Fiscal Note & Local Impact Statement

125 th General Assembly of Ohio

Ohio Legislative Service Commission

77 South High Street, 9th Floor, Columbus, OH 43215-6136 ² Phone: (614) 466-3615

² Internet Web Site: http://www.lsc.state.oh.us/

BILL:

Sub. H.B. 243

DATE:

April 20, 2004

STATUS:

As Enacted – Effective August 6, 2004

SPONSOR:

Rep. Raussen

LOCAL IMPACT STATEMENT REQUIRED:

No

Minimal cost

 


CONTENTS:

Removes oversight of sales of home service contracts from the jurisdiction of the Department of Insurance and extends for two years an existing limit on the interest rate used to compute minimum nonforfeiture amounts on deferred annuities

 

State Fiscal Highlights

 

STATE FUND

FY 2005

FY 2006

FUTURE YEARS

General Revenue Fund

     Revenues

Loss up to $90,000

Loss up to $180,000

Loss up to $180,000

     Expenditures

- 0 -

- 0 -

- 0 -

Department of Insurance Operating Fund (Fund 554)

     Revenues

Minimal loss

Minimal loss

Minimal loss

     Expenditures

Minimal decrease

Minimal decrease

Minimal decrease

Consumer Protection Enforcement Fund (Fund 631)

     Revenues

Potential minimal gain

Potential minimal gain

Potential minimal gain

     Expenditures

Potential minimal increase

Potential minimal increase

Potential minimal increase

Note:  The state fiscal year is July 1 through June 30.  For example, FY 2005 is July 1, 2004 – June 30, 2005.

 

·        The GRF would lose between $85,000 and $90,000 in revenue in FY 2005, and between $170,000 and $180,000 in future fiscal years from the domestic and foreign insurance taxes (combined).  This loss would be offset partially by an increase in revenue under the corporate franchise tax.

·        The Department of Insurance would require slightly fewer resources to regulate the 13 home warranty companies currently licensed by the Department.  The reduction in required resources would be associated with a minimal decrease in expenditures.  There would also be a minimal reduction in revenue from filing fees from home warranty companies.

·        The Attorney General’s Office may require more resources to enforce existing consumer protection laws, as applied to home warranty companies.  The additional resources are expected to be minimal, with accompanying minimal increases in expenditures and in revenues from civil penalties.


Local Fiscal Highlights

 

·        No direct fiscal effect on political subdivisions.

 


 

 

Detailed Fiscal Analysis

 

House Bill 243 provides that a home service contract is not insurance and removes oversight authority over sales of home service contracts from the Department of Insurance.[1]  The effect of this provision is to allow transactions involving home service contracts to be regulated as are other consumer transactions under existing law.  The bill also extends for two years an existing limit on the interest rate used to compute minimum nonforfeiture amounts on deferred annuities.

 

Background

 

The Department of Insurance (ODI) currently has oversight authority over home warranty companies, which current law defines as those companies that issue home service contracts.  The Department has licensed 13 companies statewide as home warranty companies.  Because they are licensed by ODI, these companies are subject to the domestic and foreign insurance taxes, and are exempt from the corporate franchise tax.  A Department official reports that ODI certified a total of approximately $174,000 in taxes payable by home warranty companies for tax year 2003 under the domestic and foreign insurance taxes.  Generally, the tax rate is 1.4% of premiums.

 

The Attorney General’s Office (AGO) has oversight authority over other types of consumer fraud under existing law.  The effect of the bill will be to shift oversight from ODI to the AGO.  The AGO will not have duties that must be performed routinely in overseeing these companies as ODI has currently.  Rather, the AGO will become involved in response to consumer complaints.  An ODI official reports that the Department received 41 complaints involving home service contracts during the period January of 2000 through May 2003, and that there were no significant trends in the rate at which they were received over the period. 

 

Current law prohibits the sale of an annuity contract in Ohio unless the contract contains certain provisions relating to the minimum nonforfeiture amount—the minimum amount the owner of the contract would receive in the event that the owner ceases to make the payments called for in the contract.  The principal type of provision required is that the owner would receive interest on the payments that he or she made prior to cessation of payments.  In addition, current law permits the minimum nonforfeiture amount to be reduced by the amount of prior withdrawals or partial surrenders under the contract, and allows for annual contract charges to be subtracted from the amount of payments made.

 

In the case of a contract that provides for flexible considerations, the minimum interest rate that may be used in crediting such interest is currently 1.5%, but this is a temporary rate that was established by Sub. H.B. 421 of the 124th General Assembly.  H.B. 421 lowered the rate from 3.0% to 1.5% between the bill's effective date and September 1, 2004; accordingly, the rate is scheduled to increase to 3.0% on September 1, 2004 under existing law.  H.B. 243 would extend the life of the lower 1.5% rate until September 1, 2006.

 

Fiscal Effect

 

The bill would reduce revenues to the General Revenue Fund by up to $180,000 per fiscal year under the domestic and foreign insurance taxes.  In FY 2005, the revenue loss would be roughly half of this amount, assuming that home warranty companies are regulated as insurance companies for roughly half of calendar year 2004.  This amount would be offset partially by an increase in revenues under the corporate franchise tax, which would begin to apply to home warranty companies when they are no longer required to obtain licenses from the Superintendent of Insurance.  Taxes would be based on net profits.  Net profits in such a business might be 5% of sales.

 

An official with ODI reports that the bill would slightly reduce resources required by the Department to oversee home warranty companies.  The bill would therefore reduce departmental expenditures minimally.  The bill would also reduce filing fees by home warranty companies, thereby minimally reducing revenues to the Department of Insurance Operating Fund (Fund 554).

 

An official with AGO reports that the bill may require additional resources for the office to enforce consumer protection law, but that the number of complaints reported by ODI suggests that any expenditure increase would be minimal.  There may be an accompanying increase in revenue from civil penalties.  Both expenditures and revenues would be associated with the Consumer Protection Enforcement Fund (Fund 631).

 

 

LSC fiscal staff:  Ross Miller, Economist

 

HB0243EN.doc/lb



[1] A home service contract that is sold by a licensed property and casualty insurer would remain subject to Ohio insurance laws and under the oversight of the Department of Insurance.