer could request
a courtesy inspection. An agency inspector would assess the quality of work com-pared
to workmanship standards and issue a nonbinding opinion. If both parties
were satisfied, the matter was resolved without a formal complaint and did not
become part of the contractor’s record. In fiscal year 2002, the agency performed
approximately 1,100 courtesy inspections. Auditors could not assess these inspec-tions’
results due to the limited data the agency maintained about them.
Agency lacks statutory authority for courtesy inspections—While the
agency considered these inspections a public service that addressed simple work-manship
issues in a more timely manner than formal inspections, it does not have
the statutory authority to conduct them. A.R.S. §32-1154(B) authorizes the agency to
investigate a contractor’s acts on its own motion or when any person files a written
complaint. However, courtesy inspections were not initiated by a written complaint or
on the motion of the agency, but by a consumer or contractor’s informal request.
Further, there is no process for informal complaint resolution such as courtesy
inspections outlined elsewhere in the agency’s statutes or in its administrative rules.
The agency discontinued courtesy inspections after auditors identified this lack of
statutory authority. However, the agency continues to believe that these inspections
are a valuable service and would like to resume offering them. To do so, the agency
needs to seek and obtain statutory authority from the Legislature.
Public disclosure of results needed—A second problem with courtesy
inspections was that because the results were not publicly reported, other con-sumers
could not use the information in choosing a contractor. The lack of report-ing
creates a situation where contractors who want to avoid valid complaints on
their records could suggest courtesy inspections when problems arise, and then
fix any problems that an agency inspector may have identified. Consequently,
while the specific consumer may be helped, other consumers are deprived of
helpful information in choosing a contractor. If the agency obtains statutory
authority to resume courtesy inspections, it should better protect the public by
reporting the results of the courtesy inspections in the same manner as other
inspection results.
page12
State of Arizona
Recommendations
1. The Registrar of Contractors should develop criteria for determining when it
should pursue discipline against contractors with serious or multiple complaints.
2. The Registrar of Contractors should make the nature of valid complaints avail-able
to consumers through its phone center and Web site.
3. If the Registrar of Contractors wishes to reintroduce courtesy inspections, it
should seek statutory authority from the Legislature and make the results avail-able
to all consumers.
page13
Office of the Auditor General
page14
State of Arizona
page15
Office of the Auditor General
Some Recovery Fund changes needed
The Registrar of Contractors needs to change some aspects of the way it manages
the Residential Contractors’ Recovery Fund. The Legislature established the Fund to
assist consumers who suffer financial loss due to the actions of a licensed residen-tial
contractor. There are two main problems with the Fund’s long-term ability to meet
this goal. First, although statute requires the Fund to have sufficient resources to
cover all liabilities, the Fund’s assets are only about half the current estimate of the
Fund’s total liabilities. Second, the estimated liabilities themselves are likely to be
understated. To resolve these issues, the Registrar needs to hire an actuary to
develop better estimates of potential liabilities and then increase the Fund’s assets
to meet them. Further, the agency could use its own staff to compile financial state-ments
in nonaudit years to save money, and the Legislature should consider estab-lishing
a more appropriate method of setting limits on the Fund’s administrative
costs.
Fund protects consumers financially
The Legislature established the Residential Contractors’ Recovery Fund in 1981 to
provide recourse to consumers who have suffered a financial loss due to the actions
of a licensed residential contractor. Such consumers can recover the actual dam-ages
they suffered up to 2 years after the loss occurred. Fund payouts are limited to
$30,000 per consumer and $200,000 for the life of a contractor’s license.1 In fiscal
year 2002, the agency reports that the Fund paid approximately $3.9 million for 515
claims. Agency reports show that in fiscal year 2002 the low and high monthly aver-age
time to process a Recovery Fund claim was 114 to 153 days.
The Fund’s revenues come mainly from annual fees paid by residential contractors.
All residential contractors are required to participate in the Fund unless they can
show that they are able to maintain financial resources in an amount of at least
The Fund provides
financial protection to
consumers.
1 Laws 2002, Ch. 179 §§1 and 5 increased the limit on the amount an individual consumer can claim from $20,000 to
$30,000 and the amount that the Fund can pay against one contractor license from $100,000 to $200,000, effective
September 1, 2002. Based on the agency’s payout data, the new limits appear to provide greater coverage to more con-sumers
with approved claims.
FINDING 2
page16
State of Arizona
$200,000, and as of November 2002, only one residential contractor did not partici-pate
in the Fund. The agency determines the fee amounts annually based on pro-jected
needs. Currently, the fees are $300 for the initial year of licensure and $150
each ensuing year. A.R.S. §32-1132(B) limits these fees to $600 per contractor in any
2-year period. In addition, the Fund earns interest income and recovers some money
from contractors or their bonding companies after the Fund has paid a claim against
them. Statute requires contractors to reimburse the Fund for the actual amount paid
on claims against them plus interest at the rate of 10 percent per year before the
agency can reinstate their license. In fiscal year 2002, the Fund’s revenues and inter-est
totaled approximately $3.7 million.
Fund resources do not cover all liabilities
The Agency has operated the Fund on a pay-as-you-go basis, maintaining a suffi-cient
cash balance to pay claims as they come in rather than on the basis of main-taining
sufficient resources to cover all liabilities. The Fund has been able to pay all
valid claims using the pay-as-you-go basis; however, Arizona statute requires the lat-ter
approach. As of June 30, 2002, total liabilities, which include both submitted
claims and estimates of claims that will be submitted within the next 2 years, totaled
$11.6 million, but the Fund’s total assets were only $6.1 million. To comply with
statute and ensure it can continue to protect consumers, the agency needs to
increase the Fund’s fund balance so that it has enough reserves to cover all of its lia-bilities.
Fund has large deficit—According to the Fund’s financial statements, the Fund
had an approximate $5.5 million deficit as of June 30, 2002, and has had a deficit
since 1985. Although as of June 30, 2002, the Fund had cash and other assets of
approximately $6.1 million and has been able to pay all its past valid claims, its total
estimated liabilities totaled approximately $11.6 million. These liabilities include actual
claims and estimates of claims that will likely be filed in the next 2 years. A primary
reason for the deficit is management’s decision to set fees sufficient to pay claims as
they are due rather than assessing fees to cover all liabilities of the Fund. A.R.S. §32-
1134(A)(2) requires the Registrar to set these fees based on an actuarial projection
of anticipated claims. While the agency hires a Certified Public Accountant (CPA) to
make these projections, the agency has not set fees high enough to allow it to pay
all claims it will likely have to pay (see Figure 3, page 17).
Statutes and good business practices require claims reserves—The
Fund’s statutes and insurance industry standards require that the Fund establish
resources sufficient to cover all liabilities. A.R.S. §§32-1134(A)(1) and (3) require the
agency to maintain the Fund’s fund balance at a minimum of $200,000 and to
“establish claims reserves based on the incurral date of claims.” Because con-sumers
have up to 2 years to file a claim after suffering a loss, the Fund must main-
The Fund has been in
deficit since 1985.
The Fund lacks ade-quate
claim reserves.
page17
Office of the Auditor General
tain resources sufficient to pay for all valid claims resulting from such losses in the
past 2 years, even if the losses have not yet been reported.
Although statutes could be changed to allow the Fund to operate on a cash pay-as-you-
go basis, good business practices call for establishing appropriate claims
reserves. Auditors interviewed representatives of the Arizona Department of
Insurance who stated that the Fund should function similar to casualty insurance
companies. Casualty insurance companies are required to maintain reserves for all
claims, including claims that have not yet been reported.
Maintaining appropriate reserves has three main benefits:
􀁺􇩂 Better consumer protection—Establishing claims reserves will better ensure suf-ficient
funds to pay all valid claims. Severe economic difficulty could cause the
number of valid claims to increase as contractors go out of business with par-tially
completed jobs. Additionally, if the Fund were terminated, claims reserves
would provide sufficient resources to pay all valid claims resulting from contrac-tor
actions.
􀁺􇩆 Fairness to contractors—Assessing sufficient fees to establish claims reserves
better correlates contractors’ responsibilities with the future costs of claims
resulting from their actions. Similar to insurance premiums, contractor fees are
pooled to cover acts of the current group of residential contractors. Without
claims reserves, future contractors can be assessed larger fees to make up for
past contractors who did not pay high enough fees to cover their own risks.
-$5.5
-$4.2
-$3.9
-$5.2
-$4.8
-$3.3
-$1.2
-$1.0
-$2.0
-$4.4
-$2.6
-$5.4
-$4.2
-$3.6
-$3.4
-$3.4
-$4.7
-$1.8
-$6
-$5
-$4
-$3
-$2
-$1
$0
In Millions
Figure 3 Recovery Fund’s Year-End Fund Deficit
Years Ended June 30, 1985, through June 30, 2002
Source: Auditor General staff analysis of the Recovery Fund’s financial statements for fiscal years 1985 through
2002 compiled annually and audited triennially by a contracted CPA firm.
1985 1987 1989 1991 1993 1995 1997 1999 2001
page18
State of Arizona
􀁺􇩉 Increase investment revenue—By maintaining claims reserves sufficient to
cover all of the Fund’s liabilities, the agency would earn additional investment
income, which could help keep the Fund’s participation fees lower. In fiscal year
2002, the Fund’s financial records show it always had a monthly cash balance
of at least $5.7 million and earned approximately $228,000 in investment income
that year. Increasing the Fund’s claims reserves would provide additional invest-ment
income that could be used to pay its liabilities.
Agency should reassess contractors to resolve the Fund’s deficit—
When the Fund’s fund balance drops below $200,000, A.R.S. §32-1134.01 requires
the agency to make reassessments against all contractors participating in the Fund
in order to bring the fund balance back to the minimum required level. For example,
auditors estimate that the agency would need to reassess roughly $220 from each
of the approximately 26,000 contractors currently participating in the Fund to resolve
the Fund’s estimated deficit of approximately $5.5 million and to achieve the Fund’s
statutorily required $200,000 fund balance. However, before the agency can deter-mine
the exact amount to reassess contractors, it must first be certain that it has
accurately determined the size of its deficit. As the next section of this finding dis-cusses,
current estimates of the Fund’s liabilities may be substantially understated.
Agency should hire a qualified actuary
For several reasons, the agency needs to hire a qualified actuary to project the
Fund’s future liabilities.
􀁺􇩆 First, A.R.S. §32-1134(A)(2) requires the agency to set fund participation fees
using actuarial projections. Instead, the agency relies on its auditor, an external
CPA who is not a qualified actuary, to prepare an annual projection of anticipated
claims. According to several actuaries interviewed during the audit, CPAs with-out
actuarial training are not qualified to produce actuarial projections.
􀁺􇩓 Second, while using a CPA rather than a qualified actuary, the Fund’s anticipated
claims were underestimated by 23 percent or more seven times between 1993
and 2001 (see Figure 4, page 19). In 1995, claims were underestimated by
approximately 95 percent.
􀁺􇨠 Finally, hiring an actuary would also allow the agency to discontinue having the
contracted CPA audit his own projections of anticipated claims, which could
impair his independence.
Hiring an actuary may increase administrative costs as actuaries charge between
$250 and $300 per hour for their services, and one actuary estimated that actuarial
costs for the Fund could exceed $20,000 in the first year. However, this would only
The agency needs to
reassess fees from con-tractors.
page19
Office of the Auditor General
39%
-37%
-95%
-76%
-53%
-33%
7%
-23%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
Percentage Difference Between
Actual Payments and Estimated Payments
from the Recovery Fund1
Fiscal Years 1993 through 2001
Figure 4
1 Negative numbers indicate more paid out than the estimate.
Source: Auditor General staff analysis of the Recovery Fund’s financial statements for fiscal
years 1993 through 2001 compiled annually and audited triennially by a contracted
CPA firm.
1993 1995 1997 1999 2001
increase the Fund’s total administrative costs—which in fiscal year 2002 were
approximately $534,000—by about 4 percent. Further, costs could decline in subse-quent
years after the actuary develops a model for projecting the claims. More impor-tant,
hiring an actuary would help ensure that the millions of dollars in fund liabilities
are projected more accurately.
Other modifications needed to improve fund manage-ment
In addition to modifying the Fund’s practice of accounting for and estimating future
claims, two additional modifications are needed to improve fund management.
Agency employees can perform some contracted work—Agency
employees can perform some accounting functions currently contracted out to the
agency’s CPA. The agency contracts with a CPA to audit the Fund once every 3
years. However, the agency also pays the contracted CPA in nonaudit years to com-pile
financial statements that are filed with the Department of Insurance. These non-
page20
State of Arizona
audit-year financial statements are primarily compilations of data assembled from the
State’s accounting system as well as some additional work. At least two agency staff
members who are CPAs could perform all of this work, reducing the contract fees
provided to the external CPA (currently $6,500 per year in nonaudited years for both
the compilations and the projections of anticipated claims).
Legislature should modify the Fund’s administrative expense
statute—The Legislature should consider modifying statute to establish a more
appropriate method of setting limits on the Fund’s administrative costs. A.R.S. §32-
1134(A)(7) requires the agency to limit these administrative expenses to 10 percent
of the Fund’s fund balance. However, the Fund has been in deficit for several years
and therefore, calculating administrative expenses on the fund balance would pro-vide
no money for administering the Fund. Additionally, even if the Fund did maintain
its required $200,000 balance, it would only provide $20,000 for administrative
expenses. This amount would be insufficient. In fiscal year 2002, the Fund’s operat-ing
expenses were approximately $534,000. The administrative limits for other funds
with administrative expense limits, such as the State Assurance Fund for cleaning up
leaking underground storage tanks and the State Lottery Fund, are linked to annual
revenues. For example, the State Lottery must limit its administrative costs to 18.5
percent of its gross revenues.
Linking the Fund’s administrative expense limit to a percentage of revenue the Fund
received during the previous fiscal year would provide a sufficient amount of money
for administrative expenses for the Fund while reflecting its workload; however, it is
unclear what that percentage should be. During fiscal years 2000 to 2002, the Fund’s
expenses ranged from 14.6 percent to 18.3 percent of the Fund’s revenues from the
previous fiscal year. If the Fund’s fiscal year 2003 administrative expenses had been
limited to 15.5 percent of the previous year’s revenue, the Fund would have had
nearly $539,000 for administrative expenses, slightly more than it spent in fiscal year
2002. However, because the Fund’s participation renewal fees were changed in July
2002 to accommodate increases in claims limits, it is unclear what the Fund’s rev-enue
will be. Therefore, it may be necessary to revisit the issue of the Fund’s admin-istrative
cost limits during the 2004 regular legislative session when a complete fiscal
year’s revenue figures are available under the new fee amount. In the meantime, the
Legislature should consider amending A.R.S. §32-1134(A)(7) to limit the Fund’s
administrative expenses to a percentage of the Fund’s revenues from the previous
fiscal year. Additionally, in September 2003, 1 year after the fee increases and claims
limits were increased, the agency should report its revenues and administrative costs
to the Joint Legislative Budget Committee staff to help the Legislature determine if it
should consider any additional changes to the Fund’s administrative expense limit
statute.
page21
Office of the Auditor General
Recommendations
1. The Registrar of Contractors should ensure that the Residential Contractors’
Recovery Fund’s balance is sufficient to account for all financial liabilities, includ-ing
anticipated claims, to comply with A.R.S. §32-1134.
2. The Registrar of Contractors should contract with a qualified actuary to project
anticipated future claims and to help set appropriate fee amounts necessary to
establish sufficient claim reserves.
3. After the actuary has determined the estimate for anticipated future claims, the
Registrar of Contractors should comply with A.R.S. §32-1134.01 by reassessing
all licensed residential contractors in Arizona who have paid into the Fund to
resolve the Fund’s deficit and to achieve the Fund’s statutorily required $200,000
fund balance.
4. The Registrar of Contractors should use its own internal Certified Public
Accountants (CPAs) to compile and produce the Recovery Fund’s annual finan-cial
statement in nonaudit years and discontinue paying its contracted CPA for
these services.
5. The Legislature should consider amending A.R.S. §32-1134(A)(7) to limit the
Fund’s administrative expenses to a percentage of the Fund’s revenues from the
previous fiscal year to enable the Fund to cover its 2003 and 2004 fiscal year
administrative expenses.
6. In September 2003, 1 year after the fee increases and claims limits were
increased, the Registrar of Contractors should report its revenues and adminis-trative
costs to the Joint Legislative Budget Committee staff to help the
Legislature determine if it should consider any additional changes to the Fund’s
administrative expense limit statute.
page22
State of Arizona
page23
1 The former director discontinued using a take-home vehicle on February 1, 2003.
Office of the Auditor General
Agency’s vehicle use is inappropriate and ineffi-cient
The Registrar of Contractors should stop providing take-home vehicles to many of its
employees and should eliminate inefficiently used vehicles. The agency leases 65
vehicles from the Department of Administration (DOA) and assigns nearly all of them
to its employees for take-home use. However, this use violates state law, is a consti-tutionally
prohibited use of state resources, and should be eliminated. The agency
should also eliminate vehicles that are inefficiently used and should reevaluate future
usage to identify any additional inefficiencies. By eliminating vehicles, the agency will
save resources, as well as provide monies to the General Fund.
Take-home vehicles are inappropriate
Since 1985, the agency has provided personally assigned take-home vehicles to
many of its employees, but this practice violates statute and the State Constitution.
A.R.S. §38-538.02 forbids using state vehicles for personal uses, such as commut-ing
to and from an employee’s residence, unless the employee is on duty during the
time the employee is at home. However, during the audit, 61 of the agency’s 145
employees, including 12 administrators such as the former director and deputy direc-tor,
had personally assigned take-home vehicles. In addition to violating statute, the
take-home use of these vehicles constitutes a gift of public resources, in violation of
the State Constitution, because this use of state vehicles is not necessary for state
business and allows employees to avoid costs such as car payments, insurance,
fuel, and maintenance. The agency discontinued providing take-home cars to 11
administrators in November 2002 when auditors identified the impropriety of this use.
However, as of March 18, 2003, 49 employees still had personally assigned take-home
vehicles.1 The agency should immediately end its practice of providing take-home
vehicles to its employees.
FINDING 3
Take-home vehicles vio-late
statute and the
State Constitution.
page24
State of Arizona
Many state vehicles not used efficiently
The agency also needs to eliminate inefficiently used vehicles and better monitor the
use of all its vehicles to prevent abuse and ensure that vehicles are used efficiently.
Doing so will save agency resources and provide monies to the General Fund.
One-third of the agency’s vehicles do not meet efficient use stan-dards—
According to DOA representatives, a fleet vehicle should be used a mini-mum
of 10,000 to 15,000 miles per year to justify the cost of acquiring and main-taining
it. However, from October 1, 2001, to September 30, 2002, 22 of the agency’s
65 vehicles were driven fewer than 10,000 miles. Other options such as using State
Motor Pool vehicles or reimbursing employees for personal mileage are more effi-cient
than maintaining a fleet vehicle used for fewer than 10,000 miles. For example,
the cost to operate each of these 22 vehicles ranged from 59 cents to $1.22 per mile,
which is significantly more costly than the State’s travel reimbursement rate of 34.5
cents per mile when a state employee uses his or her own vehicle. The agency
should return these 22 vehicles to DOA.
After eliminating take-home use, many other vehicles may also be
used inefficiently—In addition to the 22 vehicles that did not meet DOA’s efficient
use standard, an additional 27 vehicles were used between 10,000 and 15,000 miles
during that same period. Once personal commuting miles are eliminated, the agency
needs to monitor the use of these vehicles, and in January 2004 it should eliminate
any of these vehicles that are used fewer than 10,000 miles per year.
Agency should better monitor its use of vehicles—The agency does not
require employees to track or report the mileage they place on their assigned vehi-cles.
Requiring detailed mileage reports on all vehicles would have two benefits. First,
it would help prevent employees’ inappropriate personal usage of state vehicles.
Second, it would help the agency identify how employees use vehicles and whether
or not that use is efficient or practical. DOA recently recommended that the agency
require its employees to maintain detailed mileage logs for these purposes. Closely
monitoring vehicle usage will also better enable the agency to identify inefficiently
used vehicles to eliminate.
Eliminating vehicles will save resources—Eliminating some of its vehicles will
save the agency’s resources as well as provide some financial benefits beyond the
agency itself.
􀁺􇩓 Save agency resources—In fiscal year 2002, the agency paid more than
$127,500 for leasing, maintaining, and providing fuel for its 22 inefficiently used
vehicles.
Twenty-two agency vehi-cles
were not used effi-ciently.
Additional vehicles may
not meet the efficient-use
standard.
page25
Office of the Auditor General
􀁺􇨠 Other benefits to the State—First, the returned vehicles could potentially be
reassigned to other agencies, reducing the need for new fleet acquisitions or
allowing DOA to use them as replacements for older vehicles. As of September
2002, no vehicle in the agency’s fleet was older than the 1997 model year, mean-ing
that DOA would likely rotate the returned vehicles into other agencies’ fleets
and in exchange receive older vehicles. Second, DOA sells vehicles that are not
reassigned, and the proceeds are deposited in the General Fund. In fiscal year
2002, the State received an average of $3,066 from each vehicle sold. If DOA
sold 22 vehicles at this average return, the General Fund would receive approx-imately
$67,000.1
Recommendations
1. To comply with A.R.S. §38-538.02, the Registrar of Contractors should immedi-ately
end its policy of providing personally assigned take-home vehicles to its
staff.
2. The Registrar of Contractors should return its 22 vehicles that were driven fewer
than 10,000 miles in the past year to the Department of Administration.
3. The Registrar of Contractors should monitor the efficiency of all vehicles that had
been driven for employees’ personal commutes to and from work, and in
January 2004, it should eliminate any of these vehicles that fall below the effi-cient-
use guideline of 10,000 miles per year.
4. To ensure that its vehicles are appropriately and efficiently used in the future, the
Registrar of Contractors should better monitor their use by requiring detailed
mileage reports on all vehicles.
1 Normally, a portion of vehicle sale proceeds goes to the Department’s Motor Pool Revolving Fund. However, beginning
in June 2002, Laws 2002, Chapter 327 §117 required that all proceeds that would usually go to the Motor Pool Revolving
Fund must instead go to the General Fund.
page26
State of Arizona
page27
Office of the Auditor General
In accordance with A.R.S. §41-2954, the Legislature should consider the following 12
factors in determining whether to continue or terminate the Arizona Registrar of
Contractors (agency).
1. Objective and purpose in establishing the agency.
The Legislature established the Arizona Registrar of Contractors in 1931. Its mis-sion
is to “promote quality construction by Arizona contractors through a licens-ing
and regulatory system designed to protect the health, safety, and welfare of
the public.”
The Registrar of Contractors regulates contractors by licensing commercial and
residential contractors, inspecting workmanship complaints filed by consumers,
and investigating violations of its statutes such as contracting without a license,
illegal advertising, and fraudulent acts committed by licensed contractors. The
agency also administers the Residential Contractors’ Recovery Fund, which pro-vides
recourse to consumers who suffer financial losses related to licensed res-idential
contractors’ work.
2. The effectiveness with which the agency has met its objective and purpose and
the efficiency with which the agency has operated.
The agency has fulfilled its responsibilities effectively and efficiently in many
areas, but has inefficiently used many state vehicles. The agency’s licensing,
inspections, complaint handling, and Recovery Fund payout functions all
appear to be done in a timely manner. For example, between September 2000
and August 2002, the monthly average time the agency took to approve a
license was usually less than 4 days. Approved license applicants must then be
posted publicly in newspapers to allow the public to notify the Registrar of
Contractors of any concerns they would have with a particular individual or
company being licensed. License applicants are required to be posted for 20
days unless they previously have had a license, in which case the agency can
SUNSET FACTORS
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State of Arizona
waive part of all of the posting period. The agency issues a license following the
required posting period.
The agency states that much of its effectiveness and efficiency in this area is due
to document imaging technology it has implemented in recent years. The
agency electronically stores nearly all documents associated with license appli-cations,
Recovery Fund claims, and some other functions. This allows staff to
easily access files at their workstations, and the agency states that this has been
instrumental in reducing its processing times, particularly in its licensing depart-ment.
The agency needs to improve its efficiency related to its use of state vehicles.
The agency currently leases 65 vehicles from the Department of Administration
(DOA), but many of those vehicles do not meet DOA’s standard for efficient use
and should be eliminated. According to representatives from DOA, a fleet vehi-cle
should be used a minimum of 10,000 to 15,000 miles per year to justify the
cost of acquiring and maintaining it. However, from October 1, 2001, to
September 30, 2002, 22 of the agency’s vehicles were driven fewer than 10,000
miles. In addition to these 22 vehicles, the agency is likely to find that several
other vehicles will not meet the efficient use standard in the future. These vehi-cles
were driven over 10,000 miles during that same 12-month period, but much
of this usage was due to inappropriate personal use as nearly all the agency’s
vehicles are personally assigned to agency staff as take-home vehicles (see
Finding 3, pages 23 through 25). The personal take-home use of the vehicles
violates statute and the State Constitution’s gift clause.
3. The extent to which the agency has operated within the public interest.
The agency operates in the public interest in many of its activities.
􀁺􇩆 First, the agency’s licensing process helps to ensure that licensed contrac-tors
possess the skills and training necessary to perform their specific type
of work. The agency requires contractors to document their past work expe-rience,
to pass appropriate trade and business exams, and to obtain
bonds.
􀁺􇩓 Second, the agency identifies, pursues, and issues civil penalties to unli-censed
contractors. Many unlicensed contractors have significantly
harmed the public by doing such things as taking down payments on proj-ects
and then never completing the work. The agency can issue fines of up
to $2,000 and in fiscal year 2002, the agency issued 503 criminal and civil
citations.
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Office of the Auditor General
􀁺􇩔 Third, the agency provides information to the public in various ways. Its
Web site contains information designed to help consumers by distributing
information, such as advice on how to go about selecting a contractor, 2
years’ worth of complaint histories for all licensed contractors, and infor-mation
on how to file a complaint against a contractor. Consumers may
also obtain some complaint history information by calling the agency’s
phone center. The agency’s newsletter updates contractors on such things
as new legislation, agency policy, and other general information. For exam-ple,
the August 2001 and January 2002 newsletters provided maps show-ing
pockets of expansive soil in the Phoenix and Tucson areas. Expansive
soil can cause building foundations to crack prematurely and require spe-cific
design and construction modifications to help prevent cracking. The
agency has also provided important information to the public in emergency
situations. For example, in the summer of 2002, during the Rodeo-Chediski
wildfires in the White Mountain area, the agency conducted a public aware-ness
campaign designed to warn the public about unscrupulous contrac-tors
who tend to prey on the public following natural disasters.
While the agency has acted in the public interest in many ways, auditors identi-fied
areas in which the agency could better serve the public interest.
􀁺􇩂 Better protecting consumers—The agency can do more to protect con-sumers.
First, the agency can do more to ensure that contractors with seri-ous
or multiple violations face discipline. Currently, if an agency inspector
identifies a workmanship problem that a contractor fixes before the issue
progresses to a hearing, and the complainant does not want to pursue the
complaint further, the contractor will not be disciplined. While the com-plainant
in each case may be satisfied, this process fails to protect future
consumers who may hire the contractor. Further, the agency does not
report the nature of complaints to consumers. Also, until December 2002,
the agency performed informal complaint inspections that were not author-ized
by statute, did not become part of a contractor’s record, and were not
reported to the public.
􀁺􇩒 Recovery Fund Deficit—The Residential Contractors’ Recovery Fund was
established in 1981 to provide recourse to homeowners who suffer losses
due to a licensed residential contractor’s actions, and it is funded from res-idential
contractors’ participation fees. Although the Fund has been able to
pay all claims as it receives them, it has operated in a deficit for several
years because it has not maintained claims reserves sufficient to cover all
fund obligations as required by statute. By not maintaining sufficient claims
reserves, the Fund cannot guarantee that it will always be able to pay
homeowners for valid claims as it receives them and would not be able to
pay all valid claims if the Fund were phased out (see Finding 2, pages 15
through 21).
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State of Arizona
4. The extent to which rules adopted by the agency are consistent with the legisla-tive
mandate.
The agency has promulgated many of its required rules, but needs some addi-tional
rules. The agency underwent its last formal rule review in 2001. The
Governor’s Regulatory Review Council reviewed the agency’s rules at the
request of the Office of the Auditor General and concluded that the agency
needs to make several changes to its rules. For example, the agency needs to
develop rules related to specific license requirements, how to apply for a license,
and how a licensee can apply to change license classifications. Additionally, the
agency needs to adopt rules that address its hearing and investigation proce-dures.
5. The extent to which the agency has encouraged input from the public before
promulgating its rules and regulations and the extent to which it has informed
the public as to its actions and their expected impact on the public.
The agency has not made significant changes to its rules in the past 3 years.
When changes were made in the past, the agency notified the public through its
newsletter, Web site, and through the administrative register. Additionally, as
required by A.R.S. §22-1104(A)(6)(a)(b), the agency sends copies of proposed
rule changes to trade associations who have filed requests to receive such infor-mation.
6. The extent to which the agency has been able to investigate and resolve com-plaints
within its jurisdiction.
The agency has sufficient authority to investigate and resolve complaints within
its jurisdiction. A majority of the complaints the agency receives are workman-ship
complaints filed by homeowners. The agency uses trained and certified
inspectors who visit the jobsite and determine if the contractor complied with
minimum workmanship standards. If not, the inspector may issue an order
requiring the contractor to correct the problem. The Office of Administrative
Hearings adjudicates all appeals of agency actions.
The agency investigates allegations of unlicensed contracting, unlawful adver-tising,
and falsifying information on license applications. In fiscal year 2002, the
agency’s Investigations Department handled approximately 2,900 such cases.
The agency can issue cease and desist orders or citations to persons found to
have contracted without a license or who have violated statutes relating to law-ful
contractor advertising. Additionally, the agency can refer information regard-ing
falsified applications to an appropriate prosecutorial jurisdiction for possible
prosecution.
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Office of the Auditor General
7. The extent to which the Attorney General or any other applicable agency of state
government has the authority to prosecute actions under enabling legislation.
The Registrar of Contractors has full authority to enforce its enabling statutes.
A.R.S. §32-1166 authorizes the agency to seek injunctive relief against statutory
violators and to issue fines of up to $2,500. A.R.S. §32-1164 classifies some vio-lations
of the agency’s enabling statutes as class 1 misdemeanors. A.R.S. §41-
192 directs the Attorney General to act as legal advisor and render such legal
services as the agency requires.
8. The extent to which the agency has addressed deficiencies in the enabling
statutes which prevent it from fulfilling its statutory mandate.
Several statutory changes were made to the agency’s enabling statutes during
the 2002 Legislative session.
􀁺􇩆 First, limits on the amounts that can be paid out from the Residential
Contractor’s Recovery Fund were increased. Laws 2002, Chapter 179 §§1
and 2 increased the amount that an individual homeowner can claim from
$20,000 to $30,000 and increased the total amount that can be paid from
the Fund against an individual license from $100,000 to $200,000. These
changes will provide greater coverage to more consumers. In fiscal year
2002, before the change took effect, 67 consumers had valid claims that
exceeded the $20,000 cap on individual claims and therefore the claims
were not fully covered, but only 34 consumers had valid claims that
exceeded $30,000. Additionally, there were 23 consumers with valid claims
who did not receive full payment from the Fund because the total claims
against their contractor had already reached the $100,000 cap. However,
had the new $200,000 cap been in place during that year, all 23 consumers
would have received full payment. This legislation also increased the mini-mum
fund balance that the Fund must maintain from $100,000 to $200,000.
􀁺􇩓 Second, Laws 2002, Ch. 305 §1 strengthened penalties against unlicensed
contractors who bid on a contract for a project. Now, if an unlicensed con-tractor
submits a bid of $20,000 or more on a project, that contractor will
not be able to obtain a contractor’s license for 1 year after the bid date.
􀁺􇩆 Finally, Laws 2002, Chapter 99 §10 gave the agency the authority to require
license applicants to submit fingerprints and fees necessary to pay for a
criminal fingerprint background check through the Arizona Department of
Public Safety.
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State of Arizona
9. The extent to which changes are necessary in the laws of the agency to ade-quately
comply with the factors listed in the Sunset review statute.
The Legislature should consider modifying the statute that limits the Residential
Contractors’ Recovery Fund’s administrative expenses. A.R.S. §32-1134(A)(7)
requires the agency to limit administrative expenses to 10 percent of the Fund’s
fund balance. However, the Fund has been in deficit for several years and, there-fore,
calculating administrative expenses on the fund balance would provide no
money for administering the Fund. Additionally, even if the Fund did maintain its
required fund balance of $200,000, it would only provide $20,000 for adminis-trative
expenses which is insufficient. In fiscal year 2002, the Fund’s operating
expenses were approximately $534,000. Other similar funds’ administrative cost
limits are linked to revenue percentages. Therefore, the Legislature should con-sider
limiting the Fund’s administrative expenses in a similar manner. However,
because the Fund’s revenues are likely to change significantly due to fee
increases, an interim change may be necessary before the Legislature makes a
more permanent change to this statute (see Finding 2, pages 15 through 21).
For several years, the agency conducted informal courtesy inspections that
were designed to help resolve disputes between contracts and their customers.
During the audit, the agency stopped conducting them because it lacks the
statutory authority to perform them. The agency would like to begin conducting
these inspections again, however it first needs to obtain statutory authority to do
so.
10. The extent to which the termination of the agency would significantly harm the
public health, safety or welfare.
Terminating the Registrar of Contractors would likely pose some harm to the
public health, safety, and welfare of Arizona citizens for several reasons.
􀁺􇩗 Without regulating contractors, Arizona citizens would have little assurance
that a contractor they selected to build, remodel, or repair their home or
business property has adequate experience and training. Many trades,
such as electrical or plumbing work, can pose significant health and safety
hazards to the public if not performed properly. The Registrar of
Contractors, through its licensing function, requires license applicants to
supply detailed documentation of their work history and to pass a trade and
a business exam, which helps to ensure that contractors are properly
trained to work in their specific trades.
Without regulation at the state level, consumers would get some protection
from cities in Arizona that have inspectors who visit construction sites to
enforce building codes. However, this only helps consumers once con-
page33
Office of the Auditor General
struction has begun and cannot help consumers when hiring a contractor.
Further, city building inspectors do not inspect work when it does not
require a city permit, such as roofing an existing building.
􀁺􇩂 Because the agency can currently suspend or revoke a contractor’s
license, unscrupulous or improperly trained contractors could continue to
perform contracting work in the absence of regulation.
􀁺􇩗 Without the agency’s inspection and complaint resolution process, con-sumers
would not have access to an inexpensive and timely means of
resolving problems with contractors.
􀁺􇩔 The Residential Contractor’s Recovery Fund provides financial restitution to
consumers harmed by licensed residential contractors.
11. The extent to which the level of regulation exercised by the agency is appropri-ate
and whether less or more stringent levels of regulation would be appropri-ate.
The Registrar of Contractors provides an appropriate level of regulation. Arizona
is one of 12 states that has a central regulatory body that regulates nearly all
aspects of the construction industry. Other states leave this regulation to local
government or share the regulatory responsibilities among multiple state agen-cies.
Further, the extent of regulation varies significantly. In some states, regula-tion
is limited to certain trades such as plumbing or electrical work. Other states
only regulate construction projects with costs that exceed several thousand dol-lars.
12. The extent to which the agency has used private contractors in the performance
of its duties and how effective use of private contractors could be accomplished.
The agency has used private contractors to perform various services. For sev-eral
years the agency has contracted with a private company to administer the
agency’s trade and business exams. The agency has also contracted with a
Certified Public Accountant (CPA) to perform examinations of the Residential
Contractors’ Recovery Fund. This CPA has also made projections of future
claims the Fund may incur, which is necessary when setting fees against con-tractors
to generate the revenues needed to support the Fund. However, as dis-cussed
in Finding 2 (see pages 15 through 21) of this report, the Registrar of
Contractors should hire a qualified actuary to perform these duties.
This audit did not identify any additional opportunities for the agency to use pri-vate
contractors.
page34
State of Arizona
Office of the Auditor General
AGENCY RESPONSE
March 31, 2003
Ms. Debbie Davenport
Auditor General of the State of Arizona
2910 North 44th Street
Phoenix, AZ 85018
Dear Ms. Davenport:
Enclosed is the final response to the final performance audit prepared by your office
dated March 21, 2003. I am confident that your feedback will help to guide me in my
efforts to improve agency services and to strengthen the protections provided to
consumers of construction-related products and services in Arizona.
Although your office had concluded the audit before my official appointment by
Governor Napolitano, I wish to thank you and your staff for the time that was taken to
study our operations, and for the professionalism and courtesy demonstrated by your
audit staff in working with the Registrar of Contractors’ staff over the past several
months.
If I can be of assistance in the future in any way, please do not hesitate to let me know.
Sincerely,
Israel G. Torres
Director
IT:mh
Enclosure
State of Arizona
Registrar of Contractors
Final Response
Office of the Auditor General Performance Audit
Israel G. Torres
Director
March 31, 2003
2
SUMMARY
The Arizona Registrar of Contractors (ROC) Office was established in 1931 to regulate the
construction industry of Arizona. The mission of the ROC is to promote quality construction
through a licensing and regulatory system designed to protect the health, safety, and welfare of
the public. To this end, the agency licenses contractors and assists consumers in the resolution of
construction defects. In addition, the agency disciplines contractors who fail to correct poor
workmanship or fail to obtain the necessary contractor's license. Equally important, the agency
provides consumers with financial relief through the ROC Residential Contractors' Recovery
Fund should a licensed contractor not perform to minimum workmanship standards.
Although a change in the agency leadership occurred in February 2003, the agency stands
committed to continue its mission to promote quality construction by Arizona contractors and to
improve its ability to provide consumers with the best tools possible for selecting a contractor for
their construction project.
AUDITOR GENERAL FINDING 1
Consumer protection can be enhanced
Consumer protection is paramount to the ROC
In keeping with its mission statement, protection has always been a matter of paramount
concern for the ROC. The agency consistently seeks ways to make the agency's processes
more efficient, understandable and accessible to the public within the framework of the
statutes and rules pursuant to which it operates. Through the agency website, public
awareness campaign, and other informational programs, the ROC strives to provide the
public with useful and accurate information in formats designed to be easily understood.
The ROC believes that its efforts in this regard, supported by a dedicated staff, have been
extremely successful. However in keeping with the agency’s own philosophy that there is
always room for improvement, the ROC cannot help but agree with a finding that consumer
protection can yet be enhanced. It is for this very reason that the agency’s effort to improve
and refine how it accomplishes the agency’s mission is continually ongoing. The ROC
believes that it can and will continue to improve.
3
Auditor General Finding 1, Recommendation 1 - The Registrar of Contractors should
develop criteria for determining when it should pursue discipline against contractors
with serious or multiple complaints.
Agency Response: The finding of the Auditor General is agreed to and the finding will be
implemented.
The ROC effectively identifies problem contractors
The ROC is an active player in disciplining problem contractors. In FY 02, the ROC revoked
or suspended 993 out of 40,930 licensees. By comparison, the State of California in FY 02
revoked or suspended 1072 out of 288,241 licensees. Hence, the ROC disciplined
contractors over five times more frequently than California. This aggressive and effective
rate of discipline is in line with the agency's mission. In addition, the agency aims to resolve
consumer or contractor complaints at the lowest level to ensure a rapid and effective solution to
consumer problems.
In addition to existing mechanisms, the ROC has further developed criteria for determining
when it should pursue discipline against contractors with serious or multiple complaints. As
indicated in the Auditor General report, a contractor could potentially fail to meet
workmanship standards on a project and then settle the case before or during a formal
hearing to avoid disciplinary action. To address this, cases scheduled for a hearing will be
monitored to determine if a pattern of conduct is established by the contractor of attempting
to avoid disciplinary action by settling with the complainant prior to or during a hearing.
The agency has modified its computer codes to identify contractors who have more than six
vacated or settled hearings per year and a printout will be generated on a monthly basis.
These vacated and settled complaints will be reviewed by the legal department chief on a
case-by-case basis to determine if the agency should cite a contractor and join as a co-complainant
on future cases against that contractor.
Auditor General Finding 1, Recommendation 2 - The Registrar of Contractors should
make the nature of valid complaints available to consumers through its phone center
and web site.
Agency Response: The finding of the Auditor General is agreed to and the finding will be
implemented.
The ROC call center and web site are currently being expanded to provide
additional information.
Complaints filed with the ROC are public information and have always been available for
public review at the ROC offices. As such, complaints filed against licensed contractors are
reported on the website as open, closed, dismissed, unresolved or unverified complaints. The
agency believes that website public disclosure is an important tool for licensed contractors to
perform quality work as they are aware that potential customers may view the number of
complaints appearing on their official record unfavorably.
4
The agency’s long term goal is to maximize information disclosure and make all contractor
complaints and findings of agency inspectors, plus subsequent complaint actions and
adjudicated cases available to the public on the agency’s website. The current ROC website
receives approximately 350,000 hits annually. The agency is continually working to
improve its ease of use and relevance. Although the current website provides important
historical information and the agency believes information disseminated via the website can
be expanded further, the agency is faced with limitations on existing hardware and software
capabilities.
If approval is received from the Government Information Technology Agency (GITA) and
if funds are appropriated by the legislature in FY 2006, the agency will be closer to reaching
its goal. Due to the sheer volume of complaints, licensed contractors, and administrative
hearings, preliminary cost estimates of the needed technology upgrades in line with the
agency’s vision for information disclosure are $2.3 million for the hardware and software
upgrades. Furthermore, an additional three FTEs will be needed to administer and update
the additional systems. The ROC will continue to investigate avenues to minimize cost
outlays while maximizing efficiency and public disclosure.
The ROC's telephone call center handles approximately 230,000 calls annually. As
seamless customer service is our goal, we aim to answer calls within 4 minutes. Callers
receive ROC general information on processes and contractors. For more specific
complaint histories, callers are directed to their closest field office to review the requested
file in person. Again, due to the sheer volume of complaints filed, providing callers with
detailed complaint histories would require the customer service representatives to place the
call on hold, walk to a different portion of the office, find the file, and research the requested
complaint. Thus, providing more detailed information on contractor histories may, in fact,
increase the time callers spend in a queue waiting for a customer service representative.
Because a balance must be established between providing additional information and
answering calls promptly, the agency is investigating other processes to strike this balance
most effectively.
Auditor General Finding 1, Recommendation 3 - If the Registrar of Contractors
wishes to reintroduce courtesy inspections, it should seek statutory authority from the
Legislature and make the results available to all consumers.
Agency Response: The finding of the Auditor General is agreed to and the recommendation
will be implemented.
Courtesy inspections are an effective tool for consumers
The agency is seeking statutory authority to perform courtesy inspections. The agency was
performing courtesy inspections, however ceased when notified by the Auditor General that
the agency lacked authority for such a program. If approved, the agency will reinstate the
courtesy inspection model.
The courtesy inspection program is a valuable service to the consumer and contractor. It is
an informal attempt to address the consumer's concerns regarding the workmanship of a
5
contractor. When both parties are willing to participate, the agency inspector can usually
respond within seven to ten days, providing a quick and simple means to identify many of
the construction problems a consumer may raise. At the courtesy inspection, a professional
construction inspector will inspect and discuss any deficiencies in the contractor's
workmanship, trying to arrive at a mutually acceptable resolution for both parties. Since the
consumer's problem is handled in an informal setting, the consumer gets any workmanship
problems corrected sooner, the contractor can restore the confidence of their client and the
agency saves money because fewer employee hours are needed to work the complaint.
The inspections are highly valuable. Currently, most courtesy inspection requests come
from contractors dealing with a homeowner that is unfamiliar with particular workmanship
standards. The agency through this program is able to address a potential workmanship
issue for a homeowner in a highly expedient manner.
AUDITOR GENERAL FINDING 2
Some Recovery Fund changes needed
ROC Recovery Fund provides consumer protection
According to leading expert and Executive Director of the National Association of State
Contractors’ Licensing Agencies (NASCLA), “…the Fund has operated successfully for
over 21 years and with prudent enhancements has become the premier construction
consumer protection vehicle in this country.”
Auditor General Finding 2, Recommendation 1 - The Registrar of Contractors should
ensure that the Residential Contractors' Recovery Fund balance is sufficient to
account for all financial liabilities, including anticipated claims, to comply with
A.R.S. § 32-1134.
Agency Response: The finding of the Auditor General is agreed to and the recommendation
will be implemented.
The ROC Recovery Fund balance has been sufficient to pay all consumer claims as
they are received
Operated on a cash basis of accounting since it was established in 1981, the Fund balance
has always been sufficient to pay consumer claims and operating expenses when due.
Although the agency believes that the Fund balance is sufficient to pay anticipated
liabilities, the agency will begin to account for the Fund on an accrual basis of accounting
which appears to be in line with the A.R.S. § 32-1134. The agency would note however,
that the position that the Fund should follow insurance industry accounting standards and
accumulate a $5.5 million reserve for anticipated claims which have not yet been filed—in
6
addition to its current $6.1 million balance—ignores the nature and purpose of the Fund’s
operations and the governmental environment in which it exists.
Nonetheless, absent statutory authority to operate the Fund on a cash basis, the agency
concurs that A.R.S. § 32-1134 requires reserves to be maintained at a level sufficient to
cover anticipated claims. The agency shall take the actions necessary to ensure that the
Fund balance is sufficient to account for all financial liabilities, including anticipated claims.
Auditor General Finding 2, Recommendation 2 - The Registrar of Contractors should
contract with a qualified actuary to project anticipated future claims and to help set
appropriate fee amounts necessary to establish sufficient claim reserves.
Agency Response: The finding of the Auditor General is agreed to, and the recommendation
will be implemented.
Actuary will be employed
Each year, the Fund has used qualified independent CPAs to prepare actuarial projections of
anticipated future claims. Although CPAs are generally qualified to provide this service, the
agency will contract with a qualified actuary to provide this service.
Auditor General Finding 2, Recommendation 3 - After the actuary has determined the
estimate for anticipated future claims, the Registrar of Contractors should comply
with A.R.S. § 32-1134.01 by reassessing all licensed residential contractors in
Arizona who have paid into the Fund to resolve the fund's deficit and to achieve the
fund's statutorily required $200,000 fund balance.
Agency Response: The finding of the Auditor General is agreed to and a different method of
dealing with the finding will be implemented.
Fund balance will increase to provide reserves for anticipated future claims
The ROC projects the current estimated deficit will be eliminated in four to five years with
the fee increases initiated in July 2002. Although it can be argued that it is fair for
contractors to assess sufficient fees to establish full claim reserves to correlate their costs to
their responsibilities, Fund payouts have been fairly consistent in recent years and contractor
assessments have been relatively uniform. This results in a balance of costs and
responsibilities as would be expected on the accrual basis of accounting. Put another way,
imposing a special assessment on the current population of contractors for under-funded
reserves, existing since the Fund was established in 1981, does not correlate to their current
responsibility.
Nonetheless, the ROC projects the current estimated deficit of $5.5 million will be
eliminated in four to five years with the current $300 new license and $150 annual renewal
fees paid by residential contractors. Actuarial projections of the Fund’s deficit, performed
by qualified CPAs, have ranged from $3.9 to $5.5 million in the past three years. Although
7
the agency believes the deficit will be eliminated, Fund revenues and expenditures will be
closely monitored during this period.
Auditor General Finding 2, Recommendation 4 - The Registrar of Contractors should
use its own internal Certified Public Accountants (CPAs) to compile and produce the
Recovery Fund's annual financial statement in non-audit years and discontinue paying
its contracted CPA for these services.
Agency Response: The finding of the Auditor General is not agreed to, but the
recommendation will be implemented.
Independent CPAs provide added level of assurance in compiling the Fund’s
annual financial statements
The ROC takes its fiduciary responsibility very seriously. As such, the Agency believed it
was prudent and beneficial to have the Fund’s financial statements and operations reviewed
annually by an independent CPA at a reasonable cost. However, since the Auditor General
has offered to perform the required third-year audit at no cost to the Fund if in-house CPAs
prepare the interim financial statement compilations, the agency will implement the
recommendation.
Auditor General Finding 2, Recommendation 5 - The Legislature should consider
amending A.R.S. § 32-1134(A)(7) to limit the Fund's administrative expenses to a
percentage of the Fund's revenues from the previous fiscal year to enable the Fund to
cover its 2003 and 2004 fiscal year administrative expenses.
Agency Response: The finding of the Auditor General is agreed to and the agency
recommends the Legislature implement the recommendation.
The current statute, prescribing a ten percent limit of the Fund balance for operating
expenses, has been effective since the Fund’s 1981 inception, however, the agency believes
the legislation can be implemented.
Auditor General Finding 2, Recommendation 6 - In September 2003, 1 year after the
fee increases and claims limits were increased, the Registrar of Contractors should
report its revenues and administrative costs to the Joint Legislative Budget Committee
staff to help the Legislature determine if it should consider any additional changes to
the Fund's administrative expense limit statute.
Agency Response: The finding of the Auditor General is agreed to and the audit
recommendation will be implemented.
Agency will report Fund revenues and administrative costs to JLBC
8
In September 2003, the agency will report Fund revenues and administrative costs to the
Joint Legislative Budget Committee to help the Legislature determine if it should consider
changes to the Fund’s administrative expense limit statute.
AUDITOR GENERAL FINDING 3
Agency's vehicle use is inappropriate and inefficient
Agency’s vehicle use is necessary to fully protect the public
ROC Inspectors and Investigators perform critical services in the area of public health and
safety. They perform building inspections in trades that include electrical, plumbing, air
conditioning, heating and structural steel for violations of building codes and evidence of
poor workmanship. They investigate wrongful or fraudulent acts committed by licensed and
unlicensed contractors and seek disciplinary action or criminal prosecution of these contractors.
While some vehicles may not meet the criteria adopted by the auditor, the nature of the
agency's law enforcement work and protection of public health and safety in construction
matters must be given considerable weight. City, county and state police vehicles, emergency
medical vehicles and road and building maintenance vehicles may be underutilized by the
standards used by the Office of the Auditor General but such services are critical and should
not be jeopardized.
Auditor General Finding 3, Recommendation 1 - To comply with A.R.S. § 38-538.02,
the Registrar of Contractors should immediately end its policy of providing personally
assigned take-home vehicles to its staff.
Agency Response: The finding of the Auditor General is agreed to and the recommendation
will be implemented.
The agency will end its policy of domicile-to-duty use of state vehicles for inspectors and
investigators on or before May 2, 2003. The new agency policy will be consistent with the
ADOA rule interpretation provided to the ROC.
According to the ADOA rule interpretation and discussions with the Auditor General,
inspectors and investigators may take their assigned state vehicle home in limited
circumstances upon written approval by their supervisor. Further, an ROC Assistant
Director will review take home vehicle requests on a monthly basis to ensure compliance
with the policy.
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Auditor General Finding 3, Recommendation 2 - The Registrar of Contractors should
return its 22 vehicles that were driven fewer than 10,000 miles in the past year to the
Department of Administration.
Agency Response: The finding of the Auditor General is not agreed to and the
recommendation will not be implemented.
Agency’s vehicle use is necessary to fully protect the public
As previously stated, ROC Inspectors and Investigators perform critical services in the area
of public health and safety. They perform difficult building inspections and investigate
wrongful or fraudulent acts committed by licensed and unlicensed contractors and seek
disciplinary action or criminal prosecutions. They are often called to the field at moments
notice. Thus, while some vehicles may not meet the mileage criteria adopted by the auditor,
the nature of the agency's law enforcement work and protection of public health and safety in
construction matters must be given considerable weight.
The ROC has 56 inspectors and investigators. These vehicles are used by Inspectors and
Investigators on a daily basis to conduct prescheduled appointments which are scheduled
many weeks in advance. Thus, an adequate pool of vehicles must be maintained. The
agency receives over eleven thousand complaints per year. Scheduling appointments based
on the future tentative availability of transportation would place severe limitations on the
agency's ability to perform its duties. It is critical to provide inspection and investigation
services to the public and to maximize the efficient use of ROC staff. Although the vehicle
is not available on an every day take-home-basis, it is available as needed in their duties to
fully protect the public during working hours.
In addition, the nine members of the ROC executive staff currently have assigned vehicles
for use during working hours. Clearly executive staff perform duties that require regularly
scheduled transportation. Attendance and participation is required at numerous functions,
which include statewide governmental and legislative meetings, providing consumer
education, speaking engagements to contractor organizations, travel to agency field offices
for audit and supervisory functions and attending training seminars.
In an effort to reduce vehicle use, the nine executive staff members with assigned vehicles
will now share from a pool of four vehicles to perform their duties. Therefore, the agency
will return five agency vehicles to ADOA no later than Friday, April 11, 2003.
Auditor General Finding 3, Recommendation 3 - The Registrar of Contractors should
monitor the efficiency of all vehicles that had been driven for employees' personal
commutes to and from work, and in January 2004, it should eliminate any of these
vehicles that fall below the efficient-use guideline of 10,000 miles per year.
Agency Response: The finding of the Auditor General is agreed to and a different method of
dealing with the finding will be implemented.
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The agency will end its policy of domicile-to-duty use of state vehicles for inspectors and
investigators on or before May 2, 2003. The new agency policy will be consistent with the
ADOA rule interpretation provided to the ROC and discussions with the Auditor General.
Thus, because personal commutes to and from work will no longer be the case, the ROC
believes this recommendation is no longer applicable in light of the agency’s proposed
policy.
Auditor General Finding 3, Recommendation 4 - To ensure that its vehicles are
appropriately and efficiently used in the future, the Registrar of Contractors should
better monitor their use by requiring detailed mileage reports on all vehicles.
Agency Response: The finding of the Auditor General is not agreed to and the
recommendation will not be implemented.
The agency will end its policy of domicile-to-duty use of state vehicles for inspectors and
investigators on or before May 2, 2003. The new agency policy will be consistent with the
ADOA rule interpretation provided to the ROC and discussions with the Auditor General.
Therefore, because detailed mileage logs were recommended because of take home
personally assigned vehicles, the ROC believes this recommendation is not applicable in
light of the agency’s proposed policy.
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SUNSET FACTORS
1. Objective and purpose in establishing the agency.
The agency agrees with the conclusions of the Office of the Auditor General.
2. The effectiveness with which the agency has met its objective and purpose and the efficiency
with which the agency has operated.
The agency believes that it has been effective in meeting its objective and purpose in the
manner in which it has operated. Further the agency believes it is imperative for personnel to
have a sufficient number of vehicles to efficiently perform their duties and provide essential
services to the public. The ROC Inspectors and Investigators perform critical services in the
area of public health and safety. They perform difficult building inspections and investigate
wrongful or fraudulent acts committed by licensed and unlicensed contractors and seek
disciplinary action or criminal prosecutions. They are often called to the field at moments notice.
Thus, while some vehicles may not meet the mileage criteria adopted by the auditor, the nature of
the agency's law enforcement work and protection of public health and safety in construction
matters must be given considerable weight.
3. The extent to which the agency has operated within the public interest.
The agency believes that it consistently operates in the public interest in all of its activities.
The agency agrees that there is always room for improvement and aggressively pursues new
opportunities to enhance consumer protection and increase public awareness regarding
licensed contractors.
4. The extent to which rules adopted by the agency are consistent with the legislative mandate.
The agency disagrees with the Office of the Auditor General’s comments. The areas
identified by the Office of the Auditor General are already adequately covered by statute and
do not require the promulgation of additional rules.
5. The extent to which the agency has encouraged input from the public before promulgating its
rules and regulations and the extent to which it has informed the public as to its actions and
their expected impact on the public.
The agency agrees with the conclusions of the Office of the Auditor General.
6. The extent to which the agency has been able to investigate and resolve complaints within its
jurisdiction.
The agency agrees with the conclusions of the Office of the Auditor General.
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7. The extent to which the Attorney General or any other applicable agency of state government
has the authority to prosecute actions under enabling legislation.
The agency agrees with the conclusions of the Office of the Auditor General.
8. The extent to which the agency has addressed deficiencies in the enabling statutes which
prevent it from fulfilling its statutory mandate.
The agency agrees with the conclusions of the Office of the Auditor General.
9. The extent to which changes are necessary in the laws of the agency to adequately comply
with the factors listed in the Sunset review statute.
The agency agrees with the conclusions of the Office of the Auditor General.
10. The extent to which the termination of the agency would significantly harm the public health,
safety or welfare.
The agency disagrees with the conclusion of the Office of the Auditor General that
termination of the Registrar of Contractors “would likely pose some harm” to the public
health, safety and welfare of Arizona citizens. It is the agency’s position that sunsetting
would undoubtedly cause significant harm to the public health, safety and welfare of Arizona
citizens for all of the reasons cited by the Office of the Auditor General.
11. The extent to which the level of regulation exercised by the agency is appropriate and whether
less or more stringent levels of regulation would be appropriate.
The agency agrees with the conclusions of the Office of the Auditor General.
12. The extent to which the agency has used private contractors in the performance of its duties
and how effective use of private contractors could be accomplished.
The agency agrees with the conclusions of the Office of the Auditor General.
State of Arizona
02-01 Arizona Works
02-02 Arizona State Lottery
Commission
02-03 Department of Economic
Security—Kinship Foster Care
and Kinship Care Pilot
Program
02-04 State Parks Board—
Heritage Fund
02-05 Arizona Health Care Cost
Containment System—
Member Services Division
02-06 Arizona Health Care Cost
Containment System—Rate
Setting Processes
02-07 Arizona Health Care Cost
Containment System—Medical
Services Contracting
02-08 Arizona Health Care Cost
Containment System—
Quality of Care
02-09 Arizona Health Care Cost
Containment System—
Sunset Factors
02-10 Department of Economic
Security—Division of Children,
Youth and Families, Child
Protective Services
02-11 Department of Health
Services—Health Start
Program
02-12 HB2003 Children’s Behavioral
Health Services Monies
02-13 Department of Health
Services—Office of Long Term
Care
03-01 Government Information
Technology Agency—
State-wide Technology
Contracting Issues
Performance Audit Division reports issued within the last 12 months
Future Performance Audit Division reports
Water Infrastructure Finance Authority
Department of Commerce
State Board of Funeral Directors and Embalmers