Legislative Analyst Office Reports on AFDC & CalWORKs State Budgets

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/2177): failed to open stream: HTTP request failed! HTTP\/1.1 404 Not Found “}

” M A C TAY L O R L E G I S L AT I V E A N A LY S T F E B R U A R Y 1 6 , 2 0 1 8 Analysis of the Health and Human Services Budget The 2018-19 Budget: L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Human Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Medi-Cal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Overview of the Medi-Cal Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Caseload Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Proposition 55 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Federal Reauthorization of CHIP Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Proposition 56 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Department of State Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 DSH-Coalinga Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Proposals to Expand IST Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Governor’s IST Diversion Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 CalWORKs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 CalWORKs Caseload Now at Historic Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Budget Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Analysis of Governor’s Proposed Single Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Analysis of Governor’s Proposed Use of Freed-Up TANF Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Legislature Has Opportunity to Build Its Own TANF Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 In-Home Supportive Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Budget Overview and LAO Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SSI\/SSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Developmental Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Overview of the Governor’s Budget Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Issues for Legislative Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Continuum of Care Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Overview of the Child Welfare System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Major Changes Under CCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Status Update on CCR Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Overview of the Governor’s Budget for CCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 LAO Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 1 Executive Summary Overview of the Health and Human Services Budget. The Governor’s budget proposes $23 .8 billion from the General Fund for health programs\u2014a 7 .1 percent net increase above the revised estimated 2017-18 spending total\u2014and $13 .5 billion from the General Fund for human services programs\u2014a net increase of 2 .9 percent above the revised estimated 2017-18 spending total . For the most part, the year-over-year budget changes reflect caseload changes, technical budget adjustments, and the implementation of previously enacted policy changes, as opposed to new policy proposals . Significantly, the budget reflects a net increase of $1 .5 billion from the General Fund for Medi-Cal local assistance, in part reflecting (1) a lower proportion of Proposition 56 (2016) tobacco tax revenues offsetting General Fund cost growth and (2) a higher state cost share for the Patient Protection and Affordable Care Act optional expansion population . Medi-Cal: Caseload Essentially Flat, No Proposition 55 Funding Assumed. The Governor’s budget projects an average monthly Medi-Cal caseload of 13 .5 million in 2018-19\u2014virtually flat from estimated 2017-18 caseload . We find these caseload estimates to be reasonable . For the first time, the Director of Finance has made a calculation under a budget formula in Proposition 55 (2016) that determines whether a share of Proposition 55 tax revenues is to be directed to increase funding in Medi-Cal in a given fiscal year . The Governor’s budget provides no additional funding for Medi-Cal pursuant to this formula . We are currently reviewing the administration’s approach to this formula and will provide our comments to the Legislature at a later time . Recent Federal Reauthorization of Children’s Health Insurance Program (CHIP) Funding Will Result in General Fund Savings Not Assumed in the January Budget. CHIP is a joint federal-state program that provides health insurance coverage to about 1 .3 million children in low-income families, but with incomes too high to qualify for Medicaid . Due to congressional appropriations made after the administration finalized its proposed 2018-19 budget, the proposed state budget makes federal funding assumptions that differ from the recent federal action . As the recent federal action continues federal funding for CHIP at a higher federal cost share than assumed in the budget, the Governor’s May Revision budget proposal will reflect a downward adjustment of General Fund costs for CHIP totaling $900 million over 2017-18 and 2018-19 . Governor’s Proposition 56 Budget Proposal for Medi-Cal Essentially Aligns With the 2017-18 Budget Agreement; Legislature Afforded Opportunity to Target Funding Available for Additional Provider Payment Increases. Proposition 56 raised state taxes on tobacco products and dedicates the majority of associated revenues to Medi-Cal on an ongoing basis . We find that the Governor’s budget proposal essentially aligns with a two-year 2017-18 budget agreement between the Legislature and the administration on the use of Proposition 56 revenues in Medi-Cal . Of the total amount of 2017-18 and 2018-19 Proposition 56 revenues, the Governor allocates a total of about $1 .4 billion to provider payment increases, with the remaining balance of $880 million to be used to offset General Fund spending on Medi-Cal cost growth . Under the Governor’s proposal, we estimate that $523 million in total Proposition 56 funding is available for additional provider payment increases beyond those structured in the 2017-18 agreement . The Legislature will be able to determine how these new payments are structured . gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 2 Governor’s Incompetent-to-Stand Trial (IST) Proposals Raise Several Issues for Legislative Consideration. The Governor’s budget includes various proposals to increase IST capacity as a way to reduce the number of individuals waiting to be transferred to a treatment program . We recommend the Legislature define what it considers an appropriate IST waitlist, which would allow it to then determine how many additional beds are needed to reduce this waitlist . The budget also includes $100 million (one time) for the Department of State Hospitals to contract with counties to establish IST diversion programs that are intended to primarily treat offenders before they are declared IST . While the concept of IST diversion programs has merit, we find that the Governor’s proposal is not well structured to achieve its intended benefits . As such, we recommend the Legislature instead direct the department work with individual counties to develop proposals for specific county IST diversion programs that would include such information as the specific services that would be provided . CalWORKs Caseload at Historical Low, Freeing Up Federal Funds for Other Uses. The Governor’s budget estimates the California Work Opportunity and Responsibility to Kids (CalWORKs) caseload will be 400,000 in 2018-19\u2014the fewest participants in the program’s 20-year history . As a result of the caseload decline, federal funds that were previously used to fund the CalWORKs program are freed up for other purposes . The Governor proposes to spend the freed-up funds to (1) offset General Fund costs outside of CalWORKs, (2) fund a new home visiting program in CalWORKs, and (3) fund a one-time early education grant program in the California Department of Education . We evaluate the Governor’s proposal for CalWORKs, highlight issues and questions for legislative consideration, and note that the freed-up funds provide the Legislature with an opportunity to create its own plan for spending the funds . Governor’s Proposals for IHSS and SSI\/SSP Program Appear Reasonable. We have reviewed the administration’s 2018-19 budget proposals for the In-Home Supportive Services (IHSS) and the Supplemental Security Income\/State Supplementary Payment (SSI\/SSP) . While we raise a few issues for legislative consideration\u2014mainly related to the new methodology for calculating administrative costs in IHSS\u2014overall we find the administration’s proposals to be reasonable at this time . We will continue to monitor IHSS and SSI\/SSP programs and update the Legislature if we think any updates to the caseload and budgeted funding levels should be made . Department of Developmental Services (DDS) Budget Reflects Continued Activity Leading to Closure of Developmental Centers (DCs). In 2015, the administration announced its plan to close the state’s remaining DCs by the end of 2021 . The transition of the remaining DC residents to the community appears on track for 2018-19 . Noting that the Legislature has been considering a proposal to earmark any possible savings from the closures of DCs for the DDS community services program, we discuss the benefit of the Legislature directing DDS to conduct a comprehensive assessment of service gaps and related unmet funding requirements in the community services system overall . Governor Continues to Implement Continuum of Care Reform (CCR), Some Challenges Emerge. The Governor’s budget proposes funding in 2018-19 to continue to implement CCR in the state’s foster care system . At a high level, CCR aims to reduce reliance on long-term group home placements and increase the utilization and capacity of home-based family placements for children in the foster care system . While the Governor’s proposal reflects more realistic estimates of the costs and savings associated with CCR than assumed in recent Governor’s budgets, it does not propose any major changes in CCR policy . We provide background on CCR, highlight a few implementation challenges that have emerged, describe the Governor’s funding proposal, and raise issues and questions for legislative consideration with the goal of addressing these implementation challenges . gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 3 OVERVIEW HEALTH Background on Major Health Programs California’s major health programs provide a variety of health benefits to its residents . These benefits include purchasing health care services (such as primary care) for qualified low-income individuals, families, and seniors and persons with disabilities (SPDs) . The state also administers programs to prevent the spread of communicable diseases, prepare for and respond to public health emergencies, regulate health facilities, and achieve other health-related goals . The health services programs are administered at the state level by the Department of Health Care Services (DHCS), Department of Public Health, Department of State Hospitals (DSH), the California Health Benefits Exchange (known as Covered California or the Exchange), and other California Health and Human Services Agency (CHHSA) departments . The actual delivery of many of the health care services provided through state programs often takes place at the local level and is carried out by local government entities, such as counties, and private entities, such as commercial managed care plans . (Funding for these types of services delivered at the local level is known as local assistance, whereas funding for state employees to administer health programs at the state level and\/or provide services is known as state operations . ) Expenditure Proposal by Major Programs Overview of General Fund Health Budget Proposal. The Governor’s budget proposes $23 .8 billion from the General Fund for health programs . This is an increase of $1 .6 billion\u2014or 7 .1 percent\u2014above the revised estimated 2017-18 spending level, as shown in Figure 1 . Summary of Major General Fund Budget Assumptions and Changes. The year-over-year increase of $1 .6 billion General Fund over the revised estimated 2017-18 spending level is largely comprised of a net increase in expenditures in Medi-Cal local assistance . (We note that the roughly 15 percent increase in General Fund expenditures in DSH reflects in part the proposed implementation of various strategies intended to reduce the number of incompetent-to-stand-trial patients awaiting placement .) The net increase in Medi-Cal local assistance of $1 .5 billion General Fund is due to several factors, including: Figure 1 Major Health Programs and Departments\u2014Budget Summary General Fund (Dollars in Millions)a 2017\u201118 Estimated 2018\u201119 Proposed Change Amount Percent Medi-Cal\u2014Local Assistance $20,058 $21,589 $1,531 7.6% Department of State Hospitals 1,544 1,773 229 14.8 Department of Public Health 148 143 -5 -3.4 Other Department of Health Care Services programsb 235 54 -181 -76.9 Office of Statewide Health Planning and Development 33 33 \u2014 \u2014 Emergency Medical Services Authority 9 9 \u2014 \u2014 All other health programs (including state support)c 226 224 -2 -0.8 Totals $22,254 $23,826 $1,572 7.1% a Excludes general obligation bond costs. b Local assistance only. Reduction in 2018-19 reflects a $222 million reimbursement from Proposition 98 funds related to certain Medi-Cal administrative activities performed by schools. c Includes Health and Human Services Agency. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 4 Higher projected General Fund spending due to a higher proportion of Proposition 56 tobacco tax revenues in 2018-19 being budgeted to pay for supplemental provider payments as opposed to offsetting General Fund cost growth . Increased costs related to the state’s responsibility for a higher share of costs for the Patient Protection and Affordable Care Act (ACA) optional expansion population . Higher projected spending related to general growth in health care costs . We note that the January Governor’s budget, which was finalized before subsequent congressional action to reauthorize funding for the Children’s Health Insurance Program (CHIP) administered through Medi-Cal, included $300 million of higher year-over-year General Fund costs in 2018-19 for CHIP . These higher costs reflected a full-year cost to backfill an assumed reduction in federal funds, continuing from 2017-18, for CHIP . Recent federal action to reauthorize federal funding for CHIP initially at an enhanced rate will instead reduce General Fund costs by a total of $900 million over 2017-18 and 2018-19 relative to what the January budget assumed . With the adjustment to the Medi-Cal General Fund budget, the year-over-year net increase in Medi-Cal local assistance would be roughly $1 .2 billion, or 6 .2 percent . Finally, we note that the Governor’s budget does not provide any additional funding for Medi-Cal in 2018-19 pursuant to a budget formula in Proposition 55 (2016) that extended tax rate increases on high-income Californians . Proposition 56 Medi-Cal Proposal. Proposition 56 (2016) raised state taxes on tobacco products and dedicates the majority of associated revenues to Medi-Cal on an ongoing basis . The 2017-18 budget included a two-year budget agreement between the Legislature and the administration on the use of Proposition 56 revenues in Medi-Cal . We find that the Governor’s updated Proposition 56 Medi-Cal proposal\u2014discussed in detail in the Medi-Cal section of this report\u2014essentially aligns with the 2017-18 budget agreement . Specifically, of the total amount of 2017-18 and 2018-19 Proposition 56 revenues, the Governor allocates a total of about $1 .4 billion to provider payment increases, with the remaining balance of $880 million to be used to offset General Fund spending on Medi-Cal cost growth . We also note that the Governor’s budget proposal reflects a downward adjustment in the estimated costs to implement the provider payment increases as specifically structured in the 2017-18 agreement . This in effect frees up Proposition 56 resources that the Legislature can target for use in Medi-Cal in 2018-19 . HUMAN SERVICES Background on Major Human Services Programs California’s major human services programs provide a variety of benefits to its residents . These include income maintenance for the aged, blind, or disabled; cash assistance and employment services for low-income families with children; protecting children from abuse and neglect; providing home care workers who assist the aged and disabled in remaining in their own homes; providing services to the developmentally disabled; collection of child support from noncustodial parents; and subsidized child care for low-income families . Human services programs are administered at the state level by the Department of Social Services, Department of Developmental Services (DDS), Department of Child Support Services, and other CHHSA departments . The actual delivery of many services takes place at the local level and is typically carried out by 58 separate county welfare departments . A major exception is the Supplemental Security Income\/State Supplementary Payment program, which is administered mainly by the U .S . Social Security Administration . In the case of DDS, community-based services (the type of services received by the vast majority of DDS consumers) are coordinated through 21 nonprofit organizations known as Regional Centers . Expenditure Proposal by Major Programs Overview of the General Fund Human Services Budget Proposal. The Governor’s budget proposes expenditures of $13 .5 billion from the General Fund for human services programs in 2018-19 . As shown in Figure 2, this reflects a net increase of $375 million\u2014 or 2 .9 percent\u2014above estimated General Fund gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 5 expenditures in 2017-18 . The budget reflects modest year-over-year changes in the General Fund budget for some departments and programs, while reflecting more significant changes for others, including California Work Opportunity and Responsibility to Kids (CalWORKs), In-Home Supportive Services (IHSS), and Child Welfare Services programs . In general, the more significant year-over-year changes in General Fund support for these programs are in part due to various funding shifts that have occurred over the last several years . These funding shifts result in General Fund increases and decreases that are not necessarily representative of broader trends in caseload and service costs in these programs . A Closer Look at Total Human Services Funding. For those programs that are demonstrating more significant General Fund increases or decreases, taking a closer look at the total funding proposed for their support provides a clearer picture of their overall growth or decline . As shown in Figure 3, after accounting for total funding from all sources, growth or decline in most of these programs is generally relatively modest . We note that growth in IHSS remains relatively high even when looking at total funds\u2014we describe the main Figure 2 Major Human Services Programs and Departments\u2014Budget Summary General Fund (Dollars in Millions) Program 2017-18 Estimated 2018-19 Proposed Change Amount Percent SSI\/SSP $2,861.9 $2,827.0 -$34.9 -1.2% Department of Developmental Services 4,205.2 4,440.9 235.7 5.6 CalWORKs 454.7 551.9 97.2 21.4 In-Home Supportive Services 3,388.0 3,641.7 253.6 7.5 County Administration and Automation 772.0 766.1 -5.9 -0.8 Child Welfare Servicesa 517.4 433.1 -84.2 -16.3 Department of Child Support Services 315.6 315.6 0.1 \u2014 Department of Rehabilitation 64.6 64.6 \u2014 0.1 Department of Aging 34.0 34.0 \u2014 \u2014 All other human services (including state support) 466.2 379.9 -86.4 -18.5 Totals $13,079.6 $13,454.8 $375.2 2.9% a This includes, among other programs, child protective services, foster care services, and kin guardian and adoption assistance. It generally reflects child welfare services spending that is not realigned to counties. Figure 3 Major Human Services Programs and Departments\u2014Budget Summary Total Funds (Dollars in Millions) Program 2017\u201118 Estimated 2018\u201119 Proposed Change Amount Percent SSI\/SSP $9,935.7 $10,096.7 $161.0 1.6% Department of Developmental Services 6,953.8 7,305.0 351.2 5.1 CalWORKs 5,001.9 4,818.5 -183.4 -3.7 In-Home Supportive Services 10,294.8 11,241.9 947.1 9.2 County Administration and Automation 2,314.9 2,285.3 -29.6 -1.3 Child Welfare Servicesa 6,287.4 6,246.7 -40.7 -0.6 Department of Child Support Services 1,010.7 1,011.5 0.8 0.1 Department of Rehabilitation 458.5 460.1 1.6 0.3 Department of Aging 210.2 201.5 -8.8 -4.2 a This includes, among other programs, child protective services, foster care services, and kin guardian and adoption assistance. It generally reflects child welfare services spending that is not realigned to counties. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 6 factors contributing to this growth in the analysis that follows . Governor’s Budget Largely Reflective of Current Law and Policy. Our analysis of the Governor’s human services budget proposal indicates that it is largely in line with the implementation of current law and policy . For example, the proposal adjusts for increases and decreases related to changes in program caseloads and the continued implementation of existing policy changes\u2014such as the implementation of minimum wage increases in certain programs . Although the Governor’s 2018-19 budget is largely related to the implementation of current law, there are a few exceptions . One example is a proposal to create a new home visiting program in CalWORKs . In the analysis that follows, we provide an overview of the Governor’s proposals for the major human services programs, provide insight into the underlying program trends that lead to the proposed budget levels, and raise issues for legislative consideration . MEDI-CAL BACKGROUND In California, the federal-state Medicaid program is administered by DHCS as the California Medical Assistance Program (Medi-Cal) . Medi-Cal is by far the largest state-administered health services program in terms of annual caseload and expenditures . As a joint federal-state program, federal funds are available to the state for the provision of health care services for most low-income persons . Before 2014, Medi-Cal eligibility was mainly restricted to low-income families with children, SPDs, and pregnant women . As part of the ACA, beginning January 1, 2014, the state expanded Medi-Cal eligibility to include additional low-income populations\u2014primarily childless adults who did not previously qualify for the program . This eligibility expansion is sometimes referred to as the optional expansion . Financing. The costs of the Medicaid program are generally shared between states and the federal government based on a set formula . The federal government’s contribution toward reimbursement for Medicaid expenditures is known as federal financial participation . The percentage of Medicaid costs paid by the federal government is known as the federal medical assistance percentage (FMAP) . For most families and children, SPDs, and pregnant women, California generally receives a 50 percent FMAP\u2014meaning the federal government pays one-half of Medi-Cal costs for these populations . However, a subset of children in families with higher incomes qualifies for Medi-Cal as part of CHIP . Currently, the federal government pays 88 percent of the costs for children enrolled in CHIP and the state pays 12 percent . (We describe recent federal actions that affect CHIP funding later in this write-up .) Finally, under the ACA, the federal government paid 100 percent of the costs of providing health care services to the optional expansion population from 2014 through 2016 . Beginning in 2017, the federal cost share decreased to 95 percent, phasing down to 94 percent in 2018 and down further to 90 percent by 2020 and thereafter . Delivery Systems. There are two main Medi-Cal systems for the delivery of medical services: fee-for-service (FFS) and managed care . In the FFS system, a health care provider receives an individual payment from DHCS for each medical service delivered to a beneficiary . Beneficiaries in Medi-Cal FFS may generally obtain services from any provider who has agreed to accept Medi-Cal FFS payments . In managed care, DHCS contracts with managed care plans, also known as health maintenance organizations, to provide health care coverage for Medi-Cal beneficiaries . Managed care enrollees may obtain services from providers who accept payments from the managed care plan, also known as a plan’s provider network . The plans are reimbursed on a capitated basis with a predetermined amount per person per month, regardless of the number of services an individual receives . Medi-Cal managed care plans provide enrollees with most Medi-Cal covered health care services\u2014including hospital, physician, and pharmacy services\u2014and are responsible for ensuring enrollees are able to access covered health services in a timely gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 7 manner . (In some counties, Medi-Cal managed care plans also provide long-term services and supports, including institutional care in skilled nursing facilities and certain home- and community-based services .) Managed care enrollment is mandatory for most Medi-Cal beneficiaries, meaning these beneficiaries must access most of their Medi-Cal benefits through the managed care delivery system . In 2018-19, more than 80 percent of Medi-Cal beneficiaries are projected to be enrolled in managed care . Managed Care Models. The number and types of managed care plans available vary by county, depending on the model of managed care implemented in each county . Counties can generally be grouped into four main models of managed care: County Organized Health System (COHS). In the 22 COHS counties, there is one county-run managed care plan available to beneficiaries . Two-Plan. In the 14 Two-Plan counties, there are two managed care plans available to beneficiaries . One plan is run by the county and the second plan is run by a commercial health plan . Geographic Managed Care (GMC). In GMC counties, there are several commercial health plans available to beneficiaries . There are two GMC counties\u2014San Diego and Sacramento . Regional. Finally, in the Regional model, there are two commercial health plans available to beneficiaries across 18 counties . Imperial and San Benito Counties have managed care plans that are not run by the county and do not fit into one of these four models . In Imperial County, there are two commercial health plans available to beneficiaries, and in San Benito, there is one commercial health plan available to beneficiaries . OVERVIEW OF THE MEDI-CAL BUDGET The Governor’s budget revises estimates of General Fund spending in 2017-18 upward by $544 million (2 .8 percent) relative to what was assumed in the 2017-18 Budget Act. The Governor’s budget further proposes $21 .6 billion for Medi-Cal from the General Fund in 2018-19, an increase of $1 .5 billion (7 .6 percent) over revised 2017-18 estimates . In terms of federal funds, the Governor’s budget revises estimates of federal spending in Medi-Cal in 2017-18 downward from previous estimates by $5 .2 billion (7 .6 percent) . The Governor’s budget further estimates $63 .7 billion in federal funding for Medi-Cal in 2018-19, an increase of $3 .5 billion (5 .4 percent) over revised 2017-18 estimates . Below, we summarize the main factors that contribute to changes in the Medi-Cal budget in both the current and the upcoming fiscal years . Estimated and Proposed General Fund Spending Current-Year Adjustments. Increased estimated General Fund spending in Medi-Cal in 2017-18 reflects the net effect of multiple adjustments, the most significant of which include: One-time costs of about $300 million for retrospective payments to the federal government related to prescription drug rebates . Most of the increased costs from these payments is the result of a shift in timing, where some payments that were planned to be made in 2016-17 have been delayed until 2017-18 . Offsetting savings of about $270 million from a higher estimate of prescription drug rebates in managed care . Higher estimates for 2017-18 are based on actual rebate amounts coming in higher than previously budgeted . Costs of about $200 million to correct a budgeting methodology used to construct estimates of managed care costs that previously underestimated costs for SPDs . Higher projected General Fund spending of about $170 million related to a reduction in hospital quality assurance fee (HQAF) revenues available to offset General Fund costs in Medi-Cal . The amount of HQAF revenues available to offset General Fund costs is tied to the total amount of supplemental Medi-Cal payments made to private hospitals, the nonfederal share of which are financed with HQAF revenues . A technical change to how much federal funding is available for these supplemental payments resulted in lower total payments in some years and, therefore, decreased estimated HQAF revenues available to offset General Fund Medi-Cal costs in 2017-18 . gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 8 Budget-Year Changes. Year-over-year growth in General Fund Medi-Cal spending in 2018-19 largely reflects the net effect of the following major factors: Higher projected spending of $540 million to backfill Proposition 56 tobacco excise tax revenues that, while offsetting General Fund Medi-Cal costs in 2017-18, are proposed under the Governor’s budget to instead pay for supplemental payments to certain providers in 2018-19 . We describe the Governor’s proposed allocation of Proposition 56 revenues in a later section . Higher projected spending of $300 million to reflect a full year of an assumed reduction in federal funds, continuing from 2017-18, for CHIP . The lost federal funds are assumed to be backfilled with an equivalent amount of General Fund . We discuss this assumption and recent federal actions related to CHIP funding in a later section . Increased costs of roughly $200 million related to the state’s responsibility for a higher share of costs for the ACA optional expansion . The state’s share of cost for newly eligible beneficiaries increases from an effective 5 .5 percent in 2017-18 to an effective 6 .5 percent in 2018-19 . Increased costs of about $130 million related to the planned expansion into additional counties of the Drug Medi-Cal Organized Delivery System waiver, a joint federal-state-county demonstration project aimed at providing a full continuum of substance use disorder services to Medi-Cal enrollees . Higher projected spending in the hundreds of millions of dollars related to general growth in health care costs . Federal Funding Changes Changes in federal funding in Medi-Cal assumed in the Governor’s budget\u2014a decrease in 2017-18 relative to prior estimates and an increase in 2018-19 relative to revised 2017-18 estimates\u2014are also the result of a variety of factors . We briefly summarize the impact of two of the major factors below . ACA Optional Expansion Retroactive Managed Care Rate Recoupment. When the state expanded Medi-Cal eligibility under the ACA in January 2014, it was necessary to develop capitated rates that would be paid to managed care plans to provide health care services to the newly eligible population . In the absence of experience on the cost of providing health care to this new population, there was significant uncertainty about the appropriate level of the capitated rates . In recognition of this uncertainty, capitated rates for the expansion population were initially set relatively high, with the understanding that any excess funding provided to managed care plans would be recouped retroactively if actual experience turned out to be less costly than initial assumptions . Since January 2014, the costs of providing health care services to the optional expansion population have come in below expectations, creating the need to recoup significant funds from the managed care plans . Specifically, DHCS has identified $5 .3 billion in recoupments for the period from July 2015 through December 2016 that will be collected from managed care plans during 2017-18 . Since the federal government paid 100 percent of capitated rates for the optional expansion population during this period, these recouped funds will be returned to the federal government . These retroactive recoupments mean that net federal funding in Medi-Cal in 2017-18 is $5 .3 billion less than it otherwise would be, and the absence of recoupments related to the ACA optional expansion in 2018-19 is the largest factor contributing to the year-over-year increase in federal funding budgeted for Medi-Cal in 2018-19 . Capitated rates have since been reduced to reflect actual experience, such that the need for additional recoupments in the future should be relatively limited . Changes to Hospital Supplemental Payment Programs. The state operates various supplemental payment programs that provide increased reimbursements to various Medi-Cal provider types, including public and private hospitals . In 2016, the federal government finalized a sweeping set of regulations related to managed care payments in Medicaid that had significant implications for many of the state’s supplemental payment programs . In order to comply with the final regulations, the state has restructured some aspects of key hospital supplemental payment programs . In some cases, this restructuring is resulting in shifts in the timing of supplemental payments, totaling in the billions of dollars . These timing gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 9 shifts account for a significant portion of the reduced federal funding in Medi-Cal in 2017-18 . (The timing shifts also affect spending from related state special funds .) In addition to changes to hospital supplemental payment programs resulting from the federal managed care regulations, changes to the calculation of maximum payments allowed in these programs, such as under the HQAF program described above, also contribute to lower federal funds in 2017-18 . In the sections that follow, we (1) review the administration’s caseload estimates for the Medi-Cal program, (2) describe the administration’s calculation of Medi-Cal funding available under Proposition 55, (3) discuss recent federal actions related to CHIP, and (4) assess the administration’s proposed plan for allocating Proposition 56 tobacco tax revenues . CASELOAD PROJECTIONS According to the Medi-Cal Eligibility Data System, there were about 13 .4 million people enrolled in Medi-Cal in August 2017 . This count includes over 3 .8 million enrollees\u2014mostly childless adults\u2014who became newly eligible for Medi-Cal under the ACA optional expansion . A substantial number of individuals who were previously eligible\u2014sometimes referred to as the ACA mandatory expansion \u2014are also assumed to have enrolled as a result of eligibility simplification, enhanced outreach, and other provisions and effects of the ACA . After several years of significant enrollment growth largely due to the ACA, the caseload appears to have stabilized . In the following sections, we describe recent historical trends in various components of the Medi-Cal caseload and projections in the Governor’s budget for Medi-Cal enrollment in 2017-18 and 2018-19 . Historical Trends Figure 4 (see next page) displays over a decade of observed and estimated caseload for the major categories of enrollment in Medi-Cal: (1) families and children, (2) SPDs, and (3) the ACA optional expansion . Families and Children Caseload Typically Countercyclical to State Economy. Historically, the families and children caseload has been countercyclical to changes in the state’s economy\u2014 meaning enrollment has tended to increase during an economic downturn and decrease during an economic expansion . In the last recession, which formally lasted from December 2007 through June 2009, the families and children caseload did increase; however, enrollment did not decline in the years that followed as might have been expected, with growth continuing through 2015-16 . This departure from the traditional countercyclical pattern for families and children in part reflects a shift of CHIP enrollees into the families and children caseload in Medi-Cal in 2013-14, as well as the effect of the mandatory expansion described above . These factors, which pushed families and children enrollment higher than it otherwise would be in an expanding economy, now appear to have taken their course and the families and children caseload has begun to decline . Specifically, the administration estimates that the families and children caseload declined 2 percent in 2016-17 . Growth in SPD Enrollment Slowed in Recent Years. Both the seniors caseload and the persons with disabilities caseload have typically grown at a rate of roughly between 2 percent and 3 percent annually, and are typically less affected by changes in the state’s economy . In a departure from the historical trend, annual growth in seniors enrollment spiked to above 5 percent from 2013-14 through 2015-16, but has returned to the historical trend since 2016-17 . In contrast, growth in enrollment of persons with disabilities slowed beginning in 2013-14 and the caseload actually declined in 2015-16 and 2016-17 . The overall net effect of these offsetting effects is growth in SPD enrollment of less than 2 percent since 2015-16\u2014slower than would have been expected based on the historical trend . The exact reasons for the departure from the historical trend for SPDs are not clear, but they likely relate to the implementation of the ACA . Unexpected faster growth in the seniors caseload from 2013-14 through 2015-16 could potentially have been due to the effect of the mandatory expansion . Alternatively, the growth in the seniors caseload might have been the result of delays in removing enrollees from the caseload that had changes in circumstances that made them no longer eligible . Some administrative processes in Medi-Cal experienced delays during this period because of increased workload from significant ACA-related enrollment . Unexpected declines in the enrollment of persons with disabilities may be related to some individuals enrolling in Medi-Cal as part of gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 10 the ACA optional expansion instead of as part of the persons with disabilities caseload . In any given year, individuals enter and exit the persons with disabilities caseload\u2014the net growth or decline in the caseload in any given year is the difference between the entrances and the exits . It may be that, after Medi-Cal eligibility was expanded in 2014, some individuals that previously would have entered the persons with disabilities caseload instead entered the optional expansion caseload . This would result in declines in the persons with disabilities caseload being offset by a portion of the increase in the ACA optional expansion caseload . ACA Optional Expansion Caseload Is Stabilizing. The optional expansion population grew rapidly beginning in January 2014, but growth has since slowed significantly and appears to be stabilizing . In 2016-17, the administration estimates that the optional expansion population grew by only 0 .1 percent . Governor’s Budget Caseload Projections Governor’s Budget Projects Flat Overall Caseload in 2017-18 and 2018-19. The Governor’s budget projects an average monthly Medi-Cal caseload of 13 .5 million in 2017-18, a slight decrease of 0 .5 percent relative to estimated total caseload in 2016-17 . The budget further projects the Medi-Cal caseload to remain virtually flat in 2018-19 . Within the total caseload projection, the budget assumes that (1) the families and children caseload will continue to slowly decline; (2) the seniors caseload will continue to grow consistent with historical trends and the persons with disabilities caseload will be flat, resulting on net in modest growth in the SPD caseload; and (3) the a Includes certain refugees, undocumented immigrants, and hospital presumptive eligibility enrollees. Average Monthly Enrollees (In Millions) Budget Assumes Flat Medi-Cal Caseload Figure 4 2 4 6 8 10 12 14 16 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2017-18 2018-19 Families and Childrena ACA = Patient Protection and Affordable Care Act. Seniors and Persons With Disabilities ACA Optional Expansion 2016-17 Estimated Projected gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 11 ACA optional expansion caseload will experience slow growth . Administration’s Caseload Projections Appear Reasonable. We have reviewed the administration’s caseload estimates and find them to be reasonable . As we have noted in recent years, substantial ACA-related changes have made it challenging to project caseload . For example, the unanticipated decline in the persons with disabilities caseload makes it challenging to anticipate how this component of the caseload will change in the future . However, we expect that the factors leading to this decline are likely not ongoing and think the administration’s assumption that this caseload will remain flat in 2018-19 (ending the recent downward trend) is appropriate . We also expect that the families and children caseload will continue to decline gradually as the state’s economy continues to expand, consistent with the administration’s projections . Ultimately, we expect the optional expansion caseload to also follow a countercyclical pattern . Given remaining uncertainty about this newly eligible population, however, we think it is prudent to assume the optional expansion caseload may continue to slowly grow . We will provide the Legislature an updated assessment of DHCS’ caseload projections at the May Revision when additional caseload trend data are available . PROPOSITION 55 In 2016, voters passed Proposition 55, which extended tax rate increases on high-income Californians . Proposition 55 includes a budget formula that goes into effect in 2018-19 . This formula requires the Director of Finance to annually calculate the amount by which General Fund revenues exceed constitutionally required spending on schools and the workload budget costs of other government programs that were in place as of January 2016 . One-half of General Fund revenues that exceed constitutionally required spending on schools and workload budget costs, up to $2 billion, are directed to increase funding for existing health care services and programs in Medi-Cal . The Director of Finance is given significant discretion in making calculations under this formula . Under calculations made for the 2018-19 budget, the Director of Finance finds that General Fund revenues do not exceed constitutionally required spending on schools and workload budget costs . As a result, the Governor’s budget provides no additional funding for Medi-Cal pursuant to the Proposition 55 formula . Our office is reviewing the administration’s approach to the Proposition 55 formula and will provide our comments to the Legislature at a later time . FEDERAL REAUTHORIZATION OF CHIP FUNDING Background CHIP Provides Health Insurance to Low-Income Children. CHIP is a joint federal-state program that provides health insurance coverage to children in low-income families, but with incomes too high to qualify for Medicaid . States have the option to use federal CHIP funds to create a stand-alone CHIP or to expand their Medicaid programs to include children in families with higher incomes (commonly referred to as Medicaid-expansion CHIP) . California transitioned from providing CHIP coverage through its stand-alone Healthy Families Program to providing CHIP coverage through Medi-Cal . With this transition, completed in the fall of 2013, Medi-Cal (through CHIP) generally provides coverage to children in families with incomes up to 266 percent of the federal poverty level (FPL) . Some infants and pregnant women in families with incomes up to 322 percent of the FPL may also be eligible through CHIP for Medi-Cal . The administration estimates that there will be around 1 .3 million beneficiaries enrolled in CHIP coverage in 2018-19 . Federal Cost Share for CHIP Is Traditionally Higher Than for Medicaid. Traditionally, the federal government provides a higher FMAP for CHIP coverage in California relative to Medicaid . The historical FMAP for the CHIP population has been 65 percent (compared to the 50 percent FMAP traditionally for Medi-Cal), although this has been further enhanced to 88 percent by the ACA, as discussed below . CHIP Funding Is Capped. Unlike Medi-Cal, CHIP is not an entitlement program . States receive annual allotments of CHIP funding based on their CHIP FMAP and historical CHIP spending . Generally, states receive allotments that are sufficient to cover the federal share of CHIP expenditures for the full federal fiscal year (FFY) . (A FFY runs from October 1 through September 30 .) If a state does not spend its full annual allotment in a given gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 12 year, the state may continue to draw down unspent funds in the next year . The ACA and CHIP ACA Authorized an Enhanced FMAP for CHIP, but Congress Had Only Appropriated Funding Through September 2017. Beginning in FFY 2015-16, the ACA authorized an enhanced FMAP for CHIP through FFY 2018-19 . Under the ACA, California’s CHIP FMAP increased from 65 percent to 88 percent . However, at the time of congressional reauthorization for an enhanced FMAP for CHIP, Congress had appropriated funding for CHIP only through FFY 2016-17 (ending September 30, 2017) . ACA Maintenance-of-Effort (MOE) Requirements for CHIP and Medicaid. Under an ACA MOE provision, states that operate CHIP through their Medicaid programs are required to maintain their March 23, 2010 Medicaid and CHIP eligibility levels for children through the end of FFY 2018-19 . The implications of these MOE requirements are uncertain for California because the state transitioned from a stand-alone CHIP to a Medicaid-expansion CHIP after March 2010 . The federal Centers for Medicare and Medicaid Services (CMS) will need to clarify the implications of the ACA MOE requirement for California . Recent Federal Action Congressional appropriation of federal funding for CHIP lapsed on September 30, 2017 . However, California continued to operate CHIP at the higher 88 percent FMAP using a combination of rollover funding from the state’s FFY 2016-17 allotment and funding redistributed from other states to California by CMS . On January 22, 2018, Congress passed (and the President later signed) a reauthorization of federal funding for CHIP, including the following major components: Appropriates Funding for CHIP Through FFY 2022-23. States will continue to receive annual allotments to cover the federal share of CHIP expenditures until September 2023 . Annual allotments will continue to be calculated based on a state’s CHIP FMAP and historical CHIP spending . Maintains Enhanced CHIP FMAP Under ACA Through FFY 2018-19. States will continue to receive the enhanced FMAP for CHIP authorized by the ACA until September 2019 . As previously mentioned, under the ACA, California’s current CHIP FMAP is 88 percent . As we will discuss later, federal funding at this higher FMAP will reduce the state’s General Fund costs for CHIP in 2017-18, 2018-19, and the first quarter of 2019-20 . Begins Ratcheting Down the Enhanced CHIP FMAP in FFY 2019-20 and Returns to Traditional CHIP FMAP in FFY 2020-21. For FFY 2019-20 (starting October 1, 2019), states will receive half of their FMAP enhancement for CHIP authorized by the ACA which, in California, results in a 76 .5 percent FMAP instead of an 88 percent FMAP until September 2020 . For FFY 2020-21 (beginning October 1, 2020), states will return to their traditional CHIP FMAPs which, in California, is a 65 percent FMAP . Maintains MOE Requirement for CHIP Under ACA Through FFY 2022-23. As previously mentioned, the ACA required states to maintain their March 23, 2010 Medicaid and CHIP eligibility levels for children through the end of FFY 2018-19 . Federal reauthorization of CHIP funding generally extends the ACA’s MOE requirement for CHIP until September 2023 . Permits States to Limit Income Eligibility to 300 Percent of the FPL Starting in FFY 2019-20. One exception to the extension of the ACA’s MOE requirement for CHIP through September 2023 is for children in families with household incomes above 300 percent of the FPL . Starting October 1, 2019, states can choose to limit income eligibility for CHIP to at or below 300 percent of the FPL . (Children in families with household incomes at or below 138 percent of the FPL would continue to be covered by Medicaid .) Only a small number of children in families with household incomes above 300 percent of the FPL are currently eligible for CHIP in California . We note that as of the time of our finalizing this budget analysis, Congress passed (and the President later signed) legislation authorizing CHIP funding (at the traditional CHIP FMAP) and the ACA’s MOE gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 13 requirement for CHIP for an additional four years\u2014 through FFY 2026-27 . State Budget Implications Due to congressional appropriations made after the administration finalized its proposed 2018-19 budget, the proposed state budget makes assumptions about the reauthorization of federal funding for CHIP that differ from the recent federal action outlined above . 2018-19 Proposed Budget Assumed Funding for CHIP Appropriated at Traditional CHIP FMAP, Beginning on January 1, 2018. The proposed 2018-19 state budget assumed federal funding for CHIP would be reauthorized, but not at California’s ACA-enhanced CHIP FMAP of 88 percent . Instead, it assumed the state would receive its traditional CHIP FMAP of 65 percent starting January 1, 2018 . (The 2017-18 budget enacted last June had assumed a return to the traditional CHIP FMAP of 65 percent beginning on October 1, 2017 .) Federal Action Reduces Estimated General Fund Medi-Cal Costs by About $300 Million in 2017-18 and About $600 Million in 2018-19. Assuming current caseload and program spending trends continue, reauthorization of federal CHIP funding at the enhanced FMAP of 88 percent will reduce estimated General Fund Medi-Cal costs by about $300 million in 2017-18 and about $600 million in 2018-19\u2014relative to the Governor’s proposed 2018-19 budget assumptions . The Governor’s May Revision budget proposal will reflect this downward adjustment of General Fund costs totaling $900 million over 2017-18 and 2018-19 . Figure 5 reflects the reduction in the state’s cost share in 2017-18 and 2018-19 . CHIP = Children’s Health Insurance Program. State’s Cost Share for CHIP, Federal Fiscal Year a Recent Congressional Action on CHIP Results in Temporary Budget Savings Figure 5 a A federal fiscal year runs from October 1 through September 30. The state fiscal year runs from July 1 through June 30, so the first quarter of the state fiscal year overlaps with the last quarter of the federal fiscal year. b Governor’s 2018-19 General Fund multiyear forecast assumed the state’s cost share would be 35 percent through 2021-22. This figure assumes the forecast would have assumed the same cost share in 2022-23. 5 10 15 20 25 30 35 40% 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23b Assumed (Governor’s Budget) Projected (Congressional Action) gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 14 Reductions in CHIP FMAP in 2019-20 to Increase General Fund Costs Relative to 2018-19. However, starting in 2019-20, the scheduled reduction of California’s CHIP FMAP from 88 percent to 76 .5 percent will increase General Fund costs by about $225 million relative to 2018-19 (based on current caseload and program spending) . A return to California’s traditional CHIP FMAP of 65 percent in 2020-21 will further increase those costs by $525 million relative to 2018-19 . Figure 5 also reflects these increases in the state’s cost share after 2018-19 . (We note, however, that General Fund costs in CHIP are now projected to be lower in 2019-20, and the same in 2020-21, than as assumed in the Governor’s January budget .) As previously mentioned, federal reauthorization of CHIP funding generally extended the ACA’s MOE requirement for CHIP until September 2027 . If CMS determines that California is subject to the ACA MOE requirements (as the administration currently assumes), reductions in available CHIP funding could necessitate changes in state spending to maintain current CHIP eligibility levels . If California is not subject to the ACA MOE requirements, the state would have more flexibility to change eligibility levels as a means to reduce costs in the future . PROPOSITION 56 Proposition 56 raised state taxes on tobacco products and dedicates the majority of associated revenues to Medi-Cal on an ongoing basis . With Proposition 56 revenues that are dedicated to Medi-Cal, the Legislature can use this funding for two main purposes: (1) augmenting the program, such as, for example, by increasing Medi-Cal provider payments and (2) offsetting General Fund spending on cost growth in Medi-Cal . In this piece, we describe: (1) the 2017-18 budget agreement on how funds were to be allocated to these two purposes in both 2017-18 and 2018-19, (2) the Governor’s updated plan for expenditures over the two-year period, (3) the specific provider payment increases included in the 2017-18 budget agreement, and (4) the Governor’s proposal to add a new service category\u2014home health services\u2014for provider payment increases . The 2017-18 Budget Agreement The 2017-18 budget package included a two-year budget agreement on Proposition 56 revenues in Medi-Cal . Broadly speaking, the agreement dedicates Proposition 56 Medi-Cal between the two main uses of Proposition 56 funding described above: (1) increasing payments for certain Medi-Cal providers and (2) paying for anticipated growth in state Medi-Cal costs over and above 2016-17 Budget Act levels, which offsets what otherwise would be General Fund costs . Figure 6 summarizes the use of Proposition 56 funding in Medi-Cal under the 2017-18 budget agreement between the Legislature and the administration . Specifically, it authorized up to $546 million in 2017-18 and up to $800 million in 2018-19 in provider payment increases, with any remaining Proposition 56 Medi-Cal funding from 2017-18 ($711 million) and 2018-19 ($125 million) to be used to offset General Fund spending on cost growth in the program . For 2017-18, the 2017-18 budget agreement came with a structure of fixed dollar amount or fixed percentage increases in provider reimbursement levels that applied to an identified set of Medi-Cal services ranging from physician and dental visits to certain Figure 6 The 2017\u201118 Budget Agreement on the Use of Proposition 56 Funding in Medi\u2011Cal (In Millions) 2017\u201118 2018\u201119 Total Provider payment increasesa $546 $800 $1,346 Offsets to General Fund spending on Medi-Cal cost growthb 711 125 836 Total Proposition 56 Spending in Medi\u2011Cal $1,257c $925c $2,182 a The 2017-18 budget agreement authorized supplemental provider payment funding amounts up to the amounts listed in this figure. b Any Proposition 56 Medi-Cal funding not allocated to augment the program, such as to increase provider payments, is available to offset General Fund spending. c Amounts reflect the administration’s projection of total Proposition 56 revenue allocated to Medi-Cal as of the 2017-18 Budget Act. The Governor’s 2018-19 budget revises upward estimated Proposition 56 revenue allocated to Medi-Cal in both 2017-18 and 2018-19. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 15 women’s health visits . Moreover, it is our understanding that the budget agreement provides that for any provider payment increases in 2018-19 above the total 2017-18 amount, 70 percent is to be dedicated to physician services payment increases and 30 percent is to be dedicated to dental services payment increases . As the 2017-18 budget agreement only goes through 2018-19, future use of Proposition 56 funding for Medi-Cal will be determined through the annual budget process . Overview of the Governor’s 2018-19 Budget Proposal Governor’s 2018-19 Budget Proposal Essentially Consistent With the 2017-18 Budget Agreement. The Governor proposes spending the maximum amount authorized in the 2017-18 budget agreement ($1 .346 billion) on provider payment increases within the provider and service categories designated in the 2017-18 agreement . As such, we find that the Governor’s budget proposal essentially adheres to the agreement . Specifically, the Governor’s budget proposal would extend the provider payment increases structured in the 2017-18 agreement into 2018-19 and allocate the remaining Proposition 56 funding dedicated to provider payment increases to pay for new provider payment increases above 2017-18 levels . Figure 7 summarizes the Governor’s updated 2018-19 budget proposal on the use of Proposition 56 funding in Medi-Cal . The figure shows that the Governor proposes spending slightly more Proposition 56 resources from 2017-18 and 2018-19 on provider payment increases\u2014$1 .378 billion\u2014than the maximum amount authorized under the two-year 2017-18 budget agreement . The increase is attributable to the Governor’s proposed payment rate increase for Medi-Cal home health services, which we discuss later on in this analysis . Governor Does Not Provide a Detailed Spending Plan for $523 Million in Proposition 56 Funding That Is Available for Provider Payment Increases in 2018-19 . . . Under the Governor’s overall Proposition 56 budget proposal, we estimate that $523 million in total Proposition 56 funding is available for additional provider payment increases beyond those structured in the 2017-18 budget agreement . (We note that this amount represents a preliminary estimate that is subject to change at the May Revision .) However, the Governor’s budget proposal does not include a detailed plan for how to structure these additional provider payment increases . . . . Intentionally Leaving Details of the Allocation to Be Worked Out With the Legislature. The Governor’s proposal to allocate this funding broadly for additional provider payment increases without a detailed plan affords the Legislature an opportunity to provide input into how these new payments are structured . For example, the Legislature could identify new categories of providers or services to which Figure 7 The Governor’s 2018\u201119 Budget Proposal on Proposition 56 Funding in Medi\u2011Cal (In Millions) 2017\u201118 2018\u201119 Total Provider Payment Increases: Provider categories in 2017-18 agreementa $412 $412 $823 Additional funding to be committedb \u2014 523 523 Home health services (new) \u2014 32 32 Subtotals ($412) ($966) ($1,378) Offsets to General Fund Spending on Medi\u2011Cal Cost Growthc $711 $169 $880 a Amounts listed represent annual cost estimates of supplemental payments structured in the 2017-18 budget agreement by the fiscal year that the affected services are rendered. As a result, the amounts do not account for supplemental payments that are delayed into subsequent fiscal years and are not directly reflected in the Governor’s 2018-19 budget display totals. b Allocated by the Governor’s 2018-19 budget to broad provider categories included in the 2017-18 budget agreement without a planned payment structure. c Any Proposition 56 Medi-Cal funding not allocated to augment the program, such as to increase provider payments, is available to offset General Fund spending. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 16 to commit this available funding . Alternatively, the Legislature could identify different uses for this funding . For example, the Legislature could commit some or all of this amount to offset General Fund spending on Medi-Cal cost growth or further augment the Medi-Cal program in ways other than increasing provider payments . In the sections that follow, we provide more detailed information on the Governor’s budget proposal for (1) the continuation into 2018-19 of provider payment increases included in the 2017-18 budget agreement and (2) a new provider payment increase for home health services . Governor’s Budget Proposal: Provider Payment Increases Included in the 2017-18 Budget Agreement Increases Structured as Supplemental Payments. The provider payment increases discussed in this section take the form of fixed supplemental payments paid on top of standard reimbursement rates for the affected services . Since the federal government will share in the cost of these supplemental payments (at standard FMAP levels), federal approval of the payments is necessary . Certain 2017-18 supplemental payments began to be made in late 2017, while others are expected to be implemented in early 2018 . Retroactive supplemental payments for services rendered dating back to July 1, 2017 are generally expected to be made in April and May of 2018 . Governor’s 2018-19 Budget Proposes to Spend Maximum Amount Authorized for Provider Payment Increases in 2017-18 Budget Agreement . . . As discussed above, the Governor proposes spending the maximum amount authorized in the 2017-18 budget agreement ($1 .346 billion) on provider payment increases within the provider and service categories designated in the 2017-18 budget agreement . The agreement designated supplemental payment levels for a selected set of services at an estimated annual cost to the state of $546 million . Figure 8 summarizes the maximum funding amounts by which the provider and service categories could be increased under the 2017-18 budget agreement . . . . And Reflects Freed-Up Funding Due to Revised Cost Estimates. Under the Governor’s 2018-19 budget, the estimated annual cost to the state of these designated supplemental payments has been revised downward to $412 million in 2017-18 and 2018-19 . It is our understanding that this downward revision is largely the result of revised assumptions related to the federal share of cost for the majority of these payments being higher than previously projected . The Governor’s 2018-19 budget proposes to spend the funding freed up as a result of the lower updated cost estimates on additional provider payment increases beginning in 2018-19 . Figure 9 summarizes the Governor’s 2018-19 Proposition 56 budget proposal as it relates to the provider payment increases included in the 2017-18 budget agreement . This figure shows (1) the amount of annual Proposition 56 funding needed Figure 8 2017\u201118 Budget Agreement on Proposition 56 Provider Payment Increasesa (In Millions) 2017\u201118 2018\u201119 Two\u2011Year Total Authorized maximum increases to supplemental payments: Physician servicesb $325 $503 $828 Dental servicesb 140 216 356 Women’s healthc 50 50 100 Intermediate Care Facilities for the Developmentally Disabledc 27 27 54 AIDS Medi-Cal Waiver Programc 4 4 8 Totals $546 $800 $1,346 a The 2017-18 budget agreement authorized supplemental provider payment funding amounts up to the amounts listed in this figure. b The 2017-18 Proposition 56 budget agreement authorized physician and dental services provider payment increases to be increased by up to $254 million between 2017-18 and 2018-19 (bringing total Proposition 56 funding for increased provider payments to $800 million). After 2018-19, continuation of physician and dental services provider payment increases is expected to be reevaluated. c Payment increases are intended to be ongoing, though they might be funded with an alternative fund source following 2018-19. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 17 to fully fund the provider payment increases specifically structured in the 2017-18 budget agreement and (2) the additional funding available ($523 million) to be committed under the Governor’s proposal to new provider payment increases beyond those structured in the agreement . Below, we discuss in greater detail the Governor’s 2018-19 budget proposal as it relates to the supplemental payment provider categories included in the 2017-18 budget agreement . Supplemental Payments for Physician Services. The 2017-18 budget agreement designated physician services, such as doctors’ visits, to receive the majority of supplemental payments using Proposition 56 funding in both 2017-18 and 2018-19 . This funding will increase physician payments for the targeted types of physician services by between 20 percent and 45 percent compared to their standard FFS reimbursement levels . These supplemental payments will occur in both the FFS and managed care delivery systems . The federal government has approved the physician services supplemental payments within the FFS delivery system . Federal approval remains pending for these payments within the managed care delivery system but is expected to be received in early 2018, when supplemental payments across the two delivery systems are expected to begin . They are expected to expire after 2018-19, pending a new agreement being reached in the budget development process on whether and how to fund physician services payment increases in subsequent years . Under the Governor’s 2018-19 budget, the estimated state cost of the physician services supplemental payments structured in the budget agreement has been revised downward from $325 million annually to $252 million annually in 2017-18 and 2018-19 . The Governor proposes to use the funding freed up as a result of these lower updated cost estimates to fund additional physician services supplemental payments beginning in 2018-19 . Overall, the Governor proposes to spend $828 million from 2017-18 and 2018-19 Proposition 56 revenues on physician services supplemental payments . This amount is the same as the maximum amount authorized to be allocated to physician services supplemental payments in the 2017-18 budget agreement . Of the $828 million of total proposed spending on physician services provider payment increases, $324 million has been only broadly allocated to this purpose without a detailed spending plan . For Figure 9 The Governor’s 2018\u201119 Proposal for Supplemental Payments Included in the 2017\u201118 Agreement (Proposition 56 Revenues, in Millions) 2017\u201118a 2018\u201119a Additional Funding to Be Committedb Total Physician servicesc $252 $252 $324 $828 Dental servicesc 95 95 166 356 Women’s healthd 50 50 \u2014 100 Intermediate Care Facilities for the Developmentally Disabledd 12 12 \u2014 23 AIDS Medi-Cal Waiver Programd 3 3 \u2014 7 Funding expected to be reallocated among provider categoriese \u2014 \u2014 32 32 Totals $412 $412 $523 $1,346 a Amounts listed represent annual cost estimates of supplemental payments structured in the 2017-18 budget agreement by the fiscal year that the affected services are rendered. Therefore, while corresponding to the display of amounts in the 2017-18 budget agreement table, the amounts will differ from other Governor’s budget documents displaying expenditures on a cash basis. b Allocated by the Governor’s 2018-19 budget to broad provider categories included in the 2017-18 budget agreement without a planned payment structure. c After 2018-19, continuation of the physician and dental services provider payment increases is expected to be reevaluated. d Payment increases are intended to be ongoing, though they might be funded with an alternative fund source following 2018-19. e Reflects available supplemental payment funding originally allocated to provider categories that we do not expect to be adjusted above the cost of the supplemental payments as structured in the 2017-18 budget agreement. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 18 example, the Governor’s budget does not target this funding toward additional physician services or specify higher reimbursement amounts for physician services that currently receive supplemental payments . (We would note that a portion of this $324 million comprises funding that currently is not reflected in the Governor’s budget’s spending totals in 2018-19, but is reserved for commitments in the budget year .) Supplemental Payments for Dental Services. The 2017-18 budget agreement dedicated Proposition 56 funding to pay for dental services supplemental payments in 2017-18 and 2018-19 . These supplemental payments are expected to expire after 2018-19 pending a new agreement being reached on Proposition 56 funding for provider payment increases in subsequent years . Under the Governor’s 2018-19 budget, the estimated state cost of the dental services supplemental payments structured in the 2017-18 budget agreement has been revised downward from $140 million annually to $95 million annually in 2017-18 and 2018-19 . The Governor proposes to use the funding freed up as a result of these lower updated cost estimates to fund additional dental services supplemental payments beginning in 2018-19 . Overall, the Governor’s 2018-19 budget proposes to spend $356 million from 2017-18 and 2018-19 Proposition 56 revenues on dental services supplemental payments . This amount is the same as the maximum amount authorized to be spent on dental services supplemental payments under the 2017-18 budget agreement . Of the $356 million of total proposed spending on dental services provider payment increases, $166 million has been only broadly allocated to this purpose without a detailed spending plan . For example, the Governor’s budget does not target this funding toward additional dental services or specify higher reimbursement amounts for dental services that currently receive supplemental payments . (We would note that a portion of this $166 million comprises funding that currently is not reflected in the Governor’s budget’s spending totals in 2018-19 .) Supplemental Payments for Women’s Health. The 2017-18 budget agreement allocated up to $50 million annually in Proposition 56 funding in 2017-18 and 2018-19 for family planning services offered through the Family Planning, Access, Care, and Treatment Program . These supplemental payments are intended to be ongoing, though they might be funded with an alternative source following 2018-19 . The Governor’s budget proposes to spend the maximum amount authorized under the 2017-18 budget agreement . Supplemental Payments for Intermediate Care Facilities for the Developmentally Disabled (ICF-DDs). ICF-DDs are health facilities that provide residential services to individuals with developmental disabilities . These supplemental payments are intended to be ongoing, though they might be funded with an alternative fund source following 2018-19 . The 2017-18 budget agreement authorized up to $27 million annually in 2017-18 and 2018-19 for supplemental payments for ICF-DDs . Under the Governor’s budget, the estimated cost of these supplemental payments has been revised downward by over 50 percent due to federal limits on the amount by which ICF-DD reimbursement levels can be further augmented using federal funds . Accordingly, under the Governor’s budget, the ICF-DD supplemental payments are estimated to cost around $12 million annually in 2017-18 and 2018-19 . The Governor proposes to use the $31 million in funding freed up as a result of these lower updated cost estimates to fund additional supplemental payments beginning in 2018-19 . (We would note that this funding is not currently reflected in the Governor’s budget’s spending totals in 2018-19 .) It is uncertain to which provider or service categories this freed-up funding would be allocated since the state does not appear to be able to use additional Proposition 56 funding to fund ICF-DD supplemental payments above the amount budgeted in the Governor’s 2018-19 budget proposal . Supplemental Payments for AIDS Medi-Cal Waiver Program. The AIDS Medi-Cal Waiver Program provides home- and community-based services (HCBS) to individuals with the human immunodeficiency virus (HIV) as an alternative to nursing facility care or hospitalization . Such HCBS services could include, for example, skilled nursing services . These supplemental payments are intended to be ongoing, though they might be funded with an alternative fund source following 2018-19 . The 2017-18 budget agreement provided up to $4 million annually in Proposition 56 funding in 2017-18 and 2018-19 for this program, nearly doubling reimbursement levels for many or most of the services provided through the program . The Governor’s budget revised downward the annual gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 19 cost of these supplemental payments to $3 .4 million due to lower updated cost projections of how much Proposition 56 funding is needed to bring AIDS Medi-Cal Waiver Program reimbursement levels up to the levels determined in the 2017-18 budget agreement . The Governor proposes to spend the $1 million in funding freed up as a result of these lower updated cost estimates on additional provider payment increases in 2018-19 . (We would note that this funding is not currently reflected in the Governor’s budget’s spending totals in 2018-19 .) However, it is uncertain whether the Governor intends this funding to be spent on higher supplemental payments in the AIDS Medi-Cal Waiver Program or whether the Governor intends to reallocate this funding to other provider or service categories . Governor’s Budget Proposal: New Proposed Provider Payment Increase for Home Health Services The Governor’s budget dedicates a portion of Proposition 56 Medi-Cal funding to pay for payment rate increases for a health care service type\u2014home health services\u2014that was not targeted to receive payment increases in the 2017-18 budget agreement . Relative to the agreement, this proposal increases the total amount of Proposition 56 revenue proposed to be used to increase Medi-Cal provider payments and decreases the amount of Proposition 56 Medi-Cal funding available to offset General Fund spending on cost growth in the program . Home Health Services. Home health services are services provided to patients in their residence instead of an inpatient setting such as a hospital . Home health service providers such as home health agencies hire registered nurses, licensed vocational nurses, and certified home health aides to\u2014for example\u2014 administer patients’ oral medications, insert feeding tubes, and treat wounds . All Medi-Cal beneficiaries are generally eligible for home health services as long as the services are medically necessary . Medi-Cal reimburses home health services at levels based on the type of health professional who provides the services and the length of time needed . These services are available through the two main Medi-Cal delivery systems, FFS and managed care, as well as through Medi-Cal’s various HCBS waiver programs . (HCBS waiver programs allow states to deliver long-term services and supports, such as home health services, to Medicaid beneficiaries in their residences .) DHCS Identified Potential Problems With Access to Certain Home Health Services in Medi-Cal. The department monitors access to home health services in Medi-Cal FFS through federally mandated access monitoring and self-generated studies on access to particular services . For example, in a late 2016 self-generated study of access to home health services largely within the California Children’s Services program, DHCS concluded there was a gap between the number of hours authorized for eligible beneficiaries and the number of hours rendered by providers . While the study could not explain the disparity, it cited for additional study specific barriers to access, including provider rates, staffing shortages, and geographic disparities . The administration cites this study in support of its proposal to increase certain home health service provider rates in 2018-19 . Proposed 2018-19 Budget Would Increase Home Health Services Provider Rates by 50 Percent. Starting July 1, 2018, the administration proposes to increase provider rates for home health services participating in Medi-Cal FFS and four HCBS waiver programs\u2014the Home and Community-Based Alternatives Waiver, the In-Home Operations Waiver, the Pediatric Palliative Care Waiver, and the AIDS Medi-Cal Waiver Program\u2014by 50 percent . The administration estimates the total cost of the provider rate increase in 2018-19 would be $65 million\u2014$41 million for the rate increase, and $24 million for an anticipated increase in utilization of home health services by 15 percentage points . The Governor’s budget proposes to fund the nonfederal share in 2018-19\u2014$32 million\u2014using Proposition 56 revenues . While the administration proposes that these rate increases be ongoing, it does not identify funding for the nonfederal share after 2018-19 . Issues for Consideration. As discussed above, the Governor’s budget proposes to use $32 million in Proposition 56 revenue that would otherwise be available to offset General Fund spending on cost growth in Medi-Cal to increase payment rates for home health services . In support of its proposal, the administration has provided some evidence that access to home health services could be a challenge for certain Medi-Cal beneficiaries . In deciding whether to approve gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 20 the Governor’s proposal, however, we recommend that the Legislature consider the following: Whether the rate increases should be ongoing or limited term, given the uncertain cause of the gap between the number of authorized hours and rendered hours for home health services . Whether the rate increases should assume increased utilization of roughly 15 percentage points in 2018-19 and, if not, whether the amount of Proposition 56 revenues allocated for these rate increases should be higher or lower to reflect a different assumption about changes in utilization . Should the Legislature consider these issues and wish to increase payment levels for home health services in the amount proposed by the Governor’s budget, we would recommend the Legislature direct DHCS to conduct an additional study to determine the primary cause of the gap between the number of authorized hours and rendered hours for home health services in Medi-Cal . We would also recommend the Legislature direct DHCS to report back to the Legislature on changes in utilization of home health services (and associated costs) in Medi-Cal after the rate increases went into effect . DEPARTMENT OF STATE HOSPITALS OVERVIEW Department Provides Inpatient and Outpatient Mental Health Services. The Department of State Hospitals (DSH) provides inpatient mental health services at five state hospitals (Atascadero, Coalinga, Metropolitan, Napa, and Patton) . In addition, DSH provides outpatient treatment services to patients in the community . Overall, the department is currently budgeted to treat about 6,500 patients in its facilities and another 700 in the community . Patients at the state hospitals fall into one of two categories: civil commitments or forensic commitments . Civil commitments are generally referred to the state hospitals for treatment by counties . Forensic commitments are typically committed by the criminal justice system and include individuals classified as Incompetent to Stand Trial (IST), Not Guilty by Reason of Insanity, Mentally Disordered Offenders (MDOs), or Sexually Violent Predators . Currently, about 90 percent of the patient population is forensic in nature . As of January 15, 2018, the department had about 1,100 patients awaiting placement, including about 900 IST patients . Spending Proposed to Increase by $226 Million in 2018-19. The Governor’s budget proposes total expenditures of $1 .9 billion ($1 .8 billion from the General Fund) for DSH operations in 2018-19, which is an increase of $226 million (13 percent) from the revised 2017-18 level . This increase is primarily due to the implementation of various strategies intended to reduce the number of IST patients awaiting transfer, which we discuss in more detail below . DSH-COALINGA EXPANSION Background DSH Has Minimum Staffing Standards. In order to meet the minimum standards for patient treatment, DSH is required to provide a minimum number of staff depending on the level of care the patient has been assigned to (commonly referred to as level of care staff ) . These staff provide treatment services to DSH patients, and include nursing staff and behavioral health treatment team staff . Based on patients’ diagnoses and treatment plans, the department assigns patients to one of three levels of care (commonly referred to as acuity levels): Intermediate Care Facility (ICF). ICFs provide inpatient skilled nursing services to patients who do not require continuous nursing care . Acute. Acute units provide 24-hour inpatient care services, including medical, behavioral health, and pharmaceutical services . Skilled Nursing Facility (SNF). SNFs provide long-term skilled nursing care, including 24-hour gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 21 inpatient treatment and a variety of physical and behavioral health services . The minimum number of staff needed for each acuity level are based on the following staffing standards: Title 22 Requirements. Title 22 of the California Code of Regulations sets the standards for operating an acute psychiatric hospital . Specifically, Title 22 requires hospitals to be licensed by the California Department of Public Health and sets minimum requirements for staffing and facilities . In particular, it requires a certain minimum number of nursing staff based on patient acuity and associated treatment needs for different nursing shifts (meaning morning, afternoon, or overnight), as shown in Figure 10 . Title 22 nursing staff have many responsibilities, including patient observation, medication distribution, and patient escorting . Treatment Teams. In addition to the nursing staff required by Title 22, DSH also uses a behavioral health treatment team model . Under this model, clinicians work together to provide individual and group treatment to a set number of patients . Each treatment team includes five providers\u2014a psychiatrist, psychologist, social worker, rehabilitation therapist, and registered nurse . Treatment team nursing staff are distinct from Title 22 nursing staff in that they are responsible for developing treatment plans and participating in treatment team meetings . They have an assigned group of patients, rather than being assigned to morning, afternoon, or overnight nursing shifts . The number of patients assigned to each treatment team is determined by patient acuity, as detailed in Figure 11 . In addition to these staff, DSH also provides a variety of other staff to ensure its effective operation . These staff include additional level of care staff, other treatment staff (such as dieticians and medical doctors), and nontreatment staff (such as administrative staff, janitors, firefighters, and hospital police) . Currently, DSH determines the number of non-level of care staff at a facility based on internal assessments of its operations and needs . DSH Staffing Study. In 2016-17, DSH initiated a staffing study to determine whether the staffing at its hospitals resulted in adequate levels of care . The study will review staffing across all state hospitals and patient types in two phases . The first phase of the study covers level of care staff, other treatment staff, and hospital police, and was originally planned to be released by fall 2017 . The second phase is planned to cover the remaining staff, including nontreatment staff (such as custodians and food service workers), hospital operations, and hospital administration staff . At the time of this analysis, neither phase of the staffing study has been released and the department has not provided a timeline for when the two phases will be completed . This study is intended to help the administration and the Legislature determine the extent to which staffing beyond the minimum staffing standards is necessary . MDOs. MDOs are parolees, who after their release from state prison, are transferred to a state hospital for treatment as a condition of their parole because a court has determined that the individual represents a substantial danger of physical harm to others as a result of their mental illness . Around 1,300 (or 18 percent) of Figure 10 Title 22 Staffing Requirementsa Nursing Shift Patient Acuity Intermediate Care Facility Acute Skilled Nursing Facility Morning 1:8 1:6 1:6 Afternoon 1:8 1:6 1:6 Overnight 1:16 1:12 1:12 a Requirements reflect the minimum ratio of nurses to patients. Figure 11 Treatment Team Staffing Ratiosa Acuity Level Staffing Ratio Intermediate Care Facility 1:35 Acute 1:15 Skilled Nursing Facility 1:15 a Ratios reflect the average ratio of treatment team to patients. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 22 patients in state hospitals are MDOs . An MDO patient spends an average of two years in a state hospital . Governor’s Proposal The Governor’s budget proposes an $11 .5 million General Fund augmentation and 81 additional positions in 2018-19 to staff 80 additional MDO beds at 8 different units at DSH-Coalinga . Under the proposal, these resources would increase to $13 .7 million and 97 positions annually beginning in 2019-20 . The department plans to initially activate 40 beds beginning July 1, 2018, then gradually activate additional beds until all 80 beds are activated by July 1, 2019 . The 81 positions requested in 2018-19 include (1) 49 level of care staff to meet minimum staffing standards and (2) 32 positions above these standards . The 32 positions include additional level of care staff, other treatment staff, and nontreatment staff . The total requested positions are consistent with how the department is currently funded to staff other similar state hospital units . According to the administration, the 80 additional beds are needed to house MDOs who are being displaced from DSH-Atascadero and DSH-Patton because the units that currently house them will be converted into Enhanced Treatment Program (ETP) units, which are specialized units for violent and\/or aggressive patients . The 2014-15 Budget Act included $13 .6 million for DSH to construct four ETP units at these facilities . Two of the units are expected to be completed by December 2018, with the remaining two units being completed by April 2019 . LAO Assessment Staffing Request Based on Current Practices. As discussed above, the activation of the 80 additional beds at 8 different units at DSH-Coalinga is necessary to accommodate the MDOs who will be displaced by the activation of the ETP units at DSH-Atascadero and DSH-Patton . Based on the department’s existing staffing standards, it will need at a minimum 49 positions in 2018-19\u2014increasing to 59 positions in 2019-20\u2014to activate these beds . The positions requested above these staffing standards would be consistent with how DSH staffs other similar units . However, as is the case at all DSH facilities, the number of additional staff beyond these standards that are needed remains unclear . Presumably, the staffing study will shed light on this matter . LAO Recommendations Provide Funding to Allow DSH to Staff Proposed Beds Similar to Other Units. We recommend that the Legislature approve the resources requested for DSH to operate the 80 additional beds at DSH-Coalinga . This would allow these beds to be staffed at the same level as other similar units . Require Completion of Staffing Study. In order to ensure that the department completes its staffing study as planned, we also recommend that the Legislature approve provisional language requiring that both phases of the staffing study be complete by January 10, 2019 . This would provide the department one more year to complete the study . At that time, the Legislature would also be able to assess the staffing needs across the entire department and make necessary budget adjustments . PROPOSALS TO EXPAND IST CAPACITY Background IST Referral and Placement Process. Individuals who are IST and face a felony charge are typically referred by a state trial court to DSH to receive restoration services . Once DSH receives the referral, the patient is put on a pending transfer list (commonly referred to by the department as the IST waitlist ) and DSH decides whether to treat the patient in a state hospital or a county-operated program under contract with the department\u2014such as a Jail Based Competency Treatment (JBCT) program . (Under the JBCT program, counties provide restoration treatment in county jails to patients who do not require the intensive level of inpatient treatment provided in state hospitals .) Patients are removed from the waitlist when they are physically transferred to a treatment program . State law does not require an IST patient to be transferred to a program within a specified number of days . However, statute does require the department to report to the court on whether the patient is progressing towards being restored to competency no more than 90 days after he or she was referred to DSH by the court . State law allows felony IST patients to be treated gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 23 for the lesser of three years or the maximum length of time they would have served if convicted . IST Waitlist Continues to Grow Despite Additional Capacity. Over the past several years, total IST felony referrals have increased . Since DSH began reporting referral data weekly in 2013, average monthly felony IST referrals have increased from 232 to 425\u2014an increase of 83 percent . Additional funding has been provided to DSH in recent years to increase its IST capacity . For example, 55 IST beds were activated at DSH-Atascadero in 2015-16 . These efforts, combined with existing IST treatment capacity, allow DSH to operate around 1,800 beds, which can serve around 3,600 patients per year . Despite these efforts, however, the department continues to not have enough IST beds\u2014whether it be in a DSH hospital or program under contract\u2014to treat all patients who are referred by the courts . In fact, the number of patients on the IST waitlist continues to grow . As shown in Figure 12, as of February 5, 2018, there were 933 patients on the waitlist . This is about 270 patients (or 41 percent) higher than the waitlist on August 22, 2017, when the department began providing this information for both DSH hospitals and programs under contract . We note that this includes some patients who have only been waiting for a relatively short period of time, as DSH determines where the patient should receive treatment and they are transferred to the appropriate program . Patients on the waitlist are typically housed in county jails while they wait to be transferred to a DSH program, which is problematic for two reasons . First, due to limited access to mental health treatment in some jails, these patients’ condition can worsen ( decompensate ) while they are in jail, potentially making eventual restoration of competency more difficult . Second, long waitlists can result in increased court costs and a higher risk of DSH being found in contempt of court orders to admit patients . This is because courts in some counties have required DSH to admit patients within certain time frames and DSH can be ordered to appear in court or be held in contempt when it fails to do so . Construction Project at DSH-Metropolitan to Increase IST Beds. In 2015-16, as part of its efforts to expand IST capacity, the Legislature approved funding to increase secure treatment area capacity at DSH-Metropolitan in Norwalk . These modifications are necessary to house forensic patients\u2014including ISTs\u2014because these patients generally are required to be housed in a secure treatment area due to security concerns . Once this project is completed, the department plans to activate 236 new beds, which would be prioritized for IST patients . When this project was approved by the Legislature, the staffing costs for the 236 new beds were estimated to be $48 million annually, or $207,000 per bed . Governor’s Proposal The Governor’s budget for 2018-19 includes an $87 .4 million General Fund augmentation for various proposals to expand IST capacity and reduce the waitlist . (As we discuss later in this write-up, the Governor also proposes $100 million on a one-time basis for DSH to contract with counties to create diversion programs intended to primarily treat offenders Number of Patients Incompetent to Stand Trial Waitlist Continues to Increase Figure 12 100 200 300 400 500 600 700 800 900 1,000 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 24 before they are declared IST .) Specifically, the Governor proposes to: Staff DSH-Metropolitan Beds. The budget proposes $56 .8 million and 346 positions in 2018-19 (increasing to $72 .6 million annually and 473 positions beginning in 2019-20) to staff the 236 beds that are part of the DSH-Metropolitan expansion . These beds are expected to serve around an additional 470 IST patients annually at an average cost of around $308,000 per bed . The 346 positions requested in 2018-19 include (1) 182 level of care staff to meet minimum staffing standards and (2) 164 positions above these standards . The 164 positions include additional level of care staff (such as registered nurses), other treatment staff (such as dieticians), and nontreatment staff (such as janitors) . The total requested positions are consistent with how the department is currently funded to staff other similar state hospital units . Expand JBCT Programs. The budget proposes $15 .9 million in 2018-19 to add up to an additional 160 JBCT beds . This would allow the department to serve around an additional 270 IST patients annually at a cost of around $150,000 per bed . Establish Los Angeles County IST Treatment Program. The Governor’s budget proposes $14 .8 million to establish a community-based IST treatment program in Los Angeles County . This program is expected to add an additional 150 IST beds . This includes (1) 5 beds in locked units of psychiatric hospitals ($183,000 per bed), (2) 45 beds in locked mental health facilities that provide a somewhat lower level of care ($120,000 per bed), and (3) 100 beds in unlocked mental health facilities ($60,000 per bed) . In total, these beds are expected to serve 150 to 200 IST patients annually . As shown in Figure 13, these proposals would allow DSH to treat 940 additional patients annually upon full implementation . LAO Assessment Number of Pending Transfers Does Not Accurately Reflect Waitlist. Typically, waitlists are used to track the number of individuals who temporarily cannot be served by a program due to a lack of available capacity . While the IST waitlist\u2014as currently defined by DSH\u2014includes patients who cannot be served due to a lack of capacity, it also includes patients who are being processed by the department to determine where to treat them as well as those who are waiting a short period of time to be physically transferred to an available bed . The department reports that it should generally take three to six weeks to process IST referrals to determine placement . Accordingly, a more reasonable waitlist for IST treatment might only include individuals who have been on the waitlist for more than six weeks (or 42 days) . This would reflect the number of referrals that DSH should have had sufficient time to process and transport to an IST treatment program . If the waitlist were defined on this basis, the actual waitlist would be around 650\u2014or about one-third lower than the current waitlist . If the referral rate did not increase further, the department could service this waitlist with around 325 additional IST beds . However, the waitlist could be reasonably defined in other ways which would result in a higher or lower waitlist . Figure 13 Number of Beds and Patients Served by Governor’s Proposals 2018\u201119 2019\u201120 Number of Beds Number of Patients Number of Beds Number of Patients Staff DSH-Metropolitan beds 158 317 236 472 Expand JBCT programs 106 252 159 268 Establish Los Angeles County IST program 150 200 150 200 Totals 414 769 545 940 DSH = Department of State Hospitals; JBCT = Jail-Based Competency Treatment; and IST = Incompetent to Stand Trial. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 25 All of Governor’s Proposed Beds May Not Be Necessary. As noted above, alternative methods of defining the IST waitlist would significantly impact the number of additional IST beds needed to ensure that patients are transferred to a treatment program within a reasonable time frame . For example, if the waitlist were established based on the 42-day time frame and the referral rate did not increase, only 325 additional IST beds would be required rather than the 545 beds proposed by the Governor . Activating Beds at DSH-Metropolitan Is Costly Way to Address IST Needs. The annual cost of activating the beds at DSH-Metropolitan ($308,000 per bed) is significantly higher than the JBCT beds ($150,000 per bed) or the Los Angeles County program beds ($83,000 per bed on average) proposed by the Governor . This is partly due to the intensive treatment provided in state hospitals . We also note that proposed staffing costs for the DSH-Metropolitan beds are much higher than initially estimated when the Legislature approved the expansion of secure treatment capacity at the hospital . According to the department, the initial estimate inadvertently did not include certain staffing costs . While these beds are expensive, some of them may be necessary depending on the size of the waitlist and the extent to which there are patients that require relatively intensive treatment . Proposed County-Operated Beds Have Various Advantages, but Additional Information Needed. As discussed above, both the proposed JBCT expansion and Los Angeles County IST program cost significantly less than activating state hospital beds on a per-bed basis . While this is because the county-operated beds would provide less intensive treatment, they have other advantages . For example, these beds allow patients to remain relatively close to their families and the Los Angeles County program would help address the significant need for IST beds in that county . However, the Governor’s proposal does not identify the specific counties that would receive JBCT funding or whether contract terms have been agreed to . We note that DSH has had difficulty in recent years finding counties willing to operate JBCT programs . In addition, while the Los Angeles County program represents a new approach that could reduce the IST waitlist, it is uncertain whether it is a cost-effective strategy . Without the above information, it is difficult to for the Legislature to assess whether or not to approve these two proposals . LAO Recommendations Define IST Waitlist. We recommend that the Legislature define what it considers to be an appropriate IST waitlist, which would allow it to then determine how many additional beds are needed to reduce or eliminate this waitlist . We suggest defining the waitlist as consisting of those patients who have not been placed within six weeks of being found IST\u2014 the amount of time DSH reports it takes to process IST referrals . This would represent how many patients are waiting in county jail for treatment . In addition, we recommend that the Legislature approve budget trailer legislation requiring DSH to report weekly on the size of the waitlist according to the Legislature’s waitlist definition . Approve Additional Capacity Based on Waitlist Definition. After the Legislature defines the IST waitlist, it will be in a much better position to determine the extent to which the additional IST beds proposed by the Governor are necessary . If it is shown that additional beds are needed, we recommend the Legislature first consider the Governor’s proposals to expand JBCT programs and establish the Los Angeles County community-based restoration program before activating any of the DSH-Metropolitan beds . As noted above, these county-operated beds are less costly and may allow patients who do not require the more intensive level of treatment provided in state hospitals to be treated closer to their families and faster than if they waited for a state hospital bed to become available . If the Legislature defined the waitlist as not being placed within six weeks of being found IST (as we suggest), we estimate that around 325 additional IST beds would be needed . A large portion of this need could be met by approving the Governor’s proposed JBCT expansion and Los Angeles County program, which would collectively add an additional 256 IST beds . To address any potential bed need for IST patients who require the more intensive treatment provided in state hospitals, the remaining 69 beds could be provided by activating two 48-bed units at DSH-Metropolitan . This would also give the department some additional beds in case the waitlist increases further than expected . (We note that the remaining two units at DSH-Metropolitan would also be available to address any future increases in the IST waitlist .) gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 26 In order to assist the Legislature in determining the extent to which it wants to approve the Governor’s JBCT and Los Angeles County program proposals, we recommend requiring the department to report at spring budget hearings on (1) which counties will operate the proposed JBCT programs and the status of the negotiations with these counties and (2) a plan to evaluate the cost-effectiveness of the Los Angeles County program . If the Legislature decides to approve funding for the Los Angeles County program, we recommend that it do so on a limited-term basis until the program is evaluated . GOVERNOR’S IST DIVERSION PROPOSAL Background IST Referrals Continue to Increase. As previously mentioned, the number of IST referrals has increased steadily since DSH began tracking referrals in 2013-14 . Specifically, as shown in Figure 14, average monthly felony IST referrals have increased by 17 percent annually . While funding has been provided to increase capacity to treat IST referrals, this increased capacity does not address the rate at which patients are being referred by the courts to DSH . Governor’s Proposal The administration has set a goal of reducing annual IST referrals by 20 percent to 30 percent by July 1, 2021 . In order to help achieve this goal, the Governor’s budget includes a one-time $99 .5 million General Fund augmentation for DSH to contract with counties to establish IST diversion programs that are intended primarily to treat offenders before they are declared IST . The budget also includes $500,000 to support one psychologist and one health program specialist at DSH to review county plans and manage the contracts, as well as support various research-related activities . Under the Governor’s proposed budget trailer legislation, the diversion programs would target individuals who have (1) been arrested for a felony offense, (2) a mental health condition that could render them IST, and (3) a low public safety risk . Courts would have the authority to refer individuals who meet these criteria to the county IST diversion programs . If such individuals successfully complete these programs, judges could drop or reduce their charges . The administration indicates that $91 million (91 percent) of the proposed funding would be allocated to the 15 counties with the highest number of felony IST referrals to DSH, with the remaining funding available to other counties . Participating counties would be required to match 20 percent of the state funding received for the program . Under the Governor’s proposal, counties would be required to use the one-time funds to provide mental health treatment as well as services necessary to meet participants’ non-mental health needs, such as housing and transportation services . In addition, counties would be required to report various information to DSH on a quarterly basis, including the number of people who successfully completed the diversion program and whether charges were dismissed or reduced . IST = Incompetent to Stand Trial. Average Monthly Felony IST Referrals Continue to Increase Figure 14 50 100 150 200 250 300 350 400 450 2013-14 2014-15 2015-16 2016-17 2017-18 gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 27 LAO Assessment Concept of IST Diversion Programs Has Merit . . . If successful, diverting offenders who might otherwise eventually be declared IST and referred by the courts to DSH would help reduce the number of future IST referrals . As a result, such a program could reduce the number of IST patients waiting in county jails for a treatment space at DSH to become available, potentially resulting in some savings for local governments in the near term . In addition, treating individuals in community-based mental health programs at the county-level is generally less costly than providing competency restoration treatment through DSH\u2014$50,000 annually per patient versus between $140,000 and $310,000 annually per patient . We note that if referrals decrease to the point that there is no IST waitlist, it is possible that the state could consider reducing the number of IST treatment beds it operates, which would result in state savings . . . . But Governor’s Proposal Not Well Structured. While the concept of diversion programs has merit, we find that the Governor’s proposal is not well structured to achieve its intended benefits . This is due to the following reasons: Key Program Details Unclear. The Governor’s proposal does not include several key program details . For example, it is unclear (1) how the proposed funding will be allocated to specific counties, (2) the level of funding that will provided, (3) what specific programs and services will be provided, and (4) roughly how many individuals will be served with the proposed funding . The absence of such information makes it difficult for the Legislature to assess whether the amount of funding proposed by the Governor is appropriate and what impact it could have on IST referrals if approved . County Incentives to Participate Are Unclear. Since DSH is responsible for treating felony IST patients, the primary reason counties would want to reduce referrals is to reduce the number of individuals waiting in county jail to be treated by DSH . However, it is unclear whether this benefit is sufficient for counties to justify providing the matching funds required by the program . In addition, since the funding proposed by the Governor is one-time in nature, counties would have to identify the necessary resources to backfill the expiration in state funds if they wanted to continue the programs on an ongoing basis . As a result, it is unclear how many counties would be interested in contracting with DSH to establish a diversion program on a one-time basis, as well as continue the program with their own resources . Impact of Proposal Would Likely Be Minimal. Given that it would take some time for county diversion programs to have a meaningful impact\u2014particularly for those offenders who may need treatment for an extended period\u2014and that the Governor is proposing only to provide funding on a one-time basis, we find that the impact of the proposal on IST referrals would likely be minimal . Moreover, while the Governor’s proposal does require counties to report specific information to DSH, the proposal does not require DSH to conduct a meaningful evaluation of the programs, such as which specific strategies had the greatest impact on reducing IST referrals . Such an evaluation would be important to determine whether certain diversion programs were effective at reducing IST referrals and merit continuation . LAO Recommendation In view of the above concerns, we recommend that the Legislature reject the Governor’s proposal and, instead, direct the department to work with counties to develop specific IST diversion programs that the Legislature could consider funding in 2018-19 or beyond . In order to ensure that the Legislature has sufficient information to assess each specific program, the department should identify in its proposal the specific services each county would provide, the number of patients the county would serve, and a plan to evaluate the program’s effectiveness . If the Legislature chooses to approve such proposals, we would recommend providing funding on a limited-term basis over a few years and not require a local funding match (as proposed by the Governor) . To the extent that a particular county diversion program is shown to be effective at reducing the number of IST referrals from that county, we would recommend the Legislature consider providing ongoing funding for the program . gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 28 CALWORKS BACKGROUND The California Work Opportunity and Responsibility to Kids (CalWORKs) program was created in 1997 in response to the 1996 federal welfare reform legislation that created the federal Temporary Assistance for Needy Families (TANF) program . CalWORKs provides cash grants and employment services to low-income families . The CalWORKs program is administered locally by counties and overseen by the state Department of Social Services (DSS) . Cash Assistance. Grant amounts vary across the state and are adjusted for family size, income, and other factors . For example, a family of three in a high-cost county that has no other income currently receives the maximum cash grant for that family size\u2014$714 per month . On average, families enrolled in CalWORKs are estimated to receive an average grant of $567 per month in 2017-18 . Families enrolled in CalWORKs are generally also eligible for food assistance through the CalFresh program and health coverage through Medi-Cal . Work Requirement. As a condition of receiving aid, adults are generally subject to a work requirement, meaning that they must be employed or participate in job search and readiness training intended to lead to employment . People who are enrolled in work-related activities may also receive services to help them meet this requirement, including subsidized child care and reimbursement for transportation and certain other expenses . Funding. CalWORKs is funded through a combination of California’s federal TANF block grant allocation ($3 .7 billion annually), the state General Fund, realignment funds, and other county funds . In order to receive its annual TANF allocation, the state must spend a maintenance-of-effort (MOE) amount from state and local funds (including realignment and other county funds) to provide services for families eligible for CalWORKs . The MOE amount is $2 .9 billion . In addition to funding for cash grants, counties receive various funding allocations from the state to administer CalWORKs . As will be discussed in greater detail below, the largest of these\u2014known as the single allocation \u2014 funds employment services, eligibility determination and other administrative costs, and child care subsidies . Outline of the CalWORKs Analysis. In the analysis that follows, we (1) describe the program’s ongoing caseload decline, which reduces program costs and consequently provides an opportunity for the Legislature to allocate new resources in CalWORKs or to other areas of the budget; (2) provide an overview of the Governor’s proposed 2018-19 CalWORKs budget; (3) assess the Governor’s proposals to spend freed-up TANF funds available in the budget year; and (4) lay out options the Legislature may wish to consider as it crafts its own priorities for these freed-up funds . CALWORKS CASELOAD NOW AT HISTORIC LOW Fewest Participants in Program’s 20-Year History. The number of families in California receiving cash assistance declined rapidly following federal welfare reform in 1996, largely as a result of new time limits on receiving aid and the requirements that most adults receiving aid participate in work-related activities . Following this transition, as shown in Figure 15, the CalWORKs caseload settled at approximately 480,000 families during the early 2000s . Caseload then increased during the Great Recession, peaking at 585,000 families during 2010-11 . The caseload has declined each year since 2010-11 . Over that time, the number of CalWORKs families has fallen by nearly 30 percent (about 160,000 families) to 425,000 families in 2017-18 . Low Caseload Due Primarily to Strong Economy. The CalWORKs caseload increases or decreases over time depending on how many new families enter the program each month and how many leave each month . When more families enroll each month than leave, the overall caseload increases (the opposite causes the caseload to decrease) . During a typical month when the caseload is steady, about 40,000 eligible families enroll in CalWORKs and about 40,000 families leave the program . When economic conditions and the labor market are strong, employment opportunities are more accessible, hourly wages may rise, and a greater gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 29 share of families are able to meet their basic economic needs . During these times, somewhat fewer families enroll each month than depart, and the overall caseload declines from month to month . In recent years, as the state economy has recovered from the recession and the labor market has expanded, about 3,000 fewer families have enrolled in CalWORKs each month than have left the program . Caseload Decline Expected to Continue in Short Term, but Long-Term Floor Unknown. Both our office and the administration assume that the caseload decline will continue for at least 2018-19 and perhaps longer . In regard to longer-term trends, however, we are less certain about this trajectory . This is because we anticipate that some number of families will continue to be eligible for and benefit from the CalWORKs program even as the economic expansion continues . These cases likely would consist of (1) families experiencing a temporary financial crises that enroll in CalWORKs for a short time and (2) families whose adult members struggle with substantial barriers to long-term employment\u2014such as mental health challenges, substance use, domestic violence, or other issues causing family instability . Although we believe a caseload floor exists, it is difficult to estimate its general level as measured in the overall caseload number . Should this number be relatively high (closer to the current caseload level), the ongoing caseload decline would likely begin to slow relatively soon . If, on the other hand, this floor is lower, the ongoing caseload decline could continue for several years . BUDGET OVERVIEW Total Funding Trends. As shown in Figure 16 (see next page), the Governor’s budget proposes $4 .8 billion in total funding for the CalWORKs program in 2018-19, a net decrease of $183 million (4 percent) relative to the most recent estimate of current-year spending . The net effect is the result of lower spending on cash assistance Average Monthly Caseload (In Thousands) CalWORKs Caseload Now at Historic Low Figure 15 Historic Low 100 200 300 400 500 600 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15 2016-17 2018-19 Note: 2017-18 and 2018-19 data reflect the administration’s caseload forecast prepared as part of the 2018-19 Governor’s Budget. Projection gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 30 payments due to a declining caseload ($174 million less than 2017-18) and a net reduction to the single allocation ($32 million), offset somewhat by new proposed spending on the governor’s home visiting initiative ($27 million) . The $32 million year-over-year reduction in the single allocation represents a $55 million reduction offset by $23 million in funding to implement new activities . Administration’s Updated Caseload Forecast Appears Reasonable. The Governor’s budget updates previous caseload projections and assumes that an average of 425,855 families will receive CalWORKs assistance each month during 2017-18 . This updated projection reflects a nearly 6 percent decline relative to 2016-17 and is 5 .6 percent lower than the level assumed in the 2017-18 Budget Act . The Governor’s budget further projects that an average of 400,777 families will receive CalWORKs assistance each month during 2018-19, a year-over-year decline of about 6 percent . Although the continued rate of caseload decline appears reasonable, more data will be available for us to fully assess the estimate for the May Revision . Recent Shifts in Funding Sources. As shown in Figure 17, the CalWORKs program is funded by a mix of revenue sources\u2014the federal TANF block grant, state General Fund, and various sources of county realignment funds . Within the total funding amount for CalWORKs, the budget proposes $552 million from the General Fund, almost $100 million higher than the 2017-18 level . This increase is primarily the result of fewer available county funds overall, requiring that additional state funds be spent in order for the state to meet its MOE requirement . State Has Broad Flexibility in the Allocation of TANF Block Grant Funds. As illustrated in Figure 18, the 2018-19 Governor’s Budget proposes to dedicate about half of the state’s TANF block grant to support the CalWORKs program . The remainder is used to support other state programs, including student financial aid, Child Welfare Services, and community-based services for individuals with developmental disabilities . Federal law provides states significant flexibility in how TANF block grant funds may be spent . First, TANF block grant funds may be used Figure 16 CalWORKs Budget Summary All Funds (Dollars in Millions) 2017\u201118 Revised 2018\u201119 Proposed Change From 2017\u201118 Amount Percent Cash Grants $2,898 $2,724 -$174 -6% Single Allocation Employment services $828 $813 -$14 -2% Cal-Learn case management 20 19 -1 -4 Eligibility determination and administration 380 351 -29 -8 Stage 1 child care 318 324 6 2 Single Allocation augmentation 180 187 7 4 Subtotals ($1,726) ($1,694) (-$32) (-2%) Other County Allocations Mental health\/substance abuse services $129 $129 \u2014 \u2014 Expanded subsidized employment 134 134 \u2014 \u2014 Housing Support Program 47 47 \u2014 \u2014 Family Stabilization Program 47 47 \u2014 \u2014 Subtotals ($356) ($356) (\u2014) (\u2014) Home Visiting Initiative \u2014 $27 $27 \u2014 Othera $21 $17 -$4 -19% Totals $5,002 $4,819 \u2011$183 \u20114% a Primarily includes various state-level contracts. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 31 to meet any of the four purposes of the TANF program, displayed in Figure 19 (see next page) . Second, TANF funds may be used to support activities that were allowable under TANF’s predecessor program . And, finally, the state may transfer a portion of the TANF block grant to certain other federal block grants to be used according to the rules of the block grant receiving the transfer . State May Use TANF Funds Flexibly to Offset Existing General Fund Spending. Because the state has significant flexibility in the use of TANF funds, these funds may be used to support programs (other than CalWORKs) that would otherwise be supported by the General Fund, thereby freeing up General Fund resources for other state priorities . For example, prior to 2012-13, student financial aid in the Cal Grants program was supported almost entirely by the General Fund . In 2012-13, TANF funds were used to replace $800 million in General Fund spending in Cal Grants on the basis that student financial aid furthers purposes two and three of TANF . That year, consequently, the Legislature was able to redirect a portion of these funds to other legislative priorities . This budgetary practice has continued each year thereafter . Caseload Decline Frees Up TANF Funds. When the CalWORKs caseload declines year to year, a reduced amount of funding is needed to pay for the program’s ongoing cash assistance, employment Figure 17 CalWORKs Funding Sources (Dollars in Millions) 2017-18 Revised 2018-19 Proposed Change From 2017-18 Amount Percent Federal TANF block grant funds $2,127 $1,938 -$189 -9% State General Fund 455 552 97 21 Realignment and other county fundsa 2,420 2,328 -92 -4 Totals $5,002 $4,819 -$183 -4% a Primarily various realignment funds, but also includes county share of grant payments, about $60 million. TANF = Temporary Assistance for Needy Families. Early Education Grant Program $42 million Reserve for Home Visiting Initiative DDS Regional Centers Tribal TANF Stage 2 Child Care Child Welfare Services Other Transfers $364 million $132 million $113 million$86 million$77 million $81 million Cal Grants Tuition Assistance CalWORKs Program $1.1 billion $1.9 billion a 2018-19 proposed amount. Includes $207 million in TANF carry-in from prior years. Annual TANF block granta\u2014$3.9 billion How Does the State Spend Its TANF Block Grant Funds? Figure 18 TANF = Temporary Assistance for Needy Families and DDS = Department of Developmental Services. Child Welfare Services $364 Million Cal Grants Tuition Assistance $1.1 Billion CalWORKs Program $1.9 Billion Reserve for Home Visiting Initiative $132 Million DDS Regional Centers $77 Million Stage 2 Child Care $81 Million Tribal TANF $86 Million Early Education Grant Program $42 Million Other Transfers $113 Million gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 32 training, administrative, and child care costs . Generally, the decline in these costs from one year to the next results in a similar amount of freed-up TANF funds in later years that can be spent in CalWORKs or on programs that further the TANF purposes . (We use the phrase freed-up TANF funds to refer to funds that were used for CalWORKs program costs in the prior year but are no longer needed to maintain cash assistance and services at their prior year levels and are therefore available now to be spent elsewhere .) In Recent Years, Freed-Up TANF Funds Used to Offset General Fund Spending. As a result of the steady caseload decline in the CalWORKs program since the end of the recession and the flexibility in the use of TANF funds to replace existing General Fund spending, freed-up TANF funds have been used each year to increasingly offset General Fund spending elsewhere in the state budget . In particular, TANF funds spent outside CalWORKs have grown from roughly $1 billion in 2014-15 to $1 .8 billion proposed in 2018-19 . Additional funds have been directed to program areas that offset existing General Fund spending . We note that TANF funds could be redirected back to the CalWORKs program to pay for augmentations, but that this would require backfilling lost TANF funding in other areas of the budget with state General Fund dollars . 2018-19 CalWORKs Proposals Stem From Caseload Decline. The Governor’s two major CalWORKs proposals, which we examine in the following sections, reflect responses to the rapid decline in the CalWORKs caseload over the past several years . First, the Governor proposes a one-year compromise funding amount for the county single allocation . The level is higher than what counties would receive under the historical budgeting methodology due to concerns that counties may have difficulty adjusting to lower funding while continuing to provide services to CalWORKs families . Second, the administration includes two new proposals to be funded with freed-up TANF funds\u2014a home visiting initiative for young CalWORKs families and an early education grant program to be run by the California Department of Education . ANALYSIS OF GOVERNOR’S PROPOSED SINGLE ALLOCATION Background on Single Allocation Single Allocation Provides Bulk of County Funding to Administer CalWORKs. As shown in Figure 16 earlier, the Governor’s budget provides nearly $1 .7 billion in funding for the county single allocation in 2018-19 . The single allocation encompasses three main categories of funding that are used to run the CalWORKs program: (1) employment training and other services intended to help participants obtain employment, (2) eligibility determination and administration of the program, and (3) Stage 1 subsidized child care available to parents who are working or participating in employment training . Single Allocation Categories Budgeted Separately . . . As part of the annual budget process, the administration proposes statewide funding amounts for each category in the single allocation separately, based on established methodologies that adjust funding from prior years based on caseload projections, assumed costs per case, and adjustments for policy changes . After the statewide amounts are determined through the budget process, funds for each category are allocated to individual counties . Single allocation funds generally must be spent by counties within the fiscal year and unspent funds are carried forward to the following year as part of that year’s overall TANF block grant funds . . . . But Single Allocation May Be Spent Flexibly Across Categories. Although single allocation categories are budgeted and allocated to counties separately, counties can, and do, spend their total single allocation funds flexibly across the categories . Figure 19 The Four Purposes of TANF (1) Provide assistance to needy families so that children can be cared for in their own homes. (2) Reduce the dependence of needy parents by promoting job preparation, work, and marriage. (3) Prevent and reduce the incidence of out-of-wedlock pregnancies. (4) Encourage the formation and maintenance of two-parent families. TANF = Temporary Assistance for Needy Families. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 33 As a result, actual spending on the individual single allocation categories often differs from the amounts allocated to counties in the state budget . This flexibility allows counties to adapt to local factors that may not be well reflected in the process used to determine and allocate the statewide single allocation amount . Budgeted Amounts Do Not Correspond Well With County Spending. On the one hand, as shown in Figure 20, counties tend to spend less than their budgeted allocation to operate CalWORKs . On average, since 2001-02, counties have spent about $100 million (roughly 5 percent) less each year than was allocated . In some years, this amount has been higher\u2014 above $200 million\u2014as it was in 2012-13 and 2013-14, or lower, as it was in the years before the recent recession and as it was in 2016-17, the most recent year of data . Lower spending than was allocated may result from challenges counties face in administering the program, such as difficulty ramping up staffing, services, and facilities at the pace that additional funding is provided . Counties also may budget the CalWORKs program with some caution because county general fund money must be used in the event that counties spend more than their allocation . At the same time that counties spend less than their overall budgeted allocation, counties spend beyond the amount budgeted for the eligibility administration component of the single allocation while spending less than the amount budgeted for employment services . These budget trends indicate that the single allocation may not correspond well with actual county spending on CalWORKs . As we discuss below, recognition of these issues led the Legislature to request, as part of the 2017-18 Budget Act, that the administration and county officials update the budgeting methodology for the single allocation . Single Allocation Reduced in Recent Years Single Allocation Reduced in 2016-17. After increasing from 2013-14 through 2015-16, the 2016-17 Budget Act decreased funding for the single allocation by $160 million that year to reflect a projected caseload decline . At the time, we noted that the lower amount would align the single allocation more closely with what counties were spending at the time to run CalWORKs . Single Allocation Reduced Again in 2017-18. The 2017-18 Governor’s Budget reduced the single allocation by an additional $200 million (10 percent) below its 2016-17 level as a result of the continued decline in the CalWORKs caseload . Our office and others noted that the additional reduction might lead counties to eliminate staff positions, reassign staff to other health and human services programs, reduce services, or a combination of all three . In light of these concerns, the 2017-18 Budget Act restored more than one-half of the originally proposed reduction . Legislature Requests Review of Single Allocation Methodology. In recognition that counties may face challenges operating the CalWORKs program with the level of resources provided according to the existing a Data for most recent year, 2016-17, are preliminary spending amounts and therefore are subject to slight changes. (In Billions) Counties Often Spend Somewhat Less Than Budgeted Single Allocation Figure 20 0.5 1.0 1.5 2.0 $2.5 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14 2015-16 Amount Spenta Amount Budgeted gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 34 single allocation methodology, the 2017-18 budget package directed the administration and county officials to provide recommendations for revising the methodology used for development of the CalWORKs single allocation annual budget to the Legislature in January 2018 . Governor’s Single Allocation Proposal Administration Outlines Plan to Revise Budget Methodology. In response to requirements in the 2017-18 Budget Act, the administration has made available its plan to recalculate and update the eligibility administration and employment services components of the single allocation . (Stage 1 child care and the Cal-Learn components of the single allocation are budgeted based on recent actual expenditures and therefore the administration does not plan to revisit them .) In consultation with stakeholders, the administration is currently reviewing county time study data and work processes to identify county costs for the administration component of the single allocation, namely direct costs associated with processing initial applications and confirming eligibility status and indirect costs related to these operations . (The employment services component of the single allocation will be reviewed in the coming year .) The new methodology for administrative costs will be used to update the single allocation for the May Revision . In the Meantime, Administration Proposes Lower Single Allocation for 2018-19. The 2018-19 Governor’s Budget proposes to allocate $1 .694 billion to counties to operate the CalWORKs program, a decline of $32 million (about 2 percent) from the 2017-18 Budget Act amount allocated to counties . The interim proposal, though somewhat below the prior year’s budgeted amount, remains $187 million above the amount estimated using the administration’s long-standing caseload driven methodology . LAO Assessment Plan to Update Budget Methodology Likely to Improve CalWORKs Budget Process . . . In our view, the administration’s plan to update the single allocation methodology would revisit important cost components of operating the CalWORKs program and therefore is likely to be a more accurate representation of current county costs than the existing budget methodology . Insofar as the update results in better information about county costs, it should help improve the annual CalWORKs budget process by more closely aligning budgeted amounts for administration and employment services with what counties spend to provide these services each year . . . . But True Costs to Meet the Goals of CalWORKs Remain Unknown. Assessing how much counties spend in CalWORKs is helpful in understanding how counties operate the program but provides policymakers little information as to whether the program is meeting its objectives and what amount of funding might be needed to do so . It could be the case that current county spending is at the correct level, providing sufficient resources for counties to operate the program in a way that achieves the purposes of the program as the Legislature intended . Alternatively, it could be that county spending is higher than the correct amount and that similar outcomes could be achieved with fewer resources; or, that county spending is too low and therefore does not provide administrators the necessary resources to achieve these objectives for CalWORKs families . Proposed Interim Single Allocation Higher on a Cost Per Family Basis. The Governor’s 2018-19 proposed allocation represents an average statewide cost per family of $4,226, 4 percent above the amount assumed in the 2017-18 Budget Act ($4,053 per family), 7 percent above counties’ actual spending in 2016-17 ($3,960 per family), and 12 percent higher than the amount that would be allocated according to longstanding budgetary practice ($3,762 per family) . According to the administration, the proposed single allocation maintains stability for counties while the revised methodology is being developed . It does this, specifically, by budgeting the eligibility administration component of the single allocation at its 2017-18 level, despite the year-over-year caseload decline, while continuing to budget the other components using the longstanding methodology . Although our office has not evaluated how much average costs per case typically increase as the caseload declines, we would anticipate some increase in average costs because some county costs, such as those for facilities, operations, and administrative personnel, may be difficult to reduce as quickly as the budget declines . Thus, we acknowledge that counties may face some challenges if required to gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 35 reduce spending, on a percentage basis, by the same amount that the caseload has declined . Recommend Waiting for Budget Update in Coming Months. It is our understanding that the administration intends to release an updated single allocation budget based on new caseload information and a new budgeting methodology as part of the May Revision . The amount of the single allocation could differ substantially from the amount included in the Governor’s proposed budget . We therefore recommend the Legislature wait until May to make a decision about what amount to budget for the single allocation . ANALYSIS OF GOVERNOR’S PROPOSED USE OF FREED-UP TANF FUNDS The 2018-19 Governor’s Budget identifies about $226 million in freed-up TANF block grant funds that are available to be spent on program augmentations in CalWORKs or to offset General Fund spending in other areas of the state budget . These funds are available due to the shrinking CalWORKs caseload . The administration proposes to spend a small portion of freed-up TANF funds ($26 million) to offset additional General Fund spending . In a departure from the recent practice of dedicating most, if not all, freed-up TANF to existing programs so as to offset General Fund spending, the remaining $200 million is proposed for new initiatives that would not offset General Fund spending . Below, we describe and assess the Governor’s two proposed initiatives for the use of freed-up TANF funds . Proposed Home Visiting Initiative Three-Year Home Visiting Program for CalWORKs Families. The 2018-19 Governor’s Budget proposes to spend $26 .7 million in freed-up TANF block grant funds in 2018-19 to begin a three-year voluntary home visiting program for first-time mothers in CalWORKs . Families would receive regular visits\u2014 typically weekly or bi-weekly\u2014from a nurse, parent educator, or early childhood specialist who works with the family to improve maternal health, parenting skills, and child cognitive development; and to connect families, as needed, with other available resources . Budgeting Approach. The proposed $26 .7 million reflects the half-year cost to run the program\u2014full-year costs are estimated to be $52 million\u2014because the initiative would begin in January 2019 . In addition, the Governor’s 2018-19 budget proposes to set aside additional funds ($132 million) in 2018-19 in order to fund the initiative through 2020-21 . Federal law allows states to set aside a portion of their TANF block grant in the reserve fund to be used in future years . Program Details. The home visiting program would be available, on a voluntary basis, to first-time mothers and pregnant women under 25 years old who are enrolled in the CalWORKs program and whose child is younger than two years old . Families would receive home visits for up to two years . According to the administration’s statewide estimates, there are currently about 6,500 women in the CalWORKs program who meet these eligibility criteria . For budgeting purposes, it is assumed that 90 percent of women who are eligible for home visiting will enroll in the program . Counties to Submit Proposals. Counties would participate on a voluntary basis, with those participating required to submit proposals for how they intend to use home visiting funds for approval by DSS . Counties would not be allowed to supplant existing home visiting funding with these new funds . LAO Assessment of Home Visiting Other Home Visiting Programs in California. Local governments and community-based organizations operate home visiting programs in many parts of the state . Funding for these programs is made available from various sources . The largest of these sources are (1) locally controlled Proposition 10 (1998) tobacco tax revenues that fund county First 5 Commissions; (2) federal grants to local providers as part of the Early Head Start program; (3) federal grant funds available through the state-administered Maternal, Infant, Early Childhood Home Visiting (MIECHV) Program; and (4) various county-led initiatives . Although comprehensive data are unavailable, it appears that at least $120 million, and possibly more, is spent annually on home visiting in California . Experts on home visiting estimate that existing home visiting programs serve 10 percent to 20 percent of at-risk families who would likely benefit from home visiting . Many Home Visiting Models Exist. Although all home visiting program models pair a trained gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 36 professional with new mothers or pregnant women for regularly scheduled visits, existing evidence-based programs differ in important respects that dictate the model’s cost and expected outcomes . These include (1) how often visits are made; (2) at what age visits begin and whether visits begin during pregnancy; (3) which elements of childhood and maternal well-being are addressed; and (4) whether a registered nurse, early childhood development specialist, or social worker makes the visits . Effectiveness of Home Visiting Has Been Well Studied. Economists and social scientists have completed many high-quality studies of home visiting programs . In these studies, known as randomized controlled trials, researchers collect data on child and family well-being for families who received home visiting and for otherwise similar families who did not . Afterward, researchers compare the two groups and identify differences that can be attributed to the home visiting program . In some studies, these differences, or outcomes, have been used to compare the long-term fiscal benefits of the program to its short-term costs . Home Visiting Is an Effective Tool to Improve Childhood Outcomes. Strong empirical evidence exists that home visiting improves child development, school performance, and maternal well-being and that home visiting programs decrease the prevalence of substantiated child maltreatment and teenage involvement with the criminal justice system . Some Home Visiting Models May Also Help Promote Family Self-Sufficiency. In addition to improving child and maternal well-being, some studies show that home visits help parents obtain employment, enroll in high school coursework, and stabilize family relationships . Long-Term Fiscal Benefits Typically Outweigh Costs, Especially for Low-Income Mothers. One method researchers use to evaluate policies is to compare the policy’s benefits for participants, government, and society with the policy’s costs . Most studies of home visiting programs have found that, over the long term, the monetary benefits to participants and governments exceed the programs’ costs . In thinking about home visiting within the CalWORKs program, in particular, we note that benefits tend to most outweigh costs\u2014by as much as $5 in benefits to $1 in program costs\u2014when staff are paired with low-income women with risk factors that are associated with poor childhood health and well-being . LAO Comments on Home Visiting Initiative Overall, Home Visiting Proposal Merits Consideration. The Governor’s home visiting proposal is rooted in sound, evidence-based policy, and is closely aligned with the state’s main goal for CalWORKs\u2014reducing child poverty\u2014and therefore merits serious consideration . Though less certain and dependent on how well home visits are integrated with existing services, the proposal also has the potential to improve economic self-sufficiency for participating families . Cost and Participation Estimates, Though Uncertain in Nature, Appear Reasonable. Budgeting for a new initiative is subject to considerable uncertainty, in this case regarding how many counties will volunteer to participate; which home visiting models are used and therefore how costly they might be; how many of the eligible families will choose to participate; and of those who participate, how many will seek additional employment services . In general, we believe the administration has estimated these elements reasonably, but nevertheless note that the number of families who receive home visiting could vary significantly from the estimated amount (6,522) due to these uncertainties . Key Implementation Questions. Below, we outline some additional questions for the Legislature to consider as it evaluates the Governor’s initiative . What Role Should Various State Departments Play? As mentioned earlier, the federal government provides MIECHV grants to the states to fund home visiting programs . In California, the state Department of Public Health (DPH) manages these grant funds . In this role, DPH funds two evidence-based home visiting models (Healthy Families America and the Nurse-Family Partnership), provides technical assistance to service providers, collects industry-standard data, and evaluates program performance . (We note that DPH collects several indicators of family economic self-sufficiency .) In order to minimize new requirements for service providers and to take advantage of DPH’s existing gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 37 administrative infrastructure and experience managing home visiting grants, the Legislature may wish to consider a system where DSS leads programmatic management via their longstanding partnership with county human services agencies while DPH remains the primary state contact for service providers, managing data collection and program evaluation as it does now for the federal MIECHV program . This data could be shared with DSS for county oversight purposes . How Will Initiative Work Alongside Existing Local Programs? County human services agencies that participate in the home visiting initiative would submit plans for approval by DSS . The Legislature may wish to consider whether there are certain elements it expects to be included in these plans . For example, the Legislature may wish to require county plans to document how the county intends to: (1) combine its home visiting funds with other available funds so that providers have diversified funding sources, (2) collaborate with county public health and early education departments to coordinate referrals, and (3) track home visiting programs to confirm that new funds do not supplant existing county funding . Proposed Grant Program for Early Education Provides One-Time Funding for Early Education Expansion. The Governor’s budget transfers $42 million in new freed-up TANF funds to the California Department of Education (as well as $125 million in Proposition 98 funding) for a competitive grant program to increase the availability of early education for children under age five who have special needs . Freed-up TANF funds would be used to provide one-time grants to child care providers (the Proposition 98 funds would be directed to school districts and county offices of education) and are proposed to be used for a variety of purposes, including facility renovations, training, and equipment . LAO Assessment. Federal regulations generally prohibit the use of TANF funds for infrastructure . Therefore, it appears unlikely that federal TANF funds could be used for facility renovations as proposed by the Governor . Due to this restriction and additional concerns about the proposal that we raise in our analysis of K-12 education proposals, we recommend that the Legislature reject this proposal . LEGISLATURE HAS OPPORTUNITY TO BUILD ITS OWN TANF PLAN Legislature Has Opportunity Now to Choose Best Use of Excess TANF Funds. The existence of freed-up TANF in 2018-19 provides the Legislature with an opportunity to build its own TANF plan in a way that balances its priorities for the CalWORKs program with priorities in other areas of the state budget . Below, we discuss the options that are available to the Legislature . Governor’s TANF Budget Plan Is One Approach. Figure 21 details the Governor’s proposed use of freed-up TANF funds that are available primarily due to declining caseload within the CalWORKs program . A small portion of freed-up TANF block grant funds are proposed to be used to further offset General Fund spending, whereas the majority are directed toward new, short-term initiatives . Consequently, the Governor’s proposal places less emphasis on using TANF funds to offset existing General Fund costs, as has been the consistent practice in recent years . Legislature Should Develop Its Own TANF Budget Plan. The Legislature may wish to consider Figure 21 Governor’s Plan to Spend Freed\u2011Up TANF Funds TANF Funds Available Relative to Enacted 2017-18 Budget (In Millions) New Augmentations Transfer to CDE for early education grants $42 Home visiting initiative 27 Home visiting initiative reserve 132 Total $201 Additional TANF Used to Offset General Funda $26 Total Freed\u2011Up TANF Funds $226 a Includes the net effect of the TANF transfer to California Student Aid Comission for tuition assistance, and other transfers. Total does not add due to rounding. TANF = Temporary Assistance for Needy Families; CDE = California Department of Education; and MOE = maintenance-of-effort. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 38 uses for freed-up TANF funds other than those the Governor has proposed . It could use these funds to (1) augment the CalWORKs program, (2) augment non-CalWORKs programs that further the TANF objectives (but would not offset current General Fund spending), or (3) backfill existing non-CalWORKs programs that further the TANF objectives to achieve General Fund savings . Below, we describe each of these potential uses: New CalWORKs Spending. In thinking about its TANF budget plan, the Legislature could make changes to the Governor’s proposals for CalWORKs spending or fund different priorities within CalWORKs . For instance, the Legislature may wish to consider whether to fund the home visiting initiative on an annual basis, rather than funding the full three-year costs in 2018-19, to make additional TANF funds available to be spent in 2018-19 . (In this case, additional TANF funding would need to be identified in 2019-20 and 2020-21 to fund the home visiting initiative .) Alternatively, on an ongoing basis, the Legislature could also consider increasing CalWORKs grant amounts . New Spending Outside CalWORKs. The Legislature could allocate freed-up TANF funds to new initiatives outside CalWORKs that further the TANF objectives . This spending would not offset General Fund spending . The Governor’s early education grant proposal falls in this category . General Fund Savings Outside CalWORKs. If the Legislature is interested in continuing past practice for the use of freed-up TANF funds, it may wish to consider whether to use these funds to backfill existing General Fund spending, thereby freeing up additional General Fund dollars for other priorities . To do so, programs that are currently supported by the General Fund but meet the purposes of the TANF program would have to be identified . Although there do not appear to be many additional options, we believe one option could be the expansion of the annual TANF transfer to the California Student Aid Commission for Cal Grant financial aid . Consider Ongoing Commitments With Some Caution. In crafting its priorities for the use of freed-up TANF funds, we recommend the Legislature budget ongoing TANF commitments cautiously because General Fund resources would be needed in future years to maintain those spending levels should the CalWORKs caseload increase . In general, one-time or temporary commitments carry fewer budgetary risks than using freed-up TANF funds for ongoing programmatic commitments . Potential one-time uses might include a one-year augmentation to existing CalWORKs programs, such as the family stabilization or housing support programs, in order to provide temporary services to a greater number of CalWORKs families . Multiyear Approach to Program Goals That Also Addresses Long-Term Budget Pressure. Both our office and the administration anticipate that the CalWORKs caseload will continue to decline for the next year and potentially longer . As a result, we expect that freed-up TANF funds will become available\u2014 above the amount identified this year\u2014in coming budget cycles . As with all forecasts, however, these expectations are subject to considerable uncertainty and could change if the condition of the state’s economy were to deteriorate . As a point of reference, each 5 percent decline in the annual CalWORKs caseload frees up about $200 million in TANF funds to be spent in CalWORKs or elsewhere in the state budget . The opposite is also true . A 5 percent increase in the caseload would cost the state $200 million in General Fund dollars (either directly through increased spending in CalWORKs or indirectly because fewer TANF funds would be free to offset General Fund spending elsewhere) or require the Legislature to reduce CalWORKs grants or services . In light of these dynamics, the Legislature may wish to plan its major CalWORKs policy goals using a framework that balances (1) how it expects the caseload to change in the short term with (2) what amount of spending it is willing to commit to CalWORKs on an ongoing basis, acknowledging that the caseload might rise again over the long term . The Legislature could, for instance, balance any ongoing spending it makes in the CalWORKs program by setting aside (in the TANF reserve) a portion of the freed-up TANF funds each year . These reserves would be available in later years, should the caseload rise, to help pay for increased costs related to those ongoing commitments, thereby reducing budgetary pressure on the General Fund in those years . gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 39 Budget Picture Likely to Change in the Coming Months. While we strongly encourage the Legislature to begin crafting its own proposals for the CalWORKs program and for the use of freed-up TANF funds, the current estimates will change when the administration releases its updated May Revision caseload forecast . Mindful of these forthcoming changes, we encourage the Legislature to consider its goals and priorities for the program broadly and to not focus too closely on specific budgeted amounts because these are likely to fluctuate between now and when the Legislature enacts its 2018-19 budget package . IN-HOME SUPPORTIVE SERVICES BACKGROUND Overview of the In-Home Supportive Services (IHSS) Program. The IHSS program provides personal care and domestic services to low-income individuals to help them remain safely in their own homes and communities . In order to qualify for IHSS, a recipient must be aged, blind, or disabled and in most cases have income below the level necessary to qualify for the Supplemental Security Income\/State Supplementary Payment cash assistance program . IHSS recipients are eligible to receive up to 283 hours per month of assistance with tasks such as bathing, dressing, housework, and meal preparation . Social workers employed by county welfare departments conduct an in-home IHSS assessment of an individual’s needs in order to determine the amount and type of service hours to be provided . In most cases, the recipient is responsible for hiring and supervising a paid IHSS provider\u2014oftentimes a family member or relative . The average number of service hours that will be provided to IHSS recipients is projected to be about 108 hours per month in 2018-19 . IHSS Receives Federal Funds as a Medi-Cal Benefit. The IHSS program is predominately delivered as a benefit of the state-federal Medicaid health services program (known as Medi-Cal in California) for low-income populations . The IHSS program is subject to federal Medicaid rules, including the federal reimbursement rate of 50 percent of costs for most Medi-Cal recipients . Additionally, about 40 percent of IHSS recipients, based on their assessed level of need, qualify for an enhanced federal reimbursement rate of 56 percent, referred to as Community First Choice Option . As a result, the effective federal reimbursement rate for IHSS is about 54 percent . The remaining costs of the IHSS program are paid for by counties and the state . Counties’ Share of IHSS Costs Is Set in Statute. Historically, counties paid 35 percent of the nonfederal\u2014state and county\u2014share of IHSS service costs and 30 percent of the nonfederal share of IHSS administrative costs . Between 2012-13 and 2016-17, the historical county contribution rates were replaced with an IHSS county MOE . Budget-related legislation adopted in 2017-18 eliminated and replaced the initial IHSS county MOE with a new county MOE financing structure . Under the new MOE, the counties’ share of IHSS costs was reset to roughly reflect the counties’ share of estimated 2017-18 IHSS costs based on historical county cost-sharing levels (35 percent of the nonfederal share of IHSS service costs and 30 percent of the nonfederal share of IHSS administrative costs) . The new MOE will increase annually by (1) the counties’ share of costs from locally negotiated wage increases, and (2) an annual adjustment factor . (We provide updates on the implementation of the new IHSS county MOE later in this chapter .) Treatment of IHSS Services Versus Administrative Costs Under New MOE. The state General Fund is expected to pay all nonfederal IHSS service costs above the counties’ MOE expenditure level . However, as part of the 2017-18 budget package, the amount of General Fund that can be used for county IHSS administrative costs is capped . This means that counties will pay the full nonfederal IHSS administrative costs above the General Fund cap . (We discuss in detail the state and county cost-sharing arrangement under the IHSS county MOE later in this chapter .) gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 40 BUDGET OVERVIEW AND LAO ASSESSMENT The Governor’s budget proposes a total of $11 .2 billion (all funds) for IHSS in 2018-19, which is about $950 million (9 percent) above estimated expenditures in 2017-18 . The budget includes about $3 .6 billion from the General Fund for support of the IHSS program in 2018-19 . This is a net increase of $254 million (7 .5 percent) above estimated General Fund costs in 2017-18 . The year-over-year net increase in IHSS General Fund expenditures is primarily due to caseload growth and increased state minimum wage costs, which are partially offset by the decrease in General Fund assistance given to counties to assist with the transition to the new MOE . Below, we discuss some of the main components of the Governor’s budget for IHSS and note any issues with them . Primary Divers of Increased Costs in IHSS Caseload growth, rise in paid hours per case, and wage increases for IHSS providers are key drivers of increasing IHSS costs . Figure 22 shows how these factors have increased over the past ten years . Below, we describe these trends and how these cost drivers affect the Governor’s 2018-19 budget proposal for IHSS . Increasing Caseload. Average monthly caseload for IHSS has increased by 30 percent over the past ten years, from 400,000 in 2007-08 to an estimated 520,000 in 2017-18 . IHSS caseload has historically fluctuated, increasing at most by 8 percent in 2007-08 and decreasing by 4 percent in 2013-14 . More recently, year-to-year IHSS caseload growth has remained at about 5 percent and is expected to continue growing at this rate in 2018-19 . The reasons for the steady caseload growth in recent years are not completely understood, but could be related to the growth in California’s senior population (adults aged 65 and older) . The 2018-19 budget projects that the average IHSS caseload will increase to 545,000 in 2018-19\u2014 about 5 percent above 2017-18 estimates . We have reviewed the caseload projections in light of actual caseload data available to date and do not recommend any adjustments at this time . Increasing Paid Hours Per Case. Over the past ten years, the average amount of paid monthly hours per case for IHSS has increased by 25 percent, from about 86 in 2007-08 to an estimated 107 in 2017-18 . Between 2007-08 and 2012-13, average paid hours per case remained relatively flat\u2014at around 86 hours . However, between 2013-14 and 2016-17, average paid hours per case has increased annually by an average of 6 percent . a Reflect 2018-19 Governor’s Budget estimates. IHSS = In-Home Supportive Services. Growth in Key Cost Drivers for IHSS Program Figure 22 2018-19a $11.87 Average Hourly Wage Average Paid Hours Per Case Average Caseload 400,156 2007-08 2018-19a 545,180 518,511 2017-18a 86hrs 2007-08 107hrs 2017-18a 2018-19a 108hrs $9.34 2007-08 $11.37 2017-18 gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 41 The growth in average paid hours per case reflects, in part, a series of policy changes . For example, one reason for the recent increase in paid hours per case includes the implementation of the federal requirement that IHSS providers be compensated for previously unpaid work tasks, such as time spent waiting during their recipient’s medical appointments . Additionally, similar to the increase in the caseload, as the IHSS population ages there may be an increasing number of more complex IHSS cases that typically require more service hours\u2014for example, recipients who are severely impaired . We note that the administration is requesting additional positions to, in part, assess recent growth trends in paid hours per case . Although we are still analyzing the details of the proposal, given the recent increase in paid hours per case, we believe that it merits consideration . The Governor’s budget estimates that average hours per case will be the same in 2017-18 as they were in 2016-17 and will then increase slightly to about 108 hours in 2018-19 . We have reviewed the average hours per case estimates in light of actual hours per case data available to date and do not raise any major concerns at this time . State and Local Wage Increases. In addition to increasing caseload and paid hours per case, provider wage increases at the county and state level have contributed to increasing IHSS costs . Since 2007-08, the average hourly wage for IHSS providers increased by 27 percent, from $9 .34 to an estimated $11 .87 in 2017-18 . (We note that this average IHSS wage reflects the base hourly wages for IHSS providers averaged across all counties .) IHSS provider wages generally increase in two ways\u2014(1) increases that are collectively bargained at the local level and (2) increases that are in response to IHSS-related state minimum wage increases . The Governor’s budget includes $170 million General Fund ($372 million total funds) for the combined impact of the recent state minimum wage increase from $10 .50 to $11 .00 per hour on January 1, 2018 and the scheduled increase from $11 .00 to $12 .00 per hour on January 1, 2019 . The General Fund costs associated with state minimum wage in 2018-19 are roughly three times more than 2017-18 costs . This is primarily due to the fact that a greater number of counties are expected to be impacted by the state minimum wage increase to $12 .00 in 2019 (46 counties) than the increase to $11 .00 in 2018 (37 counties) or the increase to $10 .50 in 2017 (35 counties) . (A county is impacted by the state minimum wage increase when the current local wage is below the new state minimum wage level .) We note that in future years, as the state minimum wage continues to increase, more counties will be impacted, resulting in higher IHSS costs . Update on Federal Labor Regulation Compliance Costs In accordance with federal labor regulations that became effective in 2015-16 and affect home care workers, the state is required to (1) pay overtime compensation\u2014at one-and-a-half times the regular rate of pay\u2014to IHSS providers for all hours worked that exceed 40 in a week, and (2) compensate IHSS providers for authorized time spent waiting during their recipient’s medical appointments and traveling between the homes of IHSS recipients . The average number of IHSS providers is projected to be about 513,000 in 2018-19 . In preparation for IHSS compliance with the overtime rule, the Legislature adopted statutory workweek caps generally limiting the number of hours an IHSS provider can work to 66 hours per week\u2014up to 26 hours of overtime per week . When multiplied by roughly four weeks per month, this weekly limit is almost equal to the maximum number of service hours that may be allotted to IHSS recipients per month (283) . In addition, providers serving multiple IHSS recipients can be paid up to 7 hours per week for time spent traveling between the homes of the IHSS recipients . Allowable travel time hours do not count towards the statutory workweek caps or a recipient’s authorized monthly hours . Additionally, in 2016 DSS administratively established two types of exemptions in response to federal guidance asking states implementing workweek caps for IHSS to consider provider exemptions in situations where the caps could lead to increased risk of institutionalization for the consumer . Budget-related legislation in 2017-18 largely codified these two exemptions . Below, we provide an update to the costs associated with overtime pay, newly compensable work, and provider exemptions, and discuss differences in the 2018-19 Governor’s Budget relative to prior budget assumptions . gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 42 Lower-Than-Expected 2017-18 Overtime and Travel Time Costs. As illustrated in Figure 23, the revised 2017-18 General Fund cost estimate to comply with federal labor regulations ($274 million) is about $70 million less than the 2017-18 budget appropriation ($346 million) . This is primarily due to fewer providers working overtime hours than assumed in initial budget estimates . In addition, of those IHSS providers expected to work overtime, it is now estimated that they will claim fewer overtime hours . Figure 23 also provides rough cost estimates for revised 2017-18 and 2018-19 medical wait time in order to capture the full state cost to comply with federal labor regulations . Estimated Increase in IHSS Overtime Costs Between 2017-18 and 2018-19. The 2018-19 budget includes $297 million in General Fund for compliance and administration of the federal labor regulations, an increase of $23 million (8 percent) over revised estimates for 2017-18 . This is primarily due to an increase in the number of providers expected to work overtime hours as a result of the estimated increase in the IHSS caseload . Estimated Increase in Issued Exemptions to Overtime Limits for Certain Providers. As previously mentioned, in 2016 DSS issued guidance to counties establishing two exemptions to the 66-hour workweek cap for certain providers with multiple recipients, which were largely codified in 2017-18 . For both exemptions, the weekly maximum allowable hours are extended from 66 hours per workweek to 90 hours per workweek (not to exceed 360 hours per month) . The first exemption, referred to as the family exemption, applies to IHSS providers who are related to, live with, and work for two or more IHSS recipients on or before January 31, 2016 . Eligible recipients were notified of the exemption and mailed application forms by DSS . The second exemption, referred to as the extraordinary circumstances exemption, applies to IHSS providers who work for two or more IHSS recipients whose extraordinary circumstances place them in imminent risk of out-of-home institutionalized care . Qualifying extraordinary circumstances include (1) complex medical or behavioral needs that require a live-in provider, (2) residence in a rural and remote area where available providers are limited and as a result the recipient is unable to hire another provider, or (3) an inability to hire a provider who speaks his\/her same language in order to direct his\/her own care . It is our understanding that IHSS providers and recipients potentially eligible for an extraordinary circumstances exemption will be notified and mailed application forms by DSS in Spring 2018 . Budget-related legislation in 2017-18 requires that, as a part of initial IHSS assessment and subsequent reassessments, county social workers evaluate IHSS recipients to determine if their provider is eligible for either exemption . In addition, recipients or providers may contact their IHSS county social worker to determine whether they meet the eligibility criteria for an exemption . To be considered for the extraordinary circumstances exemption, it first must be determined that the recipient, with county assistance, has explored and exhausted all other options to meet their additional service needs, such as hiring another provider . If denied, the IHSS provider or recipient may request a second review by DSS . Between January 2017 and January 2018, the number of providers issued a family exemption remained roughly the same, about 1,500, while the number of providers issued an extraordinary circumstances exemption increased, on average, by 11 percent per Figure 23 Updated IHSS General Fund Costs to Comply With Federal Labor Regulationsa (In Millions) 2017\u201118 2018\u201119 Governor’s BudgetAppropriation Revised Overtime pay $283 $220 $240 Travel time pay 18 14 15 Medical wait time payb 35 30 30 Provider exemptions 7 7 8 Administration 4 4 4 Totals $346 $274 $297 a Under the IHSS county maintenance-of-effort, the nonfederal costs are assumed to be 100 percent General Fund. b Reflects our rough estimates of costs associated with compensating IHSS providers for time spent waiting during their recipient’s medical appointments. IHSS = In-Home Supportive Services. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 43 month, from about 50 providers to 120 providers . The Governor’s budget estimates that the average number of family exemptions will remain relatively flat in 2018-19 . However, the budget projects that the average number of issued extraordinary circumstances exemptions will increase at a faster rate in 2018-19 than 2017-18\u2014to about 700 in 2018-19 . Based on past growth trends, it is likely that the number of issued extraordinary circumstances exemptions and associated General Fund costs may be less than estimated in the 2018-19 budget . For example, if the number of issued extraordinary circumstances exemptions continued to increase at its recent rate (11 percent per month), the estimated number of providers with this exemption in 2018-19 would be 240, rather than 700, resulting in about a $4 million decrease in General Fund costs . IHSS Providers Continue to Receive Time Sheet Violations. Starting July 1, 2016, DSS began issuing time sheet violations to providers for exceeding their authorized monthly work caps or permitted travel time . Violations are administered based on a four-level violation system, with providers receiving a three-month suspension from the IHSS program after the third violation and a one-year suspension after the fourth violation . In 2017, the average number of providers that received a violation per month was about 3,000 . The number of providers with third and fourth violations is slightly increasing, but remains a significantly small portion of the overall IHSS provider population . Implementation of Paid Sick Leave Pursuant to state legislation, beginning on July 1, 2018, IHSS providers will be eligible to receive 8 hours of paid sick leave, ramping up to 24 hours annually when the state minimum wage increases to $15 per hour (scheduled for January 1, 2022) . In general, providers must first work a certain amount of hours to receive and use their paid sick leave hours . The 2018-19 budget includes $30 million General Fund to provide 8 hours of paid sick leave to IHSS providers . The estimated costs are primarily driven by the assumption that all IHSS providers will become eligible for and use the full 8 hours of paid sick leave in 2018-19 . We note General Fund costs would be lower if fewer than estimated providers utilize paid sick leave in 2018-19 . Update on the IHSS County MOE As previously mentioned, budget-related legislation enacted in 2017-18 established a new MOE for counties’ share of IHSS costs . The new MOE increased county IHSS costs to reflect estimated 2017-18 IHSS costs . The county MOE is expected to increase annually by an adjustment factor and the counties’ share of costs associated with locally negotiated wage increases . The annual adjustment factor varies based on the year-to-year growth in realignment sales tax revenue, which generally reflects overall economic conditions . Below, we provide an update on the implementation of the new IHSS county MOE . Estimated IHSS County MOE Costs in 2017-18 and 2018-19. As illustrated in Figure 24, the revised 2017-18 IHSS county MOE cost estimate ($1 .74 billion) is about $28 million less than the initial 2017-18 budget appropriation ($1 .77 billion) . Budget-related legislation enacted in 2017-18 authorized the administration to adjust the 2017-18 IHSS MOE downward on a one-time basis if total IHSS costs were lower than initial estimates . The resulting decrease to the IHSS MOE is Figure 24 Increase in IHSS County MOE Costs (In Millions) 2017\u201118 2018\u201119 Governor’s Budget Change From Revised 2017\u201118Appropriation Revised Total IHSS County MOE Costsa $1,768 $1,740 $1,835 $95 Share of IHSS service costs 1,672 1,630 1,720 90 Share of IHSS administrative costs 96 110 115 5 a Total IHSS county MOE costs are partially offset by General Fund assistance provided to counties to assist them in meeting their increased IHSS MOE costs in 2017-18 ($400 million) and 2018-19 ($330 million). IHSS = In-Home Supportive Services and MOE = maintenance-of-effort. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 44 partially offset by increasing county costs associated with locally negotiated wages that occurred after the budget was enacted . In addition, it is projected that the IHSS MOE costs will increase by $95 million in 2018-19 . This increase reflects the impact of the estimated annual adjustment factor (5 percent) to the IHSS MOE and the counties’ share of costs associated with locally negotiated wage increases . Revised Budget Assumptions to Calculate State and County IHSS Administrative Costs. Historically, state and county IHSS administrative costs were budgeted using 2001 county worker costs and workload estimates . Budget-related legislation enacted in 2017-18 required the Department of Finance (DOF), in consultation with counties, to update the budgeting assumptions used to estimate IHSS administrative costs . The Governor’s budget includes about $640 million total funds for IHSS administrative costs in 2018-19, which includes IHSS automation costs, IHSS public authority costs (a local entity that, in part, provides training to recipients and providers), and direct service-related and fixed administrative costs . The revised administrative cost estimates are primarily based on updated assumptions about average county wages and the average number of county workers needed to fulfill statutorily required activities at current IHSS caseload levels . It is our understanding that in future years, total nonfederal IHSS administrative costs will be increased by the year-to-year rate of growth in the IHSS caseload . State’s Share of IHSS Administrative Costs Is Capped. Under the IHSS MOE financing structure, counties continue to receive federal funds for a portion of county administrative costs . However, the portion of the county MOE obligation that can be met by county administrative costs is limited . Additionally, the amount of General Fund that is available for county administrative costs in IHSS is capped . As shown in Figure 24, the Governor’s budget estimates that only $110 million of the total IHSS county MOE obligation in 2017-18 ($1 .7 billion) and $115 million of the 2018-19 obligation ($1 .8 billion) can be met by county administrative costs . In addition to the county MOE obligation, it is assumed that the General Fund will provide up to $220 million of county administrative costs in 2017-18 and $208 million in 2018-19 . To the extent that actual county administrative costs exceed the county MOE administrative cost limit and the available state General Fund (about $330 million in 2017-18 and $323 million in 2018-19, combined), counties are responsible to pay the difference . (We note that the federal government will share these costs with the counties .) It is our understanding that in future years, the county MOE administrative cost limit will be adjusted by the annual MOE adjustment factor, while the General Fund cap will be adjusted by the year-to-year rate of growth in the IHSS caseload . Determine What Data Are Needed in Preparation for the Proposed Reexamination of Budget Assumptions. The Governor’s budget includes a reexamination of the revised administrative cost budget assumptions as a part of the 2020-21 budget process . It is our understanding that the reexamination will focus on whether the revised budgeting assumptions reasonably reflect county administrative expenditures, as documented by county administrative claims data . In addition to the county claims data, the Legislature should consider if there are other cost measures or data that should be collected to better inform the reexamination and potential need to modify the revised budget assumptions in 2020-21 . One example of this may be tracking changes to county salary and benefit costs to determine if an annual cost-of-doing-business inflator for IHSS administrative costs is necessary . Decrease in General Fund Assistance Provided to Offset IHSS County Costs. Beginning in 2017-18, additional General Fund support was provided to counties to assist them in meeting their increased IHSS MOE costs . The General Fund support to counties is expected to decrease from $400 million in 2017-18 to $330 million in 2018-19, and eventually to $150 million in 2020-21 and future years . Update to County Loans and Appeals to Public Employment Relations Board (PERB). In addition to establishing a new IHSS county MOE, budget-related legislation enacted in 2017-18 authorized DOF to provide loans to counties experiencing significant financial hardship as a result of the new MOE . It is our understanding that currently no county has applied for a loan to assist in paying its IHSS costs . Additionally, counties and unions were provided with the ability to appeal to PERB if a bargaining agreement over IHSS provider wages and benefits had not been reached by January 1, 2018 . It is our understanding that as of today, no appeal has been made to PERB concerning an IHSS bargaining agreement . gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 45 SSI\/SSP The Supplemental Security Income\/State Supplementary Payment (SSI\/SSP) program provides cash grants to low-income aged, blind, and disabled individuals . The state’s General Fund provides the SSP portion of the grant while federal funds pay for the SSI portion of the grant . Total spending for SSI\/SSP grants increased by about $160 million\u2014or 1 .6 percent\u2014from $9 .9 billion in 2017-18 to $10 .1 billion in 2018-19 . This is primarily due to increased federal expenditures as a result of an increase to the federal SSI grant levels in 2018-19 . Of this total, the Governor’s budget proposes about $2 .8 billion from the General Fund, an amount relatively equal to revised estimates of 2017-18 expenditures . Caseload Slightly Decreasing. The SSI\/SSP caseload grew at a rate of less than 1 percent each year between 2011-12 and 2014-15 . More recently, the caseload has slightly decreased\u2014by 0 .8 percent in 2015-16, 1 .2 percent in 2016-17, and an estimated 0 .5 percent in 2017-18 . The budget projects that caseload will be about 1 .3 million individual and couple SSI\/SSP recipients in 2018-19, a decrease of 0 .1 percent below estimated 2017-18 caseload levels . Background on SSI\/SSP Grants Both the State and Federal Government Contribute to SSI\/SSP Grants. Grant levels for SSI\/SSP are determined by both the federal government and the state . The federal government, which funds the SSI portion of the grant, is statutorily required to provide an annual cost-of-living-adjustment (COLA) each January . This COLA increases the SSI portion of the grant by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) . In years that the CPI-W is negative (as was the case in 2010, 2011, and 2016), the federal government does not decrease SSI grants, but instead holds them flat . The federal government gives the state full discretion over whether and how to provide increases to the SSP portion of the grant . Until 2011, the state had a statutory COLA . Although this statutory COLA existed, there were many years when, due to budget constraints, the COLA was not provided . As part of the 2016-17 budget package, the Legislature provided a COLA of 2 .76 percent on the SSP portion of the grant, the first since 2005 . The Governor’s 2018-19 budget proposal does not include an increase to the SSP portion of the grant . During Constrained Budget Environment, SSP Grants for Individuals and Couples Reduced to Federally Required Minimum. The state is required to maintain SSP monthly grant levels at or above the levels in place in March 1983 ($156 .40 for SSP individual grants and $396 .20 for SSP couple grants) in order to receive federal Medicaid funding . During the most recent recession, the state incrementally decreased SSP grants for individuals and couples until they reached these minimum levels in June 2011 and November 2009, respectively . Beginning January 1, 2017, SSP grants for individuals and couples slightly increased above the minimum level due to the COLA on the state’s SSP portion . Total Grants Have Been Gradually Increasing Largely Due to Federal COLAs, but Remain Below FPL for Individuals. As shown in Figure 25 (see next page), the maximum SSI\/SSP monthly grant amount for individuals (the bulk of the SSI\/SSP caseload) and couples have been increasing gradually since 2010-11\u2014predominantly due to the provision of federal COLAs . However, despite these increases, current maximum SSI\/SSP grant levels for individuals remain below the federal poverty level (FPL), while grant levels for couples remain above the FPL . We note that during some difficult budget times prior to 2010-11, the state negated the impact of federal COLAs by reducing the SSP portion of the grant by the amount of the federal increase, thereby holding total SSI\/SSP grant levels flat . After the state reduced SSP grants to the federally required minimum levels, the state could no longer do this . Governor’s Budget Estimates Federal SSI Grant Increase May Be Slightly Less Than Governor’s Budget Estimate. As shown in Figure 26 (see next page), the Governor’s budget estimates that the CPI-W that the federal government will use to adjust the SSI portion of the grant in 2019 will be 2 .6 percent, increasing the maximum monthly SSI\/SSP grant by $20 for individuals and $30 for couples . However, our estimate of the CPI-W is lower, gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 46 at 1 .8 percent . (The actual CPI-W will not be known until the fall .) As a result, we estimate that total maximum monthly SSI\/SSP grants would increase by $13 for individuals and $20 for couples in 2018-19 . Issue for Legislative Consideration Potential Effects of Ending the SSI Cash-Out. Due to a long-standing state policy known as the SSI cash-out, SSI\/SSP recipients receive an extra $10 payment in lieu of their being eligible to receive federal food benefits (CalFresh benefits) in California . There has been legislative interest in the fiscal and policy implications of ending the SSI cash-out policy . The decision of whether to end the SSI cash-out involves trade-offs, which we discuss a The maximum monthly grants displayed refer to those for aged and disabled individuals and couples living in their own households, effective as of January 1 of the respective budget year. Maximum SSI\/SSP Grants for Individuals and Couplesa Compared to Federal Poverty Levelb Figure 25 SSP SSI Federal Poverty Levelb 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 200 400 600 800 1,000 1,200 1,400 1,600 $1,800 b Federal poverty level established by U.S. Department of Health and Human Services, effective as of January 1 of the respective budget year. Individuals Couples Figure 26 SSI\/SSP Monthly Maximum Grant Levelsa Governor’s Proposal 2017-18 2018-19 Governor’s Estimatesb Change From 2017-18 Maximum Grant\u2014Individuals SSI $750.00 $770.00 $20.00 SSP 160.72 160.72 \u2014 Totals $910.72 $930.72 $20.00 Percent of federal poverty levelc 90% 92% Maximum Grant\u2014Couples SSI $1,125.00 $1,155.00 $30.00 SSP 407.14 407.14 \u2014 Totals $1,532.14 $1,562.14 $30.00 Percent of federal poverty levelc 112% 114% a The maximum monthly grants displayed refer to those for aged and disabled individuals and couples living in their own households, effective as of January 1 of the respective budget year. b Reflects Governor’s budget estimate of the January 2019 federal cost-of-living adjustment\u20142.6 percent\u2014for the SSI portion of the grant. c Compares grant level to federal poverty guidelines from the U.S. Department of Health and Human Services for 2018. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 47 in our legislatively requested report The Potential Effects of Ending the SSI Cash-Out (January 2018) . Estimates developed by Mathematica, a national research organization, and DSS indicate that the majority of households with SSI\/SSP recipients would benefit from the elimination of the SSI cash-out . However, some households currently receiving CalFresh benefits would either experience a decrease in food benefits or become ineligible for CalFresh . While negatively affected households generally have limited financial means, they tend to have more income than households that would benefit from ending the SSI cash-out . If the Legislature wishes to end the SSI cash-out, it could consider establishing a state food benefit program that would replace some or all of the lost food benefits . There are many ways a state food benefit program could be structured, each with its own trade-offs . DEVELOPMENTAL SERVICES BACKGROUND Overview of the Department of Developmental Services (DDS). Under the Lanterman Developmental Disabilities Services Act of 1969 (known as the Lanterman Act), the state provides individuals who have developmental disabilities with services and supports to meet their needs, preferences, and goals in the least restrictive environment possible . These services and supports are overseen by DDS . The Lanterman Act defines a developmental disability as a substantial disability that starts before the age of 18 and is expected to continue indefinitely . This definition includes cerebral palsy, epilepsy, autism, intellectual disabilities, and other conditions closely related to intellectual disabilities that require similar treatment (such as traumatic brain injury) . Unlike most other public human services or health services programs, individuals receiving services through DDS need not meet any income or qualification criteria other than a diagnosis of a developmental disability . The department administers both community-based services and state-run services . These are each described below . Community Services Program. DDS currently serves an estimated 318,000 individuals with developmental disabilities ( consumers in statutory language) in 2017-18 through its community services program . Twenty-one independent nonprofit Regional Center (RC) agencies coordinate services for consumers, which includes assessing eligibility and developing individual program plans . RCs coordinate residential, health, day program, employment, transportation, and respite services, among others, for consumers . As the mandated payer of last resort, RCs only pay for services if they are not covered and paid for through another government program, such as Medi-Cal or public education, or through a third party, such as private health insurance . RCs contract with tens of thousands of vendors around the state to purchase services and supports for consumers . DDS provides RCs with a budget for both their administrative operations and the purchase of services (POS) from vendors . State-Operated Residential and Community Facilities. At the start of 2017-18, DDS served about 800 individuals in three Developmental Centers (DCs), which are licensed and certified as general acute care hospitals, and one state-run community facility . It is also in the process of developing a state-run community-based safety net, which includes smaller five-person homes and mobile crises teams . We describe each element of DDS’ state-run services below . Closure DCs. In 2015, the administration announced its plan\u2014which the Legislature approved\u2014to close the state’s remaining DCs (which we refer to as closure DCs )\u2014Sonoma DC in Sonoma County by the end of 2018, Fairview DC in Orange County by the end of 2021, and the general treatment area of Porterville DC in Tulare County by the end of 2021 . At the start of 2017-18, 534 residents lived at closure DCs . Nonclosure Facilities. DDS will continue to operate a secure treatment program at Porterville DC, which, by statute, can serve up to 211 people, all of whom have been deemed a gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 48 safety risk and\/or incompetent to stand trial . DDS also runs Canyon Springs Community Facility in Riverside County, which can house up to 63 people at a time . Safety Net Facilities and Crisis Services. DDS currently operates two five-bed acute crisis units\u2014one at Sonoma DC and one at Fairview DC\u2014which serve anyone in the DDS system undergoing an acute crisis . Because these facilities will no longer be available once the DCs close, DDS is developing two five-bed homes in the Napa area and two five-bed homes on the Fairview DC property (a fifth home will open in 2019-20 in Northern California) to address crisis needs . The state will also operate two mobile crisis units to respond to consumers in crisis at their current residence . OVERVIEW OF THE GOVERNOR’S BUDGET PROPOSAL The Governor’s budget proposes $7 .3 billion (all funds) for DDS in 2018-19, a 5 .1 percent increase over estimated 2017-18 expenditures . General Fund expenditures comprise $4 .4 billion of this amount, a 5 .6 percent increase over estimated 2017-18 General Fund spending . Given that the declining cost to run closure DCs has lowered the overall budget for state-run facilities and services, the year-over-year increases are nearly all due to increasing costs in the community services program . Growth in the number of people served in the community services program and growing costs associated with implementing state minimum wage increases are the primary drivers of these year-over-year increases . Federal funding makes up about 40 percent of the DDS budget . Community Services Program Budget Summary The community services program is estimated to grow 7 .6 percent in 2018-19 to $6 .9 billion (all funds) . The General Fund comprises $4 .1 billion of the total budget, up 8 .4 percent from 2017-18, while federal reimbursements, primarily through Medicaid Waiver programs and Title XX social services funding will provide an estimated $2 .7 billion . The Governor’s budget reflects a $25 million ($21 million General Fund) downward adjustment in POS expenditures in 2017-18, in large part due to lower actual expenditures than previously estimated related to state minimum wage increases implemented in 2017 . In 2018-19, the Governor’s budget proposes an increase of $451 million ($285 million General Fund) in POS expenditures over revised 2017-18 estimates . Of this amount, $179 million ($98 million General Fund) is due to state minimum wage increases that took effect on January 1, 2018 and the subsequent increase that will take effect on January 1, 2019 . In 2018-19, the DDS RC budget will lose about $11 million in federal funding from the Money Follows the Person grant . This federal grant was a limited-term source of funding for services provided for consumers transitioning from institutional settings . The General Fund will backfill this loss . The DDS system is preparing itself for some fundamental changes in the way services are delivered, which affects the DDS POS budget . New federal home- and community-based service (HCBS) regulations that take effect in March 2022 and affect the state’s ability to receive federal Medicaid HCBS Waiver funding require programs that are more integrated, promote personal choice, and foster consumer independence . Some shifts may already be evident in the proposed POS budget . Work activity programs, also known as sheltered workshops, are non-integrated programs that include large groups of DDS consumers conducting work for subminimum wage . Between 2017-18 and 2018-19, the Governor’s budget reflects a decline of nearly $4 million General Fund for work activity programs and a nearly commensurate increase of about $3 million General Fund in individual supported employment . Finally, we note that under recently enacted law, behavioral health treatment for children that is considered medically necessary has been approved as a covered Medi-Cal benefit and the cost for this treatment is shifting from the DDS POS budget to the Medi-Cal budget . This transition, which began among children who have an autism diagnosis and now includes children without an autism diagnosis, is reflected as a further reduction of nearly $49 million General Fund in DDS’ 2018-19 budget . gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 49 State-Operated Residential and Community Facilities Program Budget Summary While DDS previously referred to all its state-run programs as DCs, its new nomenclature\u2014 State-Operated Residential and Community Facilities\u2014 reflects the changing role of the state in developmental services\u2014from delivering its state-staffed services primarily in institutional DC settings to delivering services in more varied ways . This still includes operating two state-run facilities (Canyon Springs Community Facility and the secure treatment program at Porterville DC), but also includes providing community-based, but state-operated, safety net and crisis services . The budget for these state-run programs is expected to decline nearly 25 percent\u2014from about $500 million (all funds) in 2017-18 to about $375 million in 2018-19 . General Fund expenditures will decline approximately 20 percent\u2014from about $365 million to about $290 million over this period . The year-over-year reductions are primarily due to DC closure activities . The budget reflects a substantial reduction in DC staff from 2017-18 to 2018-19\u2014about 830 positions\u2014 as more and more DC residents transition to the community . DDS Headquarters Budget Summary The Governor’s budget proposes $68 million for DDS headquarters operations in 2018-19, an increase of $4 million . The General Fund will provide $40 million, up $3 million from 2017-18 . The Governor’s budget proposes $2 million ($1 .4 million General Fund) and nine positions for clinical oversight and monitoring of the new models of homes that were recently developed for consumers moving from DCs . These homes and associated services specialize in intensive medical care, behavioral treatment, and crisis intervention . The Governor’s budget also proposes to create an internal audit unit, which includes two positions and $295,000 ($178,000 General Fund) . Currently, headquarters staff that conduct and oversee audits of RCs and service providers step in when needed to conduct audits of internal DDS activities . ISSUES FOR LEGISLATIVE CONSIDERATION Caseload Projections Caseload Growth Outpaces General Population Growth. Caseload in the DDS system continues to grow at a steady, but rapid, pace . While DDS serves nearly 318,000 consumers in 2017-18, it is estimated to serve about 333,000 in 2018-19, a 4 .8 percent increase . Overall caseload growth has been increasing by about the same rate each year since 2014-15, when expanded eligibility for DDS’ Early Start program for infants and toddlers was restored (eligibility was more limited during the recession from 2009 through 2014) . By comparison, the state’s total population has been growing at a rate of less than 1 percent in recent years . Growth in Early Start Caseload Continues to Outpace Growth in Lifelong DDS Consumer Caseload. The Early Start program serves infants and toddlers under age 3 who exhibit developmental delays in speech, cognitive, social or emotional, adaptive, or physical and motor development, or have a known risk factor for developmental delay . The number of Early Start infants and toddlers is projected to grow by almost 10 percent\u2014from about 43,000 in 2017-18 to about 47,000 in 2018-19 . By comparison, the caseload for those age 3 and older is growing at a slower rate of 4 percent . According to DDS, about 20 percent of Early Start participants go on to become lifelong DDS consumers at age 3 . The rate of growth among the Early Start Program has been similar in recent years (about 9 percent to 10 percent), as has the rate of growth among those 3 and older (about 4 percent) . Caseload Projections Reflect Historical Trends. Caseload growth assumptions in the Governor’s budget are in line with recent caseload trends and our own projections, for caseload overall as well as for caseload in the Early Start program . We will continue to monitor caseload growth trends and recommend adjustments to the Governor’s caseload assumptions, if necessary, following our review of the May Revision . Reasons for Growth Not Well Understood. Although the Governor’s caseload projections are in line with recent trends, we note that it is not well understood why DDS caseload is growing at a rate that far outpaces overall state population growth . While the broader eligibility criteria in the Early Start program may gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 50 help explain why caseload in this program outpaces growth in caseload among those age 3 and older, it does not explain why caseload would increase so much on an annual basis, particularly since the number of infants and toddlers overall in California has held steady or even declined in recent years . It is not clear the extent to which the rapid growth reflects an increasing incidence of developmental delays and disabilities in the general population versus improved identification and\/ or diagnoses of these conditions . DC Closures Community Placements on Track, Despite Minor Setback in 2017-18. The transition of DC residents from closure DCs to the community appear on track for 2018-19 . The Governor’s budget has revised downward its estimate for the number of placements in 2017-18, primarily due to 20 fewer residents moving from Fairview DC than previously estimated . The consumers who currently live at closure DCs, especially Fairview DC, tend to be more medically fragile or have more intensive behavioral treatment needs, on average, than residents who moved in previous years . DC and RC staff work closely with the consumers, their families, and with community-based service providers to ensure successful community placements . Sometimes this means changing the planned date of transition . Despite this current-year setback, DDS remains on track with scheduled DC closure dates . At Sonoma DC, it plans to place 173 residents in 2017-18 (as of December 2017, it had placed more than 80 consumers) and the final 83 in the first half of 2018-19 . Fairview DC and the general treatment area of Porterville DC are scheduled to close at the end of 2021, but the Governor’s budget estimates the populations will be below 100 at each by the end of 2017-18 and down to 26 and 48, respectively, by the end of 2018-19 . Sonoma DC Set to Close in December, Requiring Final Decisions About Disposition of Property. The last resident will move from Sonoma DC, which first opened in 1891, in December 2018 . DDS will continue to incur what are called warm shutdown costs through at least the end of 2018-19 . These costs include maintenance of the buildings and grounds, basic heating and electrical, record archival, disposal of assets, and site security . The Legislature will soon be faced with the decision of what to do with the state-owned property that houses Sonoma DC . (The Governor’s budget does not reflect any assumptions about this issue .) The Legislature’s options include, for example, transferring the land to another state department; selling the land to a local government, affordable housing developers, or to a private entity; or retaining the property and leasing out various parcels . (Please see our recent report, Sequestering Savings From the Closure of Developmental Centers for a more in-depth discussion of these options and the associated trade-offs .) Federal Funding Extended at Fairview DC and the General Treatment Area of Porterville DC. The state receives federal funding for DCs from Medicaid . Several years ago, the California Department of Public Health\u2014the state department responsible for licensing and certification at DCs\u2014found the intermediate care facilities for the developmentally disabled (ICF\/DD) units at all three DCs to be out of compliance with federal certification requirements . While the ICF\/DD units at Sonoma DC were decertified and lost federal funding in 2016, ICF\/DD units at Fairview DC and the general treatment area at Porterville DC remain certified through a settlement agreement with the federal government . Per the terms of the agreement, the units must be recertified each year and certification can be revoked at any time . The units at both DCs were recently recertified for 2018 and will thus continue to receive federal funding through December 2018 . (The Governor’s budget assumes the ICF\/DD units will be recertified in 2019 and federal funding will continue for the balance of 2018-19 .) DDS intends to have moved most of the ICF\/DD residents into the community by the end of 2019, the time at which federal funding for these units is scheduled to end . DDS Is Reducing the Number of DC Staff. As DDS continues to place DC residents in the community, it is also reducing the number of DC staff . This happens in several ways . First, the Legislature authorized a community state staff program (CSSP), which allows DDS to contract with a community-based service provider to hire a DC employee for work in the community . The employee remains a state employee and the service provider covers the full cost of state employee compensation and benefits . The benefit of CSSP is that experienced employees continue to work with DDS consumers, sometimes the individual consumers they served at the DCs . This helps smooth the transition to the community for the gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 51 former DC residents . The incentive for the employee is retaining state employee status and benefits . CSSP contracts currently last for one year (new contracts will last for two years beginning July 2018), but can be renewed . Currently, 49 former DC employees are employed under CSSP contracts . DDS is authorized to contract for another 220 positions through this program . Second, some DC employees transfer to another state department (for example, in the final three months of 2017, 130 employees transferred to other state departments, such as the Department of State Hospitals and the California Department of Corrections and Rehabilitation) . Third, some DC employees retire . Fourth, others elect to resign from state service and pursue employment opportunities elsewhere, which could include working directly for a community service provider . For employees who retire or resign from state service, the Governor’s budget requests $4 .7 million General Fund in 2017-18 and $5 .5 million General Fund in 2018-19 to compensate them for unused leave balances . Development of Safety Net Facilities and Crisis Services. As noted in the background, DDS is developing community-based safety net and crisis services to replace and expand upon crisis services currently available at Sonoma DC and Fairview DC . One-time development costs totaled $21 .2 million in 2017-18 (most of this from the General Fund) . The Governor’s budget proposes $13 .2 million General Fund to operate four acute crisis homes and two mobile crises teams in 2018-19, an increase of $5 .5 million over revised 2017-18 spending, when only two crisis units operated out of Sonoma and Fairview DCs . In addition, the Governor’s 2018-19 budget assumes about $7 million General Fund in the RC POS budget to pay for services provided in six new vendor-operated safety net homes . Four of these homes will provide transitional services for DDS consumers with mental health diagnoses and two will provide transitional services for people leaving the secure treatment program at Porterville DC . Chapter 18 of 2017 (AB 107, Committee on Budget) requires DDS to provide quarterly updates about the development of community-based safety net and crisis services . The Legislature may wish to request some specific additional information from DDS in these updates (beyond what DDS has thus far provided) to help it more fully understand whether the planned safety net and crisis services are adequate for the needs of DDS consumers . For example, the Legislature could seek information on: How often DDS’ mobile crisis units are engaged, the average length of time they are needed, and whether they are able to respond to all calls . How often the safety net homes reach capacity and remain at capacity . Whether each RC provides crisis intervention services and how these services are coordinated with DDS-operated services . The number of consumers who end up getting placed in a more restrictive setting, such as an Institution for Mental Disease (IMD), how long they remain in the more restrictive setting, and how many lose their community-based residential placement as a result of their placement in a more restrictive setting . (We note that recently collected DDS data indicate that more than 75 percent of the 59 consumers recently placed at IMDs have been there longer than the legal limit of 180 days .) Minimum Wage Issues State Minimum Wage Increases. The Legislature has increased the state minimum wage several times over the past decade . Currently, the state minimum wage is $10 .50 for businesses with 25 or fewer employees and $11 for businesses with 26 or more employees . The state minimum wage is statutorily scheduled to increase each year until it reaches $15\u2014 in 2022 for the larger businesses and in 2023 for the smaller businesses . Statutory Policy Guides Rate Adjustments to DDS Service Providers When the Minimum Wage Increases. To a large extent, allowable rates paid to DDS service providers ( vendors ) are subject to parameters set in statute . Currently, statute allows DDS to adjust the rates paid to vendors when the adjustment is needed to bring their lowest wage staff up to the state minimum wage . However, statute and administrative practice generally do not provide for vendor rate adjustments in response to local minimum wage increases . Currently, about 20 cities and counties have minimum wages that are higher than the state minimum wage . Two cities in the Silicon Valley already have a $15 dollar minimum wage and San Francisco will reach this level in July . Only in rare cases when a gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 52 vendor demonstrates that the health and safety of an individual consumer is at risk and both the RC and DDS agree with the vendor’s assessment, will DDS make an exception (as it is authorized to do) and adjust rates for the vendor as a result of local minimum wage cost pressures . The Way DDS Has Interpreted Statute Has Perhaps Led to Unintended Consequences. Vendors in areas with a local minimum wage that is higher than the state minimum wage appear to be more adversely affected by the statutory policy on rate adjustments for state minimum wage increases than likely was intended . This is because these vendors, in addition to generally being ineligible for rate adjustments due to local minimum wage increases, are also considered ineligible for any of the rate adjustments due to state minimum wage increases . They are considered ineligible for the state increases because they already pay their minimum wage workers a wage that is higher than the state minimum wage . In contrast, vendors providing the same service in another part of the state, but who are not subject to a local minimum wage requirement, can seek an adjustment per state policy for their minimum wage workers . To see how this plays out, consider a vendor in San Francisco (which has had a local minimum wage above the state minimum wage since 2014) . This vendor cannot request an adjustment when the state minimum wage goes up because it already has to pay its lowest wage staff more than the state minimum wage . This means it may still operate with the rate it had before 2014, whereas a vendor in Modesto (which does not have a local minimum wage) would have been able to request an adjustment each of the four times the state minimum wage has increased since 2014 . Not only does the vendor in San Francisco have to pay higher wages to its minimum wage staff (currently $14 per hour), but it cannot benefit from any of the adjustments, due to changes in state policy, that are afforded vendors in other areas of the state without local minimum wages . Analyst’s Recommendation. Given the information presented above, the Legislature may wish to clarify what it intended when it authorized DDS vendors to seek rate adjustments . For example, when the state minimum wage increases from $11 per hour to $12 per hour, does the Legislature want to allow a vendor in San Francisco paying the local minimum wage of $14 per hour to seek a rate adjustment to account for the $1 increase in the state minimum wage to partially offset its costs, as it allows a vendor in Modesto (paying the state minimum wage) to do? If so, we recommend statutory clean up to clarify that vendors in areas with a local minimum wage that is higher than the state minimum wage can seek an adjustment related specifically to the increase in the state minimum wage . In addition, we recommend the Legislature direct DDS to report at budget hearings about the estimated General Fund cost of this statutory clean up . Uniform Holiday Schedule Proposal Traditional Treatment of Holiday Schedule for Service Providers. Traditionally, each RC has required service providers in its catchment area to observe a certain number of holidays each year, meaning service providers cannot bill for services on those days (in practice, most do not provide services on those days, and if they do, they go uncompensated) . The holiday policy typically would apply to providers of services such as day program, transportation, work activity programs, and early intervention services for infants and toddlers, rather than services such as residential care . Traditionally, RCs have required service providers to observe an average of ten holidays per year . State Policy Dictating a Uniform Holiday Schedule Initiated as a Budget Solution. As part of a package of budget solutions passed in 2009 in response to the significant state budget deficit, the state enacted a policy prohibiting RCs from paying service providers on 14 holidays per year (rather than the typical ten) and requiring that all service providers statewide uniformly observe the same 14 holidays . This was called the uniform holiday schedule . Prohibiting billing on four additional days per year was estimated to save $22 million in POS expenditures ($16 .3 million General Fund) at the time of enactment of this policy . The Policy Was in Effect for More Than Five Years While Litigated. While legal action was brought against the state by service provider associations in 2011 in an effort to have the state policy repealed, the policy remained in effect for more than five years . Despite an initial ruling in favor of service providers in 2015, a subsequent court ruling in 2016 upheld the state’s policy . Since the initial ruling in 2015, the state has not enforced the policy . RCs went back to the traditional practice of setting their own holiday schedules for vendors, which included on average gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 53 about ten days per year . Service providers were able to bill again for the four extra days, meaning that although the DDS budget was not directly adjusted to reverse the savings assumed in 2009, the funding required for the four additional days was occurring through POS billing on the natural . In other words, the 2017-18 POS budget likely reflects the cost for services provided on the four additional days . Governor’s Budget Proposes Reinstating Enforcement of the Policy. Because the 14-day uniform schedule remains in statute and the court upheld it, the Governor’s budget proposes enforcing it again starting in 2018-19, with an estimated incremental savings of $10 .2 million ($3 .2 million General Fund) on top of the previously estimated savings . Options for Legislative Consideration. The Legislature has several options in response to the Governor’s plan . First, it could approve the Governor’s plan\u2014enforcement of the 14-day uniform holiday schedule in current law . The Governor’s budget assumes General Fund savings of about $3 million . (However, since the policy has not been enforced since 2015 and vendors began billing for services on four additional days, there would likely be even more savings than what the Governor’s budget assumes .) Second, the Legislature could reject the proposal outright and repeal the state policy . This would reinstate the traditional (and current) practice of allowing RCs to set their own holiday schedules and would not\u2014in effect\u2014cost the state any more in POS than what is in the 2017-18 budget . However, compared to what the Governor’s budget proposes for 2018-19, it would increase costs . Finally, the Legislature could approve a compromise solution, requiring a uniform holiday schedule, but one that includes ten days rather than 14 . This would reinstate the benefit of a coordinated schedule among service providers across RCs (this is mostly a benefit when RCs are in close geographic proximity and consumers receive services from service providers in more than one RC catchment area) . It would allow consumers to continue receiving services on the four days eliminated from the holiday schedule . Although rejecting the Governor’s proposal or approving the offered compromise solution would increase costs compared to what the Governor’s budget proposes for 2018-19, it would likely not increase costs compared to 2017-18, since RCs currently typically observe and pay their vendors according to a ten-day holiday schedule . Assessing Gaps in Community Services Program Community Service Gaps Need to Be Better Understood. Although the DDS system is structured through the individual program plan (IPP) process ideally to account for and fund each individual’s needs, it is a commonly held view that RCs struggle to help consumers find certain services, such as affordable, accessible, and safe housing; regular dental care; employment opportunities; and transportation . It is currently difficult to quantify the full extent of any service gaps since DDS lacks a standardized method for understanding these gaps on a systemwide basis . At best, DDS may know anecdotally that certain services are hard to find or that certain providers are going out of business . DDS Granted New Authority for Use of Community Placement Plan (CPP) Funds. Chapter 18 authorized DDS to expand the use of CPP funding to the entire community services program . Previously, CPP funding was designed specifically to address the community service needs of people moving out of DCs . It has funded the development of new homes and programs and paid for the transition costs to place these formerly institutionalized consumers in the community . Now DDS has the authority to use this funding to address unfunded needs of other community-based consumers in the DDS system . Legislature Is Considering a Proposal to Shift Savings From DC Closures to Community Services. The Legislature has been discussing a proposal to earmark any possible savings from the closures of DCs for the DDS community services program . (For more information on this proposal, please see our recent report, Sequestering Savings From the Closure of Developmental Centers .) Analyst’s Recommendation. We continue to suggest, as we did in our 2017-18 budget analysis and our recent report, that the Legislature may benefit from directing DDS to conduct periodic comprehensive assessments of service gaps and related unmet funding requirements in the community services system . Such assessments would help guide the use of additional resources provided for this system . The current lack of such assessments constrains the Legislature’s gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 54 and DDS’ ability to prioritize and effectively target the use of CPP or other additional resources provided to the community services system . As one example, the Legislature could consider requiring DDS to revamp its IPP process to allow for standardization of information collected . This would allow information to be aggregated at a systemwide level . Although some collection of information must be done in a highly individualized way as part of the person-centered planning process, other information could be easily standardized, such as whether a consumer needs a particular service and how many providers are currently available to provide this service . Standardizing such information would also allow DDS to see which geographic areas or demographic groups lack choice or service coverage . CONTINUUM OF CARE REFORM California’s child welfare system serves to protect the state’s children from abuse and neglect, often by providing temporary out-of-home placements for children who cannot safely remain in their home, and services to safely reunify children with their families . Beginning in 2012, the Legislature passed a series of legislation implementing the Continuum of Care Reform (CCR) . This Legislative package\u2014which includes Chapter 35 of 2012 (SB 1013, Committee on Budget and Fiscal Review), Chapter 773 of 2015 (AB 403, Stone), Chapter 612 of 2016 (AB 1997, Stone), and Chapter 732 of 2017 (AB 404, Stone)\u2014 makes fundamental changes to the way the state cares for children in the foster care system . CCR aims to increase the foster care system’s reliance on family-like settings rather than institutional settings such as group homes . Additionally, CCR makes changes to ensure that the state’s foster children receive mental health and other supportive services regardless of their placement setting . To facilitate these reforms, the Legislature has provided annual General Fund support for CCR since 2015-16 . In 2017-18, the Governor’s budget estimates spending on CCR at $198 million General Fund . In 2018-19, the Governor’s budget proposes $139 million in General Fund to support continued CCR implementation efforts . Estimated CCR spending in 2017-18 and proposed CCR spending in 2018-19 represent significant increases over previous administration projections for these same fiscal years . (For this section of the report, we restrict our CCR funding estimates and projections to what is provided for county child welfare and probation services, where most CCR spending is occurring . We therefore exclude from these estimates CCR spending on county mental health services and state operations .) This analysis provides a brief overview of the existing foster care system, summarizes the major policy changes under CCR, provides a status update on CCR implementation to date, and assesses the Governor’s CCR budget proposal for 2018-19 in light of the reform effort’s current successes and challenges . OVERVIEW OF THE CHILD WELFARE SYSTEM California’s child welfare system provides an array of services for children who have experienced, or are at risk of experiencing, abuse or neglect . These child welfare services (CWS) include responding to and investigating allegations of abuse and neglect, providing family preservation services to help families remain intact, removing children who cannot safely remain in their home, and providing temporary out-of-home placements until (1) the family can be successfully reunified or (2) an alternative permanent placement can be found . After family reunification, adoption and guardianship are the two most common permanent placement options . Child Welfare Programs Are State Supervised, County-Administered. DSS oversees CWS, while county welfare departments carry out day-to-day operations and services . DSS is responsible for statewide policy development and enforcing state and federal regulations . Counties have flexibility around the design of their operations and to some extent the range of services they provide . All counties investigate allegations of abuse, engage with families to help them remain intact, and provide foster care payments to foster caregivers and providers . Services that may vary at the discretion of counties include, for example, child care made available to certain children in care . gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 55 Assisting the counties are several hundred private Foster Family Agencies (FFAs) and congregate care providers that provide services ranging from basic care and supervision to foster parent recruitment to mental health treatment . (We provide a basic overview of FFAs and congregate care\u2014the latter of which is comprised of both group homes and CCR’s recently created Short-Term Residential Therapeutic Programs (STRTPs) \u2014in the sections that follow .) The Role of County Probation Departments in the Child Welfare System. County probation departments carry out many of the same services provided by county welfare departments but for children who have been declared wards of the court through a delinquency hearing . Unlike the majority of children who enter the child welfare system, children in out-of-home care due to probation decisions have not necessarily been subject to abuse or neglect . Instead, probation departments often utilize foster care placements with the aim of rehabilitating the child following a criminal offense . Foster Care Payments. A significant component of CWS is the making of per child per month payments to foster caregivers and providers to cover costs associated with the care, supervision, and service needs of a foster child . We refer to these as foster care payments . The state sets base-level foster care payments that can vary from under $1,000 to over $12,000 depending on the type of placement setting a foster child is in as well as by other factors . (Below, we discuss the various foster care placement settings .) In addition to state-mandated, base-level foster care payments, most counties\u2014at their own discretion and with flexible county funding\u2014pay foster caregivers caring for children with high needs supplemental payments known as specialized care increments (SCIs) . SCI levels vary from county to county, generally ranging from under $100 per child per month with slightly elevated needs to over $1,000 per child per month for foster children with the highest needs . Counties design their own assessments to determine whether a foster child qualifies for an SCI and what the SCI level should be . As a result, there is great variance in the level of SCIs throughout the state . CWS Funding Total funding for CWS is projected to be $6 .3 billion for 2018-19 . Below, we describe the major sources of this funding . 2011 Realignment Revenues Are a Major Source of CWS Funding. Until 2011-12 the state General Fund and counties shared significant portions of the nonfederal costs of administering CWS . In 2011, the state enacted legislation known as 2011 realignment, which dedicated a portion of the state’s sales tax to counties to administer CWS . The 2018-19 budget projects that nearly $2 .5 billion will be available from realignment revenues to fund CWS programs in 2018-19 . As a result of Proposition 30 (2012), under 2011 realignment, counties are either not responsible or only partially responsible for CWS programmatic cost increases resulting from federal, state, and judicial policy changes . Counties are responsible for all other increases in CWS costs\u2014for example, those associated with rising caseloads . (Conversely, if overall CWS costs fall, counties get to retain those savings .) Proposition 30 protects the state from having to reimburse counties for increasing costs of child welfare policies that were in place prior to 2011 realignment . Conversely, Proposition 30 protects counties by establishing that counties only need to implement new state policies that increase overall program costs to the extent that the state provides the funding . Federal Funding for CWS. Federal funding for CWS stems from several sources and is projected to be around $2 .9 billion in 2018-19 . State General Fund Supports Non-Realigned Components of Child Welfare and State Oversight Functions. The 2018-19 budget proposes around $433 million General Fund for county welfare and probation departments to implement components of the child welfare program that were not part of 2011 realignment . CCR implementation spending constitutes a significant portion of total General Fund spending on CWS . In addition to this $433 million, the General Fund supports the state’s CWS oversight function at DSS . Out-of-Home Placement Options Counties have historically relied on four primary placement options for foster children\u2014kinship care, gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 56 foster family homes (FFHs), FFAs, and congregate care . (For this report we refer to kinship care, FFHs, and FFAs as home-based family care [HBFC] .) In recent years, Supervised Independent Living Placements (SILPs) and transitional housing placements have become increasingly utilized as placement options for older foster youth . As of October 2017, there were around 60,000 children in foster care in California . Federal and state law mandate that children be placed in the least restrictive placement setting, which state law describes as a setting that promotes normal childhood experiences and the day-to-day needs of the child . Figure 27 shows the number of foster children in each of the above mentioned placement settings over time . The selected placement types vary in their level of restrictiveness, serve children with different though overlapping needs, provide different kinds of specialized services, and receive varying foster care payment rates from the state . Kinship Care. Established child welfare policy and practice in the state prioritizes placement with a noncustodial parent or relative . Kinship care comprises care from relatives and nonrelative extended family members and is the state’s most utilized placement option at 36 percent of foster placements as of October 2017 . Kinship care is a unique foster care placement type in multiple respects . For example, unlike other placement types, kin caregivers can take in foster children on an emergency basis before having been fully approved by counties as foster caregivers . Instead, kin caregivers only must meet basic health and safety standards before an emergency placement is made . As a result of not meeting full foster caregiver approval 2012 a Includes, for example, children in pre-adoptive homes and temporary shelters. October 2017 Number of Children in Foster Care by Placement Type Figure 27 5,000 10,000 15,000 20,000 25,000 30,000 Kinship Care Foster Family Agency Homes SILP\/Transitional Housing Congregate Care Othera 2007 2017 Foster Family Homes SILP = Supervised Independent Living Placement. Source: University of California, Berkeley\u2014California Child Welfare Indicators Project. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 57 standards prior to taking in a foster child, kin caregivers are generally not eligible to receive full monthly foster care payments until they have received full foster caregiver approval . Instead, they typically receive the CalWORKs child-only grant of almost $400 per month . Once fully approved, in 2017-18, kin caregivers receive a minimum foster care payment of at least $923 per month for the care and supervision of each foster child in their home . FFHs. County-licensed foster homes, known as FFHs, are often the preferred placement option when a suitable kin caregiver cannot be found and the child does not have needs requiring a higher level of services . Counties recruit FFH caregivers and provide basic social work services to the approximately 13 percent of foster children statewide residing in an FFH as of October 2017 . In 2017-18, FFH caregivers receive the same minimum foster care payment as kin caregivers of at least $923 per month for the care and supervision of each foster child in their home . FFA Homes. FFAs do not directly house the children under their care . Instead, FFAs are private nonprofit agencies that recruit and approve foster caregivers, place children into FFA-supervised foster homes, and provide supportive services to the children in their care, typically children with elevated needs compared to those placed in FFHs . Because they offer a relatively high level of services and often serve children with elevated needs, counties reimburse FFAs at a higher rate than either kin caregivers or FFHs . In 2017-18, FFAs receive a minimum payment of $2,139 per month for each foster child under their supervision . Of this amount, $923 is passed directly onto the foster child’s caregiver, while the remaining amount funds the FFA’s administrative and supportive services activities . FFA-supervised foster caregivers have not historically been eligible to receive county-funded SCIs . Instead, FFA-supervised foster caregivers historically received a fixed supplemental per child per month payment on top of the standard foster care payment mandated by the state for all HBFC placements . As of October 2017, 26 percent of the state’s foster children were placed through an FFA . Congregate Care. Congregate care includes group homes and STRTPs, the latter of which are expected to replace group homes under CCR as the permissible congregate care placement setting for CWS-supervised foster children unable to be placed in an HBFC home . (We discuss the differences between group homes and STRTPs in the Major Changes Under CCR section of this analysis .) Operated as private, nonprofit agencies, group homes and STRTPs provide 24-hour care, supervision, and services to foster children with the highest levels of need, often children whose significant emotional or behavioral challenges can make it difficult for them to successfully remain in home-based family foster care settings . Professional staff, as opposed to a parent-like foster caregiver, provide care and supervision to children in group homes and STRTPs . Group homes and STRTPs are considered the most restrictive, least family-like foster care setting, and are generally the least preferred placement option . Group homes and STRTPs are compensated at significantly higher rates than the other placement types\u2014in 2017-18, ranging from just under $3,000 to over $12,000 per child per month . As of October 2017, approximately 9 percent of California’s foster children were living in group homes or STRTPs . SILPs and Transitional Housing. In recent years, counties have increasingly relied upon SILPs and transitional housing placements instead of home-based family placements and congregate care settings for older, relatively more self-sufficient youth . SILPs are independent settings, such as apartments or shared residences, where nonminors who remain in the foster care system past their 18th birthday may live independently and continue to receive monthly foster care payments . Nonminor foster youth residing in SILPs receive a monthly foster care payment of $923 . Transitional housing placements provide foster youth ages 16 to 21 supervised housing as well as supportive services, such as counseling and employment services, that are designed to help foster youth achieve independence . The monthly foster care payment rate for foster youth in transitional housing placements ranges between $2,000 and $3,000 . As of October 2017, 9 percent of all foster youth were residing in either SILPs or transitional housing . This is slightly greater than the number living in group homes or STRTPs . MAJOR CHANGES UNDER CCR CCR aims to achieve a number of complementary goals including: (1) ending long-term congregate care home placements; (2) increasing reliance on gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 58 home-based family placements; (3) improving access to supportive services regardless of the kind of foster care placement a child is in; and (4) utilizing universal child and family assessments to improve placement, service, and payment rate decisions . In this section, we first highlight some of the key problems CCR is intended to address and then discuss some of the major changes underway as a result of CCR . (We note that the changes we highlight are not a comprehensive accounting of all CCR changes, but are those most relevant in understanding the Governor’s 2018-19 budget proposal for CCR .) Congregate Care Placements Are Costly and Associated With Poor Outcomes for Children. Congregate care placements can cost over $12,000 per child per month depending on the level of care provided . In contrast, foster care payments for home-based family settings generally range from around $1,000 per child per month for relative and FFH placements to somewhat more than $2,000 per child per month for FFA placements . Moreover, long-term stays in congregate care are associated with elevated rates of reentry into foster care, lower educational achievement, and higher rates of involvement in the juvenile justice system . (We note that given the potentially higher needs of children placed in congregate care, it is difficult to determine whether congregate care placements themselves directly lead to these poor outcomes .) Recognizing the above shortcomings associated with congregate care, CCR aims to end long-term congregate care placements . Concerns About the Availability and Capacity of Home-Based Family Placements. Reducing reliance on congregate care placements has been a priority for the state for some time . A major challenge to achieving this goal has been an inadequate supply of home-based family placements which are capable of caring for children with elevated needs . Additionally, the mental health and other supportive services to help home-based family caregivers care for children with elevated needs have not historically been readily accessible at all home-based family placement types . Improving the capacity and availability of home-based family placements is a principal goal under CCR . CCR Creates a New Placement Type STRTPs Replace Group Homes for CWS-Supervised Foster Children. CCR ends group homes as a placement option for CWS-supervised foster children by January 2019 . (Probation departments may continue to utilize group home placements indefinitely . Nevertheless, CCR aims to encourage probation departments to make similar changes regarding their use of congregate care as child welfare departments .) STRTPs are expected to replace group homes as the permissible placement setting for children who cannot safely and stably be placed in home-based family settings, providing a similar level of supervision as group homes, but with expanded services and supports . In contrast to group homes sometimes serving as long-term placements for children for whom home-based family placements cannot be found, STRTPs are intended to exclusively provide short-term, intensive treatment and other services to allow children to transition to a family setting as quickly and successfully as possible . CCR restricts STRTP placements to children who have been assessed as requiring the high level of behavioral and therapeutic services that STRTPs will be required to provide . Children whose level of need may qualify them for STRTP placement include, among others, those assessed as having a serious mental illness and victims of commercial sexual exploitation . To ensure the ongoing appropriateness of all STRTP placements, resident children’s case plans are subject to review every six months by the director or deputy director of the supervising county child welfare or probation department . The case plans specify the reasons for the child’s placement, the expected duration of stay, and the transition plan for moving the child to a less restrictive environment . As a result of the shorter expected durations of stay in STRTPs, as well as the restrictions around which foster children may be placed in STRTPs compared to group homes, it is anticipated that statewide STRTP capacity (number of beds) will be considerably lower than existing statewide group home placement capacity . New CCR Foster Care Payment Rate Structure CCR Foster Care Payment Rates to Generally Vary Based on Children’s Needs. Until January 2017, the state’s foster care payment rates primarily varied by age for children in HBFC . For example, a foster caregiver caring for a child below age 5 would receive a monthly foster care payment of around $700 while gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 59 a foster caregiver caring for a child over age 14 would receive a monthly payment of around $900 . Under the foster care payment rate structure being implemented under CCR, foster care payment rates vary by children’s level of need as determined by a statewide level of care (LOC) assessment tool, which we describe below . There are five payment rates under CCR’s HBFC payment rate structure, each with a corresponding LOC . LOC 1 represents the lowest level of care and corresponds with the lowest payment rate . LOC 5\u2014 also referred to as the Intensive Services Foster Care level of care\u2014represents the highest level of care and comes with the highest payment rate . In addition to changing the basic structure of foster care payment rates, the new HBFC base foster care payment rates are generally higher than they were prior to CCR . Some form of county-optional SCIs is expected to continue under the new HBFC foster care payment rate structure . However, counties may make adjustments to their SCI rate structures in order to harmonize their SCI rate structures with the HBFC rate structure . Figure 28 summarizes the HBFC payment rates under CCR . LOC Assessment Tool. The DSS developed an LOC assessment tool to determine the foster care payment rate that caregivers will receive . The assessment is designed to identify the care needs of a foster child and to translate those care needs into an appropriate foster care payment rate . Single STRTP Payment Rate. Unlike the rate structure that governed group home payment rates\u2014 which differentiated group home payment rates by the level of care and supervision different group homes provided\u2014under CCR, there is a single monthly payment rate paid for all STRTP-placed children . In 2017-18, STRTPs are paid a per child per month foster care payment rate of $12,498 . CCR Aims to Expand Access to Mental Health and Other Supportive Services Improving foster children’s access to mental health services has been a longstanding goal of the state . CCR builds on these efforts by requiring STRTPs\u2014and therefore all CWS congregate care providers beginning in January 2019\u2014to directly provide specialty mental health services to resident foster children . In addition, FFAs are required to ensure access to mental health services for the foster children they supervise by either providing the services themselves or contracting with mental health service providers to do so on their behalf . On top of aiming to improve access to mental health services, CCR mandates that certain other core services be made available to foster children . These core services include permanency services to help foster children reunify with their parents or, alternatively, secure permanency through guardianship or adoption . CCR Changes to the Caregiver Approval and Placement Processes Resource Family Approval (RFA) Replaced the Previous Multiple Approval, Licensing, and Certification Processes for Home-Based Family Caregivers. Before foster caregivers may receive full foster care payments, they must be approved to provide care . Prior to CCR, the approval process differed by placement type\u2014for example, non-relative caregivers were licensed according to one set of criteria while relative caregivers were approved under a different set of criteria . CCR replaced the multiple Figure 28 2017\u201118 Home\u2011Based Family Care Foster Care Payment Rates Under CCR Per Child Per Month Payment Rates Level of Care (LOC) 1 2 3 4 5 County-supervised foster caregivers $923 $1,027 $1,131 $1,235 $2,410 FFA payments: Foster caregivers $923 $1,027 $1,131 $1,235 $2,410 Services and administration 1,216 1,260 1,304 1,383 3,682 Totals $2,139 $2,287 $2,435 $2,618 $6,092 a In addition to this amount, counties receive $3,682 per child per month for service costs for the LOC 5 foster children that they directly supervise. CCR = Continuum of Care Reform and FFA = Foster Family Agency. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 60 approval standards with a single, more comprehensive approval process that incorporates features included in assessments for prospective adoptive parents (such as a psychosocial assessment) . Because it is a more comprehensive approval process, completing the RFA process is intended generally to automatically qualify a foster caregiver for guardianship and adoption . CCR legislation requires all new prospective foster caregivers to complete the RFA process beginning in January 2017 . Obtaining RFA is required of all existing foster caregivers by January 2019 in order for them to continue to serve as foster caregivers . More Collaborative Placement and Service Decisions Through the Use of Child and Family Teaming. To increase child and family involvement in decisions relating to foster children’s care, CCR mandates the use of child and family teaming through every stage of the case planning and service delivery process . The child and family team (CFT) may include, as deemed appropriate, the affected child, her or his custodial and noncustodial parents, extended family members, the county caseworker, representatives from the child’s out-of-home placement, the child’s mental health clinician, and other persons with a connection to the child . The CFT will meet as needed to discuss and agree on the child’s placement and service plan whenever an important foster care decision is made . Functional Assessment Tool to Inform Placement and Services Decisions. CCR calls for children to receive a comprehensive strengths and needs assessment upon entering the child welfare system in order to improve placement decisions and ensure access to necessary supportive services . In late 2017, the Child and Adolescent Needs and Strengths (CANS) tool was chosen by DSS as the state’s functional assessment tool . The CANS assessment tool will be used to inform the decisions of the CFT and will be administered separately from the LOC assessment tool discussed above . CCR Funding The budget contains funding for most of the major programmatic components identified above, including, for example, CCR’s new foster care payment rates and the new costs associated with the RFA and CFT processes . This section briefly summarizes how the Governor’s CCR budget is structured . CCR Creates Some Immediate New Costs for Counties. CCR increases certain costs for counties . For example, county administrative costs are higher as a result of the new RFA and CFT processes, which result in greater time commitments on county social workers . CCR’s relatively higher foster care payment rates also increase county costs . CCR Expected to Result in Savings Due to CCR-Related Caseload Movement. In addition to generating higher county costs, CCR is expected to result in offsetting savings for counties . As previously discussed, CCR aims to shorten foster children’s lengths of stay in congregate care, reduce the number of children ever placed in congregate care, and provide greater resources to home-based family placements in order to improve their stability . To the extent that CCR succeeds in reducing the number of foster children in more costly placements, such as congregate care, in favor of less costly placement settings, such as HBFC settings, counties are expected to experience savings . State Provides Funding for CCR’s Net Costs. As previously discussed, counties are responsible for the costs of administering CWS that were included in 2011 realignment . Counties are only required to implement new state CWS policies to the extent that the state provides funding to cover the new policies’ costs . CCR creates new costs on counties, for example, in the form of higher administrative costs, while also potentially generating savings for counties as the proportion of foster children in costly placements such as congregate care placements decreases . The state has agreed with counties to fund CCR’s net costs on a county-by-county basis . That is, the state will fund the difference between (1) the new costs that CCR creates on a county and (2) any savings that CCR generates for that same county . The state will continue to fund counties’ CCR activities until each county’s CCR-related savings equal or exceed its CCR costs . The state will not recoup from counties any CCR-related savings that exceed counties’ CCR-related costs . It is our understanding that the state and counties have agreed on a methodology to track CCR’s ongoing net costs for counties in order to identify the amount of state funding needed, if any, to pay for CCR on an ongoing basis . CCR Previously Anticipated to Be Largely Cost Neutral to the State Beginning in 2019-20. In developing previous years’ budgets for CCR, DSS gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 61 created a multiyear projection of CCR’s state costs . The previous multiyear CCR projection released in May 2017 projected county CCR-related savings to exceed county CCR costs beginning in 2019-20, resulting in the end of state CCR funding for counties beginning in that fiscal year . STATUS UPDATE ON CCR IMPLEMENTATION State and county implementation of CCR’s various components has been spread out over several years, with most of CCR’s major components implemented beginning in January 2017 . Some elements of CCR implementation have gone relatively smoothly . Other components of CCR implementation have been met with delays and challenges . Our analysis that follows focuses on some of the major challenges of CCR implementation . RFA RFA Taking Significantly More Time Than Envisioned in Law. CCR legislation generally directs RFA to be completed within 90 days of application . In practice, RFA is taking between 90 days (3 months) and 270 days (9 months) before completion for a typical case . It is our understanding that there is variation among counties in how long the RFA process is taking\u2014with early RFA implementer counties, for example, completing the process relatively faster . It has also been reported that FFAs, which complete RFA for foster caregivers of children who are placed through FFAs, have to a greater extent been able to meet the 90 days for approval standard compared to counties . While the reasons behind the prolonged RFA process are not entirely known, the relatively intensive set of social worker activities related to the psychosocial assessment\u2014which was not a part of the foster caregiver approval process prior to RFA\u2014appears to be a significant factor behind the slower than previously anticipated RFA process . DSS Issuing New County Guidance to Streamline RFA Process. In early 2018, DSS is expected to release revised guidance to counties on ways to streamline the RFA process . This guidance is expected to, for example, encourage counties to initiate all steps of the RFA process, such as the background checks and the psychosocial assessment, concurrently rather than along a linear timeline . Moreover, we understand that DSS is working with the counties to reduce the overall administrative burden that the more comprehensive RFA process places on counties by clarifying what is and is not required under RFA . For example, updated DSS guidance is expected to clarify what steps in the RFA process must be completed before RFA is granted and what steps may be completed after RFA is granted . Prolonged RFA Delaying the Payment of Standard Foster Care Assistance Payments for Affected Kin Caregivers. As previously discussed, children are allowed to be placed with kin caregivers on emergency placements before the kin caregivers are fully approved as foster caregivers . However, under CCR, kin caregivers are generally not eligible to receive full foster care payments of $923 per month until RFA is complete . Instead, they often receive the CalWORKs child-only grant of almost $400 per month during the time between the emergency placement and the completion of RFA\u2014up to nine months in some cases . Due to the prolonged RFA process, therefore, kin caregivers may be caring for foster children for months at a time without receiving a full foster care payment . It is our understanding that under the kin caregiver approval process that preceded RFA, it typically took one month to two months to receive kin caregiver approval and initiate full foster care payments . Certain counties have elected to use flexible county CWS funding to increase certain kin caregivers’ payments beyond the CalWORKs child-only grant and closer to or at the full foster care payment rate while the RFA application is pending . We note that certain kin caregivers\u2014specifically non-relative extended family members\u2014are ineligible for the CalWORKs child-only grant and, as a result, may in certain cases receive no payment while the RFA application is pending . HBFC Rate Structure LOC Assessment Tool Not Currently Being Used. The LOC assessment tool developed by DSS is not currently being used to determine foster care payment rates . This is largely due to systems delays related to the programming of the HBFC payment rate structure . The tool has undergone testing by DSS over the last year or more . LOC-Based Rates Set to Implement in Stages Beginning in March 2018. Although no foster children gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 62 are being assessed using the LOC assessment tool, the state has begun to implement the new HBFC payment rate structure . Rather than implementing the new LOC-based HBFC payment rate structure at a single time, the state has elected to implement the new CCR rate structure in phases . During Phase 1, which began in January 2017, the state implemented the new HBFC LOC 1 rate (the foster care payment rate for children with the lowest level of need) and the STRTP payment rate . (A relatively small number of foster children with highly elevated needs in HBFC placements began to receive LOC 5 foster care payment rates based on existing case information that does not involve the LOC assessment tool .) This means that most foster caregivers of newly placed foster children began receiving the LOC 1 payment rate without regard to the actual LOC of the foster children . Because even the LOC 1 rate is generally higher than the prior age-based rates, foster caregivers of newly placed foster children are receiving higher foster care payments with the implementation of Phase 1 of the HBFC payment rate structure than they would have under the pre-CCR payment rate structure . In Phase 2, the state will start using the LOC assessment tool to implement the full LOC-based HBFC foster care payment rate structure for all foster children . This will make the full range of LOCs available for foster children . Phase 2 itself will be split into two stages . The first stage of Phase 2 will be implemented in March 2018 for FFA-supervised foster children only (both new and existing FFA-supervised youth) . The second stage of Phase 2 is then scheduled to be implemented in May 2018 for the rest of the HBFC placement types (kin caregivers and FFHs) . The reason behind the two-stage implementation of Phase 2 relates at least in part to stakeholder concerns about the LOC assessment tool developed by DSS, which we discuss immediately below . Stakeholder Concerns About LOC Assessment Tool. Stakeholders have reported concerns around whether the LOC assessment tool developed by DSS to determine the foster care payment rates that foster caregivers are paid is reliable . These concerns arose after initial testing of the LOC assessment tool was done on a sample of foster children in selected counties throughout the state . Stakeholders’ concerns are at least threefold: Potential Bias Toward Lower LOC Levels. Stakeholders contend that the LOC assessment tool assigns foster children with elevated needs into inappropriately low LOC levels, resulting in lower foster care payment rates for their foster caregivers . During testing of the LOC assessment tool, the highest proportion of foster children received an LOC 1 determination, with decreasing proportions receiving higher LOC determinations until LOC 5, where there was an increase in the number of foster children receiving the highest LOC determination . Potential Lack of Inter-Rater Reliability. Stakeholders are concerned about the objectivity of the LOC assessment tool insofar as different social workers using the tool may make different LOC determinations for the same foster child (a challenge referred to as inter-rater reliability) . Uncertain Compatibility With Existing County SCI Determination Processes. As discussed earlier, certain counties provide SCIs for foster caregivers of children with elevated needs and have their own need-based SCI assessment processes that do not necessarily correspond to the state’s new LOC assessment tool . Stakeholders are concerned that certain caregivers could see reductions in their overall foster care payment rates due to inconsistencies between the LOC and SCI assessment processes . Reductions in certain foster caregivers SCIs could potentially come about if counties begin using the LOC assessment tool to determine SCI levels and the LOC assessment tool results in a lower SCI determination than the previous, county-operated assessment process . DSS Will Test LOC Assessment Tool During First Stage of Phase 2 HBFC Payment Rate Implementation. It is the intent of DSS to test the reliability of the LOC assessment tool as it is being implemented for FFA-supervised children during stage one of the LOC-based HBFC payment rate implementation beginning in March and ending in May . Lessons learned from this testing will inform whether changes need to be made to the LOC assessment tool and potentially, if so, whether wider implementation of the LOC assessment tool should be delayed . gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 63 Group Homes and STRTPs Phase Down of Group Homes and Replacement by STRTPs Are in Their Early Stages. Group homes must end operations as congregate care providers or convert into STRTPs by January 1, 2019 . (To maintain operations past January 1, 2017, group homes have had to apply to DSS for temporary license extensions, which the department has so far generally granted .) As of November 2017, there were 62 STRTPs that had received licensure from DSS (a requirement to begin STRTP operations and receive STRTP payments) . All of these 62 operating STRTPs converted from group homes . These 62 operational STRTPs have a total license capacity of nearly 1,000 beds . Minimal Caseload Movement as of January 2018 Movement From Higher-Level Placements Into Lower-Level Placements Has Been Slower Than Previously Anticipated. As of October 2017, around 5,000 foster children in both the CWS and probation systems remained in congregate care . The number of children residing in congregate care has been declining without interruption since 2003\u2014long before the implementation of CCR . It is uncertain what portion of the decline in congregate care placements, if any, is attributable to CCR efforts . Rates of caseload movement out of congregate care settings do not appear to be appreciably faster since CCR implementation largely began in 2017 than they were in 2016 . OVERVIEW OF THE GOVERNOR’S BUDGET FOR CCR The Governor’s 2018-19 budget increases estimated General Fund spending on CCR in 2017-18 and 2018-19 compared to previous projections . Higher estimated 2017-18 and 2018-19 CCR spending does not result from any major proposed changes in CCR policy . Rather, this higher CCR spending reflects updated cost projections of the various components of CCR implementation . We describe the changes in estimated spending below . Upward Revision in Estimated 2017-18 CCR State Spending. Figure 29 breaks down the changes in estimated and projected CCR General Fund spending by CCR component for 2017-18 and 2018-19 .The Governor’s 2018-19 budget increases estimated General Fund spending on CCR in 2017-18 compared to the 2017-18 budget . The General Fund provided $134 million in 2017-18 to counties through DSS to implement CCR . (We solely focus on state CCR funding for counties through DSS as this comprises the bulk of total CCR-related spending .) The Governor’s 2018-19 budget revises Figure 29 Differences in Projected CCR Spending Between the 2017 Budget Act and the Governor’s 2018-19 Budgeta General Fund (In Thousands) 2017-18 2018-19 2017-18 Budget Act Governor’s 2018-19 Budget Difference 2017-18 Budget Act Governor’s 2018-19 Budget Difference CCR foster care paymentsb $11,273 $74,408 $63,135 -$88,081 $34,084 $122,165 Child and family teams 51,177 51,177 \u2014 51,177 51,943 766 Foster parent recruitment, retention, and support 43,260 43,260 \u2014 21,631 21,630 -1 Resource family approval 18,556 18,556 \u2014 23,145 23,145 \u2014 Other administrative and automation components 9,940 10,134 194 7,895 8,101 206 Totals $134,206 $197,535 $63,329 $15,767 $138,903 $123,136 a Only includes local assistance funding through the Department of Social Services. It therefore excludes all state operations spending as well as CCR-related mental health expenditures. b This line includes the net costs of the following (1) the costs associated with the new higher CCR payment rate structure and (2) the offsetting savings generated by children moving out of more costly foster care placements to less costly placements. CCR = Continuum of Care Reform. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 64 estimated 2017-18 General Fund spending on CCR upward by $63 million to $198 million . Higher Than Previously Anticipated Proposed State Spending on CCR in 2018-19. Previous multiyear CCR spending projections anticipated $16 million in General Fund spending on CCR in 2018-19 . As Figure 29 shows, the Governor’s 2018-19 budget now proposes $139 million in General Fund spending on CCR in 2018-19, a $123 million increase over previous projections . Higher CCR Spending Largely the Result of Updated Caseload Movement Projections. The main driver of higher than previously anticipated and proposed state spending on CCR is the projected slower speed at which foster children are moving out of congregate care into HBFC settings . As previously discussed, projected spending on CCR from 2016-17 through 2021-22 depends significantly on the number of children transitioning out of costly placements such as congregate care placements and into lower cost placements such as HBFC settings, which generates savings for counties that the state uses to offset its CCR-related costs . Previous CCR spending projections included significant movement out of congregate care as a result of CCR efforts beginning as early as 2016-17 . The net costs associated with now slower projected caseload movement are reflected in the CCR Foster Care Payments line of Figures 29 (and Figure 31 below) . This line combines (1) the costs associated with the new higher HBFC payment rate structure and (2) the offsetting savings generated by children moving out of more costly placements such as congregate care settings to less costly placements such as HBFC settings . Because the expected speed at which children exit congregate care is a major a factor in understanding CCR’s net costs, Figure 30 compares the Governor’s updated caseload movement projections with previous budgets’ caseload movement projections . In the figure, we show the number of foster children projected to reside in congregate care settings under the Governor’s 2018-19 proposal (both traditional group homes and STRTPs) compared to prior CCR projections . The latest caseload movement projections assume approximately 2,500 foster children remain in congregate care through 2020-21, whereas the previous projection in January 2017 assumed around 1,000 foster children would remain in congregate care . 2018-19 Proposed Budget Reflects a Year-Over-Year Decline in Costs for CCR. While overall CCR costs in 2017-18 and 2018-19 are higher than under the administration’s previous projections, the Governor’s 2018-19 budget proposal reflects a net year-over-year reduction in state General Fund costs for CCR of almost $60 million . Three factors largely explain the net decrease: Greater Projected Caseload Movement in 2018-19. The Governor’s 2018-19 budget projects that CCR-related caseload movement out of congregate care and into HBFC settings will pick up speed and result in greater county savings in 2018-19 compared to 2017-18 . These county savings are available to offset more state General Fund spending on CCR in 2018-19 . DSS Multiyear Congregate Care Caseload Projections Figure 30 2016-17 2017-18 2018-19 2019-20 2020-21 2016 Multiyear Projection 2017 Multiyear Projection 2018 Multiyear Projection 1,000 2,000 3,000 4,000 5,000 6,000 DSS = Department of Social Services. gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 65 A Planned Reduction in Funding for Foster Caregiver Recruitment and Retention. Consistent with previous multiyear CCR spending plans, the Governor’s budget proposes a 50 percent reduction in General Fund for counties for their foster caregiver recruitment and retention efforts in 2018-19 compared to 2017-18 . The Governor’s budget proposes almost $22 million in General Fund funding for this purpose in 2018-19 . Increase in RFA Funding. The Governor proposes a nearly $5 million increase in General Fund for counties to approve existing foster caregivers under the new RFA process . Previous funding primarily covered the costs of completing RFA for new foster caregivers . Current law requires all existing foster caregivers to complete full RFA by January 1, 2019 . Figure 31 summarizes the change in year-over-year General Fund spending on CCR between 2017-18 and 2018-19 . CCR Expected to Result in Net State Costs for Foreseeable Future. In the administration’s prior multiyear CCR spending projection, released at the 2017-18 May Revision, the administration projected CCR to be cost neutral to the state by 2019-20 . These projected savings were the result of projected CCR-related caseload movement savings exceeding the total projected costs of CCR’s other components . The administration no longer expects caseload movement-related savings to exceed the costs of CCR’s other components within the administration’s multiyear time horizon, which extends through 2021-22 . Based on information from the administration, we project the net state costs directly attributable to CCR to be between around $20 million and $30 million annually from 2019-20 to 2021-22 . (We note that these spending projections exclude $30 million to $40 million in projected spending on a program enacted around the same time as CCR to increase foster care payments for certain kin caregivers who previously were ineligible for full foster care payments .) LAO ASSESSMENT Below, we provide a brief assessment of the Governor’s 2018-19 CCR budget and raise several issues for legislative consideration . This assessment is based on our initial review of the Governor’s CCR budget . We will provide an update to the Legislature as needed as we continue to analyze the Governor’s budget and how CCR implementation is going . Governor’s Upward Revision of Estimated and Projected CCR Spending Appropriate The Governor’s 2018-19 budget revises upward estimated General Fund spending on CCR in 2017-18 and General Fund costs for CCR in 2018-19 . We find these upward adjustments in estimated and projected CCR spending to be reasonable . Slower Projected Caseload Movement Reasonable in Light of Slower CCR Implementation. The administration’s previous projections of Figure 31 Year\u2011Over\u2011Year CCR Spending Under the Governor’s 2018\u201119 Budgeta General Fund (In Thousands) 2017\u201118 2018\u201119 Difference CCR foster care paymentsb $74,408 $34,084 -$40,324 Child and family teams 51,177 51,943 766 Foster parent recruitment, retention, and support 43,260 21,630 -21,630 Resource Family Approval 18,556 23,145 4,589 Other administrative and automation components 10,134 8,101 -2,033 Totals $197,535 $138,903 \u2011$58,632 a Only includes local assistance funding through the Department of Social Services. It therefore excludes all state operations spending as well as CCR-related mental health expenditures. b This line includes the net costs of the following (1) the costs associated with the new higher CCR payment rate structure and (2) the offsetting savings generated by children moving out of more costly foster care placements to less costly placements. CCR = Continuum of Care Reform. gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 66 CCR-related caseload movement were relatively ambitious, assuming that the changes under CCR would quickly translate into movement of children away from more costly placement settings such as congregate care to less costly placements such as HBFC settings . Certain components of CCR implementation have taken longer to implement than originally intended . The principal example is the delayed rollout of the full LOC-based HBFC payment rate structure, originally intended to start in January 2017 and now not expected to be fully operational until May 2018 . Given this and other CCR implementation delays, it is reasonable to expect that certain goals of CCR will take longer to be realized, including CCR-related caseload movement and the associated savings . From the initial data available, it doesn’t appear that movement out of congregate care placements, for example, has increased appreciably between 2016 (pre-CCR implementation) and 2017 (post-initial CCR implementation) . As such, we believe it is prudent to assume slower caseload movement as the administration has proposed in the 2018-19 budget . Speeding Up RFA Process Critical to CCR’s Success CCR’s success in part depends on the state and counties’ ability to increase the number of HBFC caregivers . Prolonged RFA Process Has Potential Negative Impact on the Supply of HBFC Settings. A critical first step in increasing the supply and capacity of HBFC caregivers is to complete the foster caregiver approval process, RFA, in a timely manner . The prolonged RFA approval process described earlier impedes the state’s ability to increase the number of foster caregivers and, accordingly, prevents the state from moving foster children out of congregate care settings and into HBFC settings as fast as it otherwise could . Prolonged RFA Process May Impair the Stability of Certain Kin Caregiver Placements. In addition, the prolonged RFA process may impair the stability of some emergency placements with kin caregivers . As previously discussed, the prolonged RFA process increases the amount of time in which kin caregivers providing emergency placements for kin foster children do not receive the full foster care payment and instead receive a payment potentially up to half of the full foster care payment . Caring for a kin foster child without the full monthly foster care payment can represent a significant economic burden that has potential to impair these kin caregiver placements’ stability . Recommend the Legislature Closely Monitor How Long the RFA Process Is Taking and Consider Legislative and\/or Budgetary Fixes if There Is Limited Improvement. DSS is in the process of releasing new county directives aimed at shortening the time it takes to complete the RFA process . At this time, the administration is not proposing that additional funding resources are needed to shorten the RFA process . We recommend that, between now and the May Revision, the Legislature closely monitor whether the RFA process does begin to speed up as a result of (1) increasing county experience implementing the new CCR-mandated caregiver approval process and (2) the new DSS directives aimed at streamlining the process . Should little improvement be shown in the speed of the RFA process between now and the May Revision, the Legislature should consider whether legislative policy changes around RFA and\/or augmentations to state funding for counties to complete RFA are necessary . Consider Funding for Kin Caregivers at the Time of Placement. The prolonged RFA process is resulting in delays in the payment of full foster care payments for certain kin caregivers . The Legislature might consider ways to provide full foster care payments to kin caregivers at or close to the time they take in kin foster children as emergency placements . It is our understanding that the administration is exploring ways to fund full foster care payments at or close to the time of the emergency placement . One potential funding source being considered, for example, is federal funding from Temporary Assistance for Needy Families . We recommend that the Legislature ask the administration during upcoming budget proceedings to (1) report on the potential for the state to utilize these or other funding sources to fund full foster care payments for kin caregivers at or close to the time of emergency placement, (2) the potential trade-offs associated with the various funding sources being considered, and (3) the estimated cost . Implementation of LOC-Based HBFC Rates Implementation of CCR’s full HBFC payment rate structure requires the use of an assessment to determine foster children’s general level of need and, gutter analysis full www.lao.ca.gov 2 0 1 8 – 1 9 B U D G E T 67 accordingly, determine an appropriate foster care payment rate . DSS developed the LOC assessment tool to perform this function . Issues to Consider Related to the Planned Implementation of the Full LOC-Based HBFC Payment Rate Structure. As noted above, there are stakeholder concerns related to the LOC assessment tool’s reliability . As such, the administration plans to implement the full LOC-based payment rate structure in stages beginning with FFA-placed foster children in March 2018 and then for all foster children in HBFC settings in May 2018 . On the one hand, because FFA-supervised children are not eligible for the SCI, the concerns raised about the new rate structure’s compatibility with the SCIs do not apply . In addition, implementation of the LOC-based HBFC payment rate structure for FFAs would give the state and counties experience administering the LOC assessment tool and present the state with an opportunity to refine its guidance and training on using the tool . On the other hand, we recognize stakeholders’ concerns about the LOC assessment tool’s reliability . As a result, we recommend that the Legislature ask the administration to report at budget hearings on how the earlier implementation of the LOC-based HBFC payment rate structure will be used to inform the implementation of the LOC rate structure for non-FFA supervised foster children . Specifically, the administration should report on how it will be assessing the tool’s ability to accurately assess level of care and how the consistent application of the tool will be assessed and assured . Additional State Funding Likely Needed to Fund Counties to Perform LOC Assessment. The Governor’s 2018-19 budget for CCR generally appears reasonable . One component that appears missing from the Governor’s CCR budget is funding for county social workers to carry out the LOC assessment with the LOC assessment tool . Since this is a new requirement placed on counties by a new state policy, Proposition 30 likely requires that the state provide funding . We recommend that the Legislature ask the administration for its rationale for not including funding for this component in its 2018-19 CCR budget proposal and to provide an estimate of this component’s cost if it in fact warrants state funding . gutter analysis full L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2 0 1 8 – 1 9 B U D G E T 68 LAO PUBLICATIONS This report was reviewed by Ginni Bella Navarre and Mark C. Newton. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. Contact Information Chas Alamo CalWORKs 319-8357 [email protected] Jackie Barocio IHSS and SSI\/SSP 319-8333 [email protected] Ben Johnson Medi-Cal and Continuum of Care Reform 319-8336 [email protected] Brian Metzker Medi-Cal 319-8354 [email protected] Lourdes Morales Information Technology 319-8320 [email protected] Sonja Petek Developmental Services 319-8340 [email protected] Jonathan Peterson Department of State Hospitals 319-8324 [email protected] Ryan Woolsey Medi-Cal 319-8356 [email protected] gutter analysis full ”

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1675): failed to open stream: HTTP request failed! HTTP\/1.1 404 Not Found “}

” Presented to: Senate Budget and Fiscal Review Subcommittee No. 3 On Health and Human Services Hon. Holly J. Mitchell, Chair CalWORKS Grants: Relation to Poverty Measures and Recent Changes March 10, 2016 YEARS OF SERVICE L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E 2L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 10, 2016 \uf0fe Families Enrolled in the California Work Opportunity and Responsibility to Kids (CalWORKs) Program Receive Monthly Cash Grants Intended to Help Meet Basic Needs \uf0fe Grant Amount Varies by Family Size and Earnings, Among Other Factors \uf06e Larger families are generally eligible for a higher maximum grant than smaller families. \uf06e A family’s monthly grant is reduced by the amount of the family’s earnings, such that families with no income receive the maximum CalWORKs grant. \uf06e A portion of earnings is disregarded when calculating the family’s grant so that the reduction in the grant is less than the amount of the earnings. This means that a family combining earnings with CalWORKs assistance will have greater total resources (grant plus earnings) than if the family has no earnings. \uf0fe Families Receiving CalWORKs Grant Generally Also Receive CalFresh Food Assistance Background Effects of Hypothetical Earnings on CalWORKs Grant Amount Without Earnings With Earnings Change Earnings \u2014 $660 $660 CalWORKs granta $704 487 -218 Totals $704 $1,147 $443 a Maximum grant for a family of three living in a high-cost county. 3L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 10, 2016 \uf0fe Following CalWORKs Implementation, Maximum Grants Initially Tracked Increases in Federal Poverty Level (FPL) \uf06e Prior law provided for annual cost-of-living adjustments (COLA). \uf06e Due to regular grant increases, the maximum grant remained above 50 percent of the FPL until the mid-2000s. Maximum CalWORKs Grants Have Fallen Over Time Relative to the FPL 200 400 600 800 1,000 1,200 1,400 1,600 $1,800 97-98 99-00 01-02 03-04 05-06 07-08 09-10 11-12 13-14 15-16 CalWORKs Grant FPL Maximum Monthly CalWORKs Grant and Federal Poverty Level (FPL) for a Family of Three in a High-Cost County 4L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 10, 2016 \uf0fe Maximum Grant Levels Later Leveled Off as FPL Continued to Rise \uf06e Beginning in the mid-2000s, annual COLAs were frequently suspended, and during the last recession the maximum grant was reduced. Grants were partially restored following the recession, but remain below pre-recession levels. \uf06e Under the proposed budget, the maximum grant will be about 42 percent of the FPL in 2016. \uf0fe CalFresh Food Assistance Increased as CalWORKs Grants Leveled Off \uf06e CalFresh food assistance benefi ts, which are federally funded, generally receive annual COLAs. \uf06e The maximum CalWORKs grant combined with CalFresh food assistance was roughly 74 percent of the FPL in 1997. \uf06e The proposed maximum CalWORKs grant combined with CalFresh food assistance will be roughly 71 percent of the FPL in 2016. Maximum CalWORKs Grants Have Fallen Over Time Relative to the FPL (Continued) 5L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 10, 2016 \uf0fe Research Supplemental Poverty Measure (SPM) Differs From Offi cial Poverty Measure \uf06e SPM thresholds are adjusted for regional cost of living, and are higher than the FPL in most parts of the state. \uf06e SPM resource defi nition is more comprehensive, and includes most major public benefi ts in family resources, including CalFresh food assistance and refundable tax credits. \uf06e SPM thresholds have been issued only since 2011, making them less useful for comparisons over time. \uf0fe CalWORKs Grant Relative to SPM Threshold \uf06e For a family of three, the maximum CalWORKs grant proposed f or 2016-17 is equal to roughly 31 percent of an average SPM threshold from 2014 (the most recent year for which SPM thresholds have been calculated) for high-cost counties, and 37 percent in low-cost counties. \uf06e The combined maximum CalWORKs grant and CalFresh food assistance for the same family is equal to roughly 53 percent of the average SPM threshold in high-cost counties, and 65 percent in low-cost counties. CalWORKs Grants and the SPM 6L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 10, 2016 \uf0fe Grants Were Reduced During the Recession . . . \uf06e Grants were reduced by 4 percent and the statutory COLA was eliminated in 2009. \uf06e Grants were further reduced by 8 percent in 2010. \uf0fe . . . Then Partially Restored \uf06e Grants were increased by 5 percent in March 2014. \uf06e Grants were increased by an additional 5 percent in April 2015. \uf06e After adjusting for infl ation, the CalWORKs grant proposed in the Governor’s budget will have lost roughly $114 (16 percent) of its purchasing power since before the recession (2007-08). Recent Changes to CalWORKs Grant Levels Monthly CalWORKs Grant and CalFresh Benefi t Pre- and Post-Recession 2007-08 2016-17 Proposed Change Amount Percent CalWORKs granta $723 $704 -$19 -3% CalFresh benefi tb 356 497 141 40 Totals $1,079 $1,197 $118 11% a For a family of three in a high-cost county with no other income. b Based on CalFresh benefi t levels in federal fi scal year 2016. 7L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 10, 2016 \uf0fe Current Law Provides for Automatic Grant Increases When Dedicated Funds Are Available. \uf06e Current law dedicates a portion of the growth in certain county realignment revenues to support the ongoing costs of grant increases. The costs of both the March 2014 and April 2015 grant increases are largely paid for from the dedicated funds. \uf06e Each year, if any dedicated funds remain after paying the costs of previous grant increases, current law provides that grants be increased by an amount that can be supported by the dedicated funds. \uf06e Dedicated funds estimated to be available in 2016-17 do not fully cover the cost of the previous two grant increases. As a result, no automatic grant increase will be provided in 2016-17 and the General Fund will cover the shortfall. Recent Changes to CalWORKs Grant Levels (Continued) ”

” M A C T A Y L O R L E G I S L A T I V E A N A L Y S T F E B R U A R Y 2 0 1 6 The 2016-17 Budget: Analysis of the Human Services Budget 2016 -17 B U D G E T 2 Legislative Analyst’s Office www.lao.ca.gov 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 3 EXECUTIVE SUMMARY Overview of the Human Services Budget. The Governor’s budget proposes $12.2 billion from the General Fund for human services programs\u2014a 3.9 percent increase over 2015-16 estimated expenditures. The year-over-year changes mainly reflect the combination of (1) continued implementation of previously enacted policy changes; (2) changes in caseload, utilization of services, and cost per unit of service; and (3) new policy proposals in the Department of Developmental Services (DDS) and, to a lesser degree, the Supplemental Security Income\/State Supplementary Payment (SSI\/SSP) program. (We will be providing more information of the Governor’s major proposals in DDS in our upcoming publication, The 2016-17 Budget: Analysis of the Developmental Services Budget.) Legislature Will Want to Evaluate Administration’s SSI\/SSP Proposal in Light of Its Own Goals. The Governor’s 2016-17 budget proposal includes six months of funding to provide a one-time cost-of-living adjustment (COLA) to the state-funded SSP portion of the SSI\/SSP grant. If the Legislature has an interest in increasing SSI\/SSP grants, we find that the Governor’s proposal to provide a one-time COLA to be one way to do so. However, we think that the Legislature will first want to set its own goals for where it would like SSI\/SSP grants to be, and over what time period it would expect to take to get there. Once these goals are established, the Legislature would be in a better position to consider the specific grant proposal made by the Governor. By establishing its goals for the program, the Legislature can ensure that any funding provided for SSI\/SSP grant increases is used in a way that furthers those goals. Governor’s Proposals for In-Home Supportive Services (IHSS) and California Work Opportunity and Responsibility to Kids (CalWORKs) Appear Reasonable. We have reviewed the administration’s 2016-17 budget proposals for IHSS and CalWORKs. While we raise some areas of uncertainty\u2014mainly related to caseload estimates in CalWORKs and the recent implementation of federal labor regulations in IHSS\u2014overall we find the administration’s proposals to be reasonable at this time. We will continue to monitor these areas of uncertainty and update the Legislature if we think any updates to the caseload and budgeted funding levels should be made. Governor’s Continuum of Care Reform (CCR) Proposal Is Logical Next Step, but Some Uncertainty Remains. The Governor’s budget proposes funding in 2016-17 to continue to implement CCR in the state’s foster care system. At a high level, CCR aims to reduce reliance on long-term group home placements and increase the utilization and capacity of home-based family placements for children in the foster care system. We provide background on CCR, describe the Governor’s funding proposal, and highlight key areas of remaining uncertainty surrounding CCR implementation. While we think that the Governor’s budget is a logical next step in the implementation of CCR, we suggest some key issues and questions for legislative consideration with the goal of gaining some clarity around these remaining areas of uncertainty. 2016 -17 B U D G E T 4 Legislative Analyst’s Office www.lao.ca.gov 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 5 OVERVIEW Background on Human Services California’s major human services programs provide a variety of benefits to its citizens. These include income maintenance for the aged, blind, or disabled; cash assistance and employment services for low-income families with children; protecting children from abuse and neglect; providing home care workers who assist the aged and disabled in remaining in their own homes; collection of child support from noncustodial parents; and subsidized child care for low-income families. Human services are administered at the state level by the Department of Social Services (DSS), Department of Developmental Services (DDS), Department of Child Support Services, and other California Health and Human Services Agency departments. The actual delivery of many services takes place at the local level and is typically carried out by 58 separate county welfare departments. A major exception is the Supplemental Security Income\/State Supplemental Payment (SSI\/SSP), which is administered mainly by the U.S. Social Security Administration. In the case of DDS, community-based services (the type of services received by the vast majority of DDS consumers) are coordinated through 21 nonprofit organizations known as regional centers. Recent Major Changes in Funding for Human Services. As a result of realignment-related legislation in 2011 and 2013, the budget reflects shifts to counties of a significant amount of General Fund costs in human services programs. Specifically, as a result of 2011 legislation, the budget (beginning in 2011-12) reflects shifts to local realignment revenues of about $1.1 billion of General Fund costs in the California Work Opportunity and Responsibility to Kids (CalWORKs) program and about $1.6 billion in child welfare and adult protective services General Fund costs. Legislation enacted in 2013 shifted additional General Fund costs in the CalWORKs program to local realignment revenues that previously have been used to provide health services to indigent individuals. These realignment revenues have been freed up given that many indigent individuals are newly eligible for coverage in the state- funded Medi-Cal program. The 2013 legislation additionally provided that the costs of specified ongoing increases to the CalWORKs assistance payments will be shifted to revenues from the growth of existing local realignment revenues that otherwise would have supported other human services programs. We discuss the statutorily driven CalWORKs grant increases in greater detail later in the CalWORKs section in this report. Expenditure Proposal by Major Programs Overview of the Human Services Budget Proposal. The Governor’s budget proposes expenditures of $12.2 billion from the General Fund for human services programs in 2016-17. As shown in Figure 1 (see next page), this reflects a net increase of $453 million\u2014or 3.9 percent\u2014above estimated General Fund expenditures in 2015-16. Summary of the Major Budget Proposals and Changes. As shown in Figure 1, the budget reflects generally stable General Fund expenditures across a majority of the human services programs, with relatively higher growth in DDS. Major new policy- driven spending proposals are concentrated in DDS and, to a lesser extent, SSI\/SSP. While in some cases the year-over-year funding growth appears modest or flat, this is actually masking both cost increases and decreases within the program. We highlight the major budget changes below. 2016 -17 B U D G E T 6 Legislative Analyst’s Office www.lao.ca.gov DDS. The 7.5 percent growth ($265 million) in DDS General Fund expenditures is driven in part by several new spending proposals primarily aimed at supporting community services as well as their development in preparation of the continued closure of developmental centers. (We will provide more information on the Governor’s major proposals in DDS in our upcoming DDS publication, The 2016-17 Budget: Analysis of the Developmental Services Budget.) CalWORKs. The 6 percent growth ($43 million) in General Fund expenditures in CalWORKs largely reflects funding shifts and masks a decline (3 percent) in total funding for the program from all sources. The decline in total funding is primarily the result of lower estimated caseloads. DSS Nonrealigned Children’s Programs. The slight decrease in General Fund support for the nonrealigned children’s programs under the DSS budget is primarily the result of the cost of a one-time set-aside to pay for a $50 million federal penalty in 2015-16. Although this $50 million is not included in 2016-17, the year-over-year savings is almost completely offset by proposed increased funding for the continuation of the implementation of the Continuum of Care Reform (CCR). At a high level, the funding provides for additional resources to improve the state’s child welfare system by performing comprehensive assessments of children to ensure that their initial placement is the most appropriate setting, increasing the use of home-based family care, and reducing the use of group homes. Some funding was provided for CCR in 2015-16, and the Governor’s budget continues this, and some additional funding, in support of this effort. In-Home Supportive Services (IHSS). It is important to note that the modest (1.1 percent) year-over-year net growth in the IHSS General Fund expenditures masks a number of both cost increases and savings. On the cost front, the budget reflects increased costs for a full year of implementation of compliance with new federal labor regulations, caseload growth, and higher costs per service-hour as a result of wage increases. On the savings front, the Governor’s January budget proposes to continue to restore IHSS service hours Figure 1 Major Human Services Programs and Departments\u2014Budget Summary General Fund (Dollars in Millions) 2015-16 Estimated 2016-17 Proposed Change From 2015-16 to 2016-17 Amount Percent SSI\/SSP $2,795.9 $2,872.8 $76.8 2.8% Department of Developmental Services 3,508.8 3,773.5 264.8 7.5 CalWORKs 697.7 740.5 42.8 6.1 In-Home Supportive Services 2,934.4 2,966.0 31.6 1.1 County Administration and Automation 824.3 855.1 30.8 3.7 Nonrealigned Children’s Programsa,b 259.5 255.6 -3.9 -1.5 Department of Child Support Services 314.3 314.2 -0.1 \u2014 Department of Rehabilitation 59.8 59.9 0.1 0.2 Department of Aging 33.4 33.8 0.3 1.0 All other human services (including state support) 334.7 345.0 10.3 3.1 Totals $11,762.9 $12,216.3 $453.4 3.9% a This includes, among other programs, the Kinship Guardianship Assistance Payment Program, Approved Relative Caregiver Program, and funding for the Continuum of Care Reform efforts. b The 2015-16 General Fund includes a $50 million set-aside for a potential federal penalty. This penalty is currently being appealed. If the state does not ultimately have to pay the penalty, or pay a lesser amount, General Fund costs in this area would be less. 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 7 that were eliminated as a result of a previously enacted 7 percent reduction in service hours, but do so through a restructured tax on managed care organizations (MCOs) rather than from the General Fund as was done in 2015-16. We note that on February 8, 2016, the administration released an updated MCO tax proposal. The administration has indicated that funding to continue the IHSS service-hour restoration could come from either MCO tax revenues or the General Fund. SSI\/SSP. Finally, although the year-over-year growth in SSI\/SSP would not be considered significant (2.7 percent), we note that unlike in recent years, it includes funding increases for more than just growth in the caseload. The budget includes about $40 million to fund a one-time cost-of-living adjustment (COLA) (estimated to be 2.96 percent) to the state-funded, SSP portion of the grant. SSI\/SSP The SSI\/SSP program provides cash grants to low-income aged, blind, and disabled individuals. The state’s General Fund provides the SSP portion of the grant while federal funds pay for the SSI portion of the grant. For 2016-17, the budget proposes nearly $3 billion from the General Fund for the state’s share of SSI\/SSP\u2014an increase of $77 million (2.8 percent) over estimated 2015-16 expenditures. This increase would bring total program funding to $10.3 billion ($2.9 billion from the General Fund and $7.4 billion federal funds) in 2016-17. The primary drivers of this increase are modest caseload growth (less than 1 percent) and the Governor’s proposal to provide a one-time COLA to the SSP portion of the grant. Caseload Growing Modestly. The SSI\/SSP caseload has continued to grow at a rate of less than 1 percent each year since 2011-12. The budget estimates that about 1.3 million individuals and couples will receive SSI\/SSP grants in 2016-17, an increase of 0.8 percent over 2015-16. Background on SSI\/SSP Grants Both the State and Federal Government Contribute to SSI\/SSP Grants. Grant levels for SSI\/SSP are determined by both the federal government and the state. The federal government, which funds the SSI portion of the grant, is statutorily required to provide an annual COLA each January. This COLA increases the SSI portion of grant by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In years that the CPI-W is zero or negative (as was the case in 2010, 2011, and 2016), the federal government does not increase SSI grants, but instead holds them flat. The federal government gives the state full discretion over whether and how to provide increases to the SSP portion of the grant. Until 2011, the state also had a statutory COLA. Although this statutory COLA existed, there were many years that, due to budget constraints, the COLA was not provided. The last state-funded COLA was provided in April 2005. During Constrained Budget Environment, SSP Grants for Individuals and Couples Reduced to Federally Required Minimum. The state is required to maintain SSP grant levels at or above the levels in place in March 1983 in order to receive federal Medicaid funding. As a result of difficult budget times during the most recent recession, the state decreased SSP grants for individuals and couples to these minimum levels. As shown in Figure 2 (see next page), for couples, the state reduced the SSP grant to the federally required minimum ($396 per month) in 2009-10. For individuals, SSP grants 2016 -17 B U D G E T 8 Legislative Analyst’s Office www.lao.ca.gov were first reduced by 2.9 percent to $171 per month in 2009-10, and then subsequently to the federally required minimum of $156 per month in 2011-12. Because no state COLA has been provided since these reductions, SSP grants for individuals and couples have remained at these minimum levels. Grants Have Been Gradually Increasing Due to Federal COLAs, but Remain Below Pre-Recession Levels. As shown in Figure 2, the total SSI\/SSP monthly grant amount for individuals and couples has been increasing since 2010-11\u2014 solely due to the provision and pass-through of federal COLAs. We note that during some difficult budget times prior to 2010-11, the state negated the impact of COLAs by reducing the SSP portion of the grant by the amount of the federal increase, thereby holding total SSI\/SSP grant levels flat. After the state reduced SSP grants to the federally required minimum levels, the state could no longer do this. Despite the gradual increases in the grants shown in the figure, current maximum SSI\/SSP grant levels remain below the 2008-09 levels. Governor’s Proposed One-Time COLA Budget Proposes One-Time COLA to SSP Portion of Grant. The budget includes six months of funding ($41 million) from the General Fund to increase SSP grants by the California Necessities Index (CNI) beginning January 1, 2017. The Governor’s budget estimates that the CNI will be 2.96 percent. The annualized cost of this COLA is estimated to be approximately $80 million to $90 million from the General Fund. In addition, the budget estimates that the federal government will provide a 1.7 percent COLA to the SSI portion of the grant, also beginning January 1, 2017. Based Maximum SSI\/SSP Grants for Individuals and Couplesa Compared to Federal Poverty Levelb Figure 2 a The maximum monthly grants displayed refer to those for aged and disabled individuals and couples living in their own households, effective as of January 1 of respective budget year. 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1,600 $1,700 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 Individuals SSP SSI Federal Poverty Levelb 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 Couples b Federal Poverty Level as established by U.S. Department of Health and Human Services, effective as of January 1 of respective budget year. 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 9 upon the Governor’s estimate of the CNI and CPI, the administration estimates that total monthly maximum grants for individuals will increase by $17.09 and grants for couples will increase by $30.43. With Revised CNI and CPI, Grant Increases Less Than Estimated by Governor. The CNI is an estimate of how the cost of living in California has changed from year to year. The Governor’s budget estimates that the CNI will be 2.96 percent, using partial data. Our review of the actual data\u2014published after the release of the Governor’s budget\u2014indicates that the January 2017 CNI is 2.76 percent (we expect this to be the final CNI). Using the updated CNI, we estimate the proposed January 1, 2017 SSP COLA would cost the General Fund $38 million in 2016-17, a decrease of $3 million below the Governor’s January estimate. The Governor’s budget estimates that the CPI-W that the federal government will use to adjust the SSI portion of the grant will be 1.7 percent, but our estimate of the CPI-W is slightly lower, at 1.39 percent. (The actual CPI-W will not be known until the fall.) As a result of these downward estimates of the CNI and CPI-W, we estimate that monthly SSI\/ SSP grants would increase by $14.51 for individuals and $26.23 for couples under the Governor’s proposal. Figure 3 shows current maximum grant levels for individuals and couples compared to the Governor’s budget proposal (as estimated by both the administration and our office). Grant Increases Should Reflect the Legislature’s Goals for SSI\/SSP Grant Levels Setting Goals for SSI\/SSP Grant Levels. The Governor’s proposal is one way to increase the SSI\/SSP grant. It raises grant levels to all recipients and would essentially maintain grants at roughly the same level relative to the federal poverty guideline as they are today. We think, however, that the Legislature will want to first set its own goals for where it would like SSI\/SSP grant levels to be, and over what time period it would expect to take to get there. Once these goals were established, the Legislature would also be better positioned to consider the specific grant increase proposal made by the Governor. Below, we provide examples of ways the Legislature may approach increases to the SSP grant\u2014depending on its specific goals. Target Available Resources to Most Effectively Achieve Legislature’s Goals. As we described above, the Governor’s budget provides the same Figure 3 SSI\/SSP Monthly Maximum Grant Levelsa Governor’s Proposal 2015-16 Governor’s 2016-17 Budget Proposal Governor’s Estimatesb LAO Estimates Amountc Change From 2015-16d Maximum Grant\u2014Individuals SSI $733.00 $745.46 $743.19 $10.19 SSP 156.40 161.03 160.72 4.32 Totals $889.40 $906.49 $903.91 $14.51 Percent of Federal Poverty Leveld 90% 92% 91% Maximum Grant\u2014Couples SSI $1,100.00 $1,118.70 $1,115.29 $15.29 SSP 396.20 407.93 407.14 10.94 Totals $1,496.20 $1,526.63 $1,522.43 $26.23 Percent of Federal Poverty Leveld 112% 114% 114% a The maximum monthly grants displayed refer to those for aged and disabled individuals and couples living in their own households, effective as of January 1 of the respective budget year. b Reflects Governor’s budget estimate of the (1) January 2017 federal cost-of-living adjustment (COLA) for the SSI portion of the grant, and (2) the Governor’s one-time January 2017 state-funded COLA for the SSP portion of the grant. c Reflects LAO estimate of the (1) January 2017 federal COLA for the SSI portion of the grant, and (2) the Governor’s one-time January 2017 state-funded COLA for the SSP portion of the grant. d Compares grant level to federal poverty guideline from the U.S. Department of Health and Human Services for 2016. 2016 -17 B U D G E T 10 Legislative Analyst’s Office www.lao.ca.gov percentage grant increase for all recipients through a one-time COLA. However, the Legislature may have other goals for grant increases that could suggest targeting the increases among recipients. As an example, if the Legislature established a goal to ultimately bring the maximum SSI\/SSP grant for all recipients to 100 percent of the federal poverty level, it may not make sense to provide the same grant increase to all SSI\/SSP individuals and couples (as proposed by the Governor), but instead focus the available funding on individuals. This is because grants for individuals are currently at about 90 percent of the federal poverty guideline while grants for couples are at about 112 percent. Alternatively, the Legislature could set its goals relative to another measure of poverty (such as the Supplemental Poverty Measure, which accounts for cost-of-living differentials). The cost to the General Fund for these types of targeted grant increases would vary by the grant level chosen, the size of the population targeted, and the time period over which the grant increases would be provided. Providing COLAs to Maintain Desired Grant Levels. Once SSI\/SSP grants are at desired levels, the Legislature may also want to consider providing ongoing COLAs to maintain the purchasing power of those grants. The Governor’s proposed COLA to the SSP portion of the grant\u2014if provided annually\u2014would be one way to achieve this goal. This approach takes the view that it is the state- funded SSP portion of the grant that should be maintained, while federal COLAs would continue to adjust the SSI portion of the grant. In past years when state COLAs were provided, the state used a different methodology\u2014a statutory formula to adjust the total SSI\/SSP grant by the CNI. It worked by applying the CNI to the combined SSI\/SSP grant. First, the federal COLA was applied to the SSI portion of the grant, and then the cost to increase the total, combined grant by the CNI (after accounting for the federal COLA) was covered with state funding. This type of COLA effectively raises the total SSI\/SSP grant by the CNI and may be referred to as a whole-grant COLA. This approach takes the view that the overall grant level is what should be maintained (rather than just the SSP portion directly controlled by the state). For this option, the state cost is determined, in part, by the difference between the CPI and CNI. The higher (lower) the CNI is relative to the CPI, the greater (less) the state cost in applying this COLA methodology. We estimate that the cost of providing this type of COLA in 2016-17 would be about $115 million for six months of an increase (approximately $230 million for a full year) and would result in the changes to the maximum grant reflected in Figure 4. Figure 4 SSI\/SSP Monthly Maximum Grant Levelsa If Whole-Grant COLA Provided 2015-16 2016-17 Estimated Whole-Grant COLA Change Maximum Grant\u2014Individuals SSI $733.00 $743.19 $10.19 SSP 156.40 170.76 14.36 Totals $889.40 $913.95 $24.55 Percent of Federal Poverty Levelb 90% 92% Maximum Grant\u2014Couples SSI $1,100.00 $1,115.29 $15.29 SSP 396.20 422.21 26.01 Totals $1,496.20 $1,537.50 $41.30 Percent of Federal Poverty Levelb 112% 115% a The maximum monthly grants displayed refer to those for aged and disabled individuals and couples living in their own households, effective as of January 1 of respective budget year. b Compares grant level to federal poverty guideline from the U.S. Department of Health and Human Services for 2016. 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 11 IN-HOME SUPPORTIVE SERVICES Background Overview of IHSS. The IHSS program provides personal care and domestic services to low-income individuals to help them remain safely in their own homes and communities. In order to qualify for IHSS, a recipient must be aged, blind, or disabled and in most cases have income below the level necessary to qualify for SSI\/SSP cash assistance. The recipients are eligible to receive up to 283 hours per month of assistance with tasks such as bathing, dressing, housework, and meal preparation. Social workers employed by county welfare departments conduct an in-home IHSS assessment of an individual’s needs in order to determine the amount and type of service hours to be provided. The average number of service hours that will be provided to IHSS recipients is projected to be approximately 102 hours per month in 2016-17. In most cases, the recipient is responsible for hiring and supervising a paid IHSS provider\u2014oftentimes a family member or relative. The IHSS Program Receives Federal Funds as a Medi-Cal Benefit. For nearly all IHSS recipients, the IHSS program is delivered as a benefit of the state-federal Medicaid health services program (known as Medi-Cal in California) for low-income populations. The IHSS program is subject to federal Medicaid rules, including the federal medical assistance percentage reimbursement rate for California of 50 percent of costs for most Medi-Cal recipients. For IHSS recipients who generally meet the state’s nursing facility clinical eligibility standards, the federal government provides an enhanced reimbursement rate of 56 percent referred to as Community First Choice Option. The nonfederal costs of the IHSS program are paid for by the state and counties, with the state assuming the majority of the nonfederal costs. Counties’ Share of IHSS Costs Is Set in Statute. Budget-related legislation adopted in 2012-13 created a county maintenance-of-effort (MOE) for IHSS. The county MOE generally sets counties’ contributions to IHSS at their 2011-12 levels, and increases the contributions annually by 3.5 percent (for inflation) plus a share of any wages and benefits subsequently negotiated at the county level. Under the county MOE financing structure, the state General Fund assumes all nonfederal IHSS costs above counties’ MOE expenditure levels. In 2016-17, the Governor’s budget estimates the total county MOE to be about $1.1 billion, an increase of $37 million above the estimated county MOE for 2015-16. The Governor’s Budget Proposal and LAO Assessment The budget proposes $9.2 billion (all funds) for IHSS expenditures in 2016-17, which is an approximately $700 million (8.3 percent) net increase over estimated expenditures in 2015-16. General Fund expenditures for 2016-17 are proposed at nearly $3 billion, a net increase of Whatever the Funding Level, SSI\/SSP Grant Increases Could Be Structured to Further Legislature’s Goals. As we have discussed above, there are various goals the Legislature may wish to establish when considering SSI\/SSP grant increases, all at various costs. Once the Legislature sets its goals for the program, it can ensure that whatever the funding level provided for SSI\/SSP grant increases\u2014be it the $41 million proposed by the Governor or some other amount\u2014the funding would be used in a way that furthers those goals. 2016 -17 B U D G E T 12 Legislative Analyst’s Office www.lao.ca.gov $32 million, or 1.1 percent, above the estimated expenditures in 2015-16. It is important to note that the modest year-over-year net growth in IHSS General Fund expenditures masks a number of both cost increases and savings. On the cost front, the budget reflects caseload growth, higher costs per service-hour as a result of wage increases, and increased costs for a full year of compliance with new federal labor regulations. On the savings front, the Governor’s January budget proposes to continue to restore IHSS service hours that were eliminated as a result of a previously enacted 7 percent reduction in service hours, but to do so through a restructured tax on MCOs rather than through the General Fund, as was done in 2015-16 (at a General Fund cost of $233 million). We note that on February 8, 2016, the administration released an updated MCO tax proposal. The administration has indicated that funding to continue the IHSS service-hour restoration could come from either MCO tax revenues or the General Fund. While we generally do not take issue with the Governor’s budget proposal, overall, we note that the budget includes several areas of fiscal uncertainty. Below, we describe some of the main components of the Governor’s IHSS proposal and note any issues with them. Increases in IHSS Basic Services Costs. Caseload growth and wage increases for IHSS providers continue to be two primary drivers of increasing IHSS service costs. The Governor’s budget assumes the average monthly caseload for IHSS in 2016-17 will be about 490,000, an increase of 5.7 percent compared to the estimated 2015-16 average monthly caseload. We have reviewed the caseload projections in light of actual caseload data available to date and do not recommend any adjustments at this time. Provider wage increases also contribute to increasing IHSS service costs. The Governor’s budget includes $70 million General Fund ($150 million total funds) for a full-year impact of the state’s minimum wage increase from $9 to $10 per hour that began on January 1, 2016. In addition, the budget reflects wage increases negotiated at the county level for IHSS providers. We note, however, that the Governor’s budget does not take into account wages negotiated after September 2015, including a county-negotiated wage increase from $10 to $11 for Los Angeles County IHSS providers effective February 1, 2016. We estimate the Los Angeles County wage increase will cost the General Fund approximately $70 million in 2016-17. We expect that the Governor’s revised estimates released in May will account for this and other negotiated wage increases that occurred after the development of the Governor’s budget, but are set to take effect in 2016-17. Implementation of Federal Labor Regulations Affecting Home Care Workers. As shown in Figure 5, the 2016-17 budget includes full-year funding ($850 million total funds, $395 million General Fund) to comply with federal labor regulations that became effective in 2015-16. The new regulations require states to (1) pay overtime compensation\u2014at one-and-a-half times the regular rate of pay\u2014to IHSS providers for all hours worked that exceed 40 in a week, and (2) compensate IHSS providers for time spent waiting during medical appointments and traveling between the homes of IHSS recipients. We note that 2014 budget-related legislation generally restricts IHSS providers to work no more than 66 hours per week. Although these federal regulations were issued in 2013, legal challenges in the federal courts halted implementation. In anticipation of a federal court decision requiring implementation sometime in 2015, the 2015-16 budget included partial-year funding to implement the regulations (contingent on the courts’ validation), but did not specify an implementation date. Following a federal court decision in August 2015 that affirmed the validity 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 13 of the rules, the state set an implementation date of February 1, 2016 for the new regulations to take effect in IHSS. Below, we discuss several elements of the state’s implementation plan and highlight any issues with them: Current Year May Be Overbudgeted Due to Delayed Implementation. The 2015-16 budget assumed that the new federal labor regulations would be implemented on October 1, 2015. Since then, the administration has established an implementation date of February 1, 2016. Rather than reduce the 2015-16 IHSS budget by an estimated $120 million General Fund to account for the implementation delay, the administration has indicated that it made the decision to keep this funding in the budget to provide for any unforeseen costs associated with the new regulations. We note that the methodology it used to estimate 2015-16 expenditures related to implementation of the new rules already provides contingency funding to account for some level of uncertainty. As a result, IHSS may be overbudgeted by around $120 million General Fund in 2015-16. Limitations Placed on Overtime and Newly Compensable Work Activities. The 2016-17 budget includes a full year of funding for IHSS provider overtime and newly compensable work activities. This estimate reflects the statutory caps adopted in 2014\u2014before federal courts placed a temporary hold on implementation\u2014 generally limiting the number of hours an IHSS provider can work to 66 hours per week. When multiplied by roughly four weeks per month, this weekly limit is about equal to the maximum number of service hours that may be allotted to IHSS recipients per month. The Governor’s budget estimates that 28 percent of providers typically work more than 40 hours per week, and that most of these providers generally work less than the new 66 hour per week cap. The legislation establishing the caps also limits the amount of time an IHSS provider who works for multiple recipients can spend traveling between the homes of recipients to seven hours per week. We note that DSS estimates that of the approximately 18 percent of IHSS providers who serve more than one recipient, most spend Figure 5 In-Home Supportive Services: Costs to Comply With New Federal Labor Regulations (In Millions) 2015-16 Estimates (February 1, 2016 Implementation) 2016-17 Governor’s Proposal (Full-Year Cost of Compliance) General Fund Total Funds General Fund Total Funds Overtime premium pay $164 $356 $218 $475 Newly compensable work activities 117 247 172 366 Administration 25 50 2 5 Changes to time sheet and payrolling system (CMIPS II) 6 11 2 4 Totals $312 $664 $395 $850 CMIPS II = Case Management, Information and Payrolling System. 2016 -17 B U D G E T 14 Legislative Analyst’s Office www.lao.ca.gov under seven hours per week traveling between recipients. These limitations will be enforced by a tiered penalty system developed by DSS. Providers can be terminated if they violate these limitations on multiple occasions. Exceptions to Overtime Limit for Certain Providers. After the 2016-17 Governor’s budget was released, DSS issued guidance to counties establishing two exemptions to the overtime cap: (1) an exemption for live-in family care providers, and (2) a temporary exemption for extraordinary circumstances. We note that current law does not provide specific authority for these exemptions. It is our understanding that the administration will be seeking statutory authority for these exemptions through the budget process. The first exemption is for IHSS providers who are related to, live with, and work for two or more IHSS recipients. For these providers, the overtime cap is extended to 90 hours per workweek (not to exceed 360 hours per month). In 2015-16, it is estimated that approximately 760 IHSS providers met this criteria. For the second exemption related to extraordinary circumstances, DSS (in consultation with the Department of Health Care Services), is in the process of establishing criteria for temporarily exempting IHSS providers from the 66-hour workweek limit in situations where the limit would place IHSS recipients at risk of out-of-home institutionalized care. At this time, the Governor’s budget does not include funding to account for either of the two exemptions. Based on the number of providers estimated to meet the live-in family care provider exemption in 2015-16, we estimate that this exemption could result in General Fund costs in the low millions of dollars annually. Until more guidance is issued about how the extraordinary circumstances exemption may be applied, it is difficult to estimate its potential costs. Three-Month Grace Period for All Providers. The legislation that enacted the overtime and travel time limits for IHSS providers also established a grace period for the first three months of implementation (now spanning February 1 through May 1, 2016). During this grace period, providers will not accrue penalties if they violate the overtime and travel time limits. County social workers, however, may work with IHSS providers found violating the limits and inform them of the violation without penalty during this time. Proposed Continued Restoration of Service Hours From 7 Percent Reduction. Offsetting the above increases in IHSS General Fund costs, the Governor’s January budget proposes to use revenue from a restructured MCO tax, rather than General Fund, in the amount of $236 million to provide the nonfederal share of funding needed to continue to restore service hours from the 7 percent reduction enacted in 2013-14. In 2015-16, the service hours were restored through the use of the General Fund on a one-time basis, with the intent that an alternative funding source would be used in future years. The 7 percent restoration relates to terms of an IHSS settlement agreement\u2014adopted by the Legislature\u2014that resolves two class-action lawsuits stemming from previously enacted budget reductions. The terms of the settlement agreement require the state to pursue a revenue source other than the General Fund for the purpose of restoring service hours from the 7 percent reduction. On 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 15 WTW 24-Month Time Clock Determines Allowable Activities. As of 2013, state law defines two sets of rules for which allowable WTW activities may be used to meet the work requirement. The first set of rules, referred to as federal rules because they closely mirror federal TANF law, place greater emphasis on employment over some other activities including education, training, and mental health and\/or substance abuse treatment. The second set of rules, referred to as CalWORKs rules, allow relatively greater flexibility to choose activities that may help adult recipients address barriers to employment. Adult recipients may meet the work requirement under federal rules at any time, but may meet the work requirement under CalWORKs rules only for up to a cumulative, but not necessarily consecutive, 24 months. Once 24 months of participation under CalWORKs rules have been exhausted, recipients must participate under federal rules. This policy is referred to as the WTW 24-month time clock. Federal Work Participation Rate (WPR) Requirement. As noted above, federal law lays out rules governing how recipients may meet the work requirement. Federal law requires the state to track the percentage of assisted families that meet the work requirement under federal rules, also known as the WPR. Federal law further requires the state to maintain a WPR of at least 50 percent or face financial penalties. Adult Time Limit on Aid. In California, adult recipients are also generally limited to a cumulative lifetime maximum of 48 months of assistance in CalWORKs. Adults who exhaust 48 months of cash assistance are removed from the calculation of their February 8, 2016, the administration released an updated MCO tax proposal. As noted earlier, the funding source for the service-hour restoration could be either MCO tax revenues or the General Fund. CALWORKS Background The CalWORKs program was created in 1997 in response to 1996 federal welfare reform legislation that created the federal Temporary Assistance for Needy Families (TANF) program. CalWORKs provides cash grants and employment services to families whose income is inadequate to meet their basic needs. Cash Assistance. Grant amounts vary across the state and are adjusted for family size, income, and other factors. For example, a family of three that has no other income and lives in a high-cost county currently receives a cash grant of $704 per month (equivalent to 42 percent of the federal poverty level). A family in these circumstances would generally also be eligible for food assistance through the CalFresh program in the amount of $497 per month and health coverage through Medi-Cal. Work Requirement and Employment Services. As a condition of receiving aid, able-bodied adults are generally subject to a work requirement, meaning that they must be employed or participate in specified activities\u2014known as welfare- to-work (WTW) activities \u2014intended to lead to employment. CalWORKs cases that include an adult who is subject to the work requirement are entitled to receive subsidized child care and other employment services to help meet the requirement. Individuals who fail to meet the work requirement without good cause are subject to a sanction by being removed from the calculation of their family’s monthly grant, resulting in reduction in cash assistance (of roughly $140 dollars). 2016 -17 B U D G E T 16 Legislative Analyst’s Office www.lao.ca.gov family’s monthly grant, resulting in decreased cash assistance. (The family would continue to receive a reduced grant for children who remain eligible.) Funding. CalWORKs is funded through a combination of California’s federal TANF block grant allocation, the state General Fund, and county funds, including significant amounts spent by counties as a result of state-local realignment. In order to receive its annual TANF allocation, the state is required to spend an MOE amount from state and local funds to provide services to families eligible for CalWORKs. In recent years, this MOE amount has been $2.9 billion. While the CalWORKs program makes up the majority of TANF and MOE spending, it is important to note that the TANF block grant is used to fund a variety of programs in addition to CalWORKs, and some state and local expenditures outside CalWORKs are counted toward the MOE requirement. Budget Overview As shown in Figure 6, the Governor’s budget proposes $5.3 billion in total funding for the CalWORKs program in 2016-17, a net decrease of $187 million (3 percent) relative to estimated current-year funding. This decrease primarily reflects savings from a declining caseload, slightly offset by a small increase in other spending (specifically, an increase in state support for Tribal TANF programs). Within the total funding amount, the budget proposes $741 million in General Fund support for CalWORKs, an increase of $43 million (6 percent) over estimated current-year levels. This increase in General Fund support primarily reflects a net decrease in the amount of funding budgeted from non-General Fund sources, thereby increasing the requirement for General Fund. The following sections highlight some major features of the 2016-17 CalWORKs budget. Budget Estimates Reduction in Current-Law Funding Requirement The budget estimates that the total funding required to operate CalWORKs consistent with current law and policy will decrease in 2016-17 relative to the prior year. Below, we describe two factors that contribute to the decreased funding requirement. Savings From Declining Caseload. The number of families receiving CalWORKs assistance each month has generally declined since 2011-12, primarily due to an improving labor market. The budget estimates that the average monthly number of CalWORKs cases in 2015-16 will be 507,615\u2014a 5 percent decrease from the prior year. The average monthly number of cases is projected to further decline by 2 percent in 2016-17 to 496,558. Consistent with these caseload declines, the budget reflects savings from a declining caseload of about $165 million (all funds) in 2016-17 relative to the prior year. Figure 6 CalWORKs Budget Summary All Funds (Dollars in Millions) 2015-16 Estimated 2016-17 Proposed Change From 2015-16 Amount Percent Cash grants $3,051 $2,963 -$88 -3% Employment services 1,468 1,390 -78 -5 Stage 1 child care 410 394 -16 -4 Administration 494 482 -12 -2 Othera 95 102 7 7 Totals $5,518 $5,331 -$187 -3% a Excludes transfer of federal Temporary Assistance for Needy Families block grant funds to the Cal Grant program and funding for the Kinship Guardianship Assistance Payment Program. 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 17 Savings From Ongoing Implementation of the WTW 24-Month Time Clock. Adult recipients who exhaust 24 months of participation under CalWORKs rules may continue to receive assistance by meeting the work requirement under federal rules. However, some recipients who exhaust the 24 months are anticipated to fail (for a variety of reasons) to meet the work requirement under federal rules, resulting in reduced cash assistance. The first individuals to exhaust the 24 months, fail to meet the work requirement under federal rules, and have their assistance reduced, are beginning to do so during 2015-16, with the number expected to grow over the next several years before leveling off. Specifically, the administration estimates that 1,790 cases (0.4 percent of the total caseload) will have reduced cash assistance by the end of 2015-16 with an estimated savings of $1 million (all funds), growing to 11,650 cases (2.4 percent of the total caseload) and savings of roughly $11 million (all funds) by the end of 2016-17. Shifts in Program Funding Sources Within the estimated total funding requirement of the program in 2016-17, the Governor’s budget reflects some shifting of total CalWORKs costs among the program’s major funding sources, displayed in Figure 7. Below, we describe some of the factors that contribute to these shifts. Reduced Realignment Funding From Local Indigent Health Savings. Current law directs certain realignment funds previously dedicated to local indigent health programs to instead be used each year to pay for an increased county share of CalWORKs grant costs, in an amount equal to the estimated savings that counties will realize in their indigent health programs due to the expansion of Medi-Cal. This redirection of funds reduces the amount of state and federal funds needed to support the CalWORKs program. (For more information on this redirection, see the CalWORKs write-up in our previous report, The 2014-15 Budget: Analysis of the Human Services Budget.) Current law also provides that the state true up the amount of redirected savings three years after the fact to reflect actual county savings amounts. For 2016-17, the budget estimates that the amount of CalWORKs grant costs paid with realignment funds from local health savings will be $413 million, which is $329 million (44 percent) less than estimated for 2015-16. The main reasons for the significant reduction in estimated savings Figure 7 CalWORKs Funding Sources (Dollars in Millions) 2015-16 Estimated 2016-17 Proposed Change From 2015-16 Amount Percent Federal TANF block grant fundsa $2,574 $2,684 $110 4% General Fundb 698 741 43 6 Realignment funds from local indigent health savings 742 413 -329 -44 Realignment funds dedicated to grant increases 311 302 -9 -3 Other county\/realignment funds 1,193 1,191 -2 \u2014c Totals $5,518 $5,331 -$187 -3% a Excludes transfer of federal Temporary Assistance for Needy Families (TANF) block grant funds to the Cal Grant program. b Excludes funding for the Kindship Guardianship Assistance Payment Program. c Rounds to zero. 2016 -17 B U D G E T 18 Legislative Analyst’s Office www.lao.ca.gov are (1) data from counties show that the state’s estimated savings in 2013-14 were likely overstated, requiring the state to return an estimated $151 million to counties through the true-up process during 2016-17, and (2) the administration now has lower expectations for the amount of annual ongoing savings. Decreased realignment funding from local health savings increases the need for funding from other sources. We note that estimated local indigent health savings for 2016-17 are uncertain and may be updated at the May Revision. Realignment Funds Dedicated to Grant Increases Insufficient for New Increase. Current law dedicates certain other realignment funds to pay the costs of new CalWORKs grant increases and outlines an annual process through which these grant increases are provided. Unlike realignment funds from local health savings, discussed above, these dedicated funds are not intended to offset the funding needed from other sources. Rather, dedicated funds are intended to cover increases to total program costs resulting from new grant increases. Specifically, each year the Department of Finance (DOF) estimates the combined cost of all past increases provided from the dedicated funds (two separate 5 percent increases have been provided to date, in March 2014 and April 2015, at a total annual cost of $319 million during 2016-17) and the total amount of available dedicated funds ($302 million in 2016-17). When the estimated amount of dedicated funds exceeds the estimated cost of previously provided increases, DOF further determines the percentage increase in CalWORKs grants that could be sustained by the excess dedicated funds. A grant increase of this amount would then be provided during the budget year. When the estimated cost of previous grant increases exceeds the estimated amount of dedicated funds, as is the case for 2016-17, the General Fund covers the difference and no additional grant increase is provided. The amount of General Fund support needed to make up for insufficient dedicated funds in 2016-17 is $17 million. Increased General Fund Needed to Backfill Reduced Realignment Funding and Meet MOE Requirement. As noted above, the state must pay a minimum MOE amount from state and local funds (including realignment) to receive the annual TANF block grant. The reduction in the estimated current-law funding requirement and the estimated decrease in available realignment funds from local health savings mean that General Fund spending in CalWORKs must increase for the state to meet the required MOE in 2016-17. Specifically, General Fund support for CalWORKs increases by $43 million (6 percent) in 2016-17 over the prior year. Increased Federal TANF Support From Carry-In. The budget estimates that the amount of unused TANF funding available for use in 2016-17 increased by roughly $400 million over the prior year, largely from funds allocated to counties in prior years that were not spent. After accounting for the increased General Fund support needed to meet the state’s MOE requirement, only $110 million of these additional TANF funds are needed to meet the estimated current-law funding requirement of the program. The budget increases TANF support for CalWORKs by this amount and increases the amount of TANF funds used to support financial aid for low-income college students through the Cal Grant program by $304 million, directly offsetting what otherwise would be General Fund Cal Grant costs of the same amount. State Has Likely Reached WPR Compliance California Has Failed to Meet WPR Requirement Since 2007. California has failed to meet the WPR requirement every year since federal fiscal year (FFY) 2006-07 and has been assessed 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 19 cumulative penalties of about $1.3 billion, as shown in Figure 8, that would ultimately take the form of a one-time reduction to the state’s TANF block grant allocation. To date, the state has not faced any reductions to the TANF block grant as the state pursues various administrative avenues to reduce or eliminate the penalties. Federal Law Allows WPR Penalties to Be Reduced or Eliminated Through Corrective Compliance Plans. Federal law provides that penalties may be eliminated if a state enters into a corrective compliance plan that results in the state meeting the WPR requirement in a later year. To date, the state has submitted two corrective compliance plans. Under the first, $342 million in penalties for 2007-08, 2008-09, and 2009-10, would be eliminated if the state meets the WPR requirement during FFY 2014-15 (which ended in October 2015). Under the second, $558 million in penalties for 2010-11 and 2011-12 may be eliminated if the state meets the WPR requirement during FFY 2015-16. The state has not yet submitted a corrective compliance plan for the 2012-13 penalties. California Likely Reached Compliance in FFY 2014-15. With the release of the Governor’s budget, the administration announced that it appears to have achieved a WPR of 55 percent\u2014sufficient for compliance\u2014during FFY 2014-15. If compliance is verified by the federal government, $342 million of the state’s penalties will be eliminated. If compliance is maintained in 2015-16, most of the penalties assessed for 2010-11 and 2011-12 will be eliminated. (A small portion of 2011-12 penalties relate to an additional WPR requirement for cases with two parents that the state continues not to meet. These penalties will need to be addressed through other means.) We note that the state failed to meet the WPR requirement in 2013-14, but penalties for that year have not yet been assessed. Analyst’s Budget Assessment Governor’s Proposal Consistent With Current Law and Policy. In our view, the Governor’s 2016-17 CalWORKs budget proposal is consistent with current law and policy and makes adjustments to total funding only to reflect costs and savings associated with changes in caseload and ongoing implementation of previously enacted policy changes. Caseload Estimates Generally Appear Reasonable, but Should Be Revisited at May Revision. The CalWORKs budget is largely driven by assumptions made by the administration about the number of families that will receive assistance and what services they will need. In examining the Governor’s proposal, we reviewed the administration’s caseload estimates against the most recent actuals available and our expectations for how caseloads may change in the future. In our view, the administration’s estimate of the number of families that will receive cash assistance and the families that will utilize child care subsidies appear reasonable. We note that the estimated need for other employment services may be overstated (implying that savings on services may be greater than assumed in the Governor’s budget). However, we recommend leaving caseload-related funding Figure 8 Work Participation Rate Penalties (In Millions) FFY Penalty 2007-08 $48 2008-09 113 2009-10 180 2010-11 246 2011-12 312 2012-13 378 Total $1,277 Note: The state failed to meet the work participation rate requirement in federal fiscal year (FFY) 2013-14 but has not yet been assessed any additional penalties. 2016 -17 B U D G E T 20 Legislative Analyst’s Office www.lao.ca.gov decisions until after the May Revision. Our office will follow actual caseload levels between now and May to assess whether any updates to the caseload Overview of the Child Welfare System California’s child welfare system provides a continuum of services for children who have experienced or are at risk of experiencing abuse or neglect. These child welfare services (CWS) include responding to and investigating allegations of abuse and neglect, providing family preservation services to help families remain intact, removing children who cannot safely remain in their home, and providing temporary out-of-home placements until (1) the family can be successfully reunified or (2) an alternative permanent placement can be found. Adoption and guardianship are the two most common permanent placement options after family reunification. Child Welfare Programs Are State Supervised, County-Administered. The DSS oversees CWS, while county welfare departments carry out day-to-day operations and services. DSS is responsible for statewide policy development, enforcing state and federal regulations, and ensuring that the state achieves the federal performance standards tied to federal funding. Counties have some flexibility around the design of their operations and the range of services they provide. All counties investigate allegations of abuse, engage with families to help them remain intact, and provide maintenance payments to foster caregivers and providers. Other services vary county by county, with some counties, for example, offering supplemental payments for children with high needs and others offering child care for a subset of children in care. Assisting the counties California’s child welfare system serves to protect the state’s children from abuse and neglect, often by providing temporary out-of-home placements for children who cannot safely remain in their home and services to safely reunify children with their families. As part of a years-long effort to identify and effect improvements to the state’s child welfare system, the Legislature passed legislation in 2015 implementing the Continuum of Care Reform, or CCR. The law, Chapter 773 of 2015 (AB 403, Stone), makes fundamental changes to the way the state cares for children who have been removed from their home. Predicated on widespread concern surrounding poor outcomes for children placed in non-family-like settings, CCR aims to increase the foster care system’s reliance on more family-like settings rather than institutional settings like group homes. Additionally, CCR makes changes to ensure that the state’s foster children receive needed mental health treatment and supportive services regardless of their placement setting. To accomplish these goals, the Governor’s budget proposes about $60 million in General Fund for support of CCR implementation efforts. While the long-term fiscal implications of CCR are unknown, the Governor’s 2016-17 budget recognizes that CCR implementation requires up-front funding from the state. This analysis begins by providing an overview of the existing foster care system; highlights the major policy changes included in AB 403; and evaluates the Governor’s proposed CCR implementation spending in light of continued uncertainties around the ultimate costs, savings, and programmatic impacts of the reform package. estimates and associated budgeted funding levels should be made. CONTINUUM OF CARE REFORM 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 21 are several hundred private Foster Family Agencies (FFAs) and group home operators who themselves provide a continuum of services ranging from foster parent recruitment and certification to mental and behavioral health counseling. The Role of County Probation Departments in the Child Welfare System. County probation departments carry out many of the same services provided by county welfare departments in the case of children who have been declared wards of the court through a delinquency hearing. After obtaining jurisdiction over a child, county probation departments will assess the parents’ ability to adequately supervise the child, provide family preservations services if there is a risk of removal, and secure a foster care placement\u2014 typically in a group home\u2014if removal is deemed necessary. Unlike the majority of children who enter the child welfare system, children in out-of-home care due to a probation decision have not necessarily been subject to abuse or neglect. Instead, probation departments typically utilize foster care placements with the aim of rehabilitating the child. Commonly considered a less restrictive setting for a population that might otherwise be placed in a locked facility, group homes are the most utilized foster care placement setting for county probation departments. In contrast, child welfare departments utilize group home placement relatively infrequently. Relative to children overseen by the child welfare system, probation youth tend to be older and require heightened supervision. CWS Funding Total funding for CWS is estimated to be roughly $5 billion for 2016-17. Below we describe the major sources of this funding. 2011 Realignment Revenues Are a Major Source of CWS Funding in the State. Until 2011-12 the state General Fund and counties shared the nonfederal costs of administering CWS. In 2011, the state enacted legislation known as 2011 realignment, which dedicated a portion of the state’s sales tax to counties to administer CWS. The 2016-17 budget assumes that over $2 billion will be available from realignment revenues for the support of CWS programs. The 2011 realignment transferred fiscal risk to counties at the same time as it gave them a guaranteed source of revenues. Prospectively, counties are not responsible for future cost increases resulting from state, federal, and judicial policy changes, but are responsible for all other increases\u2014for example, those associated with rising caseloads. Conversely, if overall child welfare costs fall, counties get to retain those savings. Proposition 30, approved by voters in 2012, protects the state from having to reimburse counties for child welfare policies that were in place prior to 2011 realignment. Proposition 30 also protects counties by establishing that counties only need to implement new state policies that increase overall program costs to the extent that the state provides funding. Federal Funding for CWS. Federal funding for CWS stems from several sources and is estimated to be over $2.5 billion in 2016-17. State General Fund Supports Nonrealigned Components of Child Welfare and State Oversight Functions. The 2016-17 budget proposes over $250 million General Fund to county welfare and probation departments to implement components of the child welfare program that were not part of 2011 realignment. This includes funding for such things as a program to combat the commercial sexual exploitation of children and foster care payments for certain relative caregivers. Additionally, the General Fund continues to support the state’s CWS oversight function at DSS. 2016 -17 B U D G E T 22 Legislative Analyst’s Office www.lao.ca.gov Child Welfare Workers Rely on an Array of Out-of-Home Placement Options When finding a placement for foster children, counties rely on four primary placement options\u2014 kinship care, foster family homes (FFHs), FFAs, and group homes. As of October 2015, there were over 65,000 children in foster care in California. For this report we refer to kinship care, FFHs, and FFAs as home-based family care. Federal and state law mandate that children be placed in the least restrictive placement setting, which state law describes as that which promotes normal childhood experiences and the day-to-day needs of the child. Figure 9 shows the proportions of foster children in each of these placement settings. The four selected placement types vary in their level of restrictiveness, serve children with different though overlapping needs, provide distinct sets of specialized services, and receive varying care and supervision payment rates from the state\u2014which we refer to as foster care payment rates. Kinship Care. Established child welfare policy and practice in the state prioritizes placement with a noncustodial parent or relative. Among child welfare workers’ first responsibilities following a child’s removal is locating a potential relative caregiver. Kinship care comprises care from relatives and nonrelative extended family members and is the state’s most utilized placement option at 38 percent of foster placements as of October 2015. Unlike other placement types, kin-caregivers are not necessarily eligible for foster care payments at the same level as other foster caregivers. Specifically, relatives caring for children who are ineligible for federal financial participation (primarily due to income eligibility rules) have historically received a lower foster care payment rate\u2014the CalWORKs child-only payment of $369 per child per month in 2015-16. However, with the passage of the state-funded Approved Relative Caregiver (ARC) funding option program in 2014, relative caregivers of federally ineligible children can potentially receive the foster care payment rate (referred to as the basic rate), which varies in 2015-16 from $688 to $859 per month based on the age of the child. The ARC program is optional at the county level and several counties have chosen not to participate; as a result, some relative caregivers continue to receive the lower CalWORKs rate. Currently 47 counties have opted to participate in the ARC program. Distribution of Foster Children by Selected Placement Typea Figure 9 a Data Source: University of California, Berkeley California Child Welfare Indicators Project. b Other includes foster children living in placements other than the four selected placements, for example, children placed in Supervised Independent Living Placements and Transitional Housing. The category excludes children placed with guardians who nevertheless have an open child welfare case. FFH = foster family home and FFA = foster family agency. Kinship Care FFA Otherb FFH Group Home 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 23 FFHs. County-licensed foster homes, known as FFHs, are often the preferred placement option when a suitable relative caregiver cannot be found and the child does not have needs requiring a higher level of services. Counties recruit FFH caregivers and provide basic social work services to the approximately 10 percent of foster children statewide who resided in an FFH as of October 2015. In 2015-16, FFH caregivers receive the foster care payment basic rate of $688 to $859 per month (varying by the child’s age) for the care and supervision of each foster child in their home. FFAs. The FFAs are the only primary placement type that does not directly house the children under their care. Instead, FFAs are private nonprofit agencies that recruit and certify foster caregivers, place children into FFA-certified homes, and provide supportive services to the children in their care, typically children with elevated needs compared to those placed in FFHs. Considered a less restrictive alternative to group home care, placement in an FFA is often the preferred option for children whose placement stability depends on greater social worker involvement and direct access to supportive services. Because they offer a wider array of services and typically serve children with higher needs, counties reimburse FFAs at a higher rate than either relative caregivers or FFHs. The FFA-certified caregivers receive the basic rate plus a $189 monthly supplemental payment known as the Child Increment. On top of this, FFAs are paid a monthly rate between $912 and $1,012 per child for the social work and administrative services they provide. Adding together the direct caregiver and FFA portions, the payment per child placed at an FFA in 2015-16 ranges from $1,789 to $2,060 per month (referred to as the FFA rate). As of October 2015, 27 percent of the state’s foster children were placed through an FFA. Group Homes. Group homes\u2014operated as private, nonprofit agencies\u2014provide 24-hour care, supervision, and services to foster children with the highest levels of need, often children with significant emotional or behavioral challenges who have difficulty achieving stability in a home-based family setting. Professional staff provide the care and supervision as well as therapeutic and supportive services to children in group homes. Due in part to the absence of a parental caregiver, group homes are considered the most restrictive (except in the case of foster children supervised by probation agencies), least family-like foster care setting, and are generally the least preferred placement option. Because of their reliance on professional staff and provision of often intensive supportive services, group homes are compensated at higher rates than the other placement types. The Rate Classification Level System (RCL), which features 14 rate levels, determines group home provider payments. For 2015-16, providers receive between $2,391 (RCL 1) to $10,130 (RCL 14) per month per child, depending primarily on the qualifications of their staff and the number of staff hours they provide to children in their care. Services and treatments vary across group homes, but often include, particularly among higher level group homes, counseling and mental health treatment services. As of October 2015, approximately 10 percent of California’s foster children were living in group homes. Other Placement Types. In addition to the four primary placement types described above, a suite of alternative options exist to serve children with distinct needs and circumstances. For example, these include supervised independent living arrangements for older, relatively more self-sufficient youth. Summary of Monthly Foster Care Provider Rates. Figure 10 (see next page) summarizes the foster care payment rate structure for the four primary placements types. Each carries different costs for the state and its federal and county funding partners. 2016 -17 B U D G E T 24 Legislative Analyst’s Office www.lao.ca.gov Impetus for CCR Longstanding concerns about the outcomes and costs of group home care led the Legislature to enact CCR legislation to reform the foster care system. CCR aims to reduce reliance on group homes and increase the capacity of home-based family placements. Children in Group Homes Experience Poor Outcomes. The foster care system provides services for children from a variety of circumstances, each with varied strengths and needs. Those placed in group homes tend to be children with higher needs than the foster care population as a whole. Research suggests that group home placements are occasionally warranted, but long-term group home stays are associated with elevated rates of reentry into foster care, lower educational achievement, and higher rates of involvement in the juvenile justice system. Children placed in group homes remain in foster care longer and often have a more limited array of permanency options than their home-based family placed peers. Those who do not reunify with their families typically emancipate by aging out of foster care. Although a portion of children who age out of group homes may reconnect with their parents and extended family, others leave the foster care system with no life-long family relationships. We note that given the potentially higher needs of children placed in group homes, it is difficult to determine whether group home placements themselves directly lead to these poor outcomes. Group Homes Are More Costly Than Home-Based Family Placements. As previously noted, group home placements can cost up to $10,130 per child per month depending on the level of care provided. In contrast, foster care payments for home-based family settings generally range from $688 per child per month for relative and FFH placements to $2,060 for FFA placements. We note, however, that there are certain home-based family placements, such as Intensive Treatment Foster Care (ITFC), that have significantly higher payment rates due to the level of services they provide. Placing children in group homes when they could be successfully served in home-based family settings may not only be less effective, but also a less efficient use of child welfare resources. Concerns About the Adequacy of Home-Based Family Placements. Reducing reliance on group home placements has been a priority for the state for some time. One major challenge to Figure 10 Selected Monthly Foster Care Payment Rates by Placement Type 2015-16 Kin Caregivers Foster Family Homes Foster Family Agencies Group Homes Relative Caregivers Non-Relative Caregivers Foster care payment rate $369 or $688-$859a $688 – $859 $688 – $859 $688 – $859 $2,391 – $10,130b Supplemental caregiver payments Specialized Care Incrementc Specialized Care Incrementc Specialized Care Incrementc $189 \u2014 Supplemental provider payments \u2014 \u2014 \u2014 $912 – $1,012 \u2014 a Relative caregivers caring for a child who is ineligible for federal financial participation and who live in a county that has chosen not to participate in the Approved Relative Caregiver Program receive the $369, CalWORKs child-only rate. All other relative caregivers receive the basic rate. b Unlike home-based care providers who primarily receive a rate based on the age of the child, group home rates are determined by the level of services they provide. Rate Classification Level (RCL) 14 is the highest level and most costly group home; RCL 1 is the least costly. Children are assigned to group homes based on the level of their service needs. c The specialized care increment is a monthly supplemental payment available to kin and foster family homes caregivers at the county option for the care of children with elevated needs. 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 25 reducing reliance on group home placements is having an adequate supply of home-based family placements, particularly those capable of caring for children whose elevated needs make them at risk for group home placement. Additionally, services and supports to enable home-based family caregivers to care for children at risk of group home placement are not available to all home-based family placement types, in some cases requiring children to move to more restrictive settings in order to receive necessary mental health and other supportive services. Ensuring the adequacy and availability of home-based family placements is a key consideration if reliance on group home placements is to be further reduced. Years of Legislative Interest Leads to Reforming the State’s Foster Care System. Longstanding concerns surrounding poor outcomes for children growing up in group homes led the Legislature in 2012-13 to call for the creation of a stakeholder workgroup to recommend changes to the foster care system\u2014known as CCR. Chapter 35 of 2012 (SB 1013, Committee on Budget and Fiscal Review) instructed the workgroup to develop revisions to the services available to children in out-of-home care as well as the rate systems that govern foster care payments. In 2015, DSS published its legislative report with 19 recommendations based on the workgroup’s findings. The 19 recommendations aim to improve the experience and outcomes of children in foster care and have largely been incorporated into AB 403. The CCR centers around several complementary goals\u2014(1) ending long-term group home placements, (2) increasing access to supportive services regardless of whether a child is in a group home or home-based family setting, (3) utilizing universal child and family assessments to improve placement and service decisions, and (4) increasing transparency and accountability for child outcomes. Major Changes Resulting From CCR CCR Creates a New Placement Type Short-Term Residential Treatment Centers (STRTCs) Replace Group Homes. Assembly Bill 403 seeks to end group homes generally as a placement option beginning January 1, 2017. (With certain exceptions on a case-by-case basis, some group homes may be allowed to continue to operate as group homes past January 2017.) STRTCs will replace group homes as the placement setting for children who cannot safely be placed in home-based family settings, providing a similar level of supervision as group homes, but with expanded services and supports. In contrast to group homes serving as long-term placements for children for whom home-based family placements cannot be found, STRTCs are intended to provide short-term, intensive treatment to allow children to successfully transition to a family setting as quickly and successfully as possible. Assembly Bill 403 restricts STRTC placements to children who have been assessed as requiring the level of behavioral and therapeutic services that STRTCs will be required to provide. Children whose level of need qualifies them for STRTC placement include, among others, those assessed as seriously emotionally disturbed and victims of commercial sexual exploitation. To ensure the ongoing appropriateness of all STRTC placements, resident children’s case plans will be subject to review every six months by the director or deputy director of the supervising county child welfare or probation department. The case plans will specify the reasons for the child’s placement, the expected duration of stay, and the transition plan for moving the child to a less restrictive environment. 2016 -17 B U D G E T 26 Legislative Analyst’s Office www.lao.ca.gov CCR Efforts to Increase Access to Necessary Services and Supports CCR Expands the Set of Core Services FFAs and STRTCs Are Required to Provide. Among other activities, FFAs currently engage in foster parent recruitment, retention, and certification, and employ social workers to support the children in their care through more frequent interactions than county social workers have historically been funded to provide. (We note AB 403 also authorizes counties to operate their own FFA.) Group homes, particularly high-level ones, administer a range of therapeutic and supportive services in addition to providing direct care and supervision. Under CCR, STRTCs and FFAs will be required to ensure access to specialty mental health services and strengthen their permanency placement services by approving families for adoption, providing services to help families reunify, and giving follow-up support to families after a child has transitioned to a less restrictive placement. Assembly Bill 403 requires several other core services to be made available, including, but not limited to, educational, health, and social supports. The specifics around the new core services that FFAs and STRTCs will have to directly or indirectly provide is currently under development. CCR Calls for Additional Integration Between Child Welfare and Mental Health Services. Prior to CCR, the state was working to ensure that CWS-involved children obtain medically necessary mental health services. CCR builds on these efforts by requiring all FFAs and STRTCs to either (1) maintain certification from the Department of Health Care Services (DHCS) or county Mental Health Plans (MHPs) to provide mental health services directly or (2) contract with mental health providers to serve children in their care. Quality Improvement and Oversight Under CCR STRTCs and FFAs Required to Obtain National Accreditation. CCR seeks to improve the quality of residential services by requiring all STRTCs and FFAs to maintain accreditation from a nationally recognized accreditation body. Accreditation typically involves an in-depth review of an organization in order to confirm it meets recognized service standards. Reaccreditation will reoccur every three years as a means of ensuring continuous quality improvement and maintenance of high operating standards into the future. FFA and STRTC Performance Measure Dashboard for County Placement Agencies and the Public. CCR calls for the development and promulgation of publicly available FFA and STRTC performance measures. DSS intends for these indicators\u2014for example, on rates of successful family reunifications, placement stability, client satisfaction, educational achievement, and health and safety standards\u2014to inform placement decisions. Assembly Bill 403 specifies January 2017 as the launch date for the public dashboard. Initially, the indicator dashboard will likely feature only a subset of the measures that will ultimately be included, and then be gradually expanded as the system undergoes continued development and additional FFA and STRTC performance data become available. CCR Changes to the Caregiver Approval and Placement Processes Resource Family Approval (RFA) Replaces the Existing Multiple Approval, Licensing, and Certification Processes for Home-Based Family Caregivers. Before foster caregivers may receive foster care payments, they must be approved, certified, or licensed to provide care. Currently, the approval process differs by placement type\u2014for 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 27 example, FFHs are licensed according to one set of criteria while relative caregivers are approved under a different set. The CCR replaces the multiple approval standards currently in place with a unified assessment that incorporates a psychosocial evaluation, risk assessment, and permanency assessment for all prospective home-based family caregivers. Unlike the previous multiple, overlapping approval processes, the RFA process will automatically qualify a foster family for guardianship and adoption. Once the transition to RFA is complete, all home-based family placements will be approved as resource families. Currently underway in five early-implementer counties, the rest of the state will convert to the resource family approval process for all new home-based family caregivers on or before January 1, 2017. More Collaborative, Child-Centered Decisions Through the Use of Child and Family Teaming. To increase child and family involvement in decisions relating to foster children’s care, CCR mandates the use of child and family teaming through every stage of the case planning and service delivery process. The child and family team may include, as deemed appropriate, the affected child, her or his custodial and noncustodial parents, extended family members, the county caseworker, representatives from the child’s out-of-home placement, the child’s mental health clinician, and other persons with a connection to the child. Members of the team will meet as needed to discuss and agree on the child’s service plan whenever an important foster care decision is being made. Needs Assessment to Inform Placement and Services Decisions. CCR calls for children to receive a comprehensive strengths and needs assessment upon entering the child welfare system to improve placement decisions and ensure prompt access to supportive services when they are determined to be necessary. The assessment is expected to utilize a structured assessment tool that will be administered by a child welfare worker, the results of which will inform decisions made by the child and family team. CCR’s New Requirements Lead to the Development of New Rate Structures New STRTC and FFA Payments Rates Are Currently Under Development. Generally, pursuant to AB 403, the RCL system featuring 14 separate group home reimbursement rates and the current FFA rate structure will sunset and be replaced by a new set of rates that will take effect beginning January 2017. These new rates are expected to reflect the expanded set of responsibilities CCR places on STRTCs and FFAs. Under consideration by DSS and a stakeholder workgroup is a system whereby a child’s needs assessment determines, at least in part, the rate that the child’s caregiver and supportive service provider(s) are entitled to. This could potentially allow, for example, a county to contract or provide supportive services for children in home-based family placements other than FFA-certified homes. This would be in contrast to the current foster care payment rate system whereby a child’s placement generally determines the foster care payment rate and services that the child receives. Rate development remains a fluid process, however, and it is unknown at this time how rates will be structured in a way that increases access to services for all children in home-based family settings. Stakeholder workgroups focused on rate development are currently meeting, and it is our understanding that a new rate system will be ready in March 2016. Overview of the Governor’s Budget for CCR The Governor proposes $61 million from the General Fund ($95 million total funds) to continue to implement CCR in 2016-17. The proposed 2016 -17 B U D G E T 28 Legislative Analyst’s Office www.lao.ca.gov General Fund spending represents an increase of $39 million over the $22 million General Fund ($34 million total funds) provided for CCR in 2015-16. We note that the 2015-16 funding for CCR is allocated primarily toward foster parent recruitment and retention and a rate increase for FFAs. As with 2015-16, most of the Governor’s proposed spending for 2016-17 is dedicated to the county child welfare and probation departments that directly administer CWS, with a small portion of the proposed funding for additional positions at DSS and DHCS to provide regulatory, implementation, and administrative support to their county partners. Figure 11 summarizes how the proposed state CCR implementation spending is allocated among the various state and local entities. Proposed CCR Spending Includes New Assumed Costs and Savings for County Implementation The Governor’s proposed budget provides funding for the next round of CCR implementation. Most major components of AB 403 become effective on January 1, 2017, requiring significant implementation efforts by the state, counties, and foster care providers in advance of that date. The Governor’s 2016-17 proposed budget recognizes new state General Fund costs associated with CCR implementation and accounts for offsetting county savings from the elimination of duplicative foster caregiver approval processes and the transition of children out of group homes into home-based family placements. The total funding proposed from the General Fund for CCR implementation for counties in 2016-17 is less than it would be if these county savings were not assumed by the budget. It is important to note that the offsetting county savings associated with CCR are accounted for in this way due to 2011 realignment, which, as we previously discussed, established that the state must provide funding to counties equivalent to the net cost of new state policy requirements. We describe the Governor’s estimated CCR costs and savings in more detail below. Over Half of the Governor’s Proposed Spending Is for Foster Parent Recruitment and Support. Reducing the state’s reliance on group home and STRTC placements depends on FFA and child welfare and probation departments’ ability to recruit and retain home-based family caregivers for the children expected to leave group homes over the next several years. The 2015-16 budget provided $17.2 million General Fund ($25.8 million total funds) to support county efforts to increase the supply of home-based family caregivers. To receive recruitment and retention funds, county child welfare and probation departments had to submit county plans to DSS identifying how they would use the funds to train, recruit, retain, and support home-based family caregivers. In 2015-16 allowable uses of the funding provided to these county departments included: (1) staffing to provide direct Figure 11 2016-17 Proposed Continuum of Care Reform State Spending (In Millions) General Fund 2015-16 Estimated 2016-17 Proposed Change Local assistance to county welfare and probation departments $21.5 $57.5 $36.0 Department of Social Services\u2014state support 0.5 3.0 2.5 Department of Health Care Services and local assistance to county mental health plans \u2014 0.4 0.4 Totals $22.0 $60.8 $38.8 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 29 services and supports to foster caregivers, (2) foster care payment supplements to support caregivers of children with exceptional needs, and (3) intensive relative finding and engagement. Budget-related legislation in 2015-16 requires DSS to report to the Legislature during 2016-17 budget hearings on counties’ uses of these funds as well as the outcomes achieved. For 2016-17, the Governor builds on the 2015-16 appropriation, proposing a total of $32 million General Fund ($47 million total funds) to help counties increase the supply of high-quality, home-based family placements. About half of 2016-17’s proposed spending is intended for county probation departments, which in 2015-16 received a small fraction of the recruitment and retention funding. At this time it is unclear whether the proposed 2016-17 funds will be allocated to counties using the same methodology used in 2015-16. RFA Implementation Results in Net Costs. The Governor proposes $11 million General Fund ($16 million total funds) to assist counties as they transition to the unified RFA process. This funding represents the estimated net cost to counties of implementing RFA after accounting for assumed total county savings of roughly $19 million in 2016-17. On the cost side, RFA imposes additional training requirements on home-based family caregivers and expands the set of assessment criteria that child welfare workers have to apply before approving a caregiver as a qualified placement. On the savings side\u2014and among other expected efficiencies\u2014the switch to RFA eliminates the need to carry out adoption assessments for caregivers already approved as resource families and is expected to encourage placement stability, thereby reducing the total number of caregiver approvals by incorporating permanency considerations into the initial placement decision. The transition to RFA will be a multiyear effort as counties initially need only apply RFA to new home-based family placements. By 2019, however, all home-based family placements will have to convert to RFA, which will require the reassessment of existing foster and kin caregivers. Funding for Proposed Child and Family Teaming (CFT) Activities. The CCR requires the use of a multidisciplinary, team-based approach to placement and other decisions that affect a child receiving CWS. The Governor’s budget recognizes that this new approach increases workload at the county level since it requires the coordination of team-based decision-making among multiple parties. After accounting for the components of CFT that were in place before 2011 realignment and therefore already incorporated into county funding, the Governor’s budget includes $10 million General Fund ($14.4 million total funds) for a half year of implementation for this component of CCR. Remaining Proposed Funding for a Variety of CCR-Related Activities. The remaining $11 million General Fund ($18 million total funds) proposed for CCR implementation at the county level in 2016-17 is intended to (1) maintain the FFA rate increase enacted in 2015-16 given caseload growth, (2) implement needs assessments and STRTC case reviews, (3) help cover a portion of initial FFA and STRTC accreditation costs, (4) update child welfare workers’ case management system, and (5) develop the provider performance indicator dashboard. Also included in the Governor’s proposal is approximately $200,000 General Fund ($400,000 total funds) for county MHPs to ensure children in STRTCs are appropriately placed. Savings Due to Lower Foster Care Payments Expected to Materialize in 2016-17. While the Governor’s proposal does not provide a long-term outlook for CCR-related General Fund costs, the 2016-17 CCR proposal assumes that county savings related to lower foster care payments, which offset the above estimated costs, begin to accrue in 2016-17. These savings are due to an assumed steady transition of about 2,500 children 2016 -17 B U D G E T 30 Legislative Analyst’s Office www.lao.ca.gov out of group homes into less costly home-based family placements over the first three years after CCR becomes effective. For 2016-17, the Governor projects $6.4 million in county savings as a result of shifting children to less costly placements, which offset the General Fund contribution that would otherwise be necessary to implement CCR’s other mandated activities. We note that although CCR requires a new rate structure for STRTCs and FFAs, these new rates were still under development at the time of the Governor’s budget. In the absence of new rates for STRTCs and FFAs, the Governor’s budget uses the rates currently paid to RCL 14 group homes and ITFC providers as placeholder figures for the new provider rates under CCR. Summary of Governor’s Estimated Costs and Savings for 2016-17 CCR County Implementation. Figure 12 shows the Governor’s estimated costs and assumed county foster care payment savings for the major components of the 2016-17 CCR budget proposal that will be implemented by counties (that is, apart from state operations expenditures). State Operations Spending The Governor Proposes New Positions at DSS and DHCS for CCR Implementation. In 2015-16, DSS received $500,000 for two new positions to administer the foster parent recruitment, retention, and support funding. The 2016-17 proposed budget requests temporary funding (three years) of $2.5 million in General Fund ($5 million total funds) to add 34.5 new positions at DSS to form a CCR implementation team to, among other responsibilities, oversee policy development as well as a robust stakeholder workgroup process. For 2016-17, DHCS requests $175,000 General Fund ($350,000 total funds) to help STRTCs obtain mental health certification. Across the state there are over 700 group homes, a subset of which will likely seek mental health certification as they convert to STRTCs. If an STRTC chooses to Figure 12 Proposed CCR State Spending for County Child Welfare and Probation Department Implementation (In Millions) Activity 2015-16 2016-17 Change From 2015-16 General Fund Total Funds General Fund Total Funds General Fund Total Funds Foster parent training, recruitment, retention, and support $17.2 $25.8 $32.2 $47.4 $15.0 $21.6 Resource Family Approvala \u2014 \u2014 11.2 16.2 11.2 16.2 Child and family teaming \u2014 \u2014 9.7 14.4 9.7 14.4 2015-16 FFA rate increase 4.3 7.3 4.5 7.6 0.2 0.3 Case planning assessment, reviews, and training \u2014 \u2014 4.4 6.6 4.4 6.6 Accreditation \u2014 \u2014 1.4 2.8 1.4 2.8 Automation and performance measure development \u2014 \u2014 0.5 0.8 0.5 0.8 Assumed foster care payment savings at the county levelb \u2014 \u2014 -6.4 -7.3 -6.4 -7.3 Totalsc $21.5 $33.1 $57.5 $88.6 $36.0 $55.5 a Estimated total spending for Resource Family Approval is net of estimated county savings, which are estimated at approximately $19 million in total funds. b Assumed foster care payment savings offset the costs of the other proposed CCR activities, reducing the total estimated state funding for CCR implementation. c This figure does not include the approximately $3.4 million General Fund ($6.4 million total funds) in the Governor’s proposed budget to support DSS state operations, DHCS state operations, and county Mental Health Plans’ CCR implementation efforts. CCR = Continuum of Care Reform; FFA = Foster Family Agency; DSS = Department of Social Services; and DHCS = Department of Health Care Services. 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 31 provide the services directly, CCR requires that it obtain certification from DHCS or a county MHP. DHCS requests additional resources to support one permanent position and temporary funding for two positions to directly certify the new STRTCs and assist county MHPs that choose to carry out STRTC certification themselves. LAO Assessment Governor’s Proposal Is a Logical Next Step for CCR Implementation Full implementation of AB 403 is expected to be a multiyear effort. Funding for CCR implementation began in 2015-16 with an augmentation for counties to increase outreach, recruitment, and support for foster parents and to provide an increase to the FFA rate. The Governor’s 2016-17 proposal builds upon the 2015-16 efforts, and continues to primarily focus early implementation efforts on building capacity in home-based family settings while beginning to phase in other components of CCR implementation. We have reviewed the Governor’s proposal for new positions at DSS and DHCS. Given the magnitude of the CCR implementation efforts, we find them to be reasonable. We note that the request for DSS positions includes limited term funding, which will allow the Legislature to reevaluate the ongoing CCR workload when implementation is further along. Overall, we find that the Governor’s proposal is a logical next step in the implementation of CCR, but recognize that many uncertainties continue to surround CCR implementation. We highlight several of these key uncertainties in this section. Considerable Fiscal and Programmatic Uncertainties Surround CCR Implementation Because CCR results in a fundamental shift in the way CWS are delivered in California, large uncertainties surrounding the total fiscal impact and programmatic challenges of the reform package remain. The Governor’s budget recognizes that implementation will result in up-front costs for the counties. Offsetting those costs are assumed county savings that are projected to materialize beginning in 2016-17. These offsetting savings are uncertain because they are based upon particular assumptions about rates (which have not been finalized) and other assumptions about the number and speed at which children will exit group homes (which will depend upon the availability of home-based family caregivers). Ultimately, the future costs or savings from CCR are contingent on a host of interconnected factors, including the new STRTC and FFA foster care payment rates that DSS develops, the rate at which children exit group homes to home-based family care, and which home-based family settings are most heavily utilized following the closure of group homes. Programmatically, the ability of counties to recruit and support additional home-based family caregivers will be critical to CCR’s success. Availability of New Home-Based Family Placements Key to CCR’s Success. Currently, over 5,500 children reside in group homes. DSS projects that around 2,500 of these children will gradually transition to home-based family placements over the three years following implementation. Child welfare and probation departments are developing strategies to better identify and support home-based family settings for children transitioning from group homes. Recognizing the necessity of finding new home-based family caregivers under AB 403, the Governor dedicates nearly half of new CCR spending to counties for foster parent recruitment and retention. County welfare and probation departments’ ability to translate these funds into additional home-based family caregivers is unknown at this time. As we have noted, AB 403 2016 -17 B U D G E T 32 Legislative Analyst’s Office www.lao.ca.gov requires DSS to report at upcoming legislative hearings on the recruitment and retention efforts currently underway. Without a considerable increase in the number of home-based family placements, CCR’s goal of reducing the state’s reliance on long-term group home placements cannot be met. The Speed at Which Children Will Leave Group Homes Is Unknown. In estimating 2016-17 savings for counties, DSS assumes a steady transition of children out of group homes and into STRTCs or home-based family placements. What the exit rate will ultimately be is subject to significant uncertainty, such as the extent to which group homes successfully petition for license extensions past CCR’s January 1, 2017 implementation date. By January 2019, all child welfare group home placements must cease, but probation group home placements may potentially continue indefinitely. In both the short and long run, children remaining in group homes will add cost pressures to CCR that may affect its net fiscal impact. New Rate Structures for FFAs and STRTCs Are Still Under Development. The new rate structures currently under development will take into account the new requirements of CCR\u2014 accreditation, mental health certification, CFT, and the augmented slate of core services that FFAs and STRTCs must provide. The near finalization of regulations surrounding new core service requirements is a precondition to the final adoption of a rate system since the payments providers receive must take into account the services they will be required to provide. Moreover, as previously noted, alternative rate models may be considered that would tie, at least in part, the rate a child’s caregiver and service provider receive to the child’s needs assessment rather than the child’s placement type. Which model is ultimately adopted will likely have important programmatic and fiscal effects, which are unknown at this time. CCR’s Net Costs Will Ultimately Depend on Speed of Transition and Finalization of Rates. The level at which the state sets rates will help determine CCR’s fiscal impact. Higher rates for children in STRTCs and FFAs than what the Governor’s budget assumes will erode potential savings accruing from transitioning children out of group homes, even more so if that transition is slower or less complete than anticipated. As we have noted, the administration’s estimates of foster care payment savings assumes that the rates paid to FFAs and STRTCs will be roughly similar to those in place today. While we recognize that this approach is prudent in the absence of new, finalized rates, using current rates could underestimate the future costs of STRTC and FFA provider payments, potentially underestimating total General Fund costs for CCR implementation. The administration will be releasing the rate structure in March, at which time it should have a better estimate of potential costs and savings. Realignment May Complicate Budgeting for CCR Implementation. As we have noted, under 2011 realignment, if the state places new requirements on counties, it must provide state resources to reimburse counties for the new costs. Counties are not required to implement any changes in state policy that increase overall program costs unless the state provides funding to cover those increased costs. The Governor’s budget attempts to compensate counties for the increased net costs associated with CCR, but as we have noted, current estimates are based on a number of assumptions. We think it is reasonable to assume counties could realize some level of savings as children transition out of group homes and that these savings could be used to offset the state’s cost for CCR. However, the net impact on counties will ultimately depend upon the finalization of rates and the speed at which children transition from 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 33 more costly care. Adding to the uncertainties, there may be wide variation in the speed and level of savings achieved across the various counties. Uncertainties Surrounding Mental Health Services and Certification. Assembly Bill 403 requires that all STRTCs and FFAs either obtain mental health certification from DHCS or county MHPs or contract with a certified mental health provider. For FFAs and STRTCs, there is some uncertainty around what certification will require and who will be the certifying entity or entities. It is our understanding that counties have concerns that insufficient resources are being provided for MHPs to prepare for the influx of new applicants and potential service recipients should the plans have a direct role in certifying providers and administering services to these additional children. The Governor proposes funding for DHCS and MHPs to carry out CCR-related workload, but the augmentation is limited to what is needed to serve STRTCs. FFAs facing the same rules as STRTCs do not appear to be accounted for in the Governor’s mental health-related budget augmentations. It is unclear whether there may be additional General Fund cost pressures associated with the mental health certification of FFAs. DSS is convening a workgroup with DHCS and representatives from the county MHPs to focus on the role of mental health in CCR. Additionally, the administration is considering legislation that will provide more clarity on the mental health component of CCR. Key Issues for Legislative Consideration Overall, we find the Governor’s proposal to continue the implementation of CCR to be a reasonable next step. We also find the Governor’s request for additional positions at DSS and DHCS to oversee and implement CCR to be reasonable and raise no concerns at this time. We do, however, make some suggestions for the Legislature to consider as it evaluates the proposal. These suggestions are primarily focused on gaining additional clarity around the key issues of uncertainty we raise in this analysis. CCR Implementation Costs and Savings Subject to Change Once New Rates Are Finalized. The long-term cost of CCR largely depends on the savings achieved from children exiting group home care. Due to the absence of finalized rates in the Governor’s January budget, the likelihood and extent of county savings from lower foster care payments is uncertain. The Legislature will want to revisit the proposed CCR implementation funding once new provider rates are developed in March, at which time more accurate savings and costs can be estimated. Use Budget Deliberations to Gain Clarity on Key Aspects of the Proposal. As we have noted, there are several other components of CCR that create some uncertainty. The Legislature may wish to use the upcoming budget process to ask the administration some clarifying questions around these areas of uncertainty. The following are some key issues for the Legislature’s consideration: Addressing Realignment Challenges. Given the uncertainty surrounding CCR’s net costs or savings, how will the administration ensure that it is accurately funding counties for the newly required activities under CCR? How will the administration track county savings attributable to CCR on an ongoing basis? How Core Services Will Be Made Available to All Children. Once the rates are developed, the Legislature may want to ask the administration to provide greater detail to demonstrate if and how the new rate structure increases access to core services for all children regardless of placement setting. 2016 -17 B U D G E T 34 Legislative Analyst’s Office www.lao.ca.gov Recruitment and Retention Funding. The ability to recruit and retain home-based family placements is important to the success of CCR. Under current law, the administration is required to report in budget hearings on counties’ uses of these funds, providing an opportunity for the Legislature to oversee the strategies, allocation amounts, and progress of the funding. Given the increased funding for this effort, the Legislature may consider requiring the department to include other oversight measures in this report in the upcoming budget process, such as the number of home-based families recruited and key recruitment and retention challenges counties are experiencing. Role of Mental Health. Based on progress from the mental health workgroup process, and deliberations on potential legislation to clarify the role of mental health in CCR, what is the most up-to-date vision of how mental health will be further integrated with CWS under CCR? 2016 -17 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 35 2016 -17 B U D G E T LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are avai lable on the L AO’s website at w w w. lao.ca .gov. The L AO is located at 9 25 L Street , Suite 10 0 0, Sacramento, CA 95814. 36 Legislative Analyst’s Office www.lao.ca.gov Contact Information Ginni Bella Navarre Managing Principal Analyst, 319-8342 [email protected] Health and Human Services Callie Freitag SSI\/SSP 319-8331 [email protected] In-Home Supportive Services Ben Johnson Child Welfare Services 319-8336 [email protected] Continuum of Care Reform Ryan Woolsey CalWORKs 319-8356 [email protected] ”

” M A C T A Y L O R L E G I S L A T I V E A N A L Y S T F E B R U A R Y 2 0 1 5 The 2015-16 Budget: Analysis of the Human Services Budget 2015-16 B U D G E T 2 Legislative Analyst’s Office www.lao.ca.gov CONTENTS Executive Summary ……………………………………………………………………………………..3 Overview …………………………………………………………………………………………………….5 The Human Services State Budget: Programmatic and Spending Trends Since 2007-08 ………………………………….8 Federal Court Blocks New Federal Labor Regulations, Impacting IHSS and DDS ……………………………………………………………………….16 Background …………………………………………………………………………………………………………………. 16 Governor’s Budget Proposal ……………………………………………………………………………………… 16 Court Ruling Blocks Regulations After Budget Developed ………………………………….. 18 What Happens to Funding Appropriated in 2014-15 Budget to Comply With the Federal Labor Regulations? ………………………………………………. 18 Analyst’s Recommendations …………………………………………………………………………………….. 19 In-Home Supportive Services …………………………………………………………………….20 Department of Developmental Services …………………………………………………….23 Background …………………………………………………………………………………………………………………. 23 The Governor’s Budget Proposal ……………………………………………………………………………… 24 LAO Comments on Overall Budget Proposal ………………………………………………………….. 27 Closure Plans Needed for Fairview and Sonoma DCs ……………………………………………. 32 Analyst’s Recommendation ……………………………………………………………………………………… 36 CCL Quality Enhancement and Program Improvement ………………………………..38 Background …………………………………………………………………………………………………………………. 38 2014-15 Quality Enhancement and Program Improvement Update …………………. 39 Governor’s Proposal and LAO Analysis …………………………………………………………………… 39 LAO Overall Take on the Governor’s Proposal ……………………………………………………….. 45 CalWORKs ………………………………………………………………………………………………….46 Budget Overview ………………………………………………………………………………………………………… 47 Analyst’s Budget Assessment ……………………………………………………………………………………. 47 Continuum of Care Reform …………………………………………………………………………50 Background ………………………………………………………………………………………………………………….. 50 Overview of the Governor’s Budget Proposal ………………………………………………………… 56 LAO Assessment ………………………………………………………………………………………………………….. 56 Recommendation ……………………………………………………………………………………………………….. 57 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 3 EXECUTIVE SUMMARY Overview of Human Services Budget. The Governor’s budget proposes $10.9 billion from the General Fund for human services programs\u2014a 4.3 percent increase above 2014-15 estimated expenditures. For the most part, the year-over-year changes reflect the implementation of previously enacted policy changes as well as changes in caseload, utilization of services, and costs per unit of service, as opposed to new policy proposals. The Governor’s budget proposal for human services programs reflects significant fiscal uncertainty relating to federal actions in a number of programmatic areas. For example, the President’s recent executive action on immigration would have a highly uncertain fiscal impact on human services programs. Programmatic and Spending Trends Since 2007-08. Our review of trends in the major human services programs since 2007-08 (the last budget developed before the recent recession) finds that total spending is up by 11 percent (in inflation-adjusted terms), with major changes in how human services programs are funded. Specifically, there has been an increasing reliance on federal funds and realignment revenues and less reliance on the General Fund. Caseloads are up in all major programs, cash assistance payments and some provider rates have fallen in real terms, and while funding for some program reductions made during recessionary times have been fully or partially restored, other program reductions continue today. In addition, the Legislature has made a select group of program augmentations since 2007-08 as well. Uncertain Legal Status of Federal Labor Regulations Affecting In-Home Supportive Services (IHSS) Program and Department of Developmental Services (DDS). A federal court has blocked the implementation of new federal labor regulations (originally set to take effect on January 1, 2015) that would have required the payment of overtime compensation and other payments to home care workers in IHSS and DDS’s community program. This court decision has been appealed. The Legislature will need to account for this legal uncertainty in approving the IHSS and DDS budgets. To the extent funding budgeted in 2014-15 and 2015-16 to implement the federal regulations is no longer needed because the federal court’s decision is ultimately upheld on appeal, monies would be freed up for other legislative priorities. Proposed Restoration of IHSS Service Hours Previously Reduced. The Governor’s budget proposes to use revenue from a restructured managed care organization tax to provide the nonfederal share of funding needed to restore service hours from the 7 percent reduction in hours enacted in 2013-14. We find the Governor’s overall concept to be a reasonable approach to allow for this funding restoration. Developmental Center (DC) Closure Plans Needed. Federal and state policy promotes the integration of individuals with developmental disabilities into community settings. In furtherance of this policy, and supported by our analysis of the fiscal merits of transitioning DC residents to community settings, we recommend that the Legislature move torward closure of Fairview and Sonoma DCs. Governor Proposes Next Steps in Addressing Program Deficiencies in Community Care Licensing (CCL). The Governor’s budget proposes a multiyear, multistage plan to reform the CCL 2015-16 B U D G E T 4 Legislative Analyst’s Office www.lao.ca.gov program that oversees the licensing of child care, children’s residential, and adult and senior care facilities. This proposal builds on reforms enacted in the 2014-15 budget to address recent health and safety issues discovered at these CCL-licensed facilities. Overall, we find that the Governor’s proposal is responsive to the Legislature’s interest in decreasing the lengthy time interval (currently as long as five years) between required inspections. We think that increasing the inspection frequency for all facility types to at least once every three years\u2014the first stage of the Governor’s proposal\u2014is a reasonable first step. However, we think it is premature to approve the Governor’s proposal to further increase inspection frequencies in the subsequent stages of his plan until enforcement data is reviewed in an effort to target enforcement resources as cost-effectively as possible. Continuum of Care Reform (CCR) Budget Proposal Should Be Justified in Context of Broader Reform Effort. The Governor’s budget proposes funding in 2015-16 to implement 2 of 19 recommendations of a working group established by the Legislature to recommend revisions to rates, services, and programs in the foster care system. The impetus for the reform effort is to further state law that requires that foster children be placed in the least restrictive, most family-like setting possible. While we think that the budget proposal appropriately focuses first on building capacity in home-based settings, we are unclear on how the proposed funding fits into the broader CCR implementation and how the funding would help achieve CCR objectives. We therefore recommend that the administration provide the needed justification at budget hearings. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 5 OVERVIEW Background on Human Services Programs California’s major human services programs provide a variety of benefits to its citizens. These include income maintenance for the aged, blind, or disabled; cash assistance and welfare-to-work services for low-income families with children; protecting children from abuse and neglect; providing home care workers who assist the aged and disabled in remaining in their own homes; collection of child support from noncustodial parents; and subsidized child care for low-income families. Human services are administered at the state level by the Department of Social Services (DSS), DDS, Department of Child Support Services, and other California Health and Human Services Agency departments. The actual delivery of many services takes place at the local level and is typically carried out by 58 separate county welfare departments. A major exception is Supplemental Security Income\/State Supplementary Payment (SSI\/SSP), which is administered mainly by the U.S. Social Services Administration. In the case of DDS, community-based services (the type of services received by the vast majority of DDS consumers) are coordinated through 21 nonprofit organizations known as regional centers (RCs). Recent Major Changes in Funding for Human Services Programs. As a result of realignment- related legislation in 2011 and 2013, the budget reflects shifts to counties of a significant amount of General Fund costs in human services programs. Specifically, as a result of 2011 legislation, the budget (beginning in 2011-12) reflects shifts to local realignment revenues of about $1.1 billion of General Fund costs in the California Work Opportunity and Responsibility to Kids (CalWORKs) program and about $1.6 billion in child welfare and adult protective services General Fund costs. As a result of the latter shift, the state’s role with respect to child welfare and adult protective services is largely one of oversight of county administration of these program areas. Legislation enacted in 2013 shifted additional General Fund costs in the CalWORKs program to local realignment revenues that previously have been used to provide health services to indigent individuals. These realignment revenues have been freed up given that many indigent individuals are newly eligible for coverage in the state-funded Medi-Cal program. Specifically, the budget shifts $300 million in CalWORKs General Fund costs to these local realignment revenues in 2013-14, $725 million in 2014-15, and $698 million in 2015-16. The 2013 legislation additionally provided that the costs of specified ongoing increases to CalWORKs assistance payments will be shifted to revenues from the growth of existing local realignment revenues that otherwise would have supported other human services programs. We discuss the statutorily driven CalWORKs grant increases in greater detail later in the CalWORKs section in this report. Expenditure Proposal by Major Programs Overview of Human Services Budget Proposal. The Governor’s budget proposes expenditures of about $10.9 billion from the General Fund for human services programs in 2015-16. As shown in Figure 1 (see next page), this reflects an increase of $444 million\u2014or 4.3 percent\u2014above revised General Fund expenditures in 2014-15. Summary of Major Budget Proposals and Changes. As shown in Figure 1, the budget reflects generally stable General Fund expenditures across a majority of human services programs, with relatively 2015-16 B U D G E T 6 Legislative Analyst’s Office www.lao.ca.gov significant growth in DDS and IHSS expenditures being the exceptions. The 6.5 percent growth ($202 million) in DDS General Fund expenditures is driven largely by caseload growth and higher utilization of community services. The year-over-year expenditure growth also reflects a new spending proposal for $18.1 million in 2015-16 to increase capacity in the secured treatment program at Porterville DC. The 9.1 percent growth ($204 million) in IHSS General Fund expenditures largely reflects the annualized cost of complying with new federal labor regulations (currently unenforceable pursuant to a court order, as discussed later), caseload growth, and higher costs per service-hour as a result of wage increases. As also discussed below, the Governor’s budget proposes to restore IHSS hours that were eliminated as a result of the current 7 percent reduction in service hours initially enacted as a budget solution in a prior year. Funding for this restoration, however, is proposed to come from a restructured tax on managed care organizations, rather than from the General Fund. It is important to note that the modest (2 percent) year-over-year net growth in CalWORKs General Fund expenditures masks a number of both cost increases and savings. On the cost front, the budget reflects increased costs for the full-year implementation of items adopted as part of the 2014-15 budget package, including the April 2015 grant increase (partially funded from the General Fund) and the extension of eligibility for drug felons. On the savings front, the budget reflects a projected decrease in caseload and the increased utilization of non-General Fund monies. Budgetary Uncertainty Related to Federal Actions. The Governor’s budget proposal for human services programs reflects significant fiscal uncertainty relating to federal actions in a number of programmatic areas. We highlight these uncertainties in Figure 2 and later discuss some of the key ones in greater detail. Caseload Trends Generally Varied Growth Through Most Recent Recession. While caseload grew for most of the state’s human services programs during Figure 1 Major Human Services Programs and Departments\u2014Budget Summary General Fund (Dollars in Millions) 2013-14 Actual 2014-15 Estimated 2015-16 Proposed Change From 2014-15 to 2015-16 Amount Percent SSI\/SSP $2,772.6 $2,805.0 $2,834.0 $29.0 1.0% Department of Developmental Services 2,801.0 3,098.1 3,298.8 200.7 6.5 CalWORKs 1,161.9 650.0a 663.2 13.2 2.0 In-Home Supportive Services 1,926.3 2,246.1 2,449.7 203.6 9.1 County Administration and Automation 674.5 843.6 842.2 -1.4 -0.2 Department of Child Support Services 304.6 313.6 313.6 \u2014 \u2014 Department of Rehabilitation 57.0 58.4 58.4 \u2014 \u2014 Department of Aging 31.5 32.3 30.4 -1.9 -5.9 All other social services (including state support) 253.0 415.9 416.2 0.3 \u2014 Totals $9,982.4 $10,463.0 $10,907.3 $444.3 4.3% a Primarily reflects a year-over-year increase in the use of certain funds previously used for health services under 1991 realignment to pay for CalWORKs grants, reducing year-over-year General Fund expenditures in CalWORKs by $425 million. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 7 the most recent recession, there was substantial variability in the growth rate across programs. This variability largely reflects the extent to which a program’s caseload is susceptible to economic fluctuations. (One key exception to this recessionary caseload growth is the state’s foster care caseload, which has declined since 2001 and through the recession. In part, this reflects the creation of the Kinship Guardian Assistance Payment program in 2000 that facilitates a permanent placement option for relative foster children outside of the foster care system.) Both Caseload Growth and Declines Since Recession. Since the end of the most recent recession several years ago, caseloads in human services programs that are particularly sensitive to economic fluctuations\u2014such as CalWORKs\u2014have experienced year-over-year caseload declines as the Figure 2 Human Services Budgetary Uncertainty Related to Federal Actions Issue Budgetary Uncertainty Implementation of new federal labor regulations for In-Home Supportive Services (IHSS) and Department of Developmental Services (DDS) The 2015-16 budget includes a combined total of $342 million General Fund in IHSS and DDS to make overtime and other required payments pursuant to new federal labor regulations. However, if a current lower federal court ruling invalidating the regulations is upheld, the state would realize General Fund savings. Presidential executive action on immigration If the President’s executive action takes effect, some undocumented immigrants may newly qualify for state human services programs, including IHSS and the Cash Assistance Program for Immigrants. The potential cost increase to the state’s human services programs resulting from this action is highly uncertain. Federal funding of developmental centers (DCs) The budget assumes that the state will retain federal Medicaid funding for DCs, despite DCs not meeting federal certification requirements. If the state does not make sufficient improvements to DCs, then a total of about $103 million in annual federal funding is at risk. Historically, lost federal funds for the DCs have been backfilled with General Fund monies. Federal CalFresh administration funding target The federal government typically pays 50 percent of CalFresh administrative costs. However, projected need for federal funds in 2014-15 and 2015-16 exceeds a federal funding maximum target. In the past, federal administrative funds from other states that spent below their respective targets were made available to California. To the extent that such funds are not available, as much as $270 million in additional General Fund spending would be required over the two years should the state backfill the lost federal funds. Federal Title IV-E funding (foster care) disallowance The federal government identified an instance of noncompliance with Title IV-E foster care regulations and has ordered the state to repay Title IV-E funds, with interest, that were disallowed because of the noncompliance. The state has appealed the disallowance, but has also set aside $50 million (General Fund) should the appeal be rejected. These set-aside dollars would become available for other purposes should the state’s appeal succeed. 2015-16 B U D G E T 8 Legislative Analyst’s Office www.lao.ca.gov economy improved. Other program areas\u2014those that are less sensitive to economic fluctuations, such as DDS\u2014have generally experienced caseload growth. We now turn more specifically to caseload trends in IHSS, DDS, and CalWORKs and the budget’s assumptions regarding caseload for these three program areas in 2015-16. IHSS Caseload Projected to Grow Modestly in 2015-16. The budget projects the average monthly caseload for IHSS to be 462,648 in 2015-16\u2014a 3.7 percent increase over the most recent estimate of 2014-15 caseload. DDS Community Caseload Continues to Grow. The budget projects the average monthly DDS caseload in the community to be 288,317 in 2015-16\u2014a 3.5 percent increase over estimated 2014-15 caseload. This caseload has grown steadily at similar percentage increases over each of the last several years, largely reflecting increased diagnoses of autism, the moratorium on the placement of consumers in state DCs, and general population growth. CalWORKs Caseload Continues to Decline. In the midst of the most recent recession, the CalWORKs caseload rose substantially and peaked at over 597,000 cases in June 2011. The caseload has been declining since that time due to enacted policy changes and an improving labor market. The budget assumes an average monthly CalWORKs caseload of 543,557 in 2014-15\u2014a decline of 1.3 percent from the prior year. The year-over-year decline in caseload is projected to accelerate slightly to 1.9 percent in 2015-16, resulting in an average monthly caseload of 533,335. While caseload is declining, resulting in savings on cash assistance payments, the number of CalWORKs cases utilizing services is expected to modestly increase, partially offsetting cash assistance savings. THE HUMAN SERVICES STATE BUDGET: PROGRAMMATIC AND SPENDING TRENDS SINCE 2007-08 The Legislature has expressed significant recent interest in the issue of the level of the state’s spending in human services programs today compared to pre-recession levels (the 2007-08 state budget was the last budget developed before the recent recession). As with all areas of the budget, significant General Fund budget reductions were made in the human services policy area to help balance the budget during the recessionary years. This section is intended to provide information to the Legislature to be able to make a meaningful comparison between (1) the state’s spending and programmatic service\/benefit levels in human services programs in the 2007-08 budget and (2) the level of spending and service\/benefit levels for such programs proposed in the 2015-16 Governor’s Budget. For the state’s major human services programs, we discuss caseload trends, changes in how programs are funded, changes in eligibility and service\/benefit levels, and other main drivers explaining the difference between 2007-08 and 2015-16 spending levels. Total Human Services Spending Has Grown Significantly, but With Major Changes in the Funding Mix As shown in Figure 3, when all funding sources flowing through the state budget are considered (including federal funds), total spending in human services programs has grown by 25 percent 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 9 between 2007-08 and the Governor’s 2015-16 budget proposal. After adjusting for inflation, the increase in spending is 11 percent. Embedded in this total spending increase over the period are substantial changes in how human services programs are funded. Specifically, while General Fund spending has declined over this period, spending from federal funds and realignment revenues has increased substantially. To a significant extent, federal funds and realignment revenues are replacing what otherwise would have been General Fund expenditures, thereby driving down General Fund expenditures without a concomitant decrease in program benefit and service levels. (Realignment revenues are replacing General Fund expenditures in the child welfare services, adult protective services, and CalWORKs program areas.) As a result, General Fund spending on human services as a percentage of the total state General Fund budget decreased from 11.6 percent in 2007-08 to 9.6 percent in the 2015-16 budget proposal. Below, we provide a more in-depth comparison of pre-recession versus 2015-16 spending on a program-by-program basis, drilling down into how the caseload served, eligibility, benefit and service levels, and funding mix have changed over this period. In-Home Supportive Services A benefit of the state-federal Medicaid program\u2014known as Medi-Cal in California, IHSS provides in-home personal care and domestic services to low-income aged, blind, and disabled individuals. Significant Expenditure Growth. In the period from 2007-08 to the budget proposed for 2015-16, IHSS expenditures have grown from $5 billion ($1.7 billion state funds) to $8.2 billion ($2.7 billion state funds), or an increase of 65 percent. Caseload Growth. In the period from 2007-08 to the budget proposed for 2015-16, the IHSS caseload has grown from 400,156 individuals to an estimated 462,648 individuals, or an increase of 15.6 percent. Service Hours From 7 Percent Reduction Proposed to Be Restored in 2015-16. Over the nine-year period from 2007-08 to 2015-16, IHSS recipients have experienced reductions in service hours. From 2010-11 to 2012-13, a 3.6 percent reduction in service hours was generally in effect, increasing to an 8 percent reduction in 2013-14, and ratcheting down to a 7 percent reduction in 2014-15. (We note that the 8 percent and 7 percent reductions were enacted in 2013 in relation to an IHSS settlement agreement that resolved two class- action lawsuits related to previously enacted IHSS Figure 3 The Human Services State Budget: Pre-Recession Versus 2015-16 Proposal (Dollars in Billions) Fund Source 2007-08 Actual 2015-16 Proposed Change From 2007-08 to 2015-16 Amount Percent General Fund $12.0 $10.9 -$1.1 -9% Federal fundsa 12.1 15.1 3.0 25 Realignment revenues 1.6 6.3 5.7 342 Other special funds 0.7 0.7 \u2014b 2 Totals (All Funds) $26.4 $33.0 $6.6 25% a Includes Medicaid funding passed through from Department of Health Care Services. b Change is $17.5 million. 2015-16 B U D G E T 10 Legislative Analyst’s Office www.lao.ca.gov budget reductions that had not taken effect.) The 2015-16 budget proposes to fully restore service hours from the 7 percent reduction. Other Factors Explaining Growth in Spending. After accounting for inflation and caseload growth, the remaining significant growth in total spending between 2007-08 and 2015-16 reflects several factors, including the assumed implementation beginning in 2014-15 of new federal labor regulations (requiring the payment of overtime and the payment for previously uncompensated activities of IHSS providers), wage increases (both state-mandated minimum wage increases and wage increases negotiated at the county level), and higher average utilization of IHSS among recipients. State Share of IHSS Costs Has Decreased Slightly. The IHSS program is funded through a combination of state funds, county realignment funds, and federal Medicaid funding. Beginning in 2011-12, the federal government began providing an enhanced reimbursement rate for a significant portion of the IHSS caseload, which has caused the federal share of costs to increase. In 2012-13, the Legislature enacted a county maintenance-of-effort (MOE) requirement, in which counties generally maintain their 2011-12 expenditure level for IHSS. The county MOE has caused the county share of IHSS costs to decrease. On net, the state share of IHSS costs has decreased slightly from 33.2 percent in 2007-08 to 32.5 percent in 2015-16. SSI\/SSP The SSI\/SSP program provides cash grants to low-income aged, blind, and disabled individuals. The state’s General Fund provides the SSP portion of the grant while federal funds pay for the SSI portion of the grant. Modest Growth in Overall Program Spending. Total spending for SSI\/SSP grants\u2014including General Fund and federal expenditures (which are not passed through the state budget)\u2014has increased by about $1.1 billion\u2014or 12 percent\u2014 between 2007-08 and 2015-16. As this spending is less than the rate of inflation over this time period (roughly 14 percent), total spending has decreased slightly in real terms. Modest Caseload Growth. In the period from 2007-08 to the budget proposed for 2015-16, the SSI\/SSP caseload has grown from 1,235,932 individuals to an estimated 1,310,977 individuals, or an increase of 6.1 percent. Decline in State-Funded Grant Levels. Historically, the state provided an annual cost-of- living adjustment (COLA) for the SSI\/SSP grant. However, the state has not provided a COLA since June 2008 and no COLA is proposed for 2015-16. Further, over the period from 2007-08 to 2015-16, the state has significantly reduced the maximum SSP grant available for individuals and couples to the minimum allowed under federal law. We note that SSI\/SSP recipients continue to receive a federally funded COLA for the SSI portion of the grant. In Figure 4, we display the maximum monthly SSI\/SSP grant for individuals and couples in 2007-08, as compared to proposed grant levels for 2015-16. We also compare the grant levels in each of the two years to the federal poverty level (FPL) in that year (the FPL is adjusted annually for inflation). Reflecting SSP grant reductions and the suspension of the state COLA, the combined SSI\/ SSP maximum monthly grant for individuals and couples has declined significantly as a percentage of FPL over the nine-year period. After adjusting for inflation, the maximum combined SSI\/SSP grant proposed for 2015 16 (1) for individuals represents roughly $76 (8.7 percent) less purchasing power than was provided in 2007 08 and (2) for couples represents roughly $190 (12.4 percent) less purchasing power than was provided in 2007 08. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 11 Department of Developmental Services The DDS oversees the provision of services and supports for individuals with developmental disabilities. Community-based services are coordinated through 21 nonprofit organizations known as RCs. Significant Expenditure Growth. In the period from 2007-08 to the budget proposed for 2015-16, DDS expenditures will have grown from $4.4 billion ($2.7 billion state funds) to an estimated $5.7 billion ($3.3 billion state funds), or an increase of 30.9 percent. Significant Caseload Growth. In the period from 2007-08 to the budget proposed for 2015-16, the total DDS caseload has grown from 223,737 individuals to an estimated 289,327 individuals, or an increase of 29.3 percent. Most Budget Solutions Implemented Since 2007-08 (and Earlier) Remain in Place. During the most recent period of budget deficits, the Legislature enacted numerous DDS budget reductions and cost savings measures in order to yield General Fund savings, such as rate restrictions for RC vendors, service changes, and reliance on increased federal funding. Rates paid to vendors established by statute or by the department have generally been frozen since 2003-04. Rates negotiated by the RCs for new vendors were limited beginning in 2008 to no higher than the median rate for that service. On top of the rate freezes and restrictions, temporary rate reductions were implemented broadly to RC vendors from 2009-10 through 2012-13, but these were completely lifted in 2013-14. In 2009-10, service reductions and eligibility restrictions were implemented in the Early Start program, which provides early intervention services to infants and toddlers under the age of three who have a developmental disability or delay(s). While the Early Start service reductions continue, the Early Start eligibility criteria were restored to the threshold in place prior to 2009 as of January 1, 2015. Also in 2009-10, the DDS suspended the availability of certain services, including social\/recreation activities, camping services and associated travel, educational services for school-aged children, and certain nonmedical therapies. The Governor’s budget does not propose any restorations for these suspended services. Collectively, the Early Start service reductions and service suspensions that continue are estimated to create General Fund savings in the low tens of millions of dollars annually. Figure 5 (see next page) shows average spending per consumer over the period. While such spending has increased slightly in nominal terms, it has fallen by 9.5 percent once adjusted for inflation. Federal Share of Costs Has Increased. The DDS is funded through a combination of state and federal funds. In 2007-08, 38 percent of total DDS Figure 4 SSI\/SSP Maximum Monthly Grants Pre- and Post-Recession 2007-08 2015-16 Proposeda Maximum Grant\u2014Individuals SSI $637 $744 SSP 233 156 Totals $870 $900 Percent of FPL 102.3% 91.8% Maximum Grant\u2014Couples SSI $956 $1,116 SSP 568 396 Totals $1,524 $1,512 Percent of FPL 133.6% 113.9% FPL = federal poverty level. a Figures corrected on 3\/11\/15 after original publication. 2015-16 B U D G E T 12 Legislative Analyst’s Office www.lao.ca.gov costs were paid for by federal funds. In 2015-16, 42 percent of total DDS costs are proposed to be paid for by federal funds. This increase in federal funding is due primarily to the state’s efforts to increase federal Medicaid funding during the recent period of budget deficits. CalWORKs CalWORKs provides cash grants and welfare- to-work services to families whose income is inadequate to meet their basic needs. Total Expenditures Have Risen 11 Percent. From pre-recession levels in 2007-08, the Governor’s CalWORKs proposal for 2015-16 represents an increase in total spending (from all fund sources) of 11 percent\u2014from $5.2 billion to $5.8 billion. As shown in Figure 6, total funding has increased slightly over this period for cash assistance, services, and county administration. Growth in services and administration has somewhat outpaced growth in cash assistance. Significant Program Costs Shifted From General Fund to County Funds. As shown in Figure 6, the mix of funds supporting the CalWORKs program has changed significantly from 2007-08 to 2015-16. Over this period, the state has taken several actions to shift General Fund CalWORKs costs to counties, primarily through state-local realignment. Specifically, in 2011, the state provided dedicated revenues to counties to meet additional fiscal responsibilities in several Figure 5 DDS Average Spending Per Consumer Pre- and Post-Recession 2007-08 2015-16 Proposed Total funds (in millions) $4,356 $5,699 Total caseload 223,737 289,327 Average spending per consumer $19,467 $19,699 Average spending per consumer \u2014adjusted for inflation $19,467 $17,617 DDS = Department of Developmental Services. Figure 6 CalWORKs Funding Before and After Recession 2007-08 Actual 2015-16 Proposed Funds Share of Total Funds Share of Total Spending by Purpose (Dollars in Millions) Cash assistance $3,006 58% $3,242 56% Services and county administration 2,031 39 2,348 41 Other 142 3 181 3 Total Funding $5,179 100% $5,771 100% 2007-08 Actual 2015-16 Proposed Funds Share of Total Funds Share of Total Spending by Fund Source (Dollars in Millions) Federal funds $3,765 69% $2,928 51% State General Fund 1,319 29 663 11 County funds 95 2 2,180a 38 Total Funding $5,179 100% $5,771 100% a Includes significant amounts spent by counties through state-local realignment that directly offset what otherwise would be General Fund costs. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 13 areas. Of these new funds, $1.1 billion annually was directed to pay for an increased county share of existing CalWORKs grant costs, directly offsetting General Fund spending. In 2013, the state began redirecting realignment funds used by counties to provide indigent healthcare to instead pay for an additional county share of CalWORKs grant costs. The amount redirected each year corresponds to estimated county savings resulting from the shift of low-income individuals into Medi-Cal. This transfer, at an estimated $698 million in 2015-16, also directly offsets General Fund spending in CalWORKs. Finally, in 2013, the state also redirected future growth in certain other realignment funds to pay for the costs of future CalWORKs grant increases. These funds generally pay for new CalWORKs costs instead of directly offsetting existing General Fund costs, but will continue to increase the portion of CalWORKs supported by county funds over time. Caseload Rose During Recession, Remains Above Pre-Recession Levels by 14 Percent. During 2007-08, an average of 465,951 families received CalWORKs assistance each month. As shown in Figure 7, during the recession, the monthly CalWORKs caseload reached nearly 600,000 (in June 2011) and has been declining since that time. The Governor’s budget assumes that the average monthly caseload during 2015-16 will be 533,335 families\u201414 percent higher than in 2007-08, but lower than the recession’s peak caseload. Adult Eligibility for Aid Tightened. In general, adult eligibility for CalWORKs is time limited and able-bodied adults are subject to a work requirement. In July 2011, the lifetime maximum number of months that an adult could receive CalWORKs assistance was reduced from 60 to 48. This reduction in the amount of time over which an adult can receive CalWORKs assistance was one of the most important policy changes made to the program since 2007-08. It was estimated to save the state about $110 million when initially implemented (this savings amount would have declined slightly due to lower caseload today). There have also been major policy changes related to the work requirement that applies within the 48 months of assistance; however, these policy changes are not expected to create significant budgetary savings. Grants Reduced, Then Partially Restored. In 2007-08, a family of three with no other income received a CalWORKs grant of $723 per month. Since 2007-08, CalWORKs grants have been both reduced and increased. Specifically, in 2009, grants were reduced by 4 percent and a statutory COLA that automatically adjusted grants for changes in inflation was eliminated. Grants were further reduced by 8 percent in 2011. Grants were later CalWORKs Caseload 2007-08 Through 2015-16 Figure 7 100,000 200,000 300,000 400,000 500,000 600,000 700,000 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 Actuals Governor’s Budget Projection 2015-16 B U D G E T 14 Legislative Analyst’s Office www.lao.ca.gov increased by 5 percent in 2014, and are scheduled to be increased by 5 percent again in April 2015. Both of these increases were provided through a new statutory mechanism that functions like a COLA, but bases automatic grant increases on availability of funds from a dedicated fund source rather than cost of living. The Governor’s proposal assumes no additional grant increase in 2015-16, such that the same family of three with no earned income would receive a grant of $704 per month\u2014$19 (about 3 percent) lower than in 2007-08. After adjusting for inflation, the CalWORKs grant amount for this family proposed for 2015-16 represents roughly $115 (14 percent) less purchasing power than was provided in 2007-08. Because recent increases have not fully restored past reductions, and because the statutory COLA was eliminated, grants have also fallen as a percentage of FPL (a poverty threshold that is adjusted for inflation) between 2007-08 and 2015-16. Federally funded CalFresh food benefits (which CalWORKs families generally receive) are adjusted for inflation and have risen since 2007-08; however, combined CalWORKs and CalFresh food assistance have still fallen as a percentage of FPL from 2007-08 to 2015-16, as shown in Figure 8. Employment Services Funding Temporarily Reduced. . . Beginning in 2009-10 and continuing through the first half of 2012-13, the Legislature reduced county funding for CalWORKs services (initially by $420 million) and exempted certain CalWORKs families with young children from the program’s work requirement, thus reducing demand for services and allowing counties to manage the reduction. This reduction, and the associated exemption, was slowly phased out in 2013 and 2014. As formerly exempt recipients became subject to the work requirement, county funding for services was restored. . . . Then Augmented With Early Engagement Strategies. The 2013-14 budget package included funding for three new strategies intended to better identify and address CalWORKs recipients’ barriers to employment early in their time on aid. These strategies included (1) ongoing funding to pay for additional subsidized employment opportunities for CalWORKs recipients, (2) the creation of the Family Stabilization Program within CalWORKs to provide intensive case management for families experiencing destabilizing crisis situations that interfere with their ability to meet the work requirement, and (3) the creation of a new online appraisal tool to comprehensively evaluate recipients as they enter the program to identify barriers to employment. This online appraisal tool is expected to be implemented statewide during 2015-16. The collective cost of these early engagement strategies in 2015-16 is about $140 million. Other Program Reductions, Restorations, and Augmentations. Other relatively smaller CalWORKs reductions, restorations, and augmentations (each in the range of low to mid tens of millions of dollars) Figure 8 Monthly CalWORKs Grant and CalFresh Benefit Pre- and Post-Recessiona 2007-08 2015-16 Proposed Change Amount Percent Grant $723 $704 -$19 -3% CalFresh benefit 356 493 137 38 Totals $1,079 $1,197 $118 11% Grant as percent of FPL 51% 42% Grant and CalFresh benefit as percent of FPL 75 71 a For a family of three in a high-cost county with no other income. FPL = federal poverty level. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 15 have taken place since 2007-08. For example, reimbursement rates for child care provided to certain CalWORKs families were reduced on an ongoing basis. The mechanism that allows CalWORKs families to keep a portion of their grant as their earnings increase was reduced and later restored. Case management services in Cal-Learn, a program within CalWORKs that helps pregnant and parenting teens complete high school, was eliminated and later restored. In 2014, a new Housing Support Program was created in CalWORKs, and CalWORKs eligibility will be expanded to individuals with prior drug felony convictions beginning in April 2015. Summary In summary, the main takeaways from our analysis of programmatic and spending trends in the major human services programs since 2007-08 are as follows: Spending Up, Funding Mix Changed. While total spending has gone up in real (inflation-adjusted) terms\u2014by about 11 percent\u2014there have been major changes in how programs are funded. Specifically, there has been an increasing reliance on federal funds and realignment revenues and less reliance on the General Fund. For the most part, these funding shifts have no affected program service levels. Caseloads Up. Caseloads have risen in all major human services programs since 2007-08, many at rates faster than the rate of growth of the state’s population. However, while some caseloads have grown steadily, the CalWORKs caseload\u2014 more closely tied to the state’s economy and labor market than other caseloads\u2014 reached a peak during the recession and has been declining since. Cash Assistance Payments and Some Provider Rates Have Fallen in Real Terms. The inflation-adjusted level of CalWORKs and SSI\/SSP grants has fallen, reflecting both actual grant reductions (funding for which has not been fully restored) and the lack of COLAs in these two program areas for many years. Similarly, widespread rate freezes have applied to DDS vendors since 2003-04, meaning that these vendor rates have fallen in real terms. Some Programmatic Reductions Continue, but There Have Also Been Augmentations. In addition to reductions in cash assistance grant levels, there were a number of other programmatic reductions made during the recessionary period. While funding for many of these reductions has been fully or partially restored, several of the reductions continue today. For example, a number of DDS community services continue to be suspended today. On the other hand, there have also been a number of program augmentations since 2007-08. For example, the CalWORKs budget has been augmented to implement new strategies intended to better identify and address CalWORKs recipients’ barriers to employment early in their time on aid. 2015-16 B U D G E T 16 Legislative Analyst’s Office www.lao.ca.gov FEDERAL COURT BLOCKS NEW FEDERAL LABOR REGULATIONS, IMPACTING IHSS AND DDS CMIPS II system changes would be needed to process overtime compensation and payments for newly compensable work activities, and provide other needed capabilities. Most CMIPS II system changes have already been completed in preparation for the assumed implementation of the new federal labor regulations beginning January 1, 2015. The total estimated FLSA-related project cost is $37 million ($19 million General Fund) over 2014-15 and 2015-16. Governor’s Budget Proposal Updates 2014-15 Estimated Expenditures to Comply With New Labor Regulations The Governor’s budget updates 2014-15 estimated expenditures for FLSA-related costs in IHSS and DDS to a total of $459 million ($212 million General Fund). This is an increase of $48 million ($30 million General Fund) above the 2014-15 enacted budget appropriation, primarily due to adjustments for IHSS administrative costs at the county level and CMIPS II system changes. Below, we provide a breakdown of these costs. Governor’s Budget Updates 2014-15 Estimated Expenditures for FLSA-Related IHSS Costs. The Governor’s budget updates 2014-15 estimated expenditures for FLSA-related IHSS costs, including a total of $439 million ($200 million General Fund) to fund the following: overtime compensation, newly compensable work activities, administrative costs at the county level, and CMIPS II system changes. We note that the total estimated cost for FLSA compliance also includes an administration proposal to provide work limit exceptions to certain parent providers of IHSS recipients at an estimated cost of $2 million Background Recently Adopted Federal Labor Regulations Affect Home Care Workers In 2013, the federal Department of Labor (DOL) issued revised regulations related to the Fair Labor Standards Act (FLSA) affecting the home care industry, resulting in impacts on the state’s IHSS program and DDS. Under these new labor regulations (originally set to take effect on January 1, 2015), the state is required to make the following changes to the IHSS program: (1) provide overtime compensation\u2014at one-and-a-half times the regular pay rate\u2014to IHSS providers for hours that exceed 40 in a work week, and (2) make payments for newly compensable work activities of IHSS providers, including wait time during medical appointments and commute time under certain circumstances. (We note that 2014 budget-related legislation generally restricts IHSS providers to working no more than 66 hours per week.) For DDS, the state is required to provide funding to enable home care vendors to provide overtime compensation to their employees. Please refer to the Human Services Compliance With Federal Labor Regulations analysis in The 2014-15 Budget: Analysis of the Human Services Budget for further background on the labor regulations. IHSS Information Technology (IT) System Changes Related to the New Labor Regulations The Case Management, Information and Payrolling System (CMIPS) II is the newly implemented IT system that stores IHSS case records, provides program data reports, and processes IHSS provider payments. In order to comply with the new federal labor regulations, 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 17 ($985,000 General Fund) in 2014-15. This exception would allow certain parent providers to exceed the work limit of 66 hours per week. Governor’s Budget Updates 2014-15 Estimated Expenditures for FLSA-Related DDS Costs. The Governor’s budget updates 2014-15 estimated expenditures for FLSA-related DDS costs, providing $21 million ($11 million General Fund) to increase the rates paid to vendors that provide in-home care to individuals with developmental disabilities. The additional funding is intended to enable home care vendors to provide overtime compensation to their employees. 2015-16 Budget Annualizes Funding, Assuming Regulations Effective The 2015-16 proposed budgets for IHSS and DDS provide a total of $758 million ($342 million General Fund) to annualize the cost of complying with the new labor regulations. Below, we provide a breakdown of these costs. IHSS Budget Includes $717 Million ($319 Million General Fund). The 2015-16 proposed budget for IHSS annualizes the cost of complying with the new labor regulations, including a total of $717 million ($319 million General Fund). This amount includes about $1 million ($513,000 General Fund) for a total of eight positions\u2014four new limited-term positions and the extension of four CMIPS II limited-term positions\u2014at DSS to address workload related to implementation of the new federal labor regulations. DDS Budget Includes $41 Million ($22 Million General Fund). The 2015-16 proposed budget for DDS annualizes the cost of complying with the new labor regulations, including $41 million ($22 million General Fund) to increase the rates paid to home care vendors to enable them to provide overtime compensation to their employees. FLSA-Related Costs Budgeted for IHSS and DDS in 2014-15 and 2015-16 In Figure 9, we provide a breakdown of FLSA-related costs budgeted for IHSS and DDS in 2014-15 and 2015-16. Figure 9 FLSA-Related Costs Budgeted for IHSS and DDS (In Millions) 2014-15 Estimated 2015-16 Proposed General Fund Total Funds General Fund Total Funds IHSS Overtime compensation $87.6 $200.8 $166.4 $385.2 Newly compensable work activities 69.7 152.2 146.2 319.1 Work limit exception for certain parent providers 1.0 2.1 2.0 4.4 Administrative costs at the county level 25.3 50.4 1.7 3.3 DSS staffing request \u2014 \u2014 1.0 0.5 Subtotals ($183.6) ($405.6) ($317.3) ($712.5) CMIPS II system changes $16.7 $33.0 $2.0 $4.0 IHSS Totals $200.3 $438.6 $319.3 $716.6 DDS Rate increase for home care vendors $11.3 $20.7 $22.4 $41.4 Grand Totals $211.6 $459.3 $341.7 $758.0 FLSA = Fair Labor Standards Act; IHSS = In-Home Supportive Services; DDS = Department of Developmental Services; DSS = Department of Social Services; and CMIPS = Case Management, Information and Payrolling System. 2015-16 B U D G E T 18 Legislative Analyst’s Office www.lao.ca.gov Court Ruling Blocks Regulations After Budget Developed In a lawsuit brought by associations of home care companies, a federal district court recently ruled that DOL overreached its rulemaking authority when it promulgated the revised FLSA regulations for the home care industry. Effectively, the court ruling invalidates the DOL’s new regulations, removing any requirement for the state to (1) provide funding for overtime compensation for IHSS and DDS, and (2) provide payments for wait and commute time for IHSS providers. DOL Appeal Creates Fiscal Uncertainty for the State. At the time of this analysis, the DOL had appealed the federal court ruling. It is therefore uncertain as to whether the federal labor regulations will eventually go into effect, requiring the state to implement overtime compensation for IHSS and DDS, make the wait and commute time payments for IHSS, and complete the CMIPS II system changes needed to fully conform with the new regulations and related rules specified in 2014 budget-related legislation. It is our understanding that the appeal proceedings will occur on an expedited schedule. It is therefore possible that the court case could be resolved within 2014-15 or in the beginning of 2015-16, and\u2014if DOL prevails\u2014 the state would be required to implement the payments. State Implementation of Additional Payments Halted if Federal Regulations Are Deemed Ineffective. Budget-related legislation enacted in 2014 deletes state implementation of overtime compensation for IHSS and DDS as well as the wait and commute time payments for IHSS in the event that the federal labor regulations are deemed ineffective. Consistent with this statutory direction, both DSS and DDS halted the commencement of these payments related to the labor regulations (scheduled to have begun on January 1, 2015) in light of the federal court ruling. Further, the 2014 budget-related legislation for IHSS requires that the funding appropriated for FLSA-related costs remain within the IHSS budget. We address this aspect of the legislation below. What Happens to Funding Appropriated in 2014-15 Budget to Comply With the Federal Labor Regulations? Legislature Can Use Freed-Up Funding as It Sees Fit. Given the invalidation of the federal labor regulations for now, the Legislature can use the 2014-15 funding appropriated for FLSA-related costs toward an alternative purpose. Although 2014 budget-related legislation requires the funding appropriated for FLSA-related IHSS costs to remain within the IHSS budget, the Legislature is free to enact new legislation specifying its intent to use the funding\u2014about $184 million General Fund\u2014for any purpose. We note that the $11 million General Fund from the updated 2014-15 DDS budget is also available for alternative purposes, and the Legislature could specify its intent on how to use the funding. Alternatively, if the Legislature does not take any action, there are two possible scenarios. First, these monies intended for FLSA-related purposes could remain unspent, with the funding reverting to the General Fund at the end of 2014-15, thereby building up the state’s General Fund reserve. As a second scenario, the departments could spend some or all of these funds on other purposes. This would reduce or eliminate the amount available for other legislative priorities. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 19 Analyst’s Recommendations Recommend Legislature Take Action Related to 2014-15 FLSA-Related Appropriation, but Hold Off on Addressing 2015-16 Appropriation Funds Appropriated in 2014-15. If the Legislature is concerned about the possibility that DSS and DDS could spend some or all of the 2014-15 funding appropriated for FLSA-related costs on other purposes, the Legislature would want to enact legislation specifically reverting these funds so that they would be available for any legislative priority. Amounts Proposed for 2015-16. The uncertainty as to whether the federal labor regulations will be implemented in 2015-16 lead us to recommend that the Legislature wait until the May Revision before making a decision related to the 2015-16 FLSA-related appropriations for IHSS and DDS. Because of the expedited appeal filed by DOL, there is a fiscal risk that, if the court’s decision is overturned, the regulations could go into effect during 2015-16, requiring the state to provide overtime compensation and other payments for much of 2015-16. At the May Revision, we may know more about the timing of the fiscal risk associated with the court case. At that time, we would be in a better position to advise the Legislature on how much money, if any, should be appropriated or set aside for IHSS and DDS to meet possible FLSA-related costs in 2015-16. Direct DSS to Report at Budget Hearings on Plan for CMIPS II, Given Legal Uncertainty of Federal Labor Regulations The state had completed most of the CMIPS II system changes needed to process overtime compensation, provide wait and commute time payments to IHSS providers, and enforce related rules when the labor regulations were invalidated in federal court. Given DOL’s appeal of the court’s decision, the uncertainty as to whether the labor regulations will eventually be implemented raises questions about the department’s plans for CMIPS II system changes. We therefore recommend that the Legislature direct DSS to report at budget hearings on the proposed plan for CMIPS II, including the following specific issues. Plan for Period of Legal Uncertainty. We recommend that the department report at budget hearings on its plan for FLSA-related CMIPS II system changes\u2014 including the changes that have already been made and those that have not\u2014during the current period of legal uncertainty while validity of the regulations is being challenged in the courts. This would help the Legislature to understand the feasibility of allowing CMIPS II changes to lie in a dormant state for an extended period of uncertainty. Fiscal Impact if Labor Regulations Remain Invalidated. We recommend that the department also report on the fiscal impact to the CMIPS II budget if the federal labor regulations were to remain invalidated upon resolution of the court case. We anticipate that there could be some costs associated with reversing FLSA-related system changes. Fiscal Impact if Labor Regulations Are Upheld. Finally, we recommend that the department assess the fiscal impact to the CMIPS II budget if the federal labor regulations were to be upheld upon resolution of the court case. We anticipate that there would be a change in when expenditures to complete FLSA-related CMIPS II system changes are incurred. 2015-16 B U D G E T 20 Legislative Analyst’s Office www.lao.ca.gov Ascertaining the information we describe would enable the Legislature to assess what, if any, CMIPS II budget adjustments are appropriate. Hold Off on Taking Action Related to DSS Staffing Request Given the uncertainty as to whether the labor regulations will eventually be implemented\u2014and whether such implementation will occur in 2015-16\u2014we recommend that the Legislature hold off on taking action related to the DSS staffing request that assumed the January 1, 2015 implementation of FLSA-related changes to the IHSS program and CMIPS II. We further recommend that the Legislature direct DSS to report at budget hearings on staffing implications if the regulations remain invalid in 2015-16. IN-HOME SUPPORTIVE SERVICES Background Overview of IHSS. The IHSS program provides personal care and domestic services to low-income individuals to help them remain safely in their own homes and communities. In order to qualify for IHSS, a recipient must be aged, blind, or disabled and in most cases have income below the level necessary to qualify for SSI\/SSP cash assistance. The recipients are eligible to receive up to 283 hours per month of assistance with tasks such as bathing, dressing, housework, and meal preparation. Social workers employed by county welfare departments conduct an in-home IHSS assessment of an individual’s needs in order to determine the amount and type of service hours to be provided. The average number of hours that will be provided to IHSS recipients is projected to be 94 hours per month in 2015-16. In most cases, the recipient is responsible for hiring and supervising a paid IHSS provider\u2014oftentimes a family member or relative. The IHSS Program Receives Federal Funds as a Medi-Cal Benefit. For nearly all IHSS recipients, the IHSS program is delivered as a benefit of the state-federal Medicaid health services program (known as Medi-Cal in California) for low-income populations. The IHSS program is subject to federal Medicaid rules, including the federal medical assistance percentage reimbursement rate for California of 50 percent of costs for most Medi-Cal recipients. For IHSS recipients who generally meet the state’s nursing facility clinical eligibility standards, the federal government provides an enhanced reimbursement rate of 56 percent referred to as Community First Choice Option (CFCO). Because of the large share of IHSS recipients eligible for CFCO\u2014about 40 percent of the caseload\u2014the average federal reimbursement rate for the IHSS program is 55 percent. The remaining nonfederal costs of the IHSS program are paid for by the state and counties, with the state assuming the majority of the nonfederal costs. (Under the federal Patient Protection and Affordable Care Act\u2014also known as federal health care reform\u2014about 20,000 individuals, or 4 percent of the IHSS caseload, are projected to receive IHSS as a result of the optional Medi-Cal expansion, with their costs fully paid for by the federal government in 2015-16.) Counties’ Share of IHSS Costs Is Set in Statute. Budget-related legislation adopted in 2012-13 enacted a county MOE, in which counties generally maintain their 2011-12 expenditure level for IHSS\u2014to be adjusted only for increases to IHSS providers’ wages (when negotiated at the county level through collective bargaining) and an annual inflation factor of 3.5 percent beginning in 2014-15. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 21 Under the county MOE financing structure, the state General Fund assumes all nonfederal IHSS costs above counties’ MOE expenditure levels. In 2015-16, the total county MOE is estimated to be about $1 billion, an increase of $35 million above the estimated county MOE for 2014-15. To the extent wage increases negotiated at the county level are implemented in the remainder of 2014-15 or in 2015-16, the county MOE will increase by a percentage share of the annual cost of those wage increases. The Governor’s Budget Proposal Year-to-Year Expenditure Comparison. The budget proposes $8.2 billion (all funds) for IHSS expenditures in 2015-16, which is a $1 billion, or 14.4 percent, net increase over estimated expenditures in 2014-15. General Fund expenditures for 2015-16 are proposed at $2.4 billion, a net increase of $204 million, or 9.1 percent, above the estimated expenditures in 2014-15. This net increase in General Fund expenditures incorporates the $35 million increase in the county MOE (which offsets General Fund expenditures). Below, we describe the major factors that explain the net increase. Increase in IHSS Basic Services Costs. The budget includes $300 million ($152 million General Fund) because of (1) caseload growth of 3.7 percent and (2) higher costs per hour due to the increase in the state- mandated hourly minimum wage from $9 to $10 beginning January 1, 2016. A total of 32 counties will be impacted by the minimum wage increase, at a cost of $68 million ($34 million General Fund). (Because the state enacted the minimum wage increase, the county MOE is not adjusted to reflect cost increases associated with the new minimum wage.) New Federal Labor Regulations Assumed to Be Effective. The budget also proposes a net increase of $307 million ($134 million General Fund) to reflect the annualized cost of complying with new federal labor regulations, including funding for: overtime compensation, newly compensable work activities, work limit exceptions for certain parent providers, and administrative costs at the county level. The budget was developed assuming that the regulations would take effect on January 1, 2015. However, a federal court recently invalidated the regulations, and the DOL has appealed the ruling. (Please refer to the Federal Court Blocks New Federal Labor Regulations, Impacting IHSS and DDS analysis earlier in this report for more detail on, and our analysis of, this issue.) CMIPS II. Offsetting the above increases, the budget includes reduced funding for CMIPS II of $53 million ($27 million General Fund) due to expected completion of: (1) system enhancements for blind and visually impaired IHSS recipients, (2) software upgrades and associated training, and (3) one-time system changes related to assumed implementation of the new federal labor regulations in 2014-15. The CMIPS II IT system stores IHSS case records, provides program data reports, and processes IHSS provider payments. (Please refer to the Federal Court Blocks New Federal Labor Regulations, Impacting IHSS and DDS section for more detail on, and our analysis of, CMIPS II system changes related to the new federal labor regulations.) 2015-16 B U D G E T 22 Legislative Analyst’s Office www.lao.ca.gov Proposed Restoration of Service Hours From 7 Percent Reduction. The budget proposes to use revenue from a restructured managed care organization (MCO) tax in the amount of $216 million to provide the nonfederal share of funding needed to restore service hours from the 7 percent reduction enacted in 2013-14. (The total cost to restore service hours from the 7 percent reduction is estimated to be $483 million in 2015-16.) The current 7 percent reduction relates to terms of an IHSS settlement agreement\u2014adopted by the Legislature\u2014that resolves two class-action lawsuits stemming from previously enacted budget reductions. The terms of the settlement agreement require the state to pursue a revenue source other than the General Fund for the purpose of restoring service hours from the 7 percent reduction. We generally find the Governor’s overall concept to be a reasonable approach for raising revenues needed to restore service hours from the 7 percent reduction. Please refer to the MCO Tax Modification analysis in the Medi-Cal section of The 2015-16 Budget: Analysis of the Health Budget for a more thorough discussion of the Governor’s MCO tax proposal. Potential Costs in IHSS and Cash Assistance Program for Immigrants (CAPI) Related to President’s Immigration Actions. We note that the President’s recent executive actions on immigration could result in additional state costs for two human services programs\u2014IHSS and CAPI (the state- funded cash assistance program for immigrants ineligible for SSI\/SSP). If the actions are ultimately implemented at the federal level, then under existing law some undocumented immigrants may newly qualify for IHSS and\/or CAPI fully paid for by the state. The potential fiscal impact of these actions on human services programs is highly uncertain. Please refer to the President’s Executive Actions on Immigration analysis in the Medi-Cal section of The 2015-16 Budget: Analysis of the Health Budget for more discussion of the President’s immigration actions, as they potentially relate to the state’s health and human services programs. Caseload Growth. The Governor’s budget assumes the average monthly caseload for IHSS in 2015-16 will be 462,648, an increase of 3.7 percent compared to the revised estimate of the 2014-15 average monthly caseload. We have reviewed the caseload projections for IHSS and do not recommend any adjustments at this time. We note that the caseload estimates for 2014-15 and 2015-16 do not include the average monthly caseload associated with the optional Medi-Cal expansion (about 20,000 cases) or the relatively small but likely increase in IHSS recipients as a result of the Coordinated Care Initiative (CCI). The CCI integrates IHSS, and other long-term care services and supports, into managed care plans in seven counties statewide and requires managed care plans to provide care coordination services for new plan enrollees, potentially leading to an increase in IHSS use. Staffing-Related Budget Requests. The budget is requesting additional staff resources for the following proposals: Staffing Request to Comply With New Federal Labor Regulations Assumed to Be Effective. The budget proposes about $1 million ($513,000 General Fund) for a total of eight positions\u2014four new limited-term positions and the extension of four limited-term CMIPS II positions\u2014to address administrative workload related to implementation of the new federal labor regulations. Please refer to our analysis earlier Federal Court Blocks New Federal Labor Regulations, Impacting IHSS and DDS for more detail on, and our analysis of, this budget request. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 23 workload associated with shifting IHSS to a managed care plan benefit in seven counties under CCI. We find that this budget proposal is justified on a workload basis. Staffing Request Related to IHSS in CCI Counties. The budget requests the extension of nine existing limited-term positions through 2016-17 to address DEPARTMENT OF DEVELOPMENTAL SERVICES Background Overview of DDS. The Lanterman Developmental Disabilities Services Act of 1969 (known as the Lanterman Act) forms the basis of the state’s commitment to provide individuals with developmental disabilities a variety of services and supports, which are overseen by DDS. The Lanterman Act defines a developmental disability as a substantial disability that starts before age 18 and is expected to continue indefinitely. The developmental disabilities for which an individual may be eligible to receive services under the Lanterman Act include: cerebral palsy, epilepsy, autism, intellectual disabilities, and other conditions closely related to intellectual disabilities that require similar treatment (such as a traumatic brain injury). The department works to ensure that individuals with developmental disabilities over the age of three have access to services and supports that sufficiently meet their needs, preferences, and goals in the least restrictive setting. For children under the age of three with a developmental disability or delay(s), the department administers early intervention services through the Early Start program. Unlike most other public human services or health services programs, services for the developmentally disabled are generally provided without any requirements that recipients demonstrate that they or their families do not have the financial means to pay for the services themselves. The department administers two main programs for eligible individuals (referred to as consumers), described in detail below. Community Services Program. Community- based services are coordinated through 21 nonprofit organizations known as RCs, which assess eligibility and\u2014through an interdisciplinary team\u2014develop individual program plans (IPPs) for eligible consumers. The DDS provides RCs with an operations budget in order to conduct these activities. The department also provides RCs with a budget to purchase services from vendors for its consumers\u2014estimated at 278,593 in 2014-15. These services and supports can include housing, activity and employment programs, in-home care, transportation, and other support services that assist individuals to live in the community. The centers purchase more than 100 different services on behalf of consumers. As the payer of last resort, RCs generally only pay for services if an individual does not have private health insurance or if the RC cannot refer an individual to so-called generic services such as (1) other state-administered health and human services programs for low-income persons or (2) services that are generally provided to all citizens at the local level by counties, cities, school districts, or other agencies. We note that the majority of consumers receiving services through the Community Services Program are enrolled in Medi-Cal, California’s federal-state Medicaid health program for low-income individuals. (For a description of the Medi-Cal program, please refer to the Medi-Cal section of The 2015-16 Budget: Analysis of the Health Budget.) 2015-16 B U D G E T 24 Legislative Analyst’s Office www.lao.ca.gov More than 99 percent of DDS consumers receive services under the Community Services Program. These consumers live in the community with their parents or other relatives, in their own houses or apartments, or in residential facilities or group homes designed to meet their needs. Less than 1 percent of DDS consumers live in state- operated institutions known as DCs, discussed below. DCs Program. The DDS operates three 24-hour facilities known as DCs\u2014Fairview DC in Orange County, Porterville DC in Tulare County, and Sonoma DC in Sonoma County\u2014and one smaller leased community facility (Canyon Springs in Riverside County). Together, these facilities provide care and supervision to approximately 1,100 consumers in 2014-15. Each DC is licensed by the Department of Public Health (DPH), and certified by DPH on behalf of the federal Centers for Medicare and Medicaid Services (CMS), as skilled nursing facilities (SNFs), intermediate care facilities for the developmentally disabled (ICF-DDs), and general acute care hospitals. The DCs are licensed and certified to provide a broad array of services based on each resident’s IPP, such as nursing services, assistance with activities of daily living, specialized rehabilitative services, individualized dietary services, and vocational or other day programs outside of the residential unit. The DCs must be certified in order to receive federal Medicaid funding, and the vast majority of DC residents are enrolled in Medi-Cal. Generally, for Medi-Cal enrollees living in DCs, the state bears roughly half the costs of their care and the federal government bears the remainder. Over the past 15 years, oversight entities such as DPH, CMS, and the United States Department of Justice have repeatedly identified problems at the DCs, including inadequate care, insufficient staffing, and inadequate reporting and investigation of instances of abuse and neglect. For more background on the history of problems identified at DCs, please refer to the Department of Developmental Services analysis in The 2013-14 Budget: Analysis of the Health and Human Services Budget. The Governor’s Budget Proposal Overall Budget Proposal. The budget proposes $5.7 billion (all funds) for DDS in 2015-16, which is a 4.5 percent net increase over estimated expenditures in 2014-15. General Fund expenditures for 2015-16 are proposed at $3.3 billion, a net increase of $201 million, or 6.5 percent, over estimated expenditures in 2014-15. This net increase in total expenditures generally reflects year-over-year increases in the budget for the Community Services Program, partially offset by decreasing costs in the DCs program budget. 2014-15 Adjustments Require Supplemental Appropriation. The revised 2014-15 DDS budget includes a number of adjustments that require a supplemental appropriation of $128 million General Fund ($102 million for the Community Services Program and $26 million for the DCs program), described further below. Community Services Program Budget 2014-15 Adjustments. The revised 2014-15 budget for the Community Services Program includes several adjustments, requiring a supplemental appropriation of $102 million General Fund above the 2014-15 enacted budget appropriation to cover the following costs: Caseload Growth and Greater Utilization of Services. Increase of $111 million ($56 million General Fund) because of caseload growth and greater utilization of specialized adult residential facilities and supported living services. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 25 Unrealized Savings From Transferring Behavioral Health Treatment (BHT) Costs to Private Health Insurance. Increase of $44 million General Fund because of unrealized savings related to the transfer of BHT costs from RCs to private health insurance for individuals with autism who have private health insurance coverage. Chapter 650, Statutes of 2011 (SB 946, Steinberg), required private health insurance companies to provide BHT coverage to individuals with autism beginning July 1, 2012. New Federal Labor Regulations Assumed to Be Effective. Increase of $3.7 million ($1.9 million General Fund) to reflect an updated cost estimate for complying with new federal labor regulations originally set to take effect on January 1, 2015. Please refer to the Federal Court Blocks New Federal Labor Regulations, Impacting IHSS and DDS analysis earlier in this report for more detail on, and our analysis of, this issue. We have reviewed these cost increases but are withholding our recommendation on this proposal, pending further information from the department on its estimated cost increase associated with greater utilization of services. We address this issue in greater detail later in this section. 2015-16 Community Services Program Budget. The budget proposes $5.1 billion (all funds) for the Community Services Program in 2015-16, which is a 6 percent net increase over estimated expenditures in 2014-15. Of this total, $615 million is proposed for RC operations expenditures and the remainder of $4.5 billion is for the purchase of services from RC vendors. General Fund expenditures are proposed at $3 billion, a net increase of $231 million, or 8.3 percent, above the estimated expenditures in 2014-15. This net increase reflects the following year-over-year budget changes. Caseload Growth and Greater Utilization of Services. Increase of $198 million ($181 million General Fund) because of caseload growth and greater utilization of specialized adult residential facilities and supported living services. We analyze these two components of the Governor’s proposal\u2014caseload growth and greater utilization of services\u2014later in this section. State-Mandated Hourly Minimum Wage Increase From $9 to $10. Increase of $64 million ($37 million General Fund) primarily for increasing the rates paid to certain RC vendors that employ workers currently earning less than $10 per hour. Chapter 351, Statutes of 2013 (AB 10, Alejo), will increase the state-mandated hourly minimum wage from $9 to $10 beginning January 1, 2016. We analyze this component of the Governor’s proposal later in this section. Paid Sick Days for Employees of RC Vendors. Increase of $25 million ($16 million General Fund) to provide funding to vendors that do not currently provide paid sick leave to their employees. Chapter 317, Statutes of 2014 (AB 1522, Gonzalez), requires employers to provide at least 24 hours (or three days) of sick leave per year to an employee. We analyze this component of the Governor’s proposal later in this section. One-Time Adjustment to RC Purchase of Services (POS) Budget. Decrease of $13 million General Fund to adjust the 2015-16 budget to account for a one-time augmentation of $13 million General 2015-16 B U D G E T 26 Legislative Analyst’s Office www.lao.ca.gov Fund in 2014-15\u2014used to implement recommendations from the Task Force on the Future of DCs. Annualizing Cost of New Federal Labor Regulations Assumed Effective. Increase of $21 million ($11 million General Fund) to annualize the cost of complying with new federal labor regulations originally set to take effect on January 1, 2015. Please refer to the Federal Court Blocks New Federal Labor Regulations, Impacting IHSS and DDS analysis earlier in this report for more detail on, and our analysis of, this issue. DCs Program Budget 2014-15 Adjustments for DCs Program Budget. The revised 2014-15 budget for the DCs program includes several adjustments, requiring a supplemental appropriation of $26 million General Fund above the 2014-15 enacted budget appropriation to cover the following costs: Expanding Capacity at Porterville DC for Incompetent to Stand Trial (IST) Admissions. Increase of $9 million General Fund to expand capacity within the secure treatment program (STP) of Porterville DC to accommodate an additional 32 beds for IST admissions. We note that a similar proposal to expand capacity for IST admissions is included in the budget for the Department of State Hospitals. Please refer to the Department of State Hospitals analysis in The 2015-16 Budget: Analysis of the Health Budget for more detail on, and our analysis of, this related proposal. Backfilling Withdrawn Federal Funding at Sonoma DC. Increase of $8.8 million General Fund is requested to backfill withdrawn federal funding for four ICF-DD residential units at Sonoma DC. The budget assumes federal funding for the four residential units will be restored no later than February 18, 2015. Implementation of Program Improvement Plans (PIPs) for Fairview and Porterville DCs. Increase of $12 million ($7.5 million General Fund) to fund ongoing improvements needed at Fairview and Porterville DCs in order to meet federal certification requirements for ICF-DD residential units. We have reviewed these cost increases and find the supplemental appropriation request related to the DCs program to be reasonable. 2015-16 DCs Program Budget. The budget proposes $515 million (all funds) for the DCs program in 2015-16, which is an 8.5 percent net decrease below estimated expenditures in 2014-15. General Fund expenditures for 2015-16 are proposed at $280 million, a net decrease of $30 million, or 9.6 percent, below estimated expenditures in 2014-15. The major factors explaining the net decrease are: Completion of Lanterman DC Closure. Net decrease of $46 million ($24 million General Fund) related to the closure of Lanterman DC. The net decrease takes into account costs related to settling workers’ compensation claims and ensuring the successful transition of DC residents to the community, which are more than offset by savings from eliminating staff positions. The last resident transitioned to the community from Lanterman DC in December 2014. The budget proposes to transfer the Lanterman DC property to the California State University as of July 1, 2015. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 27 Annualizing Cost of Expanding Capacity at Porterville DC for IST Admissions. Increase of $9 million General Fund to annualize the cost of expanding capacity within the STP of Porterville DC to accommodate an additional 32 beds for IST admissions. We analyze this component of the Governor’s proposal later in this section. Staffing Reductions Due to Decreased DC Resident Population. Decrease of $12 million ($6.6 million General Fund) because of staffing reductions as the population of DCs declines (these staffing reductions exclude Lanterman DC, which is discussed separately above). Replacement of the Sonoma Creek Pump Station Intake System for Sonoma DC. Increase of $1.6 million General Fund to begin work related to replacing the pump station intake system at Sonoma Creek in order to ensure availability of the local water supply for Sonoma DC residents and staff. (Completing the replacement will cost an additional $2 million General Fund in 2017-18.) Deferred Maintenance for DCs, Including Capital Outlay at Porterville DC. An increase of $7 million General Fund is budgeted separately from the department’s DC program budget for deferred maintenance projects within the DCs. Approximately $800,000 of these funds is proposed to conduct preliminary work related to a new fire alarm system at Porterville DC. (To complete the project will cost an additional $7.2 million General Fund over several years.) At the time of this analysis, the DDS is preparing a list of high-priority deferred maintenance issues to be addressed using the balance of the $7 million General Fund. Please refer to The 2015-16 Budget: The Governor’s General Fund Deferred Maintenance Proposal for more detail on, and our analysis of, the Governor’s deferred maintenance proposal. Headquarters Budget Proposal. The budget proposes $43 million ($27 million General Fund) for headquarters operations expenditures, which is a 0.2 percent increase above the estimate of expenditures in 2014-15. LAO Comments on Overall Budget Proposal Budget’s Caseload Assumptions Community Caseload Has Steadily Grown in Recent Years. Between 2007-08 and 2014-15, the community caseload is projected to grow from 211,069 to an estimated 278,593\u2014an average annual growth rate of 3.4 percent. The caseload trend is shown in Figure 10 and includes the combined total for consumers over the age of Figure 10 Community Caseload Growth Trends Average Monthly Caseload Increase From Prior Year Consumers Percent 2007-08 221,069 \u2014 \u2014 2008-09 231,451 10,382 4.7% 2009-10 233,294 1,843 0.8 2010-11 239,153 5,859 2.5 2011-12 247,674 8,521 3.6 2012-13 256,294 8,620 3.5 2013-14 265,216 8,922 3.5 2014-15a 278,593 13,377 5.0 a Administration’s caseload estimate. 2015-16 B U D G E T 28 Legislative Analyst’s Office www.lao.ca.gov three as well as infants and toddlers enrolled in Early Start. Community Caseload Estimate Appears Reasonable. The Governor’s budget assumes the community caseload in 2015-16 will be 288,317, an increase of 9,724 consumers, or 3.5 percent, compared to the most recent estimate of the 2014-15 caseload. Based upon our review of recent community caseload data, we find the administration’s caseload estimate to be reasonable. If we receive additional information that causes us to change our overall assessment, we will provide the Legislature with an updated analysis at the May Revision. DC Caseload Has Steadily Declined in Recent Years. Between 2007-08 and 2014-15, the DC population has declined from 2,668 to an estimated 1,116\u2014an average annual decline of 11.6 percent. This decline is mostly attributable to the closure of Agnews and Lanterman DCs and the corresponding transition of DC consumers to community-based settings, which is consistent with federal and state policy to provide services to developmentally disabled individuals in integrated community settings. In addition, the moratorium on new admissions to DCs established in 2012-13 has contributed to the decline. DC Caseload Estimate Appears Reasonable. The Governor’s budget assumes the DC caseload in 2015-16 will be 1,010, a decrease of 106 consumers, or 9.5 percent, compared to the most recent estimate of the 2014-15 caseload. Based upon our review of recent DC caseload data, we find the administration’s caseload estimate to be reasonable. If we receive additional information that causes us to change our overall assessment, we will provide the Legislature with an updated analysis at the May Revision. Budget Proposes Spending Increases Related to Caseload Growth and Greater Utilization of Services in the Community Although we find the department’s community caseload estimates for 2014-15 and projections for 2015-16 to be reasonable, we have identified issues with the department’s estimate of costs associated with greater utilization of services. Specifically, we have reviewed the department’s cost estimates related to greater utilization of (1) specialized adult residential facilities (under the community care facilities POS category) and (2) supported living services (under the support services POS category). For these two categories, we find that the 2015-16 estimated costs proposed for General Fund expenditures that do not draw down federal Medicaid matching funds (known as non-matched General Fund) far outpace recent trends in cost growth. For community care facilities, the non-matched General Fund portion of expenditures is estimated to increase from $96 million for the 2014-15 enacted budget appropriation to $152 million for the 2015-16 proposal, an increase of $56 million (58.6 percent). Meanwhile, matched General Fund expenditures and federal reimbursements are estimated to hold relatively stable. For support services, the non-matched General Fund portion of expenditures is estimated to increase from $81 million for the 2014-15 enacted budget appropriation to $160 million for the 2015-16 proposal, an increase of $79 million (97.2 percent). Meanwhile, matched General Fund expenditures and federal reimbursements are estimated to experience relatively modest growth. The non-matched General Fund increases proposed for these two POS categories in 2015-16 deviate significantly from the cost growth trend over the last three fiscal years. At the time of this analysis, the department was unable to provide information on new factors that sufficiently explained the 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 29 proposed increases for non-matched General Fund costs that deviate significantly from past trends. Analyst’s Recommendation. We recommend that the Legislature direct the department to report at budget hearings on why non-matched General Fund expenditures are significantly increasing for community care facilities and support services and far outpacing the cost growth of expenditures that draw down federal matching funds. Budget Proposes Funding for RC Vendors Related to Enacted Minimum Wage Increase and Paid Sick Days Background. Two state-mandated policies, which begin implementation in 2015-16, impact workers employed by RC vendors: (1) an increase in the hourly minimum wage from $9 to $10 beginning January 1, 2016, pursuant to Chapter 351, and (2) the requirement to provide at least three paid sick days per year to employees beginning July 1, 2015, pursuant to Chapter 317. We note that DDS does not maintain data on the number of workers employed by RC vendors, their wages, or whether vendors provide paid sick leave to their employees. Governor’s Budget Proposal Related to Minimum Wage Increase. The Governor’s budget proposes to increase the rates paid to certain vendors that employ workers who currently earn less than $10 per hour. Because DDS does not maintain data on the workers who will be impacted by this increase, the Governor’s budget proposes budget-related legislation\u2014similar to the legislation enacted in 2014 for the increase in the minimum wage from $8 to $9\u2014that would establish a process whereby vendors provide documentation to either DDS or the RC on the number of employees currently earning less than $10 per hour in order to receive an appropriate rate increase. The Governor’s budget assumes that seven types of RC vendors will receive a rate increase\u2014community care facilities, day programs, habilitation services, transportation services, support services, in-home respite, and out-of-home respite\u2014at an estimated cost of $62.3 million ($35 million General Fund) in 2015-16. We note that it is the intent of the department to enable vendors that provide services outside of these seven areas to also request a rate increase as a result of the minimum wage increase, if necessary. An additional $1.9 million ($1.6 million General Fund) is budgeted to provide a wage increase to $10 per hour for account clerks and secretaries under the core-staffing formula, which determines the RC operations budget. The exact cost of funding the minimum wage increase is uncertain, since there are no existing data available on impacted workers. Governor’s Budget Proposal Related to Paid Sick Days. The Governor’s budget proposes to provide a rate increase to certain vendors that do not currently provide paid sick leave to their employees. Here again, DDS does not maintain data on the number of workers who will be impacted by the requirement of employers (including RC vendors) to provide at least three paid sick days per year. The Governor’s budget proposes budget-related legislation\u2014similar to the legislation proposed for the minimum wage increase\u2014that would establish a process whereby vendors provide documentation to either DDS or the RC on the number of employees that currently do not receive paid sick leave. The Governor’s budget assumes that nine types of RC vendors will receive a rate increase as a result of the paid sick leave requirement\u2014these vendors include the seven vendor types assumed to be affected by the minimum wage increase as well as medical facilities and miscellaneous services\u2014at an estimated cost of $25 million ($16 million General Fund) in 2015-16. Here again, the exact cost of funding the paid sick leave requirement is uncertain, since there are no existing data available on impacted workers. 2015-16 B U D G E T 30 Legislative Analyst’s Office www.lao.ca.gov Analyst’s Recommendation. We recommend that the Legislature approve the Governor’s proposed augmentations related to the minimum wage increase and the new paid sick leave requirement. We find the administration’s flexible approach of allowing impacted vendors to seek rate adjustments for the minimum wage increase and\/ or the paid sick leave requirement to be reasonable. However, because of the uncertainty related to the exact cost of funding the two proposals, we further recommend that the Legislature require a supplemental report from DDS\u2014similar to the report to be provided for the 2014 minimum wage increase\u2014on the actual General Fund cost for each of these proposals. This information would enable the Legislature to assess the degree to which the department’s estimating methodology needs to be revised in the event that similar policies are enacted in the future. State Auditor Finds Inefficiencies and Inconsistencies in Parental Fee Program The California State Auditor recently completed an audit in January 2015 (after the Governor’s budget proposal for DDS had been developed) of the department’s Parental Fee Program, which assesses a monthly fee to parents of children with developmental disabilities\u2014under the age of 18\u2014who receive 24-hour out-of-home care. As of June 2014, about 550 children with developmental disabilities were receiving out-of-home care. In 2013-14, the Parental Fee Program billed $1.9 million and collected $1.2 million in fees. The Auditor found that the process used by DDS to assess parental fees is riddled with unnecessary delays, lack of documentation, incorrect calculations, and inconsistent staff interpretations. The Auditor made a number of recommendations to improve the efficiency, consistency, and transparency of the Parental Fee Program. The department has provided a written response to the Auditor’s report, saying it agrees with the majority of the recommendations in the audit and is committed to implementing the recommendations. Analyst’s Recommendation. We recommend that the Legislature require DDS to report at budget hearings on its progress toward implementing the Auditor’s recommendations, and whether there are any budgetary implications associated with implementing the recommendations. Budget Proposes Expanding Capacity for IST Admissions at Porterville DC Background. Under state and federal law, all individuals who face criminal charges must be mentally competent to help in their defense, and individuals who are deemed IST have a right to receive training in order to potentially gain competency to stand trial for their alleged crime(s). A waiting list exists for individuals with developmental disabilities who have been deemed IST for charges related to a violent felony and\/ or a sex offense to receive competency training within the STP of Porterville DC. The STP serves individuals with developmental disabilities who have been involved with the criminal justice system, including individuals receiving competency training in order to stand trial for their alleged crime(s). At the time of this analysis, the IST waiting list for individuals with developmental disabilities awaiting the availability of competency training at Porterville DC includes 52 people, who have been in jail or juvenile hall for an average of 309 days. The courts have expressed concern that the long wait time is a potential violation of individuals’ due process rights. Governor’s Budget Proposal Responds to IST Waitlist for Individuals With Developmental Disabilities. The Governor’s budget proposes to provide additional staff as well as operating expenses and equipment needed to expand capacity for IST admissions within the STP of Porterville 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 31 DC by an additional 32 beds. An increase of $9 million General Fund above the 2014-15 enacted budget appropriation is proposed for 2014-15, with a total of $18 million General Fund proposed in 2015-16 to reflect the full-year cost of expanding capacity within the STP of Porterville DC. Analyst’s Recommendation. We recommend that the Legislature approve the Governor’s budget proposal to expand capacity by 32 beds within the STP of Porterville DC. The nature of the charges brought against individuals with developmental disabilities on the IST waitlist combined with the need to expand capacity relatively quickly to address the long wait time for competency training lead us to find that the proposed expansion of capacity within the STP of Porterville DC is appropriate. Budget Proposes Implementation of Improvement Plans at DCs In Order to Meet Federal Certification Requirements DCs Have Not Met Federal Certification Requirements. The DPH licenses health facilities and annually certifies them on behalf of CMS. Facilities must be certified in order to receive federal Medicaid funding. The three DCs\u2014 Fairview, Porterville, and Sonoma\u2014have recently been found in surveys conducted by DPH to be out of compliance with federal certification requirements for ICF-DD residential units. The facilities were found to have some common deficiencies, including inconsistent treatment plans, residents who were not adequately protected from abuse or harm, and inconsistent implementation of policies generally related to residents’ health, safety, and rights. Generally, when a DC is found to be out of compliance with federal certification requirements, it must implement a PIP that involves the following steps: (1) an independent review conducted by outside experts who develop an action plan that identifies the root cause of deficiencies and proposes action items to prevent the deficiencies, (2) DPH approval of the action plan and implementation by the facility, and (3) a recertification survey by DPH. With the exception of four ICF-DD units at Sonoma DC\u2014discussed immediately below\u2014all DCs have retained federal Medicaid funding while they undergo the PIP process. At Sonoma DC, Four ICF-DD Units Have Not Received Federal Funding. The DDS voluntarily withdrew four ICF-DD units at Sonoma DC from federal certification in January 2013 due to significant problems identified in these units. This action led to the loss of about $13 million in annual federal funding, which the state has backfilled with General Fund monies. Beginning in 2013-14, additional funding was provided to implement the PIP for Sonoma DC, which involved ongoing augmented staffing levels and other improvements. However, the 2014 DPH survey found that the remaining seven ICF-DD units at Sonoma DC\u2014 that had not previously lost federal funding\u2014did not meet federal certification requirements. At the time of this analysis, Sonoma DC is preparing to meet federal certification requirements in a February 2015 survey in order to retain federal funding for the seven ICF-DD units and restore federal funding for the four ICF-DD units. Governor’s Budget Implements PIPs at Fairview and Porterville DCs in Effort to Meet Federal Certification Requirements. In certification surveys conducted in 2013, DPH found that ICF-DD units at Fairview and Porterville DCs were out of compliance with federal certification requirements. At Fairview, all eight ICF-DD units, which receive an estimated total of $32 million in annual federal funding, were found to be out of compliance with federal certification requirements. At Porterville, all seven ICF-DD units in the general treatment area, which receive an estimated total of $28 million in federal funding, were found 2015-16 B U D G E T 32 Legislative Analyst’s Office www.lao.ca.gov to be out of compliance with federal certification requirements. The Governor’s budget proposes an increase of $12 million ($7.5 million General Fund) above the 2014-15 enacted budget appropriation in 2014-15 to implement PIPs at Fairview and Porterville DCs, including ongoing augmented staffing levels and one-time staff training. The full-year ongoing cost of augmented staffing levels is proposed at $12 million ($6.5 million General Fund) in 2015-16. (We note that a technical budgeting error understates the General Fund cost in 2015-16 by $1.2 million in the DC estimate.) At the time of this analysis, DPH had begun its 2015 survey of Fairview DC. The DPH survey of Porterville DC is expected to occur soon. All DCs at Risk of Losing Federal Funding. If the DCs do not meet certification requirements in 2015 DPH surveys, then DDS could lose as much as $90 million in annual federal Medicaid funding\u2014 in addition to the $13 million in withdrawn federal funding for the four units at Sonoma DC. In Figure 11, we provide a breakdown of federal funding at stake for ICF-DD units at each DC. Governor’s Budget Assumes Full Restoration and Retention of Federal Funding. The Governor’s budget assumes that federal funding for the four decertified ICF-DD units at Sonoma DC will be restored as of February 18, 2015. This outcome is contingent upon Sonoma DC successfully meeting federal certification requirements in a survey expected to occur prior to February 18th. The Governor’s budget also assumes that all other ICF-DD units at Sonoma, Fairview, and Porterville DCs will successfully meet federal certification requirements in 2015 DPH surveys and retain federal funding. Analyst’s Recommendation. We recommend that the Legislature approve the Governor’s proposal to implement the PIPs for Fairview and Porterville DCs, as we find this funding to be an appropriate attempt to meet federal certification requirements and retain federal Medicaid funding for the facilities in 2015 DPH surveys. We note, however, that the ongoing funding provided by the PIPs may not necessarily lead to the DCs continuing to meet federal certification requirements in later-year DPH surveys. We address the long-term future of DCs in the analysis below. Closure Plans Needed for Fairview and Sonoma DCs In the following section, we provide background on the historical role that DCs have played in the state of California and recent efforts to close DCs, federal and state policy regarding the integration of individuals with developmental disabilities into community settings, and community living options provided by DDS. We then provide our analytical findings on the fiscal merits of transitioning DC residents to community settings. We conclude with a recommendation for the Legislature on how it could move toward closure of Fairview and Sonoma DCs. Figure 11 Estimated Federal Funding for ICF-DD Units at DCs in 2014-15 (Dollars in Millions) DC Number of ICF-DD Units Annual Federal Funding at Stakea Fairview 8 $32 Porterville 7 28 Sonoma 7 30 Subtotals (22) ($90) Sonoma 4b 13 Totals 26 $103 a Federal certification requirements must be met in order to receive federal funding. b These ICF-DD residential units at Sonoma DC are not currently receiving federal Medicaid funding. ICF-DD = intermediate care facility for the developmentally disabled and DC = developmental center. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 33 Background Prior to Lanterman Act of 1969, DCs Were Only Out-of-Home Placement Option. The Lanterman Act of 1969 specifies the state’s intent to promote community integration, independent, productive, and normal lives, and stable and healthy environments for individuals with developmental disabilities. However, prior to the Lanterman Act, the state operated DCs as the primary out-of-home placement setting for individuals with developmental disabilities. The DCs were established as early as 1851 as state-run institutions for individuals with a wide-array of conditions, including developmental disabilities. At their peak in the late 1960s, the state housed about 13,000 individuals with developmental disabilities in eight DCs\u2014large institutions stretching over hundreds of acres with more than 100 buildings or structures at each site, enabling the institutions to be self-sustaining and generally autonomous from neighboring communities. Beginning in the early 1970s, with the enactment of the Lanterman Act and establishment of RCs, the population of the DCs began to decline as community services and supports for individuals with developmental disabilities began to proliferate. Today, DCs House Less Than 1 Percent of Total DDS Caseload. The state now operates three DCs\u2014Fairview, Sonoma, and Porterville\u2014and one smaller leased facility in Canyon Springs. The remaining DC residents\u2014about 1,100 individuals\u2014 are more likely to have behaviors or medical needs that can be more challenging to serve in the community. A small portion of these 1,100 individuals\u2014about 170 people\u2014reside in the STP of Porterville DC, which serves individuals with developmental disabilities who have been involved in the criminal justice system. With the exception of units within the STP of Porterville DC, all units at DCs are eligible to receive federal Medicaid funding. Agnews and Lanterman DCs Were Closed in the Last Decade. Since the early 2000s, the state has successfully closed Agnews DC\u2014over the five-year period from 2004-05 to 2008-09\u2014and Lanterman DC\u2014over the six-year period from 2009-10 to 2014-15. Unlike the closure of Stockton and Camarillo DCs in the late 1990s, the closure of Agnews and Lanterman DCs were the first instances in which DDS sought to transition all DC residents to community settings over the course of several years. In Figure 12 (see next page), we list the major closure activities over the roughly five years it has historically taken to close a DC and successfully transition consumers to the community. In order to begin the closure process for a DC, existing state law specifies that the department must submit a detailed closure plan to the Legislature no later than April 1 immediately prior to the fiscal year in which the plan begins implementation. Almost All Residents of Agnews and Lanterman DCs Successfully Transitioned to Community Settings. In the case of Agnews DC, all but 20 of the 386 consumers residing at the DC at the time the closure process began in 2004-05 were successfully transitioned to the community. The 20 consumers who did not transition to the community were transferred to other DCs. In the case of Lanterman DC, all 401 consumers who were residing at the DC at the time the closure was announced in January 2010 were successfully transitioned to the community. Most Lanterman DC residents who transitioned to the community moved to a specialized residential facility for specific needs that are nonmedical in nature or an adult residential facility for persons with special health care needs\u2014two residential options described further below. (We note that some residents of Agnews and Lanterman DCs passed away before they could transition to the community.) 2015-16 B U D G E T 34 Legislative Analyst’s Office www.lao.ca.gov Federal and State Policy Promotes Integrated Community Settings for Individuals With Developmental Disabilities. The federal Americans with Disabilities Act of 1990 and the Olmstead U.S. Supreme Court decision (1999) require the state to provide services and supports to individuals with developmental disabilities in the most integrated setting appropriate to meet their needs. At the state level, the Lanterman Act of 1969 first specified the state’s intent to provide services and supports to individuals with developmental disabilities in integrated community settings. In 2012-13, budget-related legislation imposed a moratorium on new admissions to DCs, with certain exceptions for individuals involved in the criminal justice system and consumers in acute crisis in need of short-term stabilization. In January 2014, the Task Force on the Future of DCs convened by the administration released a plan on the long-term future of DCs. The plan recognizes the need to reevaluate the role of DCs in light of the historical trend of individuals with developmental disabilities transitioning from institutional placements to community settings. The plan also recognizes the varying needs of existing DC residents and makes Figure 12 Major Activities DDS Undertakes to Close a DC Pre-Closure Activities 9 Announce Intention to Close DC 9 Hold Initial Meetings With Stakeholders 9 Hold Public Hearing on the DC Closure 9 Submit Closure Plan to Legislature by April 1 Prior to Fiscal Year That Closure Will First Be Implemented Year 1 9 Continue Communication With Stakeholders (Ongoing Throughout Closure) 9 Initiate Transition Planning for DC Residents, Including Individual Health Care Plans 9 Track the Development of Community Homes for DC Residents. 9 Communicate With RCs to Review Transition Status of DC Residents Years 2 and 3 9 Continue Transition Planning for DC Residents 9 Transition DC Residents to Community Settings as Resources Become Available (Ongoing Throughout Closure) 9 Continue Tracking the Development of Community Homes for DC Residents (Ongoing Throughout Closure) 9 Continue Communication With RCs to Review Transition Status of DC Residents (Ongoing Throughout Closure) Year 4 9 Complete Transition Planning for Remaining DC Residents Post-Closure Activities 9 Operation of Outpatient Clinic to Ensure Continuity of Services for DC Residents Who Have Transitioned to Community Settings 9 Facility Maintenance Until DC Is Transferred to Department of General Services as Surplus State Property DDS = Department of Developmental Services and DC = developmental center. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 35 recommendations for improving community services and supports, while retaining state- operated facilities for individuals who are in acute crisis or involved in the criminal justice system. Various Residential Options Are Available in the Community for Individuals With Developmental Disabilities. Individuals with developmental disabilities can live in a wide-array of residential options in the community, including homes and facilities that serve individuals with a greater or lesser acuity of needs\u2014either medical needs or other needs, such as those related to challenging behaviors. Generally, the following six residential options serve individuals who have greater medical needs in that they provide continuous or intermittent nursing care: (1) adult residential facilities for persons with special health care needs, (2) SNFs, and (3) four types of ICF-DDs, including nursing and habilitative facilities that are typically single-family homes serving no more than six consumers. Typically, for individuals who have needs that are nonmedical in nature of a lesser or greater acuity, the following residential options are available: (1) community care facilities, (2) specialized residential facilities, and (3) adult family homes. We note that two new models of care authorized by 2014 budget-related legislation include homes with enhanced behavioral supports and community crisis facilities. Generally, community homes or facilities serve four to six consumers in each residence. Finally, we note that consumers can receive supported living services in their own homes. In Figure 13, we list all of the community living options that are being utilized by former Lanterman DC residents. Higher Costs in Continuing to Operate DCs Average Annual Spending Per Consumer in DCs Has Increased Over Time to More Than $500,000 in 2014-15. There are significant fixed costs to operating DCs, given their massive size and scope of provided services\u2014from day programs to hospital care. In terms of facility maintenance, the department has deferred numerous upgrades and focused mostly on fire, life, and safety projects. Even these projects can cost millions of dollars because of the large physical size of the DCs. The fixed cost to run DCs primarily explains why the total average spending per DC consumer has grown as the population has declined\u2014as displayed in Figure 14 (see next page). Today, the average annual spending per DC consumer is estimated to be more than $500,000 (total funds). In calculating the average amount of annual spending per DC consumer, we have considered DC operating costs but not capital outlay investments made at the DCs. Figure 13 Community Living Options Used by Former Lanterman Developmental Center Residents Residential Option Former Lanterman DC Residents Specialized residential facility 238 Adult residential facility for persons with special health care needs 61 Community care facility 21 ICF-DD-nursing 9 Long-term sub-acute facilitya 8 ICF-DD-habilitative 7 Supported living services 7 Family home\/other 5 Adult family home 3 Total 359 a Individuals may be placed in a long-term sub-acute facility after a hospitalization due to a greater acuity of needs. ICF-DD = intermediate care facility for the developmentally disabled. 2015-16 B U D G E T 36 Legislative Analyst’s Office www.lao.ca.gov For DC residents\u2014almost all of whom are Medi-Cal enrollees\u2014the General Fund typically provides at least half the costs of their care and the federal government pays for the remainder. Average Annual Spending for Former Lanterman DC Residents Now Living in the Community Is Less. In order to compare the average annual spending per DC consumer to the average annual spending for similar consumers in the community, we have provided in Figure 15 the average annual spending for Lanterman DC residents who recently transitioned to the community. Because total annual costs for consumers vary significantly by residential option, we have provided the average annual cost per consumer by residence type, using expenditure data for former Lanterman DC residents who have been in the community for at least 12 months\u2014179 of the total 359 consumers who transitioned from Lanterman DC. As Figure 15 shows, average annual spending per consumer varies greatly by residence type\u2014from about $75,000 to $300,000 (total funds). However, in all cases, the average annual cost to provide care to a former Lanterman DC resident is far less expensive in a community setting than it would be in a DC. The total average spending displayed in Figure 15 is paid for with a combination of General Fund monies and federal Medicaid funding in almost all cases. The General Fund provides for roughly half the costs and the federal government pays for the remainder. We also note that the department incurs upfront development costs\u2014fully paid for by the General Fund\u2014when it establishes new residential options for DC residents transitioning to the community, including acquisition of a property, renovation to meet the needs of individuals with developmental disabilities, and provider start-up costs (such as staff training and supplies). For the Lanterman DC closure, the department reports that approximately $40 million General Fund was spent to develop 92 homes. There was not adequate information available to allocate these costs to the different types of residences shown in Figure 15. Even if these upfront development costs were to be incorporated into the average annual spending per consumer displayed in Figure 15, it would not fundamentally change our fiscal analysis that it is considerably more cost-effective to provide care to former Lanterman DC residents in community settings. Analyst’s Recommendation Require DDS to Report at Budget Hearings on Long-Term Plan for Fairview and Sonoma DCs In its plan for the long-term future of DCs, the Task Force on the Future of DCs convened by the administration recognized the need to maintain state-operated facilities for individuals in acute crisis or involved in the criminal justice system. We agree with the task force on the need Figure 14 Average Annual Spending Per DC Consumer Has Increased Over Time a Estimated costs. Total Funds Note: Our calculation of average annual spending incorporates developmental center (DC) operating costs, but not capital outlay investments made at the DCs. 100,000 200,000 300,000 400,000 500,000 $600,000 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15a 15-16a 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 37 to maintain state-operated facilities for individuals invovled in the criminal justice system and find that Porterville DC should continue to operate for this purpose. However, we find significant fiscal and policy justification for closing Fairview and Sonoma DCs and seeking to transition all residents in these facilities to community settings. On a fiscal basis, we find that providing services and supports to former DC residents in community settings is cost-effective. On policy grounds, the provision of services and supports in integrated community settings is consistent with federal and state policy. We therefore come to the conclusion that DDS should close both Fairview and Sonoma DCs within ten years. We would defer to the department’s judgment as to which DC should be closed first. We recognize that DDS may not be in a position to submit a closure plan for Fairview or Sonoma DC to the Legislature by April 1, 2015, as required under existing state law in order to begin closure activities in 2015-16. We therefore recommend that the Legislature require DDS to report at budget hearings on its long-term plan for Fairview and Sonoma DCs. Upon considering the department’s testimony at budget hearings, the Legislature may seek to enact legislation providing a closure timeline for Fairview and Sonoma DCs. Figure 15 Average Annual Spending for Former Lanterman DC Residents in Community Settings Residence Type Average Annual Spending Per Consumer (Total Funds)a Number of Consumers Supported Living Services $301,178 3 Typical services include adult day care, work programs, behavior analyst services, and transportation. Specialized Residential Facility\u2014Health 299,918 2 Typically does not include other services. Adult Residential Facility for Persons With Special Health Care Needs 245,774 14 Typical services include day programs and supplemental staffing. Specialized Residential Facility\u2014Habilitation 180,926 152 Typical services include community integration training programs, personal assistance, supplemental staffing, day programs, behavior management programs, and transportation. Adult Family Home 165,674 2 Typical services include transportation. Adult Residential Facility 75,722 6 Typical services include supplemental staffing, day programs, behavior management programs, and transportation. a Average annual spending includes all service costs (including housing) as reported by the Department of Developmental Services, with adjustments to include Medi-Cal managed care costs and\u2014for consumers receiving supported living services\u2014In-Home Supportive Services costs. We have not accounted for other generic services that may be provided by local entities. Note: The average annual spending displayed above only reflects costs for individuals for which the department has at least 12 months of expenditure data\u2014179 of the total 359 consumers who transitioned from Lanterman DC to community settings. To the extent that individuals who recently transitioned to community settings (less than 12 months ago) have lower or higher annual costs than those for whom we have displayed spending, the average annual spending for all Lanterman DC residents who transitioned to the community could be lower or higher, respectively. DC = developmental center. 2015-16 B U D G E T 38 Legislative Analyst’s Office www.lao.ca.gov CCL QUALITY ENHANCEMENT AND PROGRAM IMPROVEMENT The Community Care Licensing (CCL) division within DSS oversees the licensing of various facilities that can be grouped into three broad categories: child care, children’s residential, and adult and senior care facilities. The division is also responsible for investigating any complaints lodged against these facilities and for conducting inspections of the facilities. The state monitors approximately 66,000 homes and facilities, which are estimated to have the capacity to serve over 1.3 million Californians. Additionally, DSS contracts with counties to license an additional 8,700 foster family homes and family child care homes. Background CCL Staffing and Facility Monitoring. The roughly 66,000 homes and facilities statewide directly under the regulatory purview of CCL are primarily monitored and licensed by just over 460 licensing analysts. These licensing analysts are located in 25 regional offices throughout the state and are responsible for conducting annually over 24,000 inspections and 14,000 complaint investigations. Current practice is for CCL to conduct random inspections on at least 30 percent of all facilities annually, and law requires each facility to be visited no less than once every five years. Additionally, approximately 10 percent of facilities are required to be inspected annually as a requirement of federal funding or due to poor compliance history. Although the CCL has had difficulty meeting these time frames in the past, the division is generally meeting these time frames currently. Past Budget Reductions Have Increased the Times Between Annual Visits. Prior to 2002-03, most facilities licensed by CCL were required to be visited annually. Visits were used to check for compliance with health and safety requirements designed to protect those in the care of CCL-licensed facilities. Budget-related legislation enacted in 2003 lengthened the intervals between visits for most facilities from one year to five years. Additionally, the legislation included trigger language that increased the percentage of annual random inspections\u2014starting with 10 percent of facilities\u2014based on the number of citations issued in the prior year. CCL Now Relies Significantly on Complaints to Identify Noncompliance. The extended interval between visits has made CCL more reliant on complaints to identify health and safety violations. This means CCL is primarily identifying noncompliance after the fact\u2014frequently as the result of a complaint where harm has already occurred, rather than identifying and addressing risks that may not have yet resulted in harm. The concern is that relying on complaints may be less effective at protecting the health and safety of clients than a system that detects and addresses issues proactively. Currently, CCL investigates over 14,000 complaints involving licensed care annually. Recent Issues at Licensed Facilities Have Gained Attention. Recent health and safety incidents at licensed facilities have gained the attention of the media and the Legislature. These include incidents of neglect and abuse, as well as evidence in general of inconsistent and inadequate oversight, monitoring, and enforcement of licensing standards. In response to the health and safety issues discovered at facilities under the regulatory purview of CCL, the 2014-15 Governor’s Budget proposed and the Legislature approved a 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 39 comprehensive plan to reform the CCL program. We now turn to an update of the status of the 2014-15 reforms to improve the CCL division. 2014-15 Quality Enhancement and Program Improvement Update 2014-15 Budget Act Funds CCL Quality Enhancements. The 2014-15 spending plan funds the Governor’s proposal for quality enhancements and improvements in CCL. This includes 71.5 positions and $5.8 million General Fund to (1) create a more robust training program for licensing inspectors, (2) create a quality assurance unit that is trained to detect instances of systemic noncompliance, (3) centralize and make more efficient the application and complaint intake process, and (4) create some medical capacity at DSS to begin considering the increasing medical needs of those in assisted living facilities. The creation of the quality assurance unit was intended in part to address the historical lack of systematic enforcement data to help target enforcement resources to cases with the greatest likelihood of improving compliance. For instances when the license of a facility is suspended or revoked, budget- related legislation allows for the department to appoint a qualified temporary manager or receiver to: (1) assume responsibility of the operation of the facility and assist in bringing it into compliance, (2) facilitate the transfer of ownership of the facility to a new licensee, or (3) coordinate and oversee the transfer of clients to a new facility if the facility is closing. (Refer to our February 20, 2014 report, The 2014-15 Budget: Analysis of the Human Services Budget, for a comprehensive description of the 2014-15 CCL budget proposal that was ultimately approved by the Legislature.) Status of 2014-15 Reforms. The DSS has filled the vast majority of positions authorized as part of the 2014-15 Budget Act for the CCL quality enhancements. Several components of the 2014-15 spending plan are now fully implemented, while in other cases the department is still hiring and training its staff in preparation for implementation. Specifically, the greatest advances have been made in the provision of more robust training for managers and licensing analysts and in establishing the statewide complaint hotline, which is now operational. While staffing resources for the quality assurance unit and centralized application processing have been hired, these staff are still undergoing training before the units become operational. On the other hand, the department has not yet filled the nurse practitioner position authorized to assist in the oversight of a population that is increasingly medically fragile. Legislative Intent to Increase Inspection Frequency. The final 2014-15 budget package included statutory language specifying that it is the intent of the Legislature to, over time, increase the frequency of CCL-regulated facility inspections to annually for some or all facilities. Governor’s Proposal and LAO Analysis In response to the intent language noted above, the Governor’s budget proposes a multiyear, multistage plan to further reform the CCL program. The proposal includes an increase of 28.5 positions (13 two-year limited-term positions) and $3 million General Fund in 2015-16 to (1) hire and begin training staff in preparation for an increase in the frequency of inspections for all facility types beginning in 2016-17 and (2) make various other changes intended to strengthen enforcement capacity and improve the quality of care delivered at facilities under the regulatory purview of CCL. The proposed reforms would go into effect incrementally through 2018-19. The proposal includes a request for additional resources in budget years beyond 2015-16 to fully implement 2015-16 B U D G E T 40 Legislative Analyst’s Office www.lao.ca.gov the proposal. When fully implemented, the proposal would add a total of 145 new permanent positions within DSS at a cost of $37.3 million General Fund. Below, we describe the main components of the proposal and provide our analysis and recommendations in conjunction with each component. Overall, we find the Governor’s proposed multiyear plan addresses legislative interest in increasing inspection frequency. However, we find it premature to approve the multiyear plan in totality\u2014in particular the plan’s proposal to further increase inspection frequencies in future years\u2014and recommend the Legislature approve only the first stage of the proposal at this time. Multiyear, MultiStage Plan to Increase Inspection Frequency The Governor’s proposal would increase the frequency of inspections from at least once every five years to at least once every three years or more frequently depending on the facility type. To implement this component of the plan, the Governor requests a total of 133 positions, mostly licensing analysts. The Governor envisions hiring staff beginning in 2015-16 (with five positions) and incrementally through 2018-19 to correspond with the increased workload as the various stages of the proposal go into effect. Once fully implemented, child care facilities would be inspected every three years, children’s residential care facilities would be inspected every two years, and adult and senior care facilities would be inspected annually. The CCL division would continue to conduct random inspections on at least 30 percent of all facilities annually as is current practice. The changes to inspection frequency would go into effect in stages as follows: Stage 1 of Increased Inspection Frequency: Sets Inspection Frequency for All Facility Types to at Least Once Every Three Years. Beginning in January 2017, the inspection frequency for child care, children’s residential care, and adult and senior care facilities would be set at no less than once every three years. Stage 2 of Increased Inspection Frequency: Increases Inspection Frequency for Residential Care Facilities to at Least Once Every Two Years. Beginning January 2018, the inspection frequency for children’s residential care and adult and senior care facilities would increase to no less than once every two years. The child care facilities would continue with an at least once every three years inspection frequency. Stage 3 of Increased Inspection Frequency: Increases Inspection Frequency for Adult and Senior Care Facilities to at Least Annually. Beginning January 2019, adult and senior care facilities would be inspected at least annually. The children’s residential care facilities would continue with an at least once every two years inspection frequency. Figure 16 compares current law to the Governor’s proposed inspection requirements by facility type and over time. Increasing Inspection Frequency Could Increase Ability to Discover Potential Threats to Residents Before Harm Occurs. Inspections that are more frequent could help overcome some of the recent health and safety incidents discovered at facilities under the regulatory purview of CCL, including incidents of neglect and abuse. Prolonged intervals between inspections allow noncompliance to occur and remain unaddressed, placing children, adults, and seniors at risk, while more frequent inspections could provide more consistent and 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 41 adequate oversight and enforcement of licensing standards. There has been concern that five-year intervals between inspections are too lengthy and place vulnerable clients at risk. (Most states inspect such facilities more frequently than at least once every five years.) Although three-year inspection intervals seems like a reasonable minimum standard for inspection frequency moving forward, the optimal inspection interval is difficult to identify and likely varies among facilities. Multiyear Plan Should Better Focus Additional Compliance Efforts in Manner That Maximizes Outcomes. We understand the Governor’s proposal to set inspection frequencies based on three very broad categories of facility type is driven in part by the degree of informal oversight available at each facility type. Informal oversight refers to the feedback clients or clients’ families can offer providers or state officials regarding realized or potential threats to health and safety at CCL-licensed facilities. On the basis that child care facilities receive the highest level of informal oversight through the flow of parents in and out of facilities on a daily basis, the administration is of the view that parents’ ability to identify risks and file complaints justifies the longer interval between inspections for this facility type. By comparison, the administration indicates adults and seniors are the most vulnerable as they receive the least amount of informal oversight and therefore require the most frequent inspections. While the Governor’s approach has a certain appeal, it may not be the most cost-effective way to allocate enforcement resources based solely on facility type. For example, a child care center facing staffing challenges in a tight labor market may have chronic problems complying with health and safety standards while a Residential Care Facility for the Elderly (RCFE) facing fewer staffing challenges may have a longstanding history of providing a safe environment for its clients. In this example, the Governor’s proposal would require a cost-ineffective allocation of enforcement resources\u2014annual inspections for the well-performing RCFE and inspections at three-year intervals for the poor-performing child care center. Rather than setting inspection frequency based solely on broad facility type, as proposed by the Governor, we recommend that the choice of increased inspection frequencies (above the once every three years level) be based on data that target resources to individual facilities with the greatest likelihood of improving compliance. We note that lengthening inspection intervals (still no less than once every three years) for well-performing facilities\u2014through a model that uses data to help Figure 16 Inspection Frequency: Current Law and Governor’s Proposal, by Facility Type Facility Type Current Law Governor’s Proposal Stage 1: January 2017 Stage 2: January 2018 Stage 3: January 2019 Inspections must occur at least once every. . . Child care facilities 5 years 3 years 3 years (unchanged from stage 1) 3 years (unchanged from stage 1) Children’s residential care facilities 5 years 3 years 2 years 2 years (unchanged from stage 2) Adult and senior care facilities 5 years 3 years 2 years 1 year 2015-16 B U D G E T 42 Legislative Analyst’s Office www.lao.ca.gov the department target enforcement resources to cases with the greatest likelihood of compliance problems\u2014creates the flexibility and capacity for licensing analysts to visit poor-performing facilities even more frequently than is proposed in the Governor’s plan. (In other words, annual inspections could be too infrequent for the chronically poor performers.) We also believe that the proposal to increase inspection frequency beyond once every three years is premature. That is, the outcomes from recent reforms\u2014just in the beginning stages\u2014will need to be evaluated in order to assess the need for adjusting inspection frequency. We therefore recommend the Legislature approve stage one of the Governor’s proposal, setting a minimum inspection frequency for all facility types to at least once every three years, while directing DSS to develop a data-driven model to determine the appropriate frequency of inspections for the future stages of the Governor’s plan. The data gathered through the new quality assurance unit, as well as the trends observed through the centralized application and statewide complaint hotline, could help determine how best to target enforcement resources in a cost-effective way for subsequent stages. Requested Resources Based on Outdated Workload Study, Staffing Levels Necessary to Implement Plan Uncertain. The requested resources for the Governor’s multiyear plan are based on a 2001 workload study on licensing analysts. Yet the nature of a licensing analyst’s workload has changed considerably over the last 14 years. In some cases workload has increased, such as through the addition of new statutory responsibilities. On the other hand, the introduction of the Key Indicator Tool\u2014a measurement tool that is designed to measure compliance with a small number of licensing standards to predict compliance with all of the remaining licensing standards\u2014has reduced workload for licensing analysts. The net effect of these changes on licensing analysts’ workload is uncertain. Therefore, the 2001 study may no longer accurately reflect a licensing analyst’s workload. Only once a revised study is available would DSS be able to assess the actual level of staffing resources necessary to increase the frequency of inspections as proposed. The DSS has been working towards a revised workload study. While the study was originally expected to be completed by December 2014, it is now expected to be delayed by more than one year. Given that the final results from the workload study will not be available until after the conclusion of the 2015-16 budget process, we recommend approval of the requested first-stage resources based on the existing standards, as we think moving towards an increased level of inspection frequency for facilities beginning in 2016-17 is consistent with legislative intent. We note that the department may be able to update its requested resources at the May Revision based on preliminary findings from its revised workload study. Should such information be available, we recommend that it be presented to the Legislature at May Revision to enable it to evaluate whether any budget adjustments are appropriate. We also recommend that the Governor’s budget proposal in 2016-17 reflect the findings of the revised workload study and incorporate the budget adjustments necessary to conform to the study. Additional Changes to Inspection Frequency Likely Necessary in Future Years to Comply With Federal Child Care and Development Block Grant (CCDBG) Requirements. The recent reauthorization of the federal CCDBG requires annual inspections of child care facilities as a requirement of continued federal funding to states. The administration is currently awaiting additional federal guidance on this, although no state action to conform to the federal law changes appears necessary in 2015-16. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 43 Provides Resources to Address Complaint Backlog As described above, CCL has experienced an increase in complaints since budget-related legislation lengthened the intervals between visits. The department indicates the increase in complaints\u2014coupled with reductions in staff in recent years that have not been fully remedied by the elimination of furloughs, hiring of replacement staff, and the use of overtime\u2014have created a complaint backlog. Point-in-time data from January 2015 show 2,450 complaints remained unresolved beyond the 90-day period CCL allots for investigating and addressing substantiated complaints. These are referred to as overdue complaints. Figure 17 provides a breakdown of open and overdue complaints by facility type as of January 2015. The Governor’s 2015-16 budget proposes 13 two-year limited-term licensing analyst positions to address the complaint backlog. Limited-Term Resources to Address Complaint Backlog Seems Reasonable. We find that the proposed positions would help (1) address the risk to clients that prolonged complaint investigations represent, (2) make programs current on addressing existing complaints, and (3) keep programs within the requirement to close complaint cases within 90 days going forward. The DSS has increasingly had to dedicate resources to responding to complaints driven in part by the decreased inspection frequency. This is a vicious cycle that is exacerbated over time so that DSS now has a backlog of complaints and reduced ability to complete inspections. Clearing the backlog would free resources to engage in proactive enforcement rather than responding to violations where harm may have already occurred. Once the backlog is cleared, we expect that recent changes to the CCL program and components of the 2015-16 budget proposal, if approved, would prevent a return of overdue complaints. The more frequent facility visits and expansion of resources that support providers between visits, such as the technical assistance unit, are likely to reduce the instances of noncompliance and therefore lead to a smaller number of complaints going forward. For these reasons, we recommend approval of the proposed use of limited-term positions to address the backlog in overdue complaints. Provides Nurse Consultants to Monitor Residents’ Medical Needs Historically, RCFEs have been considered differently from skilled nursing facilities (SNFs) because their purpose is to serve those with less acute medical needs than those who would qualify for SNF placement. However, as the state’s population has aged, and the general state policy goal of caring for people in the least restrictive setting has been emphasized, the role of the RCFEs has also changed to include those with more acute medical conditions. As a result, the CCL division has had to assess on a case-by-case basis whether residents can safely remain within Figure 17 Community Care Licensing (CCL) Division’s Open and Overdue Complaints January 2015 Facility Type Total Open Complaints Complaints Open Over 90 Daysa Child care 550 65 Children’s residential care 1,615 820 Adult and senior care 2,505 1,565 Totals 4,670 2,450 a CCL allots a 90-day period for investigating and addressing substantiated complaints. Complaints that remain open beyond 90 days are referred to as overdue complaints. 2015-16 B U D G E T 44 Legislative Analyst’s Office www.lao.ca.gov a CCL-licensed facility rather than being cared for in a SNF. Currently, DSS contracts for this clinical expertise. The Governor’s 2015-16 budget proposes position authority for 1.5 nurse consultant positions to replace the use of contract staff for this purpose. The nurse consultants would be strategically located throughout the state so as to easily be deployed when licensing analysts need the assistance of medical experts. Reasonable for State Staff to Assess Medical Needs of Clients. Ensuring that clients are appropriately treated is critical to the long-term health and wellness of clients. The use of contract staff was reasonable at an earlier time when there was only relatively infrequent and periodic need for medical expertise. However, as the population of CCL-licensed facilities has become more medically fragile, licensing investigators have had to increasingly leverage the medical expertise of the contract staff to assess the appropriate placement of clients. Since assessing the medical needs of clients has become an ongoing workload, there are benefits to developing in-house state expertise in this area. We therefore recommend approval of the proposed nurse consultant positions. Expands Resources to Support Providers and Clients The Child Care Advocate Program (CCAP)\u2014 formerly the Child Care Ombudsman Program\u2014 was established in 1984 to provide information to the general public and parents on child care licensing standards and regulations. The program’s goal was to improve the level of engagement of client-families and advocates so as to ultimately enhance the quality of care delivered at child care facilities. The Technical Support Program (TSP) was established in 1992 to (1) assist residential care providers who were experiencing difficulty in complying with licensing standards and in achieving and maintaining compliance with licensing requirements, and (2) offer trainings to providers in specific areas where licensing analysts identified chronic noncompliance. Budget pressures in recent years reduced staffing for CCAP to two positions while eliminating TSP. The Governor’s 2015-16 budget proposes position authority to add two positions to CCAP and provide three positions for TSP to expand the availability of technical assistance to providers. These resources would be available to respond to compliance-related questions and requests from providers and the public-at-large. Detection and Remediation of Compliance Problems Through Technical Assistance Could Be More Efficient Than Depending on Complaints. We find that the requested additional resources to provide more up-front guidance to providers (that is, prior to an enforcement action being taken) are a good investment. Focusing on detection and remediation of compliance problems through technical assistance to facilities could be a more efficient way to address compliance problems that relying on complaints. Providing a link between facilities and the public-at-large through the advocacy program could foster constructive engagement between clients and providers and help encourage compliance with standards. For these reasons, we recommend approval of the Governor’s budget proposal for five positons to expand CCAP and reestablish TSP. Implements Southern California Training Unit for Licensing Analysts, Expands Refresher Training The CCL division operates a training unit in Northern California that is responsible for training all new managers and licensing analysts at the time of hire. Additional training is provided as needed so that licensing inspectors remain current on regulatory requirements as statute changes. The division does not anticipate being able to absorb 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 45 the increase in demand for training from the newly hired licensing analysts. In addition, the CCL division is interested in offering more robust ongoing training to licensing analysts based on special topics of relevance. The Governor’s 2015-16 budget proposes four positions to establish a new Southern California training unit and to extend ongoing training offerings to current managers and licensing analysts. Expansion of Training Unit, Establishing Refresher Training Courses Seem Reasonable. We agree that additional resources are necessary to train the influx of new licensing analysts anticipated as the frequency of required visits increase for CCL-licensed facilities and that a more robust ongoing training program would be valuable. Establishing a Southern California unit would make trainers more readily available throughout the state to offer licensing inspectors tailored support at their respective regional offices. Additional trainings could also improve the consistency and adequacy of the enforcement of licensing standards. The quality assurance unit, statewide complaint hotline, and centralized application unit could be valuable sources of data to help identify areas where compliance may be most problematic and be a source of training topic ideas. For these reasons, we recommend approval of the Governor’s budget proposal for the Southern California training unit and expanded training offerings. LAO Overall Take on the Governor’s Proposal Overall, we find that the Governor’s proposal is responsive to the Legislature’s interest in decreasing the time interval between required inspections. Increasing the inspection frequency for all facility types to at least once every three years (the first stage of the Governor’s proposal) is a reasonable first step. However, future-year changes to further increase inspection frequencies should be based on the need for targeted inspections of the most problematic facilities as identified by data analysis rather than solely on broad facility type as proposed by the Governor. We are not recommending a reduction in resources for the department’s enforcement efforts. Rather, our recommended approach is intended to allocate enforcement resources more cost-effectively. The other components of this proposal build on the comprehensive reforms approved in 2014-15 and are a reasonable response to identified failings of CCL, including the recent health and safety issues uncovered in facilities licensed by CCL. Finally, we have concerns that the Governor’s request for staffing resources is based on an outdated workload study. To the extent possible, the approved level of staffing should reflect the findings from an updated workload study currently in progress. Accordingly, we recommend that the Legislature: Approve stage one of the Governor’s proposal to ramp up the inspection frequency\u2014setting a minimum inspection frequency for all facility types to at least once every three years beginning in 2016-17. Given that the final results from the workload study will not be available until after the conclusion of the 2015-16 budget process, we recommend approval of the first-stage resources based on the 2001 workload study as we think moving towards an increased level of inspection frequency for facilities beginning in 2016-17 is consistent with legislative intent. Should preliminary findings from the revised workload study be available by the May Revision, we recommend that these be provided to the Legislature to evaluate whether any budget adjustments are appropriate. (The first phase of 2015-16 B U D G E T 46 Legislative Analyst’s Office www.lao.ca.gov the Governor’s proposal includes 57.5 managers and licensing analysts and various support positions across 2015-16 and 2016-17.) Reject the proposal to increase inspection frequency beyond stage one at this time. Direct DSS to develop a data-driven model to determine inspection frequency so that future stages of the Governor’s plan target inspections to individual facilities with the greatest likelihood of improving compliance. Approve the requested 13 two-year, limited-term positions and associated expenditure authority to address the backlog in overdue complaints. Approve the requested positon authority for 1.5 nurse consultant positions to provide medical expertise to licensing analysts. Approve the requested positon authority for five positons to expand CCAP and reestablish TSP. Approve the requested four positions and associated expenditure authority to establish a new Southern California training unit and to extend ongoing training offerings to current managers and licensing analysts. CALWORKS The CalWORKs program was created in 1997 in response to 1996 federal welfare reform legislation that created the federal Temporary Assistance for Needy Families (TANF) program. CalWORKs provides cash grants and welfare- to-work services to families whose income is inadequate to meet their basic needs. Cash Assistance. Grant amounts vary across the state and are adjusted for family size, income, and other factors. For example, a family of three in a high-cost county that has no other income currently receives a cash grant of $670 per month (equivalent to 40 percent of the FPL). A family in these circumstances would generally also be eligible for food assistance through the CalFresh program in the amount of $503 per month and health coverage through Medi-Cal. Work Requirement and Time Limit. As a condition of receiving aid, able-bodied adults are generally subject to a work requirement, meaning that they must be employed or participate in specified activities\u2014known as welfare-to-work activities \u2014intended to lead to employment. CalWORKs cases that include individuals subject to the work requirement are entitled to receive services to help meet the requirement, including subsidized child care and reimbursement for transportation and certain other expenses. Adults who fail to comply with the work requirement without good cause are sanctioned by being removed from the calculation of their family’s monthly grant, resulting in decreased cash assistance (generally by about $130). Adults are also generally limited to a cumulative lifetime maximum of 48 months of assistance in CalWORKs. Adults that exhaust 48 months of cash assistance are similarly removed from the calculation of their family’s monthly grant, resulting in decreased cash assistance. (The family would continue to receive a reduced grant for children that remain eligible.) 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 47 Funding. CalWORKs is funded through a combination of California’s federal TANF block grant allocation ($3.7 billion annually), the state General Fund, and county funds (including significant amounts spent by counties as a result of state-local realignment). In order to receive its annual TANF allocation, the state is required to spend an MOE amount from state and local funds to provide services to families eligible for CalWORKs. In recent years, this MOE amount has been $2.9 billion. While the CalWORKs program makes up a majority of TANF and MOE spending, the TANF block grant is used to fund some programs in addition to CalWORKs, and some General Fund expenditures outside CalWORKs are counted toward the MOE requirement. Budget Overview As shown in Figure 18, the Governor’s budget proposes $5.8 billion in total funding for the CalWORKs program in 2015-16, a net increase of $116 million (2 percent) over estimated current-year funding. This increase reflects the net effect of increased costs for cash grants, employment services, child care, and other program activities, offset by a small decrease in administrative costs. These year-over-year changes are largely the result of (1) reduced grant costs from a declining caseload, partially offset by expected increased utilization of employment services and child care, and (2) the implementation of program changes enacted in prior years, most significantly a 5 percent grant increase that is scheduled to take effect in April 2015, the cost of which will more than offset grant savings resulting from a declining caseload. Within the total funding amount, the Governor’s budget proposes $663 million in General Fund support for CalWORKs, an increase of $13 million (2 percent) above estimated current-year levels. Analyst’s Budget Assessment The Governor’s 2015-16 CalWORKs budget proposal continues current-year policy and makes adjustments only to reflect costs and savings associated with changes in caseload and ongoing implementation of previously enacted policy changes. We find that the administration’s estimates are reasonable and consistent with current policy. The following sections review the administration’s caseload projections for CalWORKs and describe how implementation of some recent policy changes will affect the program’s budget. Caseload Projections Appear Reasonable Gradual CalWORKs Caseload Decline Expected to Continue During Budget Year. The CalWORKs caseload has been consistently declining since 2011-12 at an average rate of about 2 percent annually, primarily due to an improving labor market. The budget estimates that the average monthly number of CalWORKs Figure 18 CalWORKs Budget Summary All Funds (Dollars in Millions) 2014-15 Estimated 2015-16 Proposed Change From 2014-15 Amount Percent Cash grants $3,201 $3,242 $41 1% Employment services 1,422 1,464 41 3 Stage 1 child care 330 362 32 10 Administration 533 523 -10 -2 Othera 170 181 12 7 Totals $5,656 $5,771 $116 2% a Excludes federal Temporary Assistance for Needy Families funds to provide financial aid for certain low-income students in the Cal-Grant program. 2015-16 B U D G E T 48 Legislative Analyst’s Office www.lao.ca.gov cases in 2014-15 will be 543,557\u20141.3 percent lower than in the previous year. The average monthly number of cases is projected to further decline by 1.9 percent in 2015-16 to 533,335 cases. We find the administration’s total caseload estimate reasonable and consistent with our expectations of a long-term downward caseload trend as the labor market continues to improve. Utilization of Supportive Services Expected to Increase. While the total CalWORKs caseload is estimated to decline in both 2014-15 and 2015-16, the number of cases utilizing employment services and subsidized child care is assumed by the budget to increase somewhat in both of these years. In 2014-15, increased utilization of these services is primarily the result of the ending of a prior policy that exempted certain CalWORKs cases with young children from the work requirement. Going forward, utilization may continue to increase. It is difficult to assess whether utilization will continue to increase in 2015-16 based on our review of available data. Additional data will be available to refine the estimate at the time of the May Revision and we will report to the Legislature at that time whether adjustments are warranted. Implementation of Recent Program Changes Continues Governor’s Proposal Funds Full-Year Costs of Previously Approved Grant Increase. . . As part of the 2014-15 budget package, the Legislature approved a 5 percent CalWORKs grant increase that will take effect in April 2015. For a family of three in a high-cost county that has no other income, the amount of cash assistance received will increase to $704 per month (42 percent of FPL), while the statewide average grant is expected to rise to $507 per month during 2015-16. The administration estimates that the cost of providing this grant increase from April through June of 2015 is $44 million, with a full-year cost in 2015-16 of $175 million. Pursuant to state law, this increase is to be funded first with local funds allocated from the Child Poverty and Family Supplemental Support subaccount (hereafter Child Poverty subaccount ), which is part of the 1991 realignment funding structure. The General Fund is required to pay for any shortfall when Child Poverty subaccount funds are insufficient. The Governor’s proposal estimates that $101 million in Child Poverty subaccount funds will be available to pay the cost of this increase in 2015-16, with the General Fund covering the remaining $73 million. . . .And Does Not Assume Further Grant Increases Through Statutory Mechanism. Current law requires that CalWORKs grants be automatically increased in years when Child Poverty subaccount funds are sufficient to cover the cost of such an increase, as well as the ongoing cost of all previous increases provided from Child Poverty subaccount funds. The Governor’s proposal assumes that no automatic grant increase will be provided in 2015-16 since Child Poverty subaccount funds are insufficient to cover the ongoing cost of prior grant increases, including the April 2015 increase described above. We estimate that Child Poverty Subaccount funds will not be sufficient to provide an additional grant increase until 2017-18. Some CalWORKs Recipients Will Reach 24-Month Time Limit During 2015. . . As part of the 2012-13 budget package, the Legislature enacted two significant changes to the CalWORKs work requirement. First, the state rules that specify which activities adult recipients may participate in were changed to provide greater flexibility to address their barriers to employment. Second, a new 24-month limit on adult eligibility for CalWORKs assistance under the more flexible work requirement was introduced. Once 24 months of assistance under the more flexible work requirement have been exhausted, adult recipients 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 49 may continue to receive assistance (up to the maximum lifetime limit of 48 months), but must meet a relatively less flexible work requirement that closely mirrors the work requirement in federal TANF law. The federal work requirement places heavier emphasis on employment, as opposed to some other activities such as education, training, or mental health and\/or substance abuse treatment. As noted above, recipients that fail to meet the applicable work requirement (either the flexible state requirement available for 24 months or the less flexible federal requirement that applies thereafter) are sanctioned by having their family’s grant reduced by the adult portion. Months counted toward the 24-month limit need not be consecutive, such that adults that participate in activities that meet the federal requirement in any given month will not have that month counted against their limit. A county may also extend the time available to participate under flexible state rules for 20 percent of cases that have passed the 24-month limit in that county. Some CalWORKs recipients will begin to reach the 24-month limit for the first time during 2015. . . .But Impact on Recipients and State Budget Is Uncertain. Some CalWORKs recipients that reach the end of their 24 months of participation under the flexible state work requirement will successfully transition to meeting the federal requirement and will continue to be assisted. Others will fail to comply with the federal work requirement, resulting in reduced cash assistance for those cases and grant savings for the state. Based on very limited data, the Governor’s budget assumes that there will be no savings in 2014-15 from the 24-month time limit and $6.4 million (General Fund) in savings in 2015-16. This is equivalent to roughly 7,500 cases\u2014a little over 1 percent of the total caseload\u2014experiencing an ongoing reduction in cash assistance by the end of 2015-16 as a result of the 24-month time limit. More recent data that was not available at the time the administration’s estimates were developed suggests that there may be a limited number of cases (at most 1,200) that could reach the 24-month limit before the end of 2014-15 and have their cash assistance reduced. Additional data will be available at the time of the May Revision to improve estimates of the impact of the 24-month time limit on recipients and the CalWORKs budget. Expanded Eligibility of Drug Felons Increases Costs. As part of the 2014-15 budget package, the Legislature provided CalWORKs eligibility to certain adults that had previously been ineligible due to prior drug-related felony convictions. This eligibility change is scheduled to be implemented in April 2015. The Governor’s budget estimates that costs to pay for increased cash assistance and services (including employment services and child care) for newly eligible adults in the final three months of 2014-15 will be $8.2 million (General Fund) and $23.2 million (General Fund) in 2015-16. Beginning in 2015-16, the budget assumes that a portion of newly eligible adults will begin working, resulting in offsetting grant savings. As a result, increased spending to provide eligibility to this population in 2015-16 will primarily pay for services. Higher Child Care Reimbursement Rates Increase Child Care Costs. As part of the 2014-15 budget package, the Legislature increased the maximum amount by which providers of child care for CalWORKs recipients may be reimbursed, effective January 2015. This will increase costs in the broader CalWORKs child care system, which is funded partly in DSS (known as Stage 1 ) and partly in the California Department of Education (known as Stage 2 and Stage 3 ). The Governor’s budget estimates that the cost to fund this rate increase in Stage 1 during the last half of 2014-15 will be $12.1 million (General Fund) and $25.6 million (General Fund) in 2015-16. 2015-16 B U D G E T 50 Legislative Analyst’s Office www.lao.ca.gov CONTINUUM OF CARE REFORM provides funding to states to pay for a portion of foster care primarily through Title IV-E of the Social Security Act. In connection with this funding, the federal government enacts laws and policies that require state compliance. Some of these requirements relate to the allowable use of federal Title IV-E funds. Others relate to child well-being outcomes and standards against which the state’s performance is evaluated. States that fail to meet federal standards are required to enter into corrective action plans and can be assessed financial penalties for continued noncompliance. In areas not directly governed by federal law, the state has some flexibility. For example, the state has some discretion to determine the amount of payments that are received by different placement types to care for foster children. The state’s structure for paying foster care providers will be discussed in greater detail later. The state also has flexibility to delegate the direct administration of foster care to counties, which it has chosen to do. Counties Implement State Policy, With Some Local Flexibility. Under the supervision of the state, county child welfare agencies are directly responsible for administering the foster care system, including finding temporary placements and finding permanent adoptive parents or guardians for children who cannot be safely reunified with their families. In addition to county welfare agencies, county probation agencies perform case management (including placement services) for foster children who are also involved with the juvenile justice system. The state provides counties some flexibility in how they operate their local programs, and therefore there is some variation in administration and services offered across the state. For example, counties have the discretion to provide supplemental payments to foster families that care for children that have The state’s foster care system provides temporary out-of-home placement for children who have been removed from their homes due to abuse or neglect. The foster care system relies on a continuum of placement types, ranging from the homes of relatives to institutional group care settings. State law requires that foster children be placed in the least restrictive, most family-like setting possible. Concerns about a lack of availability of less-restrictive placements that are able to meet the sometimes significant needs of foster children have motivated efforts to identify new ways to provide services and supports that would allow for greater reliance on more family-like settings and less reliance on institutional group care settings. In January, DSS released a series of recommendations pursuant to legislative direction, collectively known as continuum of care reform (CCR), that are intended to address some of these concerns. In conjunction with the release of the CCR recommendations, the Governor’s budget proposal includes $9.6 million ($7 million General Fund) to begin implementation of the recommendations. In this analysis, we describe the existing foster care system and the concerns that motivated the development of the CCR recommendations, provide a high-level overview of the recommendations, describe the Governor’s budget proposal, and identify some issues that will likely play a key role as the budget proposal is considered in the context of broader CCR implementation. Background Foster Care Overseen by State, Administered by Counties State Is Accountable to Federal Government for Foster Care Outcomes. The federal government 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 51 special behavioral or medical needs. This aspect of the foster care system will be discussed later in greater detail. Realignment Transferred Fiscal Responsibility for Foster Care to Counties. Prior to 2011-12, the state and counties shared the nonfederal costs of administering the foster care system. In 2011, the state enacted legislation known as the 2011 realignment, which transferred nonfederal funding responsibility for foster care and dedicated a portion of the state sales tax (in lieu of General Fund dollars) to the counties. Under 2011 realignment, counties bear the fiscal risk of administering foster care. This means that if costs in the program increase from year to year, counties are generally required to pay the full nonfederal portion of these increased costs. (Generally, counties would also receive the full nonfederal share of any savings in the event that program costs fall from year to year.) Additionally, legislation enacting 2011 realignment provided that counties are not required to implement any changes in state policy that increase overall program costs by instituting a higher level of service than what was required at the time 2011 realignment was enacted, unless the state provides funding to cover these increased costs. Proposition 30, approved by voters in November 2012, placed similar language in the State Constitution. This requirement means that the state generally must compensate counties for any changes in state policy that increase the costs of administering foster care. Current Law and Practice Rely on Variety of Placement Options When finding a temporary placement for a foster child, counties have a variety of placement options to choose from. The four primary placement options are described below. Figure 19 shows the distribution of foster care placements across these options. Kinship Care. Kinship care refers to when a foster child is placed with a relative for care and supervision. Under federal and state policy, kinship care is generally preferred over other foster care placement types, as it is the least restrictive, most family-like option. Currently, about 45 percent of children in foster care are placed with kin caregivers. County-Licensed Foster Family Homes (FFHs). Foster parents can be licensed by counties to provide temporary care and supervision for foster children in their homes. If a suitable relative placement cannot be found, a foster child may be placed in such a county-licensed FFH by the county. Counties are generally responsible for the recruitment of FFH caregivers. Currently, about 11 percent of children in foster care were placed in a county-licensed FFH setting. Foster Family Agency (FFA)-Certified Foster Homes. FFAs are private, nonprofit agencies defined under state law that recruit foster parents to provide care and supervision for foster children, generally those with elevated needs relative to children placed with county-licensed FFHs. Because of their elevated needs, these foster children would otherwise be at risk for group home placement. The FFAs provide more services to Figure 19 Foster Care Placements FFA = foster family agency. 2014-15 Kin Caregivers County-Licensed Foster Homes FFA-Certified Foster Homes Group Homes 2015-16 B U D G E T 52 Legislative Analyst’s Office www.lao.ca.gov the foster parents and more frequent home visits than counties provide to county-licensed FFHs. Currently, about 30 percent of children in foster care were placed in foster homes through an FFA. Group Homes. Group homes, sometimes referred to as congregate care placements, provide 24-hour care, supervision, and services to foster children with significant emotional or behavioral problems that require a more restrictive environment than a foster home. Group homes vary in size, services provided, and level of supervision provided by group home staff. Group homes are the most restrictive and least family-like placement type (excluding foster children supervised by probation agencies), and therefore are generally the least preferred option for placement. Currently, about 13 percent of children in foster care were placed in a group home. Payments to Providers and Services Vary by Placement Type and County Most Family-Based Placements Receive Same Basic Rate for Care and Supervision. As shown in Figure 20, family-based placements\u2014including kin caregivers that are eligible for federal foster care payments, county-licensed FFHs, and FFA-certified foster homes\u2014all receive the same monthly payment in compensation for the monthly costs of care and supervision, such as food, shelter, clothing, and other expenses the household incurs to care for the child. This monthly payment is sometimes referred to as the basic rate. The basic rate is adjusted annually to reflect changes in cost of living. Under Current Law, Certain Kin Caregivers May Not Receive Basic Rate. One notable exception to family-based placements receiving the basic rate is when a kin caregiver placement is not eligible for Title IV-E federal funding. (Eligibility for federal foster care funding is determined by the circumstances of the family from which the foster child is removed, not the foster care provider with whom they are placed.) Under current state law, nonrelative foster care placements (for example, a placement with a county-licensed FFH) that are ineligible for federal funding receive the basic rate, paid for with nonfederal funds. In lieu of the basic rate, kin caregiver placements that are not eligible Figure 20 Monthly Foster Care Provider Rates Rate Per Child, by Placement Type, 2014-15 Rate Type Kin Caregivers County-Li- censed FFH FFA-Certified Foster Homes Group Homes Eligible for Federal Foster Care Payments Not Eligible for Federal Foster Care Payments Basic rate (care and supervision) $670 – $838 $369a $670 – $838 $670 – $838 $2,332 – $9,879b Specialized care increment? Yes No Yes No No Child increment?c No No No $189 No Administration and social work rate? No No No $868 – $968 No a Kin caregiver placements that are not eligible for federal foster care payments currently receive a CalWORKs grant in lieu of the basic rate. Beginning in 2014-15, the state provides some funding to counties through the Approved Relative Caregiver Funding Option Program for counties to optionally increase payments to such kin caregivers up to the basic rate. The program has not yet been implemented. Most counties have expressed interest in participating, but none have committed. b Group homes do not receive the basic rate, but receive a total rate that is determined through the rate classification level system and varies based on the qualifications of group home staff and the number of staff hours provided to children placed in the group home facility. c Specialized care increments are provided to county licensed FFHs and kin caregivers that are eligible for federal foster care payments when children in care have a special medical or behavioral need. Not all counties provide a specialized care increment, and the amount of the specialized care increment varies among counties that do. FFH = foster family home and FFA = foster family agency. 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 53 for federal funding receive a cash grant through the CalWORKs program that is significantly less than the basic rate. Roughly a quarter of kin placements are estimated to be receiving a CalWORKs grant in place of the basic rate. Recently Enacted Approved Relative Caregiver (ARC) Funding Option Program Provides Basic Rate to All Kin Caregivers at County Option. In 2014, the Legislature created the ARC Funding Option Program, which provides state funds to counties that choose to pay all kin caregivers the basic rate, regardless of eligibility for federal foster care payments. To protect the state from the risk of future growth in costs due to caseload changes, but to also avoid requiring counties to provide a higher level of service without compensation (which is not permissible under 2011 realignment), the program was made optional. As such, counties that choose to participate may use the appropriated General Fund dollars to provide increased payments to kin caregivers, but are responsible for any additional costs that may result in the future from changes in the affected caseload. Counties that choose to implement the ARC Funding Option Program have the flexibility to opt out at a later date. Currently, no counties have formally opted into the program, although most have expressed preliminary interest in participating. As a result, different kin caregiver placements continue to receive different payments based on whether or not the placement is eligible for federal funding. County-Licensed FFHs and Some Kin Caregivers Additionally May Receive Specialized Care Increment at County Option. Most counties have a specialized care increment system that provides supplemental payments, in addition to the basic rate, to foster homes that are caring for a foster child with significant health or behavioral needs. County-licensed FFHs and kin caregiver placements that are eligible for federal foster care payments may receive a specialized care increment. (Kin caregiver placements that are not eligible for federal foster care payments may not, even if a county opts into the ARC Funding Option Program.) Not all counties provide a specialized care increment, and the amount of supplemental payments provided varies across counties that do\u2014 ranging from less than $100 to more than $1,000 monthly. FFA-Certified Foster Families Receive Services, Treatment, and Child Increment. The FFAs receive a monthly rate that consists of different components, including an administration rate, a social worker rate, a child increment rate, and the basic rate. The basic rate, as noted above, is adjusted annually to reflect changes in cost of living. The other components of the FFA rate were reduced by 10 percent in 2009 in order to achieve General Fund savings and have not been increased since that time. At a minimum, the child increment, which is intended to reflect the elevated needs of foster children placed in FFA certified homes, and the basic rate are required to be passed through to foster parents. The social work and administration components of the FFA rate are typically retained by the FFA to provide services and treatment to certified foster families. Available services and treatment vary across FFAs, but could include additional social worker visits to the home, therapy, or in some cases mental health treatment. Group Homes Receive Rates Based on Rate Classification Level (RCL) System, Provide Intensive Services and Treatment. Group homes receive standard monthly rates based on the RCL system that are generally much higher than rates provided for family-based placements. For example, the RCL system features 14 rate levels that in 2014-15 range from $2,322 per month for level 1 to $9,879 per month for level 14. A provider’s rate level is primarily determined by the qualifications of its staff and the number of staff hours that it proposes to provide children placed in its facility. Available 2015-16 B U D G E T 54 Legislative Analyst’s Office www.lao.ca.gov services and treatments vary across group homes and may include counseling and mental health treatment. Impetus for Reform Research Suggests That Prolonged Group Home Placement Can Be Detrimental for Most Foster Children. Research suggests that, while there are circumstances in which group home placement is warranted, for the majority of foster children, sustained group home placement is associated with negative outcomes, including increased later involvement with the criminal justice system, increased rates of reentry into foster care, and lower educational achievement. The DSS estimates that more than two-thirds of children placed in group homes remain there longer than two years. Group Homes Are More Costly Than Other Placement Types. As noted above, group home placements cost significantly more than other family-based placement options. Continued placement of foster children in group home settings when they could successfully be served in family- based settings may not only be less effective, but also a less efficient use of foster care resources. Concerns About Adequacy of Family-Based Placements. Reducing reliance on group home placements has been a priority for the state for some time. One major challenge to reducing reliance on group home placements is having an adequate supply of family-based placements, particularly those capable of caring for children whose elevated needs make them at risk for group home placement. In recent years, counties have reported a shortage of county-licensed FFHs, particularly in high-need areas of the state. Additionally, as discussed above, services and supports to enable family-based placements to care for children at risk for group home placement are not available to all family- based placement types. Ensuring the adequacy of family-based placements is a key consideration if reliance on group home placements is to be further reduced. Budget Legislation Called for Stakeholder Workgroup. In connection with the 2012-13 Budget Act, DSS was required to establish a stakeholder workgroup to recommend revisions to rates, services, and programs in the foster care system, focusing attention, at a minimum, on services and programs provided by group homes and FFAs. The Legislature specified that the workgroup consider, among other things, (1) how assessment processes could be structured to match a foster child’s characteristics to the appropriate placement setting, (2) how providing services more comprehensively could improve foster child outcomes, (3) how these services could be better provided in family-like settings, and (4) how quality evaluations and rate-setting systems could be used to improve the quality of placements. The Legislature required that DSS submit recommended revisions for the Legislature’s consideration by October 2014. Administration Recently Released CCR Report With Recommendations The DSS convened a stakeholder workgroup pursuant to this legislation in 2012. Workgroup discussions continued through the following three years. In January 2015, concurrent with the release of the Governor’s budget proposal, DSS released California’s Child Welfare Continuum of Care Reform, a report that features 19 recommendations based on workgroup discussions. The main objective of the recommendations is to improve the experience and outcomes of children and youth in foster care by (1) improving assessments of children and families to make better initial placement decisions, (2) emphasizing family-based placements by providing appropriate services and supports, (3) changing the goals of group home placements, and (4) increasing transparency and accountability 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 55 for child outcomes. The report’s specific recommendations fall into a few general areas as discussed below. The following description includes major aspects of the CCR recommendations, but is not intended to be a comprehensive summary. Recommendation on Assessments. Counties are currently required to use assessments when initially placing a foster child. Under the CCR recommendations, counties would be required to use assessments with standard features and would use the assessment to make placement decisions with the help of a child and family team consisting of the child, the child’s family, and social workers. Residential Treatment Recommendations. Under the CCR recommendations, placements in lower-level group homes (specifically those with RCL one through nine) would be discontinued, and children currently placed in such group homes would be transitioned to family-based placements. Higher-level group homes would continue to be available as a placement option when children cannot safely be placed in a family-based setting, but would be refocused as short-term residential treatment centers, or STRTCs. The STRTCs would provide short-term, intensive therapeutic treatment and services based on more comprehensive assessments and specific care plans developed for each child that would explicitly address how the child would be transitioned to a family-based setting as quickly and appropriately as possible. Home-Based Family Care Recommendations. To increase the capacity of family-based placements to care for children formerly in group home placements, services and supports would be more broadly available for family-based placements than under the current system. FFAs would be required to provide a more extensive set of core services to the foster families that they certify. Additionally, counties would be able to contract with FFAs to provide the same services to other foster families, including county-licensed FFHs and kin caregivers. Counties would also have the option to become licensed as FFAs and provide services to county- licensed FFHs and kin caregivers directly. Finally, the CCR recommendations would strengthen recruitment of foster families and increase training requirements to improve quality. Fiscal Recommendations. The CCR recommendations envision some significant changes to the way payments are provided to STRTCs (formerly group homes) and FFAs. Under the recommendations, the RCL system would be replaced with a single, statewide STRTC rate. While a specific rate methodology for STRTCs is not identified in the recommendations, the new STRTC rate would likely be higher for many current group home providers due to increased requirements. For FFAs, the rate structure would be revised to recognize a distinction between FFAs that provide treatment and which are required to provide core services (as noted above) and FFAs that primarily focus on recruiting foster parents but do not provide treatment services. To account for expanded core services required to be provided by FFAs, the recommendations would increase the social worker component of the FFA rate. Performance Measures and Outcomes Recommendations. In order to improve transparency and accountability in the foster care system, the recommendations would establish a series of performance measures and evaluate STRTCs and FFAs using these measures. Proposed performance measures would focus on outcomes including child safety, stability of placements, child health, and educational support. Data from these performance measures would be made publicly available to promote accountability. Additionally, a survey instrument would be designed to obtain feedback directly from foster children and families on the effectiveness of placements. 2015-16 B U D G E T 56 Legislative Analyst’s Office www.lao.ca.gov Overview of the Governor’s Budget Proposal Full implementation of the recommendations in the CCR report would be a multiyear effort. For the 2015-16 budget, the Governor proposes funding to begin implementation of two of the report’s recommendations, as described below. Specifically, the proposal includes $3.8 million ($2.8 million General Fund) for counties to increase outreach, recruitment, and support for foster parents, and $5.8 million ($4.2 million General Fund) to increase the social worker component of the FFA rate by 15 percent, for a total of $9.6 million ($7 million General Fund). Overall, the Governor’s proposal would focus initial CCR implementation on building capacity in family-based placements before implementing other recommendations that would reduce group home placements. Because of 2011 realignment, the budget proposal does not assume counties will contribute funding and provides the full nonfederal share of costs from the General Fund. LAO Assessment General Comments on CCR Report and Recommendations Recommendations Broadly Consistent With Legislative Intent. . . We find that the CCR recommendations are broadly consistent with legislative intent. The recommendations address key issues raised by the Legislature, including changes to improve initial assessment, changes to the types of services provided and the placements in which they are provided to allow for greater emphasis on family-based settings, and increased evaluation of foster care placements to promote accountability and improve placement quality. Taken together, the CCR recommendations represent a significant policy shift for the state’s foster care system. . . .Many Details Yet to Be Determined. At the present time, the CCR recommendations lack many key details necessary for implementation. Most notably, the recommendations provide little detail on specifically how the rates for STRTCs and FFAs would be structured to achieve CCR objectives. The administration has indicated that it intends to release a legislative package that would outline in broad terms how the CCR recommendations would be implemented. It will be important for the Legislature to consider the Governor’s overall plan as it makes decisions in the budget process. Implementation of CCR Recommendations Complicated by Realignment. Whatever plan is ultimately agreed on, implementation of the CCR recommendations will be complicated by realignment. It is likely that changes in rates paid to FFAs and STRTCs, as well as new responsibilities for counties contemplated in the recommendations, will result in some new, possibly significant, county costs. Counties could choose to implement the CCR recommendations, but would not be required pursuant to the Constitution to do so unless the state provides funding for any increased costs. In the recent past, the state has been reluctant to expose the General Fund to new cost pressures in realigned programs, and has preferred to place caps on General Fund spending for policy changes in these programs and make implementation of such policy changes optional. This approach was used in enacting the ARC Funding Option Program as discussed previously. It is unclear at this time how the CCR recommendations would be implemented. If an approach similar to that taken with the ARC Funding Option Program is taken with the CCR recommendations, this will raise additional policy questions for the Legislature to address. If the state were to require implementation of the CCR recommendations and provide General Fund dollars to reimburse counties for new costs, it is likely that counties would realize some 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 57 savings as foster children are transitioned from more costly group home placements to less costly family-based placements. It seems reasonable that such savings could be used to offset state costs for CCR implementation, reducing the state’s ongoing contribution to CCR implementation or even making it temporary. However, the specifics of how the long-term implementation of the CCR recommendations would be financed is unclear, both because little detail has been provided on how rates would be restructured and how broader CCR implementation would be sequenced, and because the provisions of 2011 realignment have not been tested in this way before. Comments on the CCR Budget Proposal Appropriate to Focus First on Building Capacity in Home-Based Settings. . . We think the focus of the CCR budget proposal on beginning CCR implementation with increasing capacity in family-based settings makes sense. Given concerns about insufficient numbers of county foster homes, it will be important to ensure that, when new restrictions are placed on length of stay in group home placements, there are enough family- based placements available to care for children transitioning from group home placements and that these family-based placements have access to services and supports necessary to meet these children’s needs. . . .But Unclear How Proposed Funding Will Achieve CCR Objectives in the Context of Broader Reform Implementation. The administration has so far provided little detail on how the funding proposed as part of the budget fits into the broader CCR implementation and how the funding would help achieve CCR objectives. Specifically, the administration does not have a specific proposal for how the $3.8 million for foster parent outreach, recruitment, and support would be used and what outcomes would be expected once these funds were spent. It is also unclear how this funding would be distributed and whether all counties would have access to these funds. If the proposed funding amount was distributed equally among all 58 counties, each would receive roughly $66,000 (for a half year). As this funding is not tied to specific outcomes related to broader CCR implementation, it is difficult to assess whether the amount proposed is appropriate to meet CCR objectives. Similarly, no clear rationale has been given for why the appropriate level of FFA social worker rate increase is 15 percent. The proposed increase is not tied to any new FFA responsibilities or core services as envisioned in the CCR recommendations. Instead, the increase appears to be intended to allow FFAs to better meet existing expectations under current law. Given past reductions in the FFA rate, increasing FFA rates to a level that is adequate to meet current expectations until higher expectations are put in place as part of broader CCR implementation may have merit. However, we believe that such an increase, if it were provided, should be considered in the context of a broader CCR implementation plan that would outline what additional rate increases, if any, would be provided in the future to compensate for higher levels of service. Recommendation Recommend DSS Justify Budget Proposal in Context of Broader Implementation Plan at Budget Hearings. Given the lack of detail on how the proposed funding will fit into broader CCR implementation and how it will help meet CCR objectives, it is difficult to evaluate the merits of the budget proposal. We recommend that the Legislature require DSS to justify the budget proposal in the context of broader CCR implementation at budget hearings. Ultimately, any funding approved as part of the 2015-16 budget should be consistent with timelines and 2015-16 B U D G E T 58 Legislative Analyst’s Office www.lao.ca.gov priorities developed through deliberations on the forthcoming legislative package. The following are key questions and issues for the Legislature’s consideration through this process: How Will the Implementation of the CCR Recommendations Address Challenges Associated With Realignment? Key questions related to realignment include: Would the state provide funding to make implementation of CCR recommendations mandatory? To what extent would any county savings from reduced group home placements be used to offset state costs of implementing the CCR recommendations? How would these savings be determined? How Will Funding Proposed for County Foster Parent Recruitment and Support Be Allocated and Used? Key questions relating to proposed funding for county foster parent recruitment and support include: Would the proposed funding be available to all counties? What specific county activities will the proposed funding pay for? What outcomes are expected from these activities? How will these outcomes be evaluated? What Is the Rationale for the Proposed Level of FFA Social Worker Rate Increase? Key questions relating to the proposed FFA social worker rate increase include: What level of rate increase would be required to allow FFAs to adequately meet current law expectations? What are the new expectations and core services that FFAs would be required to perform under the CCR recommendations? What additional amount of rate increase would be required to allow FFAs to meet new expectations under the CCR recommendations? 2015-16 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 59 2015-16 B U D G E T LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 60 Legislative Analyst’s Office www.lao.ca.gov Contact Information Mark C. Newton Deputy Legislative Analyst 319-8323 [email protected] Shawn Martin Managing Principal Analyst 319-8362 [email protected] Ginni Bella Navarre Child Welfare and Support 319-8342 [email protected] Community Care Licensing Rashi Kesarwani In-Home Supportive Services 319-8354 [email protected] Developmental Services SSI\/SSP Lourdes Morales Information Technology 319-8320 [email protected] Community Care Licensing Ryan Woolsey CalWORKs 319-8356 [email protected] CalFresh Child Welfare and Support ”

” M A C TAY L O R L E G I S L A T I V E A N A L Y S T F E B R U A R Y 2 0 , 2 0 14 The 2014-15 Budget: Analysis of the Human Services Budget 2014 -15 B U D G E T 2 Legislative Analyst’s Office www.lao.ca.gov CONTENTS Executive Summary ……………………………………………………………………………………..3 Overview …………………………………………………………………………………………………….5 Human Services Compliance With Federal Labor Regulations ………………………………………………………………….7 Background ……………………………………………………………………………………………………………………..7 The Governor’s Budget Responds to Federal Labor Regulations ………………………… 11 IHSS Overtime Restriction Raises Fiscal and Policy Issues …………………………………… 16 Potential Modifications to Proposed Overtime Restriction ………………………………….. 19 Other Implementation Issues Regarding Governor’s Overtime Restriction ………. 22 Conclusion ……………………………………………………………………………………………………………………. 23 In-Home Supportive Services ……………………………………………………………………..24 Community Care Licensing Quality Enhancement and Program Improvement ………………………………………………………………………26 Background ………………………………………………………………………………………………………………….. 26 Governor’s Proposal and LAO Analysis ……………………………………………………………………. 27 LAO Overall Take on the Governor’s Proposal ………………………………………………………… 35 CalWORKs ………………………………………………………………………………………………….36 Overview of the Governor’s Proposal ………………………………………………………………………. 37 Implementation of Previously Enacted Program Changes …………………………………… 38 State-Local Realignment and the CalWORKs Budget ……………………………………………. 41 Automatic Grant Increase Mechanism …………………………………………………………………….. 44 Proposed Parent\/Child Engagement Demonstration Pilot ………………………………….. 46 DSS State Hearings Division ……………………………………………………………………….49 Developmental Services …………………………………………………………………………….52 Background ………………………………………………………………………………………………………………….. 52 The Governor’s Budget Proposal ………………………………………………………………………………. 54 LAO Comments on Overall Budget Proposal ………………………………………………………….. 55 Health and Human Services Agency IT Strategic Planning Proposal ………………………………………………………………….59 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 3 EXECUTIVE SUMMARY Overview of Human Services Budget. The Governor’s budget proposes $9.9 billion from the General Fund for human services programs\u2014a 2.5 percent net decrease below 2013-14 estimated expenditures. For the most part, the year-over-year changes reflect the implementation of previously enacted policy changes as opposed to new policy proposals, but there are a few significant policy proposals that we highlight below. The largest General Fund budget adjustment relates to a year-over-year increase of $600 million in 1991 health realignment revenues that are being redirected to help pay for grant costs in the California Work Opportunity and Responsibility to Kids (CalWORKs) program, thereby reducing General Fund expenditures by a like amount. Apart from the CalWORKs program, the budget reflects either stable funding or relatively modest General Fund expenditure growth in all other major human services programs. Concerns With Governor’s Policy Proposal to Comply With Federal Overtime Regulations in the In-Home Supportive Services (IHSS) Program. New federal labor regulations effective January 1, 2015 will generally require the state to pay overtime to home care workers\u2014including IHSS providers\u2014for all hours worked in excess of 40 in a week. (The state is currently exempt from paying overtime for these workers.) In response to these regulations, the Governor’s budget proposes to restrict overtime in the IHSS program and establish a provider backup system for IHSS recipients in unforeseen circumstances. While our analysis finds that the Governor’s proposal would result in a net fiscal benefit to the state, we raise various policy concerns with the proposal, including concerns about the proposal’s erosion of consumer choice and the uncertainty whether there would be a sufficient number of IHSS providers available to meet the demand for second providers created by the overtime restriction. We recommend the Legislature consider potential modifications to the Governor’s proposal to address these concerns, while still maintaining most of the proposal’s fiscal benefits. Potential modifications to the Governor’s overtime restriction include providing a targeted exemption for providers of certain recipients, providing a limited allotment of overtime to certain providers, authorizing overtime when other providers are unavailable, and consideration of a new model of service provision to IHSS recipients with live-in providers. Governor Makes Comprehensive Proposal to Begin Addressing Program Deficiencies in Community Care Licensing (CCL). In response to recent health and safety issues discovered at facilities licensed by the CCL division of the Department of Social Services (DSS), the Governor’s budget proposes a comprehensive plan to reform the CCL program, including an increase of 71.5 positions. The plan includes recognizing the changing needs of clients in Residential Care Facilities for the Elderly, increasing licensing fees and penalties, making field staff available for more inspections, creating new enforcement tools, establishing a quality assurance unit, creating a more robust training program, and establishing a technical assistance unit to support licensees. We think that the Governor’s general approach to respond to the identified failings of CCL makes sense. We do, however, recommend several modifications to the proposal’s accompanying budget-related legislation. 2014 -15 B U D G E T 4 Legislative Analyst’s Office www.lao.ca.gov Proposed CalWORKs Parent\/Child Engagement Demonstration Pilot Not Justified. The Governor’s budget includes a proposal for a $115 million, three-year demonstration project to test a multifaceted intervention to address the needs of CalWORKs families with multiple barriers to employment. One component of the pilot would test the impact of providing high-quality child care (which appears to mean child care featuring a stronger educational focus), while another component would test the impact of parental involvement in the child care setting. While we find that the administration’s proposal raises valid concerns, we recommend that the Legislature reject it. First, we find that a number of components of the intervention largely duplicate existing CalWORKs services, some of which are in the beginning stages of implementation. Second, as the state currently funds child care programs with an educational focus for similar low-income children, a new pilot is not necessary to demonstrate the impact of these programs on child outcomes. (We note, however, that the fact that CalWORKs families cannot easily access educationally focused child care programs funded by the state raises an important policy issue for legislative consideration.) Finally, the potential added value of testing the impact of parental involvement activities is not sufficiently compelling to justify a CalWORKs pilot, particularly given the pilot’s substantial cost. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 5 OVERVIEW Background on Human Services Programs California’s major human services programs provide a variety of benefits to its citizens. These include income maintenance for the aged, blind, or disabled; cash assistance and welfare-to-work services for low-income families with children; protecting children from abuse and neglect; providing home care workers who assist the aged and disabled in remaining in their own homes; collection of child support from noncustodial parents; and subsidized child care for low-income families. Human services are administered at the state level by DSS, Department of Developmental Services (DDS), Department of Child Support Services, and other California Health and Human Services Agency (CHHSA) departments. The actual delivery of many services takes place at the local level and is carried out by 58 separate county welfare departments. The major exception is Supplemental Security Income\/State Supplementary Payment (SSI\/SSP), which is administered mainly by the U.S. Social Services Administration. Recent Major Changes in Funding for Human Services Programs. As a result of realignment- related legislation in 2011 and 2013, the budget reflects shifts to counties of a significant amount of General Fund costs in human services programs. Specifically, as a result of 2011 legislation, the budget (beginning in 2011-12) reflects shifts to local realignment revenues of about $1.1 billion of General Fund costs in the CalWORKs program and about $1.6 billion in child welfare and adult protective services General Fund costs. As a result of the latter shift, the state’s role with respect to child welfare and adult protective services is largely one of oversight of county administration of these program areas. Legislation enacted in 2013 shifted additional General Fund costs in the CalWORKs program to local realignment revenues that previously have been used to provide health services to indigent individuals. These realignment revenues have been freed up given that many indigent individuals are newly eligible for coverage in the state-funded Medi-Cal Program. Specifically, the budget shifts $300 million in CalWORKs General Fund costs to these local realignment revenues in 2013-14 and an additional $600 million (for a total of $900 million) in 2014-15. The 2013 legislation additionally provided that the costs of specified ongoing increases to CalWORKs assistance payments will be shifted to revenues from the growth of existing local realignment revenues that otherwise would have supported other social services programs. These recent changes to realignment are discussed in greater detail below in the CalWORKs section of this report. Expenditure Proposal by Major Programs Overview of Human Services Budget Proposal. The Governor’s budget proposes expenditures of about $9.9 billion from the General Fund for human services programs in 2014-15. As shown in Figure 1 (see next page), this reflects a decrease of $132 million\u2014or 2.5 percent\u2014from revised General Fund expenditures in 2013-14. Summary of Major Budget Proposals and Changes. As shown in Figure 1, the budget reflects generally stable or modest growth in General Fund expenditures across most human services programs, with CalWORKs being the major exception. The 47 percent decrease ($569 million) in CalWORKs General Fund expenditures can largely be explained by a year-over-year increase of $600 million in 1991 health realignment revenues 2014 -15 B U D G E T 6 Legislative Analyst’s Office www.lao.ca.gov that are being redirected to help pay for CalWORKs grant costs, thereby reducing General Fund expenditures by a like amount. The CalWORKs budget also reflects a 5 percent increase in cash grant levels costing $168 million, although this is funded almost entirely from realignment revenues (with $6 million General Fund). The CalWORKs budget also reflects a net increase of $91 million from the General Fund to implement a number of recent policy changes\u2014that result in costs and savings\u2014related to early engagement, family stabilization, and subsidized employment. Finally, the budget proposes a six-county, three-year Parent\/Child Engagement Demonstration Pilot in CalWORKs, at a three-year cost totaling $115 million General Fund ($9.9 million in 2014-15). We discuss the grant increase, implementation of recent policy reforms, and the proposed pilot program in detail later. The 4.4 percent growth ($84 million) in IHSS General Fund expenditures mainly reflects the partial-year cost ($99 million General Fund in 2014-15) of the Governor’s policy proposal to comply with new federal labor regulations. These regulations require, among other things, that IHSS providers be paid overtime for work over 40 hours a week. We provide an analysis of this proposal later. The 4.6 percent increase ($36 million) in General Fund expenditures in the County Administration and Automation budget line item largely reflects a $30 million increase for CalFresh administration (due to the caseload impact of outreach conducted with the implementation of the federal Patient Protection and Affordable Care Act [ACA]) and a $12 million increase for two human services automation projects. Caseload Trends Varied Growth Through Recession. While caseload grew for most of the state’s human services programs during the recent recession, there was substantial variability among them. (One key exception is the state’s foster care caseload, which has declined since 2001 and through the recession. In part, this reflects the creation of the Kinship Guardian Assistance Payment program Figure 1 Major Human Services Programs and Departments\u2014Budget Summary General Fund (Dollars in Millions) 2012\u201113 Actual 2013\u201114 Estimated 2014\u201115 Proposed Change From 2013\u201114 to 2014\u201115 Amount Percent SSI\/SSP $2,752.6 $2,782.3 $2,816.5 $34.2 1.2% Department of Developmental Services 2,674.5 2,803.1 2,934.7 131.6 4.7 CalWORKs 1,544.5 1,206.2a 636.9b -569.3 -47.2 In-Home Supportive Services 1,705.9 1,910.0 1,994.1 84.1 4.4 County Administration and Automation 617.0 763.2 798.7 35.5 4.6 Department of Child Support Services 298.9 313.0 312.9 -0.1 \u2014 Department of Rehabilitation 55.3 57.0 57.0 \u2014 0.1 Department of Aging 31.4 32.2 32.2 \u2014 \u2014 All other social services (including state support) 239.3 261.7 294.7 33.0 12.6 Totals $9,919.3 $10,128.7 $9,877.7 \u2011$251.0 \u20112.5% a Primarily reflects (1) the impact of a year-over-year reduction in a funding swap between CalWORKs and the California Student Aid Commission that decreased year-over-year General Fund expenditures in CalWORKs by $262 million and (2) the use of certain funds previously used for health services under 1991 realignment to pay for CalWORKs grants, reducing General Fund expenditures in CalWORKs by $300 million. b Primarily reflects a year-over-year increase in the use of certain funds previously used for health services under 1991 realignment to pay for CalWORKs grants, reducing year-over-year General Fund expenditures in CalWORKs by $600 million. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 7 in 2000 that facilitates a permanent placement option for relative foster children outside of the foster care system.) For example, over the 2007-08 to 2011-12 period, the CalFresh and CalWORKs caseloads increased by 97 percent and 27 percent, respectively, while the IHSS caseload\u2014less susceptible to economic fluctuations\u2014increased by 8 percent. The SSI\/SSP caseload grew modestly during this time period (3.4 percent)\u2014in part reflecting recent grant reductions that in effect reduced the eligible population\u2014and is projected to grow relatively modestly in 2014-15. We now turn more specifically to caseload trends in the IHSS and CalWORKs programs and the budget’s assumptions regarding caseload for these two programs in 2014-15. IHSS Caseload Projected to Grow Modestly in 2014-15. The budget projects the average monthly caseload for IHSS to be 453,417 in 2014-15\u2014a 1.3 percent increase over the most recent estimate of the 2013-14 caseload. We discuss the administration’s projection in further detail below in the IHSS section of this report. For historical perspective, the IHSS caseload has remained relatively flat throughout the five-year period from 2009-10 through 2013-14, in part reflecting policy changes that constrained caseload growth. CalWORKs Caseload Continues to Decline. In the midst of the recent recession, the CalWORKs caseload rose substantially and peaked at over 597,000 cases in June 2011. The caseload has been declining since that time due to enacted policy changes and an improving labor market. The budget assumes a CalWORKs caseload of 545,647 cases in 2013-14, a 2.5 percent decline from the previous year. The year-over-year decline in caseload is assumed to accelerate somewhat to 3 percent in 2014-15, resulting in a caseload of 529,376. HUMAN SERVICES COMPLIANCE WITH FEDERAL LABOR REGULATIONS Background Recent Federal Labor Regulations Affect Home Care Workers The federal Department of Labor recently released new regulations that affect home care workers. A home care worker can be any individual who provides home care services, including certified nursing assistants, home health aides, or personal care aides such as providers for California’s IHSS program. Personal care refers to assistance with activities of daily living\u2014such as bathing, grooming, and bowel and bladder care\u2014provided to a consumer by a home care worker. The new federal labor regulations\u2014 effective January 1, 2015\u2014make two significant changes, discussed below, that affect the home care industry. These new federal labor regulations have budgetary implications for both the state’s IHSS program and DDS. In this analysis, we describe the federal labor regulations, explain how these regulations impact IHSS and DDS, describe the Governor’s proposals to comply with the regulations, and provide modifications to the Governor’s IHSS proposal for consideration by the Legislature. Federal Labor Regulations Require Home Care Workers to Be Paid for Certain Work Activities. The federal labor regulations require home care workers to be paid for certain work activities, effective January 1, 2015. Generally, employers have been exempt from the requirement 2014 -15 B U D G E T 8 Legislative Analyst’s Office www.lao.ca.gov to pay home care workers for the following work activities that will now require payment. Wait Time During Medical Appointments. Time spent waiting for consumers during medical appointments must be paid. Travel Time During the Work Day. Time spent traveling during the employee’s regular work hours, such as travel time to shop for food or perform other errands on behalf of the consumer, must be paid. For home care workers employed by a third- party employer, travel time between consumers during the workday must also be paid. (A third-party employer is an employer other than the consumer receiving services. In the case of the IHSS program, the state can be understood to be the third-party employer.) Mandatory Worker Training. Time spent attending training required by the employer must be paid. Federal Labor Regulations Require Home Care Workers to Receive Overtime Pay for Working More Than 40 Hours Per Week. Employers of home care workers have been exempt from the requirement to pay overtime at the rate of one-and-a-half times the regular pay rate for all hours worked that exceed 40 in a week. However, effective January 1, 2015, federal labor regulations require home care workers to be paid overtime. Under federal law, the requirement to pay overtime may not be waived by agreement between the employer and employee. Further, an announcement or notice by the employer that no overtime work will be permitted will not infringe on the employee’s right to receive overtime pay for hours that exceed 40 in a workweek. In other words, the employer is required to pay overtime when it is claimed by an employee on his\/her timesheet, regardless of whether the overtime is authorized or not. Narrow Exemptions to Overtime Pay Requirement When Consumer, His\/Her Family, or Household Is the Employer. When a worker is employed by a consumer receiving services or the consumer’s family or household, the federal labor regulations provide for narrow exemptions to the requirement to pay overtime. One of these exemptions\u2014known as the live-in domestic service worker exemption is available when a worker is employed by\u2014and resides with\u2014the consumer receiving services or the consumer’s family or household. In these cases, the consumer, his\/her family, or household may claim the live-in domestic service worker exemption to avoid paying the worker overtime for hours that exceed 40 in a workweek (and would instead pay at least the state-mandated hourly minimum wage for all hours worked). However, this exemption is not available to a third-party employer, such as the state in the existing program model of IHSS. (It may be possible for an IHSS recipient to claim this exemption under a different program model for the delivery of IHSS-like services, which we discuss later in this report.) Federal Labor Regulations Have Impact on IHSS Program The federal labor regulations we describe have significant implications for the state’s IHSS program. Effective January 1, 2015, IHSS providers that deliver personal care and domestic services to IHSS recipients will be compensated for certain work activities, including wait time during medical appointments and travel time during the work day, which are currently not compensated by the IHSS program. Additionally, IHSS providers will be eligible to receive overtime pay for hours worked that exceed 40 in a workweek. Below, we provide 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 9 background information about the IHSS program that is relevant to understanding the implications of the federal labor regulations. The IHSS Program Is a Medi-Cal Benefit That Provides Personal Care and Domestic Services. The IHSS recipients are eligible to receive up to 283 hours per month of assistance with tasks such as bathing, dressing, housework, and meal preparation that are delivered by an IHSS provider in the recipient’s home. The recipient has the right to determine when service hours are provided within the month. For nearly all recipients, the IHSS program is delivered as a benefit of the state’s Medicaid health services program (known as Medi-Cal in California) for low-income populations. The IHSS program is therefore subject to federal Medicaid rules. For more background on IHSS, please refer to the In-Home Supportive Services section of this report. Division of Employer Responsibilities in the IHSS Program. Employer responsibilities in the IHSS program are divided among three entities. Recipient. The recipient has the right to hire, supervise, and train the IHSS provider and can fire the provider for any reason. Essentially, the recipient has the right to receive care from a provider of his\/ her choosing\u2014a concept we refer to as consumer choice. State. The IHSS providers submit their timesheets to a state processing facility and receive payment from the state for the hours they work during each pay period. The state is responsible for paying for certain benefits, including state disability insurance, unemployment insurance, and workers’ compensation insurance. Public Authority. The Public Authority at the county level currently negotiates with unions representing IHSS providers to set wages and benefits. The Public Authority also maintains a registry of providers who may be available to work for IHSS recipients who are unable to identify their own provider. (We note that recent legislation provides for the future transfer of collective bargaining responsibilities from the county level to the state level in certain counties.) Because of this division of IHSS employment responsibilities, it is our understanding that the IHSS recipient, the state, and the Public Authority at the county level are all considered to be joint employers of IHSS providers for the purposes of the new federal labor regulations. The state and the Public Authority are third-party employers because they are entities other than the consumer receiving services. However, because of the financial structure of the IHSS program in which county costs are effectively capped given recently enacted maintenance-of-effort (MOE) requirements, the state would assume all of the nonfederal costs associated with newly paying for overtime and for the work activities newly required to be compensated. Individuals Must Follow Four Steps Before Being Enrolled as IHSS Providers. Currently, prospective IHSS providers must complete four steps in order to be enrolled as a provider and receive payment from the state, including completion of an application, a criminal background check, a brief IHSS program provider orientation, and completion of an enrollment agreement. IHSS Providers Receive Wages Negotiated at the County Level. Because the wages of IHSS providers are negotiated at the county level, they vary by county\u2014currently ranging from the state-mandated hourly minimum wage of $8 to $12.20 per hour. Providers currently receive the negotiated wage for all hours worked, regardless of whether they work in excess of 40 hours in a 2014 -15 B U D G E T 10 Legislative Analyst’s Office www.lao.ca.gov week. Chapter 351, Statutes of 2013 (AB 10, Alejo), increases the state-mandated hourly minimum wage from $8 to $9 effective July 1, 2014\u2014and to $10 effective January 1, 2016. In 2014-15, the minimum wage increase to $9 will affect IHSS providers in 17 counties, where wages are currently less than $9 per hour. IHSS Providers and Recipients Impacted by Federal Labor Regulations. The DSS, which administers the IHSS program, estimates that 385,425 individuals will work as IHSS providers in 2014-15. About 49,000 providers, or 12.7 percent of the estimated workforce, currently work more than 160 hours per month and will therefore be impacted by the requirement to pay overtime for hours that exceed 40 in a workweek. We note that some providers work for more than one recipient. The DSS estimates that 453,417 low-income individuals who are aged, blind, or disabled will receive IHSS in 2014-15. About 37,000 recipients, or 8.2 percent of the estimated caseload in 2014-15, are expected to receive more than 160 service hours per month from a single IHSS provider. The IHSS recipients who receive more than 160 service hours per month are generally individuals who are reliant on the IHSS program for significant assistance with activities of daily living. IHSS Providers Are Often Family Members or Relatives of Recipients. About 70 percent of IHSS recipients (an estimated 317,000 recipients) receive their care from a family member or relative provider. About half of IHSS recipients (an estimated 222,000 recipients) receive their care from a live-in provider, and 84 percent of these live-in providers are family members of the recipient. These family members could be, for example, a parent providing services to a minor child, a spouse providing services to a husband or wife, or an adult child providing services to a parent. Estimated IHSS Cost of Complying With Federal Labor Regulations Absent Program Changes Absent any changes to the IHSS program, the administration estimates the annualized cost to comply with the federal labor regulations to be $620 million ($288 million General Fund). There are three main components of this cost estimate. Overtime Costs. Based on the existing workload of IHSS providers statewide, the DSS estimates that the cost of paying overtime would be $402 million ($186 million General Fund) annually. This estimate likely understates the actual cost of paying overtime as some IHSS providers would choose to work additional hours for other recipients in order to receive overtime pay for hours exceeding 40 in a workweek. Costs of Newly Compensable Work Activities. The DSS estimates that the cost of paying IHSS providers for wait time during medical appointments and travel time during the work day is $192 million ($89 million General Fund) annually. Administrative Activities. The DSS estimates that the cost of administrative activities to implement the new payments is $26 million ($13 million General Fund) annually. These costs would fund such administrative activities as county social worker time to answer questions from IHSS recipients and providers, making provider timesheet changes, and modifying the Case Management, Information, and Payrolling System (CMIPS) II information technology (IT) system used by the IHSS program\u2014in order to handle authorization and payment for the newly compensable work activities and overtime. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 11 Federal Labor Regulations Also Impact the Community Services Program Administered by DDS The federal labor regulations we describe also have a budgetary impact on the state’s Community Services Program for eligible individuals with developmental disabilities that is administered by DDS. The budgetary impact for the Community Services Program is relatively minor when compared to the impact on the IHSS program. For more background on the Community Services Program, please refer to the Developmental Services section of this report. Community Services Program Provides In-Home Assistance, Among Other Services and Supports. The Community Services Program provides eligible individuals with developmental disabilities with a broad range of services and supports they need to live in the community. The DDS oversees 21 nonprofit organizations known as regional centers (RCs), which purchase services and supports from vendors (generally organizations that hire employees to deliver services) for consumers. In some cases, consumers receive IHSS as a Medi-Cal benefit and receive other in-home services paid for by RCs, either on an ongoing basis or temporarily to provide respite to the primary caregiver. Consumers and Workers Affected by Federal Labor Regulations. Due to current data limitations, the number of consumers who receive in-home assistance that exceeds 40 hours per week\u2014and the number of workers who provide in-home assistance that exceeds 40 hours per week\u2014is not known by DDS. These consumers who receive more than 40 hours of in-home assistance per week and home care workers who provide this assistance will be affected by the federal labor regulations. The Governor’s Budget Responds to Federal Labor Regulations The Governor’s budget responds to the federal labor regulations by (1) funding the cost associated with newly compensable work activities, (2) limiting the cost of overtime in the IHSS program by restricting IHSS providers to no more than 40 hours of work per week, and (3) providing a small rate increase to certain RC vendors in order for vendors to mitigate the fiscal impact of the requirement to pay overtime to their employees. At the time of this analysis, the administration had not yet released budget-related legislation providing further detail on its overtime proposals for IHSS and DDS. We provide details of the Governor’s proposals that were made available to us at the time of this analysis. For IHSS, Budget Proposal Has Three Main Components The administration estimates the annual ongoing cost of funding the three main components of its IHSS proposal\u2014(1) paying for newly compensable work activities, (2) funding administrative activities to prevent overtime, and (3) maintaining a Provider Backup System \u2014is $239 million ($113 million General Fund) annually. In Figure 2 (see next page), we provide a cost summary of the Governor’s proposal to respond to the federal labor regulations in 2014-15 and 2015-16. (We note that Figure 2 includes the estimated costs of the Governor’s IHSS proposal as corrected by the administration for a technical budgeting error.) We discuss each component of the Governor’s IHSS proposal below. Pay for Newly Compensable Work Activities. The Governor’s budget proposes $87 million ($40 million General Fund) in 2014-15 to comply with the federal labor regulations that require the 2014 -15 B U D G E T 12 Legislative Analyst’s Office www.lao.ca.gov state to compensate IHSS providers for certain previously exempted work activities beginning January 1, 2015, or, for six months of 2014-15. The department estimates that the full-year cost is $188 million ($88 million General Fund) in 2015-16. The Governor’s budget funds compensation for wait time during medical appointments and travel time during the work day, but not the mandatory provider orientation, as explained below. Providers’ Wait Time During IHSS Recipients’ Medical Appointments. The current in-home IHSS assessment conducted by a county social worker assesses a consumer for the amount of time needed to travel to medical appointments, but makes no assessment for the amount of wait time that may be involved. The Governor’s budget assumes that the 85 percent of IHSS recipients who receive medical accompaniment will have their provider wait three hours per month\u2014on average\u2014during appointments. Based on these assumptions, the six-month cost of this work activity is estimated to be $81 million ($37 million General Fund) in 2014-15. However, because the exact amount of time that providers wait at medical appointments is unknown, the actual cost of paying IHSS providers for wait time during recipients’ medical appointments is uncertain. Providers’ Travel Time Between IHSS Recipients. The Governor’s budget estimates that 19 percent of IHSS providers serve multiple recipients. It is assumed that these providers who work for multiple recipients will spend one hour per month\u2014on average\u2014traveling between recipients. Based on these assumptions, the six-month cost of this work activity is estimated to be $6 million ($3 million General Fund). Like wait time during medical appointments, there is currently no data collected by the IHSS program on the exact amount of time IHSS providers spend traveling between IHSS recipients during the work day. Therefore, the cost of paying IHSS providers for travel time is uncertain. Mandatory Provider Orientation. While the federal labor regulations require IHSS providers to be paid for any mandatory training, the Governor’s budget does not request funding for the cost of paying Figure 2 Cost of Governor’s IHSS Proposal to Respond to Federal Labor Regulations (In Millions)a 2014-15 2015-16 General Fund Total Funds General Fund Total Funds Newly compensable work activities $40 $87 $88 $188 Administration to restrict overtime 27 53 10 19 Provider Backup System (including higher wage for backup providers and related costs)b 10 21 15 32 Totals $77 $161 $113 $239 a Administration’s cost estimates of its proposal. b This reflects the estimated cost of the Provider Backup System as corrected by the administration for a technical budgeting error. The error caused the Governor’s Budget to overstate the cost of the Provider Backup System by $22 million General Fund in 2014-15 and $48 million General Fund in 2015-16. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 13 individuals to attend the mandatory orientation prior to enrollment as an IHSS provider. The DSS has indicated to us that it assumes that the state may not need to pay individuals for participating in the mandatory orientation since it occurs before the individual enrolls as an IHSS provider. Based upon our review of the federal labor regulations, we find this assumption to be reasonable. However, because the mandatory orientation is brief (about one to two hours in most counties) and is only required to be completed once for individuals newly seeking to become IHSS providers, we do not estimate a significant General Fund cost if this activity is ultimately determined to require compensation. Administrative Costs to Prohibit IHSS Providers From Working Overtime. The Governor’s budget proposes to respond to the federal labor regulations requiring overtime pay for home care workers by establishing an administrative structure that would prohibit IHSS providers from working overtime\u2014at an estimated cost of $53 million ($27 million General Fund) in 2014-15. This restriction would generally require an IHSS recipient who receives more than 40 hours of care per week from a single provider to secure a second provider. To help IHSS providers set their schedules to avoid working overtime, the proposal requires all recipients and providers to complete workweek agreements to ensure no provider is scheduled to work more than 40 hours per week. These workweek agreements must be submitted to the county, reviewed by a county social worker, and entered by clerks into CMIPS II. The full-year cost of the administrative activities to restrict overtime is estimated to be $19 million ($10 million General Fund) in 2015-16. These administrative costs are estimated to decrease in 2015-16 primarily because the processing of workweek agreements by county social workers and clerks mostly occurs in the first year of implementation. In addition to the workweek agreements, as a method to deter providers from working overtime, the proposal provides for suspending IHSS providers who claim more than 40 hours per week on their timesheet on at least two occasions. After the first instance of overtime claimed on a timesheet, the IHSS provider would receive a warning notice that he\/she cannot claim more than 40 hours per week on his\/her timesheet. After the second instance, the IHSS provider would be suspended from the program for a period of one year. County social workers and clerks would conduct all administrative activities associated with the overtime restriction, including: (1) mass mailings about the overtime restriction and workweek agreement, (2) answering questions from IHSS providers and recipients about the overtime restriction, (3) reviewing the workweek agreements and entering the agreements into CMIPS II, (4) suspending and reenrolling certain IHSS providers, (5) adding IHSS providers to the Public Authority registry, and (6) coordinating services for the Provider Backup System, described below. Provider Backup System for Unforeseen Circumstances. The Governor’s budget proposes $69 million ($32 million General Fund) in 2014-15 for the costs associated with establishing a Provider Backup System at the county level. (In Figure 2, we display the estimated costs of the Provider Backup System in 2014-15 and 2015-16 after correcting for a technical budgeting error, discussed below.) This system would supply a backup provider for an unforeseen circumstance in which an IHSS recipient is in need of immediate assistance but his\/her regular provider has already worked 2014 -15 B U D G E T 14 Legislative Analyst’s Office www.lao.ca.gov 40 hours within the week, and other options, such as a second provider or the informal support of a family member or neighbor, are unavailable. In such circumstances, the consumer could call the system to request a backup provider who would be available in a short amount of time to provide assistance. Service hours delivered by a backup provider would be counted toward\u2014and not in addition to\u2014a recipient’s total allotment of monthly IHSS hours. The backup provider would receive a higher wage than the standard rate in the county to compensate him\/her for the need to provide services on short notice. The majority of the costs for the Provider Backup System funds a wage premium for backup providers above the county’s negotiated wage in order to compensate them for providing services on short notice. The estimate assumes that the cost of compensating the backup provider would be\u2014on average\u201425 percent higher per hour than the estimated statewide average cost per hour of $12.33 in 2014-15. This translates into a wage premium of $3.08, and an average wage of $15.41 per hour for backup providers in 2014-15. (We note the exact amount of the wage premium for backup providers will be specified in forthcoming budget-related legislation.) The administration assumes that IHSS recipients with at least 60 monthly service hours will use the Provider Backup System. Accepting the administration’s assumptions regarding the utilization of the Provider Backup System and the incremental cost increase of about $3 per hour for provider backup services, we find the administration has overestimated the cost associated with paying for authorized service hours delivered by a backup provider by $22 million General Fund in 2014-15 (and by $48 million General Fund in 2015-16). This overestimation is due to a technical budgeting error, the administration acknowledges. In the nearby box, we provide an overview of two small-scale programs in San Francisco and Los Angeles Counties that have some similarities to the proposed Provider Backup System. Apart from paying for backup provider wages, the estimated cost for the Provider Backup System in 2014-15 includes $4 million General Fund to make relevant changes to CMIPS II and $250,000 General Fund for paying overtime to some IHSS providers who may claim more than 40 hours per week, despite the overtime restriction, on no more than two occasions. Budget Proposes to Increase Rates Paid to Certain DDS Vendors The Governor’s budget proposes $7.5 million ($4 million General Fund) in 2014-15 to respond to the new federal labor regulations for DDS. These costs would double in 2015-16 to $15 million ($8 million General Fund). This amount funds a 2.25 percent increase in the rates paid to certain RC vendors that provide in-home assistance to individuals with developmental disabilities. The rate increase intends to provide vendors with sufficient funding to mitigate the fiscal impact of the requirement to pay their employees overtime for hours that exceed 40 in a workweek. Vendors may mitigate this fiscal impact by, for example, hiring more employees to deliver in-home services. However, as we noted earlier, the DDS does not have data available on the number of consumers who currently receive in-home assistance that exceeds 40 hours per week nor does it maintain data on the number of workers who provide in-home assistance that exceeds 40 hours per week. While we find it reasonable to assume that vendors will incur increased administrative costs to minimize overtime pay, we are uncertain because of data limitations whether a rate increase in the amount of 2.25 percent is appropriate. Analyst’s Recommendation. Although we find it reasonable that vendors would incur 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 15 Programs Similar to Provider Backup System Used in San Francisco and Los Angeles Counties A number of Public Authorities at the county level have administered small-scale programs that have some similarities to the proposed Provider Backup System. The In-Home Supportive Services (IHSS) hours provided by these programs are counted toward\u2014and not in addition to\u2014a recipient’s total allotment of monthly service hours. Below, we provide an overview of the programs in San Francisco and Los Angeles Counties that recipients may use when their regular provider is unavailable. San Francisco’s Public Authority Operates On-Call Program. Consumers in San Francisco who need an IHSS provider on short notice can get assistance from the On-Call Program operated by the Public Authority. The On-Call Program is intended for several unforeseen circumstances: (1) when a consumer suddenly needs a provider but has not yet hired one, (2) when a recipient’s regular provider is not available, and (3) when the consumer is being discharged from a hospital or nursing home without a regular provider in place. The On-Call Program phone line is available Monday through Friday from 8:30 a.m. to 5 p.m. with messages retrieved until 8 p.m. On weekends and holidays, an assigned counselor checks the On-Call line for messages five times throughout the day. The On-Call Program averages about 130 requests per month from consumers seeking assistance. The On-Call counselors dispatch a provider from a select group of providers who are willing to make themselves available on short notice and who receive a higher wage of $16 per hour plus a $5 transportation allowance (compared to the standard wage of $11.75 per hour in San Francisco with no transportation allowance). Los Angeles’ Public Authority Operates Backup Attendant Program (BUAP). The BUAP began as a pilot program in 2007 with the intent of providing high-need IHSS recipients in Los Angeles County with a backup provider available on short notice for urgent, temporary needs. Today, IHSS recipients who receive 25 hours or more of personal care each month are eligible to access BUAP when their provider and usual substitute provider are not available. The BUAP phone line is available Monday through Friday 8 a.m. to 5 p.m. When a consumer calls, the BUAP operators use a computer database to identify a backup provider who can best meet the consumer’s needs. All backup providers are required to undergo training or a proficiency exam in the provision of paramedical services, such as administering medications, wound care, or tube feeding. Backup providers also receive a higher wage of $12 per hour (compared to the standard wage of $9.65 per hour in Los Angeles County). We note that BUAP is not heavily utilized. In 2013, only 142 IHSS recipients were enrolled in BUAP. The BUAP phone line received 254 calls and provided 1,342 backup service hours for the full year in 2013. 2014 -15 B U D G E T 16 Legislative Analyst’s Office www.lao.ca.gov administrative costs to limit overtime, it is difficult to determine the actual cost to vendors in the absence of data. In order to assess whether a 2.25 percent rate increase for certain vendors is appropriate on an ongoing basis, we recommend DDS report to the Legislature\u2014no later than May 1, 2016\u2014on the results of the rate increase on impacted vendors. The DDS could potentially gather and report relevant information, such as the average number of new employees that were hired by vendors based on organizational size, the average administrative cost of hiring a new employee, and other methods used by vendors to mitigate the fiscal impact of overtime pay for employees who would otherwise work more than 40 hours in a week. IHSS Overtime Restriction Raises Fiscal and Policy Issues We find the Governor’s proposal to restrict overtime for IHSS providers to be worthy of consideration by the Legislature as a reasonable starting point for addressing the fiscal impact of the federal labor regulations on the IHSS program. The Governor’s proposal complies with the federal labor regulations in a manner that controls costs without reducing authorized service hours for IHSS recipients. Notwithstanding its merits, below we identify fiscal and policy issues that the Governor’s proposal raises. Later, we offer modifications to the Governor’s proposal that the Legislature may wish to consider to mitigate some of these policy concerns. Restricting Overtime Raises a Number of Policy Issues That Impact IHSS Recipients and Providers Below, we raise a number of policy issues with the Governor’s proposal to restrict IHSS providers from working more than 40 hours in a week. Some of these policy issues call into question whether the Governor’s proposal will work as intended to restrict overtime without causing recipients to forgo authorized service hours. Some IHSS Recipients Will Experience an Erosion of Consumer Choice. As we note, the administration estimates that about 37,000 recipients who receive more than 160 service hours per month from a single provider will be impacted by the overtime restriction. About 49,000 providers currently work more than 160 hours per month and would experience a reduction in income because of the proposed overtime restriction. Under the Governor’s proposal, high-hour recipients would need to hire, supervise, and train an additional provider. Further, recipients who receive less than 160 service hours per month would need to ensure that their providers\u2014who may work for multiple recipients\u2014do not exceed 40 hours in any workweek. For some recipients who receive less than 160 service hours per month, this may involve switching to a provider who can fully accommodate their care without exceeding 40 hours in a workweek or hiring a second provider. The overtime restriction may prove to be an inconvenience for recipients who have an established plan of care with a single preferred provider. For consumers who receive care from a live-in provider, or from a family member or relative, the overtime restriction and potential need to hire a second provider may prove to be undesirable. Finally, for recipients with certain disabilities, such as a developmental disability, we understand anecdotally that some may experience challenges in adjusting to a new provider. The requirement that no single provider work more than 40 hours per week can be understood as an erosion of the existing consumer choice of some IHSS recipients who would no longer be able to receive all of their care from a single provider of their choice. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 17 Uncertain Whether IHSS Providers Will Be Available to Fully Meet Predictable, Regular Care Needs. Because the Provider Backup System is only intended for unforeseen circumstances, an IHSS recipient who predictably and regularly needs more than 40 hours of assistance per week would need to retain at least two providers. It is uncertain if a sufficient number of IHSS providers would be available to meet this new demand for second providers\u2014in some cases, for a small number of weekly hours. Depending on the labor market in a particular geographic area and a county’s negotiated wage\u2014both of which change over time\u2014along with a consumer’s needs and preferences, there may or may not be a sufficient pool of available providers. We note that the following factors will likely assist consumers in identifying second providers: Public Authorities currently maintain registries of available IHSS providers (some providers on the registries may not be currently working at all), some existing IHSS providers who regularly work less than 40 hours per week may be willing to work additional hours for other recipients, and\u2014in 17 counties where wages are currently set below $9 per hour\u2014the increase in the state-mandated hourly minimum wage to $9 may encourage some individuals to work as IHSS providers. On the other hand, the Governor’s proposed one-year suspension of IHSS providers who claim overtime on two occasions, discussed further below, could somewhat reduce the pool of available providers. Uncertain Whether the Right Backup Provider Will Be Available for Unforeseen Circumstances. For consumers who are in need of a backup provider to provide unforeseen assistance within a workweek, we find that a higher wage for backup providers is a reasonable way to work toward ensuring that a sufficient pool of backup providers is available from which to draw on short notice. However, even with a higher wage, it remains uncertain whether the Provider Backup System will be able to successfully pair all consumers with backup providers who meet consumers’ individualized needs in a manner that maintains their quality of care and preserves their preferences. The consumer may live in a geographically isolated area, may communicate in a language other than English, may have paramedical needs, or other specialized needs during the period in which the unforeseen assistance is required. The system would need to have a sufficient pool of backup providers as well as an effective matching process in order to adequately meet consumers’ individualized needs and preserve consumers’ right to hire a provider of their choosing. Governor’s Proposal to Restrict Overtime Generally Lacks Flexibility. By restricting all overtime that exceeds 40 hours in a workweek, the Governor’s proposal inherently lacks flexibility. This lack of flexibility could have some significant policy consequences. Could Impede Consumers’ Access to Care. In the case of predictable, regular care for high-hour recipients, we are concerned about situations in which a county faces a shortage of available providers and is therefore unable to provide a consumer with a list of possible second providers. Under this scenario, the county would not have the flexibility to authorize overtime for a recipient’s regular provider until a second provider can be identified, and a consumer may be forced to forgo authorized care that exceeds 40 hours in a week in the interim. Could Result in Inefficient Response to Some Unforeseen Circumstances. Although the cost per hour of a backup provider is less expensive than the cost per hour of overtime for a regular provider, 2014 -15 B U D G E T 18 Legislative Analyst’s Office www.lao.ca.gov there may be other factors to consider\u2014 such as convenience and a consumer’s preference\u2014when the care needed is unforeseen and requires a provider to exceed 40 hours in a week, but is expected to be limited in duration to just a couple hours. For instance, a recipient could fall and require assistance from the provider to get up, or a doctor’s appointment may last longer than expected. Under the Governor’s proposal, there is no flexibility for a provider to claim overtime for these types of short, unforeseen care needs if he\/ she has reached\u2014or is approaching\u2014the 40-hour workweek limit. However, such a situation may be an inefficient use of the Provider Backup System, which includes not only the higher wage of the backup provider but associated administrative costs to coordinate services in a short time frame. Enforcement of Overtime Restriction Could Lead to Some Unnecessary Disruptions in Care. The Governor’s proposed one-year suspension of IHSS providers who claim overtime on two occasions\u2014without any exceptions\u2014raises concerns in that it may suspend some IHSS providers and unduly cause a disruption in care for individuals receiving care from these providers. For example, if a provider does not receive the warning notice\u2014 because of a change of address or for some other justifiable reason\u2014and as a result, claims overtime on two occasions, the provider would be suspended for a period of one year and the recipient would lose his\/her regular provider. The provider may also submit two timesheets simultaneously or in close succession\u2014both claiming overtime\u2014before he\/she receives the warning notice. Short of appealing the suspension, the provider would have no recourse but to wait for the period of one year to elapse. In cases in which the provider has made an honest mistake, the one-year suspension may be unwarranted and the recipient would likely experience a disruption in care that may cause him\/her to rely on the Provider Backup System or to forgo care while a new regular provider can be identified. Fiscal Assessment of Governor’s Proposal to Restrict Overtime After correcting the technical budgeting error, the administration estimates that the Governor’s proposal to restrict overtime for all IHSS providers, including administrative activities to prevent overtime and maintenance of the Provider Backup System, would cost $51 million ($25 million General Fund) annually. This is significantly less than the estimated cost of paying for the overtime\u2014 $401 million ($186 million General Fund) annually. Both the cost of the Governor’s proposal and the estimated cost of paying the overtime are subject to some uncertainty. On the one hand, the cost of restricting overtime under the Governor’s proposal is somewhat uncertain because the ongoing administrative costs could be higher than assumed and the ongoing Provider Backup System costs could be higher if utilization exceeds the administration’s assumptions. On the other hand, the cost of paying for overtime would likely be higher than estimated by the administration since providers could change their behavior (such as by working additional hours for other recipients) in order to receive overtime pay. Despite this uncertainty, the General Fund cost of restricting overtime as proposed by the Governor would still likely be significantly lower than the alternative\u2014paying for overtime for all IHSS 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 19 providers. We therefore find that on a purely fiscal basis, the Governor’s proposal makes sense. Even if the annual ongoing costs of restricting overtime were significantly higher, the state would still likely save more than $100 million General Fund annually by implementing the Governor’s overtime restriction instead of paying for overtime for IHSS providers. However, as we explained, there are programmatic implications associated with the Governor’s overtime restriction. Below, we suggest potential modifications to the proposal that the Legislature may wish to consider to mitigate, at least to some degree, these concerns. Potential Modifications to Proposed Overtime Restriction Because of the policy issues we raise with the Governor’s proposal to restrict overtime, the Legislature may want to consider potential modifications to the Governor’s proposal. In evaluating these modifications, the Legislature would want to weigh any additional costs of implementing the modification against the benefit of mitigating a particular policy concern using the following criteria. Costs Incurred for Overtime. What is the annual General Fund cost of overtime associated with the modification? Generally, mitigating an undesirable policy consequence of the overtime restriction\u2014 such as requiring a new provider for a high-hour recipient who currently relies on a single live-in provider\u2014would result in additional costs compared to what the Governor is proposing (through the payment of overtime at least for some circumstances). However, the Legislature may wish to incur this cost if the modification mitigates, at least to some degree, an undesirable policy consequence of the Governor’s overtime restriction. Consumer Choice. Does the modification preserve or infringe on the existing choice of a recipient to hire a single provider of his\/her choosing? Does the modification create added inconvenience for the consumer? The modification should mitigate\u2014at least to some extent for certain populations\u2014the undesirable policy consequence of reduced consumer choice and added inconvenience under the Governor’s overtime restriction. Administrative Cost and Complexity. Is the modification administratively costly and complex to implement? The modification should not be overly burdensome to implement at the state and county levels. Need for Additional Providers. Would the modification require the recruitment of new IHSS providers? The modification should not require a significant number of additional providers. Within the framework of the Governor’s proposal to restrict overtime, we find the Legislature has options to modify the proposal in a manner that addresses the policy concerns we raise. We assess each modification based on the criteria described above. We note that because IHSS is a Medi-Cal benefit, the implementation of some of these modifications would likely require approval from the federal Centers for Medicare and Medicaid Services (CMS) to ensure compliance with federal requirements. Provide Targeted Exemption for Providers of Certain Recipients The Legislature could consider a targeted exemption from the overtime restriction for the providers of certain IHSS recipients\u2014recipients 2014 -15 B U D G E T 20 Legislative Analyst’s Office www.lao.ca.gov who would find themselves in particularly disruptive situations if the overtime restriction applied to their providers. For example, a targeted exemption could include providers of (1) individuals with developmental disabilities who may face particular challenges in adjusting to a new provider, (2) individuals in rural counties who may face difficulties in finding a suitable second provider, or (3) individuals with live-in family or relative providers who strongly prefer to receive all of their care from the family member or relative. Because of federal Medicaid rules, we note there is significant uncertainty as to whether this modification would receive CMS approval. In Figure 3, we assess this modification to the Governor’s overtime restriction based on the criteria discussed above. Provide a Limited Allotment of Overtime Hours to Certain IHSS Providers The Legislature could consider modifying the Governor’s proposal by authorizing a limited allotment of overtime hours\u2014for example, 48 hours in a year\u2014to IHSS providers who work for high-hour recipients in order to give these providers some flexibility to work hours exceeding 40 in a week for special circumstances, such as a recipient’s fall or a long doctor’s appointment, without facing disciplinary action. This option could give providers who may already be in a consumer’s home the opportunity to address an unforeseen issue that is limited in duration to just a couple hours and could potentially reduce the number of calls placed to the Provider Backup System. We assess this modification to the Governor’s overtime restriction\u2014using the example of 48 hours of flexible overtime in a year\u2014 in Figure 4. Authorize Overtime When Other Providers Are Unavailable We noted earlier that it is uncertain if a sufficient number of additional providers will be available in all counties to meet the new demand for providers under the Governor’s proposed overtime restriction. If a county is unable to provide a consumer with a list of alternative providers or a backup provider, the recipient could presumably be forced to forgo authorized care. If the Legislature wishes to ensure that all recipients maintain their current level of access to services, then it could consider authorizing overtime for an existing provider when a county is unable to give recipients a list of alternative providers or supply a backup provider. By authorizing overtime for the recipient’s existing provider in these situations, the Figure 3 A Targeted Exemption From the Overtime Restriction for IHSS Providers of Certain Recipients Criteria Assessment of Modification Relative to Governor’s Proposal Costs incurred for overtime Additional costs, with amount dependent upon the overtime exposure of exempted providers delivering services to the targeted recipient population. Consumer choice Enhances consumer choice for the targeted recipient population. Administrative cost and complexity Results in some additional administrative activities\u2014and thus added costs and complexity\u2014associated with authorizing and tracking overtime for exempted providers of the targeted recipient population. Need for additional providers Reduces number of additional providers that would need to be recruited, since the targeted recipient population would not need additional providers. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 21 state could ensure that the IHSS recipient receives authorized service hours until a second provider or backup provider can be identified. We assess the modification of authorizing overtime for a provider in the event that the county is unable to provide alternative options to the recipient in Figure 5. Consider Cash and Counseling Model for IHSS Recipients With Live-In Providers The Cash and Counseling Model Is an Alternative to IHSS. Some states have implemented what is commonly referred to as the Cash and Counseling (or Self-Determination ) Model as an alternative to the IHSS model for the provision of personal care and domestic services. Under the Cash and Counseling Model, consumers receive a monthly sum of available funds, based on the cost of the hours of in-home services that they would otherwise have been authorized to receive under an IHSS-like program. Recipients have more flexibility in the use of these funds than they would in a program like IHSS. They can use these monthly sums to set wage levels; hire a provider; and purchase permissible goods that make it easier to remain at home\u2014expenditures not permitted now under IHSS. Under the Cash and Counseling Figure 4 Provide a Limited Allotment of Overtime, Such as 48 Hours Annually, to Certain IHSS Providers Criteria Assessment of Modification Relative to Governor’s Proposal Costs incurred for overtime Additional costs, with amount dependent upon the amount of the flexible overtime allotment and utilization by providers. For our example, assuming 49,000 providers working for high-hour recipients claim the full 48 hours per year, the overtime cost would be roughly $5 million General Fund annually Consumer choice Some added convenience and greater consumer choice for the special circumstances in which overtime is used. Administrative cost and complexity Results in some additional administrative activities\u2014and thus costs and complexity\u2014 associated with designating and tracking the flexible overtime allotment to ensure it is not exceeded. Need for additional providers Need for additional providers largely unchanged. Figure 5 Authorize Overtime When Other Providers Are Unavailable Criteria Assessment of Modification Relative to Governor’s Proposal Costs incurred for overtime Additional costs dependent upon the frequency and amount of overtime authorized. Consumer choice Enhances\u2014to some degree\u2014consumer choice by enabling a recipient to receive care from his\/her existing provider in the event that a county is unable to provide alternative options. Administrative cost and complexity Some additional administrative activities\u2014and thus costs and complexity\u2014associated with tracking instances of authorized overtime. Need for additional providers Reduces need for additional providers in the short term. Need for additional providers largely unchanged in the longer run. 2014 -15 B U D G E T 22 Legislative Analyst’s Office www.lao.ca.gov Model, a counselor (often a social worker) helps consumers craft spending plans; offers advice on hiring, supervising, and training a provider; and monitors use of the available funds. A bookkeeper from a financial management services agency assists the consumer in the paperwork required to pay a provider’s wages and withhold taxes. Under the Cash and Counseling Model, Live-In Providers Could Potentially Qualify for an Exemption From the Overtime Requirement Under Federal Labor Regulations. Based upon our review of the federal labor regulations, it appears that the Cash and Counseling Model could potentially have the effect of classifying the consumer as the sole employer of a live-in provider. Under such a scenario, the consumer could be able to claim the live-in domestic service worker exemption from the requirement to pay overtime to a home care worker. In effect, this would mean that live-in providers could work more than 40 hours per week and receive the set wage for all hours worked. As we noted earlier, half of IHSS recipients have a live-in provider. The ability of consumers with live-in providers to claim the live-in domestic service worker exemption under a Cash and Counseling Model would depend largely on the operational details of the program. Additionally, consideration of such a significant change to the IHSS program should weigh the benefits to consumers with live-in providers against the overall policy merits of this new model of care. We therefore recommend the Legislature require DSS to report in budget hearings with its initial take on the policy merits and trade-offs of the Cash and Counseling Model as an option for IHSS recipients with live-in providers. We assess this modification of providing a Cash and Counseling Model to recipients with live-in providers in Figure 6. Other Implementation Issues Regarding Governor’s Overtime Restriction If the Legislature wishes to work within the framework of the Governor’s proposal to restrict overtime, then we recommend the following two changes related to implementation of the proposal. Recommend Revision to Enforcement of Overtime Restriction for IHSS Providers. We described earlier that the Governor’s proposed one-year suspension of IHSS providers who claim overtime on two occasions\u2014without any exceptions\u2014raises concerns in that it could be Figure 6 Cash and Counseling Model for IHSS Recipients With Live-In Providers Criteria Assessment of Modification Relative to Governor’s Proposal Costs incurred for overtime No change in costs to pay overtime. Reduced Provider Backup System costs. Consumer choice Enhances the consumer choice of high-hour recipients with live-in providers, who could continue to receive all assistance from a single provider of their choice. Administrative cost and complexity Substantial administrative activities\u2014and thus costs and complexity\u2014associated with providing the counseling component of the model. Assuming all IHSS recipients with live-in providers chose the Cash and Counseling Model and received quarterly visits from a counselor, the cost of social worker time for these visits could be roughly $20 million General Fund annually. Potential additional costs associated with financial management services. Need for additional providers Reduces the number of additional providers that would need to be recruited. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 23 unduly disruptive to some IHSS recipients. For example, if a provider does not receive the warning notice\u2014because of a change of address or for some other justifiable reason\u2014and as a result, claims overtime on two occasions, the recipient would lose his\/her provider for a period of one year. The provider may also submit two timesheets simultaneously or in close succession\u2014both claiming overtime\u2014before he\/she receives the warning notice. Short of appealing the suspension, the provider would have no recourse but to wait for the period of one year to elapse. In such instances, we find a one-year suspension to be unduly punitive to both provider and recipient. We therefore recommend the Legislature revise the enforcement of the overtime restriction by adding a suspension that is one month in duration prior to the one-year suspension. In effect, providers would be suspended for a period of one month if they claim overtime on two occasions. We find that a shorter suspension would have a similar deterrent effect as a one-year suspension in preventing IHSS providers from claiming overtime, but would not force a recipient to go without his\/her preferred provider for an extended period of one year. We find that if a provider claims overtime on a third occasion, it would then be appropriate to suspend the individual for a period of one year. Recommend Quarterly Reporting From DSS on Authorized Hours Versus Paid Hours. To increase legislative oversight of recipients’ access to service hours under the Governor’s overtime restriction, we recommend the Legislature require DSS to report quarterly on the total number of IHSS hours authorized compared to the total number of hours claimed by providers in each county statewide. A differential between these two indicators that is greater than the historical average may indicate a possible shortage of IHSS providers in a particular county. Conclusion We find the Governor’s proposal to restrict overtime in the IHSS program has merit in that it complies with the federal labor regulations in a manner that controls costs without reducing authorized service hours for IHSS recipients. Our analysis finds that the Governor’s proposal would result in a net fiscal benefit to the state. We therefore believe the Governor’s proposal should be given consideration by the Legislature as a reasonable starting point for addressing the federal labor regulations in the IHSS program. Although our analysis finds that the Governor’s proposal results in a net fiscal benefit to the state, we raise various policy concerns with the proposal. If the Legislature wishes to proceed within the Governor’s proposed framework of restricting overtime, then we recommend the Legislature consider potential modifications to address the policy concerns raised. Ultimately, the Legislature would want to weigh its policy priorities against the cost of each modification in order to arrive at a suitable approach for addressing the budgetary impact of the federal labor regulations in the IHSS program. Aside from the Governor’s proposal to restrict overtime in the IHSS program, we find his proposal to fund the costs of newly compensable IHSS work activities to be reasonable. In regards to the Governor’s proposal to provide a rate increase for DDS vendors, we find it reasonable to assume that vendors will incur increased administrative costs to minimize overtime payments. Because of current data limitations on the exact amount of these costs, we recommend DDS report to the Legislature\u2014no later than May 1, 2016\u2014on the results of the proposed rate increase on impacted vendors in order to assess whether it is appropriate on an ongoing basis. 2014 -15 B U D G E T 24 Legislative Analyst’s Office www.lao.ca.gov IN-HOME SUPPORTIVE SERVICES Background Overview of IHSS. The IHSS program provides personal care and domestic services to certain individuals to help them remain safely in their own homes and communities. In order to qualify for IHSS, a recipient must be aged, blind, or disabled and in most cases have income below the level necessary to qualify for SSI\/SSP cash assistance. Recipients are eligible to receive up to 283 hours per month of assistance with tasks such as bathing, dressing, housework, and meal preparation. Social workers employed by county welfare departments conduct an in-home IHSS assessment of an individual’s needs in order to determine the amount and type of service hours to be provided. The average number of hours that will be provided to IHSS recipients is projected to be 84 hours per month in 2014-15 (after accounting for a previously enacted service reduction explained below). In most cases, the recipient is responsible for hiring and supervising a paid IHSS provider\u2014oftentimes a family member or relative. The IHSS Program Receives Federal Funds as a Medi-Cal Benefit. For nearly all IHSS recipients, the IHSS program is delivered as a benefit of the state’s Medicaid health services program (known as Medi-Cal in California) for low-income populations. The IHSS program is subject to federal Medicaid rules, including the federal medical assistance percentage reimbursement rate for California of 50 percent of costs for most Medi-Cal recipients. For IHSS recipients who generally meet the state’s nursing facility clinical eligibility standards, the federal government provides an enhanced reimbursement rate of 56 percent referred to as Community First Choice Option (CFCO). Because of the large share of IHSS recipients eligible for CFCO\u2014about 40 percent of the caseload\u2014the average federal reimbursement rate is 54 percent for the IHSS program. The remaining nonfederal costs of the IHSS program are paid for by the state and counties, with the state assuming the majority of the nonfederal costs. Counties’ Share of IHSS Costs Is Set in Statute. Budget-related legislation adopted in 2012-13 enacted a county MOE, in which counties generally maintain their 2011-12 expenditure level for IHSS\u2014to be adjusted only for increases to IHSS providers’ wages (when negotiated at the county level through collective bargaining) and an inflation factor of 3.5 percent beginning in 2014-15. Under the county MOE financing structure, the state General Fund assumes all nonfederal IHSS costs above counties’ MOE expenditure level. In 2014-15, the county MOE is estimated to be $994 million, an increase of $34 million above the estimated revised county MOE for 2013-14. To the extent wage increases negotiated at the county level are implemented in the remainder of 2013-14 or in 2014-15, the individual county’s MOE will increase by a percentage share of the annual cost of those wage increases. The Governor’s Budget Proposal Year-to-Year Expenditure Comparison. The budget proposes $6.4 billion (all funds) for IHSS expenditures in 2014-15, which is a 4.9 percent net increase over estimated revised expenditures in 2013-14. General Fund expenditures for 2014-15 are proposed at $2 billion, a net increase of $84 million, or 4.4 percent, above the estimated revised expenditures in 2013-14. This net General Fund increase incorporates the $34 million increase in the county MOE (which offsets General Fund expenditures) and several other factors described below. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 25 Costs to Comply With New Federal Labor Regulations. Increase of $209 million ($99 million General Fund) in response to recent federal labor regulations (affecting overtime pay and other matters) to take effect January 1, 2015. Please refer to the Human Services Compliance With Federal Labor Regulations analysis in this report for more detail on, and our analysis of, this proposal. Increase in IHSS Basic Services Costs. Increase of $68 million ($35 million General Fund) because of (1) caseload growth of 1.3 percent and (2) higher costs per hour because of the increase in the state-mandated hourly minimum wage from $8 to $9 beginning July 1, 2014. (Because the state enacted the minimum wage increase, the county MOE is not adjusted to reflect cost increases associated with the new minimum wage.) CMIPSII\u2014Transition to New Phase. Decrease of $40 million ($20 million General Fund) due to the transition from the design, development, and implementation phase to the maintenance and operation phase for the CMIPS II IT system that stores IHSS case records, provides program data reports, and authorizes IHSS provider payments. As of November 2013, all 58 counties have transitioned to CMIPS II. Partial Rollback of Reduction in Authorized Service Hours. Year-over-year increase of $15 million ($8 million General Fund) as a result of implementing current law that requires an ongoing 7 percent reduction in IHSS authorized service hours beginning in 2014-15, rather than the one-time 8 percent reduction in service hours that applied in 2013-14. Total General Fund savings from the 7 percent reduction are estimated to be $181 million in 2014-15. This 7 percent reduction in service hours is part of an IHSS settlement agreement\u2014 adopted by the Legislature\u2014that resolves two class-action lawsuits related to previously enacted budget reductions. New Services Costs Related to Coordinated Care Initiative (CCI). The budget also reflects an increase of $49 million in total expenditures ($22 million as reimbursement from the Department of Health Care Services (DHCS) originating from the General Fund) for (1) increased IHSS hours for existing recipients as a result of the CCI and (2) new IHSS recipients who are expected to transition out of more costly institutional care settings and into IHSS because of the CCI. As part of the CCI, the IHSS program will shift from a Medi-Cal fee-for-service benefit to a Medi-Cal managed care plan benefit in certain counties beginning April 1, 2014. For more background on the CCI, please refer to The 2013-14 Budget: Coordinated Care Initiative Update. Caseload Growth. The Governor’s budget assumes the average monthly caseload for IHSS in 2014-15 will be 453,417, an increase of 1.3 percent compared to the most recent estimate of the 2013-14 average monthly caseload. LAO Comments on Overall Budget Proposal. We discuss elsewhere in this report the Governor’s proposal to respond to federal labor regulations as they apply to IHSS and DDS. The balance of the IHSS budget changes as outlined above appear reasonable. We have reviewed the caseload projections for IHSS as they relate to caseload growth in prior years and do not recommend any adjustments at this time. We note that the 2014-15 caseload estimate does not take into account a relatively small but likely increase in 2014 -15 B U D G E T 26 Legislative Analyst’s Office www.lao.ca.gov IHSS recipients as a result of the CCI. If we receive additional information that causes us to change our overall assessment, we will provide the Legislature with an updated analysis. COMMUNITY CARE LICENSING QUALITY ENHANCEMENT AND PROGRAM IMPROVEMENT The CCL division of DSS develops and enforces regulations designed to protect the health and safety of individuals in 24-hour residential care facilities and day care. The Governor’s budget proposes expenditures of $118 million ($36 million General Fund) for CCL in 2014-15. This represents an 11 percent increase above estimated 2013-14 total expenditures (and a 37 percent increase above estimated 2013-14 General Fund expenditures). This increase is primarily the result of (1) the Governor’s proposal to take steps to enhance the quality of CCL and (2) providing General Fund monies to backfill federal funds that were lost as a result of the reduction in the federal Social Services Block Grant. Below, we provide some background on CCL and the Governor’s proposal. Background The CCL oversees the licensing of various facilities including child care centers, adult residential facilities, group homes, foster family homes, and residential care facilities for the elderly (RCFE). The division is also responsible for investigating any complaints lodged against these facilities and for conducting inspections of the facilities. The state monitors approximately 66,000 homes and facilities, which are estimated to have the capacity to serve over 1.3 million Californians. Additionally, DSS contracts with counties to license an additional 8,700 foster family homes and family child care homes. CCL Staffing and Facility Monitoring. The roughly 66,000 homes and facilities statewide directly under the regulatory purview of CCL are primarily monitored and licensed by just over 460 licensing analysts. These licensing analysts are located in 25 regional offices throughout the state and are responsible for conducting annually about 24,000 inspections and 13,000 complaint investigations. Current law requires CCL to conduct random inspections on at least 30 percent of all facilities annually, and each facility must be visited no less than once every five years. Although the CCL has had difficulty meeting these time frames in the past, the division is generally meeting these time frames currently. Past Budget Reductions Have Increased the Time Between Annual Visits. Prior to 2002-03, most facilities licensed by CCL were required to be visited annually. Budget-related legislation enacted in 2003 lengthened the intervals between visits for most facilities from one year to five years. Additionally, the legislation included trigger language that initially required CCL to randomly visit 10 percent of facilities each year. If, in a given year, the number of citations identified exceeded that of the prior year by 10 percent, the random visits that were required to be conducted would increase by an additional 10 percent. As a result of this trigger methodology, CCL is now required to randomly visit 30 percent of facilities each year, and the requirement that each facility be visited every five years continues. The CCL Began to Use a Key Indicator Tool (KIT). As a method to assist CCL in achieving the required inspection frequency, the KIT was formally adopted by CCL in the fall of 2010. This tool allowed CCL to increase the number of 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 27 enforcement visits licensing analysts were able to conduct within existing budget constraints. The KIT is a measurement tool that is designed to measure compliance with a small number of licensing standards to predict compliance with all of the remaining licensing standards. In other words, whether or not a facility is in compliance with certain measures is considered to be an indicator of whether it will be in compliance with all measures. Due to the reliance on key indicators, rather than the more comprehensive assessment, it takes less time for licensing analysts to conduct a KIT inspection than a more comprehensive inspection. Only facilities that are in generally good standing are eligible for the KIT inspection, and at any given point during a KIT inspection, a licensing analyst may discover issues that trigger a more comprehensive inspection. The DSS has partnered with Sacramento State University to evaluate the KIT process and expects to have more information and analysis of the KIT available in the spring of 2014. Recent Issues at Licensed Facilities Have Gained Attention. Recent health and safety incidents at licensed facilities have gained the attention of the media and the Legislature. These include incidents of neglect and abuse, as well as evidence in general of inconsistent and inadequate oversight, monitoring, and enforcement of licensing standards. Governor’s Proposal and LAO Analysis In response to recent health and safety issues discovered at facilities licensed by CCL, the Governor’s budget proposes a comprehensive plan to reform the CCL program. The proposal includes an increase of 71.5 positions and $7.5 million ($5.8 million from the General Fund) for the support of this proposed plan as well as budget- related legislation. Below, we describe the main components of the proposal and provide our analysis and recommendations in conjunction with each component that is discussed in detail. Overall, we find the Governor’s proposal contains elements that seek to respond to the recent issues and shortcomings identified at CCL. Although we do not raise any particular concerns with the level of staff requested by the department, we recommend some modifications to the accompanying budget- related legislation. Recognizes the Changing Needs of Clients at RCFEs There are currently over 7,500 RCFEs that are licensed by CCL for a capacity to provide care for about 175,000 people throughout the state. Historically, RCFEs have been considered to be different from skilled nursing facilities (SNFs) because their purpose is to serve those with less acute medical needs than those who would qualify for skilled nursing home placement. However, as the population has aged, and the general policy goal of caring for people in the least restrictive setting has been emphasized, the role of the RCFEs has also changed. Although the populations at the RCFEs have changed to include those with more acute medical conditions, the regulatory and enforcement structure at CCL has not changed, and there are currently no staff in the division with medical expertise. Additionally, there are increasing numbers of corporations applying for licenses to operate multiple RCFEs in multiple regional office jurisdictions. Because the RCFEs that are part of a larger corporation are inspected by licensing analysts from various regional offices, it is difficult for CCL to recognize patterns of problems associated with specific corporations. Begins to Develop Medical Expertise. The Governor’s budget proposes to establish a nurse practitioner at CCL to begin research on potential policy and regulatory changes that the department 2014 -15 B U D G E T 28 Legislative Analyst’s Office www.lao.ca.gov and Legislature should consider to ensure that there is adequate oversight of the RCFE population that is increasingly more medically fragile. Establishes a Mental Health Populations Unit. In response to the changing needs of residents in RCFEs, and recent legislation that is expected to increase the number of facilities that treat individuals with mental health needs, the department proposes to establish four positions to create a mental health populations unit. This unit would create mental health and treatment expertise at CCL and be responsible for such things as developing regulations, answering policy questions from the field, and coordinating oversight activities with the DHCS. Creates a Corporate Accountability Unit. The Governor’s budget proposes to establish two positions to create a corporate accountability unit that would be responsible for identifying and addressing issues of systemic noncompliance by RCFE operators with facilities in more than one of the geographic areas overseen by regional offices. LAO Analysis: Changing Medical Conditions of RCFE Clients Warrants Initiating Proposed Health Expertise at DSS. Traditionally, DSS has had a contract with a public health nurse consultant to provide medical expertise on specific complaint investigations. Potential evidence that the population in the RCFEs is becoming increasingly more medically complex is that DSS has become more reliant on the use of this contracted nurse in recent years. In 2011-12, DSS used this nurse for 30.5 hours of services. In 2012-13, the use of the contract nurse grew to 252 hours. Finally, only six months into 2013-14, the department has used the nurse for 272 hours of service. Another indication of the increasing medical complexity of residents at RCFEs is that many RCFE providers have successfully secured waivers to provide hospice level care in the facilities. Given the changing medical conditions of RCFE residents, we find merit in the department’s proposal to have a public health nurse assessing the appropriate role for RCFEs and whether changes to the enforcement structure are needed to adequately monitor these changing facilities. Building this capacity at DSS would enable it to consider whether the RCFEs are an appropriate placement for those with more acute medical conditions, and if so, whether licensing requirements should be different for RCFEs that provide services to those with more complex heath needs. Finally, this nurse could assist the department in considering whether partnerships with the Department of Public Health (DPH) (the entity that licenses SNFs) should be established for the monitoring of RCFEs that are authorized to serve clients with more complex medical conditions. Due to the increasing workload associated with recent legislation, and the changing profile of those applying for licenses to operate RCFEs, we also recommend approving the Governor’s request to establish a mental health populations unit and corporate accountability unit for CCL. Increases to Licensing Fees and Penalties Currently, licensed facilities are responsible for paying an application fee and an annual fee which is set in statute. The revenue from these fees are used to partially offset the cost of CCL enforcement and oversight activities. We note that the last fee increase for licensed facilities was a 10 percent increase in 2009. In addition to these annual fees, facilities are assessed civil penalties in the event they are found to have committed a licensing violation. Below, we describe the Governor’s proposal to increase licensing fees and penalties. Increases Application and Annual Licensing Fees for Facilities. This proposal increases the application and annual licensing fees for facilities by 10 percent. Additionally, the budget includes trailer bill language that would require fees to 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 29 be adjusted annually by the Consumer Price Index. The DSS estimates that this increase in the application and annual licensing fees would generate about $2 million in additional annual revenue to support CCL operations. (The fee is estimated to generate a total of roughly $21 million in 2014-15.) For the 2014-15 budget, the Governor assumes revenue from the fee increases to be $1 million to account for the time needed to allow for a notification period for facility providers. Figure 7 provides examples of what this change in the fee structure would mean for various provider types. Requires DSS to Monitor the Appropriateness of the Fee Over Time. Proposed budget legislation requires the department to analyze the fees at least once every five years to determine whether the levels are appropriate or should be adjusted. Increases Civil Penalties. The Governor’s budget proposes to increase civil penalties imposed on licensees for three types of serious noncompliance\u2014(1) initial finding of the violation, (2) repeat violations, and (3) failure to correct the violation. The fact that the maximum civil penalty under current law is $150 per day has been a concern for the department and stakeholders\u2014 especially in instances of significant noncompliance or even death of a client. The proposed changes are as follows. Serious Violations. Current law defines a serious violation as such things as (1) fire clearance violations, (2) accessible firearms, and (3) accessible bodies of water. The Governor’s budget proposes to add violations that result in the injury, illness, or death of a client to the list of serious violations. In addition to this change, proposed budget-related legislation increases the amount of the civil penalty that can be assessed for these violations from a maximum of $150 per day to five times the licensee’s annual fee per day. This means that facilities with higher annual fees (larger facilities) would pay more in civil penalties than those with lower annual fees (small facilities). As noted above, under this proposal, annual licensing fees will be adjusted each year for inflation. Since this proposal ties the civil penalties to annual fees, the civil penalties would also be adjusted annually. Repeat Violations. It is proposed that any facility that is cited for repeating the same serious violation within 12 months of the previously cited violation will have an immediate civil penalty assessed that is three times the facility’s annual licensing Figure 7 Selected CCL Fee Levels: Current Law Compared to Governor’s Proposal Examples of Facilities Current Law Governor’s Proposal Difference Application Annual Application Annual Application Annual Residential care facility for the elderly (4-6 people) $825 $413 $908 $454 $83 $41 Adult day program (16-30 adults) 275 138 303 152 28 14 Family child care center (1-8 children) 66 66 73 73 7 7 Child care centers (31-60 children) 880 440 968 484 88 44 CCL = Community Care Licensing. 2014 -15 B U D G E T 30 Legislative Analyst’s Office www.lao.ca.gov fee. If the violation continues, a penalty of 1.5 times the annual fee will be assessed daily until the violation is corrected. Under current law, facilities with repeat violations are assessed an immediate civil penalty of $150 and $50 for each day the violation continues. Figure 8 provides examples of what the proposed change in civil penalties for serious violations would mean for various facility types. Failure to Correct Violations Within Specified Time Frame. If a violation is not corrected within the time frame specified in the notice of the violation, a civil penalty that is 25 percent of the annual fee is assessed for each day the violation continues. Creates a Late Fee. The budget proposal requires the department to charge a late fee that represents an additional 10 percent of the unpaid civil penalty when the licensee fails to pay the penalty by the due date. The late fee would not be assessed on licensees who are in compliance with a payment plan developed by DSS. The proposal also prevents facilities that have not paid the civil penalties from new admissions or expansions of facility capacity. Broadens Eligible Uses of the Civil Penalty Fine Revenue. Currently, civil penalties that are assessed on licensed facilities are deposited in the Technical Assistance Fund and are required to be used by the department exclusively for the technical assistance, training, and education of licensees. Proposed budget-related legislation amends current statute to state that these funds may be used for these activities. In addition to the proposed statutory change in the allowable usage of the penalty revenues, the department is proposing budget bill language that would allow the Director of Finance to use the unspent revenue from the penalties deposited in the fund to offset the overall General Fund cost of the program. We note that the change in the civil penalty structure could result in significantly more penalty funds being deposited in this fund than in prior years. LAO Analysis: Reporting Back on the Appropriateness of Fees Will Increase Legislative Oversight. We find that the Governor’s proposal to increase fees has merit. Since the changes the Governor is seeking through the overall CCL proposal are aimed at improving the CCL system generally, it makes sense that facilities would share in the cost of those improvements. Although we are unsure of the exact level that the application and annual fees should be, the Governor’s approach Figure 8 Selected CCL Civil Penalty Levels for Serious Violations: Current Law and Governor’s Proposal Examples of Facilities Current Law Governor’s Proposal Initial Repeat Within 12 Months Initial Repeat Within 12 Months (Per Day) (First Day) (Each Additional Day) (Per Day) (First Day) (Each Additional Day) Residential care facility for the elderly (4-6 people) $150 $150 $50 $2,270 $1,362 $681 Adult day program (16-30 adults) 150 150 50 760 456 228 Family child care center (1-8 children) 150 150 50 365 219 110 Child care centers (31-60 children) 150 150 50 2,420 1,452 726 CCL = Community Care Licensing. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 31 requires the department to report back on the appropriateness of the fee levels on an ongoing basis. This report would enhance the Legislature’s oversight of the fees and assist it in determining whether the growth in fees is outpacing or keeping pace with the growth in the total program, and whether any adjustments to the fee structure are warranted. LAO Analysis: CCL Penalties Should Be Increased Incrementally. On the issue of civil penalties, we think it is reasonable to increase the maximum penalty for the most serious violations beyond what current law allows. It is difficult to assess the right level of civil penalty that serves to deter serious violations. Other states perform similar licensing functions to CCL and there is variation in the levels of civil penalties in place across states. California’s assessment of $150 per day for serious noncompliance, however, is relatively low compared to other states. Although it is difficult to determine the appropriate levels at which to set civil penalties, we agree with the concept of basing the level of the civil penalty on the size of the facility. This is because setting a flat rate for all facility types (such as the $150 in place under current law) could result in an unequal deterrent effect across facility types\u2014a $150 penalty for a very small facility with a limited amount of revenue may be a larger deterrent than it would be for a larger facility that generates more revenue. Additionally, the act that resulted in the civil penalty puts more people at risk in larger facilities than in smaller facilities. Because of the uncertainty surrounding the appropriate level of civil penalties, and the variations in these levels across states, the Legislature may wish to consider a more gradual ramp up of civil penalty levels than that which is proposed by the Governor. For example, the Legislature could set civil penalties for the initial serious violation at three times the annual licensing fee (rather than at five times as proposed by the Governor) and repeat violations equivalent to the annual license fee level (rather than at three times as proposed by the Governor). This gradual increase to the civil penalties would still allow for a significant increase in penalty levels in the budget year, but also allow the Legislature to evaluate the appropriateness of the penalties again in a year to determine whether additional increases should be implemented. We understand that the current, low civil penalties for serious violations are especially concerning when the violation is related to the serious injury, or even the death, of a resident. One option would be to implement an even more significant increase in the civil penalty amounts for these particular violations. We recommend the Legislature require DSS to report back annually with information that will help the Legislature evaluate the appropriateness of the levels of civil penalties and determine whether further adjustments are warranted. This report should include the number of serious violation penalties issued, the number of penalties that were appealed, and the rate of the collection of the penalties. LAO Analysis: Reasonable to Use Penalty Revenues to Offset General Fund Costs. Because the funding from penalties is not a predictable and reliable revenue source, the Governor’s budget does not assume revenue from penalties to fund the CCL proposal. However, as we noted, the proposed legislation opens up the possibility to use these funds for purposes beyond what current law allows. Additionally, the proposed budget bill language would authorize the Director of Finance to use unspent penalty revenues to offset General Fund costs in the program. We find it to be reasonable to use penalty revenue to fund the basic cost of the CCL program. We note that using fee and penalty revenues to support licensing\/permitting and enforcement activities is a common practice 2014 -15 B U D G E T 32 Legislative Analyst’s Office www.lao.ca.gov among state regulatory programs. However, if the Legislature has other priorities for the penalty revenues, beyond offsetting General Fund costs, it could enact statutory changes that stipulate such priorities. Makes Field Staff Available for More Inspections by Centralizing Certain Activities and Providing Support Staff The Governor’s proposal requests 34.5 positions to centralize two activities that are currently being provided at each regional office. By centralizing these activities at the state headquarters level, it is intended by this proposal that staff at the regional offices will be freed up to conduct more inspections. Creates a Centralized Application Processing Unit. Currently, applications for licensure are handled at the regional office level. Licensing analysts who would otherwise be in the field conducting inspections dedicate a portion of their time to processing applications for licenses. The budget proposes to centralize this function by creating a specialized, trained application processing unit at the state headquarters level. Establishes a Statewide Complaint Hotline. Similar to license application processing, complaints against licensed facilities are handled at the regional offices. Licensing analysts who would otherwise be conducting inspections rotate the responsibility to stay in the office to receive complaint calls. The Governor’s budget proposes to centralize the complaint intake process and to create a statewide toll-free public complaint hotline. In 2012-13, DSS received 9,698 licensing related complaints. In addition to receiving calls related to complaints, the regional offices receive general inquiries from the public and requests to verify licensing status. Provides Support Staff to Assist Special Investigators. The Governor’s budget requests six positions to assist special investigators at CCL. These special investigators have peace officer status and are responsible for investigating the most serious complaint allegations received by CCL. LAO Analysis: Centralizing Application Processing and Complaint Intake Could Increase State Oversight and Efficiency. We find that centralizing these activities could result in efficiencies, increased consistency, and better state-level oversight for CCL operations. It is our understanding that the current process for applying for a license is cumbersome from the applicant perspective. In some cases, an applicant that is applying for licensure in several different regions may receive different application-related questions and guidance from the different licensing analysts in the various regional offices. By creating a centralized application processing unit where staff are trained specifically on processing applications, CCL would be able to ensure that a single licensee with multiple applications gets one reviewer and one set of instructions. Additionally, from the state’s perspective, having the application processed centrally would allow it to better track applicants who are operating multiple facilities throughout the state. By providing a statewide complaint hotline, there would be benefits to both the public and state. The public would have one number to call for any complaint they would like to report to the licensing agency. Additionally, the public could call this number to verify a facility’s licensure status and the citation and complaint history for a particular facility. From the state’s perspective, creating this centralized unit would allow for improved consistency in complaint intake and response. By centralizing the intake of complaints, the state will be able to better track the types of complaints coming in statewide and potentially recognize patterns that may indicate a need for an inspection or increased enforcement. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 33 LAO Analysis: Support for Special Investigators Appears Reasonable. It is reasonable to provide these support staff for the special investigator peace officers at CCL. These assistants would perform the activities that do not require peace officer status, but are currently being done by peace officers. By freeing the investigators of this workload, they could be available for more field work. Creates New Enforcement Tools for CCL Currently, CCL has the authority for three major enforcement actions after discovering instances of serious noncompliance\u2014(1) create a corrective action plan (2) issue civil penalties, and (3) revoke or suspend the license of a facility. In some cases, while issuing a civil penalty or corrective action plan may not seem like enough of a penalty for a particular violation, revoking the license may seem to be too severe. Additionally, there are significant logistical details involved when a decision has been made to revoke a license\u2014most importantly, alternative placements for residents or clients of the facility that had its license revoked must be secured. For the clients of these facilities, these relocations can be physically and emotionally challenging. Governor’s Budget Establishes a Temporary Manager and Receivership Process. The Governor’s budget proposes to provide DSS with an additional enforcement tool for CCL. Essentially, in instances where the department determines that the residents of a particular facility are likely to be in danger of serious injury or death, and the immediate relocation of clients is not feasible, a temporary manager or receiver could be appointed to act as the provisional licensee. The temporary manager or receiver would stay in the role until the facility has become compliant with the law, a new operator takes over the facility and becomes the licensee, or the facility is closed and residents are transferred to other facilities. The proposal does not apply to small facilities that serve less than six residents and are also the principal residence of the licensee. It is our understanding that the funds to pay for this process would be paid from the revenues generated by the facility. To the extent these revenues are not enough, the department could advance funding from the Technical Assistance Fund (the fund that holds the civil penalties) to cover the costs. The budget-related legislation requires the licensee to ultimately reimburse the department for the advanced costs. LAO Analysis: New Enforcement Tool Makes Sense in Concept, but Details Warrant Careful Consideration. We agree with this proposal in concept. As a result of the complex issues involved in revoking the license of a facility, it is reasonable to authorize CCL to use the additional enforcement tool involving a temporary manager and receivership structure. However, we note that the Governor’s proposed trailer bill language includes many implementation and policy details related to such things as (1) limits on the amount of funding the temporary manger or receiver is able to spend while acting in this role, (2) appeal rights of the licensee, and (3) length of time that the temporary manger or receiver is authorized to act in this capacity. It is our understanding that this temporary manager and receivership process was largely modeled off of the process DPH uses in its oversight of SNFs. Given the significant implementation details that are specified in the proposed legislation, we recommend that the Legislature require the department to report at budget hearings on (1) the main differences between the CCL proposal and how DPH currently administers its receivership and temporary manager process for SNFs, and (2) the rationale for these differences. 2014 -15 B U D G E T 34 Legislative Analyst’s Office www.lao.ca.gov Establishes a Quality Assurance Unit The current IT systems used for CCL were not designed to have the capacity to produce automated reports that allow for statewide oversight and tracking of complaints, penalty actions, or enforcement outcomes. As a result, compiling data for CCL to use to perform oversight and provide information to the public is mostly done manually and is not usually able to be done quickly. The Governor’s budget proposes to establish six positions to form a unit dedicated to conducting quality assurance reviews on a regular basis. This unit would be tasked with reviewing the data that is available in the current system to (1) respond to requests for information, (2) identify training needs in the field, and (3) identify patterns that may indicate vulnerabilities in the current enforcement process. The administration has acknowledged the shortcomings of its current CCL IT infrastructure. In response to this, the administration has indicated that it is currently in the early stages of analyzing the costs and potential benefits of implementing a new IT system for CCL. LAO Analysis: Given Current IT Limitations, Quality Assurance Unit Proposed Is Reasonable. Given that there is an immediate interest in the collection of quality licensing data, we recommend approving the department’s request to create a quality assurance unit. It is our understanding that this unit would be able to track performance of staff at the regional office level. Additionally, this unit would be able to identify training needs based on patterns it may uncover in the review of data. Although we recommend approving the establishment of a quality assurance unit, since the department is currently in the early stages of evaluating the costs and benefits of a new IT system, we recommend that these positions be limited-term to allow for a future evaluation of the workload as the state moves towards the implementation of the IT project. Additionally, if there are certain activities that the Legislature would want the new system to have the capacity to perform, these priority functions should be communicated to the administration during the budget hearings process. Examples of these priority functions could be the ability for the new system to allow the public to access current and historical licensure and citation history online and the ability to run statewide compliance and demographic reports. Creates a More Robust Training Program for Managers and Licensing Analysts Training for Licensing Analysts. The department indicates that in difficult budget times, it reduced the amount of training it required licensing program analysts to complete from six weeks of intensive training to 18 hours of webinar training and 80 hours of in-person training. The Governor’s budget proposes to restructure the training for licensing analysts to require two additional weeks of in-class training and an ongoing training requirement. Training for Licensing Managers. Although licensing managers participate in 80 hours of state-required general supervisory training, DSS currently does not have CCL-specific training for licensing managers. The licensing managers are responsible for reviewing complaint investigations and administrative actions taken by the licensing analysts. In some cases, the documents they are reviewing involve allegations of injury, illness, or death. The Governor’s budget proposes one position and funding for a contract with an academic institution to develop a CCL-specific training curriculum for licensing managers. LAO Analysis: A More Robust Training Program Could Increase Enforcement Consistency. It is our understanding that there is significant variation and inconsistency across 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 35 the state in terms of how licensing analysts and managers perform their enforcement-related duties. The lack of a robust training program for licensing analysts and managers is likely a contributor to this. We recommend adopting the administration’s proposal to create a more robust training program for analysts and managers. Providing this training could result in a more consistent application and enforcement of licensing statutes and regulations across the state. This training is increasingly important when coupled with the Governor’s proposal to increase fines for civil penalties. Because the civil penalties are proposed to be higher under the Governor’s proposal, it is even more important that the licensing analysts and managers are appropriately assessing these penalties. Provides Resources to Support Licensees and Administrators One issue that has been raised by licensees is that the increase in the time between periodic, scheduled annual inspections has resulted in CCL providing more reactive enforcement than proactive enforcement. It is thought that if licensing analysts were visiting facilities more frequently, they could provide advice to licensees that would help them maintain compliance with the law and avoid penalties in the first place. To address some of the concerns from the licensees, the Governor’s budget contains two components that aim to provide more guidance to facility licensees and administrators to potentially reduce the instances of noncompliance. The first component of the proposal is the establishment of a technical assistance unit at the state level that is available to respond to questions and requests for guidance from licensees and licensing analysts. It is our understanding that this unit would be able to provide field staff and licensees with guidance to ensure that the actions they take comply with the law and assist in preserving the health and safety of the clients. Currently, facilities with residential clients are required to have certified administrators who are responsible for the operation of the facility. These administrators must attend 40 hours of department-approved training in order to be certified. This proposal also includes a component that would provide for the department to conduct quality assurance monitoring of the training programs facility administrators are required to attend. LAO Analysis: Increased Intervals Between Inspections Makes Up-Front Guidance Important. We find that these additional resources to provide more up-front guidance to licensees, administrators, and licensing analysts in the field is a good investment. Since the Governor’s proposal increases penalties for noncompliance, it is important that program rules and expectations are clearly communicated to facility licensees and administrators to ensure that the state is holding them accountable for complying with rules that were effectively communicated to them. LAO Overall Take on the Governor’s Proposal Governor’s Approach to First Address CCL Infrastructure Makes Sense. Overall, we find this to be a comprehensive proposal that seeks to respond to identified failings of CCL, including the recent health and safety issues uncovered in facilities licensed by CCL. We understand that there is interest in exploring options to decrease the time intervals between required licensing visits, but we find that it is reasonable to first address these general, programmatic infrastructure-related issues\u2014such as developing a training curriculum for analysts, evaluating the changing role of RCFEs, reforming the fee and penalty structure, 2014 -15 B U D G E T 36 Legislative Analyst’s Office www.lao.ca.gov and changing the way complaints and applications are processed\u2014prior to making an increased investment in additional inspectors at the local level. This is because, until the administration addresses the current inefficiencies and shortcomings of CCL, the actual level of additional resources needed to appropriately increase the frequency of inspections is unknown. Addressing the inefficiencies and implementing a new quality assurance unit and IT system for CCL could lead to a more targeted, informed approach to conducting inspections and oversight. Further, there are some aspects of the Governor’s proposal, such as training improvements, that should be in place before there is a significant increase in licensing analysts to conduct inspections. Summary of LAO Analysis and Recommendations In summary, we support the administration’s proposal to begin to respond to the recent problems identified at CCL. Although we do not raise any particular concerns at this time with the level of the staffing request\u201471.5 positions proposed (with the exception of recommending that six positions be approved as limited term)\u2014we do make several recommendations for modifications to the accompanying budget-related legislation. Specifically, we recommend that the Legislature consider: Implementing a more gradual increase in the level of civil penalties assessed for findings of serious noncompliance, with periodic reports to the Legislature. Using the budget hearing process to (1) require the department to provide more detail on the temporary manager and receivership process, and (2) communicate CCL IT-related priorities to the administration. CALWORKS The CalWORKs program was created in 1997 in response to the 1996 federal welfare reform legislation, which created the federal Temporary Assistance for Needy Families (TANF) program. CalWORKs provides cash grants and welfare- to-work (WTW) services for families whose income is inadequate to meet their basic needs. Grant amounts vary across the state and are adjusted for family size, income, and other factors. For example, a family of three in a high-cost county that has no earned income currently receives a monthly cash grant of $638 per month (equivalent to 39 percent of federal poverty guidelines). A family in these circumstances would generally also be eligible for food assistance through the CalFresh program in the amount of $494 per month and health coverage through Medi-Cal. CalWORKs Work Requirement. As a condition of receiving aid, CalWORKs families that include able-bodied adults are required to be employed or participate in WTW activities (hereafter referred to as the work requirement ) and are entitled to receive services intended to help meet this requirement. Adults that fail to comply with the work requirement without good cause are sanctioned by being removed from the calculation of the family’s grant, resulting in decreased assistance (generally about $125). Barriers to Employment. Many CalWORKs recipients face circumstances, commonly referred to as barriers, that make it difficult to obtain long-term employment. These barriers can include low educational attainment, low English proficiency, lack of work experience, responsibility 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 37 of caring for disabled parents or children, lack of child care, learning disabilities, poor mental health, substance abuse, domestic violence, prior criminal convictions, and others. In some cases, the CalWORKs program will exempt recipients with certain barriers from the work requirement. In other cases, the CalWORKs program provides services intended to help address the barriers. These services include adult basic education, English as a Second Language services, subsidized child care, unpaid and subsidized work experience opportunities, mental health and substance abuse treatment, domestic violence services, and others. CalWORKs Funding. CalWORKs is funded through a combination of California’s federal TANF block grant allocation ($3.7 billion annually), the state General Fund, and county funds (including significant amounts spent by counties as a result of state-local realignment). In order to receive its annual TANF allocation, the state is required to spend an MOE amount from state and local funds to provide services to families eligible for CalWORKs. In recent years, this MOE amount has been $2.9 billion. While the CalWORKs program makes up the majority of TANF and MOE spending, it is important to note that the TANF block grant is used to fund a variety of programs in addition to CalWORKs, and some General Fund expenditures outside CalWORKs are counted toward the MOE requirement. Overview of the Governor’s Proposal As shown in Figure 9, the Governor’s budget proposes $5.5 billion in total funding for the CalWORKs program in 2014-15, a net increase of $83 million over estimated current-year funding. This increase is the net effect of a $176 million increase in employment services and $5 million in other increases, partially offset by a total of $98 million in decreased funding for cash grants, child care services, and program administration. These year-over-year changes largely reflect (1) lower costs due to expected CalWORKs caseload decline; (2) the implementation of program changes enacted in previous years, including various significant changes to CalWORKs employment services and a 5 percent grant increase effective March 2014; and (3) a $10 million increase in funding tied to a proposed Parent\/Child Engagement Demonstration pilot project. Each of these items is discussed in greater detail below. While total funding for CalWORKs would increase under the Governor’s proposal, General Fund support for CalWORKs would decrease from $1.2 billion in 2013-14 to $637 million in 2014-15. This primarily reflects a decision made as part of the 2013-14 budget package to use certain funds provided to counties under 1991 realignment for local health programs to offset General Fund expenditures in the CalWORKs program. Under the Governor’s proposal, the amount of health realignment funds used to offset General Figure 9 CalWORKs Budget Summary All Funds (Dollars in Millions) 2013-14 Estimated 2014-15 Proposed Change From 2013-14 Amount Percent Cash grants $3,072 $3,051 -$22 -1% Employment services 1,185 1,361 176 15 Stage 1 child care 406 385 -22 -5 Administration 567 511 -55 -10 Othera 172 177 5 3 Totals $5,402 $5,485 $83 2% a Excludes federal Temporary Assistance for Needy Families funds used to provide financial aid for certain low-income students in the Cal-Grants program. 2014 -15 B U D G E T 38 Legislative Analyst’s Office www.lao.ca.gov Fund costs in CalWORKs would increase by $600 million in 2014-15 to a total of $900 million. (For more information on the redirection of health realignment funds, see the Medi-Cal write-up in our report The 2013-14 Analysis of the Health Budget.) CalWORKs Caseload Decline Expected to Continue During Budget Year. The CalWORKs caseload rose substantially during the recent recession, peaking in June 2011 at over 597,000 cases. Since that time, the caseload has been declining due to enacted policy changes and an improving labor market. The budget estimates that the average monthly caseload in 2013-14 will be 545,647 cases\u20142.5 percent lower than during the previous year. The average monthly caseload is projected to further decline by 3 percent in 2014-15 to 529,367 cases. A declining CalWORKs caseload generates program savings as fewer families receive cash assistance and WTW services. In the Governor’s budget, these savings are more than offset by net costs associated with ongoing and proposed initiatives discussed below. We find the administration’s caseload estimate reasonable and consistent with our expectations of a long-term downward caseload trend as the labor market and earnings prospects for low-income families continue to improve. The following sections will (1) discuss the implementation of recently enacted program changes; (2) review the role of realignment in the CalWORKs budget, focusing on a recently created mechanism that funds future CalWORKs grant increases with 1991 realignment growth revenues; and (3) evaluate the Governor’s Parent\/Child Engagement Demonstration proposal. Implementation of Previously Enacted Program Changes Several significant program changes enacted in prior years will continue to be implemented during 2014-15. The following section briefly describes the state’s progress in implementing these changes and the associated fiscal impact assumed in the Governor’s budget. Phase-Out of Short-Term Young Child Exemptions Beginning in 2009-10 and continuing through half of 2012-13, the Legislature temporarily broadened the circumstances under which counties could exempt CalWORKs recipients from the work requirement. Budgetary savings were achieved by not providing subsidized child care and employment services to most of the exempted population (some exempted recipients chose to participate in WTW activities despite their exemption). These temporary exemptions were eliminated effective January 2013, and counties are required to meet with all formerly exempt recipients by the end of 2014 to inform them that, unless the recipients are eligible for and choose to take an additional exemption, they are now subject to the work requirement and are entitled to receive supportive services. As shown in Figure 10, the rate of exemption from the work requirement increased dramatically in 2009-10, but has begun to decrease since early 2013 as counties have begun to make contact with formerly exempt recipients. The DSS estimates that 11,769 cases remain to be contacted before the end of December 2014. The Governor’s budget proposal includes $99 million (General Fund) to provide child care and employment services to families newly participating in WTW. This amount appears reasonable and is consistent with our understanding of the pace and cost of phasing out the short-term exemptions. WTW 24-Month Time Limit As part of the 2012-13 budget package, the Legislature enacted two fundamental, ongoing changes to CalWORKs. First, the state rules that 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 39 govern the activities a recipient may participate in to meet the work requirement were altered to provide greater flexibility to recipients to participate in activities and receive services that best align with addressing barriers to employment. Second, a new 24-month limit on adult eligibility for CalWORKs assistance under these more flexible rules was introduced. Once 24 months of assistance under the flexible state rules are exhausted, adult recipients are required to meet the work requirement under relatively less-flexible federal work rules, which generally have a heavier emphasis on employment, as opposed to education, training, or certain activities designed to address barriers to employment (such as mental health or substance abuse treatment). Recipients that fail to meet the applicable work rules at any time while receiving aid are sanctioned by having their family’s grant reduced by the adult portion. Months of participation under the 24-month time limit need not be consecutive, meaning that cases that participate in activities that meet federal requirements in a given month will not have that month counted against their limit. Additionally, counties may grant up to 20 percent of cases that have passed the 24-month limit and meet certain criteria an extension to continue to participate under state rules. We expect that the implementation of the WTW 24-month time limit may result in some General Fund savings in two primary ways. First, increased work rule flexibility may result in a greater number of families finding employment with wages high enough to disqualify them from CalWORKs assistance. Second, some adult recipients will reach the 24-month time limit, fail to comply with federal work rules, and not be granted extensions, resulting in decreased cash assistance and employment services for these families. The administration has not estimated any savings from the WTW 24-month time limit during 2014-15. We believe this is appropriate for a few reasons. First, if a greater number of recipients found employment because of the program changes, we would expect the CalWORKs caseload to decline. However, there are many factors that could cause the CalWORKs caseload to decline and data are not available to isolate the effect, if any, of the new time limit and related changes. Second, the earliest any recipient could reach the 24-month time limit is January Rate of Exemptiona From CalWORKs Work Requirement Figure 10 a Rate of exemption defined as number of individuals exempt from the work requirement divided by the total number of individuals that could potentially be subject to the work requirement (including those exempt from the work requirement, sanctioned, and enrolled in welfare-to-work activities). 5 10 15 20 25 30 35 40 45% 2009 2010 2011 2012 2013 Short-Term Exemptions in Effect Graphic Sign Off Secretary Analyst MPA Deputy ARTWORK #140100 Template_LAOReport_mid.ait 2014 -15 B U D G E T 40 Legislative Analyst’s Office www.lao.ca.gov 2015; however, there are many situations that can result in a month not being counted toward the 24-month limit, thereby extending the earliest date for most to reach the 24-month limit past January 2015. Based on limited, preliminary data, less than one-third of recipients participating in WTW had the month of November 2013 count against their limit. Based on this limited data, we expect that the number of recipients exhausting their 24-month limit in the latter half of 2014-15 will be relatively small. Additional data needed to more precisely estimate the fiscal and policy effects of the 24-month limit will become available as implementation continues during 2014. Early Engagement Strategies As part of the 2013-14 budget package, the Legislature enacted Chapter 21, Statutes of 2013 (AB 74, Committee on Budget), which included three strategies intended to help recipients more effectively engage with the WTW component of CalWORKs in light of increased work rule flexibility and the introduction of the 24-month time limit. Similar to these previous changes, the early engagement strategies were in part intended to further assist CalWORKs recipients to address barriers to employment. These strategies, collectively known as early engagement, include an expansion of subsidized employment; additional funding for counties to provide enhanced services, known as family stabilization services, to certain CalWORKs families; and funding to develop and implement a new statewide WTW appraisal tool. The Governor’s budget proposes a combined $139 million (General Fund) for early engagement in 2014-15, a $92 million increase over estimated spending on these initiatives in 2013-14. This increase essentially reflects the costs of a full year of implementation. Progress on implementing each of the early engagement strategies and proposed funding for 2014-15 are discussed in detail below. Expanded Subsidized Employment. Counties were allocated $39 million in September 2013 to create additional subsidized employment positions for CalWORKs recipients. This amount was budgeted to allow for gradually building up the number of new subsidized positions to roughly 8,250 by June 2014. Chapter 21 defined broadly how the additional funds could be used and required counties to submit plans to DSS describing in greater detail how they intend to use the funds. The DSS reports that several counties have submitted plans to date, with more expected in the coming months. For 2014-15, the Governor proposes to increase the amount of funding for expanded subsidized employment to $134 million (General Fund), with offsetting grant savings of $38 million (a net amount of $96 million). Offsetting grant savings occur because of reductions in cash assistance received by subsidized employment recipients to reflect increased wages. This amount represents funding to continue 8,250 positions through the 2014-15 fiscal year. As we have noted in previous analyses, this represents a substantial expansion of the role of subsidized employment in the CalWORKs program. In light of the Legislature’s approval of expanded subsidized employment in the 2013-14 budget package, we find that the magnitude of increased funding for subsidized employment is consistent with the costs of continued implementation for a full year. Family Stabilization Services. Counties were allocated $11 million in November 2013 to provide intensive case management and specialized services to adults and children in CalWORKs families facing certain immediate, destabilizing needs during the second half of 2013-14. Chapter 21 broadly defines eligibility for family stabilization services and what types of services may be provided, and requires counties to submit plans to DSS outlining how family stabilization funds will be used. However, implementing instructions 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 41 from DSS were delayed and no county plans had been received by DSS at the time this analysis was prepared. For 2014-15, the Governor proposes to increase the amount of funding for family stabilization services to $26 million (General Fund), which largely represents the same level of funding as was provided in 2013-14 but for a full year of services. Without the experience of county implementation, it is difficult to assess the ongoing need for family stabilization services. We find the budgeting methodology used by the administration to establish the funding level for the services to be a good start and recommend that the Legislature reevaluate the funding level for family stabilization as part of the 2015-16 budget process, taking into account county experience that will have accumulated by that time. Standardized Appraisal. Chapter 21 expanded the scope of the appraisal performed for new WTW participants, and required counties to use a new standardized appraisal tool to be developed by DSS beginning in January 2014. The 2013-14 budget package included $8 million in additional funding for counties to account for the additional time requirements of the new appraisal. However, the development of the standardized appraisal has also been delayed. As of the writing of this analysis, DSS is in the final stages of engaging a contractor to customize and implement a standardized appraisal tool that will be known as the Online CalWORKs Appraisal Tool, or OCAT, which is anticipated to be available to all counties by July 2014. The Governor proposes $16 million (General Fund) in additional funding for counties for 2014-15. This amount reflects a full year of implementation of OCAT. Five Percent Grant Increase As part of the 2013-14 budget package, the Legislature also approved a 5 percent CalWORKs grant increase that will take effect in March 2014. For a family of three in a high-cost county that has no earned income, the amount of cash assistance received will increase to $670 per month (41 percent of federal poverty guidelines), while the statewide average grant is expected to rise to $480 per month during 2014-15. The administration estimates that the cost of providing this grant increase from March through June of 2014 is $58 million, with a full-year cost in 2014-15 of $168 million. As described in greater detail in the following sections, the costs of this grant increase are to be funded with certain 1991 realignment growth revenues, to the extent that such revenues are estimated to be available. The Governor’s budget assumes that the realignment growth revenues will be more than sufficient to cover the partial-year cost of the 5 percent increase during 2013-14, but that realignment revenues will be insufficient in 2014-15, such that $6.3 million of the total cost of the increase would be borne by the General Fund. State-Local Realignment and the CalWORKs Budget State-local realignment plays an important role in funding the CalWORKs program. The following section provides some background on state-local realignment, recent changes to realignment, and the ways that these recent changes affect the CalWORKs budget. 1991 Realignment Program Changes. In 1991, the state enacted a major change in the state and local government relationship, known as realignment. The 1991 realignment package: (1) transferred several programs from the state to the counties, including indigent health, public health, and mental health programs; (2) changed the way state and county costs are shared for certain social services and health programs (CalWORKs, IHSS, California Children’s Services, and child welfare programs); and (3) increased the sales tax and vehicle license 2014 -15 B U D G E T 42 Legislative Analyst’s Office www.lao.ca.gov fee (VLF) and dedicated these increased revenues for the increased financial obligations of counties. Funding Allocations Laws. The realignment legislation established the Local Revenue Fund, and within it a series of accounts and subaccounts, into which dedicated revenues are placed to fund different groups of programs. These included the Social Services subaccount, the Health subaccount, and the Mental Health subaccount. These three subaccounts, along with others added through subsequent legislation, are displayed in Figure 11. A revenue allocation system was also established in which the total amount of revenues allocated to each of these subaccounts in one year becomes the base level of funding in the next year. Growth in revenues between two years is allocated to these subaccounts based on a separate set of statutory formulas. Under these formulas, growth revenues are first allocated to the Caseload subaccount, which provides funding to repay counties for the changes in cost-sharing ratios for programs funded through the Social Services subaccount. Approximately 4 percent of any remaining growth revenues are then allocated to the County Medical Services Program subaccount. All remaining growth revenues, if any, are then allocated to the General Growth subaccount. Prior to the changes discussed immediately below, revenues deposited in the General Growth subaccount were distributed back among the Social Services, Health, and Mental Health subaccounts, with about 8 percent going to the Social Services subaccount, a little more than half going to the Health subaccount, and about 40 percent to the Mental Health subaccount. 2013-14 Budget Changes to General Growth Allocation. In 2013, budget-related legislation changed the way that growth revenues are allocated. This legislation (1) reduced by roughly two-thirds the amount of General Growth allocated to the Health subaccount by fixing the allocation at 18 percent; (2) eliminated General Growth allocations to the Social Services subaccount; and (3) instead deposited these General Growth revenues in the newly created Child Poverty and Family Supplemental Support subaccount (hereafter referred to as the Child Poverty subaccount ), which pays for the costs of certain future increases to CalWORKs grants. Family Support Subaccount. The 2013 legislation additionally created the Family Support subaccount in the Local Revenue Fund. This subaccount receives annual transfers of funds from the Health subaccount in an amount that roughly reflects estimated county indigent health savings resulting from the expansion of Medi-Cal through the ACA. The Family Support subaccount does not receive base or growth allocations from dedicated 1991 realignment revenues. Funds deposited into the Family Support subaccount are used to pay for an increased county share of CalWORKs grant costs, directly offsetting General Fund expenditures. 2011 Realignment Program Changes. The Legislature again enacted a major change in the state and local government relationship in 2011 by shifting certain additional state program responsibilities and revenues to local governments (primarily counties). As with the 1991 realignment, the 2011 realignment provided dedicated sales tax and VLF revenues to support increased county fiscal responsibility for various criminal justice, mental health, and health and social services programs. The 2011 realignment resulted in the creation of the Local Revenue Fund 2011, within which numerous accounts were established to distribute dedicated revenues among the realigned programs. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 43 Allocation of 1991 Realignment Revenues Local Revenue Fund Figure 11 ARTWORK #140038 Growth in VLF Growth in Sales Tax Base VLF Revenues Base Sales Tax Revenues Social Services Subaccount Health Subaccount Mental Health Subaccount Child Poverty and Family Supplemental Support Subaccount Family Support Subaccount CalWORKs MOE Subaccount Caseload Subaccount General Growth Subaccount Revenue Collection Revenue Allocation Varies $900 Millionb 4%a 18% About 40% Remaining Growth Remaining General Growth CMSP Subaccount $1.1 Billionc VLF = vehicle license fee; CMSP = County Medical Services Program; and MOE = maintenance of effort. a An additional amount equal to 4 percent of the Caseload subaccount allocation is allocated to the CMSP subaccount when the Caseload subaccount allocation is at least $20 million. b Amount estimated to be transferred in 2014-15. Actual amount transferred each year varies with estimates of local indigent health savings resulting from the expansion of Medi-Cal under the federal Patient Protection and Affordable Care Act. c Funds transferred to the CalWORKs MOE subaccount are provided from 2011 realignment funds. Template_LAOReport_fullpage.ait Graphic Sign Off Secretary Analyst MPA Deputy 2014 -15 B U D G E T 44 Legislative Analyst’s Office www.lao.ca.gov CalWORKs\/Mental Health Transfer. Among other things, the 2011 realignment legislation provides counties with revenue from the Local Revenue Fund 2011 for mental health programs, freeing up county mental health funding provided through 1991 realignment. The 2011 realignment legislation requires these freed up 1991 realignment funds to be used to pay for a higher county share of CalWORKs grant costs within each county, offsetting state General Fund costs. This transfer of funds takes place as follows. Each year a specified amount of 2011 realignment revenues is transferred to the Mental Health subaccount in the Local Revenue Fund (1991 realignment). An equal amount of funding is then transferred from the Mental Health subaccount to a new subaccount created in the Local Revenue Fund, called the CalWORKs MOE subaccount. Similar to the Family Support subaccount, the CalWORKs MOE subaccount does not receive base or growth funding from 1991 realignment dedicated revenues. Significant CalWORKs General Fund Spending Offset With Realignment Funds As a result of the realignment changes discussed above, significant CalWORKs costs that otherwise would be borne by the General Fund are instead paid for with realignment revenues. Specifically, in the Governor’s 2014-15 budget proposal, General Fund spending on CalWORKs is directly offset by (1) $1.1 billion from the CalWORKs MOE subaccount, (2) $900 million from the Family Support subaccount, and (3) $162 million from the Child Poverty subaccount. Taken together, funding from these three realignment sources represent 72 percent of proposed spending on CalWORKs grants from all funds, and 40 percent of proposed spending on the entire CalWORKs program from all funds. Automatic Grant Increase Mechanism As noted above, budget-related legislation enacted in 2013 created a statutory mechanism by which CalWORKs grant payments will be automatically increased in years when a dedicated revenue stream (consisting of the growth in certain 1991 realignment revenues) is estimated to be sufficient to cover the cost of such an increase, as well as the ongoing cost of all previous increases provided under the mechanism. The 5 percent increase that takes effect in March 2014 is the first increase to be funded with the dedicated revenues. Going forward, additional grant increases will be provided under a process that is laid out in statute. Specifically, the new statutory mechanism requires that the Department of Finance (DOF) regularly perform various calculations to determine the level of grant increase, if any, to be provided each year. Specifically, each January and May, in connection with the release of the Governor’s budget and May Revision, DOF will estimate the amount of dedicated revenues available to support grant increases previously provided under the mechanism. If the available funds exceed the cost of previous increases, DOF will calculate the percentage increase in CalWORKs grants that can be supported by these excess funds. Such an increase would take effect the following October and would be ongoing. If, on the other hand, no excess funds are estimated to be available, no additional grant increase will be provided. In the event that dedicated realignment revenues are estimated to be insufficient to cover the costs of previous grant increases, the previous increases remain in effect and the shortfall will be paid for from the General Fund. In this scenario, no future grant increases would be provided until past increases are fully supported by the dedicated revenues. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 45 Dedicated Revenues Estimated to be Insufficient for Additional Increase in October 2014. As noted previously, DOF estimates that dedicated revenues will be insufficient to fully cover the cost of the 5 percent grant increase in 2014-15. Under the process laid out in statute, this means that no additional grant increase would be provided in October 2014. We find the DOF estimate reasonable; however, we note that the estimated amount of dedicated revenues may be updated as part of the Governor’s May Revision as additional information becomes available to estimate revenues and costs in 2013-14 and 2014-15. Magnitude of Future Grant Increases Uncertain, but Likely Around 2 Percent Annually. Beyond 2014-15, we estimate that CalWORKs grants could be increased through the statutory mechanism on average by around 2 percent each year. We further estimate that this level of grant increases will largely keep pace with annual increases in the federal poverty guidelines, such that the level of grants as a percentage of federal poverty guidelines may remain relatively constant over the next few years. This estimate is subject to uncertainty, and the amount of grant increase that can be provided in any given year will vary. The three main sources of uncertainty in the estimate are: Revenue Growth Projections. As shown in Figure 11, the amount of dedicated funds deposited in the Child Poverty subaccount depends first on the amount of growth in sales tax and VLF revenues deposited in the Local Revenue Fund. Year-over-year changes in these revenue streams are sensitive to economic conditions and are difficult to predict with precision. Caseload Subaccount Allocations. As shown in Figure 11, the allocation to the Caseload subaccount is met before distributing remaining growth funds to other accounts, including the Child Poverty subaccount. The application of the methodology for calculating the Caseload subaccount allocations is difficult to predict\u2014allocations to the subaccount have varied significantly, ranging from less than $1 million to more than $100 million in the past decade. As a result, growth in revenues dedicated to provide additional grant increases may not be stable from year to year. CalWORKs Caseload Projections. Finally, the size of grant increase that can be paid for with a given amount of dedicated revenues depends on the number of CalWORKs cases that receive assistance. As the caseload continues to decline, a given amount of dedicated revenues can provide a larger percentage grant increase. Fluctuations in the CalWORKs caseload will affect both the cost of previously provided grant increases as well as the size of future grant increases. Future Grant Increases Sensitive to Economic Conditions. It is important to note that our estimate of the likely magnitude of future grant increases assumes continued steady, moderate growth in the economy. In a hypothetical scenario in which the state economy experiences a moderate recession, growth in dedicated revenues could slow or stop and the costs of grant increases previously provided under the statutory mechanism would increase as more families enter the CalWORKs caseload. This would likely result in a period of years in which no new grant increases would be provided and the General Fund would bear some of the costs of previous grant increases. 2014 -15 B U D G E T 46 Legislative Analyst’s Office www.lao.ca.gov Proposed Parent\/ Child Engagement Demonstration Pilot Overview Governor Proposes Testing New Approach to Addressing Needs of Families With Multiple Barriers to Employment. The Governor proposes in 2014-15 to begin a demonstration project that would focus on improving outcomes for CalWORKs families that face multiple barriers to employment and are at higher risk of being sanctioned. As noted previously, sanctions occur when adult recipients do not comply with the work requirement. When sanctioned, the adult is excluded from the calculation of the family’s grant, resulting in reduced monthly cash assistance for the family (generally about $125). The administration highlights a few issues relating to families with multiple barriers to employment that motivate the proposal, specifically: (1) children in these families are less likely to access high-quality child care, (2) parents in these families may not be engaged in the educational development of their children, and (3) these families have very limited income and resources and, if sanctioned, receive decreased assistance and are not accessing CalWORKs WTW services that could help address their barriers to employment. Proposed Pilot Seeks to Address These Issues by Providing Intensive Services for Children and Parents. To enable an evaluation of a potential approach to address these issues, the pilot, beginning in March 2015 and extending through December 2017, would (1) provide intensive case management and services under the existing CalWORKs program intended to address the parents’ barriers to employment and improve work-readiness; (2) provide stable, high-quality child care; and (3) require parents to participate in certain parental involvement activities for a number of hours each week with their children at the child care location. The demonstration would involve an estimated 2,000 families in six counties. Participating counties would be selected through a competitive application process. The demonstration would result in General Fund costs of $10 million in 2014-15, and an estimated total General Fund cost of $115 million over three years. This total cost would be made up of roughly $5 million for intensive case management and barrier-removal services, $80 million for high-quality child care, and $31 million for parental involvement activities, with minor offsetting savings assumed to result from higher earnings of pilot participants. Specific Demonstration Elements to Be Determined by Implementing Counties. While the administration has indicated some of the features it wants included in the demonstration, other features of the intervention to be demonstrated would be determined by the six implementing counties. For example, it appears that counties would largely determine what standard and type of child care providers would be used (for example, counties could partner with State Preschool programs or licensed family child care homes), the format of parental involvement activities, and which families would participate (participation by families would be voluntary). Counties would be expected to consult with local child care organizations, such as Local Child Care and Development Planning Councils, as they develop their applications. A project consultant from DSS would work with selected counties as they plan for implementation. Participating counties would be required to submit regular progress reports and a final report on various outcomes, including child care attendance, participation in parental involvement activities, parent work readiness and employment, and school readiness. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 47 Assessment Administration Raises Valid Concerns. In general, we find that the concerns raised by the administration about CalWORKs families facing multiple barriers to employment are valid, particularly when these families are sanctioned. As of November 2013, about 52,000 adults were sanctioned (roughly 16 percent of all adults that could be subject to the work requirement) and the number of sanctions is gradually rising. Given the numerous negative outcomes that are associated with poverty, particularly for children, we believe that focusing on addressing barriers to employment for those families that face the most significant barriers is an appropriate priority for the Legislature. In including access to high-quality child care as a component of the pilot, the administration also raises some important questions about the role of standards-based child care in the CalWORKs program. Proposed Pilot Intervention Is Complex. The pilot seeks to address multiple concerns using a multifaceted intervention and would examine effects on several outcomes. As noted, the pilot would seek to improve outcomes for both parents and children in families with multiple barriers to employment\u2014specifically, work-readiness and employment outcomes for adults and school-readiness and developmental outcomes for children. The three main components of the intervention might intuitively be expected to affect different sets of outcomes. The first component, intensive case management and barrier-removal services, might be expected to primarily affect adult work-readiness and employment outcomes. The second component, stable, high-quality child care, might be expected to affect both adult and child outcomes, but in different ways. Lack of child care is a common barrier to employment\u2014providing child care makes it possible for adults to participate in other barrier-removal activities and ultimately work. Stable, high-quality child care might also be expected to improve child developmental outcomes. The final component of the intervention, parental involvement activities in the child care setting, might be expected to affect both adult work-readiness outcomes and child developmental outcomes. We address each component of the intervention below. Intensive Case Management and Barrier Removal Component Overlaps With Existing CalWORKs Services. The proposed pilot would provide intensive case management and barrier removal services to CalWORKs families with multiple barriers to employment. In our view, this aspect of the intervention has the greatest direct relevance to improving parent work-readiness outcomes\u2014one of the fundamental objectives of the CalWORKs program. However, this component also appears to largely overlap with existing CalWORKs services, particularly in light of recent program changes (enacted by the Legislature in 2012 and 2013), some of which are still under implementation. As discussed previously, recent significant changes to the CalWORKs program, including increased flexibility in work rules and early engagement strategies, were intended to increase the capacity of the CalWORKs program to help recipients address barriers to employment. In particular, Family Stabilization Services includes an intensive case management component and provides specialized services to families facing an identified destabilizing situation that would interfere with participation in WTW\u2014a condition that we believe would apply to at least some of the families that the proposed pilot would target. We note that the Legislature has already required an evaluation of the extent to which changes related to the WTW 24-month time limit (including the new work rules) result in addressing barriers to employment more effectively. 2014 -15 B U D G E T 48 Legislative Analyst’s Office www.lao.ca.gov CalWORKs Families Already Entitled to Child Care as Means to Improve Adult Employment Outcomes. As part of the CalWORKs program, families that are employed or participating in WTW activities already are guaranteed access to subsidized child care. This pilot therefore would not provide anything substantially different in terms of addressing adult work-readiness and employment outcomes than what is currently available. State Child Care Programs With Educational Emphasis Currently Exist, but Access Issues for CalWORKs Families Arise. In terms of addressing child outcomes, the pilot could provide a different type of child care program than CalWORKs families currently access. Currently, some child care providers that serve CalWORKs families must meet basic health and safety standards, but are not required to include educational components in their programs. The Governor’s proposal suggests that the child care offered as part of the pilot demonstration would include a greater emphasis on quality, which would appear to feature a stronger educational focus. (Increasingly, research indicates that early childhood programs that focus on education can have positive impacts on children’s outcomes.) The state, however, already funds several child care programs that have considerable educational components, suggesting the state does not need to create a new pilot program to demonstrate the impacts of such programs. CalWORKs families historically have had a difficult time accessing these programs because of the way the state structures services\u2014an important policy question for the Legislature to consider. Little Evidence to Suggest That Parental Involvement Activities Would Directly Improve Employment Outcomes. In our view, the parental involvement component is the primary aspect of the pilot relating to adult outcomes that appears to both exceed the services generally available through CalWORKs and present an opportunity to test a new strategy through a demonstration. Little is known about the effect of parental involvement activities on adult work-readiness or employment outcomes. While we acknowledge the possibility that such activities could affect these adult outcomes, we think this effect would be very indirect and that the potential value added from demonstrating the impact of parental involvement on work readiness does not justify the pilot. Parental Involvement as Means to Improve Child Outcomes Outside CalWORKs Program Focus. The potential effect of parental involvement on child outcomes would be more direct. Providing parental involvement activities in a child care setting is an approach that could be worth investigating. However, we do not believe the added value of investigating the impact of parental involvement on child outcomes would justify the proposed pilot either, given the CalWORKs program’s focus on assisting parents to become work ready as a means to reduce child poverty. Recommendations On Balance, Recommend Rejecting Governor’s Proposal to Create New Pilot Program. While the Governor raises valid concerns about CalWORKs families with multiple barriers to employment, we have several issues with the proposal. Specifically, in our view (1) certain aspects of the proposed pilot would provide services that largely duplicate those already available in the CalWORKs program, particularly given recent significant statutory changes that are still partially under implementation; (2) the state currently funds child care programs with an educational focus for similar low-income children, so a new pilot is not necessary to demonstrate the impact of these programs on child outcomes; and (3) the potential added value of testing the impact of parental involvement activities is not sufficiently compelling to justify a CalWORKs pilot, particularly given the pilot’s substantial cost ($115 million over three years). 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 49 Recommend Legislature Explore Ways to Address Inconsistencies in Child Care Standards. The proposed pilot does not directly address challenges faced by CalWORKs families in accessing educationally focused child care programs funded by the state, but this issue does merit legislative consideration. We recommend the Legislature explore alternative ways to provide CalWORKs families more access to child care programs with an educational focus. DSS STATE HEARINGS DIVISION Background State Hearings Division (SHD). The mission of the SHDa division of DSS\u2014is to resolve disputes of applicants and recipients of various health and social services in an impartial, independent, and timely manner, ensuring that due process is met. Appeal claimants can dispute how an application or benefits\/services are\/ were handled for various programs, including Medi-Cal, CalWORKs, CalFresh, and IHSS. Federal and state law, along with judicial decisions, require DSS to provide claimants with a timely due process in the adjudication of claims. To comply with the timeliness standards, SHD is generally required to adjudicate claims within 90 days from when a claimant requests an appeal (within 60 days for CalFresh claims). According to a court decision, the state is assessed financial penalties to the benefit of the claimants if the timeliness standards are not met by DSS. Penalties vary by program and are based on complex penalty formulas that can change from month to month depending on whether SHD adheres to a 95 percent timeliness standard. In January 2014, the penalty rate per day of a late decision was $82.50 for Medi-Cal, $55 for CalWORKs, $12.50 for CalFresh, and $82.50 for IHSS. Penalties levied on the state for untimely SHD adjudication in 2012-13 totaled $5.2 million. ACA-Related Growth in Appeals Caseload. In order to make health care coverage more accessible and affordable, the ACA establishes entities called Health Benefit Exchanges. Through these exchanges, individuals and small businesses are able to obtain information about health coverage and purchase coverage. The California Health Benefit Exchange (also known as Covered California) built a web-based portal designed to be a streamlined resource from which individuals and small businesses are now able to research, compare, check their eligibility for, and purchase coverage. Covered California has designated SHD to adjudicate all appeal requests related to various of its determinations, including those regarding Advanced Premium Tax Credits and Cost-Sharing Reductions, Modified Adjusted Gross Income (MAGI) Medi-Cal, and Small Business Health Option Programs. The SHD currently provides the appeal function for the Medi-Cal caseload, which will also increase to cover new populations and additional enrollees under the ACA. The implementation of the ACA is projected to increase in 2014-15 SHD’s overall caseload by 53 percent above 2012-13, an equivalent of over 9,400 appeals. State Hearings System (SHS). The SHD is supported\u2014technology wise\u2014by an antiquated mainframe application and 21 ad-hoc applications to track, schedule, and manage appeal claims received from claimants in all 58 counties. Collectively, these systems are known as the SHS. According to DSS, the SHS does not meet existing SHD needs and will not be able 2014 -15 B U D G E T 50 Legislative Analyst’s Office www.lao.ca.gov to support the increased caseload associated with ACA implementation. Since the base technology for the SHS was built over 30 years ago, business needs of the SHD have changed so that the system can no longer address new information tracking requirements, information security challenges, additional reporting needs, and other changes. Although these requirements have been addressed for the time being through the development of the 21 ad-hoc systems, these applications are largely manual and are not a sustainable solution to SHD’s changing business needs. Office of Systems Integration (OSI). The OSI\u2014an office of the Health and Human Services Secretary\u2014was established in 2005 to provide project management, oversight, procurement, and support services to a portfolio of large, complex, and high criticality health and human services IT projects. Since its inception, OSI has developed a track record of successfully managing and deploying mission critical IT systems that support health and human services programs at the state, federal, and local level. Governor’s Budget Proposal The Governor’s budget includes a proposal to address the growth in SHD caseload associated with the ACA and the deficiencies of the SHS, at a total cost of $11.1 million ($1.8 million General Fund) in 2014-15. The proposal includes two components: Staff Resources to Address ACA Caseload Growth. The Governor proposes 63 two-year limited-term positions to address the addition of the ACA caseload to SHD. The proposal requests a mixture of administrative law judges (39 positions) and support staff (24 positions). Staff Resources for Appeals Case Management System (ACMS). The Governor also proposes 11 three-and- one-half-year or four-year limited-term positions to develop and begin to implement and maintain the new ACMS over a four-year period. The ACMS project is intended to replace the SHS with a modernized case management database that would consolidate intake, scheduling, and reporting functions. The ACMS project is estimated to cost $12.3 million and expected to be complete in March of 2017. The proposal also requests $130,000 in expenditure authority for one one-year limited-term position at OSI to provide procurement and acquisition expertise to DSS on the ACMS project. LAO Findings ACA Caseload Projections Appear Reasonable. The SHD’s standard caseload assumption is that 2.5 percent of applicants of programs overall for which it performs an appeals function will request a state hearing, while 25 percent of hearing requests will result in a full hearing. The SHD applies this standard assumption in estimating the impact of ACA on its caseload. This appears reasonable. However, given the significant uncertainty about the actual impact of the ACA on SHD’s caseload, it is appropriate for the requested additional staff to address ACA caseload be limited-term, as has been proposed by the Governor. New ACA Workload Cannot Be Absorbed by SHD. The SHD experienced a growth in penalties assessed against it for not meeting timeliness standards over the last five years due to a convergence of trends\u2014a 26 percent growth in caseload over the past five years and a loss of 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 51 experienced staff due to a high rate of retirements. Given the challenges SHD has had complying with timeliness standards for existing caseload, the SHD is unlikely to absorb the additional ACA-related caseload without jeopardizing timely due process and increasing the state’s penalty exposure. Proposed Staffing Model Fosters Efficiencies at SHD. In addition to increasing the number of administrative law judges, the proposal also depends heavily on support staff to address the ACA-related caseload. Support staff are critical to reducing the number of cases that go from hearing requests to actual hearings by performing prehearing functions, including reviewing all hearing requests, preparing administrative dismissals of invalid hearing requests, confirming the need for a language interpreter, contacting claimants and authorized representatives to assure hearing readiness of case, assisting in the transmission and exchange of hearing documents, and preparing postponement and withdrawal of cases as appropriate. Collectively, the support positions can increase efficiencies attained from assessing the readiness of cases, thereby reducing administrative law judges’ time spent on hearing cases. Extensive SHS Deficiencies Compromise SHD. The SHD determined that the SHS did not have the capacity to manage the added volume created by the ACA caseload. To accommodate the new caseload, SHD built a duplicative skeleton SHS to process ACA-related appeals. This solution is not an efficient response and does not represent a long-term solution. The SHS also has a series of deficiencies that compromise its ability to efficiently manage existing caseload. The proposed ACMS project would create a single case management database that would consolidate intake, scheduling, and reporting functions. The consolidation of the SHS is intended to streamline the workload that is currently highly dependent on inefficient manual processes. Delaying or Rejecting Request Jeopardizes Timeliness of Adjudication and Increases State’s Penalty Exposure. Given the safety-net nature of the programs adjudicated through the SHD, timely due process for claimants is critical for effective and appropriate support of children, the aged, blind, disabled, and their families. Without the staffing resources requested and efficiencies created by ACMS development, SHD would face significant challenges addressing a claims backlog while simultaneously providing due process to the new ACA-related claimants. Analyst’s Recommendation We recommend approval of the Governor’s proposal for 74 limited-term positions and $11.1 million to address the growth in caseload associated with the ACA and the replacement of SHS with ACMS. This approach better positions SHD to provide timely due process for additional claimants as a result of ACA implementation and reduces the state’s penalty exposure through the development of a more efficient automated case management system to support SHD. It is particularly appropriate that the added staff related to ACA-driven caseload be limited term, as proposed by the Governor, given uncertainty about the extent of this new workload as well as the impacts of adding the requested staff. At the end of the limited term, ongoing ACA-related staffing requirements can be reevaluated, by considering what had been achieved in terms of decreased penalty exposure and compliance with timeliness standards as a result of the addition of the requested limited-term staffing. 2014 -15 B U D G E T 52 Legislative Analyst’s Office www.lao.ca.gov DEVELOPMENTAL SERVICES Background Overview of DDS. The Lanterman Developmental Disabilities Services Act of 1969 (known as the Lanterman Act) forms the basis of the state’s commitment to provide individuals with developmental disabilities with a variety of services and supports, which are overseen by DDS. The Lanterman Act defines a developmental disability as a substantial disability that starts before age 18 and is expected to continue indefinitely. The developmental disabilities for which an individual may be eligible to receive services under the Lanterman Act include: cerebral palsy, epilepsy, autism, intellectual disabilities, and other conditions closely related to intellectual disabilities that require similar treatment (such as a traumatic brain injury). The department works to ensure that individuals with developmental disabilities, regardless of age, have access to services and supports that sufficiently meet their needs, preferences, and goals in the least restrictive setting. Unlike most other public social services or medical services programs, services for the developmentally disabled are generally provided without any requirements that recipients demonstrate that they or their families do not have the financial means to pay for the services themselves. The department administers two main programs, described in detail below. Community Services Program. Community- based services are coordinated through 21 nonprofit organizations known as regional centers (RCs), which provide diagnosis, assess eligibility, develop individual program plans for each consumer, and help consumers coordinate and access the services they need. The DDS provides RCs with an operations budget in order to conduct these activities. The DDS also provides RCs with a budget to purchase services from vendors for an estimated 265,709 consumers in 2013-14. These services can include day programs, transportation, residential care provided by community care facilities, and support services that assist individuals to live in the community. The RCs purchase more than 100 different services on behalf of consumers. As the payer of last resort, RCs generally only pay for services if an individual does not have private insurance or if the RC cannot refer an individual to so-called generic services such as other state-administered health and human services programs for low-income persons or services that are generally provided at the local level by counties, cities, school districts, or other agencies. We note that the majority of consumers receiving services through the Community Services Program are enrolled in Medi-Cal, California’s Medicaid program. (For a description of the Medi-Cal Program, please see the Medi- Cal section in The 2014-15 Budget: Analysis of the Health Budget.) More than 99 percent of DDS consumers receive services under the Community Services Program. These consumers live with their parents or other relatives, in their own houses or apartments, or in residential facilities or group homes designed to meet their needs. Less than 1 percent live in Developmental Centers (DCs), discussed below. During a period of recent budget deficits, the Legislature enacted numerous DDS budget reductions and cost savings measures to yield General Fund savings, such as rate changes and provider payment reductions for RC vendors, service changes, and reliance on increased federal funding. The provider payment reductions experienced by RC vendors\u2014including the 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 53 3 percent reduction in 2009-10, the 4.25 percent reduction in both 2010-11 and 2011-12, and the 1.25 percent reduction in 2012-13\u2014have expired with no new provider payment reductions proposed for 2014-15. However, rates paid to providers established by statute or by the department have generally been frozen since 2003-04. Rates negotiated by the RCs for new providers were limited beginning in 2008 to no higher than the median rate for that service. Certain RC programs and services have experienced further ongoing reductions. In 2008-09, the Supported Employment Program provider rates were cut by 10 percent (after having been increased by 24 percent in 2006-07) and remain at that level with no restorations proposed for 2014-15. In 2009-10, a number of ongoing reductions were made to the Early Start program, which provides services to infants and toddlers under the age of three who have a developmental disability (and prior to 2009-10, to children who were at-risk for a developmental disability). Also in 2009-10, the DDS suspended the availability of certain services, including social\/recreation activities, camping services and associated travel, educational services for school-aged children, and certain nonmedical therapies. The Governor’s budget does not propose any restorations for the Early Start program or for the suspended services. DCs Program. The DDS operates four 24-hour facilities known as DCs\u2014Fairview DC in Orange County, Lanterman DC in Los Angeles County, Porterville DC in Tulare County, and Sonoma DC in Sonoma County\u2014and one smaller leased community facility (Canyon Springs in Riverside County), which together provide 24-hour care and supervision to approximately 1,300 consumers in 2013-14. Each DC is licensed by the Department of Public Health (DPH), and certified by DPH on behalf of CMS, as Skilled Nursing Facilities, Intermediate Care Facilities for Individuals with Intellectual Disabilities (ICF\/IID), and General Acute Care hospitals. The DCs are licensed and certified to provide a broad array of services based on each resident’s individual program plan, such as nursing services, assistance with activities of daily living, specialized rehabilitative services, individualized dietary services, and vocational or other day programs outside of the residence. The DCs must be certified in order to receive federal Medicaid funding. The vast majority of DC residents are enrolled in Medi-Cal. Generally, for Medi-Cal enrollees living in DCs, the state bears roughly half the costs of their care and the federal government bears the remainder. Over the past 15 years, the DCs have faced a history of problems identified by oversight entities, such as DPH and the United States Department of Justice, including inadequate care, insufficient staffing, and inadequate reporting and investigation of instances of abuse and neglect. For more background on the history of problems identified at DCs, please refer to the DDS analysis in The 2013-14 Budget: Analysis of the Health and Human Services Budget. Task Force Provides Framework for Long-Term Future of DCs. While the Governor’s budget (discussed below) addresses the immediate funding needs of the DCs, a task force convened by the administration during the seven-month period from June to December 2013 released a plan on January 13, 2014, for the long-term future of DCs. The task force included consumers, family members of DC residents, RC directors, consumer rights advocates, labor union members, community service providers, and staff from DDS. The plan released by the task force on the future of DCs recognizes the need to reevaluate the role of DCs in light of the historical trend of individuals with developmental disabilities moving out of institutional settings and into the community. We note that budget-related legislation enacted in 2014 -15 B U D G E T 54 Legislative Analyst’s Office www.lao.ca.gov 2012-13 imposed a moratorium on new admissions to DCs, with exceptions for individuals involved in the criminal justice system and consumers in an acute crisis needing short-term stabilization. The plan released by the task force recognizes the varying needs of existing DC residents and makes recommendations for improving community services and supports, while retaining institutional facilities for individuals who are in acute crisis or involved in the criminal justice system. The Governor’s Budget Proposal Overall Budget Proposal. The budget proposes $5.2 billion (all funds) for DDS in 2014-15, which is a 4.5 percent net increase over estimated revised expenditures in 2013-14. General Fund expenditures for 2014-15 are proposed at $2.9 billion, a net increase of $132 million, or 4.7 percent, over estimated revised expenditures in 2013-14. This net increase in total expenditures generally reflects increases in the budget for the Community Services Program, partially offset by decreasing costs in the DCs Program budget. Community Services Program Budget Proposal. The budget proposes $4.7 billion (all funds) for the Community Services Program in 2014-15, which is a 5.7 percent net increase over estimated revised expenditures in 2013-14. Of this total, $580 million is proposed for RC operations expenditures and the remainder of $4.1 billion is for the purchase of services from RC vendors. General Fund expenditures for the Community Services Program in 2014-15 are proposed at $2.6 billion, a net increase of $162 million, or 6.5 percent, above the estimated revised expenditures in 2013-14. This net increase mainly reflects caseload growth and greater utilization of services, along with rising costs for vendors as a result of the state-mandated increase in the hourly minimum wage and recent federal labor regulations impacting home care workers. The 2014-15 Community Services Program budget plan reflects the following year-over-year budget changes: Caseload Growth and Greater Utilization of Services. Increase of $139 million ($83 million General Fund) because of caseload growth and greater utilization of services. State-Mandated Hourly Minimum Wage Increase From $8 to $9. Increase of $110 million ($69 million General Fund) for increasing the rates paid to certain RC vendors that employ workers currently earning less than $9 per hour. Chapter 351, Statutes of 2013 (AB 10, Alejo), will increase the state-mandated hourly minimum wage from $8 to $9 beginning July 1, 2014. We analyze this component of the Governor’s proposal later in this section. Federal Labor Regulations. Increase of $8 million ($4 million General Fund) in response to recent federal labor regulations to take effect January 1, 2015. Please refer to the Human Services Compliance With Federal Labor Regulations analysis in this report for more detail on, and our analysis of, this proposal. Decrease in RC Purchase of Services Due to Medi-Cal Benefit Restorations. Decrease of $3 million General Fund because of the restoration of certain Medi-Cal benefits, including the full restoration of enteral nutrition coverage and the partial restoration of adult dental services. DCs Program Budget Proposal. The budget proposes $526 million (all funds) for the DCs Program in 2014-15, which is a 5.4 percent net decrease below estimated revised expenditures in 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 55 2013-14. General Fund expenditures for 2014-15 are proposed at $275 million, a net decrease of $31 million, or 10 percent, below estimated revised expenditures in 2013-14. This net decrease in the DCs Program budget reflects the following year-over-year budget changes. Staffing Reductions Due to Decreased Resident Population. Decrease of $13 million ($7 million General Fund) because of staffing reductions as the population of the DCs declines (these staffing reductions exclude Lanterman DC, which is discussed separately below). Completion of Lanterman DC Closure. Net decrease of $23 million ($12 million General Fund) related to the ongoing closure of Lanterman DC. The net decrease takes into account costs for closure and post-closure activities, which are more than offset by savings from staff reductions as the resident population is assumed to decline to zero by December 31, 2014. Restoration of Lost Federal Funds at Sonoma DC. Decrease of $16 million General Fund (increase of $16 million in federal funds) assumed in 2014-15 because of the expected restoration of previously lost federal funds as a result of the implementation of the improvement plan, discussed below, for four decertified ICF living units at Sonoma DC. Deferred Maintenance. Increase of $10 million General Fund for deferred maintenance projects in the DCs budget. It is our understanding that the funds will be used to replace boilers at Sonoma DC and Porterville DC and retrofit boilers at Fairview DC to ensure compliance with emissions regulations established by local Air Quality Management Districts. The funding is part of the Governor’s proposal to spend $100 million General Fund statewide on deferred maintenance projects in 2014-15. Sonoma DC Improvement Plan. Increase of $2 million ($1 million General Fund) to fund improvements needed at Sonoma DC to ensure compliance with federal certification requirements for ICF living units. We note that DDS requested\u2014and the Joint Legislative Budget Committee (JLBC) approved\u2014$7 million ($4 million General Fund) in 2013-14 to begin making needed improvements at Sonoma DC. We analyze this component of the Governor’s proposal later in this section. Headquarters Budget Proposal. The budget proposes $41 million ($26 million General Fund) for headquarters operations expenditures, which is a 1.8 percent increase above the revised estimate of expenditures in 2013-14. LAO Comments on Overall Budget Proposal Caseload Growth RC Caseload Has Steadily Grown in Recent Years. Between 2006-07 and 2013-14, the RC caseload is projected to grow from 211,180 to an estimated 265,709\u2014an average annual growth rate of 3.3 percent. The caseload trend is shown in Figure 12 (see next page). RC Caseload Estimate Appears Reasonable. The Governor’s budget assumes the RC caseload in 2014-15 will be 273,643, an increase of 7,934 consumers, or 3 percent, compared to the most recent estimate of the 2013-14 caseload. Based upon our review of recent RC caseload data, we find the administration’s caseload estimate to be reasonable. 2014 -15 B U D G E T 56 Legislative Analyst’s Office www.lao.ca.gov If we receive additional information that causes us to change our overall assessment, we will provide the Legislature with an updated analysis. DC Caseload Has Steadily Declined in Recent Years. Between 2006-07 and 2013-14, the DC population has declined from 2,877 to an estimated 1,333\u2014an average annual decline of 10.4 percent. This decline in the DC population is mostly attributable to the closure of DCs and the corresponding transition of consumers to community-based settings, which is consistent with federal and state policy to provide services to developmentally disabled individuals in the least restrictive setting. In 2009, Agnews DC in Santa Clara County was closed and Lanterman DC is scheduled to close by December 2014. In addition, the moratorium on new admissions to DCs established in 2012-13 has contributed to a decline in the DC caseload. DC Caseload Estimate Appears Reasonable. The Governor’s budget assumes the DC caseload in 2014-15 will be 1,110, a decrease of 223 consumers, or 16.7 percent, compared to the most recent estimate of the 2013-14 caseload. This caseload estimate includes the population residing in Lanterman DC\u2014which is expected to decline to zero consumers by December 31, 2014. We note that 22 consumers are expected to reside in Lanterman DC at the beginning of 2014-15. The ability of DDS to transition all Lanterman DC consumers to community-based settings by December 31, 2014 assumes the successful execution of transition plans developed for Lanterman DC residents. Based upon our review of recent DC caseload data, we find the administration’s caseload estimate to be reasonable. If we receive additional information that causes us to change our overall assessment, we will provide the Legislature with an updated analysis. Governor’s Budget Proposes Rate Increases for Certain RC Vendors as a Result of Enacted Minimum Wage Increase Because of the structure of the Community Services Program, in which RCs purchase services from vendors on behalf of consumers, the DDS does not maintain data on the number of workers employed by RC vendors and their wages. However, since the state-mandated hourly minimum wage is scheduled to increase from $8 to $9 beginning July 1, 2014, the Governor’s budget proposes to increase the rates paid to certain vendors who employ workers who currently earn less than $9 per hour. Because DDS does not have data on the workers who will be impacted by this increase, the Governor’s budget includes a proposal for budget-related legislation that would establish a process whereby most vendors could provide documentation to either DDS or the RC on the number of employees earning less than $9 per hour in order to receive an appropriate rate increase. The Governor’s budget assumes that seven types of RC vendors will receive rate increases\u2014 these vendors include community care facilities, day programs, habilitation services, transportation services, support services, in-home respite, and out-of-home respite\u2014at an estimated cost of $110 million ($69 million General Fund) in 2014-15. Because DDS intends to provide rate increases to Figure 12 Regional Center Caseload Growth Trend Average Annual Caseload Increase From Prior Year Consumers Percent 2006-07 211,180 2007-08 221,069 9,889 4.7% 2008-09 229,675 8,606 3.9 2009-10 236,858 7,183 3.1 2010-11 242,977 6,119 2.6 2011-12 249,532 6,555 2.7 2012-13 256,224 6,692 2.7 2013-14a 265,709 9,485 3.7 Average 239,153 7,507 3.3 a Administration’s caseload estimate. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 57 vendors that are impacted by the minimum wage increase and because there is no existing data available on impacted workers, the exact cost of funding the minimum wage increase is uncertain. We note that Supported Employment Program providers would not receive a rate increase, nor have the ability to apply for a rate adjustment, based on the administration’s current approach, and we are still evaluating whether this is appropriate. Analyst’s Recommendation. We recommend the Legislature approve the Governor’s budget proposal to provide $110 million for DDS to comply with new minimum wage requirements, as we find it to be a reasonable approach for addressing the need to increase rates for certain vendors that employ workers who currently earn less than $9 per hour. We also agree that, in the absence of data demonstrating the exact number of impacted workers, the administration’s flexible approach of allowing impacted vendors to seek a rate adjustment is appropriate. However, because we are unsure of the exact cost of funding the minimum wage increase, we further recommend that the Legislature create a separate appropriation to fund this expenditure. The separate appropriation would ensure that the funds are used for the intended purpose of vendors’ payroll costs associated with the new minimum wage. Administration Proposes to Address Federal Compliance Issues at DCs The state’s DCs undergo annual recertification surveys conducted by DPH to ensure that the facilities meet federal requirements for receipt of federal Medicaid funds. A July 2012 recertification survey conducted by DPH identified problems impacting residents’ health and safety at Sonoma DC. In December 2012, DPH announced it was taking significant action to protect Sonoma DC residents due to the identified deficient practices at the DC. In January 2013, DDS voluntarily withdrew four ICF living units at Sonoma DC from federal certification, leading to the loss of federal Medicaid funds in the amount of $16 million in 2013-14 (partial-year effect for 2012-13 was $7 million). The lost federal funds have been backfilled by an equivalent amount of General Fund to ensure that DC residents continue to receive services. During annual recertification surveys conducted by DPH in 2013, ICF units at Fairview, Porterville, and Lanterman DCs were also found to be out of compliance with various federal requirements. The facilities were found to have some common deficiencies, including inconsistent treatment plans, residents who were not adequately protected from abuse or harm, and inconsistent implementation of policies generally related to clients’ health and safety and client rights. Fairview and Porterville DCs were found to have additional deficiencies unique to each facility. Generally, when a DC is found to be out of compliance with federal certification requirements, it must implement a program improvement plan that involves several steps\u2014(1) an independent review conducted by outside experts who develop an action plan that identifies the root cause of deficiencies and proposes action items to prevent the deficiencies, (2) DPH approval of the action plan and implementation by the facility, and (3) a recertification survey by DPH. Current-Year Funding Augmentations for Sonoma DC Approved by Legislature. In order to attain federal certification for the four decertified ICF living units, Sonoma DC must undertake the three-step program improvement plan process described above. In January 2014, the DDS requested\u2014and the JLBC approved\u2014$7 million ($4 million General Fund) for the unanticipated costs of implementing the action plan for Sonoma DC beginning in 2013-14. The funding approved by the JLBC for the remainder of 2013-14 will enable Sonoma DC to make the following improvements. 2014 -15 B U D G E T 58 Legislative Analyst’s Office www.lao.ca.gov Augment Staffing Levels for Licensed Medical Professionals and Other Staff Positions at Sonoma DC. Increase of $4 million ($2.1 million General Fund) to augment staffing levels for licensed medical professionals and other staff including: psychiatrists; direct care staff, such as regis- tered nurses, licensed vocational nurses, and psychiatric technicians; rehabilitation, occupational, and physical therapists; speech pathologists; office technicians; and independent program coordinators. The augmentation provides for 112 new positions (which includes 8 positions secured through contracts). Provide Training for All ICF Staff at Sonoma DC. Increase of $2.7 million ($1.5 million General Fund) to provide a one-time enhanced training to all ICF staff and to pay overtime costs to backfill direct care staff attending training. Open New ICF Unit at Sonoma DC. Increase of $400,000 ($200,000 General Fund) to open a new ICF living unit to decrease the population in existing ICF units and reduce aggressive incidents between clients. The opening of a new ICF unit does not require a capital outlay expenditure. Some of the additional direct care staff positions will staff the new ICF unit. Purchase Three Additional Wheelchair- Accessible Vehicles. Increase of $100,000 General Fund to purchase three additional wheelchair-accessible vehicles so each ICF living unit at Sonoma DC has access to transportation for community outings or on-campus transport. Governor’s Budget Proposes to Continue Funding Improvements at Sonoma DC to Ensure Restoration of Federal Funds. The Governor’s 2014-15 budget proposal requests $9 million ($5 million General Fund) for the full-year, ongoing cost of implementing the action plan for Sonoma DC. This full-year, ongoing cost mostly funds staffing at the augmented level approved by the Legislature as a current-year adjustment. The Governor’s budget indicates that the earliest possible date for the four decertified ICF living units at Sonoma DC to attain certification is March 30, 2014. Given this date, the Governor’s budget assumes that lost federal funds in the amount of $16 million will be restored beginning July 1, 2014. Analyst’s Recommendation. Based upon our review of the proposal to make improvements at Sonoma DC, it appears reasonable for the budget to assume that the federal funding will be restored beginning July 1, 2014. We find the 2014-15 budget request to be reasonable and appropriate, as the funding will enable DDS to make improvements at Sonoma DC that are needed to restore federal funding and comply with federal certification requirements. To ensure legislative oversight of the implementation of the action plan, we recommend the Legislature require the department to report at budget hearings on its progress in implementing the changes at Sonoma DC, with particular attention to the status of filling needed positions for licensed medical professionals and other staff. Fairview, Porterville, and Lanterman DCs Will Retain Federal Funding During Improvement Process. The DPH and DDS have reached agreements as of January 16, 2014, that will enable the Fairview, Porterville, and Lanterman DCs to retain federal Medicaid funding while the facilities make improvements to meet federal standards. Like Sonoma DC, the Fairview and Porterville DCs will 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 59 implement improvements based on an action plan specific to the DC\u2014to be developed through an independent review by outside experts on the root cause of deficiencies and action items to prevent the deficiencies. For Lanterman DC, which DDS plans to close by December 2014, an independent monitor will oversee the facility’s closure to ensure the health and safety of the remaining consumers. The specific plan for each of the three DCs will dictate the amount of state funding, if any, needed to make improvements to avoid federal decertification and the loss of federal Medicaid funds. Based on our conversations with DDS, the timing for the completion of a specific plan for each of the three DCs is uncertain. Additional state resources may be required to make improvements at each of the three DCs. HEALTH AND HUMAN SERVICES AGENCY IT STRATEGIC PLANNING PROPOSAL Background The CHHSA\u2014headed by the office of the Secretary of CHHSA\u2014is the largest state agency, with direct oversight of 13 departments and other entities. With an estimated cost of $1.8 billion to complete projects in progress, the CHHSA also has one of the largest and most complex IT project portfolios in the state. Some of the largest projects include (1) the Los Angeles Eligibility, Automated Determination, Evaluation, and Reporting Replacement System\u2014which replaces an existing automated welfare system, (2) California Medicaid Management Information System\u2014which processes payments to Medi-Cal fee-for-service providers, and (3) Child Welfare Services-New System\u2014which modernizes Child Welfare Services’ case management system. The Office of the Agency Information Officer (OAIO). Legislation enacted in 2007 vested broad responsibilities to improve the governance and strategic planning of IT with an agency Chief Information Officer. The CHHSA’s Chief Information Officer was established as the OAIO\u2014an office of the Secretary. It is charged with (1) overseeing the IT portfolio of CHHSA departments, (2) ensuring that all CHHSA departments are in compliance with state IT policy, and (3) developing an enterprise architecture \u2014 the organization of IT infrastructure to reflect integration, consolidation, and standardization of requirements. Historically, the OAIO has not had dedicated staff; instead, its functions have been performed primarily through the sporadic redirection of staff from various CHHSA departments. The OSI. The OSI\u2014also an office of the Secretary\u2014was established in 2005 to provide\u2014 under contract with CHHSA departments\u2014project management, oversight, procurement, and support services to a portfolio of large, complex, and high criticality health and human services IT projects. (Outside CHHSA, departments are responsible for their own project management, unless project management services are contracted out to a third- party vendor.) Although there is collaboration between OAIO and OSI, typically OSI begins its project management role once the strategic planning is competed by OAIO. Since its inception, OSI has developed a track record of successfully managing and deploying mission critical IT systems that support health and human services programs at the state, federal, and local level. Given OSI expertise, departments inside and outside CHHSA have requested OSI’s technical assistance 2014 -15 B U D G E T 60 Legislative Analyst’s Office www.lao.ca.gov for their IT projects. In other cases, at-risk projects have been referred to OSI by CHHSA or the Department of Technology. The OSI’s funding and staffing is project-specific. Therefore, OSI does not have the ability to redirect staff resources to provide technical assistance to projects not under contract with OSI. Rather, it needs to obtain reimbursement and position authority on a project-by-project basis. The OSI indicates that given barriers to securing reimbursement authority, discussed further below, OSI has not accommodated requests or referrals for technical assistance in the past. Governor’s Budget Proposal The Governor’s budget proposes various programs intended to bolster CHHSA’s ability to strategically plan IT projects under the agency. Specifically, the proposal requests three permanent positions and $431,000 in reimbursement authority to establish three agency-wide programs located in OAIO. Strategic Enterprise Architecture Program. The strategic enterprise architecture program would set the IT strategic vision for CHHSA and ensure proposed IT projects under the agency align with CHHSA’s strategic vision. The program would also foster the development of flexible technologies that facilitate information sharing across CHHSA departments. In other words, the building of systems with similar structures so they can communicate with each other is encouraged. Governance Program. A committee established through the governance program would be responsible for reviewing IT projects to identify opportunities for multiple departments with similar IT needs to leverage a single system. The committee would encourage collaboration and partnership across departments to facilitate data sharing and adoption of common standards and solutions across CHHSA. Project Assessment Program. The project assessment program would advise and collaborate with CHHSA departments during the early initiation and planning phases of a project to ensure that best practices are incorporated into project plans. The OAIO would also assess if projects are appropriately resourced and if timelines and cost projections are accurate. Collectively, these programs are intended to enhance CHHSA’s ability to provide oversight and advisory services to CHHSA departments so that projects are best positioned to succeed. While one of the requested permanent positions would focus on strategic enterprise architecture, the remaining two positions would share responsibility for governance and program assessment, with one position taking a management role while the other position taking a staff analyst role. The requested positions would replace the redirected staff used sporadically in the past. Provisional Language to Strengthen OSI’s Ability to Share Timely Expertise With IT Projects Statewide. The Governor’s budget also proposes provisional budget language that is intended to expedite OSI’s ability to provide as-needed technical assistance to departments inside and outside CHHSA. Specifically, the provisional language would exempt augmentations to reimbursements for OSI from Section 28.50 of the annual budget act\u2014which provides a legislative review process for authorizing mid-fiscal year increases in reimbursement authority above $200,000\u2014and instead only 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 61 require the Director of Finance to provide written notice to the Legislature within 30 days when the increase to reimbursements exceeds $200,000. This would allow OSI to receive reimbursements and administratively establish the positions necessary to provide the technical assistance to the requesting or referred department as soon as the request or referral for its assistance is initiated. If ongoing reimbursement and position authority were necessary, it would be requested through the annual budget process. LAO Findings Limited Capacity for IT Strategic Planning Currently Exists. The OAIO’s historical reliance on staff sporadically redirected from other CHHSA departments to address its staffing requirements has resulted in it having limited success in ensuring CHHSA-wide coordination and strategic planning of IT projects. The OAIO currently lacks the structure for comprehensive evaluation and prioritization of its IT investments. There is also no formal governance structure in place to review and assess whether multiple departments are pursuing duplicative solutions\u2014 such as when multiple departments each develop their own case management system rather than leveraging a single case management system. Pursuing duplicative solutions does not support the most cost-effective or efficient approach to technology development. Ultimately, undedicated and unstable sources of funding results in little ability to ensure IT investments are maximized so that systems are interoperable (can communicate with each other) and easily leveraged across multiple CHHSA departments with common technology needs. The ability of OAIO to fulfill its mission would be strengthened through dedicated full-time staff\u2014a component of the Governor’s budget proposal. Strategic Planning Could Eliminate Duplicative Projects, Improve System Interoperability, and Lead to Enhanced Customer Service. Once implemented, duplicative technology systems often do not align well and introduce program inefficiencies and interoperability issues, including systems being unable to share data. Collectively, the strategic enterprise architecture and governance programs proposed by the Governor’s budget could help eliminate duplicative projects by coordinating IT investments and aligning projects towards a CHHSA strategic vision. The enhanced interoperability of technology systems would create more flexible architecture that enables information sharing. A flexible architecture in turn could significantly improve the experience of Californians serviced by the programs administered through CHHSA departments. For example, in a fully interoperable environment, a recipient of multiple CHHSA administered benefits could provide a change of address notice to a single program that would then be shared with the other programs, instead of providing the change of address notice to multiple programs. Guidance During Planning Phase Could Improve Project Success. The state takes on additional risk when strategic planning of IT investments is absent. High-quality and thorough planning best positions projects for success. The best practices shared by the OAIO and incorporated into project plans of CHHSA departments during the early stages of a project could have a critical impact on the success of the project. Guidance provided by the project assessment program that is part of the Governor’s budget proposal could be the difference between a successful project and a failed project. Potentially Significant Cost Avoidance. The proposal could lead to potentially significant cost savings. First, the proposed project assessment 2014 -15 B U D G E T 62 Legislative Analyst’s Office www.lao.ca.gov program could produce better-planned projects, which could avoid costly rework commonly associated with inadequate planning. Second, the proposal’s focus on coordination and interoperability of CHHSA IT systems would allow the agency to identify opportunities where a single system could be leveraged\u2014representing a more cost-effective approach to system development. Ambitious Proposal With Limited Resources. The proposal requests modest resources to achieve ambitious policy objectives. It is the first time OAIO would be allocated dedicated staff towards fulfilling its mission. The historic use of redirected staff creates uncertainty regarding the amount of resources necessary to adequately achieve the objectives of the OAIO. Proposed Provisional Language Does Not Appear to Facilitate Desired Outcome. We agree that requests and referrals for technical assistance from OSI likely often require timely attention in order for the assistance to be valuable. The administration has stated that OSI would be better positioned to provide timely assistance if it were granted an exemption from the Section 28.50 process, and it has proposed provisional budget language to this effect. It has stated that the review process for these requests (which includes the review of the DOF) can take three months or more. Since Section 28.50 allows for a waiver of what is at most a 30-day legislative review period, and given that most requests to increase reimbursement authority to accommodate requests for technical assistance have been below the cost threshold requiring legislative review under Section 28.50, it does not appear that Section 28.50 is the root cause of the problem identified by the administration. Rather, it appears that it is the administration’s own internal review processes that are impeding the provision by OSI of timely technical assistance to requesting projects. Analyst’s Recommendation We agree that the strategic enterprise architecture, governance, and project assessment programs included in the Governor’s budget proposal could better position the state for successful deployments of CHHSA technology systems and, therefore, support the crux of the Governor’s proposal in concept. However, it is uncertain what level of resources will be necessary to meet the proposal’s ambitious goals. Therefore, we recommend that the three requested positions be approved on a three-year limited-term basis, along with approval of $431,000 in reimbursement authority, to be followed by a status report to the Legislature from the Secretary of CHHSA on the effects of the proposal and the extent to which it met its statutory charge at the budgeted level of resources. The three-year duration and subsequent evaluation would also provide OAIO with an opportunity to assess workload demands and propose staffing adjustments to maximize the impact of strategic IT planning across CHHSA. This approach would strengthen OAIO’s ability to better meet its responsibilities in the near term, while allowing OAIO staffing levels to be revaluated and adjusted as needed in the long term. At this time, we do not recommend approval of the proposed budget provisional language that would exempt augmentations to reimbursements for OSI from Section 28.50 of the annual budget act given that this exemption would not address what appear to be delays in the administration’s own internal review processes. In this regard, we recommend that the administration report at budget hearings on the steps that it can take to provide more efficient review to facilitate the provision of timely assistance by OSI to projects requesting such assistance. 2014 -15 B U D G E T www.lao.ca.gov Legislative Analyst’s Office 63 2014 -15 B U D G E T 64 Legislative Analyst’s Office www.lao.ca.gov LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. Contact Information Mark C. Newton Deputy Legislative Analyst 319-8323 [email protected] Shawn Martin Managing Principal Analyst 319-8362 [email protected] Ginni Bella Navarre Child Welfare and Support 319-8342 [email protected] Community Care Licensing Rashi Kesarwani In-Home Supportive Services 319-8354 [email protected] Developmental Services Lourdes Morales Information Technology 319-8320 [email protected] Ryan Woolsey CalWORKs 319-8356 [email protected] CalFresh ”

” The 2013-14 Budget: Analysis of the Health and Human Services Budget M A C T A y l o r l e g i s l A T i v e A n A l y s T F e b r u A r y 2 0 1 3 2013-14 B u d g e t 2 Legislative Analyst’s Office www.lao.ca.gov ConTenTS Contents executive Summary ……………………………………………………………………………………..3 overview …………………………………………………………………………………………………….5 Health ……………………………………………………………………………………………………………………………….5 Human Services ………………………………………………………………………………………………………………7 Crosscutting Issues …………………………………………………………………………………….10 Healthy Families Program Transition Update ………………………………………………10 Background ………………………………………………………………………………………………………………….. 10 HFP Transition Generally Proceeding as Planned, With Some Delays ………………… 14 Department of Alcohol and Drug Programs ………………………………………………..17 Health Issues ……………………………………………………………………………………………..20 Medi-Cal ……………………………………………………………………………………………………20 Overview ………………………………………………………………………………………………………………………. 20 Analyst’s Budget Assessment ……………………………………………………………………………………. 21 Department of Developmental Services ……………………………………………………..28 Budget Overview ………………………………………………………………………………………………………… 28 Analyst’s Budget Assessment …………………………………………………………………………………… 30 Developmental Centers Need Improved Oversight ………………………………………………. 31 Department of State Hospitals ……………………………………………………………………36 Analyst’s Budget Assessment ……………………………………………………………………………………. 38 Department of Public Health ………………………………………………………………………39 Analyst’s Budget Assessment ……………………………………………………………………………………. 39 Human Services Issues ……………………………………………………………………………….44 CalWoRKs ……………………………………………………………………………………………..44 In-Home Supportive Services …………………………………………………………………56 County Welfare Automation …………………………………………………………………..60 Case Management, Information and Payrolling System II ……………………………………. 60 Child Welfare System-New System …………………………………………………………………………… 60 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 3 Overview of Health and Human Services Budget. The Governor’s budget proposes $20.3 billion from the General Fund for health programs\u2014a 3.4 percent increase over 2012-13 estimated expenditures\u2014and $8 billion from the General Fund for human services programs\u2014a 7.9 percent increase over 2012-13 estimated expenditures. For the most part, the year-over-year budget changes reflect caseload changes, technical budget adjustments, and the implementation of previously enacted policy changes, as opposed to new policy proposals. On the health side, the budget reflects a net increase of $354 million from the General Fund for Medi-Cal, in part reflecting (1) increased enrollment among the currently eligible, but unenrolled, Medi-Cal population under the Patient Protection and Affordable Care Act (ACA) and (2) the shift of Healthy Families Program (HFP) enrollees to Medi-Cal that is currently underway. On the human services side, the budget reflects General Fund expenditure increases in all major programs, especially in the California Work Opportunity and Responsibility to Kids (CalWORKs) program\u2014a $341 million, or 21.4 percent, increase that includes increased spending on employment services. Fiscal Impact of Proposed Medi-Cal Expansion Not Reflected in Budget. While the Governor has proposed that the state adopt the optional Medi-Cal expansion under ACA, the budget does not reflect the fiscal effects from such expansion. Please see our February 2013 report, The 2013-14 Budget: Examining the State and County Roles in the Medi-Cal Expansion, for our analysis of the proposed expansion. The budget also does not reflect potential costs and savings related to other ACA provisions. These fiscal effects largely depend on pending policy decisions. Medi-Cal\u2014Uncertain Budgetary Savings. The Governor’s Medi-Cal budget proposal assumes General Fund savings from (1) prior-year budget actions that are currently being challenged in litigation or for which federal approval has not been obtained, (2) a new proposal to achieve managed care efficiencies, (3) the proposed reauthorization of the gross premium tax on managed care plans, and (4) the proposed extension of the hospital quality assurance fee. Accordingly, the level of savings assumed in the Governor’s proposal is subject to significant uncertainty and contingent on legislative action to reauthorize or extend taxes or fees. HFP Transition to Medi-Cal Generally Proceeding as Planned, With Some Delays. We find that the administration has generally complied with various statutory requirements guiding the transition of HFP enrollees to Medi-Cal. The budget reflects erosion of the initially projected General Fund savings from the transition, in part due to implementation delays to address concerns about potential interruptions to continuity of care and other issues. Developmental Centers (DCs) Need Improved Oversight. While several governmental and private entities perform oversight to ensure the health and safety of residents of the state’s DCs, there have continued to be allegations and findings of resident abuse and deficiencies in the exeCUTIve SUMMARy 2013-14 B u d g e t 4 Legislative Analyst’s Office www.lao.ca.gov management, training, and staffing of DCs. To strengthen oversight of the DCs, we recommend that the Legislature create an Office of the Inspector General (OIG), organizationally independent from the Department of Developmental Services (DDS), to oversee the DCs. CalWORKs Budget Reflects Implementation of Recent Major Program Changes. Several recent changes to CalWORKs are being implemented currently or are scheduled to be implemented in 2013-14. These changes include the phase-out of exemptions from welfare-to-work (WTW) requirements and the introduction of a new 24-month limit on adult eligibility for CalWORKs benefits under state work participation rules that are more flexible than the federal rules that apply after 24 months. The budget reflects a number of strategies to help the state meet federally required work participation rates, and we think that the administration’s approach is a reasonable one. While we recommend that the Legislature augment CalWORKs employment services funding, we recommend that it determine the amount of such augmentation by considering the level of service it expects given its recent policy actions and the level of funding it deems appropriate in light of its priorities for the CalWORKs program. In-Home Supportive Services (IHSS) Budget Proposal Has Risks. The Governor’s budget for IHSS assumes that the state will ultimately prevail in ongoing litigation regarding a 20 percent across-the-board reduction in IHSS service hours (triggered as a result of the 2011-12 budget package), allowing this budget savings solution to be implemented beginning on November 1, 2013. We think that the Governor’s budget assumption is subject to significant uncertainty. In light of the fiscal and policy concerns that we identify with respect to the 20 percent reduction, we recommend that the Legislature repeal the 20 percent reduction and instead continue a 3.6 percent across-the- board reduction that would otherwise sunset at the end of 2012-13. This action should have a better chance at achieving savings than the Governor’s proposal. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 5 Health expenditure Proposal by Major Programs Background on Health Programs. Many of California’s major health programs are administered at the state level by several different departments. Some departments administer more than one health program. For example, the Department of Health Care Services (DHCS) administers Medi-Cal\u2014California’s version of the federal Medicaid Program\u2014as well as the California Children’s Services Program and other programs. The programs administered by state departments provide a variety of benefits to California’s citizens, including purchasing health care services for qualified low-income persons and performing various public health functions. Most state health programs are administered at the state level by one of the following five departments: (1) DHCS, (2) Department of Public Health (DPH), (3) Managed Risk Medical Insurance Board (MRMIB), (4) DDS, and (5) Department of State Hospitals (DSH). The actual delivery of many health services often takes place at the local level and is carried out by local government entities, such as counties, and by private entities, such as commercial health plans. (Funding provided for these types of services delivered at the local level is known as Local Assistance. ) However, there are significant exceptions to the local service delivery model. For example, DSH operates five state hospitals for the mentally ill and DDS operates four DCs that provide developmentally disabled individuals with 24-hour care. Both the state hospitals and the DCs are staffed with state employees who directly provide services to the residents of these state institutions. Overview of Health Budget Proposal. The 2013-14 Governor’s Budget proposes $20.3 billion from the General Fund for health programs. This is an increase of $668 million\u2014or about 3.4 percent\u2014 above the revised estimated 2012-13 spending level as shown in Figure 1 (see next page). The net increase reflects increases in caseload and changes in utilization of services as well as the impact from major ongoing initiatives. Summary of Major Budget Proposals and Changes. As shown in Figure 1, the Governor’s proposed General Fund expenditures for 2013-14 reflect state-level organizational changes in the departments that will administer certain health programs. General Fund spending for HFP decreases from a revised estimate of $163 million in the current year to $19 million in the budget year, to account for the shift of HFP enrollees from HFP to Medi-Cal that is currently underway. There is a corresponding increase in the Medi-Cal budget to reflect this ongoing shift. Similarly, the General Fund spending for the Department of Alcohol and Drug Programs (DADP) decreases from a revised estimate of $34 million in 2012-13 to no expenditures in 2013-14 to reflect the department’s proposed elimination and transfer of all substance use disorder programs to DHCS. (The DADP’s Office of Problem Gambling would be transferred to DPH under the Governor’s plan.) We discuss the shift of HFP to DHCS and the proposed elimination of DADP in more detail later in this analysis. The budget plan reflects the fiscal effects of recently adopted major policy initiatives, including the Coordinated Care Initiative oveRvIeW 2013-14 B u d g e t 6 Legislative Analyst’s Office www.lao.ca.gov (CCI) that was adopted as part of the 2012-13 budget package. Broadly, the CCI is intended to better coordinate the care of about 560,000 Medi-Cal beneficiaries who are also eligible for Medicare (known as dual eligibles) by shifting them from fee-for-service (FFS) to managed care beginning in 2013-14. The budget plan reflects both costs and savings associated with implementing the CCI. For information on CCI implementation, please see our report, The 2013-14 Budget: Coordinated Care Initiative Update. The budget plan also reflects some, but not all, of the costs associated with the implementation of ACA also known as federal health care reform. For example, it includes a placeholder of $350 million General Fund for increased costs associated with additional enrollment among the currently eligible, but unenrolled Medi-Cal population as a result of changes to the eligibility determination process under ACA. However, the budget plan does not adjust for the fiscal impact to the state of the optional expansion of Medi-Cal eligibility that the Governor has committed to implement in January of 2014 and some other ACA implementation issues. For information on ACA implementation of the optional Medi-Cal expansion, please see our report, The 2013-14 Budget: Examining the State and County Roles in Medi-Cal Expansion. Caseload Trends Caseload trends are one important factor influencing state health care expenditures. Below we highlight the caseload trends assumed in the Governor’s budget for Medi-Cal\u2014by far the largest state-administered health program. Medi-Cal Caseload. Figure 2 illustrates the budget’s projected caseload trends for Medi-Cal, divided into four groups: (1) families and children, (2) seniors and persons with disabilities (SPDs), (3) HFP transfers, and (4) others. The Governor’s budget plan assumes that the 2012-13 caseload for Medi-Cal will increase by about 153,000 compared to the number assumed in the 2012-13 Budget Act. The Governor’s budget plan also assumes a large increase in caseload will occur during 2013-14. Specifically, the overall caseload is expected to increase by about 486,000 average monthly eligibles (5.9 percent) to a total of about 8.7 million in 2013-14. This year-over-year increase can mainly be attributed to the HFP program transfers. The budget plan assumes that about 393,000 HFP enrollees will shift to Medi-Cal in 2013-14. This Figure 1 Major Health Programs and Departments\u2014budget summary General Fund (Dollars in Millions) 2011-12 Actual 2012-13 Estimated 2013-14 Proposed Change From 2012-13 Amount Percent Medi-Cal\u2014Local Assistance $15,097 $14,897 $15,251 $354 2.4% Department of Developmental Services 2,563 2,604 2,759 155 5.9 Department of State Hospitals 1,329 1,321 1,457 136 10.0 Healthy Families Program (HFP)\u2014Local Assistancea 271 163 19 -144 -88.0 Department of Public Health 125 131 114 -17 -13.0 Department of Alcohol and Drug Programs (DADP)b 37 34 \u2014 -34 \u2014 Other Department of Health Care Services programs 59 136 130 -6 4.4 Emergency Medical Services Authority 7 7 7 \u2014 \u2014 All other health programs (including state support) 146 346 570 224 64.7 Totals $19,634 $19,639 $20,307 $668 3.4% a The HFP is being eliminated and enrollees are scheduled to be shifted to the Medi-Cal Program by September 1, 2013. b The DADP is being eliminated and its programs and functions will be shifted to other state departments by July 1, 2013. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 7 is in addition to the 465,000 HFP enrollees that the budget plan assumes will shift from HFP to Medi-Cal in 2012-13. Human Services expenditure Proposal by Major Programs Background on Human Services Programs. California’s major human services programs provide a variety of benefits to its citizens. These include income maintenance for the aged, blind, or disabled; cash assistance and welfare-to-work services for low-income families with children; protecting children from abuse and neglect; providing home care workers who assist the aged and disabled in remaining in their own homes; collection of child support from noncustodial parents; and subsidized child care for low-income families. Most social services are administered at the state level by DSS, the Department of Child Support Services, and the other Health and Human Services Agency (HHSA) departments. The actual delivery of many services takes place at the local level and is carried out by 58 separate county welfare departments. The major exception is Supplemental Security Income\/State Supplementary Program (SSI\/SSP), which is administered mainly by the U.S. Social Services Administration. As a result of 2011 legislation, certain state program responsibilities and revenues in the human services area have been realigned to local governments (primarily counties). Specifically, beginning with the 2011-12 budget, the budget reflects shifts to counties of about $1.1 billion of General Fund costs in the CalWORKs program and about $1.6 billion in child welfare and adult protective services General Fund costs. As a result of these changes, the state’s role with respect to child welfare and adult protective services is largely one of oversight of county administration of these program areas. Overview of Human Services Budget Proposal. The Governor’s budget proposes expenditures of $8 billion from the General Fund for human services programs in 2013-14. As shown in Figure 3 (see next page), this reflects an increase of $585 million\u2014or 7.9 percent\u2014above revised General Fund expenditures in 2012-13. Budget Forecasts Continued Growth in Medi-Cal Caseloads Figure 2 1 2 3 4 5 6 7 8 9 10 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14a Other Healthy Families Program Transfers Medi-Cal Families and Children Seniors and Persons With Disabilities 2003-04 Through 2013-14 (In Millions) a Caseload estimates do not include increased enrollment associated with the implementation of the Patient Protection and Affordable Care Act in 2013-14. 2013-14 B u d g e t 8 Legislative Analyst’s Office www.lao.ca.gov Summary of Major Budget Proposals and Changes. As shown in Figure 3, the budget reflects a growth in General Fund expenditures across all major human services programs. The 21.4 percent increase ($341 million) in CalWORKs General Fund expenditures can largely be explained by two factors\u2014a $143 million proposed augmentation for employment services (to some extent driven by policy reforms adopted in the 2012-13 budget package) and a $139 million year-over-year increase in the amount of federal Temporary Assistance for Needy Families (TANF) monies transferred to the California Student Aid Commission (CSAC). (The latter item increases the proposed CalWORKs General Fund expenditures by a like amount, but does not increase overall CalWORKs program expenditures.) We discuss both of these budget changes in further detail below. The 10 percent increase ($70 million) in General Fund expenditures in the County Administration and Automation budget line item largely reflects a $44 million proposed augmentation for two welfare automation projects, also discussed further below. Finally, the 4.9 percent net growth ($85 million) in IHSS General Fund expenditures reflects a multitude of budget adjustments\u2014both on the cost and savings fronts\u2014that do not signify new policy proposals of the Governor. For example, on the cost front, the budget includes General Fund increases in IHSS of (1) $59 million to restore funding due to the one-time nature in the 2012-13 enacted budget of a 3.6 percent across-the-board reduction in service hours and (2) about $49 million due to caseload growth. These and various other additional costs in IHSS are partially offset by the budget’s assumption that the 20 percent across- the-board reduction in service hours that was triggered by the 2011-12 budget package will begin to be implemented in November of 2013, generating partial-year savings of $113 million in 2013-14. Caseload Trends Varied Growth Through Recession. While caseload grew for most of the state’s human services programs during the recent recession, there was substantial variability in the growth rate across programs. (One key exception is the state’s Figure 3 Major Human services Programs and Departments\u2014budget summary General Fund (Dollars in Millions) 2011-12 Actual 2012-13 estimated 2013-14 Proposed Change From 2012-13 to 2013-14 Amount Percent SSI\/SSP $2,721.6 $2,764.8 $2,817.4 $52.6 1.9% CalWORKs 1,156.9 1,590.3a 1,930.8b 340.5 21.4 In-Home Supportive Services 1,725.9 1,723.2 1,808.2 85.0 4.9 County Administration and Automation 569.4 699.6 769.4 69.8 10.0 Department of Child Support Services 306.6 307.1 312.9 5.8 1.9 Department of Rehabilitation 54.5 55.3 56.6 1.3 2.4 Department of Aging 31.8 32.1 32.2 0.1 0.3 All other social services (including state support) 232.3 244.0 273.6 29.6 12.1 Totals $6,799.0 $7,416.4 $8,001.1 $584.7 7.9% a Reflects the impact of a funding swap between CalWORKs and the California Student Aid Commission (CSAC), which increased General Fund expenditures in CalWORKs by $804 million. b Reflects the impact of a proposed funding swap between CalWORKs and CSAC, which increases General Fund expenditures in CalWORKs by a total of $943 million. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 9 foster care caseload, which has declined since 2001 and through the recession. In part, this reflects the creation of the Kinship Guardian Assistance Payment program in 2000 that facilitates a permanent placement option for relative foster children outside of the foster care system.) For example, over the 2007-08 to 2011-12 period, the CalFresh (formerly Food Stamps) and CalWORKs caseloads increased by a total of 97 percent and 27 percent, respectively, while the IHSS caseload\u2014 less susceptible to economic fluctuations\u2014 increased by a total of 8 percent. The SSI\/SSP caseload grew modestly during this time period (a total of 3.4 percent)\u2014in part reflecting recent grant reductions that in effect reduced the eligible population\u2014and is projected to grow relatively modestly in 2013-14. We now turn more specifically to caseload trends in the IHSS and CalWORKs programs and the budget’s assumptions regarding caseload for these two programs in 2013-14. IHSS Caseload Projected to Decrease Modestly in 2013-14. The budget projects the average monthly caseload for IHSS to be 418,890 in 2013-14\u2014a 1 percent decrease below the most recent estimate of the 2012-13 caseload. We discuss the administration’s projection in further detail below in the IHSS write-up in this report. For historical perspective, the IHSS caseload has remained relatively flat throughout most of the five-year period from 2009-10 to 2013-14, in part reflecting policy changes that constrained caseload growth. Recent CalWORKs Caseload Decline Projected to Reverse During 2013-14. In the midst of the recent recession, the CalWORKs caseload rose substantially. The recent-year caseload peaked in June of 2011 at over 597,000 cases. Since that time, due to enacted policy changes and a slowly improving labor market, the caseload has been declining. The administration projects the average monthly caseload in 2012-13 to decline to 563,000 cases. In contrast, the average monthly caseload in 2013-14 is projected to increase by 1.5 percent to over 572,000, in part reflecting various policy changes in the enacted 2012-13 budget (discussed under the CalWORKs write-up elsewhere in this report) that should result in fewer case exits. In general, we find the administration’s caseload estimate for 2013-14 to be reasonable. In the long run, the caseload should continue to show a downward trend as the labor market continues to improve. 2013-14 B u d g e t 10 Legislative Analyst’s Office www.lao.ca.gov HeAlTHy FAMIlIeS PRogRAM TRAnSITIon UPDATe Health Insurance Program (CHIP) as the CHIP population, regardless of whether they are currently enrolled in HFP or Medi-Cal. We provide more information on CHIP in the background section of this analysis below. Summary of Analysis. In this analysis, we begin by providing a brief overview of HFP. We then summarize key provisions of Chapter 28 including: (1) the timeframe for the transition, (2) reporting requirements to ensure network adequacy and continuity of care, and (3) requirements involving stakeholder involvement and written notices to HFP enrollees. We then describe the erosion of assumed General Fund savings in 2012-13 and 2013-14 due to delays in the implementation of the transition and other factors. We also analyze recent caseload trends and recommend that the administration be required to report at budget hearings on the causes of the recent decline in the CHIP population and its potential fiscal impact. Background overview of HFP The HFP Is California’s CHIP. The CHIP provides health coverage to children in families that are low income, but with incomes too high to qualify for Medicaid. (In California, the federal Medicaid Program that provides health care services to qualified low-income persons is known as Medi-Cal.) Under the CHIP, for every dollar the state spends, the federal government provides roughly a two-dollar match. As part of his 2012-13 budget proposal, the Governor proposed shifting all enrollees in HFP\u2014administered by MRMIB\u2014to Medi-Cal\u2014 administered by DHCS\u2014over a nine-month period beginning in October 2012. The administration stated that the proposal would have several benefits, including (1) generating General Fund savings, (2) improving continuity of care by reducing the number of children who transition between Medi-Cal and HFP on an ongoing basis, and (3) implementing some requirements of ACA early. (Under ACA, a portion of the HFP enrollees will become eligible for Medi-Cal on January 1, 2014.) (For more information on the Governor’s 2012-13 budget proposal for HFP, and extensive background information on HFP and Medi-Cal, please see our report, The 2012-13 Budget: Analysis of the Governor’s Healthy Families Program Proposal.) In response, the Legislature enacted Chapter 28, Statutes of 2012 (AB 1494, Committee on Budget), to implement a modified version of the Governor’s proposal to shift all HFP enrollees into Medi-Cal (hereinafter referred to as the transition ). Notably, the Legislature’s plan delayed the start of the transition to January 2013, included direction on how the transition is to be conducted, and provided for legislative oversight. This report provides a status update on the transition. At the time this analysis was prepared, some children had shifted from HFP to Medi-Cal, while other children remained in HFP. Throughout this analysis, we will refer to all children who meet the eligibility requirements for the federal Children’s CRoSSCUTTIng ISSUeS 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 11 As of December 31, 2012 (prior to the shift of some HFP enrollees to Medi-Cal, which began on January 1, 2013), HFP provided health insurance for 852,600 children up to age 19 in families with incomes above the thresholds needed to qualify for Medi-Cal, but below 250 percent of the federal poverty level (FPL). (The FPL is currently $22,050 in annual income for a family of four.) The MRMIB provides coverage by contracting with health plans that provide health, dental, and vision benefits to HFP enrollees. All HFP enrollees are enrolled in managed care plans. (Under managed care, health plans provide coverage and are reimbursed on a capitated basis. The health plans assume some financial risk, in that they may incur costs to deliver the necessary care that are more or less than the capitated rate. Most HFP plans are regulated by the Department of Managed Health Care (DMHC), which monitors financial solvency, evaluates provider network adequacy, conducts quality performance audits, and responds to beneficiary grievances.) States Have Option to Combine Medicaid and CHIP Programs. A state may use federal CHIP funds to create a stand-alone program, such as HFP, or expand its Medicaid Program to include children in families with higher incomes. In both options, states receive the two-dollar federal match for every state dollar to provide coverage for the CHIP population. overview of the Transition Plan Chapter 28 authorized the transition and divided it into four phases. Additionally, it contained several provisions to ensure legislative oversight, continuity of care, network adequacy, and stakeholder involvement. We describe these provisions in more detail here. The Health Coverage Transition Will Take Place in Four Phases. When the 2012-13 Budget Act was enacted, the CHIP population was projected to be almost 880,000 by the time of the transition. This population was scheduled to be shifted to Medi-Cal managed care in four phases. Phase One. The first phase is authorized to begin no earlier than January 1, 2013 and includes children enrolled in HFP managed care plans that also contract with Medi-Cal. Generally, the children who are most likely to be able to stay with their current primary care provider will transition to Medi-Cal first. When the 2012-13 Budget Act was enacted, this phase was expected to include about 415,000 children. Phase Two. The second phase is authorized to begin no earlier than April 1, 2013 and includes children enrolled in HFP managed care plans that subcontract with a Medi-Cal managed care plan. When the 2012-13 Budget Act was enacted, this phase was expected to include about 249,000 children. Phase Three. The third phase is authorized to begin no earlier than August 1, 2013 and includes children enrolled in HFP managed care plans that do not contract with Medi-Cal or subcontract with a Medi-Cal plan. When the 2012-13 Budget Act was enacted, this phase was expected to include about 173,000 children. Phase Four. The fourth phase is authorized to begin no earlier than September 1, 2013 and includes children enrolled in HFP health care plans who live in a county where Medi-Cal managed care is not available. They will be transitioned into Medi-Cal FFS, unless a Medi-Cal managed care plan becomes available. (In Medi-Cal FFS, a health care provider receives a payment from DHCS for each medical service provided to a Medi-Cal beneficiary. Beneficiaries generally may 2013-14 B u d g e t 12 Legislative Analyst’s Office www.lao.ca.gov obtain services from any provider who has agreed to accept Medi-Cal patients.) When the 2012-13 Budget Act was enacted, this phase was expected to include about 42,800 children. Written approval from the federal Centers for Medicare and Medicaid Services (CMS) is required prior to implementing each phase of the transition. (As discussed below, CMS approval for phase one implementation was obtained prior to January 1, 2013.) After the transition is complete, the administration must apply for federal approval to administer the CHIP program as an integrated program with Medi-Cal. For more information on the how the federal government is monitoring the transition, see the nearby box. Dental Coverage Will Be Transitioned Concurrently With Health Coverage. Under Chapter 28, the HFP enrollees will transition their dental coverage at the same time that their medical coverage transitions. The transition will occur differently for those HFP enrollees located in Los Angeles and Sacramento counties and those HFP enrollees located elsewhere. HFP Enrollees Outside of Los Angeles and Sacramento Counties Shift to Denti-Cal. The HFP enrollees living outside of Los Angeles and Sacramento counties will receive dental care through Denti-Cal, Medi-Cal’s FFS dental program. HFP Enrollees in Los Angeles County Shift to Dental Managed Care and Denti-Cal. About 215,700 HFP enrollees live in Los Angeles County. If the enrollee is enrolled in an HFP dental plan that is also a Medi-Cal dental managed care plan, they will be enrolled in that plan. If their HFP dental plan is not a Medi-Cal dental managed care plan, they will be able to choose a new dental managed care plan or choose to be enrolled in Denti-Cal. HFP Enrollees in Sacramento County Shift to Dental Managed Care. About 27,500 HFP enrollees live in Sacramento County. If an HFP enrollee is enrolled in an HFP dental managed care plan that is also a Medi-Cal dental managed care plan, A Federal oversight Framework for Transition Has Been Developed As part of the federal approval process, the Department of Health Care Services has worked with Centers for Medicare and Medicaid Services to develop a framework for monitoring the transition. This monitoring will include collecting data on children who have transitioned from the Healthy Families Program to Medi-Cal. The monitoring framework has several objectives, including: Maintaining access to health care, dental care, behavioral and mental health services, and alcohol and substance use services. Providing continuity of care for children who are transitioning. Ensuring that the Children’s Health Insurance Program populations applying for Medi-Cal will be enrolled quickly and accurately into Medi-Cal. Metrics will be collected on a monthly, quarterly, or annual basis to measure whether these objectives are achieved. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 13 they will be enrolled in that plan. If their HFP dental plan is not a Medi-Cal dental managed care plan, they shall select a Medi-Cal dental managed care plan. If they do not choose a Medi-Cal dental managed care plan, they shall be assigned one which contracts with their current provider. The Administration Is Required to Submit Several Reports to the Legislature. Under Chapter 28, several reports are required to be submitted to the Legislature throughout the implementation of the transition. These reports include: Strategic Transition Plan. The California HHSA is required to work with MRMIB, DMHC, DHCS, and stakeholders to develop a strategic plan for the transition and submit it to the Legislature by October 1, 2012. The intent of the strategic plan is to serve as an overall guide for the development of a plan for each phase of the transition and to ensure clarity and consistency in approach to enrollee continuity of care. The strategic plan is required to address several key transition issues, including: (1) administrative readiness at the state and local levels, (2) stakeholder engagement, (3) monitoring managed care health plan performance, (4) implementation timelines and key milestones, and (5) the transfer of the HFP Advisory Board to DHCS. Implementation Plans Are Required for Each Phase. Implementation plans are required 90 days prior to each phase of the transition. The plans are to be developed to ensure state and county system readiness, an adequate network of providers in each health plan, and continuity of care, with the goal of ensuring that there is no disruption of service and there is continued access to coverage for all transitioning enrollees. Network Adequacy Assessment Is Required. An assessment of network adequacy is required to be completed 60 days before the first shift of HFP enrollees to Medi-Cal. Monthly Status Reports Due Beginning February 15, 2013. Monthly status reports on the transition must be submitted to the Legislature beginning no later than February 15, 2013. These reports must include information relating to access to care, continuity of care, changes to provider networks, and eligibility performance standards. A final comprehensive report is due within 90 days of the conclusion of the transition. Certain Performance Measures Must Be Integrated Into Medi-Cal Managed Care. Chapter 28 requires certain health plan performance measures be in place before children can be shifted from HFP to Medi-Cal. For example, Chapter 28 requires the integration of managed care performance measures with the HFP performance standards\u2014which include the child-only Healthcare Effectiveness Data and Information Set. Stakeholder Involvement and Written Notices to HFP Enrollees. Under Chapter 28, the DHCS is required to provide a process for ongoing stakeholder involvement and consultation and make information on the transition publicly available. The DHCS and MRMIB are required to work collaboratively to develop notices for HFP enrollees shifting to Medi-Cal. These written notices are required to be sent at least 60 days prior to the transition of individuals. 2013-14 B u d g e t 14 Legislative Analyst’s Office www.lao.ca.gov The HFP Faces 2012-13 Budget Shortfall 2012-13 HFP Budget Included an Unallocated Reduction. The 2012-13 Budget Act includes a $183 million unallocated General Fund reduction to HFP. A proposed extension of a tax imposed on managed care organizations (MCOs) used to offset General Fund costs would have provided an equivalent amount of money for the support of HFP in 2012-13, but it was not enacted into law. (For more information on the MCO tax, see the Medi-Cal section of this report.) The unallocated reduction of $183 million General Fund was revised downwards to $131 million in the Governor’s 2013-14 budget proposal due to changes in caseload and other factors. 2012-13 Shortfall in HFP Budget. On January 7, 2013, the Department of Finance (DOF) sent a letter to the Joint Legislative Budget Committee (JLBC) notifying the JLBC that MRMIB would expend all of its available resources for HFP in January 2013. To address this shortfall, MRMIB requested $15 million from Item 9840 of the 2012-13 Budget Act. (The Legislature appropriated $20 million General Fund in this item to be available to fund unanticipated expenses, subject to certain conditions specified in the 2012-13 Budget Act.) The DOF’s letter stated that MRMIB will seek legislation this year to cover the remainder of its shortfall in HFP as of January and the remainder of the fiscal year\u2014estimated to total about $116 million. The Governor has proposed an MCO tax as part of the 2013-14 budget, and if such a tax were implemented, it could potentially offset the General Fund expense to fund the HFP shortfall in 2012-13. We note that failure to fund HFP would likely violate federal maintenance-of-effort (MOE) requirements, putting at risk billions of dollars in federal funding for CHIP and Medi-Cal. erosion of Initially Projected general Fund Savings From Transition When the 2012-13 Budget Act was enacted, it assumed General Fund savings of $13.1 million in 2012-13 as a result of the transition, and at that time the administration projected about a $58 million savings in 2013-14 and about $73 million in full-year General Fund savings annually thereafter. The administration has revised its estimates of the savings that will be achieved through implementation of the transition. Under the revised estimates, $129,000 in savings will be achieved in 2012-13, $43 million in 2013-14, and $38 million annually thereafter. These are the net result of several different adjustments, including changes in caseload, per member per month costs, and administrative costs. We note that the administration’s revised estimate of the 2012-13 General Fund savings from the transition is based on a CHIP caseload of about 871,000 enrollees. However, as we describe in the next section of this analysis, the most recent caseload information suggests actual CHIP caseload will be lower than 871,000\u2014by about 10,000 to 20,000 fewer enrollees. As a consequence, the estimates of the fiscal impacts of the transition will need to be further revised. HFP Transition generally Proceeding as Planned, With Some Delays We find that the administration has generally complied with the requirements laid out in Chapter 28 as described above. The administration has submitted the required strategic plan, implementation plans, and network adequacy assessment reports. Written notices informing enrollees of the transition have been developed and sent to families. The DHCS has provided a process for ongoing stakeholder 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 15 involvement and consultation and has made information, such as the required reports, publicly available. The HFP transition is generally proceeding as planned, but with some delays. The DHCS worked with CMS to develop a framework for monitoring the transition and obtained federal approval of phase one of the transition on December 31, 2012. (Federal written approval is required prior to the implementation of each phase.) However, as we describe below, phase one was delayed for certain HFP enrollees due to concerns about network adequacy and continuity of care. Potential Interruptions to Continuity of Care Were Identified And. . . Prior to implementation of phase one of the transition, DHCS and DMHC completed network adequacy assessments and implementation plans for enrollees transitioning in phase one and phase two. During those assessments, potential interruptions to continuity of care for some transitioning HFP enrollees were identified. Particular Health Plan Had Low Provider Overlap Between HFP and Medi-Cal Networks, Raising Network Adequacy Issues. The first transition issue involved a particular health plan in phase one that had a low percentage of provider overlap between the HFP and the Medi-Cal networks and was unable to report how many primary care physicians would continue to see HFP enrollees after they shifted to Medi-Cal. To allow for an adequate network assessment, the transition of about 90,700 HFP enrollees enrolled in this plan was delayed. The DMHC and DHCS have indicated that HFP enrollees who are not able to remain with their current primary care provider under this plan may be given the choice to select a new plan or provider, rather than being reassigned automatically to this plan. Enrollees of a Particular Health Plan Shifted From Phase One to Phase Two Transition. The second transition issue involved a particular health plan that, while originally considered a phase one plan, was later recategorized as a phase two plan because it does not have a direct contractual relationship with Medi-Cal (instead, it subcontracts with a plan that contracts with Medi-Cal). Accordingly, about 14,600 HFP enrollees enrolled in this plan will transition to Medi-Cal at a later date than initially assumed. Some Enrollees Were Not Assigned Primary Care Physicians. The third transition issue involved HFP enrollees (mainly in rural areas with few doctors) who were not assigned to a primary care provider, although some of these HFP enrollees do have an ongoing relationship with a physician or other provider. If no primary care provider is assigned to an enrollee, claims data will be used to assign that enrollee to a provider that they have previously seen. The inability to identify a primary care provider for roughly 3,000 HFP enrollees enrolled in a particular plan in one county initially raised concerns about the administration’s ability to minimize disruptions to continuity of care. The administration has since determined that the network of Medi-Cal providers is adequate to receive transitioning HFP enrollees. The administration has determined that these enrollees can be transitioned on March 1, 2013, the second subphase of phase one. 2013-14 B u d g e t 16 Legislative Analyst’s Office www.lao.ca.gov . . . Phase one Was Slowed Down Following the network adequacy assessments that we described above, the children who had been scheduled to transition in the first phase were further subdivided into three groups to reflect missing data from some plans and the concern that some HFP enrollees in phase one may not be able to remain with their primary care provider. Accordingly, the transition schedule was adjusted and the first two phases of the transition are now occurring as follows (CHIP caseload numbers have been updated since the 2012-13 Budget Act was enacted). Phase one, which includes approximately 402,000 children, has now been further broken up into three subphases, as follows: \u2014 The first subphase began January 1, 2013. About 197,000 children in eight counties have transitioned to Medi-Cal. \u2014 The second subphase will begin March 1, 2013. About 95,000 children in 15 counties will transition to Medi-Cal. \u2014 The third subphase will begin April 1, 2013. About 110,000 children currently enrolled in a certain health plan in seven counties will transition to Medi-Cal. Phase two will begin on April 1, 2013 and include approximately 261,100 children that reside in 15 counties. There are no changes planned to phases three and four at this point. (Network adequacy assessments and implementation plans have not yet been completed for these later phases.) Some Children Who Enrolled in HFP in November Will Transition in Later Phases. Some HFP enrollees who enrolled in HFP in November and December of 2012, and who would otherwise have been transitioned in phase one, enrolled too late to receive timely notices advising them of the transition. Staff at DHCS state that they do look backs to determine when sufficient time will have elapsed between notification and the transition to ensure that state and federal requirements regarding notification are met. The CHIP Caseload Is Below Projected levels In June 2012, at the time the 2012-13 Budget Act was enacted, HFP had about 873,000 enrollees. As shown in Figure 4, the total number of enrollees has decreased steadily between May and December of 2012. By December 2012 (prior to the transition), HFP had 852,600 enrollees. It is not clear why caseload has declined. Monthly new enrollment in HFP since May 2012 has generally been below the monthly new enrollment seen in 2011. Analyst’s Recommendations Given the unanticipated decline in the CHIP caseload\u2014which dropped from 874,900 in May 2012 to 852,600 in December of 2012\u2014we recommend that DHCS and MRMIB report at Figure 4 Healthy Families Program Caseload Has Decreased steadily in recent Months Total number of enrollees in 2012 Change From Prior Month Month Caseloada Amount Percent May 874,890 966 0.1% June 872,968 -1,922 -0.2 Julyb 868,709 -4,259 -0.5 August 863,033 -5,676 -0.7 September 859,909 -3,124 -0.4 Octoberb 858,500 -1,410 -0.2 November 857,090 -1,410 -0.2 December 852,592 -4,498 -0.5 a Enrollment is as of the last day of the month. b Estimated. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 17 savings beginning in 2014-15 from the transition, including a discussion of what is driving differences between these updated projections and what was assumed when the 2012-13 Budget Act was enacted. budget hearings on the causes for the unanticipated decline in caseload. Additionally, we recommend that DHCS and DOF report at budget hearings on its updated projections of 2012-13 and 2013-14 General Fund savings and full-year General Fund DePARTMenT oF AlCoHol AnD DRUg PRogRAMS As part of his 2012-13 budget plan, the Governor proposed to eliminate DADP by July 1, 2012 and shift its programs and administrative functions to other departments. The administration provided the following rationale for its proposal: (1) co-locating substance use disorder services with physical health programs administered by DHCS is a step toward integrating services to create a continuum of care and (2) the transfer of the programs to other state departments will better align a program’s mission with that of the department receiving the new program(s). The Legislature rejected the Governor’s proposal to eliminate DADP by July 1, 2012, delaying any potential elimination of DADP until July 1, 2013, in order to allow for additional stakeholder input and the development of a transition plan for shifting DADP programs and functions to other HHSA departments. In this analysis, we provide a brief overview of DADP and then describe the Governor’s 2013-14 proposal for the elimination of DADP and the transfer of its programs and administrative functions to other departments (hereinafter referred to as the transition). We provide a description of the requirements imposed on the transition process by Chapter 36, Statutes of 2012 (SB 1014, Committee on Budget and Fiscal Review), and find that the administration has generally complied with these requirements. We recommend that DADP, DHCS, and DPH be required to report at budget hearings on various aspects of the transition of DADP programs and functions to other departments in order to ensure continued legislative oversight. DADP overview The DADP directs and coordinates the state’s efforts to prevent or minimize the effects of alcohol-related problems, narcotic addiction, drug abuse, and gambling. As the state’s alcohol and drug addiction authority, the department is responsible for ensuring the collaboration of other state departments, local public and private agencies, providers, advocacy groups, and program beneficiaries in maintaining and improving the statewide service delivery system. The DADP operates data systems to collect statewide data on drug treatment and prevention, and performs functions and administers programs in the following areas: (1) substance abuse and prevention services; (2) substance abuse treatment and recovery services; (3) licensing adult alcoholism, drug abuse recovery, and other treatment facilities; (4) drug courts and parolee services; and (5) problem gambling. governor’s Budget Proposal The Governor’s revised estimated total spending for DADP in 2012-13 is $322 million ($34 million General Fund). The Governor’s budget entirely eliminates funding for DADP in 2013-14 and shifts its functions, programs, and positions to other departments as follows. 2013-14 B u d g e t 18 Legislative Analyst’s Office www.lao.ca.gov Various Programs Shift From DADP to DHCS. The budget shifts almost $314 million in all funds ($34 million General Fund) and 225.5 positions from DADP to DHCS to ref lect the shift of the following programs and functions: (1) federal grants administration, (2) licensing activities, (3) Driving Under the Inf luence Program, (4) narcotic treatment programs, and (5) parolee services programs. Office of Problem Gambling Shifts From DADP to DPH. The budget shifts $3.7 million (all funds) and four positions from DADP to DPH to ref lect the transfer of the Office of Problem Gambling from DADP to DPH. The DPH also requests $5 million in special funds expenditure authority and two, two-year limited-term positions to continue implementation and data collection of the Problem Gambling Treatment Services Pilot Program. The budget assumes that the year-over-year net fiscal effect of the shift of DADP’s functions, programs, and positions as proposed by the Governor is neutral. Under the Governor’s proposal, costs resulting from the transition, such as the transfer of information technology (IT) systems and relocation of staff, will be absorbed within the existing resources of DADP, DHCS, and DPH. legislature Imposed Requirements Regarding DADP elimination Instead of adopting the Governor’s proposal in his 2012-13 budget to eliminate DADP by July 1, 2012, the Legislature enacted Chapter 36 to plan for implementation of the transition by July 1, 2013. However, the ultimate placement of DADP’s programmatic and administrative functions is contingent upon enactment of the 2013-14 Budget Act and implementing legislation. Chapter 36 requires HHSA\u2014in consultation with stakeholders and affected departments\u2014to develop a plan to be submitted as part of the Governor’s 2013-14 budget package. (The plan has been submitted by the administration.) The plan is intended to ensure that the transfer will achieve several goals, such as improving access to alcohol and drug treatment and ensuring appropriate state and county accountability through oversight and outcome measurement strategies. Under Chapter 36, the transition plan prepared by HHSA shall include the following: Rationale. A detailed rationale for the transfer of administrative and programmatic functions from DADP to other departments. An Analysis of Transition Costs and Activities. A cost and benefit analysis for each transfer of a program or function from DADP to another department and for the proposal as a whole, showing fiscal and programmatic impacts of the changes. Continuity of Service Assessment. A detailed assessment of how the transfer of DADP functions and programs will affect continuity of service for providers, consumers, local government counterparts, and other major stakeholders. Coordination Across Departments. If the plan proposes to transfer functions from DADP to more than one department, then the plan should include details on how a smooth transition across departments will be ensured and how 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 19 ongoing program and policy functions will be coordinated across departments. A Stakeholder Outreach Process. A detailed description of the process to include stakeholders in the development of the plan. Administration Has Complied With the legislature’s Planning Requirements Overall, we find that the administration has acted in good faith to comply with the requirements set forth in Chapter 36 regarding stakeholder outreach and the submission of a transition plan. A total of three stakeholder workgroup meetings were convened in September and October of 2012 in order to obtain input from parties that would be affected by the elimination of DADP. In January 2013, HHSA submitted the transition plan to the Legislature as part of the Governor’s 2013-14 budget plan. We have reviewed the plan and find that it broadly meets the requirements set forth in Chapter 36. Analyst’s Recommendations In order to ensure continued legislative oversight over the elimination of DADP and the shift of its programs and functions to other HHSA departments, we recommend that DADP, DHCS, and DPH report at budget hearings on how the transition is proceeding. Specifically, the departments should report on how the transition will achieve the following goals set forth in Chapter 36 to: Improve access to alcohol and drug treatment services for consumers, including a focus on recovery and rehabilitative services. Effectively integrate the implementation and financing of services. Ensure appropriate state and county accountability through oversight and outcome measurement strategies. Provide focused, high-level leadership within state government for alcohol and drug treatment services. 2013-14 B u d g e t 20 Legislative Analyst’s Office www.lao.ca.gov In California, the federal Medicaid Program is administered by DHCS as the California Medical Assistance Program (Medi-Cal). As a joint federal- state program, federal funds are available to the state for the provision of health care services for low-income pregnant women, families with children, and for SPDs. California receives a 50 percent Federal Medical Assistance Percentage\u2014 meaning the federal government pays one-half of most Medi-Cal costs. Medi-Cal is by far the largest state-administered health services program in terms of annual caseload and expenditures. There are two main Medi-Cal systems administered by DHCS for the delivery of medical services: FFS and managed care. In a FFS system, a health care provider receives an individual payment for each medical service delivered to a beneficiary. Beneficiaries generally may obtain services from any provider who has agreed to accept Medi-Cal payments. In managed care, DHCS contracts with managed care plans, also known as health maintenance organizations, to provide health care coverage for Medi-Cal beneficiaries. Managed care enrollees may obtain services from providers who accept payments from the health plan, also known as a plan’s provider network. The health plans are reimbursed on a capitated basis with a predetermined amount per person, per month regardless of the number of services an individual receives. Unlike FFS providers, the health plans assume financial risk, in that it may cost them more or less money than the capitated amount paid to them to deliver the necessary care. overview The budget proposes $15.3 billion General Fund in 2013-14 for local assistance under the Medi-Cal Program, including the provision of health care services and county administration costs. This is a $354 million net increase, or 2.4 percent, over estimated 2012-13 expenditures. Generally, the level of expenditures and changes in year-over-year spending are driven by various factors, including: The total enrollment of beneficiaries in the program and per-person cost of providing health care services, which is affected by both the price and level of utilization for individual services. Policy changes that affect the level of spending for health care services, such as changes to the amount of payment to providers and managed care plans. Technical changes that result from the timing of receipt or payment of funds. Later in this write-up, our analysis focuses on the fiscal impact on the Medi-Cal budget of prior and proposed policy changes, many of which are intended to create General Fund savings. Caseload. The budget projects a monthly average of 5.8 million Medi-Cal beneficiaries will be enrolled in managed care during 2013-14 (67 percent of this total), while a monthly average of 2.9 million (33 percent) will be enrolled in FFS. Together, these projections\u2014totaling 8.7 million beneficiaries\u2014represent a 6 percent increase over the 2012-13 average total monthly caseload of MeDI-CAl HeAlTH ISSUeS 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 21 8.2 million beneficiaries. As mentioned in the Overview section of this report, most of the growth in caseload is due to the shift of HFP subscribers to Medi-Cal. (Please see our earlier write-up in the Crosscutting Issues section of this report for a detailed update on the HFP transition to Medi-Cal.) We have reviewed the above baseline caseload projections\u2014absent any changes associated with ACA, also known as federal health care reform\u2014 and do not recommend any adjustments at this time. If we receive additional information that causes us to change our assessment, we will provide the Legislature with an updated analysis at the time of the May Revision. It is important to note that the budget’s caseload projections exclude two major populations expected to significantly increase enrollment in Medi-Cal under the ACA. Currently Eligible but Not Enrolled Population. Individuals who (1) are currently eligible but not enrolled in Medi-Cal and (2) take up Medi-Cal coverage due to provisions related to eligibility, enrollment, retention, and other changes under the ACA. Newly Eligible Population. Individuals who become newly eligible for Medi-Cal, if the state adopts the option under the ACA to expand coverage to low-income adults who are not currently eligible for Medi-Cal. There is significant uncertainty about the magnitude of these ACA-related caseload changes. To a large degree, additional enrollment among the currently eligible depends on behavioral responses that are difficult to predict, such as responses to the individual mandate and simplified enrollment processes. In addition, major state policy decisions about how to implement the expansion, such as whether to adopt a state- or county-based expansion, would have very different effects on the state’s Medi-Cal caseload. When the administration provides updated Medi-Cal caseload estimates that incorporate these ACA-related changes, we will provide the Legislature with an updated assessment. Special Session Will Address Medi-Cal- Related Issues. The Governor recently called for an extraordinary special session of the Legislature on health care to address ACA implementation issues, including conforming to federal eligibility and enrollment rules and other issues that may affect Medi-Cal take-up among individuals who are currently eligible but not enrolled. Later in this write-up, we discuss the budget’s $350 million General Fund placeholder for costs associated with this population. Governor Proposes to Adopt Optional Expansion. The administration has stated its commitment to opting in to the optional expansion and the budget outlines a state- and county-based approach to expansion, but does not provide an estimate of the fiscal impact on the state for either approach. For a detailed analysis of fiscal and policy issues surrounding the optional expansion, please see our report, The 2013-14 Budget: Examining the State and County Roles in the Medi-Cal Expansion. The CCI. The budget also proposes changes to the implementation plan for the CCI, a significant policy initiative that cuts across Medi-Cal, IHSS, and other health and human services program areas. Analyst’s Budget Assessment In the remainder of this write-up, we analyze and provide our assessment of (1) risks to savings assumed under prior budget actions, (2) new fiscal and policy proposals in the Medi-Cal budget, (3) fiscal effects associated with ACA implementation, and (4) the administration’s requests for additional resources. 2013-14 B u d g e t 22 Legislative Analyst’s Office www.lao.ca.gov Implementation Status of Recent Actions to Create general Fund Savings The Medi-Cal budget includes some key assumptions about the ongoing General Fund savings associated with recently enacted budget actions. Below, we describe two assumptions and the level of associated General Fund risk assumed in the Governor’s Medi-Cal budget. Provider Payment Reductions of Up to 10 Percent. In 2011, budget-related legislation authorized a reduction in certain Medi-Cal provider payments by up to 10 percent. Several months later, a U.S. District Court issued preliminary injunctions preventing DHCS from implementing most of the provider payment reductions. In December 2012, a Ninth Circuit Court of Appeals panel reversed the district court’s decisions and vacated the preliminary injunctions. However, on January 28, 2013, the plaintiffs petitioned the court for a rehearing and the state is currently prohibited from implementing the reductions. The Medi-Cal budget assumes the injunctions will be lifted in March 2013 and the state can begin to implement the payment reductions for managed care in April 2013 and FFS in June 2013. It also assumes that, beginning September 2013, the state will begin to retroactively recoup a portion of payments made to FFS providers during the period in which the reductions were enjoined. The budget assumes $152 million General Fund savings in 2012-13 and $573 million in 2013-14 from implementing the provider payment reductions. Analyst’s Assessment. Given the uncertainty regarding the timing and outcomes of legal proceedings, there is some risk that part or all of these savings will not be achieved as assumed in the Governor’s budget. We recommend that DHCS report at budget hearings on the status of the litigation so the Legislature can assess the likelihood of achieving these savings. Medi-Cal Copayments. The 2011-12 budget authorized mandatory copayments for Medi-Cal beneficiaries on physician visits ($5), dental visits ($5), prescription drugs ($3 or $5), emergency room visits ($50), and hospital inpatient visits ($100 per day). The state was unable to obtain approval from the federal CMS to implement the mandatory copayments at the levels authorized in the 2011-12 budget. The 2012-13 budget assumed $20 million in General Fund savings from a revised proposal to implement lower copayment amounts for certain prescription drugs ($3.10 per filled prescription) and nonemergency use of emergency rooms ($15 per visit) for beneficiaries in managed care. As part of the 2013-14 budget, the administration has revised its plan to implement copayments for Medi-Cal beneficiaries. The administration now proposes to implement only the $15 copayment for managed care enrollees who utilize the emergency room for nonemergency services. It is no longer proposing to implement copayments for certain prescription drugs. The budget assumes the copayment for nonemergency use of emergency rooms would be implemented in January 2013\u2014saving $8 million General Fund in 2012-13 and $17 million General Fund in 2013-14. Analyst’s Assessment. At the time of this analysis, we did not have any issues to raise with the administration’s revised copayment proposal for nonemergency care provided in the emergency room. However, we note that the revised copayment proposal has not been approved by the federal government. Since the budget assumed a January 2013 date of implementation, there is already some erosion to the 2012-13 savings assumed in the budget. In addition, we note that recently proposed federal rules allow copayments of up to $8 for nonemergency use of emergency rooms for enrollees with income up to 150 percent of FPL. Since the $15 copayment is more than the 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 23 $8 allowed under federal rules, the proposal requires federal approval of a waiver amendment rather than a state plan amendment (SPA). Generally, it is easier for the state to obtain federal approval for a SPA than for a waiver. The Legislature may want to consider directing DHCS to seek federal approval of a SPA for a nonemergency copayment of $8\u2014an amount that would reduce General Fund savings, but that may have a greater likelihood of receiving federal approval\u2014if it does not receive approval for the waiver amendment. Budget Assumes Savings From Managed Care efficiencies Governor’s Proposal. The administration indicates its desire to improve the quality and efficiency of the Medi-Cal delivery system. The proposed budget assumes savings of $135 million General Fund in 2013-14 by incorporating efficiency adjustments into managed care plan rates. At the time of this analysis, the administration had not provided detail about how these efficiency adjustments would be incorporated into managed care rates and how the estimated savings would be achieved. The administration indicates that these savings could be achieved under existing state law such that no statutory changes would be needed. Analyst’s Assessment. Generally, we agree with the administration’s goal of structuring payments in a way that incentivize lower health care spending and improved health outcomes. However, at this time, the details of how the administration would achieve these outcomes are unclear. We recommend against the Legislature assuming the savings associated with this proposal, unless the administration can provide additional detail about this proposal, including: How it plans to incorporate efficiency adjustments into managed care plan rates. How the changes will reduce General Fund costs. How the changes would potentially impact the quality of care and access to care for Medi-Cal enrollees. governor Proposes Reauthorization of gross Premiums Tax on Managed Care Plans Governor’s Proposal. In recent years, the state’s gross premiums tax on insurers was expanded to include Medi-Cal managed care plans. A portion of the tax revenue from Medi-Cal managed care plans was matched with federal funds and used to increase the rates at which Medi-Cal managed care plans are reimbursed to offset the cost of the tax. The remaining revenue was used to offset state General Fund costs. The tax expired on June 30, 2012. The budget proposes permanently reauthorizing the gross premiums tax on Medi-Cal managed care plans, resulting in General Fund savings of $131 million in 2012-13 and $227 million in 2013-14. Analyst’s Assessment. At the time this analysis was prepared, we did not have any issues to raise with the administration’s proposal to permanently reauthorize the gross premiums tax on Medi-Cal managed care plans. Generally, we support the concept of leveraging additional federal funding to offset state General Fund costs. If we receive additional information on this proposal that causes us to change our assessment, we will provide the Legislature with an updated analysis. governor Proposes extension of Hospital Quality Assurance Fee Background on the Hospital Quality Assurance Fee. The hospital quality assurance fee (hereinafter referred to as the fee) finances the state’s share of some increases to Medi-Cal payments to private hospitals. The state assesses the 2013-14 B u d g e t 24 Legislative Analyst’s Office www.lao.ca.gov fee for each inpatient day at each private hospital. The fee varies depending on payer type, with the highest fees assessed on Medi-Cal inpatient days and lower fees assessed on days paid for by other payers, such as private insurance. Private hospitals pay the fee in quarterly installments, and the state uses most of the proceeds to draw down federal matching funds. The combination of fee revenue and federal matching funds allows the state to increase Medi-Cal FFS and managed care payments to private hospitals without incurring additional General Fund costs. Each quarter, the state also retains a portion of the fee revenue and uses it to offset General Fund costs for providing children’s health coverage, thereby achieving General Fund savings. Governor’s Proposal. Under current law, the fee expires on December 31, 2013. The administration has proposed a three-year extension of the fee through December 31, 2016. The Medi-Cal budget assumes $310 million in savings during the last six months of 2013-14 from using the fee revenue to offset General Fund costs for children’s health care coverage. The administration has indicated that it will pursue extension of the fee through legislation that will be introduced in the policy committee rather than budget-related legislation. At the time of this analysis, draft legislation to implement the fee extension had not been provided by the administration. Analyst’s Assessment. Because the administration has not introduced legislation to extend the fee at the time of this analysis, we were unable to assess the likelihood of whether the $310 million of General Fund savings assumed in the budget would be achieved under the administration’s proposal. The administration’s assumed savings are based on the amount of General Fund savings under the current fee arrangement during the first six months of 2013-14. These savings were achieved through a series of budget and policy actions. Under Chapter 286, Statutes of 2011 (SB 335, Hernandez), the fee’s authorizing statute, the state retained $97 million in quarterly fee revenue to offset General Fund costs for children’s health care coverage. Under the 2012-13 Budget Act, the Legislature adopted $117 million in savings from reductions (over six months) to fee-funded managed care payments and direct grants to public hospitals. The administration has not identified whether the actions described above, or some other actions, would be adopted under the proposed fee extension to achieve $310 million in General Fund savings. We note that the assumed savings implies $155 million in quarterly General Fund savings from the new fee revenue\u201460 percent greater than the quarterly amount originally authorized under Chapter 286. When evaluating legislation to extend the fee, the Legislature will need to consider various policy issues, including: The schedule of fee rates for each inpatient day, by payer type. The process for using fee revenue to achieve General Fund savings and its varying impact on different categories of hospitals, such as public and private hospitals. As the Legislature determines the appropriate amount of General Fund savings to adopt under an extended fee, it should weigh the total expected fee revenue and the net benefit to hospitals over the proposed extension period. For example, enrollment in Medi-Cal is expected to increase under the ACA. If more Medi-Cal beneficiaries receive inpatient care at private hospitals as a result, the amount of fee revenue available for both payments increases and General Fund savings may grow correspondingly. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 25 Generally, we support the concept of leveraging provider fees in lieu of General Fund to increase Medi-Cal payments to providers without additional costs to the state. We recommend the Legislature enact an extension of the hospital quality assurance fee for this purpose. We also advise a limited-term fee extension, since this provides flexibility for the Legislature to restructure the fee in response to future changes that may occur in important areas, such as (1) Medi-Cal inpatient utilization and (2) federal requirements on states’ use of provider fees. However, since the administration has not submitted draft legislation at the time of this analysis, we were unable to comment on the details of administration’s proposal. The fee is a complex financing mechanism whose design has both fiscal and policy implications for the Medi-Cal Program. Therefore, we believe the policy committees are the appropriate venue for the Legislature to deliberate over important policy decisions related to the implementation of the fee\u2014including the projected amount of fee revenue over a three-year extension and the portion of revenue used to fund hospital payment increases\u2014before adopting the savings amount assumed in the Governor’s budget. governor Proposes Annual open enrollment Period Governor’s Proposal. Currently, Medi-Cal managed care enrollees may change plans on a monthly basis. The budget proposes to allow certain Medi-Cal managed care beneficiaries to change health plans only during specified periods of the year. Certain populations would be exempt from this requirement, such as SPDs. New Medi-Cal enrollees would have an initial 90-day period during which they could change plans. Existing enrollees would be allowed to change plans during an annual 60-day open enrollment period. The administration estimates General Fund savings of $1 million in 2013-14 from implementing the open enrollment period. Analyst’s Assessment. At the time this analysis was prepared, we did not have any issues to raise with the administration’s proposal. Open enrollment periods are a common requirement for individuals with private insurance coverage. If we receive additional information on these proposals that causes us to change our assessment, we will provide the Legislature with an updated analysis. Costs Associated With Increased enrollment of Currently eligible Population Under the ACA Governor’s Proposal. The Medi-Cal budget includes a $350 million General Fund placeholder for costs associated with increased enrollment of individuals who are currently eligible for Medi-Cal, but not enrolled in the program, until a more refined estimate can be developed. The ACA contains several provisions that will likely increase enrollment among individuals who are currently eligible for Medi-Cal, including simplified eligibility and enrollment procedures, enhanced outreach activities, and the individual mandate to obtain health coverage. The state will be responsible for 50 percent of the costs associated with the increased enrollment of individuals who are currently eligible. Analyst’s Assessment. The short- and long-term costs from additional enrollment among the currently eligible Medi-Cal population under the ACA are subject to significant uncertainty. Some of the major areas of uncertainty include: (1) the size of the eligible, but not enrolled population, (2) the percent of the eligible population that will enroll (take-up rate), and (3) the cost of providing services to each additional enrollee. Figure 5 (see next page) shows a range of estimated costs for 2013-14 B u d g e t 26 Legislative Analyst’s Office www.lao.ca.gov these additional enrollees under three different scenarios. Under a moderate-cost scenario that we think is most likely, we estimate that the health care costs associated with this population would be $104 million in 2013-14\u2014significantly less than the $350 million included in the Governor’s budget. Using different, but still plausible, assumptions, we estimate state costs could potentially be as low as $30 million or as high as $254 million in 2013-14. Therefore, even under a set of assumptions that would result in relatively high state costs, our near-term cost estimates are almost $100 million lower than the placeholder in the Governor’s budget. However, we estimate annual costs may be over $350 million within a few years\u2014potentially ranging from the low hundreds of millions to nearly a billion dollars annually. Additional ACA effects Add Fiscal Uncertainty Fiscal Estimates Are Incomplete. There are several potential costs and savings related to ACA implementation that are not included in the Governor’s budget. As discussed above, the budget does not assume any state savings or costs associated with the optional Medi-Cal expansion that the administration has stated it is committed to adopting. In addition, the budget does not assume savings from reduced enrollment in certain state health programs\u2014such as the Family Planning, Access, Care, and Treatment Program and the Breast and Cervical Cancer Treatment Program\u2014that may result from the additional health coverage options made available under the ACA, or administrative costs or savings associated with changes in the standards and processes used to determine Medi-Cal eligibility. To a large Figure 5 Range of Estimated Annual Medi-Cal Costs for Health Care Services to Currently Eligible but Unenrolled Population Under the ACAa (In Millions) State Fiscal Year Low-Cost Assumptions Moderate-Cost Assumptions High-Cost Assumptions Total Cost Federal Fundsb State Funds Total Cost Federal Fundsb State Funds Total Cost Federal Fundsb State Funds 2013\u201114 $65 $35 $30 $222 $118 $104 $540 $286 $254 2014\u201115 180 98 83 618 328 290 1,517 804 714 2015\u201116 222 120 102 765 407 359 1,897 1,005 893 2016\u201117 245 145 101 849 482 367 2,127 1,198 929 2017\u201118 259 157 103 901 522 379 2,279 1,309 970 2018\u201119 274 165 109 958 554 404 2,447 1,404 1,043 2019\u201120 289 174 115 1,015 587 429 2,620 1,501 1,119 2020\u201121 305 184 122 1,080 623 457 2,814 1,610 1,204 2021\u201122 323 194 129 1,150 663 487 3,027 1,731 1,297 2022\u201123 341 205 136 1,222 703 518 3,248 1,855 1,393 Key Assumptions Eligible population in 2014 2.4 million 2.5 million 3.1 million Average take\u2011up ratesc 8% 20% 33% Annual average cost per new enrollee in 2014 $1,169 $1,440 $1,694 a Estimates do not include administrative costs, such as additional costs for eligibility determinations. b Applicable federal matching rate depends on whether the enrollee is currently eligible for the Medicaid matching rate or currently eligible for the Children’s Health Insurance Program matching rate. c The take\u2011up rate is the percent of eligible individuals who actually enroll. Estimates assume take\u2011up is complete by July 1, 2016. ACA = Patient Protection and Affordable Care Act. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 27 degree, these fiscal effects depend on important policy decisions that remain to be made. The Legislature will need to account for these and other ACA-related fiscal effects in the 2013-14 spending plan. Key ACA Policy Decisions Remain. In addition to decisions about whether or not to adopt the optional expansion and whether to adopt a state- or county-based approach, the state has several other major ACA-related policy decisions that have yet to be made\u2014many of which have potential fiscal effects in 2013-14. Some of the key decisions facing the Legislature include: Selecting the benefits that would be provided to the Medi-Cal expansion population if a state-based approach to the optional expansion were adopted. Determining how to implement the new Medi-Cal eligibility standards and enrollment processes as required by the ACA. Evaluating whether to modify or eliminate existing state health programs that provide services to persons who would become newly eligible for Medi-Cal or other health coverage in 2014. Whether or not to establish a Basic Health Program, a Bridge Program between Medi-Cal and the California Health Benefit Exchange (as proposed by the Governor), or some other program, with the intent to make coverage more affordable for populations with incomes too high to qualify for Medi-Cal. These and other important ACA policy decisions may be informed by additional federal guidance that is expected in the coming months. As the Legislature considers these policy decisions, it will also need to consider any related fiscal effects as it constructs the state’s 2013-14 budget. DHCS Staffing Requests Governor’s Proposal. The Governor’s budget requests an increase of 333.5 positions for DHCS and $42.8 million ($4.3 million General Fund) in related state operations funding. The majority of the requested positions are related to the planned elimination of DADP and the related transfer of DADP programs to DHCS (238.5 positions and $28.7 million in state operations). (For more information on the elimination of DADP and the shift of its functions and programs to DHCS and the DPH, see our analysis on DADP in the Crosscutting Issues section of this report.) The remaining 95 positions are requested to support a variety of functions and programs administered by DHCS, including Medi-Cal waiver projects, CCI, the California Medicaid Management Information System replacement project, hospital financing, and other department workload activities. Of these 95 positions, the majority (76) are existing limited-term positions that the administration is requesting to extend on a limited-term basis. Overall Analyst’s Assessment of Staffing Requests. We have reviewed the Governor’s requests for additional staffing for DHCS and, with the exception of one proposal described below, we find the Governor’s requests reasonable. If we receive additional information on the Governor’s proposals that causes us to change our assessment, we will provide the Legislature with an updated analysis. Recommend Modification to Assisted Living Waiver Program Staffing Request. The budget requests $235,000 ($117,000 General Fund) and two positions\u2014including a Health Program Manager (HPM) position\u2014to continue workload related to the Assisted Living Waiver program and extend the program through February 2019. We find that 2013-14 B u d g e t 28 Legislative Analyst’s Office www.lao.ca.gov there has been insufficient workload justification to support continuing the HPM position. Specifically, we find that the workload data provided by DHCS related to the HPM position appear overstated. We therefore recommend rejecting the request for the HPM position, resulting in $124,000 in savings ($62,000 General Fund). DePARTMenT oF DeveloPMenTAl SeRvICeS Budget overview Overview of DDS. Developmental disabilities include, but are not limited to, cerebral palsy, autism, epilepsy, and related conditions. The Lanterman Developmental Disabilities Services Act of 1969 forms the basis of the state’s commitment to provide developmentally disabled individuals with a variety of services, which are overseen by DDS. Unlike most other public social services or medical services programs, services are generally provided to the developmentally disabled without any requirements that recipients demonstrate that they or their families do not have the financial means to pay for the services themselves. The Lanterman Act establishes the state’s responsibility for ensuring that persons with developmental disabilities, regardless of age, have access to services that sufficiently meet their needs and goals in the least restrictive setting. The department administers two main programs in implementing the Lanterman Act: Community Services Program. Community- based services are coordinated through 21 nonprofit organizations called regional centers (RCs), which provide diagnosis, assess eligibility, develop individual program plans for each consumer, and help consumers coordinate and access the services they need. The RCs purchase services from vendors for about 257,000 consumers in the current year. These services include day programs, transportation, residential care provided by community care facilities, and support services that assist individuals to live in the community. The RCs purchase more than 100 different services on behalf of consumers. As the payer of last resort, RCs generally only pay for services if an individual does not have private insurance or they cannot refer an individual to so-called generic services that are provided to the public at large at the local level by counties, cities, school districts, or other agencies. DC Program. The DDS operates four 24-hour facilities known as DCs\u2014Fairview in Orange County, Lanterman in Los Angeles County, Porterville in Tulare County, and Sonoma in Sonoma County\u2014and one smaller leased facility (Canyon Springs in Riverside County) which provide 24-hour care and supervision to approximately 1,600 residents in 2012-13. All of the facilities provide residential and day programs as well as health care and assistance with daily activities, training, education, and employment. More than 99 percent of DDS consumers receive services under the Community Services Program and live with their parents or other relatives, in their own houses or apartments, or in group homes designed to meet their needs. Less than 1 percent live in DCs. Overall Budget Proposal. The budget proposes $4.9 billion (all funds) for support of DDS programs in 2013-14, which is a 3.6 percent increase 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 29 over estimated current-year expenditures. General Fund expenditures for 2013-14 are proposed at $2.8 billion, an increase of almost $156 million, or 6 percent, above the revised estimate of current-year expenditures. The increase in total expenditures largely reflects increases in caseload and utilization and the restoration of funding due to the sunset of a provider payment reduction. Community Services Budget Proposal. The budget proposes $4.3 billion from all funds ($2.5 billion General Fund) for the support of the Community Services Program in 2013-14. This represents almost a $160 million General Fund increase, or 6 percent, over the revised estimate of the current-year spending. The increase is a net result of caseload growth and other program changes. Of the total $4.3 billion in funding proposed for RC programs in 2013-14, about $537 million is for RC operations and $3.5 billion is for the purchase of services. The 2013-14 Community Services program budget plan includes the following major proposals and other budget changes. Restoration of Funding Due to the Sunset of the Provider Payment Reduction. Increase of $46.7 million all funds ($31.9 million General Fund) to restore funding due to the sunset of the 1.25 percent provider payment reduction in RC operations and RC purchase of services. (The Legislature restored funding for 3 percentage points of the previous full 4.25 percent reduction in 2012-13.) Sunset of Proposition 10 Support. Increase of $40 million from the General Fund, reflecting the assumed sunset of $40 million in support from Proposition 10 monies (First Five Commission) that were used in lieu of General Fund in 2012-13. Caseload and Utilization. Increase of $177.5 million in all funds ($89.2 million General Fund) due to updated caseload information. Annual Family Program Fee. The budget continues the Annual Family Program Fee, which continues to offset General Fund costs by $7.2 million. DCs Budget Proposal. The budget proposes $539 million from all fund sources ($279 million General Fund) for the support of DCs in 2013-14. This represents a net decrease of almost $4.6 million General Fund, 1.6 percent below the revised estimate of current-year expenditures. The DC budget plan includes the following proposals and other budget changes. Caseload and Utilization. Decrease of $25.4 million in all funds ($14.4 million General Fund) to reflect updated caseload information. This decrease is largely due to the anticipated shift of 223 residents from DCs into the community and the systemwide reduction of 352.5 positions. Lanterman DC makes up almost half of the residential decline as 110 community placements are anticipated in 2013-14. Sonoma DC Staffing. Increase of $2.4 million in all funds ($1.3 million General Fund) to support staffing needs at Sonoma DC in response to licensing actions, taken by DPH and certification actions taken by DPH on behalf of the federal CMS. The DC budget also includes employee compensation augmentations due to adjustments in state employee retirement, health benefits rates, and employee compensation. 2013-14 B u d g e t 30 Legislative Analyst’s Office www.lao.ca.gov Headquarters Budget Proposal. The budget proposes $39.2 million from all funds ($24.9 million General Fund) for support of headquarters. Almost two-thirds of headquarters funding is for support of the Community Services Program with the remainder for support of the DC program. Analyst’s Budget Assessment The Governor’s budget ref lects adjustments due to overall changes in caseload and utilization, the need for additional oversight in Sonoma DC, and the sunset of various General Fund savings measures implemented in previous fiscal years in the RC budget. While we find the caseload estimates to be reasonable, we recommend the department testify at hearings on its progress with finding community housing for Lanterman DC residents, as discussed below. Additionally, while we have no concerns with most of the proposed budget changes mentioned above, we are withholding recommendation on the request for additional Sonoma DC staffing. This is for reasons discussed in our analysis that follows on the need for improved oversight of DCs. In that analysis, we make a number of policy recommendations, including the recommendation that an independent OIG be created to oversee the DCs. Caseload estimates for RCs and DCs Appear Reasonable RC Caseload Has Steadily Grown in Recent Years. Between 2006-07 and 2012-13, the RC caseload grew from 212,225 to about 266,100\u2014 an average annual growth rate of 3.4 percent. The caseload trend is shown in Figure 6. Several key factors appear to be contributing to ongoing growth in the RC caseload. Medical professionals are identifying persons with a developmental disability at an early age and referring more persons to DDS programs. Improved medical care and technology has increased life expectancies for individuals with developmental disabilities. In addition, the increase in RC caseload ref lects growth in California’s population. Recent Data Suggest RC Caseload Estimate Is on Target. The Governor’s budget plan projects an RC caseload of 256,872 in 2012-13 and 266,100 in 2013-14\u2014for a year-over-year increase of 9,228 consumers or about 3.6 percent. Based upon our review of recent RC caseload data, we find the administration’s caseload estimate to be reasonable and do not recommend any adjustments at this time. DC Caseload Has Steadily Declined in Recent Years. Between 2001-02 and 2011-12, the DC population declined from 3,632 to 1,682\u2014an average annual decrease of over 7 percent. This is consistent with federal and state policy to provide services to developmentally disabled individuals in the community rather than in an institutional setting. The decrease in the DC population between 2001-02 and 2011-12 ref lects the closure of Agnews DC in 2009, the Figure 6 regional Center Caseload growth Trends Average Annual Caseload increase From Prior year Amount Percent 2006-07 212,225 8,402 4.1% 2007-08 222,413 10,188 4.8 2008-09 231,451 9,038 4.1 2009-10 233,981 2,530 1.1 2010-11 242,977 8,996 3.8 2011-12 248,200 5,223 2.1 2012-13a 256,872 8,672 3.5 2013-14a 266,100 9,228 3.6 Averages 239,277 7,785 3.4% a Administration caseload estimate. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 31 ongoing closure of Lanterman DC, and the corresponding shift of many consumers from DCs to community-based living arrangements. Recent Data Suggest DC Caseload Estimate Is on Target. The Governor’s budget plan projects a DC caseload of 1,552 in 2012-13 and 1,304 in 2013-14\u2014for a year-over-year decrease of 248 consumers or 16 percent. Based upon our review of recent DC caseload data, we find the administration’s caseload estimate to be reasonable and do not recommend any adjustments at this time. However, we note that the ability of the department to achieve its projected year-over-year decrease in DC caseload is based largely on the assumption that there will be sufficient community- based living arrangements that are appropriate to meet the needs of consumers shifting out of Lanterman DC and into the community. A lack of appropriate community-based living arrangements could slow the ongoing closure of Lanterman DC. Analyst’s Recommendation. We recommend the department report at budget hearings on the availability of appropriate community- based placements for Lanterman DC residents. Specifically, the department should provide a timeline for when it will complete the development of sufficient community-based residences to shift the remaining Lanterman DC residents into the community. Developmental Centers need Improved oversight Summary of Findings and Recommendations. The DPH licenses health facilities and certifies them on behalf of the federal CMS; facilities must be certified to receive federal Medicaid funding. In December of 2012, DPH announced it was taking significant action to protect Sonoma DC residents due to deficient practices at the DC that have harmed some residents. In January of 2013, DDS informed CMS that, due to ongoing deficiencies at Sonoma DC, it was withdrawing from federal certification four of Sonoma DCs ten Intermediate Care Facilities for the Developmentally Disabled (ICF-DD) living units. By voluntarily withdrawing four of the ten units, Sonoma DC will be able to maintain certification and receive federal funding for the remaining six. In this analysis, we describe the existing entities that provide oversight of the DCs and a history of identified problems at the DCs regarding consumer health and safety. We provide a summary of the recent actions taken by DPH and summarize the fiscal implications of these actions to the state including the loss of federal funding. (A majority of DC residents are on Medi-Cal. Generally, for Medi-Cal enrollees living in DCs, the state bears roughly half the costs and the federal government bears the remainder.) We conclude by recommending the Legislature redirect funding from the department and use these funds to establish an independent OIG. We further recommend that the OIG have broad authority to exercise oversight over the DCs. Given the vulnerable nature of the population served by the DCs, the various civil rights legislation and related court decisions that apply to protect this population, and the ongoing nature of the health and safety problems that have plagued the DCs for more than a decade, we believe such additional oversight in the form of an OIG is warranted. oversight of DCs The DDS Performs Primary Oversight of DCs. The DDS has a general oversight role with DCs in that it hires all DC executive level staff, helps manage DC budgets, and creates rules and guidelines for how DC-related criminal investigations are to be handled. For example, the DDS set forth a new set of reporting guidelines to handle abuse allegations in 2002 and recently updated them in 2012. 2013-14 B u d g e t 32 Legislative Analyst’s Office www.lao.ca.gov Existing law establishes the Office of Protective Services (OPS) within DDS. Current statute gives peace officer status to those police officers in the DCs and authorizes them to enforce the rules and regulations of the DCs. The OPS officers are responsible for the investigation of thefts, trespassing, and suspicious person’s reports; responding to emergency calls; serving legal documents; and enforcing restraining orders on the grounds of the DCs. The OPS officers receive training at the same Peace Officers Standards and Training academies that municipal police and sheriff’s departments use. Other Entities. Various other governmental and private entities perform DC oversight functions in order to ensure the health and safety of DC residents. The DPH. In order to operate as a healthcare facility, DCs must be licensed and certified by DPH. Being certified means the facility has met certain standards set forth by the federal government to participate in the Medicaid program and receive federal Medicaid funding. Separate units in the DCs are licensed and certified as Skilled Nursing Facilities (SNFs), ICF-DD, and General Acute Care hospitals. United States Department of Justice (USDOJ). Under the Civil Rights of Institutionalized Persons Act (CRIPA), USDOJ routinely conducts investigations in institutions that provide services for persons who are disabled or mentally ill. Disability Rights of California (DRC). The DRC\u2014a nonprofit organization operating in the state\u2014has traditionally taken the role of advocating on behalf of the developmentally disabled by ensuring their legal rights are protected. However, DRC also has federal authority to audit incidents at the DCs and has done so in the past. State Council on Developmental Disabilities (SCDD). The SCDD was established by state and federal law as an independent agency whose purpose is to ensure that people with developmental disabilities receive the services they need. The SCDD produces a report called the State Plan, in which it states its intent and goals to improve the access and services for disabled individuals. In its recent State Plan, SCDD set a goal to be more involved in the planning and closure process of DCs and to work with state and federal entities in order to protect the rights of residents of DCs. The DCs Have a History of Problems The recent actions taken by DPH are the most recent in a series of actions that have been taken by various oversight entities over the past 15 years in response to findings of inadequate care, abuse, and neglect of DC consumers. The DCs Sanctioned for Inadequate Care and Insufficient Staffing. In 1998-99, several DCs faced sanctions as a result of surveys by the then Department of Health Services and the federal Health Care Financing Administration. The surveys cited the DCs for numerous examples of inadequate care and understaffed residential and treatment units. In response, the state developed a four-year plan to increase staffing levels to help address federal concerns and to restore lost federal funding. In total, the four-year plan added approximately 1,700 positions at a cost of about $107 million ($55 million General Fund). The OPS Subject of Press Allegations. In 2000, a series of news articles attributed unsolved cases 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 33 at the DCs to lack of appropriate OPS investigative protocols. The articles reported that investigators were underqualified and inadequately trained. In response to the articles, the state Attorney General’s office was instructed by the Legislature to investigate. However, due to budget cuts, the AG’s office has cut back on the number of its investigators, leaving minimal oversight of the OPS. The USDOJ Raises Concerns. In 2004, DDS was investigated by USDOJ under CRIPA. It first looked into the practices at Lanterman, and subsequently at Agnews and Sonoma DCs. The USDOJ identified civil rights violations at Lanterman and similar violations at Agnews and Sonoma DCs. For example, USDOJ found that Lanterman failed to protect its residents from neglect and physical harm\u2014a problem compounded by Lanterman’s inadequate reporting and investigation system. As a result of the investigation, the U.S. Attorney General reported to the Governor its concerns that residents at Lanterman DC suffer harm and risk due to the facility’s inability to keep them safe and provide them with adequate behavioral and mental health and medical services. The report attributed this failure to the inability of OPS to conduct adequate incident reporting and investigative functions. The report cited that in a 13-month period, almost 50 percent, or 760 cases, of the incidents recorded were listed as having an unknown origin, indicating a lack of proper investigation into possible criminal and civil cases. DRC Report Alleges Poor Investigative Practices. In 2005, DRC published a report that made claims of residents with lacerations in the Sonoma DC. The report was in response to five incidents that occurred over a five-year period at Sonoma DC. The report pointed out that investigations were hindered by delays in reporting the incidents and by the destruction of physical evidence. The DRC stated its concerns that OPS’ investigators did not have the qualifications and training necessary to investigate such sensitive cases. California Watch Reports Suspicious Investigative Practices. In 2012, a series of reports by California Watch (an independent, nonprofit online investigative reporting center) reported suspicious investigative practices that were conducted in response to major crime investigations, including of suspicious deaths, at a number of DCs. The series brought into question the training and qualifications of OPS’ investigators and their ability to handle DC cases. Future Intervention by USDOJ a Possibility. The DDS’ 2013-14 budget plan states the possibility of federal intervention from USDOJ for potential CRIPA investigations. Although USDOJ has not brought any legal actions against DDS to bring the DCs into compliance with CRIPA, it has done so in respect of other California state institutions. For example, several of the state’s mental hospitals recently operated under a CRIPA consent decree for several years. The 2012-13 budget plan included approximately $65 million related to the state mental hospital workload associated with this consent decree. Report by California Bureau of State Audits (BSA) on OPS Is Pending. At the time this analysis was written, BSA was conducting an investigation into the investigative practices of OPS and training requirements for officers and management staff. The audit is expected to be released in May of 2013. Sonoma DC Must Take Corrective Action Due to Findings of Wrongdoing In December of 2012, DPH announced that it was taking action to protect the health and safety of residents at the Sonoma DC in response to finding the center is failing to correct problems, comply with state regulations, or satisfy federal standards set by the CMS. The DPH’s actions initiated the 2013-14 B u d g e t 34 Legislative Analyst’s Office www.lao.ca.gov process to revoke federal approval for the services provided by Sonoma DCs ICF-DD and decertify it from participation in the federal Medicaid Program. (Broadly, an ICF-DD is a state-licensed nursing care facility that cares for developmentally disabled individuals who do not require the level of care provided at a hospital or SNF. The Sonoma DC ICF-DD consists of ten occupied residential units that serve 290 residents. On January 18, 2013, DDS informed the CMS that due to ongoing deficiencies at the Sonoma DC ICF-DD, the department would voluntarily withdraw four residential units from federal certification in order to allow the DC to maintain certification and receive federal funding for the remaining residences. The four units that DDS is withdrawing from federal certification serve 112 residents. According to DDS, there are deficiencies in the management, training, and staffing in the Sonoma ICF-DD units generally. However, the problems are more significant in the units that are being withdrawn and addressing the problems in these four units will take additional time. Decertification Has Fiscal Implications. The Governor’s budget plan does not take into account the potential for loss of federal funds due to decertification. The DPH has cited a number of patient care issues that potentially violate licensing and certification regulations. The department will lose approximately $1.4 million per month in federal funding for loss of certification of four ICF-DD living units. In order to continue to operate the four decertified units, the state will have to backfill the lost federal funding with General Fund monies. The DDS Responds to Allegations. In 2012, the DDS made attempts to change the culture at Sonoma by removing both the Executive Director and the Clinical Director at Sonoma and implementing a nationwide search for a new Executive Director. Additionally, several staff members were terminated or disciplined and the OPS has hired an interim commander from the California Highway Patrol in order to help the department foster the skills necessary for an effective law enforcement agency. Finally, the department has hired an outside consultant who will monitor Sonoma and report to DDS any areas of concern. The budget requests two positions and $1.3 million General Fund for additional oversight of the units. The DCs need Improved oversight As we described above, several governmental and private entities perform oversight to ensure the health and safety of DC residents. However, over the past decade, there have continued to be allegations and findings of resident abuse and deficiencies in the management, training, and staffing of DCs. An option for the Legislature to consider that would strengthen oversight of the DCs is the establishment of an independent OIG that would have broad authority to oversee the DCs. We first describe the functions of an OIG. We then discuss why the particular circumstances in which DCs find themselves make an OIG a reasonable oversight option for the Legislature to consider. General Functions of an OIG. An OIG safeguards the public’s interests by providing oversight and ongoing monitoring of a specified government agency or program. Its mission is typically to detect and deter waste, fraud, abuse, and misconduct, and to promote integrity, economy, efficiency, and effectiveness in an agency or program. This is usually accomplished by conducting independent investigations, audits, inspections, and special reviews of personnel and programs. To be effective, an OIG must have the authority and autonomy to initiate and complete investigations, audits, and reviews 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 35 without interference from other entities. The state currently has an OIG that oversees the California Department of Corrections and Rehabilitation (CDCR). For more information on the CDCR OIG, see the nearby box. What Is Unique About DCs to Warrant an OIG? Developmental Center consumers are a particularly vulnerable population subject to potential abuse due to their disabilities. An OIG for the DCs would help ensure the civil rights afforded this population\u2014as enforced through various pieces of legislation, such as the Lanterman Act and the Americans with Disabilities Act, and related court decisions\u2014are respected in the operation of the DCs. Additionally, an OIG presence would signal to the federal government the state’s concerns about keeping DC consumers protected. Analyst’s Recommendations Recommend Creation of OIG for the DCs. We recommend the Legislature adopt an additional layer of oversight and accountability over DCs by creating an OIG for the DCs. This would signal to CMS and USDOJ that the state is making a serious good-faith effort to solve the longstanding issues at the DCs and is not in need of additional federal oversight. Similar to the OIG over CDCR, this OIG would have authority to conduct a formal review of complaints, investigate possible wrongdoing against consumers, and work with local law enforcement to prosecute individuals. We recommend that the Inspector General for DCs be appointed by the Governor, subject to approval by the Senate, and both its director and staff should be organizationally independent from the department in order to maintain complete autonomy from overview of CDCR oIg The Office of Inspector General (OIG) for the California Department of Corrections and Rehabilitation (CDCR), which was created in statute, hires investigators with a variety of backgrounds. When the OIG for CDCR was first implemented in 2009-10, some of the positions had peace officer status, which is required to conduct certain types of investigations. The OIG for CDCR is subject to the same budgetary constraints as other state agencies, with funding for it appropriated by the Legislature through the annual budget process. The Inspector General for CDCR is appointed by the Governor and confirmed by the Senate, for a six-year term and may not be removed from office during that term except for good cause. The mission of the OIG is to safeguard the integrity of the state’s correctional system by inspecting, investigating, and auditing CDCR to uncover criminal conduct, administrative wrongdoing, poor management practices, waste, fraud, and other abuses by staff, supervisors, or management. The OIG provides analysis and policy recommendations to the Governor, Legislature, correctional administrators, and the public based upon its findings in these types of inquiries. The OIG has generally proven effective in monitoring the operations of CDCR and has alerted the Legislature and the public to a number of issues and concerns with CDCR’s operations, including its treatment of inmates in state prisons. The state has been able to use OIG audits of inmate medical care to document the progress CDCR has made in complying with federal court orders. This documentation will likely help the state eventually regain control over inmate medical care. 2013-14 B u d g e t 36 Legislative Analyst’s Office www.lao.ca.gov DDS. The OIG would submit biannual reports to the Governor, the Legislature, and the public to convey its findings on the effectiveness of treatment for consumers, as well as a status report on abuse and the handling of abuse cases in the DCs. In summary, the mission of the OIG would be to safeguard the integrity of the state’s DC system. Existing DDS Funds Could Be Redirected to Establish OIG. We estimate between $500,000 and $1 million would be needed to fund an OIG. We recommend that the new OIG be financed from funds redirected from the DDS’ existing budget. We note, in September 2012, the department had a 39 percent vacancy rate in OPS. The department could potentially redirect funding that is slated for some of those vacant positions with minimal impact to the current operations of the DCs. We recommend the Legislature require the department to report at budget hearings with a plan on where the funds could be redirected in a way that minimizes programmatic impacts. In particular, the department should report on whether funds could be redirected from either the DDS headquarters or the OPS budgets. The DDS Could Be Underbudgeted in Current and Budget Years. We also recommend the Legislature, in its review and approval of the DDS budget, take into account that the DCs are possibly underbudgeted by as much as $8.4 million General Fund in 2012-13, and $16.8 million General Fund in 2013-14. This could be the case if DDS is unable to achieve substantial improvement in meeting federal certification requirements for Sonoma DC. The Legislature should require DDS to report at budget hearings on the corrective actions it is taking to address the issues identified by DPH and the timeline for completion of these corrective actions. Such actions should serve to reduce the potential for a continuing or expanded federal decertification and its attendant adverse fiscal impacts. Withhold Recommendation on Sonoma DC Staffing Request. We withhold recommendation on the budget request for $2.4 million ($1.3 million General Fund) and authority to establish two positions to support staffing needs at Sonoma DC in 2013-14. At the time this analysis was written, we had not received documentation of the department’s comprehensive Performance Improvement Plan in light of the recent actions by DDS to withdraw four ICF-DD units from certification. We believe it is important to review the department’s request for additional resources as part of a comprehensive, written plan to achieve recertification and address the issues identified by DPH at Sonoma DC. Such a plan should include key objectives and a timeline for achieving those objectives. DePARTMenT oF STATe HoSPITAlS Overview of DSH. The state’s five state hospitals\u2014Atascadero, Coalinga, Metropolitan, Napa, and Patton\u2014provide treatment to a combined patient population of over 5,500. Patients at the state hospitals fall into two broad categories: (1) forensic commitments, who have been committed by the courts as inmate transfers, mentally disordered offenders, not guilty by reason of insanity, incompetent to stand trial (IST), or sexually violent predators; and (2) civil commitments, who are generally referred to the state hospitals for treatment by the counties. Additionally, two psychiatric programs located on the grounds of state prisons at Vacaville and Salinas Valley have a combined inmate patient population of less than 700. In the last decade, state hospitals have seen a shift in their population\u2014with the forensic population increasing steadily and the civil commitments in decline. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 37 that would allow DSH to centralize staffing data and (2) $1.1 million to consolidate eight existing independent hospital directories into one single directory. Budget Requests Funding for Various Capital Outlay Projects. The budget requests an increase of $2.1 million General Fund in 2013-14 to update safety and security measures in the state hospitals. The projects include: Upgrade of Security Perimeter Fencing. The budget requests $560,000 to begin to update the fencing surrounding Patton State Hospital. The administration estimates that total additional expenditures of $14.5 million General Fund will be required in future years to complete the project. Courtyard Gates and Security Fencing. The budget requests $863,000 to begin improving security at Napa State Hospital by updating the gates surrounding the hospital. The administration estimates that total additional expenditures of $2.2 million General Fund will be required in future years to complete the project. Fire Alarm System Upgrade. The budget plan requests $633,000 to begin upgrading the fire alarm systems at Metropolitan State Hospital. The administration estimates that additional expenditures of $8.3 million General Fund will be required in future years to complete the project. We note that by approving funding for the initial stages of the proposed capital outlay projects, the Legislature would create a General Fund pressure in future years to fund the costs of later phases of the projects, estimated at a total of $25 million General Fund. The DSH reports the forensic population is now 92 percent of the statewide hospital system caseload. Overall Budget Proposal. The Governor’s budget proposes $1.6 billion ($1.5 billion General Fund) for DSH in 2013-14, a net increase of $136.4 million General Fund from the revised 2012-13 expenditures for state hospitals. The major spending proposals include: Stockton Health Care Facility. The budget proposes an increase of $101 million General Fund for costs from the activation of the Stockton Healthcare Facility. This facility is not a state hospital, but a state prison that will have a designated area for treatment of mentally ill inmates who will be staffed by DSH personnel. Specifically, the budget requests $67.5 million General Fund and 540 positions for DSH to staff 514 beds scheduled for operation by July 2013. The budget also requests $33 million General Fund to recognize the full-year costs in 2013-14 of ramp-up activities that are taking place in 2012-13 (such as hiring and training staff) to ready the facility for operation. Personal Duress Alarms. The budget requests an increase of $16.6 million General Fund and four positions to support the continued installation of personal duress alarms in three of the state hospitals and to continue the installation process in the remaining two hospitals. IT Projects. The budget requests an increase of $6.5 million General Fund to implement two IT projects that would improve the efficiency of hospital management. The projects include: (1) $5.4 million and four positions for an automated staff scheduling and support tool 2013-14 B u d g e t 38 Legislative Analyst’s Office www.lao.ca.gov Analyst’s Budget Assessment The Governor’s budget reflects adjustments due to the startup of the Stockton Healthcare Facility, two new IT projects, and capital outlay projects for state hospitals. Overall, we find the requests to be reasonable. In particular, we find that the capital outlay requests and the request for personal duress alarms serve to improve hospital safety for patients and staff. The IT requests will improve the department’s management, such as by monitoring staff overtime. Stockton Health Care Facility Proposal. The DSH is in the process of recruiting candidates to fill the 540 positions requested for 2013-14 to staff the Stockton Health Care Facility. The department is also planning for the voluntary transfer of some staff from both Vacaville and Salinas Valley psychiatric facilities to the new Stockton facility. We will be monitoring the recruitment and hiring process and will recommend budget adjustments at the time of the May Revision if progress towards filling the 540 positions is behind schedule. Caseload estimates for State Hospitals Appear Reasonable Administration’s Caseload Projections and Trends. The Governor’s budget does not request an adjustment in either the current year or budget year from the caseload level assumed in the 2012-13 Budget Act. While this seems reasonable, we will continue to monitor caseload at the state hospitals and provide the Legislature with an updated recommendation at the time of the May Revision. Over the next several years, the department predicts a steady increase in its population due to growing waitlists for treatment at a state hospital. Although caseload has risen for civil commitments in recent months, recently adopted statute requires counties to fully pay for civil commitments, resulting in annual savings of over $20 million for the department. A combination of key factors will affect future costs for the population served by DSH including: (1) the elimination of mental health beds at both Vacaville and Salinas Valley facilities, (2) the limited availability of licensed beds and restrictions on the use of some of those beds in state hospitals that prohibits DSH from filling them, and (3) the aging population of current patients in state hospitals, which will increase the cost of care in the future. IST Commitments See Large Increase. Of note is the large increase in the IST population of over 150 individuals in 2012-13. By definition, those who are IST do not understand the criminal charges against them, and mental health professionals have determined that due to an individual’s insufficient mental ability, the individual is unable to help in his or her own defense. Therefore, the state commits felony charged IST individuals to a state hospital in order for competency to be restored. Traditionally, DSH has treated this population in the state hospitals. In 2007-08, the Legislature approved a pilot project allowing counties to provide treatment for ISTs in county jail, at a significantly lower cost to the state than competency treatment in a state hospital. In 2012-13, the Legislature authorized the DSH to continue this project. Analyst’s Recommendation. Given the large recent increase in IST commitments in the state hospitals, the department should report at hearings on the progress in implementing the IST restoration treatment pilot program conducted at county jails. The department should report on the savings that have accrued to the state as a result of the program and make recommendations regarding whether the program should be expanded on a statewide basis. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 39 DePARTMenT oF PUBlIC HeAlTH Overview of DPH. The DPH administers and oversees a wide variety of programs with the goal of optimizing the health and well-being of Californians. The DPH is organized into several offices and centers, including the Center for Chronic Disease Prevention and Health Promotion, the Center for Infectious Diseases, the Center for Family Health, the Center for Environmental Health, and the Center for Health Care Quality. The department’s programs address a broad range of health issues, including maternal and child health, cancer and other chronic diseases, communicable disease control, environmental and drinking water quality, and inspection of health facilities. Many public health programs and services are delivered at the local level, while the state provides funding, oversight, and overall strategic leadership for improving public health. The state also directly administers certain public health programs, such as licensing and certification of health facilities. Overall Budget Proposal. The budget proposes $3.4 billion (all funds) for support of DPH programs in 2013-14, which is a net decrease of $104 million, or 3 percent, below revised 2012-13 expenditures. General Fund expenditures for 2013-14 are proposed at $114 million, a net decrease of $16 million, or 12 percent, below the revised estimate of 2012-13 expenditures. For the budget as a whole, the Governor proposes $698 million for state operations and about $2.7 billion for local assistance. The net General Fund decrease is mainly attributable to a $16.9 million reduction in General Fund support for the AIDS Drug Assistance Program (ADAP). This reduced General Fund spending level for ADAP reflects: (1) the shift of ADAP clients into the county-administered Low Income Health Programs (which provide health insurance to low-income adults), and (2) the anticipated shift of ADAP clients to other payers due to the implementation of ACA, also known as federal health care reform. Analyst’s Budget Assessment The Governor’s budget for DPH reflects technical budget adjustments due to changes in caseload and costs for some programs, such as ADAP and the Women Infants and Children Program. It also reflects the transfer of the Office of Problem Gambling from DADP to DPH. (For more information on this transfer, please see our analysis of the proposed elimination of DADP in the Crosscutting Issues section of this report.) Nine Proposals Would Increase DPH’s Budget and\/or Position Authority. The Governor’s budget includes nine proposals that would either increase DPH’s budget and position authority or continue existing budget and position authority that would otherwise expire at the end of 2012-13. (None of the budget proposals would change General Fund support for DPH in 2012-13 or 2013-14.) In total, these proposals increase DPH’s budget by $89 million (all funds), provide DPH with 24 new positions (11 positions proposed to be converted from contract positions to full-time, permanent positions), and extend 77 existing limited-term positions. Analyst’s Overall Assessment. Overall, we find the Governor’s budget proposal generally to be reasonable. However, later in this analysis, we raise issues regarding three proposals that would increase DPH’s budget and\/or position authority. We have analyzed the following six budget proposals and have not identified any issues. However, if we receive additional information that causes us to reassess our findings, we will apprise the Legislature. The six proposals are as follows: 2013-14 B u d g e t 40 Legislative Analyst’s Office www.lao.ca.gov Convert 11 Division of Environmental and Occupational Disease Control (DEODC) Contract Positions. Convert 11 contract positions within the DEODC to full-time, permanent state positions to eliminate reliance on contracting for essential program services. Assumes savings of $48,000 (special funds). Increase Resources for the Export Document Program. Increase DPH’s budget by $287,000 (special funds) and authorize three additional permanent positions in the Center for Environmental Health’s Export Document Program in order to respond to requests for issuance of export documents within five working days of receipt of the request from California processors of foods, drugs, medical devices, and cosmetics. Increase Resources for the Stop Tobacco Access to Kids Enforcement (STAKE) Act. Increase DPH’s budget by $129,000 (special funds) and add one position to meet the expected increase in appeals for STAKE Act violations due to the imple- mentation of Chapter 335, Statutes of 2012 (AB 1301, Hill). Maintain Resources for Public Health Emergency Preparedness Responsibilities. Increase DPH’s budget by $9.4 million (federal funds) and extend 76.8 limited-term positions for four years (to align with federal grant period) to support public health emergency preparedness activities. Transfer the Office of Problem Gambling to DPH. Increase expenditure authority by $3.7 million ($3.5 million special funds, $120,000 reimbursements) and shift four positions from DADP to DPH to reflect the transfer of the Office of Problem Gambling to DPH. Maintain Resources for the Problem Gambling Treatment Services Pilot Program. Increase expenditure authority by $5 million (special funds) and extend two, two-year limited-term positions in order to continue implementation and data collection for the Problem Gambling Treatment Services Pilot Program. (The program is currently administered by DADP.) Below, we provide a summary of the three proposals that we take issue with, and give our findings and recommendations for each proposal. Proposal to Increase Positions and Spending Authority for the Recycled Water Program Background. Recycled water is wastewater which has been treated and is suitable for various uses. Depending on the degree of treatment, recycled water may be suitable for many uses, including: domestic uses, such as tap water; agricultural uses, such as irrigation; recreational uses, such as swimming pools; or industrial uses, such as water used for cooling in manufacturing processes. The Governor’s Proposal. The DPH requests three one-year limited-term positions and $700,000 in reimbursement authority to support an interagency agreement with the State Water Resources Control Board (SWRCB) to develop and adopt water recycling regulations as required by Chapter 700, Statutes of 2010 (SB 918, Pavley). Chapter 700 requires DPH to take several actions including: Adopting uniform water recycling criteria for the use of recycled water to replenish 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 41 or augment a groundwater basin or aquifer that is designated as a public water supply (this water is then treated before being delivered to consumers) on or before December 31, 2013. Convening and administering an expert panel to advise DPH on the development of uniform water recycling criteria for (1) the use of recycled water to replenish a surface water reservoir that serves as a public water supply and (2) the feasibility of developing uniform water recycling criteria for the introduction of recycled water directly into the public water supply or into the untreated water supply immediately upstream of a water treatment plant (hereinafter referred to as direct use of recycled water ). Developing uniform water recycling criteria for surface water augmentation to be submitted to an expert panel. If the panel finds that the criteria adequately protect public health, the department is required to adopt the criteria on or before December 31, 2016. Providing a report to the Legislature by December 31, 2016, on the feasibility of developing uniform water recycling criteria for the direct use of recycled water. Providing a written report submitted to the Legislature as part of the annual budget process each year from 2011 through 2016. The report shall provide information on the department’s progress towards developing and adopting uniform water recycling criteria for surface water augmentation and its investigation of the feasibility of developing water-recycling criteria for the direct use of recycled water. This report will be developed in consultation with SWRCB. Chapter 700 authorized funds from the Waste Discharge Permit Fund (administered by SWRCB) to be made available to DPH and authorizes DPH to accept funds from any source (upon appropriation by the Legislature). The SWRCB has stated that $1.4 million from the Waste Discharge Permit Fund is available starting July 1, 2012 to begin implementation of Chapter 700, of which $700,000 was appropriated in the 2012-13 Budget Act. Currently, DPH is in the process of finalizing an interagency agreement with SWRCB to complete the regulations on the use of recycled water for groundwater recharge. The DPH released draft regulations in November 2011 and is preparing responses to the comments received on those draft regulations. The DPH anticipates releasing revised draft regulations in spring of 2013. The DPH Reports It Has Insufficient Resources to Fully Implement Chapter 700. The DPH has stated that as a result of a lack of funding for this work and competing statutorily required priorities for limited staff, no progress has been made towards developing and adopting uniform water recycling criteria for surface water augmentation or investigating the feasibility of the direct use of recycled water. Accordingly, no progress reports have been submitted to the Legislature. (If additional funding is identified that could be used for Chapter 700 implementation, DPH has stated that it will request additional appropriation authority.) Analyst’s Recommendation. We do not take issue with the Governor’s request for three limited- term positions and $700,000 in reimbursement authority because we find that they are justified on a workload basis to meet the requirements of Chapter 700. However, we recommend that 2013-14 B u d g e t 42 Legislative Analyst’s Office www.lao.ca.gov the Legislature require DPH to report at budget hearings on which competing statutory priorities are delaying implementation of Chapter 700. This information will allow the Legislature to assess whether DPH’s prioritization of workload reflects the Legislature’s priorities. We also recommend the Legislature require DPH to report at budget hearings on the additional resources that would be necessary to fully meet the statutory requirements of Chapter 700. Proposal to Increase Proposition 50 Funding for local Assistance Background. In 2002, the voters approved Proposition 50\u2014the Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002\u2014a $3.4 billion water bond measure. Proposition 50 provided $485 million to DPH to address water quality issues, through the provision of grants to local water projects that address water security, reduce reliance on the Colorado River, provide source water protection, provide treatment for disinfection byproducts, study demonstration treatments, and monitor water quality. To date, the DPH has executed 52 funding agreements for Proposition 50 projects, which have totaled $189 million. The Governor’s Proposal. The Governor’s budget requests $22 million from Proposition 50 bond funds for local assistance in 2013-14. The administration is proposing budget bill language to revert, effective June 30, 2013, all unspent Proposition 50 funds from prior appropriations through 2009-10. The administration is also requesting provisional budget bill language that would allow DOF to increase the Proposition 50 expenditure authority above $22 million to an amount equal to projects which DPH can fund by June 30, 2014, if the funds are expended for a purpose that is consistent with Proposition 50 and the $22 million appropriation has already been fully encumbered. (Based on the projects currently being reviewed for approval, DPH expects that more than $22 million in local assistance will be needed to fund projects in 2013-14.) The provisional budget bill language also states that if DOF determines that DPH has demonstrated that it can fund additional Proposition 50 projects (above the amount appropriated), the department shall so report to the Legislature. Analyst’s Recommendation. We recommend that DPH report at budget hearings on the progress of implementing Proposition 50 to date. We have no issue to raise with the provisional budget bill language that would revert unspent funds. We do recommend that the Legislature reject the administration’s proposed provisional budget bill language that would allow DOF to increase expenditure authority above $22 million. The administration should request the level of funding it believes necessary to fund shovel-ready projects in 2013-14. Historically, this is how funding to implement Proposition 50 has been appropriated. Proposal to Increase Proposition 84 Funding for local Assistance Background. In 2006, the voters approved Proposition 84\u2014the Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Act of 2006\u2014a $5.4 billion water bond measure. Proposition 84 provided $300 million to DPH to address drinking water quality by providing funding for grants to local water projects that address contaminated drinking water. The DPH has spent and encumbered approximately $173 million of the $300 million available, leaving $127 million to be appropriated. The DPH is expecting to have all the funds encumbered by June 30, 2015. (The previous appropriation for Proposition 84 projects was previously approved for a five-year time period.) Governor’s Proposal. The Governor’s 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 43 budget requests $48 million from Proposition 84 bond funds for local assistance in 2013-14. The DPH expects to be able to expend more than the $48 million requested in 2013-14 and is proposing provisional budget bill language that would (1) allow the amount appropriated to be available for expenditure until June 30, 2016, and (2) authorize DOF to increase the appropriation equal to the amount of projects that DPH can fund by June 30, 2014, if the funds are expended for a purpose consistent with Proposition 84 and if all the funds appropriated have been fully encumbered. The proposed provisional budget bill language also states that if DOF determines that DPH has demonstrated that it can fund additional Proposition 84 projects, the department shall so report to the Legislature. Analyst’s Recommendation. We recommend that DPH report at budget hearings on the progress of implementing Proposition 84 to date. We further recommend the Legislature reject the administration’s proposed provisional budget bill language. The administration should request the level of funding it believes necessary to fund shovel-ready projects in 2013-14. Historically, this is how funding to implement Proposition 84 has been appropriated. 2013-14 B u d g e t 44 Legislative Analyst’s Office www.lao.ca.gov CalWORKs is funded through a combination of California’s TANF block grant allocation ($3.7 billion annually), the state General Fund, and county funds. The state is required to provide minimum MOE level of funding from the General Fund and county funds for assistance to families eligible for CalWORKs in order to receive the TANF block grant. In recent years, the MOE has been $2.9 billion. While CalWORKs makes up the majority of TANF and MOE spending, it is important to note that the TANF block grant is used to fund a variety of programs in addition to CalWORKs, and some General Fund expenditures outside CalWORKs are counted toward the MOE requirement. overview of the governor’s Budget Proposal As shown in Figure 7, the CalWORKs program received $5.2 billion in total funding in the 2012-13 budget. The Governor’s 2013-14 budget departs from proposals of recent years and reflects modest The CalWORKs program was created in 1997 in response to the 1996 federal welfare reform legislation, which created the federal TANF program. CalWORKs provides cash grants and WTW services for families whose income is inadequate to meet their basic needs. Grant amounts vary across the state and are adjusted for family size, income, and other factors. As an example, a family of three in a high-cost county that has no earned income receives a monthly grant of $638 per month (approximately 40 percent of federal poverty guidelines). A family in these circumstances would generally also be eligible for food assistance through the CalFresh program (formerly known as Food Stamps) in the amount of $520 and health coverage through Medi-Cal. As a condition of receiving aid, CalWORKs families that include able-bodied adults are required to participate in work activities and are entitled to receive supportive services, including subsidized child care and job development assistance. Figure 7 CalWorKs budget summary All Funds (Dollars in Millions) 2011-12 Appropriated 2012-13 Appropriated 2013-14 Proposed Change From 2012-13 Amounta Percent Cash grants $3,278 $3,158 $3,176 $19 1% Employment services 946 914 1,085 170 19 Stage 1 child care 435 416 417 \u2014b \u2014b Administration 631 576 574 -2 \u2014b Other 97 157 159 3 2 Totals $5,387 $5,221 $5,411 $190 4% a Reflects rounding. b Negligible amount. CAlWoRKS HUMAn SeRvICeS ISSUeS 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 45 expenditure growth in CalWORKs, with total funding up 4 percent to $5.4 billion. General Fund spending in CalWORKs is proposed to increase by $340 million over revised 2012-13 estimates. The Governor’s budget reflects (1) the continuing implementation of various policy changes enacted in prior years that have both positive and negative impacts on program spending; (2) a $943 million funding swap with the CSAC (a $139 million increase over a similar funding swap in 2012-13), which has no net impact on General Fund spending in the state budget overall; and (3) a $143 million augmentation to CalWORKs employment services. Recent Caseload Decline Projected to Reverse During the Budget Year. The CalWORKs caseload rose substantially during the recent recession, peaking in June 2011 at over 597,000 cases. Since that time, the caseload has been declining due to enacted policy changes and a slowly improving labor market. The average monthly caseload in 2012-13 is projected to be 563,000 cases. In contrast, the average monthly caseload in 2013-14 is projected to increase by 1.5 percent to over 572,000. Several factors are expected to contribute to this projected growth, including the scheduled increase in the amount of earned income that is exempted when calculating a family’s monthly grant (known as the earned- income disregard ), annual income reporting for child-only cases, and semiannual income reporting for the remainder of the CalWORKs caseload. Each of these policies results in fewer case exits and should increase the caseload in 2013-14. In general, we find the administration’s caseload estimate to be reasonable. In the long run, we expect the caseload to return to a downward trend as the labor market and earning prospects for the CalWORKs families continue to improve. Governor’s Budget Reflects Minor Erosion of Recent CalWORKs Savings. The 2012-13 enacted budget assumed $470 million in General Fund savings from the CalWORKs program, with $423 million in savings in 2013-14. These savings are driven largely by the temporary extension and creation of new work exemptions that result in decreased employment services and child care funding requirements. Updated information indicates that actual savings in 2012-13 are likely to be $24 million lower than planned due to unforeseen challenges with implementing annual reporting for child-only CalWORKs cases. Specifically, federal guidance clarified that it may be necessary to use an administratively more costly set of reporting rules, known as change reporting, for CalFresh benefits provided to CalWORKs child-only cases. The Governor’s budget assumes that savings in 2013-14 from 2012-13 budgetary actions will be approximately $120 million less than assumed when the 2012-13 Budget Act was enacted. This further erosion is primarily the result of action the Legislature took subsequent to the enactment of the 2012-13 Budget Act to restore $80 million in reduced funding for CalWORKs administration and services that was previously assumed in the budget using unspent prior-year TANF funds. This augmentation was intended to address unmet county needs associated with providing WTW services to CalWORKs recipients who are exempt from participation but choose to volunteer. The use of unspent TANF funds allowed for the augmentation to have no General Fund impact in 2012-13. However, to continue funding employment services at the same level, the Governor’s budget reflects an increase in General Fund to replace the one-time TANF funds. The following sections will (1) discuss the state’s progress in implementing recent CalWORKs program changes, (2) review the status of the state’s TANF work participation rate and the impact that the TANF-CSAC funding swap and other policies are expected to have on the rate, and (3) evaluate the Governor’s employment services augmentation proposal. 2013-14 B u d g e t 46 Legislative Analyst’s Office www.lao.ca.gov Major Changes to Be Implemented in the Budget year Several changes to the CalWORKs program enacted in recent years are being implemented currently or are scheduled to be implemented in 2013-14. The following section briefly describes some of the more significant changes, their current status, and the fiscal impact of the changes assumed in the Governor’s budget. Phase-Out of Short-Term Young Child Exemptions. Beginning in 2009-10 and continuing through 2011-12, the Legislature achieved budgetary savings by broadening the circumstances under which counties could exempt CalWORKs recipients from participating in WTW activities. Savings were achieved by not providing WTW services to the exempted population. The 2012-13 budget extended the exemptions an additional six months. As of January 1, 2013, the exemptions are discontinued and formerly exempt adults that do not qualify for an additional exemption (an estimated 15,000 cases) will be required to resume or begin participation in WTW activities. The process of reaching out to formerly exempt households to bring them back into WTW participation, informally known as reengagement, is required by statute to take place gradually over 24 months and conclude by the end of 2014. As formerly exempt populations reengage in WTW activities, additional funding will be needed to provide the services required by law. Costs for reengagement are estimated at $13 million (General Fund) in 2012-13. The Governor’s budget proposes an additional $98 million (General Fund) to perform the bulk of reengagement efforts during 2013-14. These amounts appear reasonable and are consistent with our understanding of the pace and cost of reengagement. WTW 24-Month Time Clock. The 2012-13 budget package also made two fundamental, ongoing changes to the CalWORKs program. First, the state rules that govern work participation for cases with able-bodied adults (known as work-eligible cases) were altered to provide a more flexible set of approved activities and lower required hours. Second, a new 24-month limit on adult eligibility for CalWORKs benefits under state work participation rules (known as the WTW 24-month time clock) was introduced. Once 24 months of participation under state work participation rules are exhausted, adult participants are required to comply with federal work participation rules, which are less flexible than the state rules and place a heavier emphasis on employment, as opposed to education, training, or barrier-removal activities (such as mental health or substance abuse treatment). Work-eligible cases that fail to meet the applicable work participation rules (state or federal) at any time will have their monthly grant reduced by the adult portion (generally about $120). Months under the 24-month clock need not be consecutive, meaning that cases that meet federal requirements in a given month will not have that month counted against their 24-month limit. Additionally, counties may allow up to 20 percent of their cases that have passed the 24-month limit to continue to participate under state rules. Under current law, the WTW 24-month time clock is operative as of January 2013. While all work-eligible cases are potentially subject to the clock, the number of cases moving toward the 24-month limit in any given month will be lower. This is because some cases, including those that are compliant with federal work rules, exempt from work participation, or sanctioned, will not have a month counted against their 24-month limit. Full implementation of the WTW 24-month time clock should eventually result in General Fund savings from decreased grants to cases with adults that fail to meet federal work requirements after their 24 months are exhausted, beginning in January 2015 (24 months after the time limit first 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 47 2012-13. The Governor’s budget assumes a net cost of approximately $500,000 ($400,000 General Fund) to fully implement the change in 2013-14, reflecting a partial year of administrative savings and one-time training costs. Work Incentive Nutritional Supplement (WINS) Program. The WINS program was originally authorized in the 2008-09 budget, but implementation has been subsequently delayed to January 1, 2014. The program will provide a $10 additional food benefit to CalFresh recipients that meet federal TANF work requirements but are not in the CalWORKs caseload. A primary purpose of this program is to increase the state’s TANF work participation rate (discussed below). The DSS estimates that approximately 215,000 CalFresh households will initially qualify and that approximately 140,000 of these will continue to participate during 2013-14. These households will generally be required to submit work verification on a semiannual basis as a condition of receiving the additional benefit. This represents a minor added reporting burden over what would be required for participation in CalFresh alone, and could discourage some eligible households from participating. However, we find the administration’s participation estimates reasonable. The Governor’s budget includes $10.4 million (General Fund) in 2013-14 for WINS automation, administration, and benefits. Work Participation Rate (WPR) Status While the state is free to establish its own work participation rules, federal law requires that the state report the percentage of work-eligible TANF cases that participate in federally approved work activities for the required number of hours. This percentage is known as WPR. A state’s WPR must be at least 50 percent for all work-eligible TANF households (referred to as the all-families WPR ) and at least 90 percent for work-eligible took effect). Accordingly, the Governor’s 2013-14 budget assumes no direct costs or savings from the time limit’s implementation. However, the administration has proposed that an additional $143 million (General Fund) be spent to increase the level of employment services provided to WTW participants, in order to help a greater number of work-eligible cases find sustainable employment prior to the 24-month limit. This proposal is discussed separately later in this analysis. Earned-Income Disregard Restoration. The earned-income disregard, which lessens the grant reduction that a CalWORKs household experiences when its earned income grows, was reduced in the 2011-12 budget. The 2012-13 budget restored the earned-income disregard to its former higher level, effective October 1, 2013. The immediate impacts of this restoration are that (1) CalWORKs households with earned income will receive higher grants and (2) the amount of income at which a CalWORKs household would exit the caseload has increased, resulting in fewer case closures. The Governor’s budget estimates that the CalWORKs caseload will increase by approximately 4,300 cases in the 2013-14 fiscal year due to this change, with a corresponding cost of $38.5 million (General Fund). Semiannual Reporting. Chapter 501, Statutes of 2011 (AB 6, Fuentes), requires that the state transition from quarterly to semiannual income reporting for CalWORKs and CalFresh recipients beginning in April 2013, with full implementation no later than October 1, 2013. Due to unforeseen challenges in obtaining federal waivers to implement this change, it is anticipated that counties will meet the October 1 deadline but will not implement semiannual reporting in advance of that date as originally planned. The administration now estimates that implementation of the change will entail $10.7 million ($4.4 million General Fund) in up-front automation costs in 2013-14 B u d g e t 48 Legislative Analyst’s Office www.lao.ca.gov two-parent TANF households in order to avoid federal financial penalties. In general, penalties for WPR noncompliance start at up to a 5 percent reduction of the state’s TANF block grant (translating to about a $187 million reduction in California) and grow by 2 percentage points each following year, up to a maximum of 21 percent. Under federal regulations, any reductions in the TANF block grant that come as a result of a penalty must be backfilled with state expenditures. The state’s WPR requirements may be reduced through a caseload reduction credit, which is obtained when the caseload declines below its federal fiscal year (FFY) 2004-05 level. The state may earn additional caseload reduction credit when it spends its own resources on MOE-qualifying expenditures above the MOE requirement, also known as excess MOE. Since the creation of CalWORKs, the state has had a large caseload reduction credit and consequently has had a low adjusted WPR requirement. However, changes in federal rules altered the calculation of caseload reductions such that the state’s credit was substantially reduced in FFY 2006-07. Any remaining caseload reduction credit would have been lost as caseloads grew during the recent recession; however, Congress granted an exception that temporarily allowed the state to continue to receive the level of its FFY 2007-08 credit through FFY 2010-11. State’s WPR Shortfall to Continue. Figure 8 shows the state’s all-families and two-parent WPR requirements, available caseload reduction credits, and the state’s adjusted WPR requirements, for FFYs 2006-07 through 2011-12. The figure also shows the state’s WPR performance for FFYs 2006-07 through 2008-09\u2014the most recent three years for which the federal government has officially verified the state’s WPR. Partly as a result of changes to federal law and the effects of the recession, California has been out of compliance with the overall WPR requirement Figure 8 TAnF Work Participation rate (WPr) requirement status Federal Fiscal Year (FFY) 2006-07 2007-08 2008-09 estimated 2009-10 2010-11 2011-12 All-Families required rate 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% Caseload reduction credita 17.7 21.0 21.0 21.0 21.0 \u2014 Adjusted Requirement (32.3%) (29.0%) (29.0%) (29.0%) (29.0%) (50.0%) Actual participation rate 22.3% 25.1% 26.8% \u2014b \u2014b \u2014b shortfall(-)\/surplus -10.0% -3.9% -2.2% Two-Parent required rate 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% Caseload reduction credita 90.0 90.0 90.0 90.0 90.0 \u2014 Adjusted Requirement (\u2014) (\u2014) (\u2014) (\u2014) (\u2014) (90.0%) Actual participation rate 31.7% 26.5% 28.6% \u2014b \u2014b \u2014b shortfall(-)\/surplus 31.7% 26.5% 28.6% a Federal legislation allowed the state to continue to receive the FFY 2007-08 all-families and two-parent caseload reduction credits through FFY 2010-11. Beginning in FFY 2011-12, both the all-families and two-parent caseload reduction credits are expected to be zero. b Official WPR data have not been published by the federal government for FFYs 2009-10, 2010-11, and 2011-12. TANF = Temporary Assistance for Needy Families. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 49 since FFY 2006-07 for years with available official data. With the FFY 2007-08 caseload reduction credit in place, California’s all-families WPR fell just short of the adjusted requirement in FFYs 2007-08 and 2008-09. The all-families WPR may have increased or decreased in FFYs 2009-10 and 2010-11, but official results have not been published by the federal government. The state has benefitted from a 90 percent caseload reduction credit for two-parent families (resulting in a 0 percent adjusted requirement) and maintained official compliance with the two-parent requirement through FFY 2008-09. Compliance with the two-parent requirement is assumed in FFYs 2009-10 and 2010-11. However, as the temporary extension of the FFY 2007-08 all-families and two-parent caseload reduction credits ended with FFY 2010-11, the state’s caseload reduction credits will likely be zero beginning in FFY 2011-12. This would result in the state’s noncompliance with both the all-families and two-parent requirements beginning in FFY 2011-12. Penalties Have Been Assessed . . . The state has been notified by the federal government that penalties of $47 million and $113 million were assessed for FFYs 2007-08 and 2008-09, respectively, for failure to meet the all-families WPR. Penalties for FFY 2009-10 and beyond are unknown, but possible, given that the poor condition of the labor market, increasing caseload levels, and the state’s eventual lack of caseload reduction credit negatively impact its ability to meet the WPR requirements. However, federal law provides the circumstances under which penalties can be reduced or eliminated completely. First, if a state is compliant with the overall (all-families) WPR requirement but not the two-parent requirement, the penalty amount is lowered to reflect only the proportion of the two-parent families in the total caseload. This could be significant for California because two-parent cases make up a relatively small portion of the CalWORKs caseload. States may also claim reasonable cause in situations where the noncompliance can be shown to be the result of a natural disaster or other calamity. A finding of reasonable cause would result in the penalty being waived. If reasonable cause cannot be demonstrated, states generally may enter into corrective compliance plans, which can delay or eliminate penalties as the state demonstrates progress toward compliance. . . . But Not Enforced. The DSS has submitted documentation claiming reasonable cause relating to penalties already assessed, but to date has not been advised by the federal government as to whether reasonable cause will be granted. As a result, the state’s TANF block grant has not yet been reduced and it is unknown whether a corrective compliance plan will be needed. The extended lack of guidance from federal officials makes it unclear whether the penalties already assessed will be enforced, or whether the state will face additional penalties in the future. Recent and Proposed Actions Designed to Have Positive Impact on State’s WPR. Despite the uncertainty surrounding the enforcement of WPR-related federal penalties, significant risk to the General Fund remains. Accordingly, the state is currently in the process of taking action to increase the WPR and mitigate the potential for enforced penalties in the future. These actions are made possible in part through the TANF-CSAC funding swap. The history and implications of the this funding swap are described in the box on the next page. The major WPR-related actions are as follows: Creation of Excess MOE. The Governor’s budget\u2014if enacted as proposed\u2014would result in an estimated $475 million in General Fund spending counted toward the MOE above the amount required to receive the TANF block grant. Federal law 2013-14 B u d g e t 50 Legislative Analyst’s Office www.lao.ca.gov TAnF-CSAC Funding Swap Provides Additional State Flexibility Swap Has No Net Impact on CalWORKs Funding Levels or Overall General Fund Spending. The 2012-13 enacted budget redirected $804 million in Temporary Assistance for Needy Families (TANF) block grant funds from the California Work Opportunity and Responsibility to Kids (CalWORKs) program to the California Student Aid Commission (CSAC) to be used for expenditures in the Cal Grants program that are allowable under federal rules that govern the use of TANF funds. Reduced TANF funds in CalWORKs were replaced dollar for dollar with General Fund monies from CSAC, resulting in no net impact on funding levels for Cal Grants and CalWORKs or General Fund spending overall. Swap Results in General Fund Spending in CalWORKs Above MOE Requirement. General Fund funding in CalWORKs was subsequently reduced in the 2012-13 enacted budget by $470 million. Absent the funding swap, this would have brought the state below its required maintenance-of-effort (MOE) funding level and jeopardized the federal TANF block grant. However, because the size of the funding swap substantially exceeded the General Fund reductions in CalWORKs, the CalWORKs program was left with General Fund spending above the MOE requirement. Governor Proposes to Increase Swap. Under the Governor’s budget, the TANF-CSAC funding swap would increase to a total of $943 million in 2013-14, with no associated reductions in CalWORKs or Cal Grants. This increase reflects the full funding of all expenditures in Cal Grants eligible to be funded with the TANF block grant. The amount of eligible expenditures in Cal Grants is expected to increase in 2013-14 and the swap is proposed to be increased accordingly. As before, the swap would have no net impact on total funding in either program or on General Fund spending overall. The larger swap would, however, result in additional General Fund spending in CalWORKs above the MOE, accounting for more than one-third of the proposed $340 million increase in General Fund spending in CalWORKs over 2012-13 levels. Spending Above MOE Has Important Implications. Having higher General Fund expenditures in CalWORKs than is required by the MOE provides potential benefits to the state. First, should the state choose to do so, General Fund and county spending above the MOE could be counted as excess MOE to obtain an additional reduction in the required work participation rate (WPR), thereby lowering the risk of federal penalties. Second, General Fund and county spending above the MOE could, at the state’s choosing, not be counted towards the MOE requirement. This opens the door to CalWORKs spending on purposes that are not allowed under TANF rules but that benefit the state. For example, the state can fund CalWORKs benefits for individuals that it wishes to exclude from the state’s WPR in a so-called solely state-funded program, as discussed in more detail in the body of the CalWORKs analysis. Finally, should the need arise in the future, the state has greater flexibility to enact policy changes\u2014including those that would reduce General Fund spending in the CalWORKs program\u2014without coming up against the constraint of the MOE requirement. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 51 allows for excess MOE to create additional caseload reduction credit, which lowers the state’s WPR requirement, and thus the risk of federal penalties from noncompliance. However, as additional caseload reduction credit will not be available to the state until the CalWORKs caseload declines to FFY 2004-05 levels, the WPR-related benefit of creating excess MOE will not likely come into play until several years down the road. Solely State-Funded Program. Federal law requires that all work-eligible cases whose benefits are funded with TANF funds or state MOE dollars be included in the state’s WPR calculation. (The CalWORKs caseload includes some cases that are not subject to WTW participation under state law but are considered work-eligible under federal law and are therefore included in the WPR. Most notably, this includes safety net cases in which only children are aided because adult members have reached their maximum 48-month time limit on aid.) However, cases that are funded solely with state resources that are not counted toward the MOE may be excluded from the WPR calculation. Funding cases with non-MOE state resources constitutes what is known as a solely state-funded program. The Governor’s CalWORKs budget includes $372 million of what the administration has designated as non-MOE General Fund spending to provide grants to approximately 70,000 safety net and other cases that are not meeting federal work requirements. The solely state-funded program is expected to be implemented sometime in early 2013. The program is estimated to increase the state’s all-families WPR by an estimated 6 percentage points when fully implemented in FFY 2013-14. The impact on the FFY 2012-13 WPR will be less due to a partial year of operation. The estimated impact on the two-parent WPR is unknown. WINS Program. The statutorily created WINS program will provide an MOE-funded benefit to households not already in the CalWORKs caseload that are meeting federal work requirements. By bringing these compliant households into the calculation of the state’s WPR, the state’s WPR will increase. Specifically, the WINS program could improve the all-families WPR by 15 percentage to 20 percentage points when fully implemented in FFY 2014-15. The impact on the FFY 2013-14 rate will be less due a partial year of operation. The impact on the two-parent WPR is unknown. California May Be Partially Compliant by FFY 2014-15. Given available data and based on reasonable assumptions, we project that the combined effect of the policies described above could be to increase California’s all-families WPR to above the 50 percent requirement beginning in FFY 2014-15. This estimate is subject to significant uncertainty, however, particularly given the numerous policy changes enacted over the last several years. For example, it is unclear what, if any, effect additional flexibility in state work participation rules adopted in the 2012-13 budget might have on the WPR. The state’s future two-parent WPR is also uncertain. Beginning in FFY 2011-12, the state will face the full 90 percent two-parent WPR requirement. Compliance with this requirement will be very difficult, and the impact of the WINS and solely state-funded programs on the two-parent WPR is unknown. 2013-14 B u d g e t 52 Legislative Analyst’s Office www.lao.ca.gov Given Uncertainty, Administration’s Approach Is Appropriate. In summary, California appears compliant with the two-parent requirement in FFY 2009-10 and 2010-11, due to the continuing FFY 2007-08 caseload reduction credit that adjusts the required WPR to zero in those years. It is unclear whether the all-families WPR improved enough for the state to be compliant over the same period. In FFYs 2011-12, 2012-13, and 2013-14, California will likely be out of compliance with both the all-families and two-parent requirements, due to the expiration of the FFY 2007-08 caseload reduction credit. As discussed above, beginning in FFY 2014-15, California may be compliant with the all-families requirement, but likely will not be compliant with the much higher two-parent requirement. In each year that the state is noncompliant, the federal government may, or may not, choose to assess and enforce a penalty (in addition to those already assessed for FFYs 2007-08 and 2008-09). However, even if the state is notified that penalties will be enforced, the state could still exercise its option to enter a corrective compliance plan to avoid paying the penalties. The WPR strategies described above will have a substantial impact on improving California’s compliance with the federal TANF WPR requirement. Given the continued uncertainty surrounding penalty enforcement, it is appropriate to move forward with strategies already identified. Additional steps can be taken as the federal government’s position on penalty enforcement becomes more certain. The Proposed employment Services Augmentation Single Allocation Funds County Administration and Provision of Services in CalWORKs Program. Counties receive an annual block grant, known as the single allocation, to cover costs of administering the CalWORKs program and providing services to recipients on behalf of the state. The single allocation is made up of separately budgeted categories, including administration, employment services, and child care. Amounts are budgeted by DSS for each category in aggregate, rather than for each county individually. The total budgeted amount is then allocated among the counties according to formulas developed cooperatively by the state and the County Welfare Directors Association, as required by state law. Amounts budgeted in the different categories are increased or decreased throughout the fiscal year as updated caseload information becomes available. Counties use employment services funding to provide case management and employment counseling to WTW participants and to create numerous job development opportunities, including job search training, job skills assessments, work experience placements, basic skills training, vocational education, and others. Counties Can, and Do, Spend Flexibly Across Single Allocation Categories. While the administration, child care, and employment services components of the single allocation are budgeted separately, state law allows counties to spend flexibly among these categories as their individual needs and circumstances require. This flexibility recognizes that the state’s budgeting and allocation methodologies generally will not perfectly align with needs at the individual county level. This flexibility also means that budgeted augmentations or reductions in a given category could potentially be shifted to another category in practice. In the past, counties have at times collectively spent less than was allocated for employment services and more than was allocated in other categories, primarily administration. However, significant redirection of funds between categories has been more the exception than the rule. In general, aggregate county expenditures 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 53 in each category have been relatively similar to allocations, especially in recent years. Governor Proposes to Augment Employment Services Funding to Enable Prior-Year Policy Changes. As noted previously, the 2012-13 budget resulted in extensive changes to the CalWORKs program by broadening flexibility in state work participation rules and introducing a 24-month limit on adult eligibility under these more flexible rules. The Governor’s 2013-14 CalWORKs budget proposes to augment employment services funding in the single allocation by $143 million. (This proposed amount is in addition to planned increases in employment services spending due to reengagement of previously work-exempt cases.) This increase is intended to enable counties to provide a higher level of employment services in the form of more intensive case management and increased focus on barrier removal activities, in order to assist more families to find sustainable employment prior to reaching the new 24-month limit. Prior-Year Policy Changes Emphasize Earlier and More Comprehensive Engagement in WTW. Research suggests that a majority of TANF recipients face at least some barriers to sustainable employment. These barriers can include low educational attainment, low English proficiency, lack of work experience, responsibility of caring for disabled parents or children, learning disabilities, poor mental health, domestic violence, substance abuse, criminal records, and others. While the CalWORKs program has been designed to provide services to address many of these barriers, in practice it can be difficult to correctly diagnose which barriers a given case may have and then adequately identify and provide services to remediate them. CalWORKs cases with undiagnosed and unaddressed barriers may fail to comply with program rules, be sanctioned, and subsequently become disconnected from WTW services. The decision to increase flexibility in state work rules and the introduction of the WTW 24-month time clock reflect a balance between (1) the state’s need to move work-eligible cases toward compliance with federal work rules (in order to meet the federal WPR requirements placed on the state) and (2) a recognition that some cases will require significant barrier remediation before they will be prepared to engage in sustainable employment for the long term. By allowing for greater access to barrier removal services, such as mental health and substance abuse treatment, domestic violence counseling, and education and training opportunities, the hope is that a greater number of work-eligible cases will be prepared to find and keep employment, meet federal work participation requirements before they exhaust their 24-month time limit, and ultimately reach self-sufficiency. The effectiveness of this approach depends on the counties’ ability to more effectively identify barriers to employment, connect recipients with appropriate services and activities available under state rules, and keep recipients engaged in WTW so that progress can be made more rapidly. Governor’s Proposal Is Consistent With State Policy and Has Merit. It is likely that counties will require additional resources in order to increase the level of employment services provided in a manner consistent with state policy, as reflected by the Legislature’s policy and budget actions. The Governor’s proposal to augment employment services logically follows from policy decisions made in the 2012-13 budget and we believe increased employment services funding can make these policy changes more beneficial to CalWORKs recipients. However, the Legislature should consider whether the level of augmentation proposed is appropriate to provide the level of service intended, as discussed below. Level of Employment Services Funding Per Case Has Varied Over Time. Since 2001-02, 2013-14 B u d g e t 54 Legislative Analyst’s Office www.lao.ca.gov the basic methodology used in the development of the Governor’s budget to plan for upcoming employment services expenditures has been to adjust the prior-year appropriation for changes in caseload, maintaining an implicit level of funding per case. However, numerous policy changes and budget actions have affected the employment services funding base in the intervening years, resulting in variation in the implicit funding per case. Employment Services Augmentation Based on Updated Budgeting Methodology. The methodology used by DSS to arrive at the $143 million augmentation amount differs from historical practice in two main ways. First, the new methodology simplifies the employment services budget and is explicitly based on a defined level of funding, or cost, per case (approximately $361 per month). This cost per case is essentially the average budget allocation per case over 2006-07, 2007-08, and 2008-09, based on budget act appropriations for employment services in those years. In effect, this approach rebenches the employment services funding to prerecession levels. Moving to the new cost-per-case methodology accounts for $96 million of the proposed increase. We believe that the cost-per-case methodology improves on past practice because it is simpler and more straightforward. We also find the administration’s approach of rebenching employment services funding to be reasonable because it would allow counties to provide job development opportunities at a level consistent with what was intended by budget appropriations prior to the recession and the associated policy changes and funding reductions. Second, the administration proposes to increase the new cost per case by an additional $21 per month, based on the assumption that county employment services workers will spend more time on each case than they do currently. This is intended to allow for more intensive case management and counseling, and to reach out to cases that are not currently participating due to sanctions. Increasing the cost per case accounts for $47 million of the proposed increase. We believe that increased funding for case management is consistent with past policy and find the administration’s methodology reasonable in that it relies on justifiable workload assumptions. Choice of Adequate Funding Level Depends on Desired Level of Service. As discussed, the administration’s proposal uses a cost per case that assumes that the adequate level of service is equal to what was intended in budget act appropriations from 2006-07 through 2008-09, and then adds additional funding for enhanced case management. While we find that the administration’s approach in determining the size of the augmentation is reasonable, we note that other approaches may be equally reasonable. The appropriate level of funding for employment services depends on what expectations the Legislature has for service levels under the WTW 24-month time clock. For example, if a hypothetical cost per case had been determined using actual (prerecession) expenditures rather than appropriated allocations, it would have been lower by about $43 per month than that used by the administration under its new methodology. If this hypothetical expenditure-based cost per case were used in the new methodology, we estimate that the proposed employment services augmentation in 2013-14 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 55 would be lower by $97 million. While we find that the administration’s budgeting methodology and the hypothetical alternative just discussed would result in different levels of service, we find that both would be consistent with the policy of focusing resources on employment services. Legislature May Consider Other Policy Priorities in Determining Appropriate Employment Services Funding Level. The CalWORKs program has the dual statutory objectives of (1) providing a minimum level of subsistence to California families with children and (2) assisting these families to find self-sustaining employment. The adoption of the WTW 24-month time clock and increased flexibility in state work rules in 2012-13, as well as the employment services augmentation proposed for the 2013-14, focus on the second of these two objectives. We note that, as always, the Legislature may have a different set of policy priorities than the administration that guide which policy-driven budget augmentations that it wishes to approve. (The proposed augmentation for employment services stands out as one of a handful of policy-driven augmentations proposed in the Governor’s budget.) In the context of the CalWORKs program, the Legislature could choose to redirect some or all of the funding proposed for the employment services augmentation to support other CalWORKs program goals. For example, some of the funding for the employment services augmentation could be used instead to increase maximum grant levels. Increasing maximum grant levels by 1 percent would result in increased grant costs of approximately $38 million. The earned-income disregard could also be increased, which would have the effect of increasing grants for CalWORKs cases with income and creating an increased work incentive. Analyst’s Recommendations Recommend That Legislature Approve TANF-CSAC Funding Swap. The TANF-CSAC funding swap has no net impact on total CalWORKs funding levels and General Fund spending overall, but does result in increased General Fund spending in CalWORKs. This additional General Fund spending provides flexibility in the CalWORKs program that is beneficial to the state by helping to avoid federal penalties and achieve state objectives. In view of this benefit, we recommend that the Legislature approve the TANF-CSAC funding swap as proposed in the Governor’s budget. Recommend That Legislature Augment Employment Services Funding. We find that the policy changes implemented in the 2012-13 budget imply an increased focus on assisting work-eligible cases to identify and address barriers to employment. The Governor’s proposal to increase funding for employment services is consistent with that policy and the approach used by administration in calculating the amount of the augmentation is reasonable. While we recommend that the Legislature adopt in concept the Governor’s proposal to augment employment services funding, we also recommend that the Legislature determine the amount of such augmentation by considering the level of service it expects given its recent policy actions and the level of funding it deems appropriate in light of its priorities for the CalWORKs program. Recommend That DSS Report on County Use of Augmented Employment Services Funds. Particularly given the flexibility with which single allocation funds can be used, we recommend that the Legislature direct DSS to report to the Legislature by March 1, 2014, on the counties’ use of funds provided by the augmentation, including a discussion on changes made in the provision of employment services as a result of the 2013-14 B u d g e t 56 Legislative Analyst’s Office www.lao.ca.gov augmentation and a preliminary take on outcomes achieved. Such a report could help facilitate the identification of promising ways to better engage WTW participants and help gauge the adequacy of funding provided. In-HoMe SUPPoRTIve SeRvICeS Background Overview of IHSS. The IHSS program\u2014 administered at the state level by DSS\u2014provides in-home care for persons who cannot safely remain in their own homes without such assistance. In order to qualify for IHSS, a recipient must be aged, blind, or disabled and in most cases have income below the level necessary to qualify for SSI\/SSP cash assistance. County social workers perform an assessment to determine the number of hours and type of services to authorize an IHSS recipient to receive each month. Recipients are eligible to receive up to 283 hours per month of assistance with tasks such as bathing, housework, meal preparation, and dressing. In most cases, the recipient is responsible for hiring and supervising a provider. IHSS Is a Medi-Cal Benefit. Close to 99 percent of IHSS recipients receive program services as beneficiaries of the state’s Medicaid health services program (known as Medi-Cal in California) for low-income families with children, seniors, and persons with disabilities. Individuals with disabilities who do not qualify for Medi-Cal\u2014 primarily because of their immigration status\u2014 comprise about 1 percent of the IHSS caseload. The program is subject to federal Medicaid rules, including the FMAP reimbursement rate for California of 50 percent for most program costs. Historically, for almost all IHSS recipients, 50 percent of program costs were paid for by the federal government, with about 32.5 percent paid for by the state, and 17.5 percent by the counties. Chapter 45, Statutes of 2012 (SB 1036, Committee on Budget and Fiscal Review), altered the historical county contribution by enacting a county IHSS MOE. The MOE requirement replaced the county contribution of 17.5 percent with a requirement that counties generally maintain their 2011-12 expenditure level for IHSS beginning in 2012-13, to be adjusted annually for inflation beginning in 2014-15. Furthermore, the historical cost-sharing arrangements have been altered by ACA, which provides for an enhanced FMAP (56 percent)\u2014 known as the Community First Choice Option\u2014for certain services for certain beneficiaries, including IHSS recipients who meet the state’s nursing facility clinical eligibility standards. The CCI. The CCI is a policy initiative enacted in the 2012-13 budget intended to improve the coordination of care for SPDs. As part of CCI, the IHSS program will shift from a Medi-Cal FFS benefit to a Medi-Cal managed care plan benefit in eight demonstration counties, pending federal approval from CMS. The Governor’s 2013-14 budget proposes to begin this CCI-related shift to managed care on September 1, 2013. The governor’s Budget Proposal Year-to-Year Expenditure Comparison. The budget proposes $6.2 billion (all funds) for IHSS expenditures in 2013-14, which is a 5.9 percent net increase over estimated revised expenditures in 2012-13. General Fund expenditures for 2013-14 are proposed at $1.8 billion, a net increase of $85 million, or 4.9 percent, above the revised estimate of 2012-13 expenditures. This net increase in total expenditures reflects several factors. 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 57 Sunset of 3.6 Percent Across-the-Board Reduction. Increase of $185 million ($60 million General Fund) because of the sunset of the 3.6 percent across-the- board reduction in IHSS hours that was implemented in 2012-13 and two prior years. Increase in IHSS Basic Services Costs. Increase of $152 million ($49 million General Fund) because of (1) a larger caseload, (2) greater hours per case, and (3) higher costs per hour because of an increase in the cost of providing workers’ compensation insurance to IHSS providers. Erosion of Savings From Community First Choice Option. Increase of $94 million (General Fund) above estimated 2012-13 expenditures because of stricter federal requirements for IHSS recipients to qualify for the enhanced FMAP associated with the Community First Choice Option beginning July 7, 2013. New Services Costs Related to CCI. Increase of $35 million ($11 million as reimbursement from DHCS originating from the General Fund) for (1) increased IHSS hours for existing recipients as a result of CCI and (2) new IHSS recipients who will have transitioned out of institutional care settings into IHSS because of CCI. MOE Shift to General Fund. Increase of $30 million General Fund above estimated 2012-13 expenditures because all increases in the non-federal share of IHSS costs above the IHSS county MOE are borne by the state’s General Fund. 20 Percent Across-the-Board Reduction. Decrease of $395 million ($113 million General Fund) because the budget assumes the state will prevail in ongoing litigation to allow it to begin implementing a 20 percent reduction in service hours that was a 2011-12 budget solution. We discuss this budget reduction in further detail below. Elimination of Services for Recipients Without a Health Care Certificate. Decrease of $80 million ($26 million General Fund) below estimated 2012-13 expenditures because of an increase in the estimated number of IHSS recipients and applicants who are not expected to submit the health care certificate required to receive IHSS. Caseload Growth. The Governor’s budget assumes the average monthly caseload for IHSS in 2013-14 will be 418,890, a decrease of about 1 percent compared to the most recent estimate of the 2012-13 average monthly caseload. This 2013-14 caseload estimate does not take into account a relatively small but likely increase in IHSS recipients as a result of CCI. Under Chapter 33, Statutes of 2012 (SB 1008, Committee on Budget and Fiscal Review), managed care plans in the eight demonstration counties would have the discretion to transition dual eligibles (SPDs eligible for both Medi-Cal and Medicare) from institutional care settings to home- and community-based services (HCBS), such as IHSS. Budget Change Proposals. The budget is requesting additional staff resources for the following budget change proposals. CCI. The budget requests seven limited-term positions through 2014-15 to address workload associated with shifting IHSS to a managed care plan benefit 2013-14 B u d g e t 58 Legislative Analyst’s Office www.lao.ca.gov in eight demonstration counties under CCI. We find that this budget proposal is justified on a workload basis. Case Management Information and Payrolling System (CMIPS) II. The budget proposes $510,000 ($255,000 General Fund) to extend four limited-term positions for the CMIPS II IT project. We provide a status update of this project under the County Welfare Automation write-up in this report. Analyst’s Comments on Overall Budget Proposal. Overall, we find the Governor’s 2013-14 budget proposal for IHSS reasonable. We have reviewed the caseload projections for IHSS and do not recommend any adjustments at this time. If we receive additional information that causes us to change our overall assessment, we will provide the Legislature with an updated analysis. In the section that follows, we discuss the budgetary risk inherent in the budget’s assumption that the 20 percent across-the-board reduction to IHSS hours will begin to be implemented during the course of 2013-14. We offer the Legislature an alternative budget savings solution that could be implemented from the beginning of 2013-14. The 20 Percent Across-the-Board Reduction Origin of Reduction. The 2011-12 budget package contained a statutory mechanism, or trigger, for further reducing General Fund program expenditures if General Fund revenues were reestimated to fall short of the amount assumed in the 2011-12 Budget Act. One of these reductions was a 20 percent across-the-board reduction in IHSS hours (estimated to save $100 million General Fund in 2011-12). Ultimately, the trigger was pulled. However, in early 2012, a federal judge issued a preliminary injunction preventing the state from implementing this IHSS-related reduction. The Governor’s 2013-14 budget plan assumes the state will ultimately prevail in the ongoing litigation and be able to implement the 20 percent reduction beginning on November 1, 2013, for an estimated partial-year savings of $113 million General Fund. Legal Risk. The preliminary injunction order issued by a federal judge raised concerns about the reduction’s potential violation of federal Medicaid law, the federal Americans with Disabilities Act (ADA), and due process requirements under the 14th Amendment of the United States Constitution. The judge acknowledged that the state may reduce IHSS hours under certain circumstances, but found that the plaintiffs are likely to succeed in their claims as described below. Medicaid Law. At issue was whether the reduction violated federal Medicaid requirements, including: (1) the reasonable standards requirement that eligibility determination and the extent of assistance are consistent with program objectives; (2) the comparability mandate that individuals of comparable need receive comparable services; and (3) the sufficiency requirement mandating that each service must be sufficient in amount, duration, and scope to achieve its purpose. ADA. At issue was whether the reduction of IHSS hours would put recipients at serious risk of institutionalization, in violation of the ADA that requires states to provide services in the most integrated setting appropriate to the needs of persons with disabilities. Due Process. At issue was whether the state’s notice to IHSS recipients and the supplemental care application to seek a restoration of lost hours would meet the 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 59 requirements of due process, whereby the state must provide IHSS recipients with timely and adequate notice of the reduction and an effective opportunity to defend themselves. Litigation Update. As of the date of this analysis, an appeal of the preliminary injunction is scheduled to be heard in March 2013. If the state prevails, then it may be able to begin implementing the 20 percent reduction in IHSS hours by the November 1, 2013 date assumed in the budget. However, below we raise fiscal and policy concerns with the 20 percent reduction. Fiscal and Policy Concerns With 20 Percent Reduction. When the state enters into litigation on an enacted budget solution, some measure of uncertainty exists about whether the budget solution will ultimately be implemented. For the 20 percent reduction in particular, the federal judge has raised legal concerns that call into question the state’s ability to ultimately implement the reduction and achieve the budget’s assumed partial-year savings of $113 million in 2013-14. This assumption of savings is also susceptible to erosion should a greater-than- anticipated number of IHSS recipients apply for and receive a full or partial restoration of lost hours through the supplemental care application process. Regardless of the outcome of the litigation concerning the 20 percent reduction, we think that the Legislature should consider whether a reduction of this magnitude is the appropriate policy to pursue at this time. Subsequent to the 20 percent reduction’s enactment in 2011-12, the Legislature enacted CCI (Chapters 33 and 45), with a stated policy objective to align financial incentives so as to shift utilization away from institutional care settings and toward HCBS, such as IHSS. The IHSS program is the most commonly utilized form of HCBS among SPDs, and therefore critical to maintaining SPDs in their homes and communities. A reduction in IHSS hours of this magnitude may put some recipients at risk of institutionalization, which works against one of the stated policy goals of CCI. 3.6 Percent Across-the-Board Reduction Has Been Successful in Achieving Savings. The 3.6 percent across-the-board reduction due to sunset on June 30, 2013, has been successfully implemented without legal challenge in three fiscal years\u20142010-11 through 2012-13. In 2012-13, the reduction is effective for 11 months, with estimated savings of $60 million General Fund, or about $5.5 million per month. If the Legislature continued the 3.6 percent reduction through 2013-14, the full-year savings from the reduction would be approximately $66 million General Fund. Analyst’s Recommendations In light of the fiscal and policy concerns with the 20 percent reduction discussed above, we recommend that the Legislature take the following two actions. Repeal the 20 Percent Across-the-Board Reduction. We recommend that the Legislature repeal the 20 percent reduction because of the uncertainty of achieving the estimated savings and the potential for adverse policy consequences. Fiscally, the 20 percent reduction is subject to a particularly high level of uncertainty due to the ongoing litigation and potential savings erosion even if implementation were to occur. If the reduction were ultimately implemented, the magnitude of the reduction may cause some recipients to be at risk of avoidable institutionalization\u2014an outcome inconsistent with the Legislature’s policy goals in implementing CCI. 2013-14 B u d g e t 60 Legislative Analyst’s Office www.lao.ca.gov Continue the 3.6 Percent Across- the-Board Reduction. In lieu of the 20 percent reduction, we recommend that the Legislature continue the 3.6 percent reduction on an ongoing basis because it would result in a relatively certain amount of General Fund savings while diminishing the risk of avoidable institutionalization. Unlike the 20 percent reduction, the 3.6 percent reduction has not been subject to legal challenge and has been successfully implemented in 2012-13 and two prior years. In other words, given the risk that the 20 percent reduction may not be implemented, we think that the state would be fiscally better off by continuing the 3.6 percent reduction to achieve relatively certain savings. From a policy perspective, the continuation of an existing 3.6 percent reduction is less likely than the 20 percent reduction to lead to unnecessary out-of-home placement among recipients, which aligns with the goals of CCI. CoUnTy WelFARe AUToMATIon The Governor’s budget includes funding proposals for two county welfare automation projects\u2014CMIPS II and the Child Welfare System-New System (CWS-NS) project. We discuss each of these budget proposals below. Case Management, Information and Payrolling System II The Project. The DSS is in the process of replacing the CMIPS (commonly referred to as Legacy CMIPS) with CMIPS II. Legacy CMIPS is the existing automated statewide system that performs payroll and case management functions for all IHSS providers and recipients. (For more information on the IHSS program, please see the IHSS write-up earlier in this report.) The 30-plus-year-old Legacy CMIPS has become outdated and is unable to support many of the major technical or functional modifications necessary to support legislatively enacted program changes as well as caseload management needs. The CMIPS II will update timesheet processing for providers, implement an enhanced user-friendly system, and hold approximately 30 percent more data. The CMIPS II project entered into the maintenance and operation (M&O) phase with the conversion of Yolo, Merced, and DSS as the 59th county in July 2012 from Legacy CMIPS to CMIPS II. The remaining 56 counties will transition incrementally with full statewide operation in 2013-14. Recommend Approval of Governor’s Budget Proposal. The Governor’s budget proposes an increase of $510,000 ($255,000 General Fund; $255,000 federal reimbursements) for a two-year extension of four limited-term positions to transition from Legacy CMIPS to CMIPS II and for ongoing CMIPS II M&O activities. We recommend approval of the Governor’s proposal as it ensures the appropriate resources are maintained to continue to move the CMIPS II project forward towards full statewide operation as planned for 2013-14. Child Welfare System-new System The DSS proposes to replace the existing Child Welfare Services\/Case Management System (CWS\/CMS) with CWS-NS. Here we provide background regarding the CWS\/CMS, describe 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 61 the CWS-NS project, discuss the Governor’s proposal to authorize funding for the planning and procurement phase of the CWS-NS project, and recommend approval of the Governor’s proposal. Background The CWS\/CMS. The CWS\/CMS is the statewide case management system currently supporting the state’s CWS program. The CWS workers throughout the state rely on CWS\/CMS for access to child, family, and other case-related information to make timely decisions, perform effective case management, and ultimately keep children safe and families intact. The system has been operational since 1997 and is maintained and operated by an independent contractor for $78.9 million ($39.9 million General Fund) annually. Federal Government Provides Enhanced Funding. In 1993, the federal government offered enhanced funding to states that agreed to develop a Statewide Automated Child Welfare Information System (SACWIS). A SACWIS performs specified functions, including processing child abuse investigations and preparing foster care case plans. If a state chose to develop such a system, then the federal government provided incentive funding at 75 percent of total costs for the first three years of the project’s development and then 50 percent for the subsequent years. In 1994, California received federal approval to develop CWS\/CMS as SACWIS-compliant. In 1997, the state announced the completion of the CWS\/CMS system when it became operational in all counties. Federal Government Expresses Concerns About CWS\/CMS. The federal government, however, did not consider CWS\/CMS complete in 1997 because the system did not meet all the SACWIS requirements. Starting in 1999, the federal government raised concerns about the inability of the CWS\/CMS system to meet SACWIS requirements. In June 2003, the federal government officially notified the state that it did not consider CWS\/CMS to meet SACWIS requirements. As a result, the federal government reduced its share of funding for CWS\/CMS from roughly 50 percent to 30 percent. In addition, the federal government notified the state that it would not provide any federal funding for the project after August 2005. Go-Forward Plan Is State’s Strategy to Address Federal Concerns. In October 2004, SACWIS funding was conditionally restored retroactively after the federal government approved the state’s strategy to address the federal government’s concerns about achieving SACWIS compliance, known as the Go-Forward Plan. As a result of the federal agreement, the Legislature mandated the development of a Technical Architecture Alternatives Analysis (TAAA) Study to evaluate a number of approaches to redesigning CWS\/CMS to better meet the needs of CWS workers and the SACWIS requirements. Based on the TAAA recommendation in 2005, a decision was made to continue to operate CWS\/CMS while simultaneously building a new SACWIS using a web-based architecture. The plan for the new system became the CWS\/Web project. The 2011-12 Budget Act indefinitely suspended the CWS\/Web project because of resources challenges (the project was suspended while in the procurement phase). The CWS Automation Study Recommends the Buy\/Build Option. Additionally, as a result of its deliberations on the 2011-12 budget, the Legislature directed DSS (in Chapter 32, Statutes of 2011 [AB 106, Committee on Budget]) to partner with the Office of Systems Integration (OSI) in HHSA to assess (1) the business needs associated with CWS, (2) the current case management system, and (3) the viable automated system options to meet the requirements of CWS. In April 2012, after a review of several alternatives, the CWS automation study found it was neither feasible nor cost-effective to 2013-14 B u d g e t 62 Legislative Analyst’s Office www.lao.ca.gov maintain the CWS\/CMS and recommended its replacement. The report recommended a buy\/build approach involving the purchase of an application (or a suite of applications) that is already available and used as is, with any additional functionally built over time, so as to customize the system for California’s program needs. The replacement system project is referred to as CWS-NS. The CWS-NS. The CWS-NS will use the CWS automation study recommended buy\/build approach to replace the existing CWS\/CMS. The successful implementation of the CWS-NS is intended to meet the business needs of CWS, comply with state and federal laws and regulations, result in enhanced data reliability and availability, allow user mobility, and allow for automated system interfaces with other state partners for data sharing. The CWS-NS buy\/build approach is expected to allow the state to qualify for continued SACWIS federal financial participation (FFP) for M&O costs associated with the CWS\/CMS while also claiming FFP for implementing the new automated system. The CWS-NS is estimated to cost $392.7 million, including one full year of M&O, and planned to be fully implemented by September 2017. The governor’s Budget Proposals The Governor makes two proposals regarding the CWS-NS. Funding for OSI to Support the CWS-NS Project. The Governor proposes $2.7 million in special funds (funded by $1.35 million General Fund $1.35 million and federal funds) for eight positions (all two-year limited-term positions) in OSI to support the CWS-NS project during the planning and procurement phase. Funding for DSS to Support the CWS-NS Project. The Governor proposes $1 million ($482,000 General Fund, $506,000 federal funds, and $39,000 reimbursements) for nine positions (all two-year limited-term positions) in DSS to support the CWS-NS project during the planning and procurement phase. The resources will provide the necessary project management, fiscal, procurement and contracting, business analysis, and technical expertise to support the development of CWS-NS project during the planning and procurement phase. Analyst’s Findings CWS\/CMS Continues to Be Noncompliant. The CWS\/CMS continues to be noncompliant with federal SACWIS requirements even though the Administration of Children and Families continues to provide the state with FFP at the enhanced level of 50 percent. Continued failure to comply, however, could jeopardize future FFP funding and require a payback of SACWIS FFP claimed since the beginning of the CWS\/CMS project in the 1990s. Processes Used to Achieve Program Compliance Inefficient. Although the CWS\/CMS system is noncompliant with state and federal regulations, the CWS program itself is compliant with state and federal regulations. The program uses a series of manual processes and external technologies to fully comply with state and federal requirements even as the CWS\/CMS system remains noncompliant. The manual and technical processes used to ensure program compliance are costly and divert CWS workers from their program services delivery work. Lower Ongoing Costs Projected for CWS-NS Relative to Current System. The cost of maintaining CWS-NS is estimated to be $23.9 million in 2018-19, when the system is fully implemented. With the approved SACWIS FFP of 50 percent, the approximate annual General Fund 2013-14 B u d g e t www.lao.ca.gov Legislative Analyst’s Office 63 contribution for system maintenance is estimated to be about $12 million. This equates to annual General Fund savings of $27.9 million compared to the cost of maintaining the existing system ($78.9 million total, $39.9 million General Fund). Current System Offers Limited Functionality. The current automated system does not fully support critical child welfare operations and CWS workers do not have the tools or access to all the information needed and available to do their jobs. The new system will automate existing manual tasks, provide CWS workers the capability and flexibility needed to effectively perform their duties, and provide improved service delivery to the program’s beneficiaries. Analyst’s Recommendations We recommend approval of the Governor’s proposal for $2.7 million for OSI and $1 million for DSS to support the CWS-NS project during the planning and procurement phase. The CWS-NS is designed to comply with state and federal law and incorporate critical business functionality to provide effective and efficient child welfare services. The approval of this request will provide the necessary resources for the planning and procurement phase of the CWS-NS project. 2013-14 B u d g e t LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 64 Legislative Analyst’s Office www.lao.ca.gov Contact Information Mark C. Newton Deputy Legislative Analyst 319-8323 [email protected] Shawn Martin Managing Principal Analyst 319-8362 [email protected] Ross Brown Medi-Cal\u2014Families\/Children 319-8345 [email protected] Lishaun Francis Mental Health Programs 319-8340 [email protected] Developmental Services Eric Harper Child Welfare and Support 319-8342 [email protected] Community Care Licensing Rashi Kesarwani In-Home Supportive Services 319-8354 [email protected] Lourdes Morales Information Technology 319-8320 [email protected] Janne Olson Public Health 319-8327 [email protected] Healthy Families Local Health Programs Health Benefit Exchange Felix Su Medi-Cal\u2014Aged\/Disabled 319-8344 [email protected] Ryan Woolsey CalWORKs 319-8356 [email protected] CalFresh ”

” February 22, 2012 mac Taylor Legislative Analyst The 2012-13 Budget: The Governor’s CalWORKs And Child Care Proposals 2012-13 B u d g e T 2 Legislative Analyst’s Office www.lao.ca.gov 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 3 ExEcutivE Summary Governor’s Budget Plan Would Dramatically Reduce and Restructure Both CalWORKs and Subsidized Child Care Programs. The Governor proposes to reduce funding for the California Work Opportunity and Responsibility to Kids (CalWORKs) program and state-subsidized child care programs. His budget plan reduces General Fund support for these programs by a total of $1.4 billion or about 20 percent compared to what current law otherwise would require. These savings would be achieved by imposing stricter limits on which families are eligible to receive which types of services, as well as lowering state payments for certain existing CalWORKs recipients and child care providers. Additionally, the Governor’s proposal would make major changes to the way the state administers both welfare-to-work and child care services. Governor’s Proposals Significantly Reduces CalWORKs-Related Funding. The Governor achieves the bulk of his CalWORKs-related savings ($890 million of $985 million) by: (1) reducing cash grants, (2) short- ening the time limit for adults to receive benefits, and (3) modifying work requirements. As a result of these changes, about 432,000 existing CalWORKs cases (74 percent) would face reduced cash assistance or have their cases discontinued. Under the Governor’s plan, these policy changes would be accompanied by a change to the administrative structure of the CalWORKs program, which would divide the existing CalWORKs caseload into three programs. We believe that the Governor’s proposed policy changes could be adopted and associated savings achieved without changing the administrative structure of the program. Moreover, the proposed administrative changes do not appear to yield any additional programmatic benefits in terms of efficiencies or effectiveness. Thus, we recommend the Legislature consider the Governor’s major policy changes but reject his adminis- trative changes. Significantly Reduces Child Care Funding. The Governor has three major policy proposals related to subsidized child care programs: (1) increasing parent work requirements, (2) lowering family income eligibility thresholds, and (3) reducing reimbursement rates for licensed child care providers. These proposals would lead to a combined $391 million in savings and over 63,000 (24 percent) fewer child care slots. About 75 percent of the savings results from the stricter work eligibility requirements. These eligibility changes would have the most notable effect on parents who no longer would qualify for child care benefits while they attend school or training programs. Restructures the State’s Subsidized Child Care System. Additionally, the Governor’s proposal would begin consolidating funding and administration for several child care programs in 2012-13, with the goal of shifting administration for all child care programs to county welfare depart- ments (CWDs) in 2013-14. The proposal also would expand the state’s existing practice of offering payment vouchers to parents to choose their own child care providers and end the alternative practice of contracting directly with some centers (except for part-day\/part-year preschool). Under the new system, first priority for child care would be for families receiving cash assistance through CalWORKs. Eligible working poor families not participating in CalWORKs also could apply for 2012-13 B u d g e T 4 Legislative Analyst’s Office www.lao.ca.gov subsidized child care and be served to the extent funding remains after cash-aided families are accommodated. (Remaining child care funding would be prioritized for the lowest income eligible families.) LaO recommendations Adopt Package of Reductions Based on CalWORKs and Child Care Priorities. We believe some of the Governor’s budget proposals merit consideration, but we recommend the Legislature consider modifying some of those proposals as well as consider other potential changes not proposed by the Governor. For CalWORKs, the Legislature might consider alternative reductions, including reducing funding to counties for employment services and child care, reducing the earned income disregard, increasing penalties for not meeting work requirements, and decreasing cash assistance after long periods on aid. For subsidized child care, additional savings options include eliminating care for older school-age children who instead could be served in before and after school programs, increasing family fees, and imposing time limits for how long a family can receive subsidized child care benefits. Adopt Modified Version of Governor’s Child Care Restructuring Proposal. Because it would streamline the state’s overly complex and poorly designed child care delivery systems, we recommend the Legislature adopt the Governor’s restructuring proposal, including the plan to use 2012-13 as a transition year. We believe this proposal makes sense regardless of what policy changes or budgetary reductions the Legislature adopts for CalWORKs and subsidized child care. However, we recommend that when funds shift to CWDs in 2013-14, they be maintained as a separate county- administered block grant dedicated for child care services, rather than included as part of the CWDs’ single allocation. Before making these changes, we also recommend the Legislature make a technical adjustment to accurately reflect the amount of funding currently supporting the state’s preschool program, as well as align all funding for the program within Proposition 98. Final Package Will Depend Upon How Legislature Weighs Trade-Offs. Both CalWORKs and child care programs have experienced notable reductions in recent years. Given the magnitude of these recent reductions, the Legislature may choose not to cut as deeply as the Governor proposes. The Legislature, however, still will face difficult trade-offs and challenges as it weighs some reduc- tions to CalWORKs and child care programs, and the resulting effects on the populations they serve, against the need for overall state savings and the limited options for making reductions in other areas of the budget. To assist the Legislature in crafting its CalWORKs and child care budgets, we provide illustrative associated budget packages that contain options linked with various savings levels. 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 5 intrOductiOn The Governor proposes to reduce funding for the CalWORKs program and state-subsidized child care programs. Under his budget plan, these programs would be reduced a total of $1.4 billion or about 20 percent in 2012-13 compared to what current law otherwise would require. These savings would be achieved by imposing stricter limits on which families are eligible to receive which types of services, as well as lowering state payments for CalWORKs recipients and child care providers. Additionally, the Governor’s proposal would make major changes to the way the state administers both welfare-to-work and child care services. In this report, we describe and analyze the Governor’s proposals related to the CalWORKs program and then turn to a similar discussion of the proposed changes to child care programs. We conclude by providing the Legislature with illustrative packages of ways to achieve savings in these two areas using different approaches than the Governor. caLWOrKS The Governor’s budget proposes a major redesign of the CalWORKs program that results in significant General Fund reductions. These reductions are achieved primarily through reduced cash grants and shortened time limits for welfare- to-work services. In this section of the report, we provide background on the CalWORKs program, describe and analyze the Governor’s CalWORKs proposals, and discuss alternative options the Legislature may wish to consider for achieving CalWORKs savings. Background In 1996, federal welfare reform legislation established the Temporary Assistance for Needy Families (TANF) program. In response, California created the CalWORKs program. CalWORKs provides cash grants and welfare-to-work services for families whose income is inadequate to meet their basic needs. Although the CalWORKs program is authorized in state law and funded through the Department of Social Services (DSS), the program is primarily administered by CWDs. The current CalWORKs program is expected to serve about 586,000 cases in 2012-13. Income Eligibility Requirements and Program Benefits. To be financially eligible to enter the CalWORKs program, a family’s monthly income must be below a specified level, known as the Minimum Basic Standard of Adequate Care. This income cap varies by family size. For a family of three, the monthly income cap is $1,168. Maximum monthly cash grants\u2014known as the maximum aid payment (MAP)\u2014vary by family size and place of residence. The current MAP for a family of three living in a high-cost county is $638 per month. Once on cash aid, a family may remain eligible for aid despite having additional earnings, as a portion of earned income (the first $112 dollars plus 50 percent of additional income) is not counted when determining a family’s cash grant. This amount of disregarded income is known as the earned income disregard. A family’s aid is discontinued when its earned income (minus the disregard) exceeds its cash grant. In addition to cash assistance, CalWORKs families receive CalFresh (Food Stamps) benefits. Many CalWORKs families also are eligible for welfare- to-work services, including job search assistance, training, barrier removal (such as adult basic 2012-13 B u d g e T 6 Legislative Analyst’s Office www.lao.ca.gov education and mental health, substance abuse, and domestic abuse services), and subsidized child care. Three Sources of Funding Support the CalWORKs Program. The CalWORKs program is funded by a combination of federal, state, and local funds. Federal funding is provided through an annual $3.7 billion TANF block grant. While a majority of the TANF block grant is used to fund the CalWORKs program, TANF funds can be used for any activities that meet the broad purposes of the TANF program (see Figure 1). To receive the full TANF block grant, California must contribute at least $2.9 billion from various nonfederal sources to meet a maintenance-of-effort (MOE) requirement. Although the MOE requirement is primarily met through state and county spending on CalWORKs, some state expenditures in other programs (such as subsidized child care) also count toward satisfying the requirement. County costs to administer the CalWORKs program, as well as provide employment services and child care to CalWORKs recipients, are funded through an annual block grant (known as the single allocation) provided by the state. In addition, as a result of the 2011-12 realignment, $1.1 billion in local funds were redirected to cover a portion of CalWORKs cash grant costs. Federal Law Requires State to Meet Work Participation Rate (WPR). Federal law generally requires states to ensure that at least 50 percent of able-bodied TANF recipients participate in certain categories of work activities for a specified number of hours. Federal law also provides states with credits (known as caseload reduction credits) that reduce this obligation if they reduce their welfare caseloads. California currently does not receive any caseload reduction credits. Failure to meet the federal WPR may result in substantial penalties on the state (starting at up to 5 percent reduction to its TANF block grant and increasing 2 percent each year). California has failed to meet its WPR since 2007 and has been notified that it will be assessed penalties of $47 million and $113 million, for 2008 and 2009 respectively. However, the state is appealing these penalties and, to date, no reduction in TANF funding has been enforced. For the foreseeable future, it is estimated that California’s WPR will be in the range of 25 percent to 30 percent\u2014substantially below the federal 50 percent WPR. Federal and State Work Requirements Differ in Two Notable Ways. As shown in Figure 2, California’s statutory work requirements differ in two notable ways from federal work requirements. Allowable Activities. Federal and state law designate specific activities as core and noncore. Although federal and state core activities generally are the same, some state noncore activities are less restrictive than the federally allowable activities. Unlike federal law, state law also allows some noncore activities to count as core activities in special cases. One area in which state law is less restrictive relates to allowable education activities. Under state Figure 1 The Four Purposes of TANF Provide assistance to needy families so that children may be cared for in their own homes or in the homes of relatives. End the dependence of needy parents on government benefits by promoting job preparation, work, and marriage. Prevent and reduce the incidence of out-of-wedlock pregnancies and establish annual numerical goals for preventing and reducing the incidence of these pregnancies. Encourage the formation and maintenance of two-parent families. TANF = Temporary Assistance for Needy Families. 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 7 law, an allowable activity is any type of higher education (not limited to vocational education) typically up to 24 months. By comparison, federal law allows recipients to count only 12 months of vocational education toward meeting program requirements. Another notable difference is that current state law has a less restrictive time line for mental health, substance abuse, and domestic violence treatment than federal law. Required Hours. California requires all single parents to participate in work activ- ities for 32 hours a week whereas federal law requires 20 hours for single parents with children under six and 30 hours for single parents with older children. For two-parent families, federal law requires 30 hours of core work activities whereas state law requires only 20 hours. Program Has Sanctions and Time Limits. If a family fails to meet its work requirement, it may be subject to a sanction. The sanction reduces the amount of the family’s cash grant by the amount attributable to the adult (usually about $120 a month). Generally, able-bodied (also known as work-eligible) adults are limited to four years of cash assistance, while children are not subject to time limits. If an adult reaches the four-year time limit, the family’s grant is reduced by the amount attributable to the adult and the children continue to receive aid in a program known informally as the safety net. Families in which only the children are aided because the parent is not work eligible (such as individuals who are undocumented or receiving Supplemental Security Income [SSI]) are Figure 2 Comparison of Federal and State Work Requirements Number of Hours Required Per Week Family Type Federal State Total Hours Core Hours Total Hours Core Hours Single-parent with child under six 20 20 32 20 Single-parent with older children 30 20 32 20 Two-parenta 35 30 35 20 Allowable Activities Core Non-Core Federal and State Federal State Unsubsidized employment. Subsidized employment. Work experience. Community service. Vocational education (up to 12 months). On-the-job training. Job search and job readiness training (six weeks per year, can include mental health and substance abuse treatment). Providing child care to a community service program participant. Job skills training directly related to employment. Education directly related to employment. Satisfactory attendance at a secondary school or course leading to a certificate of GED. All activities listed under federal.b Mental health, substance abuse, and domestic abuse services beyond six weeks. Any higher education (typically up to 24 months).b Other activities necessary to assist in obtaining employment. a Must participate in a combined total of 35 hours. b These activities can count toward core hours in some circumstances. 2012-13 B u d g e T 8 Legislative Analyst’s Office www.lao.ca.gov known as child-only cases. There are currently about 232,000 child-only cases and 72,000 safety-net cases in the CalWORKs program. Recent Reductions to the CalWORKs Program. During the past three years, the state has made significant reductions to the CalWORKs program, including: lowering cash grants for families (total of a 12 percent reduction), reducing employment services and child care funding, shortening the adult time limit for assistance from 60 months to 48 months, reducing the earned income disregard, suspending intensive case management for pregnant and parenting teens, and reducing funding for substance abuse and mental health treatment. In the absence of these changes, which resulted in ongoing CalWORKs reductions of around $780 million, expenditures in the CalWORKs program would have grown significantly due to increasing caseload levels. However, as a result of these reductions, total CalWORKs expenditures remained relatively flat between 2008-09 ($5.3 billion) and 2011-12 ($5.4 billion). overview of the governor’s Budget ProPosal In 2011-12, the CalWORKs program received $5.4 billion in total funding (see Figure 3). Absent policy changes proposed by the Governor, expenditures in CalWORKs would increase to $5.8 billion in 2012-13, primarily as a result of the restoration of a one-time $377 million cut to county single allocation funding. The Governor proposes various changes to avoid this year-over-year increase in CalWORKs expenditures, as well as make additional reductions totaling $583 million, for total General Fund savings of $985 million. The reductions proposed by the Governor would come primarily through a substantial reduction in cash grants for the majority of recipients and restricted eligibility for welfare-to-work services. These policy changes are encompassed in a redesign of the CalWORKs program administrative structure. calWOrKs redesign The Governor’s proposal would replace the current CalWORKs program with a three-part system, consisting of two CalWORKs subprograms\u2014CalWORKs Basic and CalWORKs Plus\u2014and a Child Maintenance program. Figure 4 shows the process for determining which families qualify for each of these three programs. As the Governor’s CalWORKs proposal would involve significant programmatic changes, CWDs would need sufficient time to make automation and staffing changes, as well as notify recipients of changes to grant and service levels. The Governor requests that the Legislature enact his CalWORKs proposal by March 1 to provide sufficient implementation time for counties. (We believe enactment could be delayed as late as April 1 without eroding savings.) The Governor proposes to begin implementing these changes in October Figure 3 CalWORKs Budget Summary All Funds (Dollars in Millions) 2010-11 2011-12 2012-13 Proposed Change From 2011-12 Amount Percent Cash grants $3,576 $3,278 $2,749 -$529 -16% Employment services 1,074 946 938 -8 -1 Stage 1 child care 488 435 483 48 11 Administration 585 631 495 -136 -22 Other 620 97 139 42 43 Totals $6,343 $5,387 $4,804 -$583 -11% 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 9 2012, with full implementation in April 2013. Over this six-month period, families that would otherwise be removed by the Governor’s proposal to shorten time limits would continue to receive services. Divides CalWORKs Into Two Subprograms. The CalWORKs Basic program would effectively continue the current CalWORKs program (including maintaining current cash assistance levels and employment services) for work-eligible adults for up to 24 months. The CalWORKs Plus program would serve families that are working sufficient hours in unsubsidized employment to meet federal work participation requirements. These families would receive 48 months (or an additional 24 months if they were transitioning from the CalWORKs Basic program) of eligibility for cash assistance, employment services, and child care. Families that exceed the 48-month limit would be eligible to continue receiving cash assistance (less the portion attributable to the parent) and services for as long as they continue to meet work requirements. Additionally, the earned income disregard for families in the CalWORKs Plus program would be somewhat more generous, excluding the first $200 (as opposed to $112) of all income and 50 percent of remaining income from cash grant calculations. Time limits in both CalWORKs Basic (24 months) and CalWORKs Plus (48 months) would be applied retroactively to all current CalWORKs recipients, including those previously exempted from work requirements or in sanction status. Creates a Child Maintenance Program. This program would provide continued assistance for families that are no longer eligible for CalWORKs under the redesign. The Child Maintenance caseload would be comprised of families that: (1) have received 24 months of CalWORKs Basic assistance and are not working sufficient hours in unsubsidized employment, (2) have been in sanction status for three months, or (3) do not have a parent who is work-eligible. Cash assistance levels for families in the Child Maintenance program would be reduced in two ways: (1) MAP levels would be reduced by 27 percent as compared to what a family would receive in the current CalWORKs program, and (2) the earned income disregard would be reduced by $112. Additionally, Child Maintenance families would not be eligible for ongoing employment services or subsidized child care. (Families that are work-eligible and have Flowchart of Restructured CalWORKs Program Figure 4 Meeting federal work requirements through unsubsidized employment? Received cash assistance for less than 24 months? CalWORKs Basic Begins meeting federal work requirements through unsubsidized employment within 24 months of recieving assistance? CalWORKs Plus Begins meeting federal work requirements through unsubsidized employment. Child Maintenance Program YES NO YES NO YES NO YES NO CalWORKs Family Work-eligible?a a A work-eligible family includes an able-bodied parent who may legally work in the state. 2012-13 B u d g e T 10 Legislative Analyst’s Office www.lao.ca.gov not exceeded 48 months on aid may be provided one month of child care every six months to allow for job search.) The frequency of required income reporting would be reduced from quarterly (scheduled to change to semiannually in 2013) to annually for Child Maintenance families. Impact of the Governor’s Proposal on Caseload. Figure 5 shows the impact of the Governor’s redesign on the existing CalWORKs caseload (586,000). As the figure shows, in October 2012, a total of 301,000 cases would be removed from the CalWORKs program. These cases would be comprised of existing child-only, safety-net, and chronically sanctioned (sanctioned three or more months in a 12-month period) cases. Of these cases, about 260,000 cases would transition to the Child Maintenance program while about 41,000 cases would be discontinued due to lower income eligibility thresholds resulting from the change in the earned income disregard and grant reductions. In April 2013, about 131,000 cases would be removed from CalWORKs Basic due to shortened time limits for eligibility. The majority of these cases (109,000) would be placed in the Child Maintenance program, while the remainder (22,000) would be discontinued (for the reasons indicated above). Altogether, about 432,000 existing cases (74 percent) would be adversely impacted by the Governor’s proposal either due to reduced cash assistance by being placed in the Child Maintenance program or having their cases discontinued. Governor’s Budget Likely underfunds county responsibilities The Governor’s budget calculates county single allocation funding for child care for current CalWORKs recipients and county administration of the CalWORKs program based on unit costs that are lower than actual costs in past years. While proposed administrative efficiencies (such as reducing the frequency of income reporting requirements for Child Maintenance cases) could lead to somewhat lower administrative costs, the Governor likely is underestimating the actual costs counties will face. To accommodate insufficient funding for child care and county administration, counties could either redirect funds from employment services or request a midyear augmentation from the state (resulting in reduced budgetary savings). Projected Caseload Changes Under Governor’s Proposala Figure 5 a Caseload rounded to nearest 1,000. CalWORKs 586,000 CalWORKs CalWORKs Plus 25,000 Child Maintenance 260,000 Child Maintenance 369,000 285,000 301,000 109,000 Discontinued 63,000 Discontinued 41,000 July 2012 October 2012 April 2013 Basic 260,000 Basic 129,000 Plus 25,000 Plus 25,000 Plus 25,000 22,000 131,000 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 11 Major Budget reductions To achieve the bulk of his savings ($890 million of the $985 million), the Governor proposes three significant changes to the CalWORKs program: (1) reducing cash grants, (2) shortening the adult time limit for the receipt of benefits, and (3) modifying work requirements. These policy changes would be accompanied by proposed changes to the administrative structure of the CalWORKs program. We believe that the Governor’s proposed policy changes could be adopted and associated savings achieved without changing the administrative structure of the program. Moreover, the proposed administrative changes do not yield any apparent programmatic benefits in terms of efficiencies or effectiveness. Thus, we recommend the Legislature focus its evaluation on the major policy changes inherent in the Governor’s proposal and reject the Governor’s proposed administrative changes. Below, we describe, assess, and offer modifications to the Governor’s proposed policy changes. We also offer rough estimates of the full-year savings (if changes took effect July 1, 2012) associated with enacting these changes within the context of the current CalWORKs administrative structure. (These estimates consider each policy change in isolation and do not account for possible inter- active effects.) reduced cash Grants Governor’s Proposal Reduces Cash Grants for the Majority of Cases. The Governor proposes to reduce cash grants by 27 percent for current child-only, safety-net, and chronically sanctioned (sanctioned three or more months in a 12-month period) families. Upon full implementation of the Governor’s proposal, about 74 percent of the current CalWORKs caseload would face reduced cash assistance. Figure 6 provides a breakdown of cash grants and CalFresh benefits that would be received by a family of three living in a high-cost county in each of the CalWORKs Basic, CalWORKs Plus, and the Child Maintenance programs. As shown in the figure, a family currently receiving a child-only grant would face a reduction of 27 percent if shifted to the proposed Child Maintenance program. (Due to interaction with the Governor’s proposal to reduce the adult time limit, some families currently receiving a full cash grant\u2014including an adult portion\u2014would face a more substantial reduction of 41 percent Figure 6 Comparison of Maximum Monthly Cash Assistance Levelsa Current Law Governor’s Proposal Change Percent Change CalWORKs Basic Cash grant $638 $638 \u2014 \u2014 CalFresh benefits 478 478 \u2014 \u2014 Totals $1,116 $1,116 \u2014 \u2014 Percent of FPL 72% 72% \u2014 \u2014 CalWORKs Plus Earningsb $1,040 $1,040 \u2014 \u2014 Cash grant 174 218 $44 25.3% CalFresh benefits 372 353 -19 -5.1 Totals $1,586 $1,611 $25 1.6% Percent of FPL 103% 104% 1% \u2014 Child Maintenance Cash grant $516 $375 -$141 -27.3% CalFresh benefits 487 487 \u2014 \u2014 Totals $1,003 $862 -$141 -14.1% Percent of FPL 65% 56% -9% \u2014 a Example shown for a family of three with an eligible adult in a high-cost county. b Assumes one parent working 130 hours per month (about 30 hours per week) at state minimum wage of $8 per hour. FPL = federal poverty level. 2012-13 B u d g e T 12 Legislative Analyst’s Office www.lao.ca.gov if shifted to the Child Maintenance program.) The combination of a Child Maintenance cash grant and CalFresh benefits (for families with an eligible adult) would provide an average family of three resources equal to 56 percent of the federal poverty level. The full-year savings of a 27 percent cash grant reduction for child-only, safety-net, and chronically sanctioned cases would be approximately $610 million. If the Legislature were to reduce the magnitude of the Governor’s proposed cash grant reduction, savings would be reduced by roughly $100 million for each 5 percent increment below 27 percent. For example, the state would receive full-year savings of around $510 million if it reduced these cash grants by 22 percent. California Provides Higher Monthly Cash Assistance Than Other States. Figure 7 compares the MAP available for a family of three as a percentage of state median income in California and the ten other largest states. (Displaying the MAP as a percentage of state median income adjusts for varying income levels across states.) The figure shows a CalWORKs cash grant currently is equal to 11.6 percent of California median income for a family of three. This cash grant level ranks fourth highest among all states and second highest among large states. This cash grant level is 3 percentage points higher than the national average and almost 4 percentage points higher than the average of the ten largest states excluding California. Proposed Cash Grant Reductions May Increase the Incentive for Recipients to Work. The Governor’s reduction in cash grants for the proposed Child Maintenance cases could increase the incentive for these families to work by increasing the difference in cash assistance for families that are and are not working. Figure 8 demonstrates the effect of increasing the difference in cash assistance available to working and non-working families. As this figure shows, if the parent of a family of three currently in sanction status with no earned income were to obtain a part-time job earning $1,040 monthly, the family’s overall monthly resources would increase by $839 under the Governor’s proposal (after adjusting for a reduced CalWORKs cash grant), as compared to $698 under current law. (Incorporating the Governor’s proposed increased earned income disregard, the family’s monthly resources would increase by $883.) Comparison of California’s Cash Grant Level With Those of Ten Other Largest States Figure 7 2 4 6 8 10 12 14 16% New York California Michigan Ohio U.S. Average Illinois Pennsylvania Florida Georgia North Carolina New Jersey Texas Maximum Aid Payment as a Percent of State Median Income 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 13 However, the proposed Child Maintenance caseload is likely to face more barriers to self-sufficiency than other families, possibly dampening the impact of these increased work incentives. Proposed Child Maintenance Cases May Face More Barriers to Self-Sufficiency Than Other Cases. Review of caseload characteristics and relevant research suggests that Child Maintenance cases may face more barriers to self-sufficiency than the average CalWORKs family. Figure 9 provides a breakdown of the caseload of the Governor’s proposed Child Maintenance program. The largest segment of this population is cases with an undocumented parent (44 percent), followed by safety-net cases (16 percent). Overall, only 19 percent of these families are headed by a parent with a high school diploma or General Education Development credential, as compared to 53 percent of all other CalWORKs families. Additionally, only 50 percent of these families speak English as a first language, as compared to 86 percent of all other CalWORKs families. Our review of relevant research indicates that the second largest segment of the child-only population\u2014safety-net and chronically sanctioned cases\u2014are more likely to face one or more barriers to self-sufficiency, such as limited education or work experience, physical or mental health problems, or issues with transportation. Altogether, this evidence suggests that the target population of the Governor’s proposed CalWORKs cash grant reductions faces more barriers to self-sufficiency than the CalWORKs caseload as a whole. This therefore dampens the potential for the Governor’s proposed cash reductions to serve as a work incentive. Cash Grant Reductions Could Instead Be Applied to All CalWORKs Families. If the Legislature wishes to avoid concentrating the impact of cash grant reductions on a population of recipients that may, in some cases, have more difficulty securing employment, it could consider making an across-the-board cash grant reduction. To generate an equivalent amount of savings as Figure 8 Comparing Work Incentives Current Law Governor’s Proposal Nonworking Familya Earnings \u2014 \u2014 Cash grant $516 $375 Totals $516 $375 Working Familyb Earnings $1,040 $1,040 Cash grant 174 174 Totals $1,214 $1,214 Benefit of Working Earnings $1,040 $1,040 Change in cash grant -342 -201 Net Benefit $698 $839 a Assumes single-parent family of three in sanction status. b Assumes one parent working 130 hours per month (about 30 hours per week) at state minimum wage of $8 per hour. Maintains current-law earned income disregard. Figure 9 Breakdown of the Child-Maintenancea Caseload Type Cases Percent of Child-Only Undocumented parents 133,083 44.2% Safety-netb 46,884 15.6 Non-needy caretaker relative 39,198 13.0 Supplemental Security Income parents 38,239 12.7 Chronically sanctioned (more than three months) 22,328 7.4 Other 16,160 5.4 Drug and fleeing felon parents 5,108 1.7 Totals 300,999 100.0% a Includes traditional child-only cases, as well as safety-net and chronically sanctioned cases. b Defined as a case in which a parent has exceeded his\/her time limit but the family continues to receive aid on behalf of the children. 2012-13 B u d g e T 14 Legislative Analyst’s Office www.lao.ca.gov the Governor through an across-the-board grant reduction, we estimate that cash grant levels would need to be reduced by 17 percent\u201410 percentage points less than the Governor’s targeted cash grant reduction. In general, savings of around $190 million (with some additional savings associated with larger reductions due to a greater number of discontinued cases) could be achieved for every 5 percent reduction in cash grants for all cases. Phasing in Cash Grant Reductions Could Lessen Immediate Impact on Recipients. The Legislature also may wish to consider mitigating the impact of any cash grant reduction that it might choose to make. A potential option would be to phase in any reduction over several months. A phase-in period could provide families time to adjust to changes in available resources and help to mitigate problems associated with a sudden decrease in benefits. Implementing a 27 percent cash grant reduction for child-only, safety-net, and chronically sanctioned cases over a six-month phase-in period (for example, three months of no reduction followed by three months of partial reduction) would result in savings of about $390 million in 2012-13 (a loss of $70 million in savings relative to the Governor). Shortened time Limit for assistance Governor’s Proposal Significantly Shortens Time Limit for Access to Full Array of CalWORKs Services. The Governor’s proposal to divide CalWORKs into two subprograms is generally equivalent to reducing the adult time limit for the current CalWORKs program to 24 months, while continuing to maintain a 48-month time limit for adults that are working sufficient hours in unsubsidized employment. The Governor proposes to implement this change retroactively and to count prior months in which families were exempt from welfare-to-work or sanctioned for noncompliance towards the new time limit. An estimated 131,050 adults that have received aid for more the 24 months would lose cash assistance and services under the Governor’s proposal. We estimate that the full-year savings of implementing this proposal under the current program structure would be around $380 million. Shortened Time Limits Could Increase Imperative for Recipients to Move Toward Self-Sufficiency. Decreasing the amount of time nonworking CalWORKs adults can receive cash assistance could encourage CalWORKs recipients to more aggressively pursue work. Though little research exists on the impact of shortening time limits, the evidence that they serve to induce increased work among welfare recipients is mixed. Several older studies have found time limits generally can produce an anticipation effect that increases employment among recipients prior to reaching time limits. While the majority of these studies examined time limits that result in full grant elimination, there is some evidence that partial grant elimination\u2014as is the case in California\u2014can have a positive but less pronounced effect on employment. More recent work by the Public Policy Institute of California, however, does not find evidence that time limits resulting in partial grant elimination have a significant impact on employment among low-income single mothers. Based on this available evidence, the Governor’s time limit proposal likely would have a positive, but limited, effect on employment of CalWORKs recipients. Counting Prior Months in Exemption Toward Time Limit Is Inconsistent With Prior Policy. Under current law, adults are granted exemptions from participating in welfare-to-work activities under various circumstances, such as when the adult is disabled, of advanced age, or caring for a very young or ill child. Under current law, months during which an adult is exempt from 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 15 work requirements do not count against the adult’s 48-month time limit. More recently, in connection with budget reductions, exemptions have been expanded to include parents caring for one child under the age of two or multiple children under the age of six. (Exemptions generate savings for the state because employment and child care services generally are no longer provided.) Generally, exemptions give recipients the option to defer welfare-to-work activities with the understanding that they will be able to resume those activities at some point in the future without reducing their duration of eligibility. There are currently a total of about 105,000 cases that have received exemptions. The Governor’s proposal would retroactively count months in exemption towards an adult’s time limit, thereby significantly reducing the availability of future services. By doing so, the proposal would be inconsistent with prior policy under which recipients may have elected not to volunteer for welfare-to-work with the understanding that these services would be available in the future. To mitigate this issue, the Governor proposes to provide a six-month transition period for all current work-eligible CalWORKs families. In Considering Time Limit Reductions, Recommend Legislature Not Count Prior Months in Exemption. Given the adverse effect on certain families, we recommend the Legislature not count prior months in exemption towards an adult’s time limit. Our full-year savings estimate of implementing the Governor’s time-limit proposal would be reduced by approximately $90 million if the prior months in exemption were not counted. Legislature Could Consider Aligning Time Limit With Average Time on Aid. If the Legislature believes the Governor’s shortened time limit is too severe, it could consider making a less dramatic change to the time limit. One option would be to align the adult time limit with the historical average time on aid among CalWORKs recipients (about three years). Reducing the adult time limit to 36 months without counting prior months in exemption would result in annual savings of roughly $140 million. changes to Work requirements Governor’s Proposal Aligns State and Federal Work Requirements. As part of his redesign of the CalWORKs program, the Governor proposes to align the current CalWORKs work requirements with federal TANF requirements. Aligning to the federal requirements would reduce the required number of hours of participation for single parents (a majority of the caseload) but restrict the scope and time line for higher education activities and mental health, substance abuse, and domestic violence treatment. Altogether, about 35,000 cases (about 30 percent of those participating in work activities) are currently participating in activities that could be affected by the Governor’s proposal. The Governor’s budget does not directly attribute any fiscal effect to this proposal. We find that the net savings of aligning state and federal work requirements are difficult to predict due to uncertain behavioral responses among CalWORKs recipients. However, such a policy change would somewhat reduce the risk of future TANF losses due to federal WPR-related penalties. Aligning to Federal Work Requirements Would Likely Increase the State’s WPR. Under current law, a CalWORKs recipient could be in compliance with state work requirements, while failing to meet federal requirements and, therefore, not contribute to the state’s WPR. This occurs primarily because the work activities allowed by state law are more permissive than those allowed by federal law. If state and federal requirements were aligned, CalWORKs recipients no longer would be permitted to participate in activities that do not contribute to the state meeting its WPR. This likely would redirect recipients to participate in federally 2012-13 B u d g e T 16 Legislative Analyst’s Office www.lao.ca.gov allowable activities, thus increasing the state’s WPR. Increasing the state’s WPR would reduce the risk of future federal penalties. Changes in Work Requirements Likely Would Have a Mixed Impact on Welfare-to-Work Sanctions. Aligning to federal work requirements could potentially have offsetting effects on the number of CalWORKs families subject to sanctions for noncompliance. On the one hand, reducing the required hours likely would make meeting work requirements easier, thus reducing the likelihood of sanction. (For single mothers with a child under six\u2014a majority of the work-eligible caseload\u2014 required hours would drop by 38 percent.) Conversely, restricting the list of allowable work activities could make meeting work requirements more difficult, thus increasing the likelihood of sanctions. Although specific behavioral responses are difficult to predict, aligning state and federal work requirements would likely, on balance, reduce the number of cases subject to sanctions. A reduction in the number of sanctioned cases would likely result in increased CalWORKs cash grant costs. Requiring Breaks in Treatment for CalWORKs Purposes Problematic. Under current law, generally no limit exists on the amount of time mental health, substance abuse, and domestic violence treatments can count towards a CalWORKs recipient’s required hours of partici- pation. The Governor’s proposal would limit these activities for CalWORKs purposes to: (1) a total of 180 hours per year (360 hours during periods of growth in the state’s unemployment rate or CalFresh caseloads) and (2) no more than four consecutive weeks. Due to these proposed changes, a CalWORKs recipient in a treatment program might, in some circumstances, be required to interrupt treatment every four weeks. (In some circumstances counties could use administrative workarounds to allow continued treatment.) Individual treatment time in these programs is likely to vary significantly. Thus, determining how many recipients would be affected by the Governor’s proposal is difficult. However, due to variation in individual treatment times, estab- lishing a single time limit for all recipients is problematic, as some recipients likely would be moved into other work activities before adequate treatment has been provided. Recommend Making Allowances for These Treatments. Aligning state and federal work requirements generally merits consideration as it would help to improve the state’s WPR and reduce the risk of associated federal penalties. However, we believe that the Governor’s proposed limita- tions for mental health, substance abuse, and domestic violence treatments are impractical and detrimental to the successful implementation of these treatments. Therefore, we recommend the Legislature reject the proposal and not adopt the federal limitations relating to these treatments. other ProPosals cal-Learn Eliminates the Case Management Portion of the Cal-Learn Program. The Cal-Learn program provides intensive case management to about 12,000 CalWORKs teen parents who remain in school. Depending on a student’s academic performance, the teens may earn bonuses or be subject to sanctions (a decrease in the CalWORKs cash grant). The 2011-12 Budget Act suspended the case management portion of the Cal-Learn program (the bulk of the program’s expenditures) but maintained funding for the performance bonuses. The Governor proposes to permanently eliminate the case management portion of the Cal-Learn program (avoiding $35 million in otherwise higher costs in 2012-13). 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 17 In Light of Budget Constraints, Proposed Elimination Has Merit. Under the Governor’s proposal, counties would be allowed to continue funding Cal-Learn using the employment services allotment of their single allocation funding. Thus, counties would be allowed to prioritize limited employment services resources between Cal-Learn recipients and the general CalWORKs population based on local needs. In light of budgetary constraints in the CalWORKs program, we believe this proposal merits serious consideration by the Legislature. cash Grants for Work-Exempt Families Eliminates Higher Grants for Work-Exempt Families. Under current law, a CalWORKs family may qualify for a higher cash grant (about 10 percent greater) if the adult in the family is either a caretaker relative or a parent who is receiving: (1) SSI, (2) In-home Supportive Services, (3) State Disability Insurance, or (4) workers’ compensation temporary disability payments. These families are referred to as work-exempt. Currently, about 18 percent of CalWORKs families are classified as work-exempt. Higher cash grants for work-exempt families were originally established to compensate for the inability of many of these cases to augment their cash grant through employment, unlike families with able-bodied adults. The Governor proposes to eliminate these higher cash grants, reducing the grant for these families by about $54 per month, on average, for total associated savings of $50 million. Eliminating Higher Grants for Some Work-Exempt Families Merits Consideration. Although most work-exempt families have limited or no ability to obtain earned income, the majority are receiving disability-related income. For this reason, we think eliminating the higher cash grants warrants legislative consideration. The merit of eliminating higher cash grant levels for caretaker relatives is less clear, as this could discourage relatives from assuming care of children, resulting in potentially increased costs in child welfare services. using tanF Funds for cal Grant costs Uses Freed-Up TANF Funds for Cal Grant Costs. Because of federal MOE requirements, the Governor cannot reduce state spending for the CalWORKs budget. Thus, to realize General Fund savings from his CalWORKs changes, he proposes to use TANF funds freed up from the CalWORKs reductions for Cal Grant costs and, in turn, achieve General Fund savings in that program. Specifically, the Governor proposes to transfer $736 million in TANF funds to the Student Aid Commission to fund Cal Grants, resulting in General Fund savings of a like amount. According to the administration, the use of TANF funds for Cal Grants is allowable under the third and fourth purposes of TANF. This proposal is simply a change in fund source and would not have a programmatic effect on the Cal Grant program. Transfer of TANF to Student Aid Commission Is Needed to Realize General Fund Savings. The Governor’s proposal to use TANF funds for a portion of Cal Grants is needed to realize maximum General Fund savings from making reductions in the CalWORKs program while continuing to meet MOE requirements. Once the Legislature decides upon a level of CalWORKs savings, we recommend using the Governor’s TANF transfer\/Cal Grants approach as the mechanism to achieve General Fund savings. Expansion of Work incentive nutritional Supplement (WinS) Program Expands Supplemental Work Bonus Program Scheduled to Begin in 2013-14. As part of the 2008-09 budget package, the Legislature established the WINS program, which is intended 2012-13 B u d g e T 18 Legislative Analyst’s Office www.lao.ca.gov to provide $40 in additional monthly benefits to CalFresh families who are meeting federal TANF work requirements but are not in the CalWORKs program. Subsequent budget actions in 2009 and 2011, however, postponed implementation of the program until October 2013. A primary purpose of this program is to increase the state’s WPR, thereby helping the state meet federal requirements. The Governor proposes to implement the program as scheduled, as well as increase the monthly benefit from $40 to $50. Additionally, the Governor would create a new WINS Plus program that would provide a $50 monthly benefit to families receiving subsidized child care who are meeting federal TANF work requirements but are not in the CalWORKs program. This change also is intended to help the state meet the federal WPR requirement. The Governor’s proposed expansion would not result in costs in 2012-13 but would increase ongoing annual costs for WINS by about $53 million (increasing total program costs from $72 million to $126 million) following implementation in 2013-14. Proposal Reduces the Risk of Future Federal Penalties . . . Absent corrective action, the state is likely to fall short of its federal WPR by as much as 20 percentage points to 25 percentage points for the foreseeable future. The WINS program, as designed under current law, would help to increase the state’s WPR by an anticipated 10 percentage points beginning in 2013-14. The Governor’s proposed expansion of the WINS program would likely further increase the state’s WPR. While these increases alone would not allow the state to meet its WPR, it would bring the state considerably closer to its goal and reduce the risk of future federal penalties. . . . But Legislature Could Modify the Proposal to Reduce Costs. Under the Governor’s proposed expansion of WINS, ongoing costs are $126 million. The following modifications could be made to the Governor’s proposal to reduce ongoing costs by as much as $100 million, while still receiving all or most of the WPR benefit: (1) require that all new CalFresh and subsidized child care applicants also apply for WINS or WINS Plus at time of application, (2) require application for WINS and WINS Plus as a condition of ongoing eligibility for current CalFresh and subsidized child care recipients, and (3) reduce the monthly benefit from $50 to $10. We recommend the Legislature adopt the Governor’s proposal to expand the WINS program, with the modifications described above. (If the Legislature does not adopt the Governor’s income and work-related child care eligibility proposals, the administrative complexity and potential costs of WINS Plus likely would be somewhat greater.) legislature has other oPtions for achieving calworks savings The Legislature may wish to modify the Governor’s proposals or pursue alternative options for achieving CalWORKs savings. Figure 10 provides a menu of options that summarizes the reductions proposed by the Governor, ways the Legislature could modify those proposals, as well as four additional approaches to consider. We discuss the four additional options below. Continue the Current-Year Single Allocation Reduction. The Legislature could consider continuing recent unallocated reductions to county block grants. In each of the last three years, the state has reduced county single allocation funding for employment services and child care as a means of achieving budgetary savings. In 2011-12, single allocation funding was reduced by $377 million. These reductions have been accompanied by expanded exemptions from work requirements, which allowed counties to manage the single allocation reduction by reducing employment services and child care caseloads. (With the 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 19 Figure 10 Options for Generating CalWORKs Savings Maximum Aid Payment Levels Current Law: A family of three with an eligible adult receives a monthly cash grant of $638. A family of three without an eligible adult (child-only, safety-net, and sanctioned cases) receives a monthly cash grant of $516. Governor’s Proposal: Reduce cash grants for child-only, safety-net, and chronically sanctioned (three sanctions in prior 12 months) by 27 percent (family of three receives a monthly cash grant of $375). Full-year savings would be around $610 million. Option: Implement a lesser reduction. Savings are reduced by about $100 million for each 5 percent increment below the Governor’s proposed 27 percent reduction. Option: Implement cash grant reduction on all CalWORKs cases. For each 5 percent reduction, savings are approximately $190 million. A reduction of 17 percent would generate roughly equivalent full-year savings to the Governor’s proposal. Option: Phasing in a 27 percent cash grant reduction for child-only, safety-net, and chronically sanctioned cases over six months would save about $390 million in 2012-13. Adult Time Limit Current Law: Able-bodied adults are eligible for up to 48 months of cash assistance, employment services, and subsidized child care. Governor’s Proposal: Reduce the adult time limit to 24 months for adults not meeting federal work participation requirements through unsubsidized employment. Prior months in which families were exempt from welfare-to-work would be counted toward the limit. Around $150 million in 2012-13 savings and $380 million in full-year savings. Option: Do not count prior months in exemption toward 24-month time limit, resulting in forgone full-year savings of about $90 million. Option: Shorten time limit to 36 months, resulting in savings of approximately $140 million. Cal-Learn Current Law: The Cal-Learn program provides supplementary intensive case management for CalWORKs teen parents who remain in school. This case management was suspended in 2011-12. Governor’s Proposal: Eliminate most of the Cal-Learn program, resulting in savings of $35 million. Higher Cash Grants for Work-Exempt Families Current Law: Work-exempt families (such as recipients of disability income and non-parent relative caretakers) receive a cash grant which is about 10 percent higher than other families. Governor’s Proposal: Eliminate higher cash grants for work-exempt families, saving about $50 million. County Single Allocation Current Law: A reduction to county single allocation funding and associated expanded welfare-to-work exemptions will expire at the end of 2011-12, resulting in increased CalWORKs expenditures of $377 million. Governor’s Proposal: None. Option: Continue the current-year single allocation reduction, resulting in savings of $377 million. Earned Income Disregard Current Law: A portion of a family’s earned income (the first $112 and 50 percent of the remainder) is disregarded in cash grant calculations. Governor’s Proposal: Decrease the earned income disregard by $112 for proposed Child Maintenance cases and increase earned income disregard to $200 and 50 percent for families meeting work participation requirements through unsubsidized employment. Option: Modify earned income disregard for all families to $225 and 25 percent resulting in savings of about $70 million. Sanctions Current Law: Families with an eligible adult who is not compliant with work requirements for three or more months are assessed a sanction equal to the adult portion of the cash grant. Governor’s Proposal: None. Option: Reducing cash grants for these families by 50 percent would result in savings of about $40 million. Time Limits for Long-Term Cases Current Law: Regardless of adult time limits, a family may receive aid on behalf of a child until the child turns 18-years old. Governor’s Proposal: None. Option: Reduce cash grants for families after an extended period on aid. Each 10 percent reduction in cash grants for families on aid for eight years or longer results in about $50 million in savings (ten years or longer results in about $30 million in savings). 2012-13 B u d g e T 20 Legislative Analyst’s Office www.lao.ca.gov exemptions, the number of sanctions for failure to meet work requirements has also declined accordingly.) To generate savings in 2012-13, the Legislature could extend the current-year single allocation reduction and associated exemptions and continue to save $377 million. One specific advantage of this option would be that these reductions have already been in place for three years, therefore continuing them would likely not result in a new reduction of service levels. However, the current single allocation reduction and exemptions come with a trade-off, as they weaken the work component of the CalWORKs program. That is, since the implementation of the expanded welfare-to-work exemptions, the percentage of adults participating in some work activities has decreased by 11 percent. Although some of this reduced participation could be attributable to other factors, such as the recent economic downturn, maintaining the current-year policies would likely have some negative effect on the state’s WPR, increasing the risk of federal penalties. Reduce the Earned Income Disregard. The Legislature could consider altering existing earned income disregard policies. In general, an earned income disregard has two primary effects: (1) to increase the incentive for families to begin working by reducing the amount of cash assistance lost from earnings and (2) to increase the earned income threshold at which families income out of CalWORKs. Reducing the earned income disregard generates savings primarily by decreasing benefits for families with relatively more resources. Such a change would also be likely to reduce incentives for CalWORKs recipients to pursue employment. However, it is possible to mitigate this effect by structuring the earned income disregard in a way that allows families to benefit considerably from initial earnings, while decreasing the amount of earned income disregarded at higher levels of earnings. For example, changing the earned income disregard to exclude the first $225 and 25 percent of all remaining earned income (current law excludes the first $112 and 50 percent of the remainder) would maintain about the same disregard for low levels of earnings, while reducing cash grants for families with the highest levels of earned income. Such a change would result in annual savings of roughly $70 million. Increase Sanctions Imposed for Noncompliance With Work Requirements. The Legislature could impose stricter sanctions on CalWORKs participants who fail to meet welfare- to-work requirements. Under current law, if a CalWORKs family with an able-bodied adult is not complying with work requirements, the family may be subject to a sanction, which reduces the family’s grant by the amount attributable to the adult. The severity of California’s sanction policy is less than most other states, many of which discontinue aid for an entire family due to continued noncompliance with work requirements. Research on the impact of sanctions suggests that the effects on welfare recipients are disparate. The segment of cases that respond to more severe sanctions with increased work participation generally experience increased economic well-being, while those that do not respond experience a state of increased poverty. In this regard, more severe sanction policies involve a difficult trade-off of likely increases in work participation with equally likely increases in poverty among some families. One possible option for increasing the severity of sanctions would be to reduce a family’s grant by 50 percent upon three months of noncompliance with work requirements. This option recognizes the trade-offs discussed above by not fully eliminating benefits for any family. This option would result in annual savings of around $40 million. Impose Time Limits After Long Periods of Aid. The Legislature also could consider reducing 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 21 benefits for families that have received aid for an extended period of time. Currently, slightly more than 100,000 cases in the CalWORKs program have received aid for eight or more years. Of these cases, around 65,000 have received aid for ten or more years. The largest segments of this caseload are safety-net families and families with undocumented parents. While many long-term cases are likely to face significant barriers to self-sufficiency, the needs of families that have already received extended assistance could be weighed against the needs of other CalWORKs families\u2014especially newer cases that have received comparatively less assistance. Reducing cash grants for families that have received aid for ten or more years by 10 percent would result in savings of around $30 million. Similarly, reducing cash grants for families that have received aid for eight or more years by 10 percent would result in savings of around $50 million. (In both cases, savings would be roughly equivalent for each additional 10 percent reduction.) chiLd carE As with CalWORKs, the Governor has major proposals related to the state’s subsidized child care and development (CCD) programs, including several policy proposals designed to achieve budgetary savings, as well as a proposal to restructure the CCD system. Below, we provide background on California’s CCD programs and a high-level overview of the Governor’s CCD budget package. We next describe and assess the Governor’s major savings proposals and identify other savings options the Legislature could consider were it to reject some or all of the Governor’s proposals. We then describe, assess, and offer modifications to the Governor’s restructuring plan. Background Subsidized Child Care Provided Through a Variety of Programs. Figure 11 (see next page) provides a description, as well as participation levels, for each of the state’s CCD programs. All programs currently are administered by the California Department of Education (CDE), with the exception of CalWORKs Stage 1, which is overseen by DSS. California traditionally has guaranteed subsidized child care for families that currently are participating or have participated in the CalWORKs program. However, budget reductions in 2010-11 and 2011-12 resulted in some eligible families not being served in the Stage 1 and Stage 3 programs. The state also funds subsidized child care slots for low-income working families that have not participated in CalWORKs. Because demand typically exceeds funded slots in these programs, waiting lists are used to prioritize access to non-CalWORKs care. As noted in the figure, about one-third of children attending the California State Preschool Program (CSPP) are supported by funding redirected from the General Child Care (GCC) budget. Families Currently Qualify for Subsidized Child Care for a Variety of Reasons. Under current law, families generally must meet two criteria to be eligible for subsidized child care. They must display need for care and earn less than 70 percent of state median income (SMI). (The part-day state preschool program is an exception in that need is not an eligibility requirement and up to 10 percent of families can exceed the SMI cap.) As long as families meet these requirements, their children can continue to receive services until they turn 13 years of age. Most families\u2014over 90 percent 2012-13 B u d g e T 22 Legislative Analyst’s Office www.lao.ca.gov of current child care cases\u2014need care because parents are engaged in work, vocational training, or pursuing an education. Parents who are employed may receive child care benefits for the hours they are working, with no set hourly requirements or time limits. Parents engaged in vocational training or attending school can receive benefits for up to six years, provided they pass at least half of their courses or maintain a 2.0 grade point average. (Parents whose children attend a publicly funded child care center located on a college or university campus, however, are not subject to the six-year limit.) Additionally, about 6 percent of parents currently receive subsidized child care benefits because they are medically incapacitated, seeking a job, or seeking permanent housing. (In each of these latter two categories, a parent may receive child care benefits for up to 60 days per year.) The remaining caseload is made up of children under the care of child protective services (CPS) or at risk of abuse or neglect. These children qualify for care regardless of family income. State Has Two Child Care Systems. As described in Figure 12, the state essentially has two distinct child care systems. One system consists of the three stages of CalWORKs child care and the Alternative Payment (AP) program\u2014programs for which parents are offered vouchers to purchase care from licensed or license-exempt caretakers. The CalWORKs Stage 1 program is funded by DSS and locally administered by CWDs. The remaining voucher programs are funded by CDE and locally administered by 82 AP agencies across the state. The CDE distributes funding to AP agencies, and they in turn issue payments to child care providers and monitor parents’ eligibility to receive services. (In 30 counties, CWDs have subcontracted with AP agencies also to run the Stage 1 program.) In contrast, under the second system, providers for the GCC, CSPP, Migrant, and Figure 11 Overview of State’s Child Care and Development Programsa 2011\u201112 Program Description Estimated Number of Slots CalWORKs Child Care Stage 1 Stage 1 begins when a participant enters the CalWORKs grant program. 45,000 Stage 2 CalWORKs families are transferred into Stage 2 when the family is deemed stable. Participation in Stage 1 and\/or Stage 2 is limited to two years after an adult transitions off cash aid. 65,000 Stage 3 A family may enter Stage 3 when it has exhausted its limit in Stage 2, and remain as long as it is otherwise eligible for child care. 25,000 Non-CalWORKs Child Care California State Preschool Program Part-day and full-day early childhood education programs for three- and four-year old children from low-income families. (Family does not need to be working to be eligible for part-day program.) 145,000b General Child Care One type of care for low-income working families not affiliated with CalWORKs program. 33,000 Alternative Payment Another type of care for low-income working families not affiliated with CalWORKs program. 33,000 Migrant and Severely Handicapped Programs targeted for specific populations of children. 6,600 Total 352,600 a Excludes support programs, which do not provide direct child care services. b Includes about 45,000 children funded through General Child Care program budget. 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 23 Severely Handicapped child care programs contract with and receive payments directly from CDE. These mostly center-based programs also include additional programmatic components not required for providers paid through the voucher system. Because these additional program requirements (including developmental assessments for children, rating scales for classroom environments, and professional development for staff) are contained in Title 5 of the California Code of Regulations, these direct contractors often are referred to as Title 5 centers. Voucher payments are based on regional market rates (RMR) and therefore vary across different areas of the state, whereas Title 5 providers all receive the same Standard Reimbursement Rate (SRR). Recent Reductions to Child Care Programs. In recent years, the state has made significant reductions to CCD programs and operations. Since 2008-09, overall funding for the CCD system has dropped by about one-quarter. In the past three years, the state has: eliminated funding for approximately 20 percent of slots, reduced payment rates for license-exempt providers, lowered income eligibility thresholds, eliminated the Latchkey after school program, reduced administrative allowances for AP agencies and reserve balances for Title 5 centers, eliminated the state’s Centralized Eligibility List, and reduced or eliminated several of the state’s quality improvement projects. Figure 12 State Has Two Subsidized Child Care Systems Voucher-Based System Direct Contractor System Description The California Department of Education (CDE) allocates funding to local Alternative Payment (AP) agencies.a The AP agencies issue vouchers to families, who in turn choose their own child care providers. The CDE contracts directly with child care providers for a certain number of slots. Eligible families enroll in these subsidized slots. Programs CalWORKs Stages 1, 2, and 3 General Child Care AP Program State preschool Migrant child care program Severely Handicapped Program Types of Providers Licensed centers and family child care homes (FCCHs) Licensed centers and FCCHs Relatives or friends providing child care without a license ( license-exempt ). Standards Licensed providers must meet basic health and safety standards and adhere Title 22 regulations. Must meet health and safety standards and adhere to more rigorous Title 5 regulations. Payment Rates Maximum voucher amounts are based on Regional Market Rates (RMR) and differ by county and age of child, with higher rates for infant\/toddler care. Contractors are paid at a daily Standard Reimbursement Rate (SRR) for each eligible child they serve. Current maximum rates for licensed providers are set at the 85th percentile of RMR, based on 2005 data. License-exempt providers can earn up to 60 percent of the region’s licensed rate. The SRR is the same in all regions of the state, with additional funds provided to centers that care for infants\/toddlers and children with special needs. Maximum monthly voucher rates for a preschool-age child in full-time licensed care range across counties from about $650 to about $1,110. The monthly rate for a preschool-age child in full-time care is about $715. a CalWORKs Stage 1 child care is funded through the Department of Social Services, not CDE, and is administered locally by county welfare departments. 2012-13 B u d g e T 24 Legislative Analyst’s Office www.lao.ca.gov overview of the governor’s Budget ProPosal Reduces Support for Subsidized Child Care Programs by 19 Percent. As shown in the top part of Figure 13, the Governor proposes to spend a total of $1.6 billion for child care programs in 2012-13\u2014a reduction of $391 million, or 19 percent, compared to the current year. Total state funding would decrease by $468 million, offset by a $77 million increase in federal funds. Because the 2011-12 Budget Act shifted state support for all CCD programs other than the part-day preschool program from Proposition 98 to non-Proposition 98 General Fund monies, we display funding levels for part-day preschool separately at the bottom of the figure. Budget reductions Governor’s Proposal Generates Savings From Three Major Changes. Figure 14 provides Figure 13 Child Care and Development Budget Summary (Dollars in Millions) 2010-11 2011-12 Reviseda 2012-13 Proposed Change From 2011-12 Amount Percent Child Care Expenditures CalWORKs child care Stage 1 $486 $429 $482 $54 13% Stage 2 458 442 292b -151 -34 Stage 3 288 152 121b -30 -20 Subtotals ($1,232) ($1,023) ($895) (-$127) (-12%) Non-CalWORKs child care General Child Carec $785 $675 $470 -$205 -30% Alternative Payment 271 213 158b -55 -26 Other child care 28 30 26 -4 -13 Subtotals ($1,083) ($918) ($654) (-$264) (-29%) Support programs $100 $76 $76 \u2014 \u2014 Totals $2,415 $2,017 $1,626 -$391 -19% Funding State General Fund Proposition 98 $856 \u2014 \u2014 \u2014 \u2014 Non-Proposition 98 29 $1,069 $609 -$460 -43% Other state funds 350 8 \u2014 -8 \u2014 Federal funds CCDF 602 533 548 15 3 TANF 467 406 468 62 15 ARRA 110 \u2014 \u2014 \u2014 \u2014 Part-Day State Preschool Expendituresd $397 $368 $310 -$58 -16% a Includes midyear trigger reductions totaling $23 million across all programs. Also includes $8 million midyear augmentation to Stage 3. b Governor’s proposal would combine funding for Stage 2, Stage 3, and Alternative Payment into one program. c Funding totals include about $400 million used for the California State Preschool Program. d All funding for part-day preschool program is from Proposition 98. CCDF = Child Care and Development Fund; TANF = Temporary Assistance for Needy Families; and ARRA = American Recovery and Reinvestment Act. 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 25 additional detail on the Governor’s specific changes to the child care budget. The Governor has three major savings proposals: (1) increasing parental work requirements, (2) lowering family income eligibility thresholds, and (3) reducing reimbursement rates for two categories of child care providers (displayed separately in the table). These proposals would lead to a combined $391 million in savings and over 63,000 fewer slots. About 75 percent of the savings results from the stricter work eligibility requirements. Below, we discuss each of the major proposed reductions, as well as offer some alternative options for the Legislature to consider if it were to reject some or all of the Governor’s proposals and decide to make different policy changes and\/or achieve a different level of overall CCD savings. (The figure also shows a $35 million augmentation for CWDs to ramp up their activities in anticipation of the proposed restructuring.) Work requirements Governor Reduces Child Care Eligibility by Applying Stricter Work Participation Requirements. The Governor proposes to institute minimum hourly work requirements and restrict the kinds of activities that qualify parents for subsidized care, generally consistent with the changes proposed for CalWORKs. Specifically, single-parent families with older children would have to work at least 30 hours of subsidized or unsubsidized employment each week. This requirement would be higher for two-parent households (35 hours) and lower for single parents with young children (20 hours). These new eligibility standards would apply to both CalWORKs participants and other low-income families receiving subsidized child care. The administration estimates these changes would eliminate eligibility for about 46,000 children from families whose parents are engaged in other activities\u2014which is about one-fifth of the state’s current child care caseload\u2014and yield savings of $294 million. New Eligibility Criteria Would Not Provide Subsidized Child Care on the Basis of Education and Training Activities. The Governor’s proposal would have the most notable effect on the roughly 31,000 children currently receiving subsidized child care while their parents are engaged in training or attending educational programs at adult schools, community colleges, four-year universities, and graduate schools. Under the Governor’s proposal, these families would have to make other child care arrangements (and assume any associated costs) or elect to stop going to school\/training and instead find a job in order to maintain child care eligibility. Families working fewer than the required number of hours also would be affected by the proposed changes, though the administration estimates that most currently employed parents already are meeting the new minimum work requirement. Figure 14 Governor’s Proposed Reductions to Child Care Programs (In Millions) Funding County ramp-up for child care restructuring $35 Limit eligibility to families meeting new work requirements -294 Reduce reimbursement rates for centers that contract with CDEa -68 Reduce income eligibility ceiling to 200 percent of federal poverty levela -44 Reduce maximum reimbursement rates for child care vouchers -17 Technical\/caseload\/adjustments -4 Total -$391 a Governor’s proposal also includes Proposition 98 reductions to part-day preschool program, not shown here. Specifically, proposal assumes $58 million savings ($34 million for lower reimbursement rates and $24 million for income eligibility change). CDE = California Department of Education. 2012-13 B u d g e T 26 Legislative Analyst’s Office www.lao.ca.gov Administration’s Estimates Likely Overstate Savings by Roughly $50 Million. We believe the administration has overestimated the number of children who would lose eligibility based on the proposed changes. As a result, we believe his savings estimate is overstated. Specifically, since the administration has clarified that the roughly 7,000 children under the care of CPS or living with an incapacitated caretaker would retain current eligibility, no savings should be scored associated with these populations. Accordingly, we estimate the Governor’s proposed changes would only eliminate about 39,000 slots and yield about $250 million in savings. Legislature Could Consider Modified Version of Governor’s Proposal. If the Legislature wishes to continue supporting low-income families furthering their education, it could consider adopting a modified version of the Governor’s proposal. The state could continue to provide child care to low-income parents engaged in training or education, but for a more limited period of time. Instead of the current six years (or indefinitely for parents using campus-based Title 5 child care centers), the state could limit child care eligibility based on educational activities to two years. This would allow parents a limited-term opportunity to pursue nonwork activities that might make them more employable in the long run, while at the same time prioritizing limited resources for those who currently are working. Because the state does not currently collect precise information on length of time in care, however, estimating how many families this would affect or the associated savings is difficult. Based on available data, we estimate the change could yield roughly $50 million in savings. To implement this change, the state would have to start keeping track of each family’s duration of and reason for care. income Eligibility Governor Reduces Income Eligibility Ceilings to 200 Percent of FPL. Currently, families eligible for the state’s CCD programs can earn up to 70 percent of the SMI. (The income ceiling was reduced from 75 percent to 70 percent of SMI in 2011-12.) The Governor proposes to lower this income eligibility threshold to 200 percent of the FPL, or about 62 percent of SMI. For a family of three, this would drop the maximum eligible monthly income from $3,518 to $3,090. (This change is linked to the Governor’s attempt to improve the state’s WPR through bringing non-CalWORKs families receiving subsidized child care into his proposed WINS Plus program. Under federal law, 200 percent of FPL is the maximum amount a family can earn to receive TANF-funded services.) After accounting for the reduced caseload from the stricter work participation requirements, the Governor estimates that changing income ceilings would terminate child care eligibility for about 8,400 children currently being served. The Governor would eliminate the funding associated with these slots, saving $44 million. (The Governor also would apply this change to Proposition 98-funded part-day preschool, saving an additional $24 million and eliminating an additional 7,300 slots.) Because It Prioritizes Service for Lowest Income Families, Governor’s Proposal Merits Consideration. While the Governor’s proposed change would reduce the number of families eligible to receive child care, as well as the overall number of available child care slots, it also would prioritize remaining slots for the state’s lowest income families. Moreover, our review of other states’ eligibility standards for subsidized child care indicates the Governor’s proposed level would be more comparable to policies in other states. Our review suggests that only ten other states set maximum income eligibility for child 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 27 care at or above 70 percent of their respective SMIs. In contrast, over half of all states set income ceilings at or below 62 percent of their SMIs and almost two-thirds of states set them at or below 200 percent of FPL. To achieve greater savings, the Legislature also could consider reducing income ceilings (and associated slots) even lower, to 50 percent of SMI (or 163 percent of FPL). We estimate about 15 states set child care eligibility at or below that threshold. Provider Payments Governor Reduces Maximum Reimbursement Rates for Most Child Care Providers. The Governor proposes to reduce the maximum amount the state will pay for licensed providers under both the voucher-based and direct contractor systems but maintain existing payments for caretakers who are not licensed by the state. Lowers RMR for Licensed Providers Paid Through Voucher System. Currently, the maximum voucher amounts the state will pay for licensed providers are set at the 85th percentile of RMR based on a 2005 survey of regional child care markets. The Governor proposes to reduce rates to the 50th percentile of RMR using 2009 survey data. Due to the updated data, the effective reduction to rates would be between 12 percent and 14 percent, on average. In Los Angeles county, for example, the proposal would drop the maximum daily voucher for a preschool-age child in full-time care from $43.27 to $37.79. Lowers SRR for Title 5 Direct Contractors. The Governor also would reduce the SRR by 10 percent, dropping the Title 5 per-child rate for full-day services from $34.38 to $30.94 and the part-day preschool rate from $21.22 to $19.10. Maintains Current Funding Rates for License-Exempt Providers. Because maximum voucher payments for license- exempt providers were reduced in both 2010-11 and 2011-12, the Governor does not propose additional reductions for this category of caretaker. The proposed rates for these providers would shift from 60 percent of current licensed rates to 73 percent of the newly lowered licensed rates\u2014leaving actual dollar amounts essen- tially flat. Proposed RMR Voucher Ceilings Are Comparable to Policies in Many Other States. Based on our review, the Governor’s proposed voucher rates are similar to\u2014and in some cases exceed\u2014reimbursement policies in other states. While nonbinding federal guidance recommends that states set maximum rates at the 75th percentile of RMR based on current data, only six states met this target in 2010. Many states set their rates at or below the 50th percentile of current regional rates. While lower voucher amounts would mean families might not be able to afford to patronize some providers who charge higher rates, the Governor’s proposal still would assure families access to half of all licensed child care providers in their region. (As under current law, families would have the option of selecting providers who charge more than the state’s maximum reimbursement level, but they would be responsible for paying the difference.) RMR Rate Reduction Merits Consideration . . . Because lowering RMR rates would generate savings without eliminating child care slots, we believe the Legislature should carefully consider the Governor’s proposal. Child care providers serving families that pay with vouchers would have to decide if they could (1) reduce their operating budgets to accommodate the voucher reduction or (2) continue to charge the same amount and have 2012-13 B u d g e T 28 Legislative Analyst’s Office www.lao.ca.gov subsidized families to make up the difference. In the latter case, parents who could not afford to pay more could switch to a provider that charges less. While the RMR proposal would limit families’ access to some higher-priced providers, parents still would be able to afford to choose from half of the providers in the region\u2014greater access to the market than is provided to families receiving subsidized child care in many other states. The Legislature also could consider lowering the maximum amounts paid to license-exempt providers\u2014which the Governor does not propose\u2014 although these rates have already been notably reduced in recent years. . . . But Recommend Rejecting SRR Proposal. We believe the Governor’s proposed 10 percent rate reduction for Title 5 centers is more problematic. While parents and providers working with the voucher system could respond to the proposed RMR reduction in a number of ways, Title 5 centers receiving lower state reimbursements would have no choice but to reduce their operating budgets. That is, state requirements around adult-to-child ratios and days of operation\u2014and, in many cases, school district collective bargaining agreements\u2014 leave these centers little flexibility to accommodate such a reduction. State law also prevents Title 5 centers from continuing to charge existing rates and asking parents to make up the difference. Moreover, the state rate for these centers already is somewhat low\u2014in several areas in the state, the SRR currently is lower than the rates charged by the majority of other providers in the county. As a result of these factors, we believe such a reduction could lead to many Title 5 centers closing, thereby reducing access to child care services. For all these reasons, we recommend the Legislature reject the proposed SRR rate reduction. Regardless of Whether Legislature Adopts Reductions, Recommend Basing Voucher Rates on Updated Data. Even if the Legislature opts not to reduce voucher rates for licensed providers, we recommend realigning the existing rates to the 2009 RMR survey data. We estimate that holding existing rate ceiling amounts\u2014currently based on the 85th percentile of 2005 RMR survey\u2014roughly constant would equate to about the 63rd percentile of the 2009 RMR survey. This change would allow the state to be transparent about what access current rates really provide to subsidized clients. Other Options for making reductions Figure 15 summarizes six CCD policy areas, including the three discussed above, that the Legislature could explore if it desired a different overall level of CCD savings or wanted to achieve savings in different ways than the Governor. Below, we discuss the three additional CCD policy areas not addressed in the Governor’s plan that the Legislature may wish to consider. Eliminate Care for Older School-Age Children During Traditional Hours. Because more supervision options are available for school-age children, the Legislature could consider prioritizing funds for infants and toddlers\u2014for whom care typically is more costly and harder to find. California funds an extensive before and after school program in which slots could be prioritized for school-age children displaced from CCD programs. Specifically, the state annually spends almost $550 million on the After School Safety and Education (ASES) program and an additional $130 million in federal funds for the 21st Century Community Learning Centers. Many schools and communities also run a multitude of other locally based after-hours programs for school-age children. The Legislature could consider eliminating subsidized child care during traditional hours (7:00 a.m. to 6:00 p.m.) for older school-age children given many of them could instead be served in school-based programs. (The Legislature adopted this policy for 11- and 12-year olds in its 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 29 initial 2011-12 budget plan, but the final 2011-12 Budget Act did not include the change.) If it chooses to pursue this option, we recommend the Legislature make corresponding Figure 15 Options for Generating Child Care Savings Work Requirements Current Law: Families are eligible for subsidized child care if they are engaged in work, training, or education. Governor’s Proposal: Limits eligibility to families working at least 30 hours in subsidized or unsubsidized employment (20 hours for parents of young children). Savings: $294 million. Option: Could limit child care for parents engaged in education\/training to two years. Savings: Roughly $50 million, though precise data are not currently available. Income Ceilings Current Law: Families are eligible for subsidized child care if income is less than 70 percent of state median income (SMI). Governor’s Proposal: Limits eligibility to families making less than 200 percent of federal poverty level (about 62 percent of SMI). Savings: $44 million. Option: Could reduce the maximum allowable income level for families eligible for subsidized child care to 50 percent of SMI. Savings: Additional $100 million. Voucher Rates Current Law: The maximum state voucher rate for licensed providers is set at the 85th percentile of regional market rates (RMR) based on 2005 data. License-exempt providers get 60 percent of licensed rate. Governor’s Proposal: Reduces licensed rate to 50th percentile of RMR, based on 2009 data. Equates to average reduction of between 12 percent and 14 percent. Maintains current dollar amounts for license-exempt providers, increasing percentage of licensed rates from 60 to 73. Savings: $17 million. Option: Could reduce the maximum voucher rate for license-exempt providers. Savings: About $20 million if licensed-exempt rate set at 60 percent of lowered licensed rate. Age Limits Current Law: A child is eligible to receive state subsidized child care through age 12 (with some exceptions for children with special needs). Governor’s Proposal: None. Option: Could provide subsidized care for school-age children ages 6-12 only during nontraditional hours, while prioritizing slots in school-based programs for displaced children. Savings: Approximately $65 million for 11- and 12-year olds and additional $50 million for 10-year olds. Parent Fees Current Law: Families must pay a child care fee if their income is at or above 40 percent of SMI. Family fees range from $2 to $19 per day and are capped at 10 percent of total family income. These fees partially offset state reimbursement. Governor’s Proposal: None. Option: Could reduce income level at which parents must begin to pay fee and\/or increase amount of fee required for families at each existing income level and\/or charge fees per child rather than per family. Savings: Tens of millions depending on how fee schedule changed. Time Limits Current Law: Families can receive subsidized child care as long as they meet income and child age eligibility. There are no maximum time limits for receiving care. Governor’s Proposal: None. Option: Could institute time limits for the total number of years a family is eligible to receive subsidized child care. Savings: Uncertain; data not currently available. Over time, limit of six years could yield at least $100 million. 2012-13 B u d g e T 30 Legislative Analyst’s Office www.lao.ca.gov changes to ASES and 21st Century requirements, including prioritizing enrollment for low-income children and extending days of operation to cover summer vacation and school breaks. (Because most ASES programs are fully enrolled, under this option some higher-income students who currently attend ASES programs would lose their slots.) To make this transition easier, the Legislature could explore offering ASES funding directly to child care centers. Even these changes, however, would not accommodate children whose parents work evenings and weekends when school-based programs are closed. As such, the Legislature could continue providing child care funding for school-age children during nontraditional hours. We estimate that about one-third of current school-age caseload relies on services provided during nontraditional hours. Assuming the Legislature stopped providing CCD funds for two-thirds of currently served 11- and 12-year olds (and gave these children priority for ASES), we estimate the state could save approximately $65 million. The state could save an additional $50 million by extending this policy to 10-year olds. Increase Parent Fees. The Legislature also has various options for increasing family fees to generate savings, including (1) lowering the income threshold at which families must begin to pay fees, (2) increasing the fee amount required per family, and\/or (3) charging fees on a per child basis rather than a flat fee per family. While other states structure fees in various ways\u2014making comparisons difficult\u2014California’s sliding scale for fees seems generally lower than most other states. Though savings would depend upon the specific changes enacted, we estimate raising family fees could generate tens of millions of dollars in savings. Impose Time Limits for Child Care Services. The Legislature also could consider instituting a cap on the number of years a family can receive subsidized child care services. Similar to the option of imposing time limits for CalWORKs cash assistance, the state could institute a cap on the total number of years each family can receive subsidized child care. In the short-term, the state would generate savings by eliminating funding for slots currently used by families who have been receiving care for many years. In the long-term, instituting a cap would allow limited resources to serve a greater number of families, as slots would turn over more often. However, given the limitations of existing data, it is unclear whether this change could take effect immediately because it may be difficult to ascertain how long currently served families already have received services. (Data may be easier to obtain for families who have received care through the CalWORKs system.) We estimate that a time limit of six years ultimately could generate at least $100 million in annual savings. Interaction of Different Proposals Will Affect Amount of Overall Savings. The savings estimates provided in Figure 15 assume the policy changes are implemented in isolation. Adopting multiple policy changes simultaneously would have interactive effects that could alter the amount of savings generated from each option. For example, were the Legislature to lower income eligibility to 200 percent of FPL, it would have eliminated eligibility for most of the families that currently pay the bulk of family fees, so a simultaneous increase to family fee levels no longer would generate as much savings. These interactive effects need to be taken into account when estimating the total savings associated with any particular package of changes. restructuring child care systeM Governor’s Proposal Begins Restructuring in 2012-13 by Consolidating Some Funding, Eliminating Some Program Distinctions. In 2012-13, the Governor 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 31 proposes to combine CalWORKs Stage 2 and Stage 3 funding with non-CalWORKs AP funding into one voucher-based block grant to be administered locally by AP agencies. First priority for vouchers would be for families receiving cash assistance through CalWORKs (in either the Basic or Plus program). Eligible working poor families not participating in CalWORKs also could apply to an AP agency for subsidized child care vouchers and be served to the extent the agency still has funding available after accommodating cash-aided families. (Remaining funding for vouchers would be prioritized for the lowest income eligible families.) As under current law, CWDs would continue to administer child care for families just entering the CalWORKs program (comparable to the existing Stage 1 program), and CDE would continue to contract directly with Title 5 centers for non-CalWORKs care in the CSPP, GCC, Migrant, and Severely Handicapped programs. Eligibility for child care services would be contingent on families meeting the Governor’s stricter work and income requirements. (The part-day preschool program would be subject to the lower income eligibility threshold but, as under current law, parents would not have to work or show need to receive services.) Shifts Child Care Administration to DSS and CWDs in 2013-14. Beginning in 2013-14, the Governor would collapse all remaining child care programs into one voucher-based program to be administered locally by CWDs. (The proposal includes $35 million for CWDs in 2012-13 to begin preparing for this shift.) The state no longer would contract directly with AP agencies or Title 5 child care centers. (Local CWDs could choose to subcontract with AP agencies to administer child care vouchers, as many do now for the CalWORKs Stage 1 program.) The CDE would continue to administer the part-day\/part-year preschool program currently funded with Proposition 98 funds but no longer would oversee any child care services. All child care monies\u2014including both state General Fund and the federal child care block grant\u2014would be appropriated to DSS to allocate to local CWDs. Families meeting work requirements and receiving cash assistance would continue to have first priority for receiving child care. Shifts Administration of Federally Required Quality Improvement Activities. As a condition of receiving federal child care block grant funds, the state must spend a certain amount on quality improvement activities. In 2011-12 the state is spending $72 million on 27 applicable projects, including professional development, stipends for child care providers that pursue additional education, and activities related to health and safety. Some of these projects\u2014including the 60 Resource and Referral agencies operating across the state\u2014are specified in the annual budget act, and some have been selected by CDE in consultation with stakeholders. Because the Governor’s plan would shift all program administration and funding\u2014including the federal child care grant\u2014to DSS beginning in 2013-14, DSS would then assume responsibility for reviewing and potentially revising the state’s approach to spending these quality improvement funds. During the transition in 2012-13, the Governor would have DSS and CDE jointly develop a spending plan, to be approved by the Department of Finance. Governor’s Proposals Also Would Shift Administration of Recent Federal Grant Award. California recently attained a $53 million federal Race to the Top (RTTT) Early Learning Challenge Grant to develop locally based quality rating systems for CCD programs. The CDE is the lead agency charged with administering this grant, which is to be expended over four years beginning in spring 2012. The Governor’s proposal would shift responsibility for administering this grant to DSS beginning in 2013-14. It is unclear whether 2012-13 B u d g e T 32 Legislative Analyst’s Office www.lao.ca.gov the administration also proposes to change the plan for using these funds. Any modification likely would require federal approval. (The state also is in the middle of spending an $11 million federal American Recovery and Reinvestment Act grant received in 2010. Because federal guidelines require that this grant be fully expended by September 2013, these activities are not likely to be altered by the Governor’s proposed restructuring.) Enhances Overpayment Prevention Activities Beginning in 2013-14. The Governor also is proposing to increase prevention and enforcement related to child care overpayments. Specifically, beginning in 2013-14 state law would require CWDs and AP agencies to identify and recapture funding in instances where (1) a family received care for hours they were not eligible or (2) providers received payments for hours in which they did not actually provide care. The proposed legislation also would impose sanctions both on agencies that do not reduce the incidence of overpayments and on providers and families who commit intentional program violations. Any recaptured monies would be redirected to fund child care slots. Governor’s Proposal Would Streamline complicated System We believe the Governor’s restructuring proposal has many advantages. However, we also have a number of concerns and questions about how the plan would be implemented. Program and Funding Consolidation Would Create One Unified Child Care System. We believe the Governor’s attempt to consolidate, streamline, and prioritize the state’s overly complicated child care delivery systems has merit. The proposal would replace multiple state programs\u2014and multiple reimbursement rates, contract administration, standards, and eligibility criteria\u2014with one unified approach. A streamlined system would treat similar families and similar providers similarly, and hold all to the same set of requirements using the same funding model. Moreover, the proposal offers opportunities for child care to become a part of a coordinated and integrated system of local services, as CWDs oversee CalWORKs as well as a wide array of other social service programs. Restructuring Provides Opportunity to Revisit Current Quality Improvement Activities. Some have raised concerns that shifting administration of the federal child care block grant and oversight of associated quality improvement projects from CDE to DSS would discontinue the educational focus of the CCD system. However, appointing DSS as the lead agency over the child care system does not necessarily mean that current projects would be terminated or that the state’s commitment to providing quality CCD services\u2014and CDE’s involvement in these efforts\u2014necessarily would end. The large majority of other states administer their federal child care funds (and associated required quality improvement projects) through their state social services agencies, and many have well-respected early childhood education systems. Moreover, many of California’s existing 27 quality improvement projects might be worthwhile, but they have not been rigorously evaluated and it is unclear the degree to which they are coordinated or effective. The Governor’s proposal offers an opportunity for the state to rethink how best to support and improve CCD services\u2014particularly in coordination with the new federal RTTT grant. Because of CDE’s experience and expertise in this area, as well as its continuing role in the state preschool program, CDE could continue to play a collaborative role in these statewide efforts\u2014even if DSS and CWDs administer most CCD program payments at the local level. Unaddressed Issues Relating to Child Care Services for Non-CalWORKs Families. At the time this analysis was being prepared, the administration had not yet released details as 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 33 to how child care funding would be allocated to CWDs in the future. In particular, the administration had not yet clarified whether the funding would be a part of the county single allocation or one or more separate grants restricted for child care services. The current system earmarks funding explicitly to provide subsidized child care to some non-CalWORKs low-income families through the GCC and AP programs, although demand typically exceeds the number of funded slots. Depending on the specific funding structure for the new county-based system, local funding constraints and competing priorities could result in even more limited access to care for non-CalWORKs families. Specifically, first calls on single allocation funding would go not just to fund child care for families on cash assistance but also to employment support services and county administrative costs. Proposal Ignores Reality of State’s Current Preschool Program. We also have a technical concern with the Governor’s proposal for 2013-14. Chapter 308, Statutes of 2008 (AB 2759, Jones), allows local providers to merge monies from the Proposition 98 part-day preschool budget item and the GCC budget item to offer the preschool services that best meet the needs of working families and three- and four-year olds in their local communities. The Governor’s proposal treats these as two separate programs\u2014preserving one and eliminating the other. However, in reality these funding sources have been supporting one blended preschool program at the local level. The state currently serves approximately 145,000 low-income children in the CSPP, with about two-thirds in part-day programs and one-third in full-day programs. Data from CDE suggest that in 2011-12, local providers funded CSPP services by blending $368 million in Proposition 98 funds with about $400 million from the GCC program (or about 60 percent of total GCC funding). Proposal Likely Would Reduce State’s Center-Based Preschool Services. By eliminating the entire GCC program in 2013-14 and shifting the associated funding to a CWD-administered voucher system, the proposal would abolish the blended CSPP and revert to only a Proposition 98 funded part-day\/part-year program. This part-day program would serve about 91,000 children (a reduction of roughly 54,000 compared to how many children were served in CSPP in 2011-12 when combined with proposed Proposition 98 preschool reductions). Preschool providers’ ability to serve additional children or offer full-day\/ full-year services to meet the needs of working families would be limited to how many enrolled families could afford to pay out of pocket or obtain one of the limited number of state-subsidized vouchers from the CWD. Relying Solely on Voucher System Would Be Notable Departure From Current Practice. The Governor’s proposal to shift local administration of voucher-based child care services from AP agencies to CWDs would maintain a similar structure to what currently exists. By comparison, the proposal to eliminate direct-contracting practices for existing GCC and migrant child care centers would represent a more substantial departure from current practice. Many of these centers likely would continue to operate and serve subsidized families but be paid with vouchers rather than directly from the state. Presumably, switching to a solely voucher- based system means the state no longer would require these centers to follow existing Title 5 programmatic standards regarding classroom practices and activities, child assessments, and staff development. (These requirements would remain for state preschool programs, and the CSPP currently accounts for 80 percent of all children attending Title 5 centers. As noted, however, the Governor’s proposal would shift the GCC-funded portion of the CSPP to the new voucher program.) 2012-13 B u d g e T 34 Legislative Analyst’s Office www.lao.ca.gov Though presumably no longer required, centers could opt to continue Title 5 practices, as many non-Title 5 centers currently do. adopt modified version of Governor’s restructuring Proposal We recommend the Legislature adopt the Governor’s proposal to streamline the state’s CCD system\u2014with some important modifications. Adopt Governor’s Restructuring Proposal but Maintain Child Care Funding as Separate County Block Grant. Because it would streamline the state’s overly complex and poorly designed child care delivery systems, we recommend the Legislature adopt the Governor’s restructuring proposal, including the plan to use 2012-13 as a transition year. As part of this restructuring, the Legislature could apply generally consistent child care eligibility requirements to all qualifying low-income families (both CalWORKs and non-CalWORKs families). We believe this restructuring makes sense regardless of what budgetary reductions the Legislature adopts for CalWORKs and subsidized child care. However, we recommend that when funds shift to CWDs in 2013-14, they be maintained as a separate county- administered block grant dedicated for child care services, rather than included as part of the CWDs’ single allocation. This would ensure the monies are used for their intended purpose, and make it more likely that some child care funding would continue to be available for non-CalWORKs families after accommodating families receiving cash assistance. We also recommend the Legislature restrict the amount of the block grant that counties can dedicate to administrative costs (as it does for AP agencies under the current system). Align Full CSPP Funding Within One Proposition 98 Budget Item. Before consolidating other child care programs, we recommend the Legislature accurately reflect the existing CSPP budget and align all funding for the program within Proposition 98. (As part of the alignment, we recommend a comparable adjustment to the Proposition 98 minimum guarantee to avoid the need for a corresponding reduction to K-12 programs.) Specifically, we recommend the Legislature reduce non-Proposition 98 General Fund for GCC by $400 million (the amount of GCC funds spent for CSPP services in 2011-12) and increase Proposition 98 funding for preschool by a like amount. This would allow the state to make policy and budget decisions affecting preschool services for four-year olds based on actual programmatic funding and caseload counts. It also would preserve Title 5 programmatic requirements for the majority of current centers, focusing on the age-group that research suggests benefits the most from school-readiness activities. We also recommend the Legislature preserve the existing flexibility for CSPP providers to offer full-day services for working families who want to send their children to preschool and still have their care needs met. Maintain Legislative Oversight Over Quality Improvement Activities and Federal Grant. We recommend the Legislature continue to take an active role in encouraging and overseeing activities that support a high-quality CCD system. Specifically, the Legislature could provide guidance to DSS by including broad spending objectives or even specific activities for the quality improvement funds within the annual budget act. It also could direct DSS to work collaboratively with CDE and legislative representatives to develop future priorities for these funds. Based on these collaborative plans, the budget act could assign roles and\/or allocate funds to CDE for specific projects where expertise in early childhood education is important. Additionally, through its appropriation authority, we recommend the Legislature monitor the activities and expenditures 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 35 associated with the $53 million RTTT grant to ensure the projects are meeting intended outcomes, particularly if grant administration shifts from CDE to DSS in the middle of implementation. Regular reports to budget subcommittees could help identify issues, improve state oversight, and inform the Legislature as to how best to encourage local efforts to support quality programs. adOPt a PacKaGE OF rEductiOnS BaSEd On PriOritiES We recommend the Legislature use the menus of options provided in the earlier sections of this report to construct its own CalWORKs and CCD budget packages. Figures 16 and 17 provide illustrations of potential CalWORKs and CCD budget packages, respectively. While we present CalWORKs and CCD packages separately, the Legislature could consider the two policy areas together and adopt policy changes that result in savings across both programs\u2014as the Governor does with his work participation proposals. Final Packages Would Depend Upon Magnitude of Savings Sought. Both CalWORKs and CCD programs have experienced notable reductions in recent years. Given the magnitude of these recent reductions, the Legislature may choose not to cut as deeply in 2012-13 as the Figure 16 Illustrative CalWORKs Budget Packages Savings of Approximately $500 Million Continue the current-year single allocation reduction. Eliminate higher work-exempt cash grants. Eliminate Cal-Learn case management. Reduce the earned income disregard. Savings of Approximately $750 Million All items above. Reduce cash grants for all families by 6 percent. Savings of Approximately $1 Billion All items above. Reduce cash grants by 10 percent after eight years of aid. Reduce cash grants by 15 percent after ten years of aid. Shorten adult time limit to 36 months. Figure 17 Illustrative Child Care and Development Budget Packages Savings of Approximately $100 Million Subsidize child care only during nontraditional hours for 12-year olds. Reduce income ceilings from 70 percent to 60 percent of state median income (SMI). Raise parent fees. Savings of Approximately $250 Million All items above. Subsidize child care only during nontraditional hours for 11-year olds. Reduce income ceilings from 60 percent to 50 percent of SMI. Reduce licensed voucher rates to 50th percentile of 2009 regional market rates. Savings of Approximately $400 Million All items above. Subsidize child care only during nontraditional hours for 10-year olds. Set license-exempt voucher rates at 60 percent of lowered licensed rates. Limit eligibility for child care for parents engaged in training or education to a total of two years. Limit eligibility for child care to total of six years (achieves saving in future years). 2012-13 B u d g e T 36 Legislative Analyst’s Office www.lao.ca.gov Governor proposes. Additionally, due to the nature of these programs and the vulnerable populations they serve, any reductions made to these programs will have negative effects on families that will lose cash assistance and child care. We therefore present examples of CalWORKs and CCD budget packages that include fewer reductions than the Governor proposes. However, in recognition of the state’s need to address its budget problem, we also offer illustrative packages that achieve approximately the same level of savings as the Governor. Each CalWORKs and CCD package builds upon the previous set of reductions. For example, the CCD package worth $250 million assumes all of the policy changes that are included in the $100 million package, and then makes an additional $150 million in reductions. To the extent the Legislature adopts a combined package that results in fewer savings, it would need to make additional reductions to other areas of the state budget to achieve the same overall level of solution as the Governor. Final Packages Will Depend on How Legislature Weighs Trade-Offs. Similar to the past several years, the state faces a number of trade-offs and challenges in putting together its overall budget plan for 2012-13. In general, the Legislature will have to weigh the trade-offs of further reducing CalWORKs and child care programs and the resulting effects on the populations they serve, against its need for savings and the limited options for making reductions in other areas of the budget. As it grapples with a specific approach to building budget packages for these programs, we recommend the Legislature consider striking a balance between various competing program objectives. For CalWORKs, this means balancing efforts to encourage greater work participation with a recognition of the barriers some families face to working. For child care, this means balancing efforts to maximize the number of children who can be served with the quality of their supervision. For the overall state budget, this means balancing efforts to achieve needed savings while still protecting those services the Legislature deems essential. By identifying a broad menu of savings options, we hope this report helps the Legislature as it determines how best to balance these multiple sets of competing objectives. 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 37 2012-13 B u d g e T 38 Legislative Analyst’s Office www.lao.ca.gov 2012-13 B u d g e T www.lao.ca.gov Legislative Analyst’s Office 39 2012-13 B u d g e T LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 40 Legislative Analyst’s Office www.lao.ca.gov Contact Information Mark C. Newton Deputy, Health and Human Services 319-8323 [email protected] Jennifer Kuhn Deputy, Education 319-8332 [email protected] Brian Uhler CalWORKs 319-8328 [email protected] Rachel Ehlers Subsidized Child Care 319-8330 [email protected] ”

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/708): failed to open stream: HTTP request failed! HTTP\/1.1 404 Not Found “}

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/706): failed to open stream: HTTP request failed! HTTP\/1.1 404 Not Found “}

” Approach to the 2011-12 CalWORKs Budget L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 Presented to: Assembly Budget Subcommittee No. 1 On Health and Human Services Hon. Holly Mitchell, Chair 1L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Major Budget Solution. As shown in the table below, the Governor’s budget proposes a series of California Work Opportunity and Responsibility to Kids (CalWORKs) solutions, which total about $1.5 billion General Fund. If adopted, the savings would represent a 50 percent reduction in net General Fund costs for CalWORKs compared to the workload budget. When federal funds are included, the total reduction is about 25 percent of program costs. \uf0fe Handout Organization. This handout (1) provides background on the CalWORKs program, (2) explains the funding structure, (3) reviews the state’s compliance with federal work participation rules, (4) discusses each of the Governor’s proposals, (5) presents alternative approaches to achieving savings, and (6) concludes with an alternative package which would achieve about $850 million in General Fund solution. CalWORKs Program Governor’s Proposed Solutions (General Fund Benefi t, in Millions) Program\/Solution 2010-11 2011-12 Establish 48-month time limit \u2014 $833 Reduce grants by 13 percent $14 405 Reduce county block grants \u2014 377 Repeal July 2011 sanctions and time limits \u2014 -135 Reduce age eligibility for child care \u2014 34 Totals $14 $1,514 Overview 2L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Participation Requirements. The CalWORKs program requires adults in single-parent families to participate in work or approved education or training activities for 32 hours each week. An adult recipient in a two-parent family must participate for 35 hours per week. There are certain exceptions related to age or disability. \uf0fe Welfare-to-Work Services. CalWORKs recipients receive services including: job search, assessment, welfare-to-work activities (education and training), and community service and work experience. Following the assessment, counties and recipients develop individualized welfare-to-work plans. Child care is provided when needed for participation. \uf0fe Sanctions. The sanction for failure to participate in work activities or community service is removal of the adult portion of the grant. \uf0fe Five-Year Time Limit\/Safety Net. After fi ve cumulative years on aid, the amount of the CalWORKs grant is reduced by the portion for the adult. After the adult is removed from the grant, the children continue to receive a child-only grant in a program informally known as the safety net. \uf0fe Federal Penalties. Federal law requires states to have specifi ed percentages of their caseloads engaged in work or work-related activities. Failure to meet these requirements results in penalties of up to 5 percent of a state’s federal block grant, with increasing penalties for consecutive failures. \uf0fe Earned Income Disregard. By disregarding the fi rst $225 earned each month, as well as 50 percent of any further earnings, CalWORKs recipients can work and have combined income and benefi t levels above the federal poverty guideline. CalWORKs Background: Participation Requirements, Services, Child Care, Sanctions, and Time Limits 3L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Federal Block Grant. Each year, California receives a $3.7 billion federal Temporary Assistance for Needy Families (TANF) block grant. Unspent TANF block grant funds may be carried over indefi nitely from one fi scal year to the next. The TANF funds may be expended on activities which are reason- ably calculated to meet a purpose of the TANF program. \uf0fe TANF Purposes. The four stated purposes of TANF are: (1) assisting needy families so that children can be cared for in their own homes; (2) reducing the dependency of needy parents by promoting job preparation, work, and marriage; (3) preventing out-of-wedlock pregnancies; and (4) encouraging the formation and maintenance of two-parent families. \uf0fe TANF Transfers. States may also transfer some of their TANF funds into the Title XX Social Services Block Grant or the Child Care Development Fund. Although TANF is the primary federal source of funding for the CalWORKs program, the broad purposes of TANF and fl exible transfer provisions allow states to use TANF funds for many different programs. In addition to existing transfers, the Governor’s budget proposes to transfer approximately $950 million to the Student Aid Commission to offset costs there. \uf0fe Maintenance-of-Effort (MOE). To receive the block grant, California must expend $2.9 billion annually. Typically, the General Fund appropriation for CalWORKs provides about $2 billion of the required MOE. The remaining MOE funding comes from county expenditures and expenditures in other state departments, such as child care spending in the Department of Education. \uf0fe Conclusion: Block Grant and MOE Provide State Flexibility. The block grant and MOE fi nancing structure of TANF give states a lot of fl exibility to spend on CalWORKs or other programs without losing federal funds. CalWORKs Funding 4L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Recent History. For the past fi ve years, California’s work participation rate has been in the mid-20s. The federal Defi cit Reduction Act reduced a caseload reduction credit the state had received, and thus increased California’s obligation to get recipients to participate in work or other allowable activities. For 2007 and 2008, California’s participation rate was below the federal requirement. \uf0fe Penalty Status. For 2007, the federal Administration for Children and Families (ACF) provided California with relief from work participation requirement penalties. For 2008, California is claiming reasonable cause for missing the federal requirement. To date, the ACF has not responded to California’ May 2010 letter claiming reasonable cause. \uf0fe Focus First on Budget Solution, Secondarily on Work Participation. The TANF program is authorized through September 2011. Given the uncertainty regarding what actual participation rules and requirements may be in the future, we recommend that in the short term the Legislature focus primarily on fi nding budget solutions in CalWORKs that are consistent with the Legislature’s program goals. With respect to work participation, we recommend that the Legislature take a longer-term view. Work Participation Status Federal Work Participation Requirement and California Work Participation Rate 2003-2008 2003 2004 2005 2006 2007 2008 Federal requirement 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% Caseload reduction credit -44.2 -46.1 -45.5 -44.9 -17.7 -21.0 Effective requirement 5.8 3.9 4.5 5.1 32.3 29.0 Work participation rate 24.0 23.1 25.9 22.2 22.3 25.1 Surplus\/Shortfall 18.2% 19.2% 21.4% 17.1% -10.0% -3.9% 5L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Current Law. As part of the 2009-10 budget plan, the Legislature created a system of shortened time limits for most families, increased sanctions, and new service obligations for families affected by these policies commencing July 1, 2011. These changes could reduce grant levels below those currently provided in the safety net, but all families would retain some level of assistance. \uf0fe Repeal Changes and Replace With New Time Limit. The Governor proposes to repeal these changes. Their elimination would result in General Fund costs of approximately $135 million in CalWORKs. (It also results in Stage 2 child care savings of about $34 million, which are budgeted in the Department of Education.) As discussed below, the Governor proposes to replace these changes with a new time limit with substantially greater impacts on recipients and the budget. \uf0fe Recommendation. We concur with the proposal to repeal the July 1, 2011 sanctions and time limits. We believe these changes would be confusing to clients and administratively cumbersome at the county level. In our view, there are better ways of achieving savings, as discussed below. Governor’s Proposal: Repeal July 2011 Sanctions and Time Limit Modifi cations 6L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Summary of Proposal. Effective July 1, 2011, the budget proposes to establish a 48-month time limit, applied retroactively, on the receipt of CalWORKs cash assistance for all recipients. This would apply to both adults and children, with narrow exceptions for non-needy caretaker relatives and adults receiving Supplemental Security Income\/State Supplementary Program. Previous months of cash aid would count toward the 48-month limit, including months in which a recipient had been exempted from work participation requirements or was tempo- rarily disabled. However, children in families in which the adult was meeting federal work participation requirements would be allowed to receive aid beyond 48 months. Impacts of Proposal \uf0fe Fiscal Impact. The proposed time limit results in savings of approximately $833 million. \uf0fe Impact on Recipients. The Department of Social Services (DSS) estimates that, under this proposal, approximately 115,000 families and 234,000 children would lose cash assistance. This proposal essentially ends the CalWORKs safety net for children unless their parents can meet federal work participation requirements. \uf0fe Impact on Work Participation. This budget assumes that approximately 32,000 cases subject to the 48-month limit would meet federal work participation requirements. The DSS estimates that the proposal would raise the work participation rate by about 10 percent when fully implemented. \uf0fe Impact on General Assistance. Under current law, children who lose benefi ts under this proposal would probably be eligible for county-funded General Assistance. We understand the administration intends to put forth a trailer bill proposal to restrict children’s eligibility for General Assistance once they have Governor’s Proposal: Retroactively Establish 48-Month Time Limit for Children and Adults 7L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 received 48 months of CalWORKs aid. If children are eligible for General Assistance, this proposal could result in county costs in the hundreds of millions of dollars. \uf0fe Impact on County Costs. Although the proposal assumes that about 32,000 families subject to the time limit will meet work participation requirements, there is insuffi cient funding available to provide child care and services for all of these families. Moreover, determining which families are eligible by meeting federal participation requirements would be administratively diffi cult for the counties because it would require some individualized case reviews. Alternatives to the Proposal \uf0fe Prospective Implementation. The Legislature could implement the time limit prospectively for families that have not received 48 months of welfare-to-work services and child care. For families that have received nearly 48 months of services, the Legislature could provide at least one year of services before implementing the time limit on their children. \uf0fe Shorten the Time Limit Only for Adults. The Legislature could shorten the time limit to 48 months for adults, but maintain the safety net portion of the grant for the children. \uf0fe Reduce Safety Net Benefi ts for Families Not Meeting Participation Requirements. Rather than total benefi t termina- tion, the Legislature could impose a 50 percent grant reduction on safety net families in which the adult does not meet federal work participation requirements. Alternatively, the Legislature could remove a family from cash assistance if the adult refuses to participate in a community service or subsidized job. Governor’s Proposal: Retroactively Establish 48-Month Time Limit for Children and Adults (Continued) 8L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Proposal. Effective June 2011, the budget proposes to reduce grants by 13 percent as shown in the table. This results in General Fund savings of $14 million in 2010-11 and $405 million in 2011-12. The table below shows the proposed grant levels. Impacts of Proposal \uf0fe Impact on Poverty. The proposal would reduce the combined grant and CalFresh benefi t to the equivalent of just about 70 percent of the federal poverty guideline, depending on the county of residence. For the past few decades, California’s combined grant and CalFresh benefi ts has typically been between 75 percent and 80 percent of the federal poverty guideline. \uf0fe Impact on Caseload. The proposal would remove about 5,500 families from cash assistance. These would be families with earned income of about $1,400 per month or higher, depending on county of residence. Governor’s Proposal: Reduce Grants by 13 Percent CalWORKs Maximum Monthly Grant and CalFresh Benefi ts Family of Three Current Law Governor’s Budget Change From Current Law High-Cost Counties Grant $694 $604 -$90 CalFresh benefi tsa 460 485 25 Totals $1,154 $1,089 -$65 Percent of Poverty 76% 71% Low-Cost Counties Grant $661 $575 -$86 CalFresh benefi tsa 470 487 17 Totals $1,131 $1,062 -$69 Percent of Poverty 74% 70% a Formerly known as food stamps. Benefi t amount is based on the average allotment for families with zero earned income. 9L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 Governor’s Proposal: Reduce Grants by 13 Percent (Continued) \uf0fe Impact on Work Participation. Due to the removal of the 5,500 families with earned income, the work participation rate would decrease by about 1 percent when fully implemented. Alternative \uf0fe Phased Implementation. Historically, California has never reduced grants by more than 6 percent at one time. The Legislature could consider phasing in the 13 percent reduction over the next fi scal year, allowing aided families to adjust their spending commitments. For example the Legislature could reduce grants by 6.5 percent on June 1, 2011 and an additional 6.5 percent on January 1, 2012. This approach would reduce the savings in 2011-12 to about $300 million. 10L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Background. For 2009-10 and 2010-11, the Legislature reduced the county block grants for welfare-to-work services and child care by approximately $375 million each year. This two-year reduction was accompanied by additional exemptions from work participation requirements which allowed counties to manage the reduction by not providing services to the exempted families. Prior budget legislation also provided that, for any month for which a recipient has been excused from work participation requirements due to lack of support services, the case does not count toward the state’s time limit for their receipt of cash aid. \uf0fe Proposal. The Governor’s budget proposes to continue an unallocated reduction of $377 million in county block grants while repealing the exemptions. \uf0fe Impact of the Proposal. During the past two years, counties exempted approximately 39,000 cases from participation in order to manage the reduction in funding. Absent the specifi c exemp- tions, counties will need to make case-by-case fi ndings of good cause for nonparticipation in order to not provide services. This is administratively cumbersome. Governor’s Proposal: Continue County Block Grant Reduction While Repealing Participation Exemptions 11L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 Alternatives \uf0fe Provide County Flexibility. If the Legislature makes the unallocated reduction, we recommend adopting similar work participation exemptions or some other mechanism to allow counties more fl exibility. \uf0fe Further Reductions to Welfare-to-Work Services. Another potential budget solution would be to increase the Governor’s proposed $377 million reduction in accordance with increased fl exibility. Possible approaches include: \uf06e Expanding the Age Exemption. The age exemption could be increased to include children ages three and four. \uf06e Temporal Exemptions. Rather than creating additional exemption categories, the Legislature could create periodic exemptions. For example, after one year of services, recipi- ents could be given a one-year exemption from participation and services followed by another year of services. In order to keep the welfare-to-work message strong from the start, all incoming adults would be provided services. This approach could balance the importance of providing access to services for recipients with the time limits imposed on them to move off of aid. Governor’s Proposal: Continue County Block Grant Reduction While Repealing Participation Exemptions (Continued) 12L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 Modify Earned Income Disregard \uf0fe Background. Under current law, California disregards (does not count) the fi rst $225 of income and 50 percent of each dollar earned beyond $225 when calculating a family’s monthly grant. This policy provides a work incentive for families. \uf0fe Proposal: Simplify the Disregard. The Legislature could modify the disregard by eliminating the complete exclusion of the fi rst $225 of earned income. When fully implemented, savings in the range of $200 million annually could be achieved by simplify- ing the disregard to a fl at 50 percent of all income earned. These savings are based on current law grant levels. Savings would be less, if grants are reduced as the Governor proposes. \uf0fe Impact on Grants. For families earning more than $225 per month (about 125,500 cases), their grants would be reduced by $112.50. For families with earnings below $225 per month (about 16,500 cases), grants would be reduced by an amount equal to 50 percent of their earnings. \uf0fe Impact on Caseload. Approximately 5,600 cases with incomes above $1,200 per month would be removed from assistance. \uf0fe Impact on Work Participation. Assuming no change in behavior, this proposal would reduce the work participation rate by about 1 percent. LAO CalWORKs Alternatives 13L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 Expand Subsidized Employment \uf0fe Background. During 2009 and 2010, counties used the federal TANF Emergency Contingency Fund (ECF), along with other county and private resources, to create approximately 20,000 subsidized jobs for CalWORKs recipients. The TANF ECF expired in September 2010. However, under current state law\u2014Chapter 589, Statutes of 2007 (AB 98, Niello)\u2014counties may receive a match from the state toward the cost of provid- ing a subsidized job. The match is capped at 50 percent of the maximum grant. When a client receives a subsidized wage, their grant is reduced, in part offsetting the cost of the subsidy. \uf0fe Interaction With Earned Income Disregard. If the Legislature increases the earned income disregard as described above, this would increase the state savings from providing subsidized employment positions. Essentially, the state could double the amount of available funding per job and the cost would be offset by grant savings. In order to hold the state costs harmless, counties would need to reprioritize within existing child care allocations. \uf0fe Benefi ts of Subsidized Employment. When recipients participate in subsidized employment, they develop coping and life skills that allow them to compete for nonsubsidized jobs. They are also eligible for the federal Earned Income Tax Credit, which brings additional federal funds into California. \uf0fe Consider Expanding Subsidized Employment. If the Legislature increases the earned income disregard, we would recommend expanding the AB 98 subsidized employment program. Under this proposal, the state participation in wages would be capped at the maximum grant or 50 percent of the subsidized wage, whichever is less. This change would be budget neutral in the short run, with potential savings in the long run if recipients successfully transition into nonsubsidized jobs. LAO CalWORKs Alternatives (Continued) 14L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 Suspend Cal-Learn for Five Years \uf0fe Background. The Cal-Learn program provides intensive case management to about 12,000 teen parents who remain in school. Depending on school performance, the teens may earn bonuses and sanctions. \uf0fe Proposal. Suspending this program for fi ve years would result in $50 million in savings annually. \uf0fe Impact on Recipients. Approximately 11,000 teen parents would not receive case management, or school performance related bonuses and sanctions. They would be eligible for regular welfare-to-work services to the extent there was suffi cient funding in their county of residence. LAO CalWORKs Alternatives (Continued) 15L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 Diffi cult Balancing Act \uf0fe Maintaining Program Goals. The Legislature’s policy goal for CalWORKs has been to (1) maintain a safety net for low- income families with children who cannot support themselves; (2) encourage CalWORKs recipients to become self-suffi cient through work, education, and training; and (3) preserve a county-run delivery system committed to these goals. \uf0fe Obtaining Signifi cant Savings. The Legislature can control costs in CalWORKs through eligibility rules, grant levels, and the availability of welfare-to-work services to assist recipients in becoming self-suffi cient. Because of the federal block grant, substantial General Fund savings can be achieved without a loss of federal funds. Given the state’s budget defi cit the Legislature must achieve substantial savings in all major program areas, including CalWORKs. \uf0fe Key Questions. As it evaluates the Governor’s proposals and considers the tradeoffs between program goals and the need for savings, we suggest the Legislature focus on the following questions. \uf06e Do the proposals allow some level of core services to be maintained? \uf06e Do the proposals work together and complement each other? \uf06e Are the proposals consistent with program goals? Roadmap for the Legislature on CalWORKs Budget Reductions 16L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E February 2, 2011 \uf0fe Reconciling the Proposed Time Limit. The Governor’s proposed time limit raises serious fi scal and policy issues with respect to (1) ending CalWORKs support for children, (2) not funding services for families facing complete benefi t termination, and (3) shifting costs to county general assistance programs. Addressing these issues would most likely result in General Fund costs that would partially offset the $833 million in savings the Governor hopes to achieve. If the Legislature rejects the proposed time limit, there are still ways to achieve substantial savings in the CalWORKs program. Below, we present an alternative package which achieves about $840 million in General Fund savings. Roadmap for the Legislature on CalWORKs Budget Reductions (Continued) CalWORKs Package General Fund Benefi t (In Millions)a Program\/Solution 2010-11 2011-12 Phase in 13 percent grant reduction $7 $304 Reduce county block grants with exemptions \u2014 377 Repeal July 2011 sanctions and time limits \u2014 -135 Suspend Cal-Learn for fi ve years \u2014 50 Reduce age eligibility for children \u2014 34 Modify earned income disregard to fl at 50 percent \u2014 180 Reduce safety net benefi ts for those refusing community service or subsidized employment \u2014 30 Totals $7 $840 a Preliminary estimates. ”

” Child Welfare Realignment L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 1L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ;; Child;Welfare;System;Summary. The purpose of California’s child welfare system is to prevent, identify, and respond to alle- gations of child abuse and neglect. Families in the child welfare system receive services so that (1) children can remain safely in their homes and\/or (2) children who are temporarily removed from their homes can reunify with their families. For cases in which children are unable to reunify with their families, efforts are made to find them a permanent home through adoption or guardianship. ;; Realignment;Proposal.;The Governor’s budget proposal would realign the child welfare system to counties in 2011-12 and shift $1.6 billion in tax revenues to counties in lieu of General Fund. ;; Child;Welfare;Realignment;Is;Workable. A realignment of the child welfare system has merit, but the Legislature will have to address some significant fiscal and policy issues in developing a realignment plan. ;; Organization. This handout provides information on: \ufffd The child welfare system and the federal, state, and county roles in child welfare. \ufffd The Governor’s realignment proposal. \ufffd General principals of realignment program design. \ufffd Applying realignment principals to child welfare. Overview 2L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ;; Child;Welfare;Services;(CWS) investigates allegations of child abuse and neglect and provides case management and support services to children and their families. Statewide, hotline calls alleging child abuse and neglect are received for approximately one-half million children each year. ;; Foster;Care provides out-of-home placement for children who have been removed from their homes due to abuse or neglect. A Foster Care placement can be with either an individual family or a group home setting. Family and group providers receive monthly grant payments for the 24-hour care and supervision of the child. Children in Foster Care may eventually be reunified with their parents or placed in adoption or guardianship when family reunification is not possible. The Department of Social Services (DSS) estimates the average monthly Foster Care caseload for 2011-12 to be approximately 48,000. ;; Adoptions;Program;has two components: (1) the Relinquishment (or Agency) Adoptions Program, which provides services to facilitate the adoption of children in foster care and (2) the Independent Adoptions Program, which provides adoption services to birth parents and adoptive parents when both agree on placement. Adoptions services are provided through state district offices, 28 county adoptions agencies, and a variety of private agencies. About 7,000 children are adopted from foster care annually. ;; Adoptions;Assistance;Program;(AAP) provides monthly cash grants to parents who adopt children from Foster Care. Virtually all children being adopted out of the Foster Care program are eligible for and receive AAP benefits. The DSS estimates the average monthly caseload for 2011-12 to be approximately 88,000. Components of the Child Welfare System 3L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 General;Fund;Expenditures;(In;Millions) Funding and Existing Sharing Ratios for Children’s Programs 2011-12 Proposed Non-Federal State\/County Sharing Ratio Child Welfare Services (CWS)a $551 70\/30 Foster Care (FC)a 310 40\/60 FC administrationa 25 70\/30 Adoptions Assistance Program 384 75\/25 CWS, FC for two waiver counties 334 \u2014 Total $1,604 a Includes some expenditures for 56 non-waiver counties. ; The sharing ratios shown above were established as part of the 1991 realignment. The relatively high share for Foster Care was designed to be an incentive for counties to control placement costs. ; The $1.6 billion provided for these programs includes about $72 million for the boarding and care of so-called AB 3632 seriously emotionally disturbed children. We recommend that the responsibility and funding for these children be realigned to school districts. 4L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ; The structure of child welfare systems varies by state. California’s child welfare system is state-supervised and county- administered. Child welfare policy is generally made by the state and federal government and implemented by the counties. All three levels of government contribute to funding. Below, we elaborate on the federal, state, and county roles in child welfare. ; Federal Role \ufffd Sets federal child welfare policy. \ufffd Monitors state compliance with federal requirements through performance reviews and assesses penalties when states do not meet performance standards. \ufffd Provides federal funds. ; State Role \ufffd Sets statewide child welfare policy, such as standards for abuse and neglect and Foster Care rates. \ufffd Monitors county compliance with state and federal require- ments through performance reviews. Provides technical assistance and oversight to counties. \ufffd Provides direct services such as adoptions and the licensing of Foster Care homes. \ufffd Acts as single state agency for child welfare. Reports state performance outcomes to the federal government and negoti- ates Performance Improvement Plans. \ufffd Provides state funds and passes on federal funds to counties. Federal, State, and County Roles in Child Welfare 5L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ; County Role \ufffd Investigates allegations of abuse and neglect and determines, based on state and federal regulations, when to remove a child from the home and into Foster Care. \ufffd Provides case management to children and families who seek to reunify. \ufffd Develops and delivers child welfare programs and services. \ufffd Provides county funding and may overmatch state funds. Federal, State, and County Roles in Child Welfare (Continued) 6L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ;; Shifts;Funding;Responsibility;to;Counties. The Governor’s proposal would realign a child welfare system of shared state\/ county costs to one that is fully county-funded. It would also shift $1.6 billion in tax revenues to counties in lieu of General Fund support. ;; Increase;in;County;Flexibility. In his budget proposal, the Governor calls for counties to be given as much flexibility as possible to operate their child welfare programs. To date, the administration has not provided details on what new programmatic flexibility would be provided to counties. ;; Component;of;Larger;Proposal.;The child welfare realignment is part of a larger realignment proposal that would raise a total of $5.9 billion in taxes and shift that amount to counties to implement increased program obligations in social services, health, and criminal justice. ;; Certain;Exceptions. The Child Welfare Services Case Management System (CWS\/CMS) computer system and the licensing of Foster Care placements are not included in the realignment plan. Governor’s Realignment Proposal 7L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ;; Questions;to;Consider.;The Legislature must consider a number of factors when determining whether or not to realign a program to the counties. \ufffd Programs where statewide uniformity is vital\u2014usually are more effectively controlled and funded by the state. \ufffd Programs where innovation and responsiveness to community interests are paramount\u2014usually are more effectively controlled by local governments. \ufffd Coordination of closely linked programs is facilitated when all programs are controlled and funded by one level of government, usually local government. \ufffd If state and local governments share a program’s costs, the state’s share should reflect its level of program control. ;; Proposal;Has;Merit.;Some aspects of the child welfare system are suited to realignment. \ufffd Counties already perform many key functions in child welfare, such as determining when to remove a child from home due to abuse or neglect. \ufffd Counties provide direct services connected to child welfare, such as mental health and substance abuse services. \ufffd A system for measuring child welfare performance and reporting outcomes is already in place. Is Child Welfare a Good Candidate For Realignment? 8L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ;; Proposal;Raises;Concerns. Other aspects of the child welfare system are not well-suited to realignment. \ufffd The state has an interest in the wellbeing of children through- out California and has an important role in setting child welfare policy and providing oversight. \ufffd Foster Care is a federal entitlement program and even with more flexibility, counties cannot entirely control caseload and costs. \ufffd The federal role in performance review and penalty assess- ment may not work well with 58 separate counties. Is Child Welfare a Good Candidate For Realignment (Continued) 9L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 General Principles of Realignment Program Design ; Link Program Funding Responsibility and Program Policy Control \ufffd Realignment works best when the same level of government has program policy authority and fiscal responsibility. \ufffd Let the level of government that pays a program’s bills set its rules. ; Build in Accountability \ufffd Promote accountability by quantifying results regarding governmental performance and broadly disseminating information to the public. \ufffd Minimize reliance on detailed reports to state agencies. ; Address Cost Impacts of Changes in Program Responsibility \ufffd Provide sufficient revenues to maintain an appropriate level of program services over the long term. \ufffd Roughly match the rate of growth for the portfolio of realigned programs with the rate of growth for the portfolio of realignment revenues. \ufffd Avoid creating state-reimbursable mandates. ; Allow Realignment Funds to Be Used Flexibly \ufffd Limit earmarking of realignment revenues or segregating revenues into multiple pots. \ufffd Allow funds to be used to meet diverse and changing local objectives. \ufffd Promote accountability though performance measures, not fiscal controls. 10L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 General Principals of Realignment Program Design (Continued); ; Develop a Simple Revenue Allocation Methodology \ufffd Design a revenue allocation methodology that works over the long term. \ufffd Minimize long-term reliance on formulas that reflect prior-year revenue allocations or program costs. \ufffd Distribute revenues based on each local government’s population or another broad based indicator of overarching need. ; Rely on Financial Incentives to Promote Intergovernmental Coordination \ufffd Create fiscal incentives that encourage the efficient achieve- ment of programmatic goals by multiple levels of government. \ufffd Identify and address counter-productive fiscal incentives between state and local government. 11L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 Child Welfare Realignment Program Design Issues ;; Proposal;Has;Merit. A realignment of the child welfare system is workable, but the Legislature will have to address some significant fiscal and policy issues in developing a realignment plan. ;; Certain;Issues;Must;Be;Addressed.;We have identified at least three areas that the Legislature will need to consider: \ufffd State control and county flexibility. \ufffd Federal oversight. \ufffd Funding. 12L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ;; Degree;of;Flexibility. Since counties would have increased financial responsibility for child welfare programs under realign- ment, they should have as much programmatic responsibility as possible. The Legislature will have to determine how much control of the child welfare system will remain at the state level and how much can be given to the counties. ;; Options;for;the;Legislature.;In limited cases, there may be an overriding policy need for statewide standards. Even in these cases, however, we recommend that the Legislature draft them to maximize county flexibility. In weighing its options for providing counties with more flexibility, the Legislature should consider: ;\ufffd Establishing;Minimum;Standards. The Legislature could create minimum child welfare standards. This would establish statewide standards for the protection of children while allowing counties to have more control. ;\ufffd Setting;Ranges;for;Rates. The Legislature could establish ranges for foster care placement rates and other regulations. This would provide some flexibility to the counties while maintaining a degree of standardization at the state level. ;; More;Limited;Role;for;the;Legislature;in;Child;Welfare.;The Legislature should avoid enacting new policies that create cost burdens not contemplated under the realignment. State Control and County Flexibility 13L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 ;; Single;State;Agency.;The federal government is unlikely to interact with each of the 58 counties separately. The state most likely would continue to serve as the single agency contact for the federal government under a realigned child welfare system. If not, the state and counties would need to develop an alternative structure for dealing with the federal government. ;; Governance;Options.;In weighing its options for structuring the state’s future relationship with the federal government, the Legislature should consider: ;\ufffd Establishing;a;Method;for;Sharing;Risk.;The Legislature should determine how the state and counties will share costs resulting from changes in federal law and performance review penalties. This could also apply to costs incurred from lawsuits. ;\ufffd Creating;a;Consortium;of;Counties.;The Legislature could allow counties to group themselves into several regional consortia. The consortia would be recognized in statute and have a say in negotiations that affect county costs and programs, such as federal Performance Improvement Plans. Federal Oversight 14L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E January 25, 2011 Funding ;; County;Concerns. Counties will likely seek a higher level of funding for child welfare in a realignment to cover the cost of providing services. \ufffd Historically, the state has provided less funding than legislatively mandated studies would suggest is needed for minimal social worker caseload standards. \ufffd Funding for CWS has been reduced by $80 million (10 percent) from 2008-09 levels. The current Governor’s budget proposal does not restore that funding. \ufffd Some counties have contributed their county funds (with no state match) to address these and other funding issues in child welfare. ;; Legislature;Sets;Initial;Funding;Level. While the Governor’s budget has proposed shifting $1.6 billion in tax revenues to counties for child welfare programs, the Legislature could choose to provide counties with a different level of funding. ;; Reducing;County;Cost;Burdens.;The Legislature could reduce county costs without increasing state funding by reducing certain child welfare rates, enabling the $1.6 billion to go further. For example, the Legislature could reduce AAP rates and allow counties to keep the savings generated from the reduction. ;; Allocation;Issues. Although the initial funding allocation among counties could be based on current costs, it would be preferable if over time the funding allocation transitioned to a broader measure, such as the population of children. ”

” The 2010 11 Budget: How the Special Session Actions Would Affect Social Services MAC TAylor l e g i s l A T i v e A n A l y s T JAnuAry 29, 2010 The Governor declared a fiscal emer\u2011gency on January 8, 2010, calling the Legislature into a special session to begin taking action on the $19.9 billion in solu\u2011 tions he proposes to address the budget problem and create a $1 billion reserve. Around 40 per\u2011 cent of the Governor’s budget solution relies on funding or flexibility to be provided by actions of the federal government. Another 40 percent consists of reductions to state spending. The remainder of the Governor’s proposals consists of various fund shifts. These include a proposal that the Legislature put measures before voters in June 2010 to allow use of a combined $1 billion of Proposition 10 early childhood development funds and Proposition 63 mental health services funds to help balance the budget. POLICY BRIEF For the special session, the Governor pro\u2011 poses solutions for social services programs totaling $121 million in 2009\u201110 and $2.6 billion in 2010\u201111. Figure 1 (see next page) shows the solutions by program area. The state Department of Social Services (DSS) oversees most of these programs. The figure also displays the two main types of proposed solutions: expenditure reduc\u2011 tions and fund shifts (federal, county, and special funds). In addition to the General Fund savings, adoption of this package would result in the loss of about $3 billion in federal funds, assuming that the American Recovery and Reinvestment Act (ARRA) is extended through June 30, 2010. Below, we provide our analysis of the Governor’s propos\u2011 als, in some cases offer alternative approaches, and recommend the actions that we believe the Legislature should take on them at this time. CrossCutting issues Early Action Required. We recommend that the Legislature act relatively quickly to address some of the key proposals to reduce spend\u2011 ing in social services programs because of the lead time necessary to implement them. For example, because most social services programs are administered by county welfare departments using four separate automation systems, it gen\u2011 erally takes at least two months to implement policy changes. The federal government typically takes three months to modify grant levels in the Supplemental Security Income\/State Supplemen\u2011 tary Program (SSI\/SSP). Taking early action, in most cases by the end of March, would result Figure 1 Governor’s Proposed Special Session Solutions (In Millions) General Fund Savings Federal Funds LossProgram\/Description 2009\u201110 2010\u201111 Program Expenditure Reductions In\u2011Home Supportive Servicesa Limit services to most severely impaired $56.6 $650.8 $2,400.0 Reduce state wage and benefit support to $8.60\/hour 21.3 271.8 \u2014 SSI\/SSP Reduce grants (1.8 percent) to the federal minimum $13.7 $177.8 \u2014 CalWORKs Reduce grants by 15.7 percentb $9.4 $120.6 $468.9 Reduce maximum child care reimbursement rates \u2014 54.8 \u2014 Eliminate Programs for Legal Noncitizens Cash Assistance Program for Immigrants $8.1 $107.3 \u2014 California Food Assistance Program 3.8 56.2 \u2014 CalWORKs grants and services 0.7 21.8 $33.6 Subtotals ($113.6) ($1,461.1) ($2,902.5) Funding Shifts Proposition 10 Redirect reserves and revenues to offset General Fund \u2014 $550.0 \u2014 County Funding Redirect county savings to children’s programs \u2014 505.5 \u2014 Foster Care Increased federal eligibility for Foster Care $7.5 86.9 \u2014 Subtotals ($7.5) ($1,142.4) \u2014 Totals $121.1 $2,603.5 $2,902.5 a General Fund savings are overstated because figures include about $200 million in savings that would be achieved under current state law, but have been enjoined in federal court. The federal fund loss is also overstated for the same reason. b These amounts reflect the total CalWORKs program savings. Some of these General Fund savings are through fund shifts to other departments. in achieving at least some savings in the current year and full savings in the budget year to ad\u2011 dress the state’s sizeable budget problem. Legislature Not Limited by the Choices Put Forward by the Gover- nor. Although balanc\u2011 ing the budget involves difficult decisions, the Legislature has a greater menu of options it can consider to address the problem than just the ones presented by the Governor. Throughout this report, we present more targeted approach\u2011 es to reducing social services programs. These alternatives achieve less savings than the Gover\u2011 nor but attempt to ensure that the most vulnerable recipients continue to re\u2011 ceive some services. Ac\u2011 cepting these alternatives could mean, however, that greater reductions would have to be made in other areas of the bud\u2011 get, or that it would have to approve additional revenue measures. The Legislature should care\u2011 fully consider these kinds of trade\u2011offs in address\u2011 ing the budget shortfall. Impact on Federal Funds. In addition to the $2.7 billion in Gen\u2011 eral Fund savings the administration proposes, adoption of the Governor’s package would also result in the loss of about $2.9 billion in federal funds, assuming that ARRA is extended through A n l A o r e p o r T 2 Legislative Analyst’s Office www.lao.ca.gov June 30, 2010. (The ARRA temporarily increases federal financial participation from 50 percent to 56 percent for foster care, and from 50 percent to 62 percent for In\u2011Home Supportive Services [IHSS], while also providing a new 80 percent funding stream for certain California Work Op\u2011 portunity and Responsibility to Kids [CalWORKs] costs.) The loss of federal funding would gener\u2011 ally be lower if ARRA is not continued. The General Fund savings amounts identified throughout this report assume continuation of ARRA funding through the end of 2010\u201111, but do not reflect another proposal for a permanent increase in the federal share of Medicaid costs to 57 percent proposed in the Governor’s budget. That is because, as we discuss in our recent report, How the Special Session Actions Would Affect Health Programs, while we believe it is reasonable to assume that the state will receive an extension of the enhanced sharing ratio pro\u2011 vided under ARRA, we believe it is unlikely that the state will be given an increase in the base federal share of support. in-Home supportive serviCes The IHSS program provides in\u2011home care for persons who may be at risk for institutional placement without such assistance. Assistance is provided with tasks such as cleaning, meal preparation, bathing, grooming, and errands. The federal, state, and local governments share in the cost of IHSS. The administration’s budget plan proposes to achieve General Fund savings in the IHSS program by (1) reducing state support for the wages and benefits paid to providers and (2) imposing restrictions on eligibility. IHSS CaSeload IS overbudgeted Governor’s Budget Proposal The revised budget proposal for IHSS for 2009\u201110 assumes that the caseload will grow by 7 percent over the previ\u2011 ous year. As a result, the budget estimates that, absent any proposed eligibility restrictions, the average number of IHSS cases will be over 460,000 in the current year, as shown in Figure 2. The Governor’s budget estimates that the caseload will reach nearly 490,000 cases in 2010\u201111, an increase of 6.5 percent over the cur\u2011 rent year. LAO Comments Actual Caseload Lower Than Budget Esti- mate. Our examination of caseload data indi\u2011 cates that the caseload is significantly below the Governor’s current estimate for the first six months of 2009\u201110. Our own lower estimate shown in Figure 2, which takes into account for the most recent actual monthly caseload data from December 2009, shows that the total Figure 2 IHSS Caseload Governor’s Budget and LAO Estimate Year Governor’s Budget LAO Estimate Difference Amount Percent 2008-09 429,786 429,786 \u2014 \u2014 2009-10 460,041 448,613 -11,428 -2.5% 2010-11 489,972 476,212 -13,760 -2.8 A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 3 caseload is overstated by 2.5 percent in the cur\u2011 rent year and by 2.8 percent in the budget year. Because the caseload is overstated, we estimate that the IHSS caseload is overbudgeted by about $35 million from the General Fund ($141 million for all funds) in the current year. Analyst’s Recommendation For the reasons discussed above, we recom\u2011 mend that the Legislature recognize a General Fund savings of $35 million in 2009\u201110 in re\u2011 gard to IHSS caseload. It is also likely that there will be caseload savings in the budget year. We will continue to monitor the IHSS caseload and report at May Revision if additional caseload adjustments are warranted. reduCIng State PartICIPatIon In IHSS ProvIder WageS Governor’s Budget Proposal Effective June 1, 2010, the Governor’s budget proposes to reduce state participation in IHSS provider wages and benefits to a combined $8.60 per hour (the $8.00 minimum wage estab\u2011 lished under state law, plus $0.60 for health ben\u2011 efits). This proposal is estimated to save $21 mil\u2011 lion in 2009\u201110 and $272 million in 2010\u201111, and would eliminate potential costs beyond 2010\u201111 associated with future county wage increases. LAO Comments Impact of Current Law. We note that a portion of the savings shown by the administra\u2011 tion in its budget plan would have resulted from the implementation of current law, which re\u2011 duced state participation in wages and benefits from $12.10 to $10.10 per hour. (We estimate this to be about $7 million out of $21 million in 2009\u201110, and $80 million out of $272 million in 2010\u201111.) A federal judge has issued an injunc\u2011 tion preventing the state from implementing the reduction, which had been adopted as part of the 2009\u201110 budget plan. Due to the injunction, the state is still participating in wages and ben\u2011 efits up to $12.10 per hour. Compared to current state law, the incremental savings from the Gov\u2011 ernor’s proposal to further reduce state participa\u2011 tion from $10.10 to $8.60 is about $192 million in 2010\u201111. County Discretion. The proposed reduction would not limit the amount counties could pay their IHSS providers, but rather would reduce the state’s level of support for the wages. Depending on county decisions, this proposal would either result in county General Fund costs (because a county elects to backfill the decreased state funds) or reduced provider wages (because a county does not backfill). This proposal would not imme\u2011 diately impact the 13 counties which are currently paying providers $8.60 or less per hour. Impact on Federal Funds. The administra\u2011 tion assumes that this proposal will not result in federal funds loss because it further assumes that the counties will maintain wages at current levels by backfilling the lost General Fund with county funds. However, to the extent counties decrease wages as a result of this reduction, there will be federal funds loss for the state. Legal Risks and a New Federal-State Re- lationship. Although the 2009\u201110 Budget Act reduced state participation in provider wages and benefits, a federal injunction has prevented implementation of the reduction. The Gover\u2011 nor’s proposal to reduce wages to $8.60 per hour would likely face the same legal challenges and implementation would likely be delayed. To address this issue, the Governor is requesting additional operating flexibility from the federal government in order for proposed program re\u2011 ductions to be made. This additional flexibility is part of what it terms a new federal\u2011state rela\u2011 A n l A o r e p o r T 4 Legislative Analyst’s Office www.lao.ca.gov tionship, involving federal intervention which could potentially alleviate the legal risks associ\u2011 ated with this proposal. Impact on Supply of Providers. In the past, we have noted that long\u2011term wage decreases could eventually impact the supply of quali\u2011 fied IHSS providers. However, given the current recession, and the high unemployment rates throughout the state, we do not believe that a wage reduction proposal would have a signifi\u2011 cant impact on the availability of IHSS providers at this time. This wage reduction would reduce provider income, but is unlikely to significantly impact services for IHSS recipients. Analyst’s Recommendation Temporarily Reduce Wages to Minimum. Given the current recession, and the growing expense of the IHSS program, we recommend that the Legislature temporarily reduce state participation in IHSS provider wages and ben\u2011 efits to $8.60 per hour. We believe that a wage reduction would achieve IHSS savings in a way that moderates the impact to IHSS recipients. We note that implementation of this wage reduction would depend on federal government interven\u2011 tion or a decision by a federal judge in now\u2011 pending litigation that such budget reductions are permissible. If the Legislature reduces state participation and it is deemed federally permissible, the Legisla\u2011 ture should monitor whether wages are sufficient to attract an adequate supply of providers. To this end, the LAO will analyze monthly reports that document the number of IHSS hours that are be\u2011 ing authorized and claimed each month. We will report to the Legislature if the utilization of autho\u2011 rized hours appears to be affected by the reduc\u2011 tion in state participation in wages. IHSS elIgIbIlIty reStrICtIonS Governor’s Budget Proposal The services received by an IHSS recipient depend on their impairment as assessed by a county social worker. This is accomplished using a uniform assessment tool to rank the recipient’s impairment on various IHSS tasks. The various ranks are averaged together to create a functional index (FI) score. The score ranges from 1 (least impaired) to 5 (most impaired). Effective June 1, 2010, the Governor’s budget proposes to eliminate IHSS for recipients with FI scores of less than 4. This proposal is estimated to reduce the IHSS caseload by 87 percent and save about $57 million in 2009\u201110 and about $651 mil\u2011 lion in 2010\u201111. (The administration proposes a further reduction\u2014involving the total elimination of IHSS\u2014under his budget trigger proposal. This further action is assumed by the administration to result in $495 million in savings.) LAO Comments Impact of Current Law. A portion of the savings reflected in the administration’s budget plan would come from the restrictions in current law on program eligibility (we estimate this to be about $8 million out of $57 million in 2009\u201110, and $99 million out of $651 million in 2010\u201111). Current law generally eliminated IHSS for recipi\u2011 ents with FI scores of less than 2 (with exceptions for recipients with certain services). However, a federal judge has issued an injunction prevent\u2011 ing the state from implementing the reduction, which was adopted as part of the 2009\u201110 bud\u2011 get plan on the basis that the FI scoring system is not an accurate measure of a recipient’s level of impairment. The incremental additional savings estimated by the administration in its 2010\u201111 budget proposal is about $552 million. A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 5 the Governor’s proposal to eliminate services to recipients with a FI score below 4 saves about $650 million General Fund, but results in a loss of about $2.4 billion in federal funds in 2010\u201111. This loss of federal funds would not be as signifi\u2011 cant if ARRA is not continued, as shown in the figure below. LAO Recommendations Potential Short-Term Solutions Are Risky. As we have explained above, it is possible to adopt smaller, more targeted reductions without creat\u2011 ing additional costs in other programs that more than offset the savings that would be achieved in IHSS. For example, the Legislature could elimi\u2011 nate services for recipients with a FI score of less than 2.5. The magnitude of any reduction is a fiscal and policy decision for the Legislature that should balance such factors as the state’s fiscal difficulties against the value of the program in improving the quality of life of recipients. How\u2011 ever, it would be risky to assume savings from such actions in the current and budget years. This is because the state would need to receive a favorable federal court decision or obtain new flexibility from Congress or the federal admin\u2011 istration to implement such program changes. Given these risks, we recommend that the Leg\u2011 islature focus its work in the special session on developing a better measure of impairment for IHSS recipients. Such a new measure would fa\u2011 cilitate future legislative action on reforms which Legal Risks and a New Federal-State Rela- tionship. The Governor’s proposal to eliminate IHSS for recipients with FI scores of less than 4 would likely face the same legal challenges as current law and implementation would likely be delayed. Similar to the reduction in state partici\u2011 pation in wages described above, this is another reduction where the administration is relying on federal intervention to implement the reduction or a favorable court decision. Governor’s IHSS Reduction Goes Too Far. As we have explained in our January report, Considering the State Costs and Benefits: In\u2011 Home Supportive Services, the complete elimina\u2011 tion of IHSS (or the dramatic reduction in eligi\u2011 bility proposed in the Governor’s budget plan) would likely lead to offsetting costs that more than outweigh the savings from its elimination. Given the magnitude of this proposed reduc\u2011 tion, we find that it would likely result in costs in developmental services and skilled nursing facilities that would more than offset the savings in IHSS. (While the Governor’s budget includes $50 million for increased costs for developmental services relating to IHSS reductions, our analysis indicates that these impacts are understated.) Reductions to the IHSS program are possible, as long as they are smaller and are targeted to reduce the cost of services for those recipients who are least likely to enter institutional care. Substantial Federal Funds Loss. Because the federal, state, and county governments all have a share in the costs of the IHSS program, a reduc\u2011 tion of the magnitude proposed by the admin\u2011 istration would result in a substantial additional loss of federal funds. As shown in Figure 3, the state General Fund share of the IHSS program is currently about 25 percent, due to the enhanced federal funding received under ARRA. The fed\u2011 eral share is about 62 percent, with the remain\u2011 ing portion, 13 percent, borne by counties. Thus, Figure 3 Comparing Costs of IHSS With and Without ARRA Share of IHSS Program Costs Under ARRA Without ARRA Federal 61.6% 50.0% State 25.0 32.5 County 13.4 17.5 A n l A o r e p o r T 6 Legislative Analyst’s Office www.lao.ca.gov would base service delivery on the severity of impairment. Developing a Better Measure of Impair- ment. As we have noted in this report and in our January report on IHSS, the most fiscally sound way to make reductions to this program is to reduce services for recipients who are least likely to enter an institution in the absence of those services. The current system of FI scores was not designed to measure the likelihood of a client entering a nursing home. In fact, one key argu\u2011 ment in the federal case which enjoined the state from implementing a targeted reduction was that FI scores were an inadequate measure of impair\u2011 ment and risk of institutionalization. We believe a better measure should be developed for two reasons. First, it will better enable the Legislature to target services to those most at risk of insti\u2011 tutionalization. Second, it will strengthen the state’s position with respect to legal challenges in federal court. Accordingly, we recommend enactment of legislation requiring DSS to present the Legislature with a new system of measuring impairment and the risk of institutional place\u2011 ment no later than January 10, 2011. In develop\u2011 ing the new measures, DSS should be directed to convene at least two stakeholder meetings including, but not be limited to, provider organi\u2011 zations, consumer organizations, social workers who conduct assessments, county representa\u2011 tives, and legislative staff. The new system for measuring impairment should require that a social worker make a specific finding whether the client needs IHSS services in order to avoid institutional placement. Basing Service Delivery on the Level of Impairment. In our January report on IHSS, we outlined a tiered approach to delivering IHSS. Service levels would be correlated to the new measure of impairment and risk. Such an ap\u2011 proach could provide a continuum of care which would help all Californians delay or avoid the need to enter an institution while better targeting services to those with the greatest impairment. Although subject to federal approval, we believe this approach would have a better chance of surviving potential legal challenges. supplemental seCurity inCome\/ state supplementary program The SSI\/SSP provides monthly cash grants for low\u2011income aged, blind, or disabled individu\u2011 als and couples. The SSI portion of the grant is supported by federal funds and the SSP portion is a state\u2011only supplement to the federal grant. Federal law requires that the SSP portion of the grant be maintained at or above its 1983 level. Failure to comply with this requirement would result in the loss of all federal Medicaid health care program funding (the program is known as Medi\u2011Cal in California). Under current law, a fed\u2011 eral cost\u2011of\u2011living adjustment (COLA) is applied to the federal portion of the grant every January. reduCe grantS to tHe Federal MInIMuM Governor’s Budget Proposal The Governor’s plan reduces SSP grants for individuals to the minimum levels allowed under federal law. (Grants for couples were reduced to the federal minimum as part of the 2009\u201110 Budget Act.) As seen in Figure 2, the SSP portion of the grant would be reduced to a maximum of $156 per month for individuals, effective June 2010. This would result in a $15 (1.8 percent) monthly grant reduction. Although grants would A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 7 be reduced under this proposal, as shown in Figure 4, grants for individuals and couples are expected to increase in January 2011 due to the federal COLA. Reducing grants to the federal minimum would make about 8,900 recipients ineligible for SSI\/SSP. Generally these recipients are receiving grants of less than $15 per month. They become ineligible because their income would exceed the revised income eligibility stan\u2011 dards for SSI\/SSP associated with the grant reduc\u2011 tion. This proposal is estimated to save about $14 million for the General Fund in 2009\u201110 and $178 million in 2010\u201111. LAO Alternative No Pass-Through of Federal COLA. As noted above, the federal government applies a COLA to the federal SSI portion of the grant each January. One possible alternative to the Gover\u2011 nor’s proposal would be to reduce the state SSP portion of the grant by the dollar amount that the SSI portion of the grant increases due to the Janu\u2011 ary 2011 federal COLA. This option is known as not passing through the federal COLA. As seen in Figure 5, this option would reduce SSP monthly grants for individuals by about $13 to $158 effective January 2011. This would keep to\u2011 tal grants for individuals at current levels ($845) until January 2012, when the next federal COLA is scheduled. Assuming a January 1 implemen\u2011 tation date, this would result in General Fund savings of about $51 mil\u2011 lion in 2010\u201111. Option to Make SSI\/ SSP Recipients Eligible for Food Stamps. The Food Stamp program provides monthly benefits to low\u2011income house\u2011 holds and individuals to assist them with food purchases. The cost of the federal food benefits is borne entirely by the federal government, while the associated administrative costs are shared among the federal government, the state, and the counties. Beneficiaries receive a debit card which reloads each month with their food stamps allotment. In California, recipients of SSI\/SSP are not eligible for federal food stamp benefits. This is because California has opted to increase the SSP portion of the grant (by $10 monthly) rather than administer food stamps to SSI\/SSP recipients. This is known as the food stamp cash\u2011out policy. The Legislature has the option of reversing the cash\u2011out policy to allow SSI\/SSP recipients to apply for food stamps. Reversing the cash\u2011out would benefit some SSI\/SSP recipients by mak\u2011 ing them eligible for food stamps, while reduc\u2011 ing food stamp benefits for others. Generally, those who would benefit from the reversal of the cash\u2011out would be those with lower income who live in households comprised only of SSI\/SSP recipients. The households most likely to experi\u2011 ence a reduction in food stamp benefits would be in cases where SSI\/SSP recipients reside with Figure 4 SSI\/SSP Maximum Monthly Grants: Governor’s Proposal Current Levels Governor’s Budget June 2010 January 2011 Individuals SSI $674 $674 $687 SSP 171 156 156 Totals $845 $830 $843 Percent of Poverty 94% 92% 93% Couples SSI $1,011 $1,011 $1,031 SSP 396 396 396 Totals $1,407 $1,407 $1,427 Percent of Poverty 116% 116% 118% A n l A o r e p o r T 8 Legislative Analyst’s Office www.lao.ca.gov other existing food stamp recipients whose total income tends to be higher. Preliminary analysis from the DSS indicates that in 2009 there were roughly 956,000 SSI\/ SSP households in California (representing about 1.25 million recipients). If all eligible food stamp recipients applied for and receive benefits, DSS estimated the reversal of the cash\u2011out would have the following effects: \u00b7 Over 300,000 households would be newly eligible for between $16 and $69 per month in food stamp benefits. \u00b7 About 120,000 households would retain food stamps benefits and would experi\u2011 ence an average increase of about $15 per month. \u00b7 About 425,000 households would remain ineligible for food stamps (because their total grant, Social Security, and other income is above the food stamp income eligibility thresholds). Figure 5 SSI\/SSP Maximum Monthly Grants: No Pass\u2011Through Option Current Levels No Pass\u2011 Through January 2011 Individuals SSI $674 $687 SSP 171 158 Totals $845 $845 Percent of Poverty 94% 94% Couples SSI $1,011 $1,031 SSP 396 396 Totals $1,407 $1,427 Percent of Poverty 116% 118% \u00b7 About 35,000 households would lose an average of $209 per month in food stamps and become ineligible. After accounting for the increases and de\u2011 creases in food stamp benefits for households, it is estimated that reversing the cash\u2011out would result in a net increase of about $125 million in additional food stamp benefits for California households. The General Fund administrative cost of reversing the cash out is estimated to be $17.4 million in the first year and $6.8 million an\u2011 nually thereafter. Analyst’s Recommendation Reduce Grants to Minimum and Consider Reversing Food Stamp Cash-Out. Given the cur\u2011 rent fiscal situation facing the state, we recom\u2011 mend reducing the SSP grant for individuals to the federal minimum. Because this reduction only impacts the state portion of the SSP grant, it does not result in the loss of federal funds. We note that grants for individuals and couples will increase (by an estimated $13 for individuals and $20 for couples) in January 2011 due to an estimated COLA. Additionally, we recommend that the Leg\u2011 islature examine the potential net benefits of reversing the food stamp cash\u2011out policy. This would result in additional federal food stamps for lower\u2011income California households and, in some cases, offset the SSP grant reduction. Although some households would lose food stamps eligibility as a result of the reversal, these are households with higher combined income levels than the households that would gain food stamps as a result of reversing the cash\u2011out. The key implementation issue is the development of a streamlined eligibility process for former SSI\/SSP recipients. Such a process would most likely A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 9 include making SSI\/SSP recipients automati\u2011 cally eligible for food stamps (subject to benefit determination based on income), waiving the in\u2011person interview sometimes required for food stamp recipients, and providing an exception from an existing fingerprinting requirement. This streamlined approach would increase the likeli\u2011 hood that all newly eligible recipients actually receive the food stamp benefits. CalWorKs: reduCe grants by 15.7 perCent Governor’s Budget Proposal Grant Reduction. Effective June 2010, the Governor proposes to reduce maximum monthly CalWORKs grants by 15.7 percent, which would amount to a reduction for a family of three of $109 in the high\u2011cost counties and $104 in the low\u2011cost counties. The proposed reduction would result in General Fund savings of $9 mil\u2011 lion in 2009\u201110 and $121 million in 2010\u201111 for a total of $130 million in combined General Fund and federal Temporary Assistance for Needy Families (TANF) block grant savings. According to DSS, the 15.7 percent grant reduction would make the maximum grant in California equal to the average grant in the ten states with highest rental housing costs. Interaction With Maintenance-of-Effort (MOE). The Governor’s proposed grant reduc\u2011 tion results in total savings (General Fund and TANF block grant funds) of $130 million. In 2010\u201111, proposed CalWORKs spending ab\u2011 sent this grant reduction exceeds the federal CalWORKs MOE re\u2011 quirement by $69 mil\u2011 lion. Thus, only $69 mil\u2011 lion of General Fund savings can be achieved in CalWORKs. This leaves $61 million in TANF block grant funds associated with this grant reduction. To convert the TANF funds into additional General Fund savings, the Governor transfers these funds to the Department of Developmental Services (DDS) ($43 million) and the Student Aid Commission ($18 million). This results in identical General Fund offsets in these departments. LAO Comments Comparison to Poverty. Food stamp al\u2011 lotments depend on income, including grant income. When grants are decreased, food stamp benefits increase for most families. Figure 6 shows the maximum monthly grants and esti\u2011 mated food stamps benefits under current law and Governor’s proposal. As the figure shows, relative to the 2009 federal poverty guideline, combined maximum monthly benefits would decline to 73 percent of poverty in high\u2011cost counties and 71 percent in low\u2011cost counties. Figure 6 CalWORKs Maximum Monthly Grant and Food Stamps Family of Three, June 2010 Current Law Governor’s Proposal Change Amount Percent High\u2011Cost Counties Grant $694 $585 -$109 -15.7% Food Stamps 498 526 28 5.6 Totals $1,192 $1,111 \u2011$81 \u20116.8% Percent of Poverty 78% 73% Low\u2011Cost Counties Grant $661 $557 -$104 -15.7% Food Stamps 508 526 18 3.5 Totals $1,169 $1,083 \u2011$86 \u20117.4% Percent of Poverty 77% 71% A n l A o r e p o r T 10 Legislative Analyst’s Office www.lao.ca.gov Savings Tied to Federal Fund Assumptions. Pursuant to ARRA, TANF Emergency Contin\u2011 gency Fund (ECF) provides 80 percent federal participation in increased grant costs above each state’s base costs in 2007. This funding stream is scheduled to sunset on September 30, 2010. The Governor’s budget assumes it will continue until June 30, 2010. Under the Governor’s as\u2011 sumptions, the proposed reduction results in General Fund savings of $120 million in 2010\u201111 and a corresponding federal funds loss of about $470 million. We note that, if ARRA is not ex\u2011 tended, the Legislature could delay this reduction until October 1, 2010 and achieve General Fund savings of approximately $440 million with no loss in federal funds. Criteria for Setting Grant Levels. In setting the maximum grant level, the Legislature will have to prioritize among the competing goals of achieving budgetary savings, providing income maintenance to low\u2011income families with chil\u2011 dren, giving adults an incentive to work, and meeting federal TANF work participation require\u2011 ments. The Governor’s proposal would make about 8,400 families with significant earnings ineligible for the program because their income would now fall below the revised eligibility thresholds associated with the grant reduction. Analysts’ Recommendation We recommend that any CalWORKs reduc\u2011 tion be adopted on a contingent basis, whereby the cut is made only when the federal TANF ECF expires. Once this funding expires, a CalWORKs grant reduction could be achieved with no loss in federal funds. Given there is no loss in federal funding and the reduction is partially offset by an increase in food stamps, the Legislature should target significant savings in this area on a contin\u2011 gent basis. If ARRA is not extended, CalWORKs Gen\u2011 eral Fund spending would be well above the MOE requirement. All the savings from any grant reduction adopted by the Legislature could be achieved within the CalWORKs General Fund budget. There would be no need for any TANF transfers to DDS or the Student Aid Commission. Finally, if the Legislature rejects the Governor’s proposal, General Fund backfills must be pro\u2011 vided to the respective budgets of DDS and the Student Aid Commission. CalWorKs: CHild Care reimbursement rates CalWORKs child care is administered in three stages. Stage 1 child care is provided by the county welfare departments to CalWORKs recipients as soon as a family needs child care so that the parent can meet participation require\u2011 ments. After the family’s child care situation is stable, the family may move into Stage 2 where their child care is guaranteed for two years after leaving CalWORKs cash aid. Stage 3 provides child care to former CalWORKs families who have exited Stage 2. Most child care funding is budgeted with the state Department of Educa\u2011 tion (including funding for CalWORKs Stages 2 and 3). However, funding for CalWORKs Stage 1 child care is budgeted within DSS. Governor’s Budget Proposal Rate Reductions. Currently, California will pay up to the 85th percentile of the regional market rate (RMR) (as determined by surveys of providers) for child care in each county. The Governor proposes to reduce the maximum A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 11 reimbursement rate to the 75th percentile of the RMR. He also proposes to reduce the reimburse\u2011 ment rate for certain child care facilities that are exempt from licensing from 90 percent to 70 percent of the reimbursement rate for family child care homes. These changes would result in General Fund savings of $55 million in Stage 1 child care, and $77 million in the Department of Education child care. The Governor also pro\u2011 poses to reduce funding for Stage 3 child care by $123 million. Analyst’s Recommendation Given the state’s fiscal situation, we support the concept of reducing reimbursement rate ceilings. A more complex issue is whether to use more recent survey data to update the RMR. The Governor proposes to use the 2005 survey data and indicates that using the more recent survey would substantially reduce savings. We recommend that any legislative actions taken on child care reimbursement rates in CalWORKs be consistent with the decisions made in the De\u2011 partment of Education. elimination of programs for legal nonCitizens California provides cash assistance and food stamps to legal noncitizens through several pro\u2011 grams, as described below. Cash Assistance Program for Immigrants (CAPI). The CAPI provides state\u2011only funded benefits to legal noncitizens who would other\u2011 wise be eligible for SSI\/SSP but for their citizen\u2011 ship status. The CAPI recipients include two groups. Those in the base CAPI group arrived before 1996, or have a sponsor who is dead, disabled, or abusive. Generally, the extended CAPI group is comprised of sponsored immi\u2011 grants who have been in the U.S. in excess of the ten\u2011year deeming period whereby the income of their sponsor was deemed to the immigrant for purposes of financial eligibility. California Food Assistance Program (CFAP). The CFAP provides state\u2011only funded food stamp benefits to legal noncitizens who are not eligible for federal food stamps. The federally ineligible group is comprised of adults age 18 to 64 who have been in the United States for less than five years (all other legal immigrants are federally eligible). CalWORKs Assistance. Finally, through the CalWORKs program, California provides grants, child care, and welfare\u2011to\u2011work services to legal immigrants who have been in the United States for less than five years. Although such immigrants are typically not eligible for regular TANF block grant funding, they may be funded by state MOE funding. Moreover, their grant costs are eligible for 80 percent TANF ECF funding. Governor’s Budget Proposal Effective June 2010, the Governor proposes to eliminate CAPI, CFAP, and CalWORKs for recent legal noncitizens. For 2010\u201111, these proposals would result in savings of $107 million, $56 million, and $22 million, respectively. LAO Alternatives Rather than eliminate these programs, the Legislature has a number of options which would achieve less savings but limit the potential ad\u2011 verse impacts on recipients. Because these are state\u2011only funded programs, the Legislature has A n l A o r e p o r T 12 Legislative Analyst’s Office www.lao.ca.gov significant flexibility in setting benefit levels and eligibility requirements. We discuss these alterna\u2011 tives below. Prospective Elimination. The availability of these state\u2011only programs may have influenced immigrants’ decisions about when, whether, and where to immigrate into the United States. To avoid any impacts on current recipients who have already immigrated to California based on current programs, the Legislature could prospec\u2011 tively eliminate these programs for immigrants arriving after a specified date. Existing recipients would continue to receive benefits. This ap\u2011 proach would achieve savings of approximately $18 million in CAPI, $11 million in CFAP, and about $3 million in CalWORKs in 2010\u201111. Pro\u2011 gram costs would continue to decline slowly in years beyond 2010\u201111. Gradual Partial Phase-Out for Existing Cases. In addition to the alternative approach described above, the Legislature could gradually phase out benefits for the existing caseload. This would give existing recipients more time to find other resources through earnings, friends, family, or charitable organizations to offset the loss of state assistance. It would also give current recipi\u2011 ents an incentive to attain citizenship and be\u2011 come eligible for federal benefits. This approach probably makes the most sense for CAPI, because it is a stand\u2011alone program administered by the counties. (Although possible in CalWORKs and CFAP, this approach would be creating two sets of rules within one program and would be more difficult to administer.) For illustrative purposes, a 50 percent grant reduction in CAPI effective January 1, 2011 would result in savings of about $18 million in 2010\u201111, with full\u2011year savings in 2011\u201112 of about twice that amount. Conditioning Benefits on Progress Toward Citizenship. Most recipients of these state\u2011only programs could become U.S. citizens after resid\u2011 ing in the United States for five years. Most new citizens qualify for federal benefits, resulting in significant state savings. The Legislature could make continued receipt of state\u2011only benefits contingent on commencing and making progress toward citizenship requirements. Savings from this approach are hard to estimate and would in part depend on the administrative costs associ\u2011 ated with enforcing such a requirement. Restricting Eligibility to the Most Vulner- able. Many CAPI and CFAP recipients reside in larger households which include members re\u2011 ceiving federally funded benefits. The Legislature could limit CAPI and CFAP eligibility to nonciti\u2011 zens residing alone without any other means of support. Such approaches would result in savings of about 40 percent of current program costs. Analyst’s Recommendation Because the state can reduce costs in CFAP and CAPI without a corresponding loss in fed\u2011 eral funds (unlike some other budget choices), we recommend that the Legislature set a goal of achieving at least half of the Governor’s pro\u2011 posed savings of $164 million through the vari\u2011 ous options we have outlined. With respect to CalWORKs noncitizens, we recommend that any reduction be made contingent on the expiration of the 80 percent TANF ECF in order to avoid a proportionally high loss of federal funds. A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 13 proposition 10 early CHildHood development programs Proposition 10 was enacted by the voters of California in the November 1998 election. The initiative measure created the California Chil\u2011 dren and Families Commissions, now commonly known as the state and local First 5 Commis\u2011 sions, which rely upon revenues generated by state excise taxes on cigarettes and other tobacco products to fund early childhood development programs for children up to age five. Proposi\u2011 tion 10 revenues amount to about $500 million for the current year, of which the local commis\u2011 sions receive 80 percent while the state commis\u2011 sion receives the remaining 20 percent. Governor’s Budget Proposal Ballot Measure. The Governor’s budget proposes to place before voters in the June 2010 election a measure to allow the use of Proposi\u2011 tion 10 funds for General Fund\u2011supported chil\u2011 dren’s programs in DDS and DSS. Specifically, the proposed ballot measure would (1) sweep up to $308 million, but not less than $249 million, on a one\u2011time basis from the state commission’s fund reserves and (2) redirect around 50 percent of state and local commissions’ ongoing reve\u2011 nues\u2014amounting to an estimated $242 million in 2010\u201111\u2014for five years to fund various state chil\u2011 dren’s programs. This proposal would result in General Fund savings of $550 million ($200 mil\u2011 lion in DDS and $350 million in DSS) in 2010\u201111. The General Fund savings and the funds remain\u2011 ing for the commissions would decline gradually in the out\u2011years, in accordance with the slow decreases that have been occurring in tobacco product consumption and related revenues. Voluntary Contributions. In addition to the savings from the proposed ballot measure, the budget assumes that Proposition 10 local com\u2011 missions will voluntarily provide an additional $50 million to the DDS Early Start program and $55.6 million to the Managed Risk Medical Insur\u2011 ance Board Healthy Families Program (HFP) on a one\u2011time basis in 2010\u201111. LAO Comments As noted above, the administration indicates an amount ranging between $249 million and $308 million in Proposition 10 state commis\u2011 sion reserves. The budget assumes $308 million will come from the state commission reserves to offset General Fund costs in 2010\u201111. The actual amount available for the one\u2011time sweep of the state commission’s reserves will depend on the commission’s fund balance as of June 30, 2010. We are still assessing whether these funds would be available. Also, we note that the Governor’s budget assumes voluntary contributions from the local commissions to Early Start and HFP, even though the local commissions have yet to make any funding commitments for 2010\u201111. This means it is uncertain at this point whether the General Fund savings assumed from this approach will actually be realized in the budget year. LAO Alternatives The Legislature may wish to consider the following additional options to increase the magnitude of the General Fund solution that is proposed to come from Proposition 10. Assure Local Funds Are Available for State Programs. Rather than rely on a total of A n l A o r e p o r T 14 Legislative Analyst’s Office www.lao.ca.gov $105.6 million in voluntary contributions from the local commissions for Early Start and HFP, the Legislature may wish to sweep this amount on a one\u2011time basis from the local commissions’ reserves. This option would eliminate the risk of budget deficits in Early Start and HFP, should the local commissions not provide the voluntary contributions for these programs in 2010\u201111. On the other hand, this would leave the local com\u2011 missions with lower reserves to prioritize their temporarily reduced revenues to meet local needs. In considering this option to sweep some local reserves, the Legislature should weigh the trade\u2011offs of securing Proposition 10 funding for Early Start and HFP in 2010\u201111 versus providing a level of flexibility for local Proposition 10 com\u2011 missions to prioritize their commitments while temporarily receiving decreased revenues. Permanently Redirect a Portion of Propo- sition 10 Funds. The Legislature could perma\u2011 nently redirect 50 percent of the Proposition 10 revenues to General Fund\u2011supported children’s programs, rather than adopt the administration proposal for a five\u2011year period. Under this ap\u2011 proach, the Legislature could leave both the state and local commissions’ existing reserves intact, which would help the commissions transition to a permanently reduced program environment. Analyst’s Recommendation Proposition 10, which generally funds early childhood development, health, and education programs that were designed to be enhance\u2011 ments to previously existing core programs, was approved by voters during a period when state finances were healthier. Given the state’s fiscal condition now, we believe it is reasonable for the Legislature to consider a reduction to programs for enhanced services, such as Proposition 10, rather than cut more deeply into core programs. Accordingly, we recommend the Legislature adopt the Governor’s proposal to ask the voters to prioritize the use of Proposition 10 funds to support core children’s programs and services. Moreover, the Legislature may wish to go beyond the Governor’s proposal by considering the addi\u2011 tional alternatives we presented above to (1) not rely on voluntary contributions from local First 5 commissions, and instead redirect additional funding for these purposes, and\/or (2) make the ongoing redirections of funding permanent. We note that early action is necessary for the Legis\u2011 lature to qualify any Proposition 10 measure for the June 2010 election. redireCtion of County savings to CHildren’s programs Governor’s Budget Proposal As previously described, the Governor’s bud\u2011 get proposes several reductions to the IHSS and CalWORKs programs, as well as increased fed\u2011 eral funding for various social services programs, which would result in General Fund savings of about $950 million in 2010\u201111. Because coun\u2011 ties have a share of cost in these programs, the reductions and increased federal funding would result in county savings of about $675 million. The Governor proposes to redirect a por\u2011 tion of these county savings\u2014$505.5 million in 2010\u201111\u2014to fund increased county shares of cost in the Foster Care, Adoption Assistance (AAP), and Child Welfare Services programs. Figure 7 shows the existing state and county shares of A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 15 nonfederal costs for these children’s programs, as well as the proposed changes and corresponding General Fund savings. LAO Comments Potential Mandate Issues. Whenever the Legislature or any state agency mandates a new program or higher level of service on any local government, the California Constitution generally requires the state to reimburse that local govern\u2011 ment for its costs of complying with that man\u2011 date. Proposition 1A (enacted in 2004) expanded the definition of a new program or higher level of service to include certain changes in program cost\u2011sharing ratios between state and local gov\u2011 ernments. The Constitution and statutes establish some exemptions to these reimbursement require\u2011 ments. One such exemption (specified in statute) is when the cost of a new local requirement is fully offset by savings to local agencies, so that the local agencies incur no net costs from the new state requirement. The administration argues that its proposal does not constitute a reimburs\u2011 able state mandate because the state is providing such offsetting savings. However, it is difficult to determine whether the Governor’s proposal actually does avoid creating a new reimbursable state mandate for all counties. The caseloads for each of these pro\u2011 grams vary significantly from county to county. This means that a par\u2011 ticular county may not receive the same level of savings from these program reductions or increases in federal fund\u2011 ing than another county. Therefore, the proposed across\u2011the\u2011board change Figure 7 Redirection of County Savings to Children’s Programs Changes in Sharing Ratios and Estimated Savings State\/County Sharing Ratio 2010\u201111 General Fund Savings Program Existing Proposed Child Welfare Services 70\/30 30\/70 $93.2 Adoption Assistance Program 75\/25 41\/59 154.5 Foster Care 40\/60 25\/75 257.8 Total $505.5 in cost\u2011sharing ratios for children’s programs would create fiscal winners and losers among counties. Moreover, it is likely that the savings expe\u2011 rienced by counties from the proposed social service program reductions and increased federal funding\u2014some of which are temporary\u2014would vary significantly from year to year. Therefore, the state might need to establish a mechanism to adjust these new cost\u2011sharing ratios for children’s programs each year to avoid inadvertently creat\u2011 ing a reimbursable state mandate. Finally, the offsetting savings provision of mandate law has been used very infrequently and is not well\u2011established. In addition, the Com\u2011 mission on State Mandates (CSM) advises us that it has never ruled on a case in which the savings from one program were proposed to be applied to another. Therefore, it is difficult to determine whether the Governor’s proposal could use this exemption and avoid being found to be a state\u2011 reimbursable mandate. Interaction With Previous Realignments. In 1991, the state enacted major changes in sev\u2011 eral social services programs to realign program control and funding responsibility from the state to local governments. Counties were provided with dedicated tax revenues from the sales tax and vehicle license fees to pay for these changes. Over the years, caseload increases and other A n l A o r e p o r T 16 Legislative Analyst’s Office www.lao.ca.gov factors have increased the costs of many of these social services programs. The base amount of funding dedicated to social services from this original realignment, however, has not kept pace with these increased program costs. In addition, counties have not received an inflationary adjust\u2011 ment to reflect increases in their administrative costs since 2001\u201102. At the time of the enactment of the 1991 realignment statutes, a series of poison pill provisions were put into place that would make components of realignment inoperative under specified circumstances. One such circumstance is if the CSM determines the realignment pro\u2011 visions constitute a reimbursable mandate of more than $1 million or there is an appellate court determination that upholds a reimbursable mandate. Although counties indicate that social services funding levels have not kept pace with program growth since the 1991 realignment, they have not filed for reimbursable mandate claims. However, the Governor’s proposal to further increase counties’ share of costs in children’s programs by redirecting county savings associat\u2011 ed with other social services proposals may lead counties to pursue reimbursable mandate claims related to the original realignment, which in\u2011 creases the risk of triggering the aforementioned poison pill provision. Therefore, before enacting any further changes to existing cost sharing ratios for chil\u2011 dren’s programs, it would be important for the Legislature, administration, counties, and other key parties to seek a consensus to ensure that this new realignment proposal does not jeopar\u2011 dize the previous realignment. Policy Rationale for Realignment. As we have discussed in several previous publications, realignment, implemented correctly, can im\u2011 prove the management and delivery of important programs. For this reason, we believe the Legisla\u2011 ture’s decision to realign a program should focus on program policy objectives and interest in increasing local control\u2014not simply on shifting costs to local governments to achieve General Fund savings. In our 2003\u201104 Budget: Perspectives and Issues report, we discuss the merits of realign\u2011 ing children’s programs. In general, we believe it may be beneficial to give counties more control and responsibility for the full system of children’s programs. This would encourage counties to manage each element of the program effectively and efficiently to meet local community needs. We note, however, that there are other social ser\u2011 vices programs, such as CalWORKs, that may be better candidates for realignment. Analyst’s Recommendation Because the Governor’s proposed county redirection of savings achieves General Fund sav\u2011 ings without potentially reducing service levels, we believe the proposal has merit. On the other hand, there are serious questions about whether the proposal constitutes a reimbursable mandate and how it might impact the 1991 realignment and its poison pills. Accordingly, we recommend that the Legislature and administration work with the counties to seek consensus on these issues before enacting any further changes to existing cost\u2011sharing ratios for children’s programs. A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 17 inCreased federal eligibility for foster Care The Foster Care program provides funds for the out\u2011of\u2011home care of children removed from the custody of a parent or guardian as a result of judicial order or a voluntary placement agree\u2011 ment. The Foster Care program is supported with federal funding under Title IV\u2011E of the Social Security Act for eligible cases, as well as with General Fund and county funds. About 71 per\u2011 cent of Foster Care children are from families with incomes low enough to meet eligibility requirements for federal funding. Governor’s Budget Proposal As part of its new federal\u2011state partnership proposal, the administration proposes to ask the federal government to provide federal funding for all children placed in the Foster Care program. This would require changes in federal law and regulations relating to various existing eligibil\u2011 ity requirements for federal Title IV\u2011E funds. The budget assumes an implementation date of June 1, 2010 from such a change in federal law, with General Fund savings of $7.5 million in 2009\u201110 and $86.9 million in 2010\u201111. Although this change would be permanent, the savings estimates reflect a temporarily enhanced federal match of 56.2 percent for the Foster Care pro\u2011 gram under ARRA. LAO Comments Current Federal Funding Structure Tied to Outdated Program. Many of the current federal funding provisions for the child welfare system are tied to the old federal welfare program, known as the Aid to Families with Dependent Children (AFDC) program. This is because foster care used to be part of AFDC, which included certain income eligibility standards for federal funding. Although Congress created a separate federal foster care program under the Social Se\u2011 curity Act in 1980, the new program kept many of its previous links, including the income eligi\u2011 bility standards to the AFDC welfare program. In 1996, when Congress eliminated AFDC and re\u2011 placed it with the TANF program, it kept in place existing AFDC income standards for providing federal assistance for foster care and adoption. Therefore, for a child to currently qualify for fed\u2011 eral foster care assistance, his or her family must meet the income test of the AFDC program as it existed on July 16, 1996. Because these income standards have not been revised, including any changes for inflation, the number of children who enter Foster Care who are eligible for federal assistance tends to decrease each year. For 2010\u201111, the DSS esti\u2011 mates that about 71 percent of Foster Care cases will be eligible for federal funding. New Federal Legislation Already De- Linking Adoption Assistance. We note that the federal Fostering Connections to Success and In\u2011 creasing Adoptions Act (P.L. 110\u2011351), which was passed in October of 2008, includes a provision to gradually de\u2011link AFDC income requirements for federal assistance in AAP. As a result, all AAP cases will be eligible for federal funding by 2017\u201118. In addition, a vehicle to pursue similar action on the Foster Care side already exists\u2014 H.R. 3329 was introduced in July 2009 to de\u2011link federal funding for foster care maintenance pay\u2011 ments from AFDC eligibility requirements. Analyst’s Recommendation We recommend the Legislature support the Governor’s proposal to pursue federal funding for all Foster Care cases. As discussed above, the eligibility requirements for federal funding for Foster Care are tied to an outdated income A n l A o r e p o r T 18 Legislative Analyst’s Office www.lao.ca.gov standard from a welfare program that no longer exists. Moreover, the federal government requires states to protect all children from abuse and ne\u2011 glect, regardless of their families’ income. There\u2011 fore, there does not seem to be a strong policy rationale to only provide federal funding for low\u2011 income Foster Care cases. We would also note that eliminating cumbersome federal eligibility determinations in the Foster Care program would result in some administrative savings for the state and counties. Although we recommend the Legislature support this proposal for increased federal funds for Foster Care, there is no basis to assume such federal changes will occur anytime soon. Ac\u2011 cordingly, we recommend the budget not be adjusted at this time to reflect any savings from this proposal. A n l A o r e p o r T www.lao.ca.gov Legislative Analyst’s Office 19 A n l A o r e p o r T LAO Publications This report was prepared by ginni Bella navarre and Minsun park, and reviewed by Todd Bland. The legislative Analyst’s office (lAo) is a nonpartisan office which provides fiscal and policy information and advice to the legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the lAo’s internet site at www.lao.ca.gov. The lAo is located at 925 l street, suite 1000, sacramento, CA 95814. 20 Legislative Analyst’s Office www.lao.ca.gov ”

” Considering the State Costs and Benefits: In-Home Supportive Services Program M A C T A y l o r l e g i s l A T i v e A n A l y s T J A n u A r y 2 1 , 2 0 1 0 L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 2 ExEcutivE Summary The In-Home Supportive Services (IHSS) program provides care for over 430,000 recipi- ents, at an annual total cost of about $5.5 billion. The program, which is available to low-in- come elderly and disabled persons, provides various services to recipients in their own homes. Assistance is provided with tasks such as cleaning, meal preparation, bathing, grooming, and helping with medications. The IHSS caseload varies widely with regard to the number of hours of monthly service provided. Benefits of the IHSS Program. For many recipients, the program allows individuals to live at home rather than in an institutional setting (typically, a nursing home). By preventing\u2014or at least delaying\u2014the move to a nursing home, the program can save money for the state. This is because, for a given individual, the annual public sector costs of providing IHSS services is considerably less than the costs of a nursing home. Many other recipients, however, do not face institutionalization in the absence of IHSS services. In these cases, the public sector realizes costs, but there are still benefits for recipients. The program can enhance the quality of life by making it easier to live at home, and it reduces the time and financial burden on family and friends. Net Fiscal Impact on Public Sector. The net impact on the state and counties depends on the mix of the IHSS population\u2014that is, what proportions of the caseload would be institution- alized and would not be institutionalized in the absence of the program. To explore this issue, we created a fiscal model that compares the cost of IHSS to the estimated cost of a long-term care system without IHSS. Our key findings are: \u27a2 Relative Risk for Institutionalization. Not surprisingly, our model estimates a much greater risk of entering a nursing home for those IHSS recipients who are the most el- derly and using the greatest number of hours. \u27a2 Net Costs to State and Counties. After accounting for both costs and savings to the state and counties, IHSS probably results in net costs. This is because the savings (in the form of avoided nursing home costs) are probably more than offset by the costs (to provide IHSS and related services) for those recipients who would not be institutional- ized in the absence of the program. \u27a2 Net Savings to the State. From the state’s perspective alone (not considering the coun- ties), IHSS may well result in net savings. (This is because the state receives a greater share of savings than it incurs in IHSS costs compared to counties.) Policy Implications. From a fiscal perspective, our findings indicate that the state maxi- mizes its net fiscal impact by targeting IHSS services to those recipients who are most likely to enter a nursing home in the absence of the program. This is the approach that the state took L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 3 in 2009-10 budget actions affecting the program. The state reduced services to those who are least likely to require institutionalization. Given the state’s continuing fiscal problems, we offer additional options for the Legislature to consider that can achieve state savings through in- creased targeting. We note that the Governor’s 2010-11 budget proposes to eliminate IHSS for all but the most impaired (13 percent of the caseload). L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 4 introduction The IHSS program provides in-home care for persons who cannot safely remain in their own homes without such assistance. In order to qualify for IHSS, a recipient must be aged, blind, or disabled and in most cases have income at or below the level necessary to qualify for the Supplemental Security Income\/State Supplemen- tary Program (SSI\/SSP). County social workers perform an assessment to determine the number of hours and type of services to authorize an IHSS recipient. The recipient is responsible for hiring and supervising a provider. Based on the submittal of timesheets, the providers are paid with a combination of state, federal, and county funds. Why Was iHSS created? The IHSS program was established as a way to provide in-home domestic and personal care services to recipients who may otherwise be at risk of nursing home placement. Another ben- efit of the IHSS program is that it makes living at home easier for recipients, and reduces the time and financial burdens on their friends and family members. The rationale for providing IHSS was that in-home care, rather than institutional care, would increase the quality of life for program recipients and could potentially result in cost avoidance for the state. However, as we will dis- cuss later in this analysis, quantifying the extent to which IHSS has actually resulted in net state savings is challenging. considering the cost- Effectiveness of iHSS Due to the increasing cost and demand for the IHSS program, one major ongoing legislative concern has been whether the IHSS program has saved the state money by reducing institutional placement costs. This issue of whether IHSS results in a net fiscal benefit to the public sector is one of cost-effectiveness. Overall, the program would be considered cost-effective if the aggre- gate amount the state spends on IHSS is equal to or less than the amount the state would spend on institutional placement and other services in the absence of IHSS. As we noted in our Analysis of the 2006\u201107 Budget Bill, the per-person, per-year cost of IHSS was $10,000 (at the time), while the per-person, per-year cost of institutional care was about $55,000. This simple comparison of the annual cost of these two types of care is mis- leading, however, because it does not take into account some key factors we will discuss later in this report. This report provides an analytical framework to consider the likelihood that indi- vidual IHSS recipients will enter a skilled nursing facility (SNF) if they lose IHSS, to compare the costs of these different types of care, and to ana- lyze the cost-effectiveness of IHSS with respect to state government. To this end, we created a fiscal model that compares the cost of IHSS to the cost of a world without IHSS. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 5 Background History of iHSS Some version of the IHSS program has been present in California since the 1950s. Until 1993, IHSS was funded through a combination of state, federal Title XX (Social Services Block Grant funds), and county funds. In 1993, Chapter 939, Statutes of 1992 (AB 1773, Moore), directed the Department of Health Care Services (DHCS) to submit a state plan amendment (SPA) to the fed- eral Centers for Medicaid and Medicare Services (CMS) to include a portion of the IHSS program as a service eligible for federal Medicaid funds (known as Medi-Cal in California). As a result of this SPA, some IHSS recipients became eligible for federal Medicaid funding through what is referred to as the Personal Care Services Program (PCSP). In 2004, DHCS and the Department of Social Ser- vices (DSS) submitted a waiver application to the CMS to make most of the remaining recipients eli- gible for federal funding. Approval of this waiver, now known as the IHSS Plus Option (IPO), was granted in August 2004. Currently, IHSS consists of three compo- nents\u2014PCSP (about 92 percent of the casel- oad), IPO (about 7 percent of the caseload), and Residual (about 1 percent of the caseload). Thus, about 99 percent of the caseload is eligible for federal Medicaid funding. How iHSS Works IHSS Program Funding. The IHSS program is funded through a combination of state, county, and federal Medicaid funds. For almost all IHSS recipients, 50 percent of program costs are paid by the federal government, about 32.5 percent by the state, and 17.5 percent by the county. Only about 1 percent of IHSS recipients are not eligible for federal Medicaid funding. Program costs for these recipients are shared 65 percent by the state and 35 percent by the counties. The IHSS program administration costs are shared 50 percent by the federal government, 35 per- cent by the state, and 15 percent by the counties. The amount of the federal share in the IHSS program (50 percent) is determined by a federal formula known as the federal medical assistance percentage (FMAP). The American Recovery and Reinvestment Act of 2009 temporarily increased the FMAP from 50 percent to 61.6 percent from October 2008 through December 2010. Eligibility. To be eligible for IHSS, a person must be aged, blind, or disabled and usually have income at or below the SSI\/SSP grant level ($845 per month for individuals as of October 2009). Those individuals with income in excess of this grant level may still be eligible for IHSS with a share of cost (SOC). An IHSS recipient with a SOC must make an out-of-pocket monthly pay- ment towards the receipt of IHSS services before the IHSS program pays the remainder of the cost of their services. Eligibility for IHSS is generally limited to individuals with no more than $2,000 in assets and couples with no more than $3,000 in assets (with certain exclusions for such assets as homes and vehicles). Application and Social Worker Assessment. When a potential IHSS recipient applies for the pro- gram at a county office, the determination of their eligibility is a two-step process that takes into ac- count the applicant’s income and need for services. Once a county worker verifies that an indi- vidual is financially eligible for IHSS, a county social worker visits the home of the recipient to determine whether there is a need for services. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 6 To perform this assessment, the social worker uses a uniform assessment tool to determine the number of hours for each type of IHSS service for which a recipient qualifies in order to remain safely in his\/her own home. Figure 1 provides a list of the types of services an IHSS recipient may be eligible to receive. The uniform assessment tool, known as the hourly task guidelines (HTGs), assists the social worker in ranking the recipient’s impairment level on a five-point scale known as the func- tional index (FI) ranking. Figure 2 (see next page) shows each of the potential FI rankings that may be assessed by a social worker, and what they mean for the impairment level of the recipient. Each FI ranking corresponds to an established range of service hours for a particular task. For example, a recipient who receives an FI ranking Figure 1 Examples of Services available to in-Home Supportive Services recipients tasks Examples domestic Services Cleaning, dusting, picking up, changing linens, changing light bulbs, wheelchair maintenance, and taking out garbage. Laundry Sorting, washing, hanging, folding, mending, and ironing. Shopping and Errands Purchasing groceries and putting them away, picking up prescriptions, and buying clothing. meal Preparation Planning menus, preparing food, and setting the table. meal cleanup Washing dishes and putting them away. Feeding Feeding. ambulation Assisting recipient with walking or moving in home or to car. Bathing, oral Hygiene, grooming Bathing recipient, getting in or out of the shower, hair care, shaving, and grooming. routine Bed Baths Sponge bathing the body. dressing Putting on\/taking off clothing. medications and assistance with Prosthetic devices Medication administration assistance; taking off\/putting on, maintaining, and cleaning prosthetic devices. Bowel and Bladder Bedpan\/ bedside commode care, application of diapers, assisting with getting on\/off commode or toilet. menstrual care External application of sanitary napkins. transfer Assistance with standing\/ sitting. repositioning\/ rubbing Skin Circulation promotion and skin care. respiration Assistance with oxygen and oxygen equipment. Protective Supervision Ensuring recipient is not harming themselves. of 2 on the feeding task may be authorized to receive between 0.7 hours and 2.3 hours of feeding per week. The corresponding range of hours varies depending on the particular task being assessed. For example, meal preparation services range from three to seven hours. Also, if an individual is assessed as having an FI ranking of 1 for any given task, he or she will not receive any authorized hours for that task. The weighted average of the FI rankings for each task is used to create a total FI score. Although the HTGs pro- vide a standard tool, the assessment process is individualized. Social workers may, with written justification, authorize hours above or below the range established by the HTGs. Assignment of Hours. Once a social worker has determined the number of hours to autho- rize for a recipient, the recipient is notified of L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 7 the number of hours they have been authorized for each task. Using the HTGs, social workers may authorize between 1 and 283 total hours per month of IHSS services. Currently, recipients receive an average of about 85 hours of IHSS per month. Recipients who receive over 195 hours of service each month are considered to be severe- ly impaired. All Eligible Recipients Receive Services. Once it has been determined that a recipient meets the eligibility criteria for IHSS, that indi- vidual is granted those IHSS services. As a result, there is no waiting list or cap on program enroll- ment. State Participation in Wages. County wages and benefits to IHSS workers range from $8.00 per hour to $14.99 per hour. Currently, the state has a share in the cost of IHSS wages up to $9.50 per hour and, for benefits, up to $0.60 per hour. Counties with wages and benefits above $10.10 split the additional cost with the federal govern- ment. Prior to the 2009-10 February budget, state participation in IHSS provider wages and benefits was $12.10 per hour. Although the state participation in wages has recently been lowered to $10.10 per hour, a federal judge issued an injunction to stop the decrease in state participa- tion. As a result, despite current law, the state is still participating in com- bined wages and benefits of up to $12.10 per hour. As noted above, IHSS wages and benefit levels vary across coun- ties. Within a particular county, however, IHSS workers are paid\u2014with very few exceptions\u2014 the same hourly wage regardless of their training, the type of services they are providing, and their qualifications. the iHSS Program is growing The IHSS program is the fastest growing major social services program in California. Between 1998-99 and 2008-09, IHSS General Fund expenditures grew at an average annual rate of about 13 percent. This growth was due to the combined effect of an increase in the cost per case and an increase in the IHSS caseload. In comparison, statewide General Fund spending increased by 4.8 percent annually over the same time period. Growth in the IHSS Population. Figure 3 shows that the IHSS caseload has grown from 208,400 in 1998-99 to about 430,000 in 2008-09. While the IHSS caseload has grown by about 105 percent over this time period, the total population in California has only increased by about 16 percent. Growth in the Cost Per Case. As shown in Figure 4, in addition to the growth in the casel- oad, the IHSS annual cost per case has increased from about $6,300 per case from all fund sourc- es in 1998-99 ($2,400 from the General Fund) to about $13,000 per case in 2008-09 ($4,200 from the General Fund). The increase in the cost Figure 2 Functional index rating Scale Functional index impairment implications 1 Able to perform function without human assistance\u2014independent. 2 Able to perform a function, but needs verbal assistance (reminding, encouraging). 3 Able to perform a function with some human, physical assistance. 4 Able to perform a function with substantial human assistance. 5 Cannot perform the function with or without human assistance. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 8 In-Home Supportive Services Caseload Continues to Grow Figure 3 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 per case is primarily due to increasing wages for IHSS providers and an increase in the average number of authorized IHSS hours per case. Figure 4 illustrates that the growth of the General Fund portion of the IHSS cost per case slowed from 2003-04 through 2004-05. This was due primarily to the previously mentioned 2004 federal waiver ap- proval that made most individuals in the Re- sidual program eligible for federal Medicaid funds, thereby offset- ting some General Fund costs. Since 2005-06, the average rate of General Fund growth in the cost per case has been about 4.1 percent. a closer Look at iHSS recipients The IHSS caseload is very diverse. There are some very frail recipients who receive the maxi- mum amount of hours, and some recipients with less severe disabilities and fewer hours. As a result, some IHSS recipi- ents rely more heavily on In-Home Supportive Services Cost Per Case Also Growing Figure 4 2,000 4,000 6,000 8,000 10,000 12,000 $14,000 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 Other Funds General Fund L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 9 Most Providers and Recipients Are Relatives Figure 5 Provider Not Related Close Other Relatives IHSS services than other recipients. Below, we highlight some of the characteristics that contrib- ute to the diversity of the IHSS caseload. Recipient and Provider Relationship. Cur- rently, there are about 376,000 IHSS individual providers statewide. As shown in Figure 5, almost two-thirds of IHSS recipients receive care from a provider who is related to them. More- over, about 46 percent of IHSS recipients receive care from either their own parent, spouse, or adult child (defined as a close relative for pur- poses of this report). In about half of cases, IHSS providers live in the same home as the IHSS recipient. Age of IHSS Recipients. Although the IHSS program serves a wide age range of recipients, as shown in Figure 6, the majority of recipients are elderly. While almost 60 percent of IHSS recipients are over the age of 65, only about 5 percent of the total IHSS population is under the age of 18. Authorized Service Hours. Within the IHSS caseload, some recipi- ents have high impair- ment levels and a high number of authorized hours, and others have low impairment levels and a low number of hours. Although recipi- ents may receive up to 283 hours, only a small percentage of recipients actually receive more than 200 hours of care each month (see Figure 7). Moreover, nearly 60 percent of IHSS recipients receive less than 80 hours of care each month (about 18 hours of care per week). Some IHSS Recipients are Developmentally Disabled. About 35,000 (nearly 9 percent) of IHSS recipients are developmentally disabled. A developmental disability is defined as a disabil- ity attributable to mental or physical impairment that originates before an individual is 18 years old, and that is expected to continue indefi- nitely. Developmental disabilities include, but are not limited to, mental retardation, cerebral palsy, epilepsy, autism, and other disabling con- ditions related to mental retardation. Within the IHSS population, developmental disabilities are most common among the young recipients with high hours. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 10 Community services for the developmentally disabled population are overseen by the Depart- ment of Developmental Services (DDS). These services are provided through 21 regional centers (RCs) located throughout the state. The RCs are responsible for eligibility determina- tions and client assess- ments, the develop- ment of an individual program plan, and case management. In gen- eral, RCs only pay for services after individuals have maximized their access to so-called generic services (those services provided at the local level by counties, cities, school districts, and other agencies), such as IHSS. Diverse Caseload Results in Diverse Ser- vices. As demonstrated by the above data, the IHSS caseload is not uniform. The program serves over 430,000 different recipients with varying service autho- rizations and needs. Some recipients rely more heavily on the program than others. Most of the In-Home Supportive Services Population Is Elderly Figure 6 5 10 15 20 25 30 35 40% 0 to 6 7 to 18 19 to 44 45 to 64 65 to 79 80+ (Age of Recipients) Number of In-Home Supportive Services Hours Varies Figure 7 (Percentage of Recipients According to Monthly Authorized Hours) 5 10 15 20 25 30% 0-25 26-55 56-79 80-119 120-159 160-199 200-283 L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 11 coSt-drivErS For iHSS and rELatEd ProgramS Is IHSS Cost-Effective to State Government? As we discuss below, a simple comparison of the lower yearly costs of IHSS to the higher yearly cost of a SNF does not take into account other factors which may contribute to the overall cost of IHSS. Below we discuss how the costs of these two types of long-term care compare. How the costs of iHSS and institutional care compare California currently administers a continuum of long-term care programs available to seniors and those with disabilities. As shown in Figure 8, the IHSS program is part of California’s long-term care continuum. Most long-term care programs may be classified as either community-based or institutional programs. Differences in Average Yearly Cost of Care. The average annual cost per person of institu- tional care is higher than the average annual cost per person of community-based programs. Specifically, in 2007-08, the average yearly cost of a SNF was over $50,000 per person while the average cost of IHSS was about $12,000 per person. However, these comparisons in many cases understate the true cost of keeping some- one in the community. Some IHSS recipients, for example, may be receiving multiple services, such as a home-delivered meals or case manage- ment services, that add to the overall cost of their community-based care. Differences in Average Time in Care. Anoth- er key factor to consider in comparing the costs of institutional care and community-based care is the time an individual spends in each type of care. On average, individuals in institutional care settings are there for shorter periods of time. As seen in Figure 9, for all age groups, the average time in care is longer on IHSS than in a SNF. As a result, the length of time recipients spend in IHSS should be considered when comparing the total cost of providing care for a recipient in the community rather than in a SNF. other Factors affecting relative costs Not All IHSS Recipients Would Otherwise Enter a SNF. In the absence of IHSS, what would happen to program recipients? Some clearly would be placed in a SNF. However, our analysis indicates that, given the diversity in the caseload, it is likely that a significant portion of recipients would not otherwise require institutional care. Although some IHSS recipients currently meet the eligibility criteria for SNF placement, and are therefore deemed SNF-certified, meeting Figure 8 Program costs vary in california’s Long-term care continuum 2007\u201108 Total Costs Program average annual cost Per Participant community-Based care Linkagesa $2,012 Multipurpose Senior Services Program 3,454 Alzheimer’s Day Care Resource Centera 5,043 Adult Day Health Care 10,482 In-Home Supportive Services 12,287 institutional care Skilled Nursing Facilities $51,100 a Funding for these programs was eliminated as of October 2009. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 12 Average Time in In-Home Supportive Services Much Longer Than for Skilled Nursing Facilities Figure 9 aThe average length of stay data is stratified slightly differently for IHSS and skilled nursing facilities. 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0 to 6 7 to 18 19 to 44 45 to 64 65 to 79a (65 to 84 SNF) 80+a (85+ SNF) In-Home Supportive Services Skilled Nursing Facility Age Group Years of Service this threshold is not an eligibility requirement for IHSS program participation. Moreover, no current data is available on the percentage of IHSS recipients who meet the eligibility criteria for SNF placement. Notably, exit data indicate that each year about 5,500 IHSS recipients (or about 1.3 percent of the total number of IHSS recipients) enter SNFs directly from IHSS. (This number, however, understates the actual number of recipients who eventually end up in a SNF after IHSS because some recipients first enter a hospi- tal, or some other facility, before entering a SNF.) Recipients May Enroll in Multiple Programs. Recipients who receive IHSS are usually receiving assistance through other state programs, such as a cash grant through the SSI\/SSP Program. Compar- ing only the costs of IHSS and nursing home care understates to some degree the cost of providing care for the individual in the community. PErSPEctivES on tHE coSt-EFFEctivEnESS oF iHSS Whether IHSS results in overall state sav- ings on long-term care is difficult to determine. Such an analysis requires a combination of data collection, development of key assumptions, and fiscal modeling. Below, we provide an analytical framework for considering whether the operation of the IHSS program results in a net fiscal benefit for the state. We describe the purpose of our fiscal model, our key data sources, our main assumptions, and our methodology. (We also discuss research related to this subject in the box on the next page.) Purpose of the model Developing a Fiscal Model. In the absence of IHSS, as we noted earlier, some program recipients would likely end up in institutional care, while others would not. However, it is difficult to estimate the number of recipients that would be most likely to enter a SNF if the IHSS program did L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 13 not exist. This is a key factor in evaluating the cost-effectiveness of the program. To address this question, we created a model that, based on certain assumptions, estimates the potential cost of nursing home care in the ab- sence of IHSS. As shown in Figure 10, the model assumes that, over time, all current and future IHSS recipients would otherwise (1) enter a SNF, (2) receive care from friends and family at no government cost, or (3) receive (if eligible to do so) an increased level of care from DDS. Since the exact percentage of recipients who would shift to SNF care is unknown, the model allows us to test various assumptions as to the percent- age of recipients who would enter a SNF in the absence of IHSS. The model estimates the Gen- eral Fund cost of the long-term care system for any given assumption concerning the percentage of recipients entering a SNF in the absence of IHSS. This cost estimate can then be compared to our forecast of the business as usual cost of continuing the IHSS program without changes to determine the net cost-effectiveness of the IHSS program. Although this model compares costs based on different assumptions of SNF entry rates in the absence of IHSS, it does not predict or estimate the actual SNF entry rate in the absence of IHSS. This is because data are not available to predict the behavioral response to the elimination of IHSS. LAO Hypothesis: Factors Increasing Like- lihood of SNF Entry. Given the difficulty in predicting which recipients would be likely to enter a SNF in the absence of IHSS, we created a working hypothesis of which IHSS recipients would be most likely to enter a SNF in the ab- Previous research on community-Based care The research we reviewed as part of our analysis of the cost-effectiveness of community- based care is limited and offers mixed findings. Some studies, such as one performed by researchers at the University of California, San Francisco, consider the per year cost of the community-based program and the SSI\/SSP grant and compare those costs to the costs of institutional care programs. On this basis they con- clude that community-based programs cost less per person annually than institutionalization. However, these studies do not estimate the number of recipients who would enter a skilled nursing facility (SNF) in the absence of community-based services, and therefore do not deter- mine whether in-home care results in overall governmental savings. Another study, sponsored by the U.S. Department of Health and Human Services, points out that recipients of home and community-based care services may never have entered a SNF even in the absence of alternatives. Rather than reducing costs, these recipients added to the overall cost of providing long-term care in the community. A common theme among the research is the importance of targeting community-based care to those most likely to enter an institution in order to increase the cost-effectiveness of in-home care programs. Another common theme of the research is that providing care in the community often increases the quality of life for elderly clients. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 14 sence of IHSS. Our hypothesis was based on in- formation provided by state and county officials; experiences accompanying social workers on IHSS recipient assessments and reassessments; and public testimony at legislative hearings by program recipients, providers, advocates, and county representatives. Essentially, we concluded that the recipients most likely to enter a SNF in the absence of IHSS would be those who were (1) older, (2) received high levels of authorized IHSS care, and (3) received services from a pro- vider who was not a close relative. key data Sources We collected data in a form that allowed for the testing of our hypothesis from DSS and DHCS. Below, we describe the main data sources. Stratifying the Current IHSS Caseload. To better understand the differences among IHSS recipients and how they differ in their use of the program, we obtained data that gave us a snapshot of the current com- position of the IHSS caseload. The casel- oad was stratified by age, the relationship of the provider to the recipient, and the number of authorized IHSS hours. Current IHSS Ex- its. Some recipients exit IHSS because they enter an institution, Overview of the LAO Model: Flow of Recipients In the Absence of In-Home Supportive Services Figure 10 All current and future IHSS recipients. Enter a skilled nursing facility. Rely on resources of family and friends (no government cost). Rely on increased developmental disability services. because they die, or because they no longer meet eligibility requirements. A DSS computer system documents where recipients went upon exiting IHSS. We obtained this IHSS data for a six-month period. These data were stratified by age, provider type, and the number of autho- rized IHSS hours. We specifically considered the characteristics of the IHSS recipients who died, entered a SNF, or were admitted to a hospital over this six-month period. This allowed us to determine which types of IHSS recipients were most likely to enter a SNF. We concluded that these recipients were the most frail among the IHSS caseload. SNF Data From the DHCS. The DHCS provided data on the average length of stay and average cost of SNF placements by the age of the recipient. From this data, we were able to better understand differences in the average length of L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 15 stay and cost of SNF care based on the age of the recipient. key Features of the model Below, we describe the assumptions we made related to the length of time a recipient would remain in the SNF, the characteristics of the recipients at the highest risk of SNF place- ment, and the costs and growth over time. Time in Care. This analysis assumes that those who would enter a nursing home in the absence of IHSS will stay there for the current average length of stay in a SNF. In other words, if the model is testing the cost-effectiveness of IHSS based on a scenario that assumes that 50 percent of IHSS recipients would enter a SNF in the absence of IHSS, all 50 percent that enter a SNF are assumed to have stayed for the aver- age length of stay for each age group. Relative Propensity to Enter a SNF. The exit data was used to determine the characteristics of IHSS recipients who were most likely to enter a SNF relative to other recipients. Figure 11 shows the relative propensity of an IHSS recipient to en- ter a SNF based on two factors: age and num- ber of IHSS authorized hours. The darkest shad- ing in Figure 11 indicates that older recipients with a high number of autho- rized hours are the most likely to enter a SNF. The exit data was used to inform and build the model. Under any scenario, the model assumes that a higher percentage of the more frail recipients will enter a SNF in the absence of IHSS. For example, if the model is testing a scenario where 50 percent of recipients would enter a SNF in the absence of IHSS, those who were frail would enter SNFs at a higher rate than 50 percent, while the less frail would enter at a rate lower than 50 percent. Comparing Costs at Equilibrium. For pur- poses of this analysis, we focused on the cost-ef- fectiveness of IHSS in the longer term\u2014once the model has reached equilibrium in about seven years. Under the model, the costs of SNF place- ment for the current IHSS caseload would be high in the early years. However, for purposes of this analysis, we believe it is more appropriate to compare the long-term costs of a world without IHSS to the long-term costs of IHSS as it operates today. Base-Year Costs and Growth. In general, the costs in our model for IHSS and SNF care are based on 2007-08 General Fund and county expenditures. In the out-years of the analysis, the costs were kept constant and only adjusted for caseload growth. Figure 11 in-Home Supportive Services recipients most at risk of SnFa Placement (By Age and IHSS Monthly Hours) Hours of care age 0-79 80-200 200+ risk of SnF Entry0 to 6 7 to 18 Lowest 19 to 44 45 to 64 65 to 79 Highest 80+ a Skilled Nursing Facility. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 16 additional costs and Savings included in the model Treatment of the Developmentally Disabled Population. Our model assumes that, in the absence of the availability of IHSS services, all IHSS recipients who are developmentally dis- abled would incur increased DDS costs, rather than enter a SNF. We assumed that each hour of lost IHSS services would be replaced with an hour of services purchased through the RCs at an increased cost to the state. Costs for Accidents. We recognize that, in the absence of IHSS, recipients may not imme- diately enter a SNF. Some recipients may instead have an accident or other episode that eventually results in their placement in a SNF. As a result, potential costs for accident-related injuries for some recipients are factored into the analysis. SSI\/SSP Savings. About 86 percent of IHSS recipients receive a monthly SSI\/SSP grant pay- ment. When IHSS recipients enter institutional care, their SSI\/SSP grant is significantly reduced. The model accounts for these savings in SSI\/SSP. Some Factors not accounted For in the model As previously noted, because this model is a simplification of the real world, it is based on many assumptions. As a result, it is important to acknowledge several factors that we were unable to build into our analysis. These include such factors as the impact of the program on the qual- ity of life of recipients. For more details about the factors that were excluded from our analysis, please see the box on the next page. ScEnario anaLySiS As explained above, to test the cost-effective- ness of IHSS, we used our model to estimate the cost of nursing home placement versus the cost of IHSS under various scenarios. Figure 12 (see page 19) shows how IHSS cases (including cases of recipients with and without developmental disabilities) flow through the model. As explained earlier, under our model, all IHSS recipients who are developmentally disabled (about 9 percent of the total IHSS population) would receive in- creased developmental services, rather than enter institutional care. The percentage of IHSS recipi- ents who do not have developmental disabilities and who enter a SNF depends on the particular scenario. For example, Figure 12 shows a scenar- io where it is assumed that 50 percent of the non- developmentally disabled IHSS recipients would eventually enter a SNF if IHSS did not exist. Below, we present the results of our analysis under different potential scenarios. results of the modeling Whether IHSS is cost-effective in the ag- gregate depends on the percentage of recipients who would likely enter a SNF in the absence of IHSS. Because the state and counties both have a share in the cost of the program, we looked at both cost-effectiveness from the perspectives of (1) the state and county funds combined and (2) the state General Fund alone. Below, we pres- ent the results of our model from both perspec- tives under several different scenarios. Scenario Analysis From the Combined State and County Perspective. After accounting for both costs and savings to the state and counties, our model showed that the break-even point for L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 17 Limitations of our modeL The model discussed in this report has limitations and it does not account for all of the po- tential costs and benefits of In-Home Supportive Services (IHSS). Below, we provide examples of some of the factors that were not accounted for in our model. \u27a2 Quality of Life for Recipients. Although we recognize that one of the primary benefits of the IHSS program is that it may increase the quality of life for program recipients and their families, we are unable to quantify this benefit in the model. As a result, this analy- sis is only focused on the fiscal costs and benefits of IHSS. \u27a2 Potential Costs in Other Programs for IHSS Recipients. Some IHSS recipients receive other services in the community that add to the cost of their care, such as housing ben- efits, home-delivered meals, and case-management services. Due to data limitations, we are not able to quantify the extent to which these other programs are utilized by IHSS recipients and the related costs. \u27a2 Cost-Effectiveness of IHSS for the Federal Government. Our analysis measures the cost- effectiveness of IHSS from the standpoint of the state. It does not measure whether the IHSS program is cost-effective for the federal government or society as a whole. \u27a2 A Change in the Average Length of Stay in a Skilled Nursing Facility (SNF). This analy- sis assumes that recipients would have the same average length of stay in a SNF in the absence of IHSS as they have in the current long-term care system where IHSS exists. To the extent that the existence of IHSS has an impact on the average length of stay in a SNF, the impact is not recognized in this analysis. Nevertheless, we used our model to test the effects of a 10 percent increase in the average length of stay. This change had a minimal impact on the results and did not impact our final conclusion. \u27a2 The Impact of the American Recovery and Reinvestment Act (ARRA) on the Federal Medical Assistance Percentage. As noted earlier, the federal share in the cost of IHSS and SNFs has been temporarily increased pursuant to the federal ARRA. This report does not account for this temporary reduction in the state’s cost in these programs. This is be- cause this analysis considers the long-term cost-effectiveness of IHSS, while the General Fund relief from ARRA is temporary. \u27a2 The Most Recent IHSS Program Reductions and Proposals. In recent months, the Legis- lature has taken action to reduce the costs in the IHSS program (we provide more infor- mation on the IHSS reductions included in the 2009\u201110 Budget Act later in this report). In general, the actions aim to maintain IHSS for the most impaired recipients, and eliminate, or reduce, services for the least disabled. The potential savings associated with these proposals are not included in this analysis. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 18 Illustration of Scenario Where 50 Percent of IHSS Recipients Eventually Enter a SNF Figure 12 All current and future IHSS recipients without developmental disabilities. (91% of total) All current and future IHSS recipients with developmental disabilities. (9% of total) Increased Developmental Services (100%) Resources of family and friends (no government cost). (50%) Enter skilled nursing facility (SNF). (50%) IHSS cost-effectiveness occurs when 58 percent of the non-developmentally disabled popula- tion enters a SNF in the absence of IHSS. In this break-even scenario each dollar of combined state General Fund and county funds invested in IHSS saves one dollar of state General Fund SNF costs. There are no corresponding county savings because, while counties have a share of cost in IHSS, they do not have a share of cost in SNFs. In other words, if less than 58 percent of IHSS re- cipients enter a SNF in the absence of IHSS, the program would not result in a net fiscal benefit to the state and counties combined. In addition to the 58 percent break-even scenario, Figure 13 shows the fiscal effects for nursing home entry rates under alternative scenarios\u2014in which the SNF entry rate for IHSS recipients who are not developmentally dis- abled is either 38 percent or 78 percent (20 per- centage points above and below the estimated break-even point). These percentages do not include the developmen- tally disabled recipients, who would receive increased developmental disability benefits rather than enter a SNF. The fig- ure also summarizes the net fiscal impact under each scenario in year seven. Scenario Analysis From the Perspective of the State Alone. When only considering the state General Fund costs of IHSS, the break-even point for cost-effective- ness is significantly lower than for the state and county combined. Our model shows that for Figure 13 Summary of model results for different Scenarios (General Fund and County Funds, in Millions) Percent Shifted to SnFa 38% 58% 78% Total SNF and developmental disability costs with no IHSS. $2,880 $3,822 $4,787 Baseline costs of IHSS. 3,822 3,822 3,822 net cost (-)\/Savings (+) -$924 \u2014 $965 a Percent of non-developmentally disabled shifted to skilled nursing facility (SNF). L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 19 the state General Fund, the break-even point for IHSS cost-effectiveness occurs when 32 percent of the non-developmentally disabled population enters a SNF in the absence of IHSS. Figure 14 is similar to Figure, 13 except it shows the fiscal effects for nursing home entry rates from the perspective of the state General Fund alone under alternative scenarios\u2014in which the SNF entry rate for IHSS recipients who are not developmentally disabled is 16 percent, 32 percent, or 48 percent. (A 50 percent increase and decrease compared to the estimated break- even point.) What do the Break-Even Points imply With respect to SnF Entry rates? Because there is no way to know how individuals and state programs would actually behave in a world without IHSS, it is difficult to determine whether IHSS is cost-effective for state government. The key question presented by our model is whether the IHSS program prevents at least 58 percent (or 32 percent from the perspec- tive of the state alone) of the recipients who are not developmentally disabled from entering a SNF, on average. To evaluate this question, we compared the percentage of certain subgroups that shifted from IHSS to a SNF under our model to what we as- sumed would shift under our working hypothesis. In other words, we sub- jected our model to a sort of reality check to see if it was reasonable. Below, we describe the aspects of our model that helped to inform this perspective. The Implications of a Cost-Effective Sce- nario for the State and Counties. Under a state\/ county break-even scenario, 58 percent of the total caseload that is not developmentally dis- abled would enter a SNF facility in the absence of IHSS. A scenario with overall SNF entry rates at 58 percent means different entry rates for the various subgroups within the IHSS caseload. This is because the exit data we collected indicates that certain recipients are more likely to enter a SNF than others. For example, this break-even scenario would mean that 100 percent of the non-developmentally disabled recipients over the age of 65 with over 200 hours of IHSS services would enter a SNF in the absence of the pro- gram. Additionally, it means that 12 percent of recipients under age six with under 80 hours of authorized services would enter a SNF in the absence of IHSS. Moreover, this means that 81 percent of all recipients over the age of 80, and 22 percent of those under the age of six would enter a SNF in the absence of IHSS. Lastly, if 58 percent of recipients enter a SNF in the absence of IHSS, our model estimates that about 43 percent (91,000) of recipients with under 2.5 hours of IHSS service per day (80 hours per month) would enter a SNF. Figure 14 Summary of model results for different Scenarios (General Fund, in Millions) Percent Shifted to SnFa 16% 32% 48% Total SNF and developmental disability costs with no IHSS. $1,184 $2573 $3,356 Baseline costs of IHSS. 2,573 2,573 2,573 net cost (-)\/Savings (+) -$732 \u2014 $783 a Percent of non-developmentally disabled shifted to skilled nursing facility. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 20 The Implications of a Cost-Effective Scenar- io for the State Alone. Under a state-only break- even scenario, 32 percent of the total caseload that is not developmentally disabled would enter a SNF. This break-even scenario means that 63 per- cent of the non-developmentally disabled recipi- ents over the age of 80 with over 200 hours of IHSS services would enter a SNF in the absence of IHSS. Looking at the other end of the age and hour spectrum, 6 percent of recipients under the age of six with fewer than 80 hours of services would enter a SNF in the absence of IHSS. In this scenario, 44 percent of recipients over the age of 80, and 12 percent of recipients under the age of six would enter a SNF. Finally, if 32 percent of re- cipients enter a SNF in the absence of IHSS, our model estimates that about one-quarter (about 49,000) of recipients with less than 2.5 hours of service each day would enter a SNF. Model Results Are Generally Consistent With Our Hypothesis. The model results are generally consistent with our initial hypothesis. In other words, under all scenarios, older recipients with a high number of hours have higher SNF entry rates than younger recipients with fewer hours. Although generally consistent with our hy- pothesis, some elements of the results are some- what different than we would have expected. For example, we expected that recipients with rela- tive providers would enter SNF at a lower rate than recipients with other providers. However, the results did not seem to demonstrate a sig- nificant difference between the SNF entry rates of those with close relative providers and those with other providers. FindingS Whether IHSS results in a net fiscal ben- efit or is cost-effective to the state depends on whether the costs and benefits are counted from the perspective of the state and counties combined or for the state General Fund alone. Below, we describe our findings related to the cost-effectiveness of IHSS from these two differ- ent perspectives. iHSS is Probably not cost-Effective For State and counties combined When considering state and county costs combined, we find that IHSS is probably not cost-effective in the aggregate. This is because, based on our reality check of the model results, we find it unlikely that in the absence of IHSS, 58 percent or more of the non-developmentally disabled IHSS recipients would enter a SNF. However, iHSS may Well Be cost- Effective for the State general Fund When only considering the effect on the state General Fund, it is very possible that IHSS is cost-effective in the aggregate. Our reality check of the model results confirms that it is reasonable to believe that, in the absence of IHSS, 32 per- cent or more of non-developmentally disabled IHSS recipients would enter a SNF. This find- ing is based on our best judgment and program knowledge of IHSS. We recognize that others could reasonably arrive at a different conclusion regarding the cost-effectiveness. iHSS may not Be cost-Effective For all recipients The IHSS program serves a diverse set of recipients with different needs. For those at the L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 21 greatest risk of institutional placement, IHSS is usually cost-effective. For some current IHSS recipients, however, the evidence suggests that the provision of IHSS services is not likely to be the difference between living in the community or living in a SNF. These are the recipients with a low likelihood of entering a SNF even in the absence of IHSS. Providing IHSS services to those recipients is not a cost-effective practice, from the state’s perspective. Each dollar invested in IHSS for recipients who would never have en- tered a SNF in the absence of the program adds to the overall cost of long-term care, without avoiding costs for SNF care. Although the provi- sion of these services may increase the quality of life for those recipients, it adds to the overall cost of providing care in the community. The exception to this is the developmentally disabled caseload. Although developmentally disabled recipients may not enter a SNF as a result of the loss of IHSS services, the increased cost of the developmental disability services they would instead obtain from RCs would exceed the state’s savings from the elimination of IHSS. In other words, even if a developmentally disabled recipient is not likely to enter a SNF absent the IHSS program, it is more cost-effective to provide that recipient with IHSS services rather than an increase to the level of developmental disability services that they were already recieving. cost-Effectiveness is not the Sole Purpose of iHSS As we have noted throughout this report, the existence of IHSS serves several purposes. In some cases it may delay or prevent SNF place- ments, and in other cases it may make the lives of program recipients easier and reduce the caretaking responsibilities of friends and rela- tives. As a result, whether IHSS is cost-effective to state government should not be the sole basis for evaluating the merits of the program. Instead, the Legislature should consider both the cost- avoidance potential of IHSS and the enhanced quality of life for all recipients, including those who may be at minimal risk of SNF placement in the absence of the program. PoLicy imPLicationS: targEting incrEaSES coSt-EFFEctivEnESS In examining the issue of the IHSS program’s cost-effectiveness, we have dealt with spending in the aggregate. Our findings also indicate that, regardless of the program’s cost-effectiveness, on average, the state can take incremental steps to increase the program’s relative cost-effectiveness. For instance, targeting any service reductions to those recipients with the lowest chance of enter- ing a SNF (younger recipients and those with fewer hours of care) would increase the overall cost-effectiveness of IHSS. To this end, the re- ductions included in the 2009-10 budget (dis- cussed in the nearby box) move toward a more targeted approach to providing IHSS. Below, we discuss further approaches which target IHSS services to those who are most likely to enter a SNF in the absence of IHSS. We note that these targeting strategies are subject to federal approval and may require federal law changes and\/or additional waivers. Additionally, some proposed changes could create an incen- tive for recipients to request reassessments and L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 22 recent Budget and court actions couLd affect our modeL The 2009\u201110 Budget Act includes several significant changes to In-Home Supportive Ser- vices (IHSS). Specifically, the budget eliminates domestic and related services for recipients with functional index (FI) rankings of less than 4 for domestic and related tasks. Additionally, the budget eliminates all IHSS services for recipients with FI scores (the average of all of the individ- ual FI ranks) of less than 2. We note that for both of these FI reductions, the Legislature included exceptions for individuals who may have had low ranks or scores but had overall hours of over 120 per month or who received certain services. Finally, the enacted budget includes several anti-fraud activities that are estimated to result in significant savings. These changes have not been incorporated into the scenario analysis results shown in Figures 13 and 14. This is because the caseload dynamic and cost data are not available at this time to update this analysis to reflect these recent policy changes. Additionally, at the time of this analysis, a federal judge had issued injunctions that have prevented the state from implementing both of the FI reductions. Although there is significant uncertainty about the impacts of these proposed changes to IHSS, we believe that the changes would make IHSS more cost-effective. The Governor’s 2010-11 budget includes a proposal to eliminate all IHSS services for re- cipients with FI scores of less than 4. This would discontinue IHSS for about 87 percent of IHSS recipients and is estimated to result in state savings of $650 million General Fund. file appeals, potentially offsetting some of their fiscal benefit. Lastly, we note that because IHSS may be enhancing the quality of life and alleviat- ing caretaking responsibilities for recipients and families, the loss of services for those recipients who do not enter a SNF may result in additional hardships for families. increase minimum threshold for Qualifying for iHSS Services One option the Legislature could consider to better target the program would be to raise the minimum threshold for qualifying for IHSS ser- vices. For example, each task could have a differ- ent minimum FI ranking that would be required to receive the particular task. Recipients could be required to have a FI ranking of at least 4 to receive authorization for dressing assistance, but only a 3 to receive authorization for bathing as- sistance. By increasing the minimum ranking for qualification, services would be targeted to those with the highest impairment levels for those particular tasks. We note that the use of FI rank- ings and scores as a method for targeting IHSS services is currently being challenged in court. However, there are other ways to target services, such as making certain services only available to recipients who are authorized to receive a certain minimum number of hours, or requiring SNF certification to qualify for particular services. a new Service delivery approach The Legislature could alter the delivery of IHSS services based on the level of recipient need. As noted earlier, the IHSS program consists of a diverse caseload with varying levels of need. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 23 As a result, it may make sense to construct a pro- gram that recognizes the variation in the needs of different segments of the caseload, and provides different types of services accordingly to each segment. For example, under this approach, the more frail recipients could continue receiv- ing IHSS, while other recipients could instead receive funds to purchase goods and services to assist them in remaining in their own homes. As shown in Figure 15, a new service deliv- ery approach to IHSS could establish different tiers of available services based on the recipi- ent’s overall level of need. Recipients in the first tier would be the most frail recipients (in this example, the severely impaired with over 195 authorized hours per month) for whom services would remain unchanged. The middle tier of recipients could receive a variation on cash and counseling services, with authorization to spend a set allocation of funds on the purchase of goods and services, such as in-home care or home modifications, such as a wheelchair ramp, to assist them in remaining in their own home. (The text box provides more information about the cash and counsel- ing approach.) Tier two recipients would also receive increased case management and other assistance from their IHSS social worker. The third tier of recipients would receive no IHSS services and no alloca- tion of funds. Instead, these recipients would receive quarterly visits from a social worker who would monitor the condition of the recipi- ent and provide case-management services. The intent of monitoring this group would be to trans- fer them to tier one or two if their condition met the qualification levels of those tiers. Although our example bases the tiers on the number of authorized hours, the Legislature could consider basing the tiers on other factors related to the level of recipient need\u2014such as the recipient’s FI score or whether they receive developmental disability services or are certified for SNF placement. Additionally, for purposes of illustration, our example includes three tiers. The Legislature could consider creating additional service tiers. Such a major reform to the IHSS program which would require legislative input on many details, and likely require significant changes to the current Medicaid State Plan and waiver agreements with the federal government. How- ever, we believe that a tiered approach to service delivery would effectively target resources to those with the highest risk of SNF placement. Figure 15 Example of a new tiered approach to delivering in-Home Supportive Services affected recipients iHSS Policy change Severely-impaired recipients (195+ hours of care per month). Tier One\u2014Recipients with at least 195 authorized hours per month. No change. Non-severely impaired recipients (less than 195 hours of care per month). Tier Two\u2014Recipients with between 80 and 194 authorized hours per month. Provide (1) cash for pur- chase of goods and ser- vices and (2) increased case management. Tier Three\u2014Recipients with between 1 and 79 authorized hours per month. No IHSS or cash assis- tance. Increased social worker case management. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 24 cash and counseLing an oPtion in some states Some states have implemented a cash and counseling model of self-directed, in-home care. The cash and counseling program provides recipients with a monthly sum of available funds, based on the cost of the hours of in-home services that they would otherwise have been authorized to receive. Recipients have more flexibility in the use of these funds than they would in a program like In-Home Supportive Services (IHSS). They can use these monthly sums to set wage levels and hire a provider, install wheelchair ramps, and purchase goods that make it easier to remain at home\u2014expenditures not permitted now under IHSS. Cash and counseling recipients work directly with county officials to craft spending plans, write checks, and handle payroll taxes. Potential Savings These types of targeting strategies would likely result in long-term savings to the state. The options discussed above may be implemented individually or in combination. The amount of savings that could be achieved under each policy, or combination of policies, would vary depending upon implementation, but could range from the low millions of dollars to about $400 million annually. However, our analysis indicates that there is a limit to this approach. If these reductions are taken so far as to shift a sig- nificant number of recipients from IHSS to SNFs, the potential savings could be more than offset by larger SNF costs. concLuSion The IHSS program is the fastest-growing major social services program. Evaluating the cost-effectiveness of IHSS is a complicated task that raises many issues. As we have pointed out in this report, whether IHSS may result in a net fiscal benefit to the state depends on which cost and benefit perspective is being considered\u2014the state and counties combined or the state General Fund alone. Additionally, there are other non- fiscal benefits that are not captured in this fiscal cost-effectiveness analysis. Although our model demonstrates that the program may well be cost-effective to the state General Fund in the aggregate, there are some IHSS recipients for whom the investment in IHSS may have no effect on the state’s SNF costs. In this report, we have identified some ways that the Legislature could target IHSS services to those most likely to enter a SNF in the absence of the program. Given the state’s severe fiscal dif- ficulties, we recommend that the Legislature con- sider targeting IHSS program services to those with the highest risk of SNF placement in order to achieve significant additional state savings. L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 25 L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 26 L e g i s L a t i v e a n a L y s t ‘ s O f f i c e a n L a O R e p O R t 27 28 L e g i s L a t i v e a n a L y s t ‘ s O f f i c e LAO Publications This report was prepared by Ginni Bella Navarre, and reviewed by Todd Bland. The Legislative Analyst’s Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an E-mail subscription service, are available on the LAO’s Internet site at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. a n L a O R e p O R t ”

” January 22, 2009 mac Taylor Legislative Analyst 2009-10 Budget Analysis Series Social Services SS-2 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Contents Executive Summary ………………………………………………………………….. 3 Background …………………………………………………………………………….. 5 Description of Major Social Services Programs ……………………………………… 5 Overall Historical Spending Trends ……………………………………………………… 8 Individual Program Spending Trends …………………………………………………… 9 Overview of the Governor’s Social Services Proposals ………………………….. 11 Balancing the 2009\u201110 Budget ………………………………………………… 13 Social Services Caseload Projections ………………………………………………….. 13 Supplemental Security Income\/State Supplementary Program ………………… 14 In-Home Supportive Services ……………………………………………………………. 17 CalWORKs ……………………………………………………………………………………. 22 County Welfare Automation ……………………………………………………………… 28 Kinship Guardianship Assistance Payment (Kin-GAP) Program ……………….. 28 Child Welfare Services …………………………………………………………………….. 31 Community Care Licensing ………………………………………………………………. 32 Proposition 10 Early Childhood Development Programs ……………………….. 34 Department of Child Support Services ………………………………………………… 36 Other Issues ………………………………………………………………………….. 39 Adoption Assistance Program ……………………………………………………………. 39 IHSS Time Card Reforms ………………………………………………………………….. 40 SS-3L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS exeCutive summary Overview of Social Services Programs and Expenditures A Wide Array of Services. California’s major social services programs provide a variety of benefits to its citizens. These include income maintenance for the aged, blind, or disabled; cash assistance and welfare-to-work services to low-income families with children; protection of children from abuse and neglect; home-care workers to assist the aged and disabled in remain- ing in their own homes; collection of child support from noncustodial parents; and subsidized child care. Expenditure Growth Averages About 3 Percent Per Year. For most of this decade, ex- penditures for social services programs have represented an average of about 11 percent of all General Fund outlays. Despite caseload increases in many programs, from 2001-02 through 2008-09 combined social services expenditure growth was modest, averaging about 3 percent per year. The growth rate of individual programs has varied. Growth in spending in the Cali- fornia Work Opportunity and Responsibility to Kids (CalWORKs) program has been relatively flat. However, the In-Home Supportive Services (IHSS) program has increased by an average of 11 percent per year. Balancing the 2009\u201110 Budget Governor Proposes $3 Billion in Budget Reductions. For social services, the Governor proposes $3 billion in General Fund budget solutions for 2009-10. Grant reductions and cost- of-living adjustment (COLA) suspensions in the CalWORKs and Supplemental Security Income\/ State Supplementary Program (SSI\/SSP) programs account for about half ($1.5 billion) of the total solution. Proposed benefit terminations for children on CalWORKs and legal noncitizens would provide an additional $800 million in budget solutions. Other major solutions include redirect- ing Proposition 10 cigarette tax revenues to offset General Fund costs in programs for children ($275 million), and reducing wages for IHSS providers ($267 million). LAO Approach to SSI\/SSP Grants. The Governor proposes reducing benefits to the mini- mum required by federal law, resulting in savings of $1.1 billion. We present two alternatives which achieve less total savings, but are less likely to negatively impact recipients. Specifically, we propose (1) reducing the state portion of the SSI\/SSP grant by the amount of the January 2009 COLA, and reducing grants for couples, which are currently well above the poverty level, down to 125 percent of the poverty level. Combined, these alternatives result in savings of $530 million in 2009-10. LAO Approach to IHSS Wages. The Governor proposes to reduce state participation in wages to the minimum wage for a savings of $266 million. We propose either reducing state SS-4 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS participation to $10 per hour and\/or reducing state participation in the wages of close relative providers to the minimum wage. Together, these alternatives could save over $200 million. LAO Approach to CalWORKs The Governor proposes grant reductions, benefit terminations for children, and other changes that would result in savings of almost $1.1 billion. At a minimum, we recommend that the Legislature adopt $207 million in CalWORKs savings and seriously con- sider making a 10 percent grant reduction for additional savings of $294 million. About one-third of this grant reduction would be offset by an increase in food stamps benefits. LAO Approaches to Obtaining More Federal Funds Pursuant to Recently Enacted Leg- islation. Recent federal legislation creates opportunities to draw down federal funds to offset state costs. Specifically, with respect to the Kinship Guardian Assistance Payment program (Kin-GAP), we estimate that up to $37 million in net General Fund benefit can be achieved by accessing new federal funds pursuant to the recently enacted Fostering Connections to Success and Increasing Adoptions Act of 2008. In addition, we find that the SSI Extension for Elderly and Disabled Refugees Act creates an opportunity for the state to obtain federal funding (about $17 million) to offset General Fund costs for legal noncitizens in the state-only funded Cash As- sistance Program for Immigrants (CAPI). Other Reform Proposals To improve the cost-effectiveness and delivery of social services programs we present two program reforms. Adoptions Assistance Program (AAP). The AAP provides ongoing cash assistance payments to all parents who adopt foster children, regardless of whether the foster children are difficult to adopt. We recommend a series of reforms to better target AAP resources toward parents who adopt children with special difficulties. IHSS Time Cards. The IHSS recipients are the employer of their providers and responsible for signing and verifying the time cards their providers submit for hours worked. To increase oversight and accountability in the IHSS program, we recommend the enactment of legisla- tion requiring providers to (1) document on their time card the actual hours that they provide services and (2) turn in their time cards within one month of providing care. SS-5L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS BaCkground California’s major social services programs provide a variety of benefits to its citizens. These include income maintenance for the aged, blind, or disabled; cash assistance and welfare-to-work services for low-income families with children; protecting children from abuse and neglect; pro- viding home-care workers who assist the aged and disabled in remaining in their own homes; and subsidized child care for families with incomes under 75 percent of the state median. Under the Governor’s budget proposal, General Fund expenditures for the state’s social services programs would be $8.7 billion in 2009-10, about 9.1 percent of proposed General Fund expenditures for all purposes. Description of Major social services prograMs Most social services are administered at the state level by the Department of Social Services (DSS), the Department of Child Support Services (DCSS), and the other Health and Human Ser- vices Agency (HHSA) departments. The actual delivery of many services at the local level is car- ried out by 58 separate county welfare depart- ments. The major exception is SSI\/SSP, which is administered mainly by the U.S. Social Services Administration. Below, we summarize the pur- pose and operation of the state’s major social services programs. Supplemental Security Income\/ State Supplementary Program The SSI\/SSP provides monthly cash grants for low-income aged, blind, or disabled individu- als and couples. The SSI portion of the grant is supported by federal funds and the SSP portion is a state-only supplement to the federal grant. Under current law, a federal COLA is applied to the federal portion of the grant every January, and a state COLA is applied to the combined state and federal grant each June. The state contracts with the U.S. Social Secu- rity Administration to administer the SSI\/SSP benefit payments. Generally, to be eligi- ble for the program, an applicant’s income, with some exceptions for certain sources of income, must be at or below the amount of the SSI\/SSP monthly grant ($870 for individuals). Additionally, an individual is usually ineligible for SSI\/SSP if he or she has assets in excess of $2,000 ($3,000 for couples), with certain exclusions, such as homes and vehicles. To qualify for SSI\/SSP on the basis of age, an individual must be age 65 or older. To be eligible for the grant based on disability, an applicant must demonstrate that he or she is unable to work because of a permanent or long- term mental or physical impairment. State-Only Program for Legal Immigrants. The state-only funded CAPI provides a monthly cash grant to legal immigrants who are aged, blind, or disabled. This program serves those who meet SSI\/SSP eligibility requirements, but who are not otherwise eligible to receive SSI\/SSP due to their immigration status. CalWORKs The CalWORKs program was created in 1997 in response to the 1996 federal welfare reform legislation, which created the federal Temporary Assistance for Needy Families (TANF) program. CalWORKs provides cash grants and welfare- to-work services to families whose income is inadequate to meet their basic needs. SS-6 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS To be financially eligible for CalWORKs, a family’s income must be below a specified income level (for example, $1,170 per month for a family of three) and meet specified asset limits. Grants vary by family size and where they reside. Currently, the maximum monthly grant for a fam- ily of three is $723 in higher-cost counties. Current law applies a COLA to the maximum grant each July. Once on aid, families may remain eligible for aid despite having significant additional earnings because of program rules establishing an earned income disregard, which does not count substan- tial earned income when determining the family’s grant. In addition, CalWORKs families receive a monthly Food Stamp allotment as described more fully below. Generally, able-bodied adults are limited to five years of cash aid, while children are not subject to such time limits. Work Requirements. Federal law generally requires that states ensure that at least 50 percent of their cases with adults be working either 20 or 30 hours per week, depending on the age of the youngest child. (Federal law provides states with credits that reduce this obligation if they reduce their welfare caseloads.) Failure to meet the net federal work participation rate (WPR) may result in substantial federal financial penalties on the state. California law governing the CalWORKs pro- gram requires single parents to work 32 hours per week or participate in related education and training activities. Higher weekly hours are required for two-parent cases. Able- bodied adults, who are required to participate, receive child care and other services to help them work, obtain training, or find work. Able- bodied adults are generally limited to five years of cash assistance. If an adult reaches the five- year limit, the family’s grant is reduced by the amount attributable to the adult and the children continue to receive aid in a program known informally as the safety-net. Children with in- eligible parents (such as undocumented persons) receive a child-only grant throughout their time on aid. Funding. To receive the $3.7 billion federal TANF block grant, California must meet a main- tenance-of-effort (MOE) requirement of $2.9 bil- lion. Although the MOE requirement is primarily met through state and county spending on Cal- WORKs, some state spending in other programs and departments is also counted toward satisfy- ing the requirement. Food Stamp Program The federal Food Stamp program provides monthly benefits to low-income households and individuals to assist them with food purchases. Generally, to qualify for the Food Stamp pro- gram, a household’s gross income must be below 130 percent of the federal poverty level, and the household must meet other financial eligibility criteria, including an asset limit of $2,000 (with exclusions for homes and vehicles). Participants in the Food Stamp program receive monthly benefits on Electronic Benefit Transfer cards, similar to debit cards, which can be used at participating stores. The maximum food stamp allotment depends on household size. For example, the maximum monthly allot- ment is $463 for a household of three. The cost of the federal food benefits is borne entirely by the federal government. Associated administrative costs are shared between the fed- eral government (50 percent), the state (35 per- cent), and the counties (15 percent). We note that a recently enacted federal law, the Food, Conservation, and Energy Act of 2008 (Public Law 110-246), renames the Food Stamp program SS-7L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS the Supplemental Nutrition Assistance Program, or SNAP. State-Only Food Stamp Program for Non- citizens. The California Food Assistance Program provides state-funded monthly benefits to legal noncitizen adults between 18 and 65 years of age who have resided in the United States for less than five years, but otherwise meet all fed- eral food stamp eligibility requirements. In\u2011Home Supportive Services The IHSS program provides in-home care for persons who cannot safely remain in their own homes without such assistance. In order to qualify for IHSS, a recipient must be aged, blind, or disabled and in most cases have income at or below the level necessary to qualify for SSI\/SSP. After the IHSS application, a county social worker visits the home of the recipient and uses a uniform assessment tool to determine the num- ber of hours for each type of IHSS service that a recipient qualifies for in order to remain safely in his\/her own home. Assistance is provided with such tasks as cleaning, meal preparation, bath- ing, grooming, and helping with medications and prosthetic devices. The IHSS recipients are sent a notice informing them of the number of autho- rized hours for each task. Typically, social work- ers conduct reassessments annually to determine whether the services needed by the recipient have changed. Once the recipient is authorized IHSS service hours, he or she must find an IHSS provider to perform those services. In the IHSS program, the recipient is considered to be the employer, who has the responsibility to hire, train, supervise, and fire their provider. Nevertheless, representatives of IHSS provid- ers are authorized under state law to participate in collective bargaining with the county for uniform salary and benefit levels in their juris- dictions. Currently, the state contributes a share of the cost of wages and benefits for each IHSS worker up to $12.10 per hour. Any wage or ben- efit costs above $12.10 per hour are paid for by counties and the federal government. Child Welfare System The purpose of California’s child welfare system is to prevent, identify, and, when neces- sary, respond to allegations of child abuse and neglect. Following a report of child abuse or neglect, county Child Welfare Services (CWS) social workers are obligated under state law and regulations to take various steps to resolve the situation. Social workers investigate such allega- tions and provide services to children who have been identified as victims, or potential victims, of abuse or neglect. Services may also be provided by counties to the families of the children to ad- dress such concerns. When an investigation indicates further ac- tions are warranted, CWS social workers may temporarily or permanently remove children from their homes for health and safety reasons and place them in Foster Care. Children are typically placed in Foster Care by the action of a juvenile court, which provides ongoing supervi- sion of what are known as dependency cases. A Foster Care placement can be with either an individual family or a group home setting. Family and group providers receive monthly grant pay- ments for the 24-hour care and supervision of the child. Children in Foster Care may eventually be reunified with their parents or placed in adop- tion or guardianship when family reunification SS-8 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS is not possible. In most cases, adoptive parents and guardians are eligible for monthly grants paid through either AAP or the Kin-GAP program. When a child is reunified with his or her family, or permanently placed with an adoptive family or guardian, the court generally dismisses the dependency case and CWS services end. The child welfare system is supported by federal, state, and county funds. With the excep- tion of the Kin-GAP program, children in the programs described above are eligible for support from federal funding if their parents have incomes below specified levels. Typically, about 75 percent of Foster Care children are federally eligible. Community Care Licensing The Community Care Licensing (CCL) Divi- sion of DSS develops and enforces regulations designed to protect the health and safety of individuals in 24-hour residential care facilities and day care. The CCL oversees the licensing of about 86,000 facilities, including child care centers, family child care homes, foster family and group homes; adult residential facilities; and residential facilities for the elderly. Counties who have opted to perform their own licensing opera- tions monitor approximately 11,000 of these facilities. In order to receive and maintain a license to operate a community care facility, applicants and providers are charged an initial licensing fee and an annual renewal fee. Depending on facil- ity type and capacity, application fees range from $60 to $10,000, while annual fees range from $60 to $5,000. The CCL program is supported with federal funds, General Fund, and fee revenue. Department of Child Support Services In California, both parents have a legal duty to provide financial support for their children. The goal of DCSS is to collect support payments from a noncustodial parent on behalf of the cus- todial parent and the child. Once a custodial parent applies for assis- tance in collecting child support, local child sup- port agencies (LCSAs) work to (1) locate absent parents; (2) establish the paternity of a child; (3) obtain, enforce, and modify child support payment orders; and (4) collect and distribute child support payments. Using a statutory guide- line, which reflects both parents’ income and time with their children, local courts determine the amount of the child support order. Orders may be enforced in various ways including the withholding of wages and unemployment ben- efits, interception of tax return refunds, and the placement of liens on real property. When a family receiving child support is also receiving public assistance, DCSS distrib- utes the first $50 per month collected from the non-custodial parent to the custodial parent and child. Any additional amount is deposited in the state General Fund to partially offset the state’s costs for providing public assistance. Generally, if the family is not receiving public assistance, the money collected by DCSS goes to the custodial parent. The DCSS is supported by a combination of state (34 percent) and federal (66 percent) funds. overall Historical spenDing trenDs Total Spending. From 2001-02 through 2008-09, General Fund spending on social services programs increased from $8.3 billion to $10.2 billion, an average annual increase of SS-9L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS 3 percent. Figure 1 shows total spending from 2001-02 though 2009-10, as proposed by the Governor. For the budget year, the Governor proposes new special funds to offset General Fund spending. (These special funds are reflected in the small second bar on top of the General Fund bar for 2009-10.) As the figure shows, Gen- eral Fund spending increased by about $500 mil- lion in 2002-03 and then grew very slowly through the end of 2005-06, when spending reached $9.2 billion. In 2006-07 General Fund spending increased by $600 million to $9.8 bil- lion. General Fund spending fluctuated in 2007-08 and 2008-09 mostly due to TANF fund shifts rather than underlying changes in actual program costs. For 2009-10, the Governor’s bud- get would reduce spending by $1.5 billion down to $8.7 billion due to various proposed actions to address the state’s fiscal problems. Adjusting for Inflation. Figure 1 also displays spending on social services programs adjusted for inflation (constant dollars). On this basis, total General Fund expenditures decreased from $8.3 billion in 2001-02 to $7.4 billion in 2008-09. If adopted, the Governor’s budget would reduce constant dollar spending to $6.4 billion, a reduction of 22 percent since 2001-02. Comparison to Overall General Fund Spending. For most of this decade, General Fund spending on social services programs has ranged between 9.5 percent and 11.5 percent of total General Fund outlays. For 2008-09, social services’ share is estimated to be 11.2 percent. Under the Governor’s budget, social services’ share would drop to 9.4 percent in 2009-10, after adjusting for special fund shifts. inDiviDual prograM spenDing trenDs Spending growth rates vary widely by program. Figure 2 (see next page) shows the average annual spend- ing growth rate by program from 2001-02 through 2008-09. The SSI\/SSP, the largest social services program, has been growing at a relatively steady pace of 3.3 percent. The second largest program is CalWORKs, which has been relatively flat throughout this period. The next largest pro- gram is IHSS, which Social Services Expenditures Current and Constant Dollars 2001-02 Through 2009-10 (In Billions) Figure 1 2 4 6 8 10 $12 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 Net New Special Funds General Fund Constant 2001-02 Dollars SS-10 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS has been growing relatively rapidly, at an average annual rate of just over 11 percent. Programs for children, including CWS, Foster Care, and AAP, have grown collectively at an average annual rate of 3.8 percent. All other social services pro- grams, have collectively declined by an average of 1.8 percent annually. Program Cost Drivers In general, the primary factors driving up costs for social services programs are changes in caseload, COLAs (if provided), county admin- istrative costs, and labor costs for providing the services. Below, we discuss these factors as they pertain to the largest social services programs. IHSS. As noted above, IHSS is by far the fastest growing social services program, as well as one the fastest growing programs in the state budget overall. The primary cost drivers are caseload, provider wages, and hours of services provided. From 2001-02 through 2008-09, IHSS General Fund expenditures increased by over $940 million (110 percent), despite a federal waiver which increased federal financial partici- pation in the program. During the same time pe- riod, the caseload increased by 61 percent. The remaining 49 percent of the spending increase is mostly due to higher wages paid to providers. A small portion of the increase is attributable to an increase in the average number of service hours authorized for recipients. SSI\/SSP. Spending on SSI\/SSP increased from $2.8 billion in 2001-02 to $3.5 billion in 2008- 09, an increase of over $700 million (or 26 per- cent). The primary cost drivers in the SSI\/SSP program are caseload growth and an- nual COLAs. From 2001-02 through 2008-09, the SSI\/SSP caseload grew by about 15 percent. An additional 6.5 percent of the growth in the cost of the program is attributable to two state Figure 2 Major Social Services Programs Average Annual Spending Growth Rate 2001-02 Through 2008-09 (General Fund) Program Rate SSI\/SSP 3.3% CalWORKs -0.1 IHSS 11.2 Children’s programs 3.8 Child Support -1.4 County administration and automation 6.4 All other -7.7 Total 3.0% statutory COLAs provided between 2001-02 and 2008-09. (Over this time period legislation was enacted to suspend six other scheduled state stat- utory COLAs.) The remaining portion of growth is mostly due to increases in the CAPI caseload during this time period. CalWORKs. General Fund spending on CalWORKs has been essentially flat during this decade, averaging about $2 billion each year. Modest caseload declines were partially offset by two COLAs granted during this time period (COLAs were statutorily suspended for six of the eight years), and some increases in spending on county administration and welfare-to-work ser- vices. We also note that, during this time period, hundreds of millions of TANF block grant funds were annually used to offset General Fund costs in other state programs. The CalWORKs casel- oad has just recently begun to increase, a trend that we discuss later in this analysis. Programs for Children. From 2001-02 through 2008-09, General fund spending for various children’s programs increased collec- tively by just under $400 million (or 30 percent). Substantial spending growth in the AAP during SS-11L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS this period accounts for about one-half of the total growth for these children’s programs. About one-third of the spending growth is attributable to discretionary investments in (1) child welfare, specifically the outcome improvement project (OIP), and (2) new services for emancipating foster youth. No Regular Inflationary Adjustments for County Administration. From 2001-02 through 2008-09 counties were not provided annual in- flationary adjustments to account for increases in their cost of doing business. At times, however, the Legislature has provided specific allocations of additional funding, such as with the OIP for child welfare or for CalWORKs administration, in part to recognize that county administrative costs for these programs have been increasing. overview of tHe governor’s social services proposals Overall Spending by Program The Governor’s budget proposes General Fund expenditures of $8.7 billion for 2009-10, a reduction of $1.5 billion (15 percent) compared to proposed spending for 2008-09. Figure 3 shows proposed expenditures for the major programs. We note that the proposed spend- ing for 2008-09 reflects almost $400 million in budget solutions proposed for the current year. Moreover, the amounts shown in Figure 3 for CWS\/Foster Care\/Adoptions Assistance reflect a General Fund reduction of $275 million that would be backfilled under the Governor’s budget plan with special funds from a proposed redirec- tion of Proposition 10 funds. Proposed Budget Solutions In the social services area, the Governor proposes about $385 million in solutions for 2008-09 and just over $3 billion in solutions for 2009-10. Figure 4 (see page 12) lists the Gov- ernor’s proposals for each program. Below, we summarize the major themes for these solutions. One common theme is that all of these solutions are ongoing rather than one-time. In the next section of this document, these solutions, along with other solutions that we have developed, are evaluated in more detail. Figure 3 Social Services Programs General Fund Spending (Dollars in Millions) Proposed Change From 2008-09 Actual 2007-08 2008-09 2009-10 Amount Percent SSI\/SSP $3,623.5 $3,514.5 $2,579.7 -$934.8 -26.6% CalWORKs 1,481.7 1,996.5 1,958.2 -38.3 -1.9 In-Home Supportive Services 1,686.5 1,798.7 1,603.3 -195.4 -10.9 CWS\/Foster Care\/Adoptions 1,596.5 1,682.3 1,366.0 -316.3 -18.8 Department of Child Support Services 326.4 400.2 330.0 -70.2 -17.5 County Administration\/Automation 451.0 500.6 540.2 39.7 7.9 All other social services programs 266.8 322.6 299.1 -23.5 -7.3 Totals $9,432.4 $10,215.3 $8,676.5 -$1,538.9 -15.1% SSI\/SSP = Supplemental Security Income\/State Supplementary Program; CalWORKs = California Work Opportunity and Responsibility to Kids; CWS = Child Welfare Services. SS-12 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS \u27a2 Grant Reductions and COLA Suspen- sions. For 2009-10, the proposed budget would achieve savings of over $1.1 bil- lion in SSI\/SSP and nearly $400 million in CalWORKs from grant reductions and COLA suspensions. We note that the COLAs are based on the change in the California Necessities Index (CNI). The Governor assumed the CNI would be 2.94 percent, but actual data indicate the CNI will be 1.53 percent. \u27a2 Benefit Terminations in CalWORKs. The budget proposes to create five-year time limits for children on CalWORKs whose parents are unwilling or unable to meet specified work participation require- ments. These proposals would result in caseload savings of over $500 million. \u27a2 Wage-Related Changes. The budget proposes to reduce state participation in the wages paid to IHSS providers to the Figure 4 Governor’s Proposed Budget Solutions for Social Services (General Fund, In Millions) Governor’s Budget Program\/Description 2008-09 2009-10 SSI\/SSP Reduce grants to federal minimum $180.1 $1,117.2 Eliminate CAPI (state only SSI\/SSP for immigrants) 20.0 129.6 Suspend June 2010 state COLA \u2014 27.0 CalWORKs 10 percent grant reduction $45.2 $294.0 Child-only time limit (five-year limit for child-only cases) 38.4 261.7 Modified safety net (five-year limit for cases with adult) 36.4 260.7 Self-sufficiency reviews (recertification in person at six months) 3.5 97.2 Suspend July 2009 COLA \u2014 79.1 Suspend pay-for-performance county incentives \u2014 40.0 Reduce childcare reimbursements to 75 percent of RMR \u2014 30.9 In-Home Supportive Services (IHSS) Reduce state participation in IHSS wages to minimum $44.5 $266.8 Eliminate domestic and related services for low functional index (FI) 11.9 71.4 Eliminate SOC buyout for low FI 6.4 46.0 Proposition 10 Eliminate state commission and redirect 50 percent of local funds to DSS Children’s programs \u2014 $275.0 Food Stamps Eliminate California Food Assistance Program \u2014 $37.8 Automation Delay Los Angeles replacement system by six months \u2014 $14.6 Totals $386.3 $3,049.1 CAPI = Cash Assistance Program for Immigrants; RMR = regional market rate; COLA = cost-of-living adjustment; SOC = share of cost; DSS = Department of Social Services. SS-13L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS minimum wage. Counties and the federal government would share in any wage costs above the minimum wage. This proposal would result in savings of about $265 million. \u27a2 Redirection of Proposition 10 Funds. The budget proposes to ask the voters to eliminate the state Proposition 10 com- mission and reduce funding for local commissions by 50 percent. If approved by the voters, the $275 million in funds freed up by these changes would be used to offset General Fund costs for CWS, Foster Care, and AAP. \u27a2 Elimination of Benefits for Legal Non- citizens. The budget would achieve sav- ings of almost $170 million by eliminating state-only funded cash and food assis- tance programs for legal immigrants. Finally, we note that for many programs, the Governor proposes a package of solutions with interactive effects. If the Legislature rejects a given proposal, such a rejection could alter the solution value of other proposals. BalanCing the 2009\u201110 Budget social services caseloaD projections Caseload Projections Are Reasonable. Figure 5 (see page 14) shows the recent trends and the projections in the Governor’s budget of annual caseload growth for the state’s major social services programs. As the figure shows, the CalWORKs and Food Stamps caseloads are projected to rise much faster than in recent years, largely due to the recession. In general, we find that these caseload projections are reason- able. Below, we discuss certain caseload trends that warrant close monitoring. CalWORKs. In November 2008, we forecast- ed caseload increases in CalWORKs of 3.7 per- cent in 2008-09 and 2.4 percent in 2009-10. Our projections were based on the data available to us through July 2008 showing that the case- load was increasing by about 0.3 percent per month, or 3.6 percent per year. More recent data through October 2008 indicate that the caseload is now increasing at a rate of 0.6 percent per month, or 7.2 percent per year. The Governor’s forecast is very much in line with the latest quar- ter of actual data. The key questions are how long will the recession persist, and when will the CalWORKs caseload stop growing so fast? How the econ- omy affects the CalWORKs program could prove difficult to project. Since enactment of the welfare reform legislation in 1996 that resulted in the creation of CalWORKs, there has only been one relatively mild recession (in 2001-02). The associated caseload increase in that recession was modest and short-lived. CalWORKs Child Care. Another caseload issue to watch in CalWORKs is child care uti- lization. The Governor’s budget assumes that utilization rates will remain at current levels. It is possible that, in a recession, less of the casel- oad will be working, and therefore utilization of child care services may fall. On the other hand, members of families enrolled in CalWORKs who cannot find work are still expected to partici- pate in education or training, and thus would still need some child care for these purposes. SS-14 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Figure 5 Major Social Services Programs Annual Caseload Growth: Recent, Past, and Projected Actual Projected Program 2005-06 2006-07 2007-08 2008-09 2009-10 CalWORKs -2.9% -3.4% 1.3% 5.9% 6.9% SSI\/SSP 2.2 1.4 0.8 2.8 2.4 IHSS 4.6 5.5 7.8 7.0 6.5 Food Stamps 9.3 7.0 12.9 15.4 12.9 The key question is how much child care they will need. CAPI Caseload May Be Underestimated. The Governor’s budget proposes to eliminate CAPI to achieve annual General Fund savings of $130 million. Our review of recent actual data sug- gest that the CAPI caseload may be growing at a faster rate than the Governor has assumed. (This means the effective savings from the Governor’s proposal could be larger if it is adopted, but that the costs of the program could be larger than budgeted if the Legislature decides to preserve the program.) We will monitor this caseload and report at May Revision if any change to the case- load budget estimates for CAPI is warranted. suppleMental security incoMe\/ state suppleMentary prograM The administration’s budget plan proposes to achieve General Fund savings in the SSI\/SSP budget by (1) reducing SSI\/SSP grants for individ- uals, and (2) eliminating the state-only CAPI. We describe the Governor’s proposals below and present other budget solutions for the Legislature to consider. Grant Reduction Proposals As described earlier, California supplements the federal SSI grant with a state-funded SSP grant. Federal law requires that the state SSP portion of the grant be maintained at or above its 1983 level. Failure to comply with the MOE requirement would result in the loss of all federal Medicaid health care program funding (the pro- gram is known as Medi-Cal in California). Governor’s Proposal: Reduce SSI\/SSP Grants to Federal Minimum. The Governor’s plan would reduce SSP grants to the minimum levels required by federal law. Specifically, the grants would be reduced to a maximum of $156 per month for individuals and $396 per month for couples, effective May 2009. This pro- posal is estimated to save $178 million General Fund in 2008-09 and over $1.1 billion General Fund in 2009-10. Below, we present two alterna- tive approaches the Legislature could consider for reducing grants. LAO Option 1: No Pass-Through of Fed- eral COLA. As we previously noted, the federal government applies a COLA to the federal SSI portion of the grant each January. This option would reduce the state SSP portion of the grant by the dollar amount that the SSI portion of the grant increased due to the January 2009 federal COLA. This option is referred to as not passing through the federal COLA. This would reduce SSP monthly grants for individuals by $37 to $196 and couples by $57 to $513. This returns the total maximum monthly grants to the level in place during 2008. Assuming a May 1, 2009 implementation date, this would save about SS-15L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS $79 million in 2008-09 and about $479 million in 2009-10. LAO Option 2: Reduce Grants for Couples. Another option to consider is to reduce the maxi- mum SSI\/SSP couples grants to 125 percent of the 2009 federal poverty guideline (as estimated by the LAO). The maximum grants for couples are currently at 133 percent of the poverty guide- line. Grants for individuals, which are at about 100 percent of the poverty guideline, would be unaffected by this option. Even with this reduc- tion, SSI\/SSP couples would remain well above the federal poverty guideline. This proposal would reduce SSP monthly grants for couples by $88, from $568 to $480, a level that would still be well above the federal MOE requirement. Couples would continue to receive the federal COLA in January 2010, and would be entitled to future federal and state COLAs when they are provided. This option saves about $21 million in 2008-09 and $135 million in 2009-10. Comparing SSI\/SSP Grant Levels. Figure 6 shows SSI\/SSP average grant levels for individu- als and couples under the Governor’s proposal and our two LAO options discussed above. The figure also compares grant levels to the federal poverty guideline. Conclusion. Because all of the options above only impact the state-funded, SSP portion of the grant, they do not result in the loss of federal funds. We note that these options may be com- bined to achieve higher levels of savings. For example, the Legislature could opt to reduce the grants for couples to 125 percent of the poverty guideline and not pass through the January 2009 federal COLA for combined savings of $86 mil- lion in 2008-09 and $530 million in 2009-10. The SSI\/SSP program represents over one-third of the total social services budget. Due to the state’s severe fiscal problems, we recommend the Legis- lature adopt one or a combination of the above proposals to achieve budget solution. Figure 6 SSI\/SSP Maximum Monthly Grants Governor’s and LAO Proposals May 2009 January 2008 January 2009 Governor’s Budget LAO Option 1 LAO Options 1 and 2 Individuals SSI $637 $674 $674 $674 $674 SSP 233 233 156 196 196 Total $870 $907 $830 $870 $870 Percent of Povertya 100% 103% 94% 99% 99% Couples SSI $956 $1,011 $1,011 $1,011 $1,011 SSP 568 568 396 513 480 Total $1,524 $1,579 $1,407 $1,524 $1,491 Percent of Povertya 131% 133% 118% 128% 125% a For 2008, poverty guideline is from the U.S. Department of Health and Human Services. For 2009, the poverty guidelines are estimated by the LAO based on recent trends. SS-16 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Restaurant Meal Allowance Under current law, individuals who self- certify that their living arrangement prevents the preparation of meals at home receive a state-funded supplement to their SSP grant. This supplement, known as a restaurant meal allow- ance, is currently provided to over 39,000 SSI\/SSP recipients at a cost of $84 for individu- als and $168 for couples per month. The annual budget for this supplement is approximately $39 million General Fund. Allowance Should Be Eliminated. We have two major concerns about the restaurant meal allowance. There is currently no verification process to ensure that this grant supplement is paid only to the SSI\/SSP recipients who actually qualify for it. Moreover, no time limit is placed on the receipt of this benefit. Because of these problems, we recommend eliminating the SSI\/SSP restaurant meal allowance, an action that would result in annual General Fund savings of about $35 million. We note that our estimate of the savings associated with the proposal is not equivalent to the total present cost of the pro- gram. This is because we have allowed for some erosion in the savings to account for the likeli- hood that some SSI\/SSP recipients who lost the allowance would apply for and receive a similar supplement available to those who qualify for the IHSS program. Finally, the Legislature could es- tablish a program to assist in one-time purchases by recipients of cooking equipment, such as a microwave oven. Proposals Affecting Cash Assistance Program for Immigrants Governor’s Proposal. The Governor pro- poses to eliminate CAPI to achieve General Fund savings of $20 million in 2008-09 and $130 mil- lion in 2009-10. Below, we present alternatives to the Governor’s proposal. LAO Option 1: Eliminate CAPI Prospective- ly. One option would be to halt any further en- rollment in the CAPI program. This option would essentially stop growth in the program and allow those already receiving benefits to remain on the program. We estimate that it would result in sav- ings of about $20 million in 2009-10, and greater annual savings in future years as current CAPI recipients exit the program. LAO Option 2: Make Some CAPI Recipi- ents Eligible for Federal Funds. On September 30, 2008 the President signed in to law the SSI Extension for Elderly and Disabled Refugees Act (P.L. 110-328). We are advised that this legislation makes certain refugees eligible for federal SSI benefits for an additional two years beyond the seven years previously authorized. Some current recipients of CAPI are refugees. However, DSS is not able to estimate the number of CAPI recipi- ents statewide who are considered to be refu- gees. Our discussions with counties suggest that there are about 2,000 current CAPI recipients potentially eligible for the SSI extension. Under current law, counties with a CAPI caseload of 70 or more recipients are already required to es- tablish advocacy programs to assist CAPI recipi- ents and applicants in applying for federal SSI. The goal of the advocacy program is to reduce state-only CAPI costs by facilitating recipients’ transition to the federally supported SSI\/SSP. We recommend instructing counties to focus their existing advocacy efforts on the CAPI cases most likely to be eligible for this federal SSI ex- tension. To further encourage counties to focus on these cases, we recommend establishing an incentive payment to counties for each case trans- ferred to federal eligibility. We would suggest the SS-17L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS payment be equal to one month of the individual CAPI grant. We estimate that the savings from the transition of these recipients from the state- only CAPI to federal and state-funded SSI\/SSP would result in net state savings of $17 million in 2009-10. This results in state savings because the state would no longer fund the entire CAPI grant ($897 for individuals and $1,559 for couples), but would instead fund only the SSP portion of the SSI\/SSP grant ($233 for individuals and $568 for couples). in-HoMe supportive services The administration budget plan proposes to achieve General Fund savings in the IHSS pro- gram by modifying (1) the state buyout of the share of cost for certain recipients, (2) the ser- vice hours provided to certain recipients, and (3) state support for the wages paid to providers. We assess the Governor’s proposals below and pres- ent other options for the Legislature to consider. Share of Cost Buyout Proposals What Is a Share of Cost (SOC)? As previous- ly noted, to qualify for IHSS, recipients generally have income at or below the SSI\/SSP grant level. However, when an IHSS recipient has income in excess of the SSI\/SSP grant levels, that recipi- ent may still be eligible to receive IHSS services with a SOC. An IHSS recipient with a SOC must make an out-of-pocket monthly payment towards the receipt of IHSS services. For example, if an IHSS recipient has monthly income that is $200 over the SSI\/SSP grant level, that recipient will pay about $200 towards their IHSS services each month before the IHSS program pays the remain- der of the cost of their services. History. In 2004, the state applied for, and received, a federal waiver that allowed 64,000 recipients (out of about 66,000) in the state-only IHSS Residual program to be eligible for federal Medicaid funding in the existing IHSS Personal Care Services Program (PCSP) or in the newly established IHSS Waiver program. This change permitted the state to achieve significant General Fund savings in IHSS. Intersection Between IHSS and Medi-Cal. The federal Medicaid program is known as Medi-Cal in California. When IHSS recipients with a SOC were moved from the Residual program to either the PCSP or IHSS Waiver pro- grams, they could have been subject to paying a higher Medi-Cal SOC. This is because both the PCSP and the IHSS Waiver programs are par- tially funded by Medicaid. The Medi-Cal SOC is usually greater than the IHSS SOC because it is based on the income of their entire family, while the amount of the IHSS SOC is based only on the individual recipient’s income. In order to avoid creating a higher Medi- Cal SOC obligation for these IHSS recipients, the state agreed to use state funds to pay for the difference in the IHSS and Medi-Cal SOC. For example, if a recipient had an IHSS SOC of $200 per month in the Residual program, but now had a higher Medi-Cal SOC of $1,000 per month, the recipient was only obligated to pay the lower IHSS SOC amount ($200).The state paid the dif- ference between the IHSS SOC and the Medi-Cal SOC ($800). Essentially, this policy holds the IHSS recipient harmless from this program change. Program Caseload and Costs Growing. The SOC buyout program has grown significantly since the establishment of the IHSS Waiver program in 2004, and that growth is projected to continue. The Governor’s budget estimates that 9,691 recipients will benefit from the state buyout in 2008-09, and that this number will SS-18 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS example\u2014a person with a monthly $1,000 SOC on Medi-Cal would have their SOC reduced to the $200 level once approved for IHSS. The buy- out occurs regardless of whether he or she then uses the IHSS services. For example, during one month, DSS made buyout payments for 174 IHSS recipients (at an average cost of $327 per month) who had not hired providers or claimed hours that month. Governor’s Proposal: Eliminate SOC Buy- out for Less Impaired. The Governor’s budget proposes to eliminate the SOC buyout program for less-impaired IHSS recipients. The level of a recipient’s impairment is assessed by a county social worker using a uniform assessment tool to rank the recipient’s impairment for each task on a five-point scale known as the Functional Index (FI) ranking. Figure 8 shows each of the potential FI rankings that may be assessed by a social worker, and what they mean for the impairment level of the recipient. The budget plan proposes to elimi- nate the SOC buyout program for recipients with an average FI ranking of less than four to reduce General Fund costs by $6.4 million in 2008-09 and $46 million in 2009-10. The administration estimates that this proposal will impact about 8,900 IHSS recipients in 2009-10, raising their SOC by an average of about $427 per month. Administration Savings May Be Less Than Estimated. Our analysis indicates that the Gov- increase to 11,080 recipients in 2009-10 (an increase of over 14 percent). In the budget year, the total cost of the SOC buyout program is esti- mated to be $57 million General Fund (up from $47 million in the current year). The range of monthly SOC buyouts paid to individual recipients varies widely, from under $100 to over $10,000 per month. Figure 7 shows the distribution of SOC buyouts. The average General Fund cost of the buyout is estimated to be $427 per person per month in 2009-10. Incentive to Apply for IHSS for SOC Buy- out, Not Services. Because of the SOC buyout program, there is an incentive for someone with a high Medi-Cal SOC to apply for IHSS. This is because once a recipient applies for and receives any amount (even one hour a month) of autho- rized IHSS hours, the state is obligated to buy out their SOC. This means that\u2014from the earlier Figure 7 Share of Cost Buyout Amounts Vary Greatly Monthly Buyout Amount Percent of Recipients $0 to $199 9% $200 to $399 60 $400 to $599 13 $600 to $999 12 $1,000 to $2,000 4 Over $2,000 1 Figure 8 Functional Index Ranking Scale Functional Index Impairment Implications 1 Able to perform function without human assistance\u2014independent 2 Able to perform a function, but needs verbal assistance (reminding, encouraging) 3 Able to perform a function with some human, physical assistance 4 Able to perform a function with substantial human assistance 5 Cannot perform the function with or without human assistance SS-19L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS ernor’s budget proposal does not account for potential increases in state administrative and program costs that could result from the pro- posed restrictions on the SOC buyout. That is a concern because we believe that this proposal could result in increased requests by recipients for reassessments and appeals. When some indi- vidual recipients learn that their SOC is increas- ing by over $400 because their FI ranking is not higher, a significant number will likely appeal or ask for a reassessment of their FI ranking. A com- bination of increased administrative and program costs from recipients who successfully appeal their FI ranking may significantly erode the sav- ings estimated in the Governor’s budget plan. LAO Option 1: Reduce SOC Buyout by 50 Percent for All IHSS Recipients. In our view, the SOC buyout is an issue of ability to pay, and is not related to the FI ranking of the recipient. In other words, a recipient’s ability to pay a Medi- Cal SOC is related to his\/her level of monthly income rather than his\/her level of disability. Accordingly, the Legislature may wish to con- sider a different approach to achieving savings on SOC buyout costs. Under this option, state participation in SOC buyouts would decrease by 50 percent for all recipients, regardless of their FI ranking. This proposal would save less than the Governor’s\u2014about $4 million in 2008-09 and $28 million in 2009-10. However, these savings would not likely be eroded because, unlike the Governor’s proposal, there is no reason for re- cipients to appeal their FI ranking. All recipients, regardless of their FI ranking, would be treated the same under this approach. LAO Option 2: Cap the Buyout at a Deter- mined Level. One variation of the 50 percent re- duction in the SOC buyout is to consider placing a specific dollar cap on the buyout amount. In other words, the state would continue to buy out the difference between the Medi-Cal SOC and the IHSS SOC up to a certain amount per month. Any amount above that would be the responsibil- ity of the recipient. The savings associated with this proposal would depend upon the amount of the cap\u2014the lower the level of the cap, the more savings achieved. For example, if the Legis- lature decided to cap the buyout amount at $400 per month, savings would be approximate- ly $13 million annually. LAO Option 3: Prospectively Eliminate SOC Buyout. The original rationale for the SOC buyout program was that it allowed IHSS recipi- ents to transfer from the Residual program to the other IHSS programs without increasing their SOC obligation, essentially holding them harm- less. Although it was reasonable to buy out the difference between the Medi-Cal SOC and the IHSS SOC for recipients who were already in the program when the IHSS Waiver was obtained, it arguably is not necessary to provide this ser- vice prospectively. Under this option, those in the existing caseload would continue to receive the existing state buyout, but the growth in the SOC buyout caseload would end. This option would save at least $9.4 million in 2009-10, with increased savings in future years as existing SOC buyout recipients exited the IHSS program. Conclusion. Given the growth in the SOC buyout program, and the current fiscal situation, we recommend the Legislature adopt one or a combination of these savings options. We note that it is not necessary to limit action to one of these proposals, as they may be combined. For example, it is possible to both eliminate the SOC buyout program prospectively and reduce state participation in the buyout by 50 percent for the existing SOC buyout recipients. SS-20 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Service Hour Proposals As we noted earlier, after the needs of an IHSS recipient are assessed by a social worker, the recipient is authorized to receive a specific number of hours each month for a variety of ser- vices. This care is allocated among certain tasks to create a package of services to assist recipients in remaining in their homes. Recipients may be authorized domestic and related care services tasks as a component of their package of servic- es, as long as their relevant FI ranking exceeds 1. Domestic and related care services include gen- eral housekeeping activities, meal preparation, meal clean-up, shopping for food, and errands. Over 95 percent of all IHSS recipients receive some level of domestic and related care. Governor’s Proposal: Eliminate Domestic and Related Care Services for Less Disabled Recipients. The Governor’s budget proposes to eliminate domestic and related care service hours for IHSS recipients with related FI rankings below four. The DSS estimates that approximately 81,000 IHSS recipients will lose each month an average of 22.6 domestic and related care service hours (out of a typical total of 84.9 hours) as a result of this policy. After accounting for some savings erosion due to administrative costs and hour restora- tions for some recipients who would successfully appeal decisions to eliminate their services, the administration estimates that this proposal will save about $12 million in 2008-09 and $71 mil- lion in 2009-10. LAO Option: A Tiered Reduction to Domes- tic and Related Care Services. We believe that the administration’s proposal has some merit be- cause it targets services to those recipients who have been assessed as being the most impaired. However, instead of a 100 percent reduction in domestic and related care services for recipients with FI rankings between 1.01 and 3.99, the Legislature may wish to consider use of a tiered approach to making the reductions. For example, recipients with functional rankings between 1.01 and 2.5 would have their hours capped at a level that would be lower than for individuals with functional rankings between 2.5 and 3.99. This approach would not completely eliminate domestic and related care service hours for any IHSS recipient, and would tend to result in fewer appeals and less erosion of savings. The amount of the savings from this proposal would depend on the tiers set by the Legislature. We think it is reasonable to set the tiers at a level to achieve savings of about half of the Governor’s proposal, or about $36 million in 2009-10. IHSS Wage Proposals Although the state participates in wages and benefits up to $12.10 per hour, as shown in Fig- ure 9, the combined wages and benefits actually paid in each county varies from $8.00 per hour to $14.68. Governor’s Proposal: Reducing State Par- ticipation in Provider Wages to Minimum. The Governor’s budget proposes to reduce state participation in IHSS provider wages and ben- efits to a combined $8.60 per hour (the $8.00 minimum wage established under state law, plus $0.60 for health benefits). This proposal results in General Fund savings of about $45 million in 2008-09, increasing to $267 million in 2009-10, and eliminates out-year costs associated with future county wage increases that would likely occur under current law. The proposed reduction would not limit the amount counties could pay their IHSS provid- ers, but rather would reduce the state’s level of SS-21L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS support for the wages. Depending on county decisions, this proposal would either result in county general fund costs (because a county elects to backfill the decreased state funds) or reduced provider wages (because a county does not backfill). LAO Option 1: Reduce State Participation in IHSS Wages and Benefits to $10 Per Hour. The Legislature may wish to consider a modifica- tion of the Governor’s approach for achieving IHSS savings. This option would reduce state participation in wages and benefits to $10 per hour (roughly the current average wage and ben- efit level). This proposal would not immediately impact counties currently paying providers less than $10 per hour. Counties with current wages and benefits above $10 per hour could share the marginal cost with the federal government, or could reduce wages and benefits. This proposal would save about $28 million in the current year and $170 million in 2008-09. LAO Option 2: State Participation in Lower Wages for Close Relative Providers. Currently, about 53 percent of IHSS providers are either the parent, spouse, or child of the person for whom they are providing care. We define these provid- ers as close relative providers. One option to consider is lowering state participation in wages to the minimum wage for close relative providers. The rationale behind this proposal is that wages do not need to be as high for close relative providers as they may need to be to attract outside providers. This option would save about $140 million General Fund in the budget year. Impact on Supply of Providers. In the past, we have noted that long- term wage decreases could eventually impact the supply of qualified Figure 9 IHSS Hourly Wages and Benefits by County Approved as of January 2009 Alpine $8.00 Tulare $9.60 Colusa 8.00 San Bernardino 9.63 Humboldt 8.00 San Diego 9.71 Inyo 8.00 Stanislaus 9.71 Lake 8.00 Madera 9.80 Lassen 8.00 San Joaquin 10.02 Mariposa 8.00 Mendocino 10.05 Modoc 8.00 Ventura 10.10 Mono 8.00 Yuba 10.10 Siskiyou 8.00 Calaveras 10.26 Trinity 8.00 Placer 10.60 Tuolumne 8.00 San Benito 10.60 Glenn 8.15 San Luis Obispo 10.60 Tehama 8.60 Riverside 10.85 Butte 8.75 Fresno 11.10 Sutter 8.85 Monterey 11.10 Shasta 9.00 Sacramento 11.10 Amador 9.10 Santa Barbara 11.10 Nevada 9.16 Yolo 11.10 Plumas 9.16 Alameda 11.49 Sierra 9.16 Sonoma 11.90 Orange 9.50 Marin 12.07 Los Angeles 9.51 Napa 12.10 Del Norte 9.60 San Mateo 12.10 El Dorado 9.60 Santa Cruz 12.10 Imperial 9.60 Solano 12.10 Kern 9.60 Contra Costa 12.75 Kings 9.60 San Francisco 13.39 Merced 9.60 Santa Clara 14.68 SS-22 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS IHSS providers. However, given the current condition of the economy, and the high unem- ployment rates throughout the state, we do not believe that a wage reduction proposal would have a significant impact on the availability of IHSS providers at this time. The various wage- related proposals discussed above would reduce provider income, but are unlikely to impact services for IHSS recipients. Conclusion. Given the state fiscal difficulties, and the growing expense of the IHSS program, we recommend that the Legislature take action to reduce the costs associated with IHSS provider wages. The options above provide a framework to consider a number of IHSS wage changes. Our analysis indicates that wage reduction proposals will result in IHSS savings in a way that minimiz- es the impact on IHSS recipients. calworKs In this section of our report, we discuss (1) federal work participation requirements and how they affect the state’s CalWORKs pro- gram, (2) the Governor’s proposals for achieving General Fund savings in CalWORKs, (3) some specific LAO alternatives to the administration’s proposals, and (4) the overall approach to these issues that the Legislature may wish to consider. Federal Work Participation Rate (WPR) and Penalties Federal Requirements. Federal law govern- ing the TANF program requires that states meet a WPR of 50 percent, as adjusted to reflect credits for any decline in caseload that has occurred since the 2005 federal fiscal year (FFY). (We discuss this aspect of the CalWORKs program in more detail in the Background section of this report.) There are actually two types of caseload reduction credits (CRCs) provided under federal regulations. The first credit is awarded for the actual decline in a state’s welfare caseload. A second type of CRC is awarded to a state that spends excess resources in support of its pro- gram above the MOE requirement established for states by the federal government. Specifically, for every $50 million in excess MOE expendi- tures, California receives a CRC of 0.73 percent. (Please see page C-98 of the Analysis of the 2008-09 Budget Bill for a more extensive discus- sion of this federal policy and its ramifications for the CalWORKs program.) Figure 10 presents the administration’s esti- mate of the net WPR requirements faced by Cali- fornia, after accounting for the credits it is likely to be qualified to receive through FFY 2011. As the figure shows, the net WPR requirement for California is likely to generally increase over the years because the CalWORKs caseload is grow- ing and the state’s MOE-related credits are likely to decrease. Calculation of WPR. The WPR is determined by dividing the number of cases meeting federal requirements (the numerator) by the number of cases subject to the requirements (the denomi- nator). As discussed later in this Analysis, vari- ous policy options impact the numerator and denominator in this calculation. We note that the federal Deficit Reduction Act of 2005 made several changes in the TANF program which had the impact of making it harder for states to meet the WPR. (These changes are discussed in our CalWORKs write-ups in our analyses of the 2007-08 and 2008-09 budget bills.) Work Participation Penalties for States. If a state fails to meet the required WPRs, it is subject to a penalty of up to a 5 percent reduction of its SS-23L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Figure 10 CalWORKs Program Adjusted Work Participation Rate (WPR) Requirements Federal Fiscal Year (FFY) 2007 2008 2009 2010 2011 Federal WPR Requirement 50.0% 50.0% 50.0% 50.0% 50.0% Caseload Reduction Credits Natural decline since FFY 2005 3.5 6.9 4.0 \u2014 \u2014 Excess MOE reduction 5.8 8.2 2.0 1.0 2.0 Total Credit 9.3% 15.1% 6.0% 1.7% 2.0% Net WPR Requirement 40.7% 34.9% 44.0% 48.3% 48.0% MOE = maintenance-of-effort. federal TANF block grant. For each successive year of noncompliance, the penalty increases by 2 percent to a maximum of 21 percent. For Cali- fornia, the 5 percent penalty would be approxi- mately $149 million annually, potentially growing by up to $70 million per year. Penalties are based on the degree of noncompliance. Pursuant to cur- rent state law, the state and counties would share in any federal penalty. States out of compliance may enter into corrective action plans which can reduce or eliminate penalties, depending on a state’s progress in meeting the negotiated goals of the corrective plan. Current Status. For 2007, California achieved a WPR of 22.3 percent, well below the required rate of 40.7 percent (50 percent less the CRCs). Normally, the federal government notifies states of their WPR status about one year after the close of the fiscal year. Accordingly, most states were expecting to receive federal notification of their WPR compliance status for FFY 2007 by September 2008. However, the prior administra- tion did not send the notifications or release the state-by-state WPR results. Potential Federal Changes Could Ease WPR Issues. Given the fiscal difficulties many states are facing, and the likelihood that Congress and the new federal administration will soon provide a federal relief package for states, it is possible that WPR penalty notifications to states may not be issued by federal authorities for quite some time. It is also possible that federal authorities will make it easier for states to meet WPR re- quirements. The TANF regulations issued during 2007 and 2008 by the prior administration made it significantly harder for states to meet the WPR, but a change in policy in this area is possible in the new federal administration. (For an exten- sive discussion of these federal regulations, see the CalWORKs chapter of the Analysis of the 2008-09 Budget Bill, page C-100.) Moreover, the federal TANF program is up for reauthorization next year, offering a further opportunity for some relaxation of the states’ WPR obligations. In any event, when and if California is notified that it failed WPR in 2007, the state would have until at least FFY 2010, and probably until FFY 2011, to attain compliance with federal law and regula- tions through a corrective action plan. Governor’s CalWORK’s Proposals The Governor’s 2009-10 spending plan offers seven CalWORKs budget reduction proposals, five of which impact grants and eligibility. Figure 11 (see next page) sum- marizes the fiscal, WPR, and eligibility impacts for these proposals. If adopt- ed, total General Fund savings would be about $123 million in 2008-09 and almost $1.1 billion SS-24 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS in 2009-10. These proposals would increase the WPR by an estimated 2.1 percent, and would remove over 234,000 children from aid. We note that because of the TANF MOE requirement described earlier, not all of the $1.1 billion in savings can be achieved in the CalWORKs program. Some of the General Fund savings are achieved by using TANF funds freed up from the proposed program reductions to offset General Fund costs in the Student Aid Commission ($192 million) and the Department of Developmental Services ($24 million). These fund shifts are feasible. The issue of whether to make these fund shifts depends on how deeply the Legislature elects to cut the CalWORKs pro- gram. Key features of the Governor’s CalWORKs proposals are described below. Grant Reduction. The proposed 10 percent grant reduction would reduce the maximum monthly CalWORKs grants by $72 in designated high-cost counties and $69 per month in low- cost counties. Roughly one-third of these grant decreases for recipients would be partially offset by an increase in food stamp benefits. This is because food stamp allotments are based on income, including grant income. Figure 12 shows the current grants and food stamp allotments and how these amounts would change under the Governor’s proposal. The figure also shows how the combined grant and Food Stamps compares to the federal poverty guideline. (We note that under current law, a COLA based on the change in CNI would be granted in July 2009. This COLA would increase the grants by 1.53 per- cent. However, the Governor proposes to sus- pend this COLA.) The administration’s proposed grant reduc- tion would reduce the WPR by 4.5 percent. This is because the grant reduction has the effect of removing about 15,400 aided families who are working sufficient hours to meet federal require- ments. (These families are removed from aid because they have incomes that would exceed the new income eligibility limit created by the proposed grant reduction and its interaction with the earned income disregard.) Modified Safety Net and Child-Only Time Limit. The administration’s modified safety net and child-only time limit proposals both establish a five-year limit on the receipt of CalWORKs Figure 11 Governor’s CalWORKs Proposals Summary of Fiscal, WPR, and Caseload Impacts (Dollars in Millions) Savings Removed From Aid 2008-09 2009-10 WPR Impact FFY 2010 Families Children 10 percent grant reduction $45.2 $294.0 -4.5% 15,400 30,200 Child-only time limit (five-year limit for child-only cases) 38.4 261.7 \u2014 42,800 83,400 Modified safety net (five-year limit for cases with adult) 36.4 260.7 5.2 35,900 90,400 Self-sufficiency reviews (recertification in person at six months) 3.5 97.2 1.4 16,000 30,400 Suspend July 2009 COLA \u2014 79.1 \u2014 \u2014 \u2014 Delay pay-for-performance county incentive program \u2014 40.0 \u2014 \u2014 \u2014 Reduce child care reimbursements \u2014 30.9 \u2014 \u2014 \u2014 Totals $123.5 $1,063.7 2.1% 110,100 234,400 WPR = Work Participation Rate; FFY = federal fiscal year; COLA = cost-of-living adjustment. SS-25L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Figure 12 CalWORKs Maximum Monthly Grant and Food Stamps Current and Proposed Grants for a Family of Three Change Through April 2009 May 2009 Amount Percent High-Cost Counties Grant $723 $651 -$72 -10.0% Food Stamps 423 445 22 5.2 Totals $1,146 $1,096 -$50 -4.4% Percent of Povertya 77% 73% Low-Cost Counties Grant $689 $620 -$69 -10.0% Food Stamps 433 454 21 4.8 Totals $1,122 $1,074 -$48 -4.3% Percent of Povertya 75% 72% a Compares grant level to federal poverty guideline. The 2009 LAO estimate is based on 2008 federal guidelines, adjusted for recent trends. assistance for children. (The proposals are un- changed from the Governor’s 2008-09 budget. We provide a more detailed discussion of these proposals in the Analysis of the 2008-09 Budget Bill [please see page C-109].) Currently, children have no time limit for receiving aid, but their par- ents (if eligible) are generally limited to five years of assistance. The modified safety net policy requires adults who have been on aid for five years to either work sufficient hours to meet the federal WPR, or have their entire family removed from aid. The administration estimates that this policy would increase the WPR by 5.2 percent and result in just over 90,000 children losing their CalWORKs grant. The child-only time limit has no impact on the work participation rate (because the parents are ineligible for assistance and are not subject to the WPR), but results in an estimat- ed 83,400 children being removed from aid. Self-Sufficiency Reviews. The Governor proposes to condition a recipient’s eligibility for CalWORKs on their attendance at an in-person review with his\/her county worker every six months. This requirement would apply to any case that was not meeting work participation requirements (including most child-only cases, which often are not subject to federal participa- tion requirements). The CalWORKs budget as- sumes that 5 percent of recipients will discontin- ue aid for failing to comply with this requirement. Based on the 5 percent discontinuance rate, the budget plan estimates that this policy would result in $97 million in savings in 2009-10 from remov- ing about 16,000 families and 30,000 children from aid. It would increase the WPR by about 1.4 percent, due to the removal of these families from the CalWORKs rolls (in other words, they are no longer in the WPR denominator). Other Proposals. The Governor also propos- es to limit child care reimbursements to the 75th percentile of the regional market (currently the limit is the 85th percentile). In addition, the Gov- ernor proposes to further delay implementation of a pay-for-performance county incentive sys- tem, which has yet to be implemented. Future WPR Sta- tus. As noted above, some of the Governor’s proposals impact the WPR. Figure 13 (see next page) compares the an- nual WPR requirements presented in Figure 10 to the estimated WPR for California, assuming the Governor’s CalWORKs SS-26 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS proposals are adopted. As the figure shows, the Governor assumes that the WPR would increase by 10 percent over a five-year period ending in FFY 2011 under current law. This assumption is based on continued implementation of recently enacted policies which focused the counties on better engaging CalWORKs recipients with work participation. Any increase is speculative, and the recession will make it harder to employ Cal- WORKs recipients. However, recent data from Los Angeles County, which comprises almost one-third of the caseload, suggest the WPR will be moving up in FFY 2008 and FFY 2009. Even with the assumed 10 percent increase in the WPR and the impact of the Governor’s proposed policies, the figure shows that the state will have a major WPR shortfall through 2011. Finally, we would note that the state’s WPR status shown here could change significantly, depending on federal direction. Alternatives to the Governor’s Proposals Below, we present two LAO alternatives to the Governor’s proposals. In general, these Figure 13 CalWORKs Program Estimated Work Participation Rate (WPR) Shortfall FFY 2007 FFY 2008 FFY 2009 FFY 2010 FFY 2011 Net WPR Requirement (see Figure 1) 40.7% 34.9% 44.0% 48.3% 48.0% 2007 WPR 22.3% 22.3% 22.3% 22.3% 22.3% Governor’s assumed increase per current law \u2014 4.0 10.0 10.0 10.0 Estimated current-law participation rate (22.3%) (26.3%) (32.3%) (32.3%) (32.3%) Governor’s Policy Proposals 10 percent grant reduction \u2014 \u2014 -1.8% -4.5% -4.5% Self-sufficiency review every six months \u2014 \u2014 0.4 1.4 1.4 Modified safety net \u2014 \u2014 1.9 5.2 5.2 Estimated Participation Rate 22.3% 26.3% 32.8% 34.4% 34.4% Estimated WPR Shortfall -18.4% -8.6% -11.2% -14.0% -13.6% FFY = federal fiscal year. options result in less savings than the Governor, but also cause far fewer children to be removed from aid. In addition, we describe the previously adopted Work Incentive Nutritional Supplement (WINS) program, which the Governor proposes to delay. LAO Option 1: Adopt Community Service Requirement for Safety Net Parents. As men- tioned earlier, the CalWORKs safety net provides cash assistance just to the children of about 50,000 cases where the adult has been aided for five years and is no longer directly eligible for CalWORKs benefits. As an alternative to the ad- ministration’s proposal, which terminates benefits for children whose parents do not meet federal WPR requirements, we propose creating a com- munity work obligation of 20 hours per week for safety net parents. The LAO proposal is de- scribed in more detail beginning on page C-115 of the Analysis of the 2008-09 Budget Bill. Under the LAO approach, safety net parents who are not meeting federal participation requirements would be offered a 20-hour per week commu- nity work requirement created by their county. SS-27L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Counties would have discretion in how to set up the community service requirement. It could be a subsidized employment opportunity pursuant to Chapter 589, Statutes of 2007 (AB 98, Niello), or some other type of supervised volunteer position. Every three months, each client would be placed in a job club\/job search program to test the labor market. Parents who refused this job would have their families removed from aid following a home visit to determine if the family was entitled to a participation exemption. We es- timate that the annual savings from this approach would be about $24 million. When fully imple- mented, this option would increase the WPR by about 2.8 percent. LAO Option 2: Focus Reviews on Families With Able-Bodied Adults. In general, the con- cept of an in-person self-sufficiency review for families with adults who are not meeting federal work participation requirements has merit. How- ever, we believe self-sufficiency reviews should be focused on cases with work-eligible adults who are not meeting federal work participation requirements. Assuming implementation of this option by May 2009, this approach would result in a net cost of $1 million in 2008-09 (mostly due to start-up costs) followed by savings of $33 million in 2009-10. When fully implement- ed, this option would raise the CalWORKs WPR by about 0.55 percent. WINS. Statutory language in the 2008-09 budget package requires the DSS to develop a WINS program. The WINS program would pro- vide $40 per month in additional food benefits to working poor families. Specifically, the ben- efits would go to Food Stamps families who are working sufficient hours to meet federal work participation requirements, but are currently not receiving CalWORKs assistance. This program is intended to increase the state’s WPR by about 10 percentage points, helping the state meet the federal work participation requirements and possibly avoiding federal penalties in the future. The Legislature added $2 million in the budget to begin the automation changes to implement WINS, but the Governor vetoed this funding. For 2009-10, the Governor proposes statu- tory budget language that would delay the implementation of WINS until October 2011. If the Legislature elects to fund this program on an earlier timetable, this would result in costs of $2 million in 2009-10 (for first-year automation costs) and $18 million in 2010-11. Ongoing costs thereafter would be about $24 million. Given these costs, and the state’s fiscal condition, it may be prudent to delay action on WINS until there is some clarification at the federal level on WPR requirements. LAO Approach Recommended Budget Solution. At a mini- mum we would recommend that the Legislature adopt (1) the COLA suspension (for savings of $79 million), (2) the reduction in child care reimbursements ($31 million), (3) the delay in the pay-for-performance incentive program ($40 mil- lion), (4) the LAO approach to self-sufficiency reviews ($33 million), and (5) the community service work requirement for safety net cases ($24 million). Together, these proposals provide $207 million in solutions to the state’s General Fund budget problem and would increase the WPR by about 3.3 percent, thus also helping to avoid future new General Fund penalty costs. Given the magnitude of the budget problem, the Legislature may need to achieve additional SS-28 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS savings in CalWORKs. In this event, we would suggest adopting a grant reduction, as described below. Seriously Consider the 10 Percent Grant Re- duction. The Governor’s proposed grant reduc- tion results in substantial General Fund savings, amounting to $294 million in 2009-10. Almost one-third of the negative impact on recipients from this action would be mitigated by an increase in food stamp benefits. Moreover, this policy modestly impacts all CalWORKs families, rather than completely eliminating benefits for entire families, which is the case with some of the administration’s other CalWORKs budget reduction proposals. The loss of 4.5 percentage points in WPR is of some concern, but probably is not critical at this time, considering the poten- tial for change at the federal level. county welfare autoMation As noted above, while DSS oversees the administration of California’s social services programs, most services are delivered by 58 separate county welfare departments. Counties have combined into four separate consortia for purposes of welfare automation. The Los Ange- les County Computer System known as LEADER system is one of the consortia. In 2005, the Legislature approved funding for a new system that would replace and update LEADER. The project is currently in the procure- ment stage and has not yet awarded a bid to a primary vendor. LA County System Replacement Should Be Delayed In November, we proposed delaying the LEADER replacement system project by up to two years in order to defer development costs into future years. This approach would save about $15 million General Fund in 2009-10 and an additional $38 million in 2010-11. The Gover- nor took a similar approach, proposing a six- month delay. The Governor’s proposal achieves savings in the budget year that are similar to our proposal while allowing the project to finish before the expiration of its existing sole-source maintenance contract. This would allow the state potentially to avoid significant cost increases for extension of the contract. We recommend adoption of this six-month delay for the LEADER replacement system. This achieves significant state savings and preserves flexibility for the Legislature in making decisions about this project next year. KinsHip guarDiansHip assistance payMent (Kin-gap) prograM The Kin-GAP program was established to en- hance family preservation and stability by plac- ing foster children in long-term placements with relative caregivers. Under Kin-GAP, a dependent child who has been living with a relative for at least 12 months in Foster Care may receive a monthly grant if the relative assumes guardian- ship and the dependency case is dismissed. The grant is identical to the one the child received while in Foster Care. California operates Kin-GAP with state and county funds only, with the state paying roughly 75 percent of the costs. New Federal Legislation Allows Feder\u2011 ally Subsidized Guardianship Payments The President signed the Fostering Connec- tions to Success and Increasing Adoptions Act of 2008 (P.L. 110-351) into law on October 7, 2008. Among its many provisions impacting the child welfare system, the act creates an option SS-29L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS for states to provide subsidized kinship guardian- ship payments with federal financial participation (FFP) through federal Title IV-E funds. (The Title IV-E program provides support to states for the costs of eligible children placed in foster homes or other types of out-of-home care under a court order or in other situations.) While the Governor’s budget does not in- clude a proposal related to this new federal act, we believe the Legislature should take advantage of newly available federal funds for guardianship programs. Below, we review this provision, out- line steps California could take to begin drawing down new federal funds for existing and new potential Kin-GAP cases, and identify key issues for legislative consideration. Eligibility Requirements for Obtaining FFP. To receive FFP for kinship guardianship pay- ments, a child must have been eligible for federal Title IV-E foster care maintenance payments while residing for at least six months in the home of the prospective relative guardian. In addi- tion, among other requirements, the state must (1) determine that returning home or adoption is not appropriate permanency options for the child, and (2) negotiate and enter into a writ- ten kinship guardianship agreement that, among other requirements, specifies the amount of the assistance payment and the manner in which the payment may be adjusted periodically. Nearly all existing Kin-GAP cases either meet, or could meet, these requirements. New Guardianship Program To Obtain Federal Funds We recommend the Legislature take steps in the current year to create a new guardianship program that enables the drawdown of federal funds for new guardianship cases, as well as for existing Kin-GAP cases. To obtain federal fund- ing, the Legislature must create a new guardian- ship program which meets federal requirements. Once established, the state may enroll new relative guardian cases directly into this new program and receive federal funding for eligible cases. What About Existing Kin-GAP Cases? One of the key issues raised by the new federal act is whether FFP is available only prospectively or for existing Kin-GAP cases as well. We believe the language allows for states to receive FFP for existing Kin-GAP cases once certain conditions are satisfied. The U.S. Administration for Chil- dren and Families, however, recently released a Program Instruction on the act’s guardianship provision containing some statements that sug- gest otherwise. The Program Instruction is meant to provide guidance to the states in advance of final regulations. If the Program Instruction and statutes are interpreted in a restrictive manner, the state may have to move existing Kin-GAP cases back into Foster Care for a brief period, and then move them to the new guardianship program, to receive FFP for these cases. A less restrictive interpretation of the act and the in- struction suggests an easier process may be avail- able in which existing Kin-GAP providers sign new negotiated agreements in order for the state to qualify these cases for FFP. As we await additional clarification from the new federal administration on the act’s guardian- ship provision, we believe the state can position itself to take either approach described above in order to draw down federal funds for existing Kin-GAP cases. We note that both approaches would result in new administrative costs. We describe both approaches in more detail below. SS-30 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Permissive Federal Approach: Signing a New Agreement. If the federal government al- lows a more permissive approach, the state may move existing Kin-GAP providers into the new guardianship program by signing a new negoti- ated agreement that meets federal requirements. This approach would result in new administrative costs for county social workers to negotiate the new agreement with guardians. These negotia- tions would occur at annually scheduled meet- ings conducted by social workers with guardian- ship families to redetermine their eligibility for the program. Restrictive Federal Approach: Converting Existing Kin-GAP Cases Through Foster Care. With respect to the more restrictive interpreta- tion, the state may have to end existing guardian- ships and ask the court to resume dependency using a technical procedure allowable under Welfare and Institutions Code Section 388. This means that for an existing Kin-GAP case, the child would technically return to Foster Care but continue living with his\/her relative care- giver. The relative caregiver would continue to receive assistance payments through the Foster Care program, which can be supported through federal Title IV-E funds for eligible cases. Once a new guardianship agreement is negotiated with the relative caregiver, the child could then exit Fos- ter Care for guardianship under the new program with FFP. The approach out- lined above would require legislation to streamline the process and to minimize court costs and the potential imposition on guardians. Even after streamlin- ing the process, however, there would be new administrative costs for county social workers to inform existing Kin-GAP providers of this change in policy, process any paperwork necessary for the court, and negotiate a new guardianship agreement with the relative caregiver. We note that the cost to the state of reimbursing counties for these additional administrative costs would likely be more than offset by the benefit to the state General Fund from qualifying these cases for FFP. We also note that further guidance from the federal government could result in an approach that is a hybrid of the two described above. Fed- eral clarification will help guide the Legislature in creating the new guardianship program. In any event, below we provide preliminary estimates on the fiscal impact of a new guardianship pro- gram with FFP. Estimated Fiscal Impact Depending on which approach the state takes to making existing Kin-GAP cases eligible for FFP, we estimate General Fund savings rang- ing from about about $31.3 million to $36.9 mil- lion in 2009-10. As shown in Figure 14, we attribute the major difference in savings from the Figure 14 Creating a New Guardianship Program With FFP 2009-10 Estimated General Fund Impact (In Millions) Permissive Federal Environment Restrictive Federal Environment State benefit from FFP $42.9 $42.9 New administrative costs -6.0 -11.6 Net Savings $36.9 $31.3 FFP = federal financial participation. SS-31L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS two approaches largely to one-time administra- tive costs. These estimates assume that legislation is enacted in the current year to create a new guardianship program and develop a process to convert existing Kin-GAP cases, with implemen- tation beginning on July 1, 2009, and phasing in over a 12-month period. Generally, these would be ongoing savings. For 2010-11, we estimate full- year General Fund savings of about $70 million. Issues for Legislative Consideration There are several other implementation is- sues for the Legislature to consider. We highlight two issues with particular fiscal impacts below. Implementation Time Frame. If the less restrictive approach described above of moving existing Kin-GAP cases to the new guardianship program with FFP is viable, the Legislature may wish to expedite the process of shifting cases over, thus accomplishing it in a shorter period than the 12 months we assumed in our estimates. While this would increase upfront administra- tive costs, the state and counties would realize increased savings due to the shorter time frame. Negotiation Requirement. As previously de- scribed, under existing law, Kin-GAP payments are set at the rate that the child received while in Foster Care. There is no negotiation process and the overall payment is not modified to reflect changes in the needs of the child. The federal requirement, however, indicates that the guard- ianship agreement should be adjusted periodi- cally as the needs of the child and circumstances of the guardian change. Depending on how often the state adjusts payments and by what criteria, the average Kin-GAP payment may increase or decrease, which would impact the level of Gen- eral Fund savings. cHilD welfare services Temporarily Suspend Budgeting Prac\u2011 tice to Achieve General Fund Savings Existing Budgeting Practice. In preparing the budget for CWS, DSS adjusts proposed fund- ing for social worker staffing upwards when the caseload increases, but does not adjust funding downward when the caseload actually de- creases. The practice of not adjusting the budget to reflect caseload decline is commonly known as the hold harmless approach, although DSS technically refers to this as the base funding adjustment. Because of the way the hold harm- less provision works, the number of social work- ers funded by the state for the counties remains unchanged despite workload decreases. In other words, if an individual county’s caseload is de- clining, its number of caseworkers is nonetheless held at the prior-year level. At the same time, if another county’s caseload is increasing, the state provides that county with funds to hire additional caseworkers. Therefore, on a statewide basis, de- spite an overall caseload decline, the funding for basic social worker support continues to grow. We note that the Child Welfare Services Workload Study, which was required by the Legislature through Chapter 785, Statutes of 1998 (SB 2030, Costa), determined that CWS social workers had too many cases to effectively ensure the safety and well-being of the children for which they were responsible. The SB 2030 Study, as it is commonly known, proposed the establishment of minimum and optimal caseload standards for social workers. The hold harmless provision has been one way for the Legislature to provide additional funding to counties to try to meet these SB 2030 standards. SS-32 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS For 2009-10, DSS reviewed the estimated caseloads per CWS component and included $22.8 million ($9.7 million General Fund) in the budget for 37 counties with declining caseloads, pursuant to the hold harmless funding provi- sion. We note that this does not include the two counties\u2014Alameda and Los Angeles\u2014participat- ing in the federal Title IV-E Child Welfare Waiver Demonstration Capped Allocation Project. Suspend Hold Harmless. Given the General Fund shortfall, we recommend suspending the hold harmless budgeting methodology for two years. This would result in General Fund savings of about $9.7 million in 2009-10, with similar savings in 2010-11. Temporarily suspending hold harmless targets CWS expenditure reductions to those counties with declining caseloads that need fewer resources and would not reduce existing social worker caseload ratios in any county. In addition, this temporary suspension of the hold harmless provision would bring the bud- geting practice for CWS in line with the state’s normal budgeting practice for a variety of casel- oad programs. When the state’s fiscal situation is better, the Legislature could revisit the workload standards and budgeting methodology for the CWS program to decide whether to continue the hold harmless provision or implement a differ- ent method to fund the program at the workload standards the Legislature desires. coMMunity care licensing The Governor proposes to increase CCL fees to support increased investigations in two pro- gram areas. We discuss this proposal below and provide an alternative approach that achieves General Fund savings in the budget year. Governor’s Community Care Facility Fee Increase Proposal The Governor’s budget proposes to add 30 new positions to the CCL Division of DSS to ad- dress (1) an increased workload in investigating subsequent arrest reports for persons previously criminally cleared to operate or work at licensed community care facilities, and (2) issues recently identified by the Bureau of State Audits (BSA) related to checking that registered sex offenders were not residing at, or otherwise had access to, such facilities. The Governor proposes to fund these new positions with additional fee revenues generated by a 16 percent increase in application and annual fees for licensed facilities. We discuss these two aspects of the proposal in more detail below. Workload Increase in Subsequent Criminal Arrest Investigations. All individuals who are licensed to operate, work in, or reside at a com- munity care facility must receive a criminal back- ground check. The Caregiver Background Check Bureau within CCL supports the processing and monitoring of background checks and arrest re- cords for these individuals. The bureau is respon- sible for reviewing and responding to both initial background checks and any subsequent criminal activity involving an arrest. Upon an investiga- tion and analysis by the bureau of subsequent criminal arrests, CCL may revoke the individual’s ability to be involved with the licensed facility. Typically, violent crimes result in such suspen- sions, while many nonviolent crimes do not. Over the last three years, there has been a 17 percent increase in the overall number of criminal arrest records submitted to the bureau for review. In particular, the number of subse- quent crime arrest records that warrant investiga- SS-33L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS tion by the bureau has increased by 60 percent. As a result of this increase in workload, CCL es- timates that there is an existing backlog of about 1,400 individuals who require review, investiga- tion, and\/or analysis by the bureau. Pending such investigation, these individuals, if not incarcerat- ed, are generally allowed to work in community care facilities. The Governor’s budget proposes to add approximately $2.1 million and 21.5 positions to CCL to address these workload increases. About $1.8 million of this augmentation would be funded through the proposed 16 percent fee increase, while the remaining $318,000 would be supported with federal funds. Service Expansion Related to Investigations of Registered Sex Offenders. In April 2008, the BSA released a report that identified 49 regis- tered sex offenders who matched 46 addresses of licensed facilities. This resulted from a review of records pertaining to over 60,000 licensed child care and foster care homes and facilities. The CCL took subsequent actions to investigate the BSA findings and, in two instances, suspend- ed licenses and took legal action against facili- ties or homes in which registered sex offenders had access and children in care were present. In 11 other cases, CCL found that the offenders had access to a facility or home with an ac- tive license, but that no children in care were present. Nevertheless, these licenses were also suspended. All of the remaining address matches required no further action from CCL as they were determined to present no safety risks. Partly in response to the BSA findings and to decrease any potential risk of abuse or harm to children and adults served by licensed facilities, the CCL proposes to expand its investigation ef- forts related to registered sex offenders. These ef- forts include providing online data to parole and probation officers about the locations of licensed facilities, conducting an annual match of address data with licensee addresses, and extending the address match process to county-licensed homes and relative placement addresses. The Governor’s budget proposes to add ap- proximately $1.4 million and 8.5 positions to CCL to expand efforts related to these investigations. About $1.2 million of this augmentation would be funded through the proposed 16 percent fee increase, while the remaining $190,000 would be supported with federal funds. In addition, the budget includes an additional $458,000, supported by the fee increase, for counties that operate licensing programs under contract to the state to undertake comparable activities. LAO Alternative: Increase Fees Now and Gradually Increase Investigation Efforts The Governor’s budget proposes increas- ing fees by 16 percent, which generates about $3.5 million in additional revenue, to support the proposal described in the previous section. Our recommendation is to increase fees by a higher amount than proposed by the Governor, and gradually invest the additional fee revenue in the program areas described in the Governor’s pro- posal. Specifically, we recommend (1) a higher fee increase of 25 percent (raising $5.4 million), (2) funding the workload increase related to subsequent crime arrest investigations (at a cost of $1.8 million), and (3) funding the data-sharing portion of the expanded efforts related to regis- tered sex offender investigations now (at a cost of $96,000) and delaying consideration of the re- maining efforts for two years. This option results in a net General Fund benefit of $3.5 million in 2009-10, with similar savings in 2010-11. SS-34 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Fee Revenue. Figure 15 compares examples of current annual and application fees to the Governor’s and LAO’s proposed fees. Under our approach of increasing fees by 25 percent, revenues would increase by about $1.9 million more than the Governor’s proposal, for a total of $5.4 million in 2009-10. These fees have not been raised since 2004-05 and currently recover about 35 percent of the state cost of licens- ing and enforcement activities. We estimate a 25 percent fee increase would raise the state’s cost recovery to about 45 percent. Gradual Investment in Expanded Registered Sex Offender Investigations. The state cur- rently invests in several processes and programs through the California Department of Corrections and Rehabilitation, the Department of Justice, and local probation agencies to monitor the whereabouts of registered sex offenders. Given these existing efforts, we believe the develop- ment of the data-sharing capability is justified at this time. Therefore, we recommend funding this portion of the Governor’s proposed efforts to ex- pand CCL’s registered sex offender investigations. Specifically, we recommend providing total funds of $111,000 to develop, administer, and maintain a Web site for sharing location information on community care facilities with parole agents and probation officers, offender placement agen- cies, and local offender registration officials. We believe funding this specific tool will enhance the efforts of existing resources that are dedicated to the monitoring of registered sex offenders. As for the remaining proposed efforts to expand CCL’s registered sex offender investiga- tions, we believe that CCL has a sound existing process in place\u2014through background checks and review of criminal arrest records\u2014to check for potential registered sex offender involve- ment with licensed facilities. This existing pro- cess contributed to the low incidence of actions resulting from the address matches identified by BSA. Therefore, although these proposed efforts to expand investigations of registered sex offend- ers have merit, these efforts represent a higher service level which we believe can wait for con- sideration for two years. At that time, the Legisla- ture can reconsider the merit of these additional positions and the state’s fiscal condition. proposition 10 early cHilDHooD DevelopMent prograMs Proposition 10 was enacted by the voters of California in the November 1998 election. The initiative measure created the California Chil- dren and Families Commissions, now commonly Figure 15 Community Care Licensing Fees Examples of Current and Proposed Fees Annual Fee Application Fee Facility Type Current Governor’s Proposal LAO Proposal Current Governor’s Proposal LAO Proposal Family child care home (1-8 children) $60 $70 $75 $60 $70 $75 Child care center (1-30 children) 200 232 250 400 464 500 Adult day facility (16-30 adults) 125 145 156 250 290 313 Residential facility (16-30 residents) 750 869 938 1,500 1,739 1,875 Foster family agency 1,250 1,449 1,563 2,500 2,898 3,125 SS-35L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS known as the state and local First 5 Commis- sions, which rely upon revenues generated by state excise taxes on cigarettes and other tobacco products to fund early childhood development programs for children up to age five. The state commission (which receives 20 percent of rev- enues) and county commissions (which receive the remaining 80 percent) operate the First 5 programs. Governor’s Proposal In November 2008, our office presented the Legislature with a budget option to eliminate the state commission and reduce local funding by 50 percent, and redirect these funds to children’s health or childcare programs. The Governor’s budget essentially adopts this LAO option. It specifically proposes to redirect $275 million in Proposition 10 funds in 2009-10 to offset Gener- al Fund costs in CWS, Foster Care, and AAP, all programs administered by DSS. The Governor’s proposal assumes that the elimination of the state commission will occur gradually over the budget year, and estimates the savings from this proposal will increase to approximately $321 million in 2010-11. We concur with the Governor’s savings estimates. We would also note that while these would generally be ongoing savings, the level of savings would likely decline over time because taxes on cigarettes and other tobacco products are a slowly declining revenue source. This proposal would require voter approval because it changes the allocation of funding originally provided under Proposition 10. LAO Analysis: Prioritizing Use of State Funds Is Logical Voters approved Proposition 10 during a healthier fiscal period for the state. Proposi- tion 10 generally funds early childhood devel- opment, health, and education programs that were designed to be enhancements to previously existing core programs. With the state facing a $40 billion deficit, many core programs are now facing reductions or elimination. Rather than cutting more deeply into core programs, in our view it makes sense to reduce enhanced pro- grams such as Proposition 10. Accordingly, we recommend asking the voters to prioritize the use of Proposition 10 revenues to provide sup- port for core children’s programs and services. This recommendation is part of a broader pack- age of proposed ballot measures\u2014discussed in our January 2009 Overview of the Governor’s Budget\u2014which would increase state revenues and offset General Fund costs in core programs. We note that while the Governor’s proposal reduces local funding by 50 percent in 2009-10 and thereafter, it allows local commissions to retain their significant existing fund balances. Under our approach, and the Governor’s bud- get proposal, local commissions would be in a position to prioritize ongoing revenues to meet local needs and would retain their unexpended balances to smooth over this transition. Issues for Legislative Consideration There are two implementation issues for the Legislature to consider with regard to the Gover- nor’s proposal to redirect Proposition 10 resourc- es to children’s programs administered by DSS. SS-36 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Oversight of Local Commissions. Each year, local commissions issue an annual report and conduct independent audits primarily related to the commissions’ financial practices and the manner in which funds were expended. Local commissions submit these audits and their an- nual report to the state commission for review and inclusion in the state commission’s annual statewide report on First 5 activities. If a local commission fails to submit its audits or annual report to the state commission, the state commis- sion may withhold funds that would otherwise have been allocated to the local commission. If the state commission were to be elimi- nated, a different entity would need to assume these oversight responsibilities over the local commissions. Existing entities, such as HHSA or the State Controller’s Office, may be able to take over these functions. Redirection Priorities. The Governor’s bud- get proposes redirecting the Proposition 10 funds to support several children’s programs admin- istered through DSS. While this is a workable approach, the Legislature could redirect Proposi- tion 10 funds to other program areas, depending upon its priorities. DepartMent of cHilD support services The Governor’s 2009-10 budget plan in- cludes three significant proposals for the DCSS. All involve additional expenditures intended to result in savings in 2009-10 and future years. We discuss these proposals below. Augmentation for Local Child Support Agencies Governor’s Proposal. In general, federal and state funding for LCSAs, which carry out child support collection efforts, has been held flat since 2003-04. Largely because costs for vari- ous operations have increased, LCSA staffing has declined during this period by 1,935 positions, or 23 percent of total staffing. The Governor’s budget proposes to stop the decline in staffing by increasing funding for LCSAs by $18.7 million ($6.4 million General Fund) in 2009-10. As mentioned earlier, all but the first $50 of the child support collected on behalf of families receiving public assistance is deposited in the General Fund. The proposed 2009-10 budget augmentation for LCSAs is intended to retain child support enforcement staff, increase child support collections, and increase deposits into the General Fund to offset public assistance pro- gram costs. Specifically, we estimate that nonas- sistance child support collections will increase by over $70 million while assistance collections will increase by $6.5 million. Because the General Fund augmentation is $6.4 million, we estimate that this proposal results in a net General Fund benefit of about $100,000 ($6.5 million in in- creased General Fund revenue, less the $6.4 million General Fund augmentation). Potential Risks. Although the retention of child support case workers would likely have a positive impact on collections to some degree, it is unclear whether this proposal would result in a net Gen- eral Fund benefit. The proposal is based on several risky assumptions. Our sensitivity analysis of the proposal indicates that even slight changes in the underlying assumptions could result in a negative impact to the General Fund rather than the posi- tive impact estimated by the Governor. Alternative Approach to Supporting LCSAs. Below, we present an alternative approach which establishes a voluntary matching program for LCSAs wishing to access new funds. Although SS-37L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS there may be risks associated with our alternative for increasing funding for LCSAs, we believe that with adequate oversight and a strategic allocation process, a General Fund benefit is probable. LCSAs Have No Fiscal Stake in the Pro- gram. Our 2006 report, Strategies for Improving Child Support Collections in California, found that California has historically performed poorly in the collection of child support compared to other states. Among several findings, the analysis notes that a contributing factor is that LCSAs have no fiscal stake in the program. Specifically, child support enforcement is supported with a combi- nation of state and federal funds without a county share of cost. We found that one way to ensure that counties bear more responsibility for the suc- cess of the child support program is to give them a fiscal stake in it though a share of program costs. The rationale behind this recommendation was that a share of cost would provide counties with a fiscal incentive to ensure that funding is spent carefully and targeted toward activities that improve child support collections. Creating a Voluntary Matching Program. The Governor’s proposed augmentation pres- ents an opportunity to implement a variation on this recommendation from 2006. Specifically, the Legislature could prioritize the proposed augmentation for counties willing to provide matching funds. For example, the Legislature could agree to match each dollar invested by the county with an additional $2 from the augmenta- tion and $6 from the federal government. Leveraging Additional Federal Funds. By using a combination of state and county funds, additional federal funds beyond those estimated by the Governor would be drawn down. Figure 16 shows how the proposed voluntary matching program would allow the state to use the same amount of General Fund as the Governor to leverage even more federal funds. Although it is hard to quantify, the larger child support collec- tion effort made possible with more federal fund- ing would have a benefit to the state General Fund\u2014potentially as much as $3.6 million. If the Legislature provides an augmentation to LCSAs, we recommend it be done through a matching program, as described above. Allocation Issues. To implement this pro- posal, the DCSS would notify the LCSAs of their potential share of these funds and their required match. Those funds not claimed by counties would be made available to other counties. If there were still unspent funds remaining at the end of the year, they would revert back to the General Fund. This allocation methodology would ensure that the counties most interested in improving their child support programs receive the additional funds. We note that the figure above assumes 100 percent county participation. Mandatory Federal Fee Background. Currently the state provides child support enforcement services free of charge for both assistance and nonassistance cases. Beginning in January 2008, in accordance with the Federal Deficit Reduction Act of 2005, the federal government began assessing an annual fee on the state of $25 for each child support Figure 16 Child Support Augmentation LAO and Governor’s Proposals (In Millions) Governor LAO County funds \u2014 $3.2 State funds $6.4 6.4 Federal funds 12.3 19.2 Total Augmentation $18.7 $28.8 SS-38 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS case for which $500 or more was collected on behalf of those who have never received public assistance. (These are known as never-assisted cases.) States were given the option to (1) col- lect the fee from the custodial parent, (2) collect the fee from the noncustodial parent, or (3) use state funds to cover the fee. Because California was in the middle of implementing a statewide child support computer system at the time, it was determined that it would not be cost-effective to make the automation changes necessary to enable the collection of the fee from the noncus- todial or custodial parent. As a result, state funds were used to cover the cost of the fee in 2007-08 ($1.8 million) and 2008-09 ($3.5 million). Governor’s Proposal. The 2009-10 budget proposes $39,000 General Fund to provide notification to never-assisted families regarding this potential fee, which would commence in 2010-11. The administration’s proposal to col- lect the fee is slightly different than an approach discussed in a June 2008 cost-benefit report prepared by DCSS regarding this fee collection issue. That report found that it would be cost-ef- fective to collect a $25 fee from all never-assisted families for which over $500 in child support was recovered. Instead of collecting a standard $25 fee, the Governor now proposes a tiered fee structure. Under this proposal, recipients would be charged $25 if over $500 is collected, $50 if over $1,000 is collected, and $75 if over $3,000 is collected on their behalf. This fee structure is likely to generate more revenue than a flat $25 collection, but the automation changes necessary to enable the collection of the fee would also be more sophisticated and, thus, likely more costly. The DCSS is currently working to update the costs and anticipated revenue estimates associ- ated with this proposal. Although the General Fund revenues are unknown, they are likely to exceed the current General Fund costs of paying the fee. Conclusion. We believe that assessing a fee on never-assisted child support cases has merit. To the extent that the DCSS finds that the required automation changes cost less than the anticipated General Fund fee revenue, we rec- ommend pursuing the collection of this fee. Child Support Automation Federal Certification. In November 2008, the California Child Support Automation Sys- tem (CCSAS) was fully implemented, after eight years and $1.5 billion in costs. The system then received federal certification as a single state- wide automation system, ending the threat of federal penalties and lifting the cap placed on federal support for automation costs. The DCSS is responsible for maintaining the functionality of CCSAS and ensuring that the LCSAs have access to the system in order to perform child support enforcement activities. Budget Requests. For CCSAS, the Governor’s budget proposes expenditures totaling about $118 million ($78 million federal funds and $40 million General Fund) for 2009-10. About $66 million of the total funds is slated for CCSAS maintenance expenses, such as system support staff, software updates, and equipment replace- ment. The remaining $52 million is for multiple change requests for additional functionality that was previously deferred in order to meet the federal certification deadline. The administration has indicated that further details on these change requests will be forthcoming. Evaluating the CCSAS Budget. The $66 mil- lion for maintenance and upkeep of the CCSAS system appears necessary to maintain current SS-39L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS functionality. However, the $52 million in func- tionality change requests appear to be enhance- ments to a federally certified system which provides adequate service levels. Given the cur- rent fiscal environment, any change requests that seek new functionality should be rejected, unless the administration provides evidence that the new functionality would result in increased child support collections and be more cost-effective than the current operations. Recommendations. At the time this analysis was prepared, the administration had not pro- vided sufficient justification for the $52 million in change requests. Accordingly, we recommend reducing the CCSAS budget by $52 million ($17 million General Fund). As details of the $52 million change requests become available, we will update our analysis and advise the Legis- lature of our findings. other issues aDoption assistance prograM The AAP provides monthly cash grants to parents who adopt foster children. State law de- fines eligible children as those who, without as- sistance, would likely be unadoptable because of their age, racial or ethnic background, or handi- cap; because they are a member of a sibling group that should remain intact; or because they come from an adverse parental background. The AAP grants are limited to the amount of the foster family home rate that the child would have received if she or he had remained in Foster Care. In addition, if the child has special needs that would have been covered had the child remained in Foster Care, the AAP grant typically includes an additional amount of funding called a specialized care increment (SCI). Growth of AAP As previously mentioned, the AAP is one of the fastest growing children’s programs within DSS. The General Fund budget for AAP has grown from $150 million in 2001-02 to a pro- posed funding level of approximately $360 mil- lion for 2009-10, an increase of over 139 per- cent, or 11.6 percent a year. This cost increase is mostly attributable to caseload growth and higher average monthly grant payments. AAP Eligibility and Payment Levels Because of broad eligibility requirements and relatively high payment levels, California’s AAP is among the most generous of such programs in the country. The state’s inclusion of adverse parental background as an eligibility factor al- lows virtually all children adopted out of the foster care system to qualify for AAP, regardless of whether or not they would otherwise be hard to place. This is because any child removed from his or her parents and placed in Foster Care must have had an adverse parental background. Other states have more limited eligibility criteria. As for grants, some states choose to cap the AAP basic grant or SCI amounts. California, how- ever, has chosen to pay the maximum allowable amount to AAP families, which is the amount the child would have received in Foster Care, includ- ing any SCI payments. SS-40 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Reform AAP to Improve Its Cost\u2011Effectiveness Based on our review of the program, we recommend enactment of a series of legislative reforms to AAP to improve its cost-effectiveness. These reforms would only apply to prospective cases, and would not affect agreements already in place with existing adoptive parents. We sum- marize these proposed changes below. Narrow the Definition of AAP Eligibility. We recommend eliminating the adverse paren- tal background category from AAP eligibility requirements. In other words, the AAP program would only be available for those children who are truly hard to place. This means, for example, that healthy children under the age of three would generally be ineligible for immediate fi- nancial support through AAP. We note that many persons become foster parents to infants and young children as the first step toward intended adoption. Therefore, the incentive for adoption provided by AAP may be unnecessary for these families. Set Grant Levels to Recognize Adoptive Parents’ Financial Responsibility. We recom- mend capping the basic AAP rate paid to adop- tive parents at 75 percent of the foster care rate. Although this reform would recognize that when adoptive parents take over the role of parenting, they assume some measure of financial respon- sibility for their children, the parents would still receive some financial assistance for adopting a child who may be hard to place. This 75 percent cap would not apply to the SCI, which can range from zero to over $2,000 per month. Better Tie Benefit Levels to Need. Currently, parents generally receive an automatic increase in their AAP grant as their children age. Because these age-driven grant increases are not based on a demonstration of need, we recommend such increases be eliminated. Grants should be increased only for more narrowly defined rea- sons, including increased costs due to physical, mental, emotional, or medical problems that the child may have, which are directly tied to their birth parents or the child’s circumstances before they were adopted. Estimated General Fund Savings. The changes outlined above would require the enact- ment of statutory changes and regulations as well as the issuance of guidance letters to coun- ties. Assuming these steps occurred by January 2010, our recommendations for reform of AAP would result in General Fund savings of approxi- mately $2 million in 2009-10, increasing to about $12 million in 2010-11, and with greater sav- ings in the out-years. For more details on these proposals, please see Reforming the Adoptions Assistance Program on page C-255 in our Analy- sis of the 2004-05 Budget Bill. iHss tiMe carD reforMs Some Efforts Have Been Made to Prevent Fraud and Abuse In the IHSS program, as we previously discussed in the Background section of this report, the recipient is considered to be the em- ployer of the person providing them services. As the employer, the recipient has the responsibility of signing and verifying the time cards of their provider. Below, we discuss current time card policies and two reform options to increase IHSS program oversight and integrity. IHSS Quality Assurance Initiative. Chap- ter 229, Statutes of 2004 (SB 1104, Committee on Budget and Fiscal Review), created an IHSS quality assurance (QA) initiative. The QA initia- tive was designed to, among other things, en- SS-41L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS hance program integrity and increase the detec- tion of program fraud and abuse. Pursuant to QA requirements, each county established a QA unit to review and investigate cases of potential fraud and abuse. The QA workers visit the homes of recipients, conduct case reviews, and make re- cipient phone calls to verify that IHSS hours are being authorized and used appropriately. Current Time Card Practices Limit Program Oversight Despite the recent QA efforts, we find that the process for documenting the number of ser- vice hours provided each month lacks the detail required to ensure adequate program oversight. Documenting Service Hours. In order to re- ceive payment, recipients and providers sign and return time cards to their counties for process- ing. These time cards require the recipient and the provider to jointly sign for the total number of service hours that were provided each day of the pay period, but do not ask either party to indicate the actual times that were worked. For example, while a provider may indicate that he or she worked for five hours on a particular date, the provider is not required to document that he or she worked from 1:00 p.m. to 6:00 p.m. Our discussions with county officials re- vealed that this situation makes it difficult for county QA employees and fraud investigators to determine whether those hours were actually provided. In certain cases, fraud investigators may be aware, through case-monitoring efforts, that hours have not been provided. However, this fraud can be very difficult to prove because the provider can claim that he or she provided the services at times when the investigator was not monitoring their activities. Submitting Time Cards for Payment. Each time card covers a two-week period. Notably, there is no time limit for providers to submit their time cards to the county for processing after the two-week period of service has been completed. The DSS indicates that providers frequently save up their time cards and submit them all for processing at the end of the calendar year. This means that counties are not able to monitor the use of IHSS hours on a regular basis. Many QA programs regularly scrutinize the records of pro- viders who are paid for delivering over 300 hours of service each month (the equivalent of ten-hour days, seven days per week). Although providers are allowed to work such a heavy schedule, it would be difficult for a provider to actually work this many hours on an ongoing basis. The QA monitors regularly follow up with providers and recipients in such situations to verify whether the services were actually delivered. The lack of any deadline for providers to submit their time cards for payment undercuts these QA efforts. Provid- ers who do not submit their time cards until the end of the year will not appear on a 300-hour report and would therefore be able in many cases to avoid an investigation. Time Card Reforms Could Improve Program Integrity To increase oversight and accountability in the IHSS program, we recommend the enactment of legislation to reform current time card practices. Specifically, we recommend requiring providers to (1) document on their time card the actual hours that they provide services and (2) turn in their time cards within one month of providing care. This would assist IHSS fraud investigators, increase pro- gram oversight, and hold providers accountable for the services they provide. SS-42 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS SS-43L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS SS-44 L e g i S L a t i v e a n a L y S t ‘ S O f f i c e 2009-10 Budget anaLySiS Ser ieS Contact Information Todd Bland Director, Social Services 319-8353 [email protected] Ginni Bella Adult Programs\/Child Support Enforcement 319-8352 [email protected] Erika Li Information Technology\/Food Stamps 319-8306 [email protected] Minsun Park Child Welfare\/Employment Programs 319-8342 [email protected] LAO Publications To request publications call (916) 445-4656. This report and others, as well as an E-mail subscription service, are available on the LAO’s Internet site at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. The Legislative Analyst’s Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature. Executive Summary Background Description of Major Social Services Programs Overall Historical Spending Trends Individual Program Spending Trends Overview of the Governor’s Social Services Proposals Balancing the 2009\u201110 Budget Social Services Caseload Projections Supplementary Security Income\/State Supplementary Program In-Home Supportive Services CalWORKs County Welfare Automation Kinship Guardianship Assistance Payment (Kin-GAP) Program Child Welfare Services Community Care Licensing Proposition 10 Early Childhood Development Programs Department of Child Support Services Other Issues Adoption Assistance Program IHSS Time Card Reforms ”

” 2008-09 Analysis LAO 65 YEARS OF SERVICE Legislative Analyst’s Office Major Issues Health and Social Services Alternative Approach to Increasing Work Participation in ; CalWORKs Failure to comply with federal work participation requirements \ufffd could result in penalties in the hundreds of millions of dollars. The Governor proposes a graduated full-family sanction and a five-year time limit for children whose parents cannot or will not meet federal work participation requirements. These policies would address anticipated work participation shortfalls and result in savings of $471 million. We present alternative approaches to increasing work participation that result in less budgetary savings and fewer children losing aid (see pages C-105 and C-113). Child Welfare Services (CWS) ; The Governor proposes to reduce county allocations for \ufffd CWS by $84 million. We evaluate the potential impacts of this proposal on social worker caseloads and children; and provide alternatives that more narrowly target reductions in CWS expenditures (see page C-118). The budget proposes to continue with the development of a \ufffd new CWS computer system at a total cost of $247 million. We recommend canceling the proposed new system and instead updating the existing CWS\/CMS to provide required functionality, resulting in savings of $184 million over the next seven years (see page C-124). In-Home Supportive Services (IHSS) Wages ; Current law grants counties broad discretion to set wage \ufffd levels and the conditions under which potential providers may list themselves as available to be employed by recipients. To C – 4 Health and Social Services 2008-09 Analysis improve the IHSS labor force and the quality of services for recipients, we recommend enactment of legislation, prior to 2010-11, which ties state participation in wages to the level of training and tenure of IHSS providers (see page C-146). Reforming Categorical Funding for ; Public Health Programs The state’s current process for administration and funding \ufffd of over 30 public health programs at the local level is frag- mented, inflexible, and fails to hold local health jurisdictions (LHJs) accountable for achieving results. We make several recommendations to improve the coordination and integra- tion of these programs so that LHJs can focus on meeting the overall goal of improving the public’s health (see page C-52). Most Proposed Reductions to Provider Reimbursement ; Could Further Limit Access to Care The Governor’s budget proposes broad reductions to Medi- \ufffd Cal health care provider rates and other reimbursements. We find that the majority of these proposed reductions could further limit program enrollees’ ability to find providers who are willing to serve them. We recommend that the Legisla- ture reject most of these proposed reductions. We further recommend that the state shift certain federal funds from hospital payments to other health care programs in order to reduce General Fund spending in those programs (see page C-34.) Pay-for-Performance Program Could Reduce Medi-Cal ; Costs and Improve Patient Care We estimate the implementation of a pay-for-performance \ufffd (P4P) program in Medi-Cal could eventually save the state tens of millions of dollars while improving patient care. We recommend the Department of Health Care Services (DHCS) take some steps towards implementing a statewide P4P pro- gram for all Medi-Cal providers by first implementing a P4P program for managed care plans and requiring the DHCS to report on how a P4P program could be implemented for fee-for-service providers (see page C-40). Legislative Analyst’s Office Table of ConTenTs Health and Social Services Overview ……………………………………………………………………… C-7 Caseload Trends ……………………………………………………… C-8 Spending by Major Program …………………………………..C-11 Major Budget Changes ……………………………………………C-11 Departmental Issues ………………………………………………….. C-17 Department of Alcohol and Drug Programs (4200) .. C-17 Department of Health Care Services (4260) …………… C-24 Department of Public Health (4265) ………………………. C-51 Managed Risk Medical Insurance Board (4280) …….. C-67 Developmental Services (4300) ……………………………… C-73 Department of Mental Health (4440) …………………….. C-80 Department of Child Support Services (5175) ……….. C-91 California Work Opportunity and Responsibility to Kids (5180) …………………………….. C-97 Child Welfare Services …………………………………………..C-118 C – 6 Health and Social Services 2008-09 Analysis Foster Care ………………………………………………………….. C-129 Supplemental Security Income\/ State Supplementary Program ………………………… C-134 In-Home Supportive Services ……………………………… C-139 County Administration and Automation Projects .. C-154 Community Care Licensing …………………………………. C-159 Findings and Recommendations …………………………….. C-163 Legislative Analyst’s Office Overview Health and Social Services Compared to the current year, General Fund spending for health and social services programs is proposed to decrease by 0.9 percent to about $29.3 billion. Most of this net decrease is attributable to a variety of caseload increases which are more than offset by proposed budget- balancing reductions in Medi-Cal reimbursement rates, grants for children receiving California Work Opportunity and Responsibility to Kids, foster care and related payments, In-Home Supportive Services domestic service hours, and county administration of various programs. ExpEnditurE proposal and trEnds Budget Year. The budget proposes General Fund expenditures of $29.3 billion for health and social services programs in 2008-09, which is 29 percent of total proposed General Fund expenditures. Figure 1 shows health and social services spending from 2001-02 through 2008-09. The proposed General Fund budget for 2008-09 is $300 million (0.9 percent) below proposed spending for 2007-08. The overview reflects the Governor’s January 10 budget plan and does not reflect technical adjustments, provided at a later date, that we describe in our analysis of the Medi-Cal Program. The reduction reflects budget-balancing reductions (BBRs) proposed for these programs by the Governor. Special funds spending for health and social services is proposed to increase by about $170 million (2.1 percent) to about $8.1 billion. Most of this special funds growth is due to an increase in realignment payments to local government. Historical Trends. Figure 1 (see next page) shows that General Fund expenditures (current dollars) for health and social services programs are projected to increase by $7.5 billion (or 34 percent) from 2001-02 through 2008-09. This represents an average annual increase of 4.3 percent. Simi- larly, combined General Fund and special funds expenditures are projected to increase by about $10.9 billion (41 percent) from 2001-02 through 2008-09, an average annual growth rate of 5 percent. Adjusting for Inflation. Figure 1 also displays the spending for these programs adjusted for inflation (constant dollars). On this basis, General C 8 Health and Social Services 2008-09 Analysis Fund expenditures are estimated to decrease by 1 percent from 2001-02 through 2008-09. Compared to the current year, General Fund spend- ing for 2008-09 is proposed to decline by 3.3 percent in constant dollars. Combined General Fund and special funds expenditures are estimated to increase by 4.2 percent during this same period, an average annual increase of less than 1 percent. Figure 1 Health and Social Services Expenditures Current and Constant Dollars 2001-02 Through 2008-09 (In Billions) Constant 2001-02 Dollars Total State Spending General Fund Spending Percent of General Fund Budget Special Funds General Fund Current Dollars 5 10 15 20 25 30 35 $40 02-03 04-05 06-07 08-09 01-02 08-09 Proposed 5 15 25 35% CasEload trEnds Caseload trends are one important factor influencing health and social services expenditures. Figures 2 and 3 illustrate the budget’s projected caseload trends for the largest health and social services programs. Fig- ure 2 shows Medi-Cal caseload trends over the last decade, divided into four groups: (1) families and children, (2) refugees and undocumented persons, (3) disabled beneficiaries, and (4) aged persons (who are primarily recipients of Supplemental Security Income\/State Supplementary Program [SSI\/SSP]). Figure 3 shows the caseloads for California Work Opportunity and Responsibility to Kids (CalWORKs) and SSI\/SSP. Medi-Cal Caseload. The Governor’s budget plan assumes that the current-year caseload for Medi-Cal will increase by 51,600 individuals, or almost 2 percent, over the number assumed in the 2007\u201108 Budget Act. As Legislative Analyst’s Office Overview C 9 Legislative Analyst’s Office Figure 2 Budget Forecasts Continued Growth In Medi-Cal Caseloads 1998-99 Through 2008-09 (In Millions) 1 2 3 4 5 6 7 98-99 00-01 02-03 04-05 06-07 08-09 Aged Disabled Refugees\/Undocumented Persons Families\/Children Figure 3 CalWORKs Caseload to Decline SSI\/SSP Caseloads Increasing Slightly 1998-99 Through 2008-09 (In Millions) 0.2 0.4 0.6 0.8 1.0 1.2 1.4 98-99 00-01 02-03 04-05 06-07 08-09 CalWORKs SSI\/SSP C 10 Health and Social Services 2008-09 Analysis shown in Figure 2, the Governor’s budget plan assumes a modest decrease of 73,900 individuals, or a 1.1 percent reduction, in caseload for the budget year in the Medi-Cal Program. The caseload projections for 2008-09 take into account reductions of almost 172,000 individuals attributable to the Governor’s proposed reinstatement of quarterly reporting requirements for children and parents. The Medi-Cal budget proposal also reflects caseload growth in several eligibility categories for the aged and disabled. Healthy Families Program (HFP) Caseload. The Governor’s budget plan assumes that the current-year enrollment for HFP will fall short by about 20,500 children compared to the number assumed in the 2007\u201108 Budget Act. However, the spending plan further assumes that the program caseload will increase by about 66,000 children, or about 7 percent, dur- ing the budget year. The budget proposal estimates that a total of about 954,000 children will be enrolled in HFP as of June 2009. The CalWORKs and SSI\/SSP Caseloads. Figure 3 shows the case- load trend for CalWORKs and SSI\/SSP. The SSI\/SSP cases are reported as individual persons, while CalWORKs cases are primarily families. For 2008-09, the budget assumes that CalWORKs will serve about 960,000 individuals. As Figure 3 shows, the CalWORKs caseload declined steadily from 1998-99, essentially leveling out in 2003-04. This period of substantial CalWORKs caseload decline was due to various factors, including the improving economy, lower birth rates for young women, a decline in legal immigration to California, and, since 1999-00, the impact of CalWORKs program interventions (including additional employment services). In 2004-05 the caseload experienced its first year-over-year increase (about 2 percent) in almost a decade. After this one-time increase, the caseload resumed its decline, at just over 3 percent in 2005-06 and 2006-07. For 2007-08 the decline is forecasted to moderate to 1.8 percent. In 2008-09, the caseload is projected to drop by about 16 percent mostly due to policy proposals which (1) increase sanctions on families where the parents do not meet program participation requirements and (2) impose new time limits on children. The SSI\/SSP caseload can be divided into two major components\u2014the aged and the disabled. The aged caseload generally increases in proportion to increases in the eligible population\u2014age 65 or older (increasing at about 1.5 percent per year). This component accounts for about 30 percent of the total caseload. The larger component\u2014the disabled caseload\u2014typically increases by about 2.5 percent per year. Since 1998, the overall caseload has been growing moderately, between 2 percent and 2.5 percent each year. For 2007-08 and 2008-09, the budget forecasts caseload growth of 1.7 percent and 2.1 percent, respectively. Legislative Analyst’s Office Overview C 11 Legislative Analyst’s Office spEnding by Major prograM Figure 4 (see next page) shows expenditures for the major health and social services programs in 2006-07, and as proposed for 2007-08 and 2008-09. Both the current- and budget-year amounts reflect the Governor’s BBRs. As shown in the figure, three major benefit payment programs\u2014 Medi-Cal, CalWORKs, and SSI\/SSP\u2014account for a large share, about two- thirds, of total spending in the health and social services area. As Figure 4 shows, General Fund spending is proposed to decrease for both Medi-Cal (-3.4 percent) and HFP (-1.5 percent) in the budget year. In contrast, the budget plan proposes increased funding for community mental health services (7.8 percent), mental hospitals (6.9 percent), and regional centers (5.4 percent). Despite the increases in these three pro- grams, the significant cuts proposed in the Medi-Cal Program result in an overall reduction in spending for services provided by the state’s health care programs. In regard to major social services programs, General Fund sup- port will increase for CalWORKs (4 percent) and SSI\/SSP (2.9 per- cent) even after the Governor’s BBRs (discussed later). Conversely, the budget proposes to reduce General Fund support for Child Wel- fare Services\/Foster Care (-7.7 percent) and Child Support Services (-14 percent), primarily as a result of BBRs. Overall, the budget proposes to hold General Fund spending on social services programs constant at about $9.5 billion. Major budgEt ChangEs Figures 5 (see page 13) and 6 (see page 14) illustrate the major budget changes proposed for health and social services programs in 2008-09. (We include the federal Temporary Assistance for Needy Families [TANF] funds for CalWORKs because, as a block grant, they are essentially in- terchangeable with state funds within the program.) Most of the major changes can be grouped into five categories: (1) funding caseload changes, (2) suspending certain cost-of-living adjustments (COLAs), (3) rate reduc- tions, (4) across-the-board reductions, and (5) other policy changes. Caseload Changes. The budget reflects caseload changes in the major health and social services programs. For example, the budget reduces resources for the Medi-Cal caseload in 2008-09 because of the expected caseload decline resulting from elimination of continuous eligibility for children and restoration of quarterly status reports for children and par- ents. General Fund support for regional centers (RCs) that serve the C 12 Health and Social Services 2008-09 Analysis Figure 4 Major Health and Social Services Programs Budget Summarya (Dollars in Millions) Change From 2007-08 Actual 2006-07 Estimatedb 2007-08 Proposed 2008-09 Amount Percent Medi-Cal General Fund $13,628.3 $14,063.9 $13,591.8 -$472.1 -3.4% All funds 35,402.1 36,997.1 36,034.7 -962.4 -2.6 CalWORKs General Fund $2,017.8 $1,481.0 $1,547.2 $66.2 4.5% All funds N\/A 5,176.5 4,798.2 -378.4 -7.3 Foster Care\/Child Welfare Services General Fund N\/A $1,235.7 $1,140.5 -$95.2 -7.7% All funds N\/A 4,365.8 4,179.3 -186.5 -4.3 SSI\/SSP General Fund $3,427.3 $3,640.8 $3,747.9 $107.1 2.9% All funds N\/A 9,153.7 9,510.2 356.4 3.9 In-Home Supportive Services General Fund $1,474.0 $1,629.8 $1,632.6 $2.8 0.2% All funds N\/A 4,863.2 4,846.9 -16.3 -0.3 Regional Centers\/Community Services General Fund $2,106.8 $2,222.4 $2,342.2 $119.8 5.4% All funds 3,288.2 3,656.8 3,798.3 141.5 3.9 Community Mental Health Services General Fund $755.1 $756.3 $815.0 $58.7 7.8% All funds 2,188.4 3,492.6 3,562.4 69.8 2.0 Mental Hospitals\/Long-Term Care Services General Fund $959.2 $1,128.3 $1,206.2 $77.9 6.9% All funds 1,034.1 1,234.4 1,312.9 78.5 6.4 Healthy Families Program General Fund $347.7 $393.6 $387.8 -$5.7 -1.5% All funds 969.6 1,090.1 1,072.4 -17.7 -1.6 Child Support Services General Fund $525.6 $351.5 $300.8 -$50.7 -14.4% All funds 1,116.5 1,036.6 858.9 -177.7 -17.1 a Excludes administrative headquarters support. b Includes Governor’s budget-balancing reduction proposals. N\/A=not available. Legislative Analyst’s Office Overview C 13 Legislative Analyst’s Office Figure 5 Health Services Programs Proposed Major Changes for 2008-09 General Fund Requested: $13.6 Billion Medi-Cal (Local Assistance) Decrease: $472.1 Million (-3.4%) + $295 million for increases in costs and utilization of prescription drugs and inpatient hospital services + $93 million for increased payments to Medi-Cal managed care plans + $59 million from increased costs for premiums paid by Medi-Cal on behalf of beneficiaries who are also enrolled in the federal Medicare Program $602 million from reducing provider rates for physicians and other medical and service providers $134 million by eliminating certain optional benefits for adults who are not in a nursing facility such as dental and chiropractic services $92 million from reductions in caseload due to the elimination of continuous eligibility for children and restoration of quarterly status reports for children and parents $87 million from reducing rates paid to long-term care facilities and certain hospitals Requested: $2.3 Billion Department of Developmental Services (Local Assistance) Increase: $119.8 Million (+5.4%) + $62 million primarily for increases in regional center caseloads $215 million continuation of regional center cost containment measures developmentally disabled would continue to grow due mainly to caseload growth. Funding would be adjusted upward in the budget year for HFP to reflect anticipated caseload growth. C 14 Health and Social Services 2008-09 Analysis Figure 6 Social Services Programs Proposed Major Changes for 2008-09 General Fund Requested: $1.5 Billion CalWORKs Increase: $66 Million (+4.5%) + $258 million to backfill reduced Temporary Assistance for Needy Families (TANF) balances + $131 million for the 4.25 percent cost-of-living adjustment + $87 million for restoring the TANF reserve + $83 million for child care and services for families who comply with work requirements in response to the graduated full-family sanction $57 million for caseload decrease $486 million from grant savings associated with new time limits and the graduated full-family sanction Requested: $3.7 Billion SSI\/SSP Increase: $107 Million (+2.9%) + $103 million for caseload increase Requested: $1.6 Billion In-Home Supportive Services Increase: $3 Million (+0.2%) + $79 million for caseload increase + $52 million for new computer system $10 million from reducing county administration by 10 percent $109 million from reducing domestic service hours by 18 percent Suspended COLAs. Pursuant to current law, the budget provides $131 million to fund the July 2008 CalWORKs COLA. The budget proposes to delete both the June 2008 and June 2009 SSI\/SSP COLAs, resulting in total savings of $23 million in 2007-08 and $300 million in 2008-09. The Legislative Analyst’s Office Overview C 15 Legislative Analyst’s Office budget does not provide the discretionary Foster Care COLA, nor does it provide the inflationary adjustment for payments to counties for admin- istration of the Medi-Cal Program resulting in General Fund savings of $22.4 million in 2008-09. Rate Reductions. The Governor proposes rate reductions in Medi-Cal, HFP, Foster Care, Developmental Services, Rehabilitation, Alcohol and Drug Programs, and to other health care services. These rate reductions are generally in the range of 10 percent and taken together result in General Fund savings of about $800 million. Across-the-Board Reductions. The budget proposes to apply across- the-board reductions to many programs after they were first adjusted on a workload basis. Typically, the reduction is in the range of 10 percent of the adjusted base. Impacted programs include child welfare services allocation to counties ($83.7 million), food stamps administration ($14.4 million), IHSS administration ($10.2 million), public health ($31.7 million), the mental health managed care program ($23.8 million), developmental services programs ($22.5 million), and alcohol and drug programs ($6.2 million). Other Policy Changes Increasing CalWORKs Sanctions. Currently, when an able-bodied adult does not comply with CalWORKs participation requirements, the family’s grant is reduced by the adult portion, resulting in a child-only grant. The Governor proposes to increase this sanction to 50 percent of the remaining child-only grant after six months in sanction status, and completely eliminate the family’s grant after another six months elapses, unless the adult comes into compliance. In response to this increased sanction, the budget estimates that many families will enter employment, resulting in child care and employment services costs of $83 million. In cases where families do not comply, the budget estimates grant and administrative savings of $62 million, so the net cost of this proposal is about $21 million in 2008-09. Time Limits for Aided Children. Currently, after five years of assis- tance, a family’s grant is reduced by the adult portion, and the children continue to receive a child-only grant in the safety net program. The bud- get proposes to eliminate the safety net grant for children whose parents fail to comply with the federal work participation requirements (20 hours per week for families with a child under age 6 or 30 hours per week for families where all children are at least age 6). The budget also proposes to limit assistance to five years for most other child-only cases (such as those with parents who are undocumented or ineligible due to a previous felony drug conviction). These time-limit policies are estimated to result in savings of about $500 million in 2008-09. C 16 Health and Social Services 2008-09 Analysis Reducing Domestic Service Hours for IHSS Recipients. Currently social workers assess each IHSS client to determine the number of hours of service that the recipient will need to remain safely in their own home. Services include personal care services (such as bathing, toileting, ambu- lation, and medication management), as well as domestic services (meal preparation, cleaning, and errands). The budget proposes to reduce do- mestic services hours by 18 percent, resulting in savings of $109 million in 2008-09. Medi-Cal Benefit Reductions. The budget proposes to eliminate cer- tain Medi-Cal optional benefits provided to adults not residing in nursing facilities including dental, incontinence creams and washes, acupuncture, and chiropractic services for savings of $134 million General Fund in 2008-09. Most of the savings ($115 million) results from the elimination of dental services. Continue RC Cost Containment Measures. The budget plan proposes to make permanent in 2008-09 cost containment measures that have been in place since 2003-04, for savings of almost $215 million General Fund. The cost containment measures include rate freezes to certain providers and a freeze on funding for the startup of new programs. Changes to Early and Periodic Screening Diagnosis and Treatment (EPSDT). The budget plan proposes to achieve savings of about $46 million General Fund in the budget year through changes to the EPSDT program. A prior authorization requirement would be imposed on requests for day treatment services exceeding six months in duration. Savings would also be achieved through rate reductions to providers. HFP Benefit Limits and Co-Payments. The budget proposes to estab- lish a $1,000 annual benefit limit for dental coverage for HFP participants and increase co-payments for nonpreventative services and premiums for children in families with incomes over 150 percent of the federal poverty level. These changes are estimated to result in $20.8 million in annual General Fund savings. According to the Managed Risk Medical Insurance Board, these changes must be negotiated with the health plans by March 1, 2008 in order to be effective for the budget year. Proposition 36 Funding Reduction. The budget proposes a net reduc- tion of $12 million General Fund for Proposition 36 drug rehabilitation programs. This would be achieved by reducing funding by $10 million for the Substance Abuse and Treatment Trust Fund, established by Proposi- tion 36. Funding for the Substance Abuse Offender Treatment Program\u2014 established to improve the outcomes of Proposition 36 Programs\u2014would decrease by $2 million. California Work Opportunity and Responsibility to Kids C 97 Legislative Analyst’s Office In response to federal welfare reform legislation, the Legislature created the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children, the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the one-parent component of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for the two-parent component if it includes a child who is financially needy due to the unemployment of one or both parents. The budget proposes an appropriation of $4.8 billion ($1.5 billion General Fund, $107 million county funds, $35 million from the Employ- ment Training Fund, and $3.1 billion federal funds) to the Department of Social Services (DSS) for the CalWORKs program in 2008-09. In total funds, this is a decrease of $378 million, or 7.3 percent, compared to estimated spending of $5.2 billion in 2007-08. This decrease is primarily attributable to estimated savings from the Governor’s proposed policy changes to es- tablish time limits for children whose parents cannot or will not comply with participation requirements. General Fund spending for 2008-09 is proposed to be $59 million, 4 percent, more than estimated spending for 2007-08. This General Fund increase is due to a higher federal maintenance-of-effort (MOE) require- ment, partially offset by using more countable MOE funds from other departments. California worK opportunity and rEsponsibility to Kids (5180) C 98 Health and Social Services 2008-09 Analysis budgEt undErEstiMatEs Cost of CalworKs Cola The Governor’s budget provides $131 million to fund the California Work Opportunity and Responsibility to Kids (CalWORKs) cost-of- living adjustment (COLA) based on an estimated California Necessities Index (CNI) of 4.25 percent. Our review of the actual data indicate the CNI will be 5.26 percent, which raises the cost of the CalWORKs COLA by $31 million, to a total of $162 million. Actual CNI Exceeds Governor’s Estimate. Current law requires that the CalWORKs grant be adjusted in July 2008 based on the change in the CNI from December 2006 through December 2007. The Governor’s budget, which is prepared prior to the release of the actual data from December 2007, estimates that the CNI will be 4.25 percent. Our review of the actual data, however, indicates that the CNI will be 5.26 percent. Higher State Cost to Provide COLA. Based on its estimate of CNI, the Governor’s budget provides $131 million to fund the CalWORKs cost-of- living adjustment (COLA) beginning in July 2008. Based on the actual CNI of 5.26 percent, we estimate the cost of providing the CalWORKs COLA to be $162 million, an increase of $31 million compared to the Governor’s budget. Grant Levels Compared to Poverty. Figure 1 shows the combined cash and food stamps in 2007-08 and in 2008-09 after the July COLA has been provided. As the figure shows, maximum monthly cash grants increase by $38 in high-cost counties, and $36 in low-cost counties. These increases are in part offset by a $17 monthly reduction in food stamps benefits. The figure also compares the combined grant and food stamps benefit to the federal poverty guideline for 2008. As the figure shows, combined ben- efits will be about 75 percent of the guideline in high-cost counties and 74 percent of the guideline in low-cost counties. MaintEnanCE-of-Effort and CasEload rEduCtion CrEdit (CrC) Pursuant to federal law, any spending above the federally required maintenance-of-effort (MOE) level results in a caseload reduction credit (CRC) which reduces California’s work participation requirement in the California Work Opportunity and Responsibility to Kids program. Recent federal changes are likely to reduce the amount of countable MOE spending and CRC available to California. We review the MOE requirement, the impact of the recent federal changes, and forecast the CRC through 2010-11. California Work Opportunity and Responsibility to Kids C 99 Legislative Analyst’s Office Figure 1 CalWORKs Maximum Monthly Grant and Food Stamps 2007-08 and 2008-09 Family of Three Change 2007-08 2008-09a Amount Percent High-Cost Counties Grant $723 $761 $38 5.0% Food stamps 361 344 -17 -4.9 Totals $1,084 $1,105 $21 1.9% Percent of povertyb 73.9% 75.3% Low-Cost Counties Grant $689 $725 $36 5.0% Food stamps 377 360 -17 -4.7 Totals $1,066 $1,085 $19 1.8% Percent of povertyb 72.7% 74.0% a Based on a grant COLA of 5.26 percent resulting from the actual change in the California Necessities Index. b Federal fiscal year 2008 federal poverty guidelines. Temporary Assistance for Needy Families (TANF) MOE Require- ment. To receive the federal TANF block grant, states must meet a MOE requirement that state spending on assistance for needy families be at least 75 percent of the federal fiscal year (FFY) 1994 level, which is $2.7 billion for California. (The requirement increases to 80 percent if the state fails to comply with federal work participation requirements.) Because Cali- fornia is likely to fail the work participation requirement for FFY 2007, the required spending level rises to 80 percent beginning in the 2008-09 budget. Although the MOE requirement is primarily met through state and county spending on CalWORKs and other programs administered by DSS, state spending in other departments is also counted toward satisfy- ing the requirement. Expanded Definition of MOE Spending. The federal Deficit Reduction Act (DRA) of 2005 expanded the definition of what types of state spending may be used to meet the MOE requirement. Previously, countable state spending had to be for aided families or for families who were otherwise eligible for assistance. The DRA allows state expenditures designed to prevent out-of-wedlock pregnancies or promote the formation of two- C 100 Health and Social Services 2008-09 Analysis parent families to count toward the MOE requirement, even if the program participants are not otherwise eligible for aid. Essentially, the act removes the requirement that countable spending for these purposes be on behalf of low-income families with children. Because of this change, California now counts some existing spending on higher education tuition assistance (CalGrants and community college fee waivers) and after school programs toward the MOE requirement. The rationale for tuition assistance is that higher education is generally associated with better employment and life outcomes, which in turn may result in fewer out-of-wedlock births. Similarly, after school programs are associated with better school attendance and achievement, which in turn improves employment and life outcomes, potentially resulting in fewer teen pregnancies. Excess MOE Spending Results in CRC. As discussed more fully in the next section, pursuant to DRA, states must meet federal work partici- pation rates (50 percent for all families) less a CRC based on the decline in their caseloads since FFY 2005. Current federal regulations allow states that spend above their required MOE level to subtract out cases funded with excess MOE for the purpose of calculating CRC. Based on the amount of excess MOE spending during FFY 2006, California increased its CRC from 3.5 percent to a total of 14.4 percent. Pursuant to federal rules, the CRC percentage that is due to excess MOE spending during FFY 2006 is subtracted from the federal work participation requirement for the sub- sequent year (FFY 2007). New Federal Regulations On February 5, 2008, the federal Administration for Children and Families published new regulations regarding the implementation of DRA. Although these regulations make many modifications to the prior rules, the most significant changes are to (1) the method by which CRC from excess MOE is calculated and (2) which types of expenditures may be counted as MOE. The new rules take effect on October 1, 2008. Change in Calculation of the MOE CRC. Many states have claimed excess MOE spending and have submitted federal reports which calculate CRC based on their amount of excess spending. The new regulations limit the amount of countable excess MOE spending to that portion of the excess MOE spending that represents assistance. Because California’s assistance spending is about one-half of its total MOE expenditures, imposition of this calculation methodology will significantly reduce California’s credit by about 50 percent compared to the existing California calculation method. California Work Opportunity and Responsibility to Kids C 101 Legislative Analyst’s Office To date, the federal government has not yet notified California that its credit will be reduced, but such notification is expected in the near future. Limits on Spending Which May Be Counted as MOE. As described earlier, DRA allowed states to count spending on individuals and families that were not eligible for TANF so long as the spending was reasonably calculated to reduce out-of-wedlock births or promote marriage. The new regulations only allow expenditures on specified programs that support marriage (such as mentoring programs, and marriage education) to be counted as MOE. States will no longer be able to count tuition assistance and other programs for families and individuals not otherwise eligible for TANF. Because these regulations go into effect on October 1, 2008, they impact how state spending is counted during FFY 2009 (October 2008 through September 2009), and impact the FFY 2010 CRC. Given this recent federal change, further analysis of California’s spending which is outside of the regular CalWORKs program, and used to satisfy either the MOE requirement and\/or create excess MOE CRC, is needed. On a preliminary basis, we are concerned that these regulations would substantially reduce countable excess MOE spending, most likely eliminating the excess MOE CRC beginning in FFY 2010. Moreover, the ability to meet the base MOE requirement under the Governor’s budget may be jeopardized. This problem is compounded by recent information suggesting that Proposition 49 after school funds may not be countable toward MOE because they are in part used to obtain federal education funds. On the other hand, it may be possible to create TANF fund shifts to restore the some of the excess MOE funds. After we have more carefully reviewed the regulations we will provide the Legislature with options for potentially mitigating this loss of MOE funds. From FFY 2007 through FFY 2010, Figure 2 (see next page) shows esti- mated excess MOE spending under both the Governor’s budget and under current law. For comparison purposes, the current law version backs out the savings from the Governor’s reforms discussed later in this chapter. The only difference is the credit for FFY 2009, which is based on spending in FFY 2008. The Governor’s proposals reduce spending during 2007-08 and 2008-09, and approximately $75 million of this savings impacts the FFY 2009 CRC. For FFY 2010, the figure shows no excess MOE spending because of the impact of the new federal regulations. Depending on the level of spending within the regular CalWORKs program, it may be possible, through fund shifts, to restore some of the excess MOE CRC in FFY 2010. C 102 Health and Social Services 2008-09 Analysis Figure 2 Excess MOE Caseload Reduction Credit Current Law and Governor’s Budget Federal Fiscal Year 2007 through 2010 (Dollars in Millions) 2007 2008a 2009a 2010 Governor’s Budget Excess MOE spendingb $408.5 $749.2 $485.1 \u2014 Caseload reduction credit -6.3% -10.9% -7.4% \u2014 Current Law Excess MOE spendingb $408.5 $749.2 $558.8 \u2014 Caseload reduction credit -6.3% -10.9% -8.4% \u2014 a Amounts for 2008 and 2009 would be lower if Proposition 49 after school funds cannot be counted as MOE. b The excess MOE spending is actually from the year prior to the credit shown, because credits are based on prior-year spending. CurrEnt worK partiCipation rEquirEMEnt and status Federal law requires that states meet a work participation rate of 50 percent for all families and 90 percent for two-parent families, less a caseload reduction credit (CRC). The Deficit Reduction Act of 2005 and associated regulations significantly changed the calculation of the par- ticipation rate and CRC. We estimate California’s work participation rate under these federal changes, and find that absent policy changes, California is out of compliance with federal requirements. Background Required Hours of Work for Adults. To comply with federal work participation rates, adults must meet an hourly participation require- ment each week. For single-parent families with a child under age six, the weekly participation requirement is 20 hours. The requirement goes up to 30 hours for single parents in which the youngest child is at least age six. For two-parent families the requirement is 35 hours per week. The participation hours can be met through unsubsidized employment, subsidized employment, certain types of training and education related to work, and job search (for a limited time period). California Work Opportunity and Responsibility to Kids C 103 Legislative Analyst’s Office Work Participation Penalties for States. If a state fails to meet the work participation rates, it is subject to a penalty equal to a 5 percent reduction of its federal TANF block grant. For each successive year of noncompliance, the penalty increases by 2 percent to a maximum of 21 percent. For California, the 5 percent penalty would be approximately $149 million annually, potentially growing by up to $70 million per year. Penalties are based on the degree of noncompliance. For example, if a state is in compliance with the all-families rate, but is out of compliance for the two-parent rate, the penalty would be prorated down based on the percentage of cases that are two-parent cases. Pursuant to current state law, the state and counties would share in any federal penalty. State Impact of Penalties. States that fail to meet their work partici- pation requirements are required to (1) backfill their federal penalty with state expenditures and (2) increase their MOE spending by 5 percent. States out of compliance may enter into corrective action plans which can reduce or eliminate penalties, depending on state progress in meeting the negotiated goals of the corrective plan. Given past practice and regulations, if California were notified in late 2008 that it was out of compliance with work participation in FFY 2007, California would have until FFY 2010 to meet the goals of a corrective action plan. Deficit Reduction Act Effectively Increases Participation Requirements for States The DRA increased participation requirements on states in three dif- ferent ways. First, it moved the base period for calculating CRC from 1995 to 2005. Because California’s caseload decline mostly occurred before 2005, this substantially reduces the state’s CRC, from about 46 percent to about 3.5 percent for FFY 2007 and an estimated 6.8 percent in FFY 2008. Sec- ond, it made families served in separate state programs subject to federal participation rates. Thus, beginning with FFY 2007, California is subject to the 90 percent federal work participation rate for two-parent families. In the past, these families were not subject to federal work participation requirements. Third, it provided the Secretary of Health and Human Services with broad authority to adopt federal regulations to (1) narrow the definition of work and participation and (2) expand the number of families who are included in work participation calculations. (For a com- plete description of how the DRA and the regulations changed the work participation calculations see Figure 3 on page C-123 of the Analysis of the 2007\u201108 Budget Bill.) C 104 Health and Social Services 2008-09 Analysis Current Participation Rate The most recent data on California’s work participation rate are from FFY 2006. The DRA provisions, which became effective in FFY 2007, in- crease the number of families required to participate and also expand the definition of which families are meeting the rate. Based on data from FFY 2006, Figure 3 estimates California’s work participation for 2007 under DRA. As the figure shows, DRA changes have the effect of reducing the participation rate from 25 percent to 21 percent. Most of this loss is attrib- utable to changes requiring that families sanctioned for more than three months and families in the safety net program (who have been on aid for five years) be included in the work participation rate. Figure 3 Work Participation Status\u2014All Familiesa Under Prior and Current Law Prior Law and Regulations Current Law\/DRA Regulations Change From Prior Law Families meeting requirementsb 49,473 59,742 10,269 Families subject to participationc 201,076 281,925 80,849 = = Participation rate 24.6% 21.2% -3.4% a Most recent data are from FFY 2006. b This is the numerator of the participation rate calculation. c This is the denominator of the participation rate calculation. Estimated Impact of Recently Enacted State Reforms. Through en- actment of Chapter 68, Statutes of 2005 (SB 68, Committee on Budget and Fiscal Review) and Chapter 75, Statutes of 2006 (AB 1808, Committee on Budget), the Legislature has made significant program changes that should increase work participation among CalWORKs families. Last year, DSS estimated that these measures would increase participation by 4 percent- age points in FFY 2007 and 10 percentage points in FFY 2008. Now DSS is forecasting that these changes will have almost the same impact, but one year later. In other words, the 4 percent increase is projected to occur in FFY 2008 with an additional 6 percent in FFY 2009. Thus, given the current participation rate of 21 percent, DSS estimates that participation will be 25 percent in FFY 2008 and 31 percent in FFY 2009. California Work Opportunity and Responsibility to Kids C 105 Legislative Analyst’s Office Projected Participation Shortfalls In order to assess where California stands with respect to meeting the federal work participation requirements, we have projected future participation and future CRCs based on the assumptions described above. Figure 4 projects that California will fall substantially below (19 percent) the required work participation rate in FFY 2007. However, in FFY 2008 the shortfall is reduced to 7 percent, falling to just under 4 percent in FFY 2009. In FFY 2010 the shortfall goes up to 12 percent, assuming the new federal rules regarding countable MOE spending cannot be mitigated by state changes. We note that the shortfall in 2009 would rise to about 12 percent if it turns out Proposition 49 funds for after school programs cannot be counted. Figure 4 Estimated Work Participation Shortfalls Current Law Federal Fiscal Year (FFY) 2007 2008 2009 2010 2011 Federal Participation Requirement 50.0% 50.0% 50.0% 50.0% 50.0% Caseload Reduction Credits Natural caseload declinea -3.5% -6.8% -6.5% -7.3% -7.3% Excess MOE reduction -6.3 -10.9 -8.4 \u2014 \u2014 Total Credit -9.8% -17.8% -14.9% -7.3% -7.3% Net Participation Requirement 40.2% 32.2% 35.1% 42.8% 42.8% Work participation rate 21.2% 25.2% 31.2% 31.2% 31.2% Participation Shortfall -19.0% -7.0%b -3.9%b -11.6% -11.6% a Since FFY 2005. b Shortfalls increase if Proposition 49 after school funds cannot be counted as MOE. govErnor’s rEforMs addrEss partiCipation shortfall and aChiEvE budgEtary savings In order to increase work participation and achieve budgetary sav- ings, the Governor proposes a series policy changes for the California Work Opportunity and Responsibility to Kids program. These are (1) a C 106 Health and Social Services 2008-09 Analysis graduated full-family sanction that increases to 100 percent of the grant after one year in sanction status, (2) a five-year time limit on children whose parents cannot meet federal work participation requirements, (3) a nutritional supplement for working poor families, and (4) a five- year time limit for other child-only cases. We review the Governor’s proposals and comment on them. Overview of Governor’s Proposal The Governor’s budget proposes four major policy changes which would significantly alter the CalWORKs program. As a package, these proposals result in net savings of $471 million in 2008-09, and are estimated to increase work participation by 9.7 percent in FFY 2009 and 19.8 percent in FFY 2010. Figure 5 summarizes the estimated fiscal and work participa- tion impacts of each component. We discuss each aspect of the Governor’s proposal below. LAO Bottom Line. The Governor’s CalWORKs proposals would increase the work participation rate and result in substantial budgetary savings because many children would lose access to cash assistance. The proposals raise significant policy and budget issues. Later in this chapter we present alternative policy approaches which increase work participa- tion but provide much less budgetary savings. In order to address federal work participation requirements, the Legislature will need to set its own priorities with respect to the policies and budget for CalWORKs. Graduated Full-Family Sanction Policy Description. Currently, when an able-bodied adult does not comply with CalWORKs participation requirements, the family’s grant is reduced by the adult portion, resulting in a child-only grant. The Governor proposes to increase this sanction to 50 percent of the remain- ing child-only grant after six months in sanction status, and completely eliminate the family’s grant after another six months elapses, unless the adult comes into compliance. Families would be able to end the sanction and restore their grants by complying with program requirements. Proposed trailer bill language strongly encourages counties to contact noncompliant cases by phone, letters, or home visits, before im- posing the increased sanction. However, the budget does not include any additional funds for these activities (meaning that counties would have to absorb these contact costs within their existing block grants). The Governor proposes that this policy be enacted through special session legislation. Clients would be notified in March about this sanction, California Work Opportunity and Responsibility to Kids C 107 Legislative Analyst’s Office and would begin experiencing the increased sanction in June 2007 unless they complied with program rules. Impact on Families. Here we describe the financial impact of this proposal using a family of three in a high-cost county for purposes of example. Currently, the maximum grant for a family of three is $723 per month plus $361 in food stamps, for a total of $1,084 per month. When a family moves into sanction status, the adult is removed, the grant drops to $584 and the food stamps increase to $416, for a total of $1,000 per month. Under the Governor’s proposal, after six months in sanction status, the grant for the noncomplying family would drop by 50 percent to $292 plus $426 in food stamps (for a combined benefit package of $718). After an additional six months, the grant would be completely eliminated and the family would retain its food stamps benefits of $426 per month. Figure 5 Governor’s CalWORKs Package Summary of Fiscal and Work-Related Impacts (Dollars in Millions) 2008-09 Change in WPRa Component Grants\/ Administration Child Care\/ Services Net Fiscal Impact FFY 2009 FFY 2010 Graduated full-family sanction -$61.7 $82.7 $21.1 3.7% 5.7% Modified safety net (5-year time limit) -256.7 -2.5 -259.2 5.1 5.1 Work Incentive Nutritional Supplement (WINS)b 8.4 \u2014 8.4 0.9 9.0 Child-only time limit -241.5 \u2014 -241.5 \u2014 \u2014 Totals -$551.5 $80.2 -$471.3 9.7% 19.8% a WPR = Work Participation Rate. b In 2008-09, $8.4 million for automation, rising to about $24 million in 2010-11. Behavioral Impacts on Families. For 2007-08, the estimated number of families in sanction status is 41,700 (with an average of 1.9 children per family). The Governor’s budget assumes that 13,000 families (31 percent) will participate sufficiently to come into compliance and avoid further sanction. The remaining 28,700 would receive a 50 percent reduction in their grant. Of this remaining group, the budget assumes that 5,800 families (20 percent) would comply with program requirements and avoid C 108 Health and Social Services 2008-09 Analysis the full-family sanction. The remaining 23,000 families are estimated to experience the full-family sanction. This represents about 44,000 children. The budget further estimates that about 6,300 families experiencing the full-family sanction would subsequently comply with program require- ments and return to aid within six months. Impact on Work Participation. There are two impacts on the state’s work participation rate from this policy. First, some families will work sufficient hours to meet federal participation requirements. Specifically, the budget estimates there will be about 1,200 newly participating fami- lies in FFY 2008, rising to 8,400 in FFY 2009, and 11,500 in FFY 2010. This increases the numerator, thus raising the work participation rate. Second, the families which experience the full-family sanction exit the program and reduce the denominator. Together, the budget estimates that these changes will increase the work participation rate by about 0.44 percent in FFY 2008, rising to 3.7 percent in FFY 2009, and 5.7 percent in FFY 2010. We note that regardless of the success rate of this policy in encouraging families to work, the policy will increase the work participation rate, because families who experience the full-family sanction will go off aid and therefore be excluded from the denominator. The only question is the number who would leave aid and be excluded. Fiscal Impact. Because of the estimated increase in compliance and work participation, the budget estimates increased child care and welfare- to-work services costs of about $83 million in 2008-09. These costs would be offset by grant savings ($62 million) from the families that experience the full-family sanction. Thus, the Governor’s budget estimates these net costs to be about $21 million in 2008-09. LAO Assessment of Graduated Full-Family Sanction Assumptions Concerning Impacts Reasonable. It is difficult to assess the behavioral impacts of sanction policies because there is no consensus in the research community on whether stronger sanctions correlate with better employment outcomes for families. This is mostly because there have been no rigorous studies that compare the impacts of randomly as- signed participants to weaker and stronger sanctions. (There is research on the characteristics of sanctioned cases and what happens to them. We summarized this research in the CalWORKs section of the Analysis of the 2007\u201108 Budget Bill.) Last year, the administration assumed that 70 percent of cases ex- periencing a full-family sanction would not only come into compliance and end their sanction, but would actually participate sufficient hours to meet federal participation requirements. As described in the Analysis of California Work Opportunity and Responsibility to Kids C 109 Legislative Analyst’s Office the 2007\u201108 Budget Bill, we concluded that these assumptions were overly optimistic. This year, the budget distinguishes between cases that will comply with program requirements (attend orientation, and participate in required activities for example) and end their sanction and cases that will actually participate enough to meet the federal hourly requirements. The adminis- tration assumes that about 28 percent of the sanctioned parents will meet federal participation requirements while 55 percent will experience the full-family sanction. We believe these assumptions are reasonable. Graduated Sanction Policy Could Be Pilot Tested. The graduated full-family sanction is a high risk and high reward strategy. On the one hand, it is likely to substantially increase work participation by 5.7 percent when fully implemented in 2010. The graduated aspect of the policy gives sanctioned cases more time to come into compliance than last year’s im- mediate sanction proposal. On the other hand, it could result in hardship for children whose parents cannot or will not cooperate with work partici- pation requirements. Given the lack of research on the behavioral impacts of sanction policies, the Legislature could consider pilot testing this policy in several counties. After seeing the results of these pilots, the Legislature could decide whether to end or expand the sanction policy pilot. Five-Year Time Limit for Children in Safety Net Policy Description. Currently, after five years of assistance, a fam- ily’s grant is reduced by the adult portion, and the children continue to receive a child-only grant in the safety net program. The budget proposes to eliminate the safety net grant for children whose parents fail to comply with the federal work participation requirements as of June 1, 2008. Families currently on the safety net would be given 90 days to increase their work hours to remain eligible. Families unable to meet federal requirements would be removed from aid. Working Families Could Reenter Safety Net. In contrast to last year’s proposal, families who are removed from aid under this policy would be able to return to the safety net under certain conditions. Specifically, the proposed trailer bill legislation allows former safety net children of adults who work sufficient hours to meet federal participation requirements to rejoin the safety net. This is because for the first six months after being removed from aid, the proposed trailer bill applies the income limits for recipients (about $1,670 per month for a family of three) to this population, rather than the much lower income limits for applicants (about $800 per month for a similar family). The income limits for recipients are higher than C 110 Health and Social Services 2008-09 Analysis those for applicants because recipients have the first $225, and one-half of all earnings above $225, disregarded when calculating their grant. Impacts on Families. The budget estimates that there would be ap- proximately 47,500 safety net cases in June 2008, rising to 48,500 cases during 2008-09. The budget assumes that in 2008-09, 26 percent of these families\u2014about 12,400 cases\u2014will work sufficient hours to maintain eligibility for the safety net. The DSS bases this 26 percent rate on data indicating that currently about 19 percent of safety net cases are meeting the federal participation requirements, and that when faced with complete benefit termination, an additional 7 percent who are working part time would increase their hours so as to remain eligible. The budget estimates that the other 35,100 cases, with approximately 67,000 children, would lose aid because of this policy. Fiscal Impacts. The budget estimates that the safety net time limit will result in savings of $18 million in June 2008, rising to $259 million in 2008-09. Impact on Work Participation. The safety net time limit would increase participation in two ways. First, it modestly increases the num- ber of families working enough hours to meet federal requirements (the 7 percent of families on the safety net who are working part-time and are assumed to reach the federally required levels in response to potential benefit termination). Second, those unable to meet federal participation would have their benefits terminated. By removing these cases from as- sistance, it reduces the denominator, thus increasing the participation rate. The budget estimates that these combined impacts will raise the work participation rate by 1.6 percent in FFY 2008, and 5 percent in FFY 2009. These estimates appear reasonable. Work Incentive Nutritional Supplement (WINS) Policy Description. Beginning on July 1, 2009, the budget proposes to provide a $40 per month nutritional supplement to working families who are not in the CalWORKs program but are working sufficient hours to meet the federal work participation requirements. The benefits would be provided in the form of additional food stamps, which are usually made available to recipients through the use of electronic benefit transfer cards. The budget estimates that approximately 40,000 families will be eligible for this supplement. For 2008-09, the budget proposes $8.4 million to make necessary automation changes. The administration estimates that during 2009-10, the cost of providing benefits under this program would be $18.6 million, rising to $24 million each year thereafter. California Work Opportunity and Responsibility to Kids C 111 Legislative Analyst’s Office Impact on Work Participation. Besides increasing food benefits for the working poor, the primary advantage of this proposal is adding about 40,000 working families to the numerator for purposes of calculat- ing the federal work participation rate. The administration estimates that this proposal will increase the work participation rate by 0.9 percent in FFY 2009, 9 percent in FFY 2010, and 10 percent in FFY 2011. Because this proposal adds to the CalWORKs caseload, in isolation it reduces the natural caseload reduction credit of 7.3 percent in FFY 2010 and FFY 2011 as shown in Figure 4. This is because the cases receiving WINS would be new CalWORKs cases, creating a caseload increase, which would reverse the 7.3 percent reduction. However, federal rules allow caseload increases from eligibility changes such as this to be offset against eligibil- ity changes that reduce the caseload. The Governor’s full-family sanction is an example of such an eligibility change which could be offset against the increase of WINS, thus preserving the full work participation impact of WINS discussed above. LAO Assessment. We believe that the WINS proposal is a cost-effective way of raising work participation, and we previously recommended adop- tion of a program like this in the 2007\u201108 Analysis. This WINS proposal is incorporated into the LAO CalWORKs reform package presented below. Child-Only Time Limit Fiscal Impacts. Effective June 1, 2008, the budget proposes to limit assistance to five years for most child-only cases (such as those with par- ents who are undocumented or ineligible due to a previous felony drug conviction). There are approximately 37,000 cases which have been aided for five years and would lose assistance under this proposal. Removing these families from assistance results in General Fund savings of $18 mil- lion in June 2008, rising to $242 million in 2008-09. There are about 70,300 children in these families. No Impact on Work Participation. Limiting benefits to other child- only cases to five years (where the parents are ineligible because they are drug felons or undocumented) has no impact on work participation. This is because they are already excluded from the work participation calculation. Governor’s Proposals Address Participation As discussed above, the Governor’s proposals substantially increase work participation. Figure 6 (see next page) compares the estimated work participation rates assuming adoption of the Governor’s proposals against C 112 Health and Social Services 2008-09 Analysis the estimated federal requirements. The figure shows that the Governor’s proposal would result in participation surpluses beginning in FFY 2009. However, if Proposition 49 after school funds cannot be counted as MOE, then there would be a 2.7 percent shortfall in FFY 2009, with surpluses beginning in FFY 2010. Figure 6 Governor’s CalWORKs Reforms Estimated Participation Shortfall(-)\/Surplus Federal Fiscal Year 2008 2009 2010 2011 Federal Participation Requirement 50.0% 50.0% 50.0% 50.0% Caseload Reduction Credits Natural caseload declinea -6.8% -6.5% -7.3% -7.3% Excess MOE reduction -10.9 -7.4 \u2014 \u2014 Total Credit -17.8% -13.8% -7.3% -7.3% Net Participation Requirement 32.2% 36.2% 42.8% 42.8% Current-Law Work Participation 25.2% 31.2% 31.2% 31.2% Policy Changes Graduated full-family sanction 0.4% 3.7% 5.7% 5.7% Modified safety net 1.6 5.1 5.1 5.1 Work Incentive Nutritional Supplement \u2014 0.9 9.0 10.4 Participation Rateb 27.2% 40.9% 51.0% 52.4% Participation Shortfall(-)\/Surplus -5.0%c 4.7%c 8.2% 9.6% a Since FFY 2005. b Includes estimated affect of policy changes on participation rate. c Shortfalls increase or emerge, respectively if Proposition 49 after school funds cannot be counted as MOE. Governor’s Proposals Likely to Result in MOE Shortfall One potential problem with the Governor’s proposal is that there may not be sufficient countable MOE expenditures from outside of CalWORKs to meet the base MOE requirement of $2.9 billion. This is because the Governor’s proposals result in savings of about $471 million, and the new federal regulations substantially reduce the amount of countable California Work Opportunity and Responsibility to Kids C 113 Legislative Analyst’s Office MOE spending. This most likely creates an MOE shortfall beginning in FFY 2009. If Proposition 49 after school funds cannot be counted as MOE, the problem would begin in FFY 2008. To address this MOE shortfall, the Legislature could (1) reject some or all of the Governor’s proposals which result in savings, (2) identify alternative sources of countable MOE spending from other departments, (3) shift TANF funds, or (4) some other combination of these solutions. altErnativEs to thE govErnor’s proposals We have identified two alternatives to the Governor’s proposals which would increase work participation but with less budgetary sav- ings. The two alternatives are a pre-assistance program which prepares incoming recipients to enter the labor force within four months of their application and a community service requirement for adults who have received five years of assistance. We discuss these alternatives, esti- mate their impacts, and present an alternative package of California Work Opportunity and Responsibility to Kids reforms which includes the Governor’s Work Incentive Nutritional Supplement proposal. This package might meet federal requirements in FFY 2009 and would very likely meet these requirements in FFY 2010 and thereafter. Pre-Assistance Program for Entering CalWORKs Recipients Federal Flexibility for up to Four Months. When states provide as- sistance to TANF recipients, all TANF rules concerning work participa- tion, child support assignment, and federal time limits apply. Assistance typically means ongoing cash assistance. Federal regulations specifically allow states to provide up to four months of aid without it being counted as assistance because four months is considered short term rather than ongoing. One potential use of this flexibility is that when recipients receive non-assistance they are removed from the federal work participation calculation for up to the first four months of aid. States such as Washing- ton, Pennsylvania, and Minnesota, have adopted pre-assistance programs using this federal flexibility. Currently, there are about 12,000 new families with adults entering CalWORKs each month. In general, able-bodied adults attend orienta- tion and then proceed to a job club\/job search program where many recipients find employment. Those unable to find employment are usually assessed for their job skills and barriers to employment. They then sign a welfare-to-work plan with the county indicating what steps the client will take toward becoming self-sufficient. Plans might include substance C 114 Health and Social Services 2008-09 Analysis abuse treatment, English as a second language, vocational training, work experience, attending community college, or a combination of activities. Below we present a four-month pre-assistance program for these newly entering families. Pre-Assistance Employment Readiness System (PAERS). Under this option, each approved family (meeting current eligibility requirements) entering aid would be placed in PAERS for up to 120 days. The goal of PAERS is to help recipients either become employed or to sign a welfare- to-work plan. The main change under this option is that in order for the family to continue receiving aid after PAERS by entering the CalWORKs program, they must become employed for sufficient hours to meet federal work participation requirements, or sign the welfare-to-work plan, unless they can establish that they are exempt or have good cause under current law for nonparticipation. Failure to meet at least one of these requirements would mean that the family does not enter CalWORKs. Families could immediately have aid restored upon agreeing to sign their plan. There would be no sanction or conciliation process during PAERS. Noncompliant families would be reminded of the requirement that they sign their plan or become employed with 120 days of entering PAERS. Advantages of PAERS. One advantage of PAERS is the potential that it will improve the work participation rate by more directly focusing clients on quickly obtaining employment or establishing a self-sufficiency plan. Currently some families fail to attend orientation and eventually slip into sanction status where it may take months before a family becomes reengaged with program activities. The 120-day PAERS time limit helps ensure that engagement occurs promptly. A second advantage of PAERS is that it delays entry into the federal work participation calculation for those unable to find employment. This is because pursuant to the federal flexibility discussed above, PAERS families are not counted in the work participation rate because they are for federal purposes in non-assistance status for 120 days (although they continue to receive cash grants). As soon as families obtain employment they would transfer to the CalWORKs program where their presence would help satisfy the work participation rate. Preliminarily, we estimate that adopting a PAERS would increase the work participation rate by 1.9 percent (when fully implemented) and result in annual net savings of about $10 million per year. Interaction With Other Policy Changes. As noted in the discussion of the Governor’s proposals, the WINS program results in a caseload increase which, in isolation, would reduce CRC by 7.3 percentage points. The PAERS described above would reduce the TANF caseload because PAERS cases are not receiving assistance pursuant to federal rules and California Work Opportunity and Responsibility to Kids C 115 Legislative Analyst’s Office thus are outside of the TANF program. This caseload reduction attribut- able to PEARS could be used to offset the caseload increase associated with WINS, thereby eliminating the loss of 7.3 CRC percentage points that would occur if WINS were implemented in isolation. Community Service Requirement After Five Years of Assistance Background. The current safety net provides cash grants to the chil- dren of approximately 48,000 families where the adult has been on aid for five years. The safety net caseload includes many situations. About 29 percent of the safety net adults are working at least 17 hours per week. Another 16 percent have some level of participation either in employment or other activities. About 55 percent are not participating at all. These non- participants (about 26,000 families) can be further subdivided into three groups: (1) adults unable to work because of substantial barriers to em- ployment, (2) adults who are working but not reporting their income, and (3) adults who are choosing not to work or participate. However, it is dif- ficult to know which cases are in each category. We believe a community service job requirement after five years of assistance could help sort out who is choosing not to participate from who is truly unable to participate. Required Community Service Job. Under this option, after five years of assistance, each safety net adult would be required to work in non- subsidized employment for 20 hours per week, participate for sufficient hours to meet federal participation requirements, or accept a subsidized employment or community service job for 20 hours per week arranged by his\/her county. Counties would have discretion in how to set up the community service position and\/or whether to offer a subsidized employment op- portunity. Adults who refuse to accept the county community service or subsidized job assignment, would have their families removed from aid. Before any such removal, there would be a required county home visit. At the home visit, county staff would attempt to determine if the client has barriers to employment that could be remedied through assistance, whether the client qualifies for an exemption from program participation requirements, or is determined to be incapable of participating pursuant to current law. Periodic Test of the Labor Market. After every three months of com- munity service or subsidized employment, each client would be placed in a job club\/job search program for one month. Some would find non-subsi- dized employment and thus meet their participation requirement. Those unable to find employment would be required to return to community service for at least 20 hours per week. After three community service\/job club cycles have been completed, at the one-year mark, counties would C 116 Health and Social Services 2008-09 Analysis have the option of exempting the client from the community service job requirement while continuing aid to the children. Clients found to be out compliance with the 20-hour requirement for community service would have the same process that exists in current law with respect to the sanction for nonparticipation. This approach would strengthen the message that in order to receive government paid income assistance, clients must meet an obligation to work or participate in com- munity service if they are able. Impacts. The exact impacts of this proposal are difficult to estimate. We believe that most clients who are unable to participate would be iden- tified by the county home visit. Most families who are employed but not reporting their income would either leave the program or begin reporting their income and thus retain eligibility by working sufficient hours. As with the Governor’s proposal, we estimate that the 5,600 current safety net cases working at least 17 hours per week would choose to increase their participation level so as to meet federal requirements (20 or 30 hours per week depending on the age of the child), thereby retaining their family’s grant (less the adult portion). Those who refuse to participate would also exit the program. Preliminarily, we estimate that adoption of this program would increase the work participation rate by 2.9 percent and result in net annual savings of about $30 million. LAO CalWORKs Reform Package In order to meet the work participation requirement, we suggest the following package. Adopt the Governor’s Work Incentive Nutritional Supplement which increases work participation by an eventual 10 percent. Adopt the Pre-Assistance Employment Readiness System which increases work participation by 1.9 percent. Adopt the requirement that safety net adults either work sufficient hours to meet federal participation or accept a community service job, which raises work participation by 2.9 percent. This package results in net General Fund savings of about $16 million per year compared to the Governor’s workload budget. (Savings of about $40 million from the community service job requirement and PAERS are partially offset by WINS costs of $24 million.) Figure 7 shows the estimated work participation rates compared to the requirements. In FFY 2009, we estimate that adopting this combina- tion would probably meet work participation requirements if the Proposi- tion 49 after school funding is countable toward the MOE. In FFY 2010 and California Work Opportunity and Responsibility to Kids C 117 Legislative Analyst’s Office FFY 2011, when the program changes are completely phased in, we estimate that California would likely exceed the estimated requirements. Figure 7 LAO CalWORKs Package Estimated Participation Shortfall(-)\/Surplus Federal Fiscal Year (FFY) 2009 2010a 2011 Federal Participation Requirement 50.0% 50.0% 50.0% Caseload Reduction Credits Natural caseload decline since FFY 2005 -6.5% -7.3% -7.3% Excess MOE reduction -8.4% \u2014 \u2014 Total Credit -14.9% -7.3% -7.3% Net Participation Requirement 35.1% 42.8% 42.8% Current-Law Work Participation 31.2% 31.2% 31.2% Policy Changes Work Incentive Nutritional Supplement 0.9 9.0 10.4 Pre-Assistance Employment Readiness system 1.6 1.9 1.9 Community service requirement for safety net 1.5 2.9 2.9 Participation Rateb 35.2% 45.0% 46.4% Participation Shortfall(-)\/Surplus \u2014c 2.2% 3.6% a Assumes zero CRC from excess MOE beginning in FFY 2010 pursuant to February 2008 federal regulations. b Includes estimated affect of policy changes on participation rate. c Drops to -7 percent if Proposition 49 after school funds cannot be counted as MOE. The LAO alternative budget (presented in Part V of The 2008\u201109 Bud\u2011 get: Perspectives and Issues) does not include this CalWORKs reform package. The alternative budget reflects the current law workload funding level without policy changes. In order to address federal work participation requirements, the Legislature will need to set its own budget policy and priorities for CalWORKs. C 118 Health and Social Services 2008-09 Analysis California’s state-supervised, county-administered Child Welfare Ser- vices (CWS) program provides services to abused and neglected children, children in foster care, and their families. The CWS program provides (1) immediate social worker response to allegations of child abuse and neglect; (2) ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect; and (3) services to children in foster care who have been temporarily or per- manently removed from their family because of abuse or neglect. In 2008-09, the Governor’s budget provides a separate CWS General Fund appropriation (Item 5180-153-0001) for the two counties (Los An- geles and Alameda) participating in the Title IV-E Child Welfare Waiver Demonstration Capped Allocation Project. The remaining 56 counties are budgeted in Item 5180-151-0001. Including the waiver counties, the Gover- nor’s budget proposes $2.5 billion from all funds and $695 million from the General Fund for the child welfare system. This represents a decrease of 3.5 percent in total funds and a decrease of 7.4 percent in General Fund from the most recent estimates of current-year expenditures. This decrease in funding primarily results from the Governor’s budget-balancing reduc- tion proposal to reduce CWS allocations (excluding automation, Adoptions, and Child Abuse Prevention) to counties by 11.4 percent. budgEt proposEs rEduCtion in Cws alloCations to CountiEs The Governor’s budget proposes to reduce the total General Fund allocation to counties for Child Welfare Services (CWS) by $83.7 million. Counties will have the discretion to apportion their reduced allocation among various program components. We describe the potential impact of this proposed reduction on social worker caseloads and possible subsequent policy consequences resulting from fewer resources. We also provide three alternatives to the Governor’s proposal that more narrowly target reductions in CWS expenditures. Child wElfarE sErviCEs Child Welfare Services C 119 Legislative Analyst’s Office Background There has been an ongoing effort in CWS to determine how many child welfare cases a social worker can carry and still effectively do his or her job. In 1984, the Department of Social Services (DSS) and the County Welfare Directors Association (CWDA) established an agreed-upon level of cases for each program component of CWS. These 1984 workload standards are still used by DSS to calculate the base level of funding for each county. In 2000, however, the Child Welfare Services Workload Study, which was required by Chapter 785, Statutes of 1998 (SB 2030, Costa), determined that the 1984 caseload standards were too high and that social workers had too many cases to effectively ensure the safety and well-being of the children for which they were responsible. The SB 2030 Study, as it is commonly called, proposed revised minimum and optimum caseload standards for social workers. Figure 1 compares the 1984 standards to the minimal and optimal standards developed in the SB 2030 Study. Figure 1 Child Welfare Services Workload Standards Cases Per Social Worker Emergency Response Assessment Emergency Response Family Maintenance Family Reunification Permanent Placement 1984 Workload Standards 322.5 15.8 35.0 27.0 54.0 SB 2030 Standards: Minimal 116.1 13.0 14.2 15.6 23.7 Optimal 68.7 9.9 10.2 11.9 16.4 Concerned about large social worker caseloads, over the years the Legislature has added additional funds known as the augmentation and the Outcome Improvement Project (OIP). The Governor’s workload budget proposes $152.7 million ($96.4 million General Fund) for these funding streams in 2008-09. These monies, in combination with the hold harmless budgeting methodology (which we discuss below), have enabled counties to hire more caseworkers and move toward standards established by the SB 2030 Study. Governor’s Proposal The Governor’s budget proposes to reduce CWS expenditures by $83.7 million General Fund. This represents a reduction of 11.4 percent to C 120 Health and Social Services 2008-09 Analysis the total General Fund allocation for CWS, excluding funds for the Child Welfare Services Case Management System (CWS\/CMS), the Adoptions Program, and the Child Abuse Prevention Program. Counties will have the flexibility to choose how to apportion the reduction to various CWS program expenditures. According to DSS, the department will work with CWDA to develop an allocation process for apportioning this proposed reduction. At the time this analysis was prepared, DSS could not provide further details on the implementation of the CWS reduction to county allocations and the potential program impacts. Staffing Level Impacts of Proposed Reduction to CWS The impact of the proposed reduction is difficult to measure because counties have multiple ways of responding to reduced funding. County options include reducing payments to service providers for preventive services, reducing transitional services for emancipated foster youth, reduc- ing overhead expenses, and\/or hiring fewer social workers. Nevertheless, because social workers and their support costs represent the majority of the CWS budget, counties are likely to substantially reduce the number of social workers. Increase in Social Worker Caseloads. One potential program impact of the proposed reduction is an increase in county social worker casel- oads because of a decrease in the number of funded full-time equivalent (FTE) social workers. The proposed reduction represents approximately 87 percent of the CWS augmentation and OIP monies. As a result, there may be a reversal of some of the progress made by counties in meeting or exceeding SB 2030 minimum standards. In order to estimate existing staffing levels and the potential impact of the proposed reduction, we used the most recent caseload and budget data available from DSS and made a series of assumptions and adjustments related to non-case carrying social workers, the amount of OIP augmenta- tion funds directed to hiring more social workers, and inflationary adjust- ments known as the cost-of-doing-business. As Figure 2 shows, we estimate that in 2007-08, 20 counties, which have 9 percent of the total CWS caseload, are funded for enough FTE social workers to either exceed the SB 2030 minimum standards, or be within 10 percent of the standards. Additionally, 14 counties, which have approximately 43 percent of CWS cases, are between 80 and 89 percent of meeting the minimum standards. As a result of the proposed reduction, we estimate an increase in the number of counties that are further away from meeting the mini- mum standards in the budget year. For example, we estimate that the Child Welfare Services C 121 Legislative Analyst’s Office number of counties that would be between 80 and 89 percent of meeting the minimum standards would decrease from 14 counties in 2007-08 to 6 counties in 2008-09. In addition, the number of counties below 80 percent of the standard would increase from 24 (representing 48 percent of the CWS caseload) to 38 (representing 90 percent of the CWS caseload) in the budget year. Figure 2 Child Welfare Services (CWS) Number of Counties and Percent of Caseload Meeting SB 2030 Minimum Standards 2007-08 Proposed 2008-09a Number of Counties Percentage of Cases Number of Counties Percentage of Cases Exceeds standards 10 1.9% 9 2.2%b From 90%-99% of standards 10 7.1 5 3.3 From 80%-89% of standards 14 42.7 6 4.8 From 70%-79% of standards 15 34.0 18 49.6 Less than 70% of standards 9 14.3 20 40.2 a Based on Governor’s proposals. LAO analysis assuming increases in county social worker caseloads. b This counter-intuitive result is because Butte County’s funding is increasing for technical reasons, despite the proposed reduction. From a statewide perspective, we estimate that the proposed reduction would result in an overall decrease of 522 FTE social workers. As a result, while the total number of funded FTE social workers in the state is at ap- proximately 79 percent of meeting the minimum standards for 2007-08, for 2008-09 that figure would decline to 73 percent. Potential Consequences of Fewer Resources While counties will take different approaches to responding to reduced funding, there are several potential policy consequences from their actions: Counties that choose to reduce the number of social workers may decide to open fewer CWS cases or close cases earlier than they would otherwise because of limited resources. This could lead to leaving children in more marginally risky situations. C 122 Health and Social Services 2008-09 Analysis Counties that choose to reduce spending on preventive services could see an increase in foster care cases. Rather than provide intensive and time-consuming family case-management services to cases in which the child remains in the home, counties with fewer social workers and limited resources may choose to change their policy to removing children from the home more frequently and placing them in foster care. Counties that choose to reduce spending in transitional services for emancipated foster youth could see an increase in unstable housing situations for this population. Alternatives to the Governor’s Proposal Below we present three alternatives to the Governor’s proposal which offer less budgetary savings, but are less likely to negatively impact ser- vices for children. Suspend Hold Harmless. In preparing the budget for CWS, DSS ad- justs proposed funding upwards when the caseload increases, but does not adjust funding downward when the caseload actually decreases. The practice of not adjusting the budget to reflect caseload decline is known as the hold harmless approach, though DSS technically refers to this as the base funding adjustment. Because of the way the hold harmless provision works, the number of social workers funded for the counties remains unchanged despite workload decreases. In other words, if an individual county’s caseload is declining, its number of caseworkers is held at the prior-year level. At the same time, if another county’s caseload is increasing, the state provides that county with funds to hire additional caseworkers. Therefore, on a statewide basis, despite an overall caseload decline, the funding for CWS continues to grow. One alternative to the Governor’s proposal is to suspend the hold harmless budgeting methodology for 2008-09. For 2008-09, DSS reviewed estimated caseloads per CWS component and included $17.6 million ($6 million General Fund) in the budget for 29 counties with declining caseloads, pursuant to the hold harmless funding provision. Under this option, the CWS case-management funding per child would remain at its 2007-08 level for these 29 counties. This would result in a General Fund savings of $6 million, while not reducing the level of care and service provided to the children and families in the child wel- fare system in the budget year. While the Governor’s proposed reduction would impact every county, suspending hold harmless would target CWS expenditure reductions to those counties with declining caseloads and would not reduce existing social worker caseload ratios. Child Welfare Services C 123 Legislative Analyst’s Office Cap Social Worker Costs. Another option is to cap the total cost per social worker at $155,000, which would result in a General Fund savings of approximately $5.1 million. The average statewide fully loaded cost of a social worker, which is currently frozen at the level of funding provided in 2001-02, is $129,074. The fully loaded cost represents the social worker’s salary and benefits, in addition to the allocated cost of supervisors, data processing, departmental overhead, and other general expenses related to providing services. The fully loaded social worker cost per county ranges from $72,788 to $176,930. This range in cost per county partially reflects cost-of- living differences, but there are also significant differences in costs between bordering counties. For example, while Sacramento County’s fully loaded social worker cost is $162,866, Yolo County’s cost is $101,468. Therefore, in some cases, the fully loaded funding for social workers in counties with similar cost-of-living rates are substantially different. By capping the total cost per social worker at $155,000, which is the 2001-02 average statewide fully-loaded cost of a social worker adjusted for the California Consumer Price Index since that time, seven counties would experience a reduction in funding because their fully loaded so- cial worker cost exceeds the proposed cap. Capping social worker costs is another alternative that targets a reduction in CWS expenditures to specific counties that have larger funding allocations per case, rather than an across-the-board reduction for all counties. A Combined Approach. The Legislature could also choose a combina- tion of a smaller across-the-board reduction to CWS county allocations, in conjunction with the hold harmless and social worker cost cap alterna- tives discussed above. For example, a 3 percent reduction to CWS county allocations, in combination with suspending the hold harmless provision and capping the fully loaded social worker cost at $155,000, results in an estimated General Fund savings of $33.1 million. Conclusion The Governor’s proposal to reduce CWS allocations to counties by 11.4 percent results in General Fund savings of $83.7 million. In deciding whether to adopt this proposal, the Legislature should weigh the budget- ary savings against the potential for increased social worker caseloads as a result of fewer FTE social workers, as well as possible subsequent policy consequences resulting from fewer resources in CWS. Although the spe- cific alternatives to reduce CWS expenditures that are outlined above save considerably less than the Governor’s proposal, these options set priorities and target the reductions which would lessen their statewide impact. C 124 Health and Social Services 2008-09 Analysis rEthinKing thE futurE of Cws autoMation The Governor’s budget proposes to spend $247 million ($112 million General Fund) over the next seven years to continue with the develop- ment of a new Child Welfare computer system (referred to as the New System). Our review indicates that the current Child Welfare Services Case Management System (CWS\/CMS) can be updated to meet federal and county functionality requirements. Accordingly, we recommend cancelling the New System project and updating the CWS\/CMS, resulting in savings (all funds) of $184 million over the next seven years. Current System The CWS\/CMS is a statewide computer system deployed in all 58 counties to support the administration of CWS. From 1992 until 1995, state and county staff participated with the vendor to develop system require- ments and design. Statewide system implementation began in 1995, and by 1997 the CWS\/CMS was in use in all 58 counties. Federal Statewide Automated Child Welfare Information System (SACWIS) Federal Funding. In 1993, the federal government offered incentive funding to states that would develop a SACWIS that met federal require- ments. These systems would receive 75 percent federal funding for the first three years of system development and 50 percent thereafter. Cali- fornia received the 75 percent funding through 1997 when it implemented CWS\/CMS and has received 50 percent federal funding since that time. SACWIS Compliance. In 1999, a federal review raised concerns about the extent to which CWS\/CMS complied with the requirements of SACWIS. In 2003, the federal government notified the state that CWS\/CMS did not meet all SACWIS functional requirements. The missing functions included Adoptions case management, Foster Care eligibility, financial management, and automated interfaces to the Child Support and human services systems. In 2004, the state submitted a plan (referred to as the Go Forward Plan) to the Department of Finance (DOF) and the federal government for achieving SACWIS compliance and for meeting additional county business requirements. The counties had two business requirements beyond the SACWIS requirements: (1) a simplified data entry process and (2) the ability to access CWS\/CMS from locations other than their office (remote access). The plan proposed to conduct a study to determine the technical viability of the current system to provide the ad- ditional functionality and a technical analysis of alternatives. The federal government approved the plan. Child Welfare Services C 125 Legislative Analyst’s Office Technical Architecture Analysis Alternatives (TAAA) In 2005, the state Office of Systems Integration (OSI) hired Eclipse Solutions and Gartner Group to conduct a technical analysis that would provide alternatives for meeting the following requirements: Achieve SACWIS compliance. Meet county requirements for simplified data entry and remote access. In addition to these requirements, OSI instructed the consultants to propose solutions for making the system accessible from the web by aban- doning the existing mainframe platform and moving it onto servers. TAAA Report Did Not Consider All Possible Alternatives State Instructions Constrained Analysis. The consultants conducted their analysis as they were instructed by OSI. The instruction that the sys- tem should be moved off the large, mainframe computer and onto servers represented a major constraint on the consultants’ analysis. It prevented them from considering all possible technical solutions for achieving SACWIS and county requirements. Only Two Alternatives Were Examined. Because of the constraint placed on the consultants, only two alternatives were examined. The first alternative would move the current system, a piece at a time, off the mainframe and onto web servers. In the process of moving the system, software changes would be incorporated to meet the county requirements and the missing SACWIS compo- nents would also be added. This alternative would take eight years to accomplish. The second alternative was to develop a new system. This alterna- tive would build in all the federal and county requirements. The new system would take three years to develop. Third Alternative Was Not Considered. A third alternative was not considered by TAAA consultants because the state had specified that it wanted to eliminate use of the mainframe. This alternative would update the current system and leave it on the mainframe. In fact, a 2003 study also conducted by Gartner Group recommended this as a solution for making CWS\/CMS accessible from the web in order to provide counties with a simplified data entry process and remote access. C 126 Health and Social Services 2008-09 Analysis Decision to Procure New System Of the two alternatives provided in the 2005 TAAA Report, the state chose to develop a new system. A feasibility report was approved by DOF in April 2006. Since that time, DSS, OSI, and the counties have been work- ing to document the detailed business requirements for a vendor bid to build a new Child Welfare system. The proposed technological solution is currently referred to as the New System. Proposed New System Adds Risk and Cost. When replacement sys- tems are built, the data from the old system must be moved to the new system. This is referred to as data conversion. In order to convert data, programmers must write software programs to locate and move the data from the old database to the new database. Data conversion efforts can be complex, time-consuming, expensive, and high risk. The high risk is attributable to the possibility that data can be accidentally altered or even lost during the conversion process. Both the alternatives considered by the TAAA require this costly and risky data conversion process. In order to avoid these cost and risk factors, many companies are choosing to retain their legacy database and modernize their systems by adding a software layer that allows the system to be accessed from the web. This software layer is referred to as an enterprise service bus. Adding an enterprise service bus enables application changes that can provide remote access and simplify data entry. LAO Alternative Update Current System. The CWS\/CMS is built on software products currently under vendor support. That is, the vendors continue to main- tain, upgrade, and market the software. Therefore, there is no reason to abandon CWS\/CMS if it can play a role in meeting the additional SACWIS and county requirements. County requirements not met by the current system can be accommodated by making the system more modular and accessible from the web. This can be accomplished by adding an enterprise service bus as described above. This approach is increasingly being used by organizations to leverage their existing databases in order to minimize both the risk of data conversion and the cost of building a new system. Thus, the LAO alternative is to (1) update the current system and (2) add the missing SACWIS components. This will meet the federal and county business requirements. Budget and Contract Availability. The CWS\/CMS has been in use for more than ten years. There is $10 million in the baseline budget to keep the system current for changes in regulations and legislation. During the first five years that CWS\/CMS was in operation, this baseline amount was being spent, most of it to adjust the system for changing business processes Child Welfare Services C 127 Legislative Analyst’s Office as social workers transitioned from a manual operation to an automated one. Over the past five years, approximately one-third has been spent of the $50 million budgeted. This reduced spending pattern is typical for new systems as they stabilize and attain user acceptance. The current vendor contract is effective through 2013 and allows up to $10 million annually for system changes. We estimate that $8 million could be made available each year from the existing baseline budget to update the system to make it accessible from the web and to add the missing SACWIS components. The remaining $2 million would be available to incorporate any regula- tory and legislative changes. Comparing New System to LAO Alternative Figure 3 shows the total project cost for the New System and the LAO alternative. As the figure shows, the new system is estimated to cost $247 million (all funds), $184 more than the LAO alternative. Figure 3 Cost Comparison for CWS Automation Projects (Total Funds in Millions) 2008-09 2009-10 2010-11 2011-12 2012-13 Through 2014-15 Totalsa New system $6.8 $8.2 $11.2 $39.5 $181.5 $247.2 LAO alternative 14.8 16.2 16.2 16.2 \u2014 63.4 a Does not include $7.4 million expended from 2006-07 through 2007-08. Cost of New System Was Understated. Over the past two years the state has spent $7 million for New System project planning. In November 2007, the administration estimated that it would take seven more years to procure a vendor and complete the system at a cost of $247 million. Dur- ing the final three years of New System development, after the contract has been awarded, there will be a reduction in federal funding for the current system. LAO Alternative Reduces Schedule, Cost, and Risk. As shown in Figure 3 above, the total cost of the LAO alternative is $63 million. The cur- rent contract provides adequate resources to perform the work necessary to update the current system to meet SACWIS and county requirements. Although there are separate costs for state and county staff to design and test the system, such costs are significantly less than they would be for C 128 Health and Social Services 2008-09 Analysis the New System. This alternative also eliminates the risk and cost of data conversion, which is necessary under the other alternatives. In addition, federal funding levels for the current system will be retained if it is updated to meet SACWIS and county requirements. Funding the LAO Alternative. The LAO alternative could be funded by applying $8 million of the existing CWS\/CMS baseline budget to cover the system programming. In addition, the increased state and county staff needed to help design and test the system changes could be covered by redirecting funding from the New System for 2008-09 ($6.8 million) and 2009-10 ($8.2 million). Thus, through these redirections, there would be no net new cost under the LAO alternative for these years. Analyst’s Recommendation We recommend canceling the Child Welfare New System Project and updating the current system. This will result in reduced time, cost, and risk. This proposal is budget neutral in 2008-09 and 2009-10. Over the life of the project, total savings would be $184 million (all funds). Foster Care C 129 Legislative Analyst’s Office Foster Care is an entitlement program funded by federal, state, and local governments. Children are eligible for foster care grants if they are living with a foster care provider under a court order or a voluntary agree- ment between the child’s parent and a county welfare department. The California Department of Social Services (DSS) provides oversight for the county-administered Foster Care system. County welfare departments make decisions regarding the health and safety of children and have the discretion to place children in one of the following: (1) a foster family home, (2) a foster family agency home, or (3) a group home. Seriously emotionally disturbed (SED) children are identified by the California Department of Education (CDE) and are typically placed in group homes to facilitate a greater degree of supervision and treatment. The 2008\u201109 Governor’s Budget provides a separate Foster Care General Fund appropriation (Item 5180-153-0001) for the two counties (Los An- geles and Alameda) participating in the Title IV-E Child Welfare Waiver Demonstration Capped Allocation Project. The remaining 56 counties are budgeted in Item 5180-101-0001. Including the waiver counties, the Governor’s budget proposes expenditures of $1.6 billion ($425 million General Fund) for the Foster Care program in 2008-09. This represents an 8.6 percent decrease in General Fund expenditures from current-year estimated expenditures. Most of this decrease is attributable to the Gover- nor’s budget-balancing reduction proposal to reduce Foster Care, Adoption Assistance, and Kinship Guardianship Assistance Payment (Kin-GAP) payment rates by 10 percent. budgEt proposEs to rEduCE fostEr CarE ratEs The Governor’s budget proposes to reduce most Foster Care, Adop- tion Assistance, and Kinship Guardianship Assistance Payment rates by 10 percent, effective June 1, 2008. This proposed reduction will save an estimated $15.9 million in total funds ($6.8 million General Fund) in the current year and $190.3 million in total funds ($81.5 million Gen- fostEr CarE C 130 Health and Social Services 2008-09 Analysis eral Fund) in 2008-09. We provide background information on existing rates and describe potential impacts of the proposed reductions on the supply of care providers. In addition, we present two alternatives to the Governor’s proposal. Background Foster Care Placement Types. If there is reason to believe that an allegation of child abuse or neglect is true, county welfare departments can place a child in one of the following: (1) a foster family home (FFH), (2) a foster family agency (FFA) home, or (3) a group home (GH). The FFAs are nonprofit agencies licensed to recruit, certify, train, and support foster parents for hard-to-place children who would otherwise require GH care. The FFA rates are based on the FFH rate, plus a set increment for the special needs of the child and an increment for the support services offered by the FFA. Children who are identified by the CDE as SED are usually placed in GHs with psychiatric peer group settings. However, some SED children are placed in FFHs and FFA homes. Permanent Placement Types. The Kin-GAP program provides month- ly cash grants for children who are permanently placed with a relative who assumes guardianship. The Adoption Assistance program (AAP) provides monthly cash grants to parents who adopt foster children. Both Kin-GAP and AAP grants are tied to the foster care payment the child would have received if the child remained in a foster care placement. Existing Rates. Foster care basic grant rates for FFH, FFA, and GH (including SED children) were designed to fund the basic costs of raising a child. For some foster care payment recipients, as a supplement to the basic grant, a specialized care increment (SCI) may be paid for the additional care and supervision needs of a child with health and\/or behavioral issues. This could include, for example, a wheelchair ramp for a disabled child. A clothing allowance may also be paid in addition to the basic grant. For 2007-08, the Legislature approved a 5 percent increase to the basic and SCI rates for FFHs and Kin-GAP recipients, effective January 1, 2008. The 5 percent increase also applies to GHs, excluding the rates for SED children, and new AAP cases entering the program after January 1, 2008. The Legislature did not approve a rate increase for FFA recipients as the average FFA grant is currently significantly higher than the average FFH grant. In addition, there is some evidence that rather than becoming the lower-cost alternatives to GHs, FFA homes have instead become higher- cost alternatives to FFHs. The last foster care rate increase was provided in 2001-02. Foster Care C 131 Legislative Analyst’s Office Governor’s Proposal. The Governor’s budget proposes to reduce the basic care, SCI, clothing allowance, and SED rates for children in FFHs and GHs by 10 percent. The proposal also reflects a corresponding 10 per- cent decrease for Kin-GAP and AAP recipients. In addition, the budget proposes to reduce FFA rates by 5 percent rather than 10 percent, as FFA recipients did not receive the recent 5 percent rate increase. The budget assumes enactment of legislation during the special session so that the rate reductions would go into effect June 1, 2008. This would save an es- timated $6.8 million General Fund in the current year and $81.5 million General Fund in 2008-09. Figure 1 compares the average monthly foster care, Kin-GAP, and AAP payments prior to the 5 percent increase, after the rate increase, and with the Governor’s proposed reduction. Figure 1 Foster Care and Related Programs Average Monthly Payments by Placement Governor’s Proposal (June 2008) Prior Law (2007) Current Lawa (January 2008) Amount Percent Reduction Foster Family Home $693 $728 $655 -9.9% Foster Family Agency 1,850 1,850 1,758 -5.0 Group Home 5,058 5,311 4,780 -10.0 Seriously Emotionally Disturbed 5,614 5,614 5,053 -10.0 Adoption Assistance 785 824 706 -14.4 Kin-GAP 552 580 522 -10.0 a Reflects 5 percent rate increase except for rates for foster family agency and seriously emotionally disturbed children which received no adjustment. Potential Impacts of Rate Reductions While the impact of the proposed reduction on existing and potential care providers is difficult to measure, one possible program impact is a decrease in the supply of care providers for both foster care and permanent placements. This change in the supply of care providers could ultimately lead to increased foster care expenditures depending on which types of placements experience the most significant supply effects. On the one hand, reduced foster care rates could result in a decrease in the number of FFH providers, which could then lead to increased placements in the C 132 Health and Social Services 2008-09 Analysis more expensive FFA homes and GHs. On the other hand, a decrease in the number of GH providers could lead to increased placements in the less expensive FFHs and FFA homes. In addition, reduced grants for Kin-GAP and AAP recipients could decrease the number of permanent placement providers, which could also lead to longer stays in foster care. This could raise Child Welfare Services costs as these cases remain open with social worker intervention. This could also increase Medi-Cal costs and utilization because recipients are eligible for these health services by virtue of their foster care status. Alternatives to the Governor’s Proposal Below we present alternatives to the Governor’s proposal which of- fer less budgetary savings, but reduce the financial impact on foster care, Kin-GAP, and AAP recipients. Rescind Recent 5 Percent Rate Increase. One alternative to the Gover- nor’s proposal is to rescind the recent 5 percent rate increase for FFH, GH, Kin-GAP, and new AAP recipients in the budget year. This option would generate an estimated savings of $17 million General Fund in 2008-09. By only rescinding the 5 percent rate increase, and not reducing rates by an additional 5 percent, foster care and permanent care providers would be no worse off financially than they were one year ago. As part of this alternative, the Legislature should consider reducing the FFA rate by 5 percent in 2008-09, to keep the differential between the FFA rate and other foster care rates established by the Legislature. The Legislature did not provide the recent rate increase to FFAs in part because of a concern that FFA homes have become a higher-cost alternative to FFHs rather than a lower-cost alternative to GHs, which was the original intent of FFAs. The caseload trend for FFAs, which has been consistently increas- ing while other placement types have been decreasing or holding steady, supports this finding. Reducing FFA rates by 5 percent would generate an additional estimated savings of $6.6 million General Fund in 2008-09. Cap the SCI Rate in Certain Counties. Another alternative is reform- ing the current SCI rate structure. As Figure 2 shows, the SCIs range from zero in three small counties to over $2,000 per month in other counties. The SCIs reflect historical rate structures which vary by county. One reform option for the SCI rate structure is to cap the maximum rate at $1,000 begin- ning in 2008-09. This option could save an estimated $1 million General Fund in the budget year. This cap would impact seven counties repre- senting approximately 20 percent of the caseload. We note that currently 51 counties are able to serve children within this proposed cap. Foster Care C 133 Legislative Analyst’s Office Figure 2 Foster Care Distribution of Maximum Specialized Care Increments Maximum Increment Number of Counties Percentage of Cases $1,001 to $2,097 7 19.5% $500 to $1,000 28 74.3 $1 to $499 20 6.1 None 3 0.1 Conclusion The Governor’s proposal to reduce most foster care, Kin-GAP, and AAP rates by 10 percent results in General Fund savings of $6.8 million in the current year and $81.5 million in 2008-09. In deciding whether to adopt this proposal, the Legislature should weigh the budgetary savings against the potential for a decrease in foster and permanent care provid- ers, which could lead to increased foster care expenditures as children may move into more expensive placements or remain in care for longer periods. Although the LAO alternatives to reduce foster care expenditures save considerably less than the Governor’s proposal, these options would lessen the financial impact on foster care, Kin-GAP, and AAP recipients, and reduce the chance for placement shifts. C 134 Health and Social Services 2008-09 Analysis The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of nearly $3.8 billion from the General Fund for the state’s share of SSI\/SSP in 2008-09. This is an increase of $107 million, or 2.9 percent, over estimated current-year expenditures. This increase in funding is primarily due to increases in the SSI\/SSP caseload. In 2008-09, it is estimated that there will be an average of about 366,500 aged, 21,600 blind, and 859,500 disabled recipients. In addition to these federally eligible recipients, the state-only Cash Assistance Program for Immigrants is estimated to provide benefits to an average of 11,419 legal immigrants in 2008-09, for whom federal financial participation is not available. budgEt dElEtEs statE Cost-of-living adjustMEnts The Governor’s budget proposes to delete the June 2008 and 2009 state statutory cost-of-living adjustments (COLAs), while passing through the federal COLAs. The budget estimates that this proposal will save $23.3 million in the current year, and $300.3 million in 2008-09. Due to revisions of the California Necessities Index and the Consumer Price Index, we estimate that the Governor’s budget understates the savings from deleting the state COLA by $5.3 million in 2008-09. Background The SSI\/SSP payment is funded with federal and state funds, with the SSI component supported with federal funds and the SSP portion funded with state funds. Under current law, both the federal and state components of the SSI\/SSP grant are adjusted annually for inflation. In the past, the supplEMEntal sECurity inCoME\/ statE supplEMEntary prograM Supplemental Security Income\/State Supplementary Program C 135 Legislative Analyst’s Office federal and state cost-of-living adjustments (COLAs) were both applied to the SSI\/SSP grant each January (with the exception of several years when the state COLA was deleted and the federal COLA was not passed through). Chapter 171, Statutes of 2007 (SB 77, Ducheny) permanently rescheduled from January to June the annual SSP state COLA. The state COLA is based on the California Necessities Index (CNI) and is applied to the combined SSI\/SSP grant. It is funded by both the federal and state governments. The federal COLA, which is applied each January, (based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W) is applied annually to the SSI (federal) portion of the grant. The remaining amount needed to cover the state COLA is funded with state monies. Based on its assumptions concerning both the CNI and CPI-W, the budget estimates the General Fund cost of providing these COLAs to be $23.3 million in 2007-08 and $300.3 million ($271 million from the June 2008 COLA, and $29.3 million from the June 2009 COLA) in 2008-09. Deleting the June 2008 COLA The Governor’s budget proposes to delete the June 2008 COLA, and includes the pass-through of the federal COLA. Because the state COLA has been permanently rescheduled from January to June, deleting the June 2008 COLA results in a one month General Fund savings of $23.3 million in 2007-08, and annualized savings of $271 million in 2008-09. Given the lead-time required to notify the Social Security Administration about grant changes, the June 2008 COLA deletion issue must be addressed prior to March 1. Deleting the June 2009 COLA The Governor proposes to delete the June 2009 state COLA, while passing through the January 2009 federal COLA. The Governor’s budget estimates that deleting the June 2009 COLA will result in a one month General Fund savings of $29.3 million in 2008-09. However, our review of the actual CNI and our estimate of the CPI-W indicates that this proposal understates the General Fund savings in the budget year. The CNI Revised. The June 2009 COLA is based on the change in the CNI from December 2006 to December 2007. The Governor’s budget, which is prepared prior to the release of the December 2007 CNI figures, estimates that the CNI will be 4.25 percent, based on partial data. Our review of the actual data indicates that the June 2009 CNI will be 5.27 percent. The January 2009 CPI Underestimated. The January 2009 federal SSI COLA will be based on the change in the CPI-W from the third quarter C 136 Health and Social Services 2008-09 Analysis (July to September) of calendar 2007 to the third quarter of calendar 2008. The Governor’s budget estimates that the change in the CPI-W for this period will be 1.7 percent. Our estimate of the CPI-W, based on additional data, is 2.41 percent. Figure 1 compares our estimates of the CNI and the CPI-W to the Governor’s budget estimates. Figure 1 June 2009 COLA Assumptions Governor’s Budget LAO Estimate CPI-W 1.70% 2.41% CNI 4.25 5.26 CPI-W = U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers. CNI = California Necessities Index. Combined COLA Deletion Savings Taken together, the changes in the CNI and the CPI-W (in relation to the Governor’s budget) increase the 2008-09 savings associated with deleting the June 2009 state COLA by $5.3 million, to a total savings of $34.6 million. As shown in Figure 2, in total, we estimate that the Governor’s proposals to delete the state COLAs in 2008 and 2009 result in General Fund savings of $23.3 million in the current year, and $305.6 million in the budget year. Figure 2 LAO Estimate of General Fund Savings From Governor’s SSI\/SSP COLA Suspension Proposal (In Millions) Proposal 2007-08 2008-09 Suspend June 2008 State COLA $23.3 $271.0 Suspend June 2009 State COLA \u2014 34.6 Total Savings $23.3 $305.6 Supplemental Security Income\/State Supplementary Program C 137 Legislative Analyst’s Office SSI\/SSP Grant Levels Figure 3 (see next page) shows SSI\/SSP average grant levels for indi- viduals and couples under both current law and the Governor’s budget proposal. The 2009 grant levels have been adjusted to reflect the actual CNI, and our best estimate of the CPI-W. As the figure indicates, under the Governor’s proposal, grants for individuals are expected to rise due to the pass-through of the federal COLA from $870 (100 percent of poverty) in January 2008 to $885 (102 percent of poverty) in June 2009. Absent the Governor’s proposal, grants for individuals would increase from $870 in January 2008 to $935 in June 2009 (108 percent of poverty). Under the Governor’s spending plan, grants for couples would increase from $1,524 (131 percent of poverty) in January 2008 to $1,547 (133 percent of poverty) in June 2009 due to the federal COLAs. Under current law, grants for couples are estimated to increase from $1,524 in January 2008 to $1,640 (141 percent of poverty) in June 2009. Inclusion in LAO Alternative Budget. As part of the LAO alternative budget package presented in The 2008\u201109 Budget: Perspectives and Issues, we recommend the deletion of the June 2008 and 2009 state statutory COLAs. This is because prior pass-throughs of the federal COLA has kept both individuals and couples above the federal poverty guideline. Moreover, the alternative continues to pass-through the federal COLA in 2009, thus ensuring that SSI\/SSP recipients remain above poverty. Additional Savings Included in the LAO Alternative Budget. Also, as part of the LAO alternative budget package, we recommend reducing SSI\/SSP couples grants to 125 percent of the 2008 federal poverty guideline. This results in General Fund savings of about $89.5 million in 2008-09. As seen in Figure 3, couples grants are currently at 131 percent of poverty, while grants for individuals are at 100 percent of the 2008 federal poverty guideline. Even with this reduction, SSI\/SSP couples will remain further above the poverty guideline than individuals. This proposal would reduce the SSP grant for couples by $66, from $568 to $502, well above the current federal maintenance of effort requirement ($396). This proposal does not result in any federal funds loss, since it only affects the SSP portion of the grant. Couples would continue to receive the federal COLA in January 2009, and would be entitled to future federal and state COLAs when they are provided. The SSP grant of $502, when combined with the federal SSI grant, would total $1,458 per month for a couple. C 138 Health and Social Services 2008-09 Analysis Figure 3 SSI\/SSP Maximum Monthly Grants Current Law and Governor’s Proposal January 2008 June 2008 January 2009 June 2009 Individuals Current Law SSI $637 $637 $652 $652 SSP 233 251 251 283 Totals $870 $888 $903 $935 Percent of Povertya 100% 102% 104% 108% Governor’s Budget SSI $637 $637 $652 $652 SSP 233 233 233 233 Totals $870 $870 $885 $885 Percent of Povertya 100% 100% 102% 102% Change From Current Law SSI \u2014 \u2014 \u2014 \u2014 SSP \u2014 $18 $18 $50 Totals \u2014 $18 $18 $50 Couples Current Law SSI $956 $956 $979 $979 SSP 568 602 602 661 Totals $1,524 $1,558 $1,581 $1,640 Percent of Povertya 131% 134% 136% 141% Governor’s Budget SSI $956 $956 $979 $979 SSP 568 568 568 568 Totals $1,524 $1,524 $1,547 $1,547 Percent of Povertya 131% 131% 133% 133% Change From Current Law SSI \u2014 \u2014 \u2014 \u2014 SSP \u2014 $34 $34 $93 Totals \u2014 $34 $34 $93 a 2008 U.S. Department of Health and Human Services Poverty Guidelines. The guidelines are adjusted annually for inflation. In-Home Supportive Services C 139 Legislative Analyst’s Office The In-Home Supportive Services (IHSS) program provides various services to eligible aged, blind, and disabled persons who are unable to remain safely in their homes without such assistance. An individual is eligible for IHSS if he or she lives in his or her home\u2014or is capable of safely doing so if IHSS is provided\u2014and meets specific criteria related to eligibility for the Supplemental Security Income\/State Supplementary Pro- gram. In August 2004, the U.S. Department of Health and Human Services approved a Medicaid Section 1115 demonstration waiver that made about 93 percent of IHSS recipients eligible for federal financial participation. Prior to the waiver, about 25 percent of the caseload were not eligible for federal funding and were served in the state-only residual program. The budget proposes about $1.6 billion from the General Fund for sup- port of the IHSS program in 2008-09, an increase of $2.8 million (0.2 per- cent) compared to estimated expenditures in the current year. This slight increase is attributable to increases in the IHSS caseload and provider wages, which is largely offset by the Governor’s proposal to reduce IHSS domestic and related care service hours. rEduCing doMEstiC and rElatEd CarE hours for ihss rECipiEnts The Governor’s budget proposes to reduce the hours of domestic and related services provided to the In-Home Supportive Services recipients by 18 percent, resulting in estimated General Fund savings of about $110 million in 2008-09. Additionally, the budget includes a proposal to reduce county administrative funding and workload by 10 percent, resulting in estimated General Fund savings of about $10 mil- lion in the budget year. We provide background on domestic care ser- vice hours, highlight key features of the Governor’s proposals, present some concerns with the estimated savings, and provide alternatives for achieving savings. in-hoME supportivE sErviCEs C 140 Health and Social Services 2008-09 Analysis Background After the needs of an IHSS recipient are assessed by a social worker, the recipient is authorized to receive a specific number of hours of care each month for a variety of services. This care is allocated among certain tasks to create a package of services to assist recipients in remaining in their own homes thereby potentially avoiding being placed in a residential care or nursing facility. Figure 1 provides a list of the tasks for which IHSS recipients may receive service hours. Who Receives Domestic Services? As shown in Figure 1, domestic and related services include general housekeeping activities, meal prepa- ration, meal clean-up, shopping for food, and errands. For 2008-09, the IHSS caseload is estimated to be about 408,000 persons. Over 95 percent of these recipients are estimated to receive some level of domestic and re- lated care service. Currently, the average number of hours authorized for IHSS domestic services is 37 hours per month, and the average number of hours for all other tasks is about 50 hours per month. In other words, for an average IHSS recipient, domestic and related services make up about 43 percent of their total care hours each month. The Current Assessment Process. The IHSS program relies on county social workers to conduct individualized assessments to determine the number of hours of each type of IHSS service that a recipient needs in order to remain in his\/her home. Recently, social workers have received train- ing in order to implement a standardized assessment process throughout the state. Reassessment Process. Current law requires social workers to reas- sess most recipients’ need for service every 12 months. The length of time between assessments can be extended for an additional 6 months (to a total of 18 months between assessments) if recipients meet certain criteria relating to their health and living conditions. IHSS Appeals. Currently, if IHSS recipients disagree with the hours authorized by the social worker, they have a right to request a reassessment, and if still not satisfied, they can appeal their hour allotment by submitting a request for a state hearing to the Department of Social Services (DSS). Governor’s Proposals County Administration Proposal The Governor’s budget proposes to reduce county administrative fund- ing by about $10 million General Fund (about 10 percent) in 2008-09. He In-Home Supportive Services C 141 Legislative Analyst’s Office also proposes to reduce the workload for county social workers by extend- ing the interval between IHSS recipient assessments from 12 months to 18 months. The Governor’s proposal allows for assessments more frequently than 18 months if recipients meet certain criteria relating to their condition or at any time that a recipient requests an assessment. Figure 1 In-Home Supportive Services Task Categories Task Examples Domestic and Related Services: Domestic Services Cleaning; dusting; picking up; changing linens; changing light bulbs; taking out garbage Laundry Sorting; washing; hanging; folding; mending; and ironing Shopping and Errands Purchasing groceries, putting them away; picking up prescriptions; buying clothing Meal Preparation Planning menus; preparing food; setting the table Meal Cleanup Washing dishes and putting them away All Other Services: Feeding Feeding Ambulation Assisting recipient with walking or moving in home or to car Bathing, Oral Hygiene, Grooming Cleaning the body; getting in or out of the shower; hair care; shaving; grooming Routine Bed Baths Cleaning the body Dressing Putting on\/taking off clothing Medications and Assistance With Prosthetic Devices Medication administration assistance; taking off\/putting on, maintaining, and cleaning prosthetic devices Bowel and Bladder Bedpan\/ bedside commode care; application of diapers; assisting with getting on\/off commode or toilet Menstrual Care External application of sanitary napkins Transfer Assistance with standing\/ sitting Repositioning\/ Rubbing Skin Circulation promotion; skin care Respiration Assistance with oxygen and oxygen equipment Protective Supervision Ensuring recipients are not harming themselves C 142 Health and Social Services 2008-09 Analysis Domestic and Related Care Reduction The Governor’s budget proposes to reduce the number of hours pro- vided for IHSS domestic and related services by 18 percent in 2008-09. This reduction is estimated to save $110 million General Fund in the budget year. Because most recipients receive domestic care services, this reduc- tion will have an effect on nearly all IHSS recipients and providers. As seen in Figure 2, the average IHSS recipient will go from having 37 hours of domestic and related services to 30.4 hours per month, and their total services will be reduced from 86.6 hours to 80 hours per month. Figure 2 Domestic and Related Services Reduction Impact of the 18 Percent Reduction Average Monthly Hours Change Current Level Governor’s Proposal Amount Percent Domestic and related care service hours 37.0 30.4 -6.6 -18% All other hours 49.6 49.6 \u2014 \u2014 Totals 86.6 80.0 -6.6 -8% Implementing the Reduction. The Governor’s proposal assumes that the reduction in domestic and related care hours would become ef- fective on July 1, 2008. This assumes enactment by the Legislature of the necessary statutory changes by March 1, 2008. Currently, information regarding recipient hour authorizations is stored in the state operated Case Management Information and Payrolling System (CMIPS). The Governor’s proposal does not include any administrative or reprogram- ming costs to enable the reduction. The DSS states that CMIPS will be reprogrammed to automatically apply the 18 percent reduction to exist- ing hour assignments for domestic and related services. At the time this analysis was prepared, it was not clear if CMIPS could make this change within its existing resources or whether additional costs will be incurred for computer reprogramming. The Assessment Process. The DSS states that there will be no change in the assessment process at the county level. Social workers will continue to use their training and existing guidelines to perform an individualized In-Home Supportive Services C 143 Legislative Analyst’s Office assessment and determine the amount of care that they believe a recipient should receive to avoid institutionalization. Pursuant to the proposed trailer bill language, after their hours are reduced by 18 percent, all IHSS recipients will receive a notice in the mail with information about (1) the amount of hours the recipient received prior to the reduction and the number of hours the recipient will receive as a result of the reduction, (2) the reason for the reduction, (3) when the reduction will be effective, and (4) how all or part of the reduction may be restored if the recipient believes he\/she will be at serious risk of out- of-home placement if the care is not restored. Changes to the Appeals Process. Current law states that IHSS re- cipients do not have the right for a state hearing if they are appealing a reduction in hours that occurred as a result of a change in federal or state law. However, when describing how all or part of the 18 percent reduction in domestic and related care service hours may be restored, the trailer bill language implementing the Governor’s proposal refers to a section in cur- rent law that allows IHSS recipients to apply to have their hours restored through an IHSS care supplement, which is designed to provide additional hours of service. If the recipient disagrees with the county’s determination regarding the need for a care supplement, the recipient may then request a hearing on that determination. Additionally, under the Governor’s pro- posal, recipients retain the right to request a social worker reassessment and to appeal their reassessment if not satisfied. Projected Savings May Not Be Achieved Although it is likely that this proposal will lead to some General Fund savings, we are concerned that the estimated savings in the Governor’s budget may be overstated. The Governor’s budget assumes that by in- creasing the allowable time between social worker assessments, county workloads will decrease by 10 percent. Additionally, the Governor’s plan assumes that all IHSS domestic and related care hours will be reduced by 18 percent for all recipients in 2008-09. Below we present our concerns with the estimated savings included in the Governor’s budget. Administrative Cost Reduction May Not Lead to Equivalent Work- load Reduction. Although the proposal to reduce funding for county administration by 10 percent results in savings, there is the potential that it will not result in a 10 percent reduction to county workload. Although the proposal extends the allowable time between reassessments, it does not change the recipient’s ability to request a reassessment at any time. As more time passes between assessments, recipients may experience changes in their conditions and request a social worker reassessment. This C 144 Health and Social Services 2008-09 Analysis may require social workers to perform more assessments than would be budgeted under the Governor’s proposal. Implementing Hour Reduction Proposal. Although the 18 percent reduction in domestic and related care service hours will be applied au- tomatically by CMIPS, it is not clear whether there will be administrative or reprogramming costs to enable the reduction. The Governor’s budget does not include any administrative or reprogramming costs that may be required for CMIPS to apply the reduction. To the extent that these costs exist, some of the savings in this proposal will erode. Appeals for Additional Hours. As recipients become aware of the 18 percent reduction in domestic and related services, there will likely be an increase in the number of recipient requests for hour restorations (whether through reassessments or requests for an IHSS care supplement). This is because the proposal does not change the ability of the recipient to request these reevaluations, and the notice they receive will inform them of their ability to restore hours if they believe that they are at serious risk of out-of-home placement. If these reassessments or appeals result in restored domestic and related care services for recipients, the savings due to this proposal will be less than estimated in the Governor’s budget. Additionally, increased reassessments and appeals would raise admin- istrative costs. This is because it will take a social worker time to process the increase in the requests and appeals. Social Worker Incentives May Reduce Savings. As social workers become aware of the 18 percent reduction, there may be an incentive to increase the hours in nondomestic categories of care, or inflate the assessed hours for domestic care, to make up for the lost hours. Social workers might do this in order to avoid requests for reassessments and appeals which take additional social worker time. It should be noted that these additional hours could be assigned to domestic or nondomestic services. This is because IHSS recipients typically use their hours as if they are a block grant. Although social workers assign a certain number of hours for each task, recipients often reallocate hours among tasks. (For a more complete discussion of how recipients treat their hours as a block grant, see Enhancing Program Integrity in the IHSS section of the Analysis of the 2007\u201108 Budget Bill.) State Plan Amendment May Be Required for Both Proposals. The DSS indicates that a Medi-Cal state plan amendment, approved by the federal Centers for Medicare and Medicaid Services, may be needed in order to implement the extension of time between recipient assessments and the 18 percent reduction in domestic and related care hours. If it is determined that a state plan amendment is required, and the amendment is In-Home Supportive Services C 145 Legislative Analyst’s Office not approved prior to July 1, 2008, the implementation date will be delayed and the proposed savings will be reduced. Other Means of Achieving Savings The administration’s proposals reduce service hours without changing the underlying statutory or regulatory criteria for assigning hours. Based on our review, we conclude that some of the estimated savings are likely to be offset by increased appeals and hour restorations, reassessments, and potential administrative costs. In order to make meaningful changes to service hours, the Legislature could consider changes in statute to the standards for authorizing hours in the program, rather than reduce the hours once they have already been assessed, as the Governor’s budget proposes. Below we present some op- tions to consider. Cap Hours for Certain IHSS Services. Although the Governor’s pro- posal reduces the number of hours assessed by social workers by 18 per- cent, it does not limit the number of hours which may be assessed. In order to achieve meaningful savings by reducing IHSS hours, the underlying criteria for providing hours could be changed. To achieve this, the Legis- lature could place caps on the hours authorized for certain IHSS services. Such caps, with exceptions, currently exist for services provided in the IHSS program. For example, the maximum number of hours that recipients can receive for certain domestic services is limited to 6 hours per month, unless there is an exception because the needs of the recipient require additional time. Thus, as an alternative approach, the Legislature could cap the hours for this service at five hours and not allow exceptions. We believe that it is reasonable to place caps, without exceptions, on certain domestic services where the condition of the recipient is not likely to lead to a variance in the need for service hours. The savings associated with this proposal would depend upon the number of services that are capped without exceptions and the number of hours at which they are capped. Consider Living Situation When Assessing Hours. The Legislature could also establish differential hours based on the recipient’s living situ- ation. In other words, the Legislature could cap the number of domestic hours available to a recipient who lives with their family at a level that is lower than for someone living independently. For example, the current maximum number of hours that recipients may receive for food shopping is one hour per week. The Legislature could consider continuing to allow one hour per week for recipients who live on their own, but authorize only one-half hour per week for recipients who live with relatives. C 146 Health and Social Services 2008-09 Analysis When assessing hours for certain domestic services, it seems appropri- ate to consider the living situation of the recipient. As part of the current assessment process, social workers do consider whether the recipient has access to voluntary assistance and other resources. However, there is no formal distinction made between the maximum authorized hours for those who live with family members and those who live independently. Recipients living with relatives may need less hours for domestic services than individuals living independently. This is because family members would likely be performing domestic tasks, such as food shopping, regard- less of whether or not they were living with a recipient of IHSS. In such a situation, it would not be necessary to provide the same number of IHSS service hours for recipients living with relatives as are provided for those living independently. The savings attributable to this type of reduction would depend upon the number of services selected for the establishment of differential hour caps, and the amount of the hour differential. State Plan Amendment. Similar to the Governor’s proposal, prior to implementing these types of IHSS hour reforms, a Medi-Cal state plan amendment (with federal approval) may be necessary. Conclusion We believe that the Governor’s proposal to reduce domestic and related care hours will result in some savings in the budget year. However, due to the concerns mentioned above, it is likely that the savings will be less than estimated by the Governor’s budget. To the extent that the Legislature wants to achieve savings by reducing service hours, the preferred approach is to change the statute regarding actual standards for assigning hours, rather than reduce the hours after the need has been assessed. iMproving thE ihss worKforCE through tiErEd statE partiCipation in wagEs Although the In-Home Support Services (IHSS) wages represent a significant cost to the state, current law grants local county boards of supervisors the authority to set wage levels and the conditions under which potential providers may list themselves as available to recipients. In order to improve the IHSS labor force, and control growing wage costs, we recommend enactment of legislation, before 2010-11, which modifies the structure for state participation in wages to reflect the training and tenure of IHSS providers. In-Home Supportive Services C 147 Legislative Analyst’s Office Background IHSS Recipients and Providers. In 2008-09, the IHSS program is estimated to provide in-home care to approximately 408,000 recipients. The IHSS care is primarily delivered by an average of 325,000 individual providers located throughout the state. About 58 percent of IHSS providers are related to the IHSS recipient for which they provide care. Recipient Control. In the IHSS program, the recipient is considered to be the employer, and has the responsibility to hire, supervise, and fire their provider. Although the recipient is the employer, they do not set IHSS wages, which are collectively bargained between counties (gener- ally represented by public authorities discussed below) and employer representatives. As the employer, IHSS recipients have few restrictions on who they are permitted to hire. Specifically, the only restrictions on IHSS recipients is that they may not hire individuals who in the last ten years have been convicted of Medi-Cal fraud, child abuse, or elder abuse. The Role of Public Authorities. For purposes of collective bargaining over IHSS provider wages and terms of employment, all but two coun- ties in the state have established public authorities (other counties have established different entities for this purpose). The public authorities essentially represent the county in provider wage negotiations. Besides collective bargaining, the primary responsibilities of public authorities include (1) establishing a registry of IHSS providers who have met various qualification requirements, (2) investigating the background of potential providers, (3) establishing a system to refer IHSS providers to recipients, and (4) providing training for providers and recipients. Funding for Provider Wages and Benefits. The federal, state, and local governments share in the cost of IHSS wages. Specifically, the federal gov- ernment funds 50 percent of the cost, and the remaining, nonfederal share of costs is funded 65 percent by the state and 35 percent by the counties. Funding Criminal Background Investigations. Among other things, Chapter 447, Statutes of 2007 (SB 868, Ridley-Thomas), provides, if funds are appropriated, for state participation in the cost of performing crimi- nal background investigations (CBIs) on registry and nonregistry IHSS providers. Prior to enactment of this legislation, the state did not share in the cost of CBIs. Pursuant to Chapter 447, if over 50 percent of those on a public authorities registry have received a CBI, the county is eligible for state reimbursement of 65 percent of the nonfederal cost. Additionally, if funds are appropriated in the annual budget act, recipients may request a CBI be conducted on their provider at no cost to the recipient or provider. No such appropriation was made in 2007-08, and the Governor’s budget does not include funding for 2008-09. Thus under current practice, there is no state participation in the cost for CBIs. C 148 Health and Social Services 2008-09 Analysis Flexibility Leads to County Variance Local county boards of supervisors have used their discretion to implement public authority registry requirements and wage structures that vary throughout the state, as discussed below. Wages Vary Among Counties. Pursuant to Chapter 108, Statutes of 2000 (AB 2876, Aroner), the state participates in combined wage and ben- efit levels of up to $12.10 per hour for IHSS providers. Although the state participates in wages of up to $12.10 per hour, as seen in Figure 3, county combined wages and benefits range from $8 per hour to $14.43 per hour. A county, such as Santa Clara, with an established wage over the state participation cap of $12.10 per hour, shares the cost of the portion of the wage that is over the $12.10 with the federal government. In other words, the additional $2.33 above the $12.10 is shared 50 percent by the federal government and 50 percent by Santa Clara County. Currently, the average statewide IHSS wage and benefit level is about $9.98 per hour. County decisions to raise wages to this level have resulted in state costs of $281 million more than they would have been if counties had continued paying minimum wage ($8 per hour as of January 2008). If all counties decide to raise wages and benefits to the authorized maxi- mum ($12.10 per hour), state costs would increase by about $316 million annually. Registry Requirements Vary. Each public authority maintains a regis- try of IHSS providers who have met various background and qualification requirements implemented by the counties. The names of providers listed on the registry are distributed to IHSS recipients to aid them in the hiring process. The IHSS recipients are not required to hire their providers from the registry. Current law grants broad discretion to counties when estab- lishing criteria for providers to qualify for IHSS registry placement. Failure to meet registry requirements does not prohibit a person from working as an IHSS provider, but instead renders them ineligible from being placed on the registry. Below we list some of the requirements that some counties have implemented in order for a person to be placed on the registry. Attend provider training, Pass a drug screening test, Pass a criminal background investigation, Provide personal and professional references, Participate in an interview with the public authority, Provide employment history. In-Home Supportive Services C 149 Legislative Analyst’s Office Figure 3 IHSS Hourly Wages and Benefits by County Approved as of January 2008 Alpine $8.00 San Bernardino $9.43 Colusa 8.00 Stanislaus 9.44 Humboldt 8.00 Los Angeles 9.51 Inyo 8.00 Yuba 9.57 Lake 8.00 El Dorado 9.60 Lassen 8.00 Kern 9.60 Madera 8.00 Placer 9.60 Mariposa 8.00 San Diego 9.71 Modoc 8.00 Statewide Average 9.98 Mono 8.00 San Joaquin 10.02 Shasta 8.00 Mendocino 10.05 Siskiyou 8.00 San Luis Obispo 10.10 Trinity 8.00 Ventura 10.10 Tuolumne 8.00 Riverside 10.35 Glenn 8.15 Fresno 10.45 Imperial 8.25 San Benito 10.60 Kings 8.60 Santa Barbara 10.60 Tehama 8.60 Monterey 11.10 Butte 8.75 Napa 11.10 Del Norte 8.85 Sacramento 11.10 Sutter 8.85 Solano 11.10 Calaveras 8.98 Sonoma 11.10 Orange 9.00 Marin 11.19 Amador 9.10 Alameda 11.49 Merced 9.10 Contra Costa 11.83 Tulare 9.10 Santa Cruz 12.10 Nevada 9.16 San Mateo 12.10 Plumas 9.16 Yolo 12.80 Sierra 9.16 San Francisco 13.39 Santa Clara 14.43 The requirements established for qualification for the provider regis- try vary by county. Not all counties have implemented all of the registry requirements listed above, and some counties have implemented require- ments that are not included. Additionally, counties with similar require- ments may implement them in a variety of ways. For example, two counties C 150 Health and Social Services 2008-09 Analysis may require that registry providers attend training, but one county may require more hours of training than another county. County Experience With Tiered Wages Although there is wide variation among county registry requirements, with very few exceptions, IHSS workers within each county are paid the same hourly wage. However, at least two counties have used their authority to consider or implement variable wage rates within their counties. Below we discuss a differential wage approach in Los Angeles County and a proposal for tiered wages in Lake County. The Los Angeles County Back-Up Attendant Program. Los Angeles County has utilized the flexibility in current law to implement a back-up attendant program. The Back-Up Attendant program was set up to ensure that IHSS recipients in Los Angeles County receive their authorized care even if their regular provider is not available. The program provides a wage of $12 per hour for providers who are willing to be listed on the registry as back-up providers, and $9 per hour for all other providers. The back-up providers are used when eligible IHSS recipients have an urgent but temporary need for assistance, and their regular provider is unable to provide that assistance. The requirements to become a back-up provider are the same as the requirements to be listed on the registry, but in addition to those requirements, back-up providers must complete a 12-hour training course or pass a proficiency test to evaluate their skills. The DSS concurred that counties have the authority to set wage levels and approved this differential wage structure, as it was implemented at no additional cost to the state. The Los Angeles Back-Up Attendant program provides an example of how counties have used their authority to make differential wage decisions. Lake County Two-Tier Wage Proposal. Recently, Lake County pro- posed to implement a two-tiered wage structure that would pay higher wages to IHSS providers who were willing and able to qualify for the Lake County Public Authority registry. Individuals who did not wish to sign up for the registry, or did not qualify for the registry, could still be hired as an IHSS provider, but would be paid a lower wage. The Lake County Board of Supervisors indicated that the purpose of this tiered wage proposal was to use a monetary incentive to encourage a heightened standard for IHSS providers. They maintain that a tiered wage structure would provide IHSS recipients with the opportunity to make more informed decisions when searching for a provider. To qualify for the registry in Lake County, a provider would have to pass a criminal background investigation, pass a drug screening, and participate in first-aid training. The DSS has concluded that current law permits counties to negotiate tiered wage structures as In-Home Supportive Services C 151 Legislative Analyst’s Office long as it is done at no cost to the state. Lake County is currently in the process of providing DSS with the details of how it plans to implement a tiered wage structure at no additional state cost. Tiered Wage Automation Considerations. Both the Los Angeles County Back-Up Attendant Program and the Lake County tiered wage proposal require a payrolling system that is able to accommodate multiple wages within a county. Each county’s payroll claim is processed by the state’s CMIPS. Currently, CMIPS is only capable of accommodating a single wage for all workers in a given county. Thus, Los Angeles County must use work arounds and manual inputs by county workers to operationalize the wage differential for the Back-up Attendant program. Similarly, DSS is requiring Lake County to address the data entry issue at no state cost. However, a new payroll processing system, CMIPS II, is currently being developed, and this new system will be able to accommodate multiple wage levels within a single county. The system should be fully operational by summer of 2011. Opportunity for the Legislature to Condition State Participation in Wages Because multiple wages within a county are permissible under current law, and CMIPS II will be able to accommodate multiple wages within a county, more counties may begin to propose differential wage structures. This will provide the Legislature with the opportunity to consider whether it wishes to link the level of state participation in wages to the skills, train- ing, and experience of IHSS providers. Differential wage structures are common in the public and private sectors. Valuing the experience and training of IHSS providers should improve the IHSS labor force and thus the quality of services for recipients. Below we present several alternatives for creating pay differentials among workers. Higher State Participation in Wages for Experienced Providers. Currently, with very few exceptions, virtually all IHSS providers within a county are paid the same amount in wages and benefits regardless of experience. Typically, wage structures in the public and private sectors are designed to pay those with more experience at a higher level than those new to the job. The Legislature could consider implementing a training wage for new IHSS providers, and therefore participate in higher wages for IHSS providers with more experience. In other words, new IHSS provid- ers would receive less state participation than providers with at least six months of experience. This would reward skilled providers, and result in some savings to the state with potential county costs or savings. Whether counties will experience savings is dependent upon county behavior. If counties decide to reduce wages to the level of state participation, they will also receive some savings from the training wage. However, those C 152 Health and Social Services 2008-09 Analysis counties that maintain wages despite decreased state participation will experience additional costs. Higher State Participation for Trained Workers. Similarly, the Leg- islature could authorize state participation in higher wages for providers who obtain training. For example, the Los Angeles City College currently offers a free IHSS provider training course. This particular training course is designed to provide IHSS providers with the skills needed to be an ef- fective in-home care provider. Upon completion of the course, participants receive a certificate of completion. Blending Training and Experience Rules. Another alternative for the Legislature to consider would be to allow IHSS providers to substitute suc- cessful completion of a training course for up to six months of on-the-job training. The Legislature would specify the number of hours of training needed to substitute training for experience, as well as require provider documentation of course completion in order to receive state participation in the higher wage. The Legislature would ultimately determine the details of the training wage. For purposes of illustration, if the Legislature creates a wage dif- ferential whereby the state participates in $0.50 cents less for a six month training wage for new providers, this would result in General Fund savings of about $1 million annually. Higher State Participation in Wages for Providers Who Complete a Criminal Background Investigation. The Legislature could provide greater state participation for providers who are willing to have a CBI conducted. Under this approach, workers desiring the higher wage level would apply to the Department of Justice (DOJ) for a CBI. The results of the CBI would be provided to the IHSS recipients and the county. The information in the CBI would assist recipients in making informed deci- sions during the hiring process. Unless the CBI reveals that the provider was convicted of fraud or abuse as previously described, the state would participate in a higher wage level for providers who complete a criminal background investigation and are hired by an IHSS recipient. Implementing this criteria would result in some savings to the state, as it is unlikely that all IHSS providers would participate in the CBI. For example, if 10 percent of all providers opt not to participate in a CBI within the timeframe established, and the Legislature decides to participate in $0.50 cents less per hour for those providers, the state would save about $5.7 million annually. Other Considerations. The options described above would improve the IHSS labor force. Additionally, encouraging training and increasing the recipient’s knowledge of the provider through a CBI, may result in In-Home Supportive Services C 153 Legislative Analyst’s Office reduced fraud in the IHSS program. These options would not prevent counties from maintaining or increasing current wages, as it only affects state participation in those wages. Failure to comply with the criteria estab- lished in these differential wage options would not prevent an individual from becoming an IHSS provider. Analyst’s Recommendation In order to improve the IHSS labor force, we recommend enactment of legislation that conditions state participation in IHSS wages on the provider’s experience, training, and willingness to have a criminal back- ground investigation conducted. Because the current version of CMIPS is only able to accommodate one wage level per county, we recommend that variable state participation in wages only become operational when CMIPS II is fully implemented (in 2010-11). The precise policy mix of state participation in wages would be up to the Legislature. Variants to the options mentioned above could include increases or decreases to the amount of the wage differentiation and the length of time new providers receive the training wage. In other words, the Legislature may decide to participate in $1 less per hour for providers who have not completed a CBI, rather than the $0.50 differential we used in our example, or they may decide to participate in a training wage for three months rather than six months. All of these decisions will influence the amount of savings associated with tiered wages. Adopting all of the options described above ($0.50 wage differentials and six months of the training wage) would result in annual General Fund savings of about $6.7 million. In addition, we believe linking pay to experience and training will improve the IHSS labor force and services for recipients. C 154 Health and Social Services 2008-09 Analysis The budget appropriates funds for the state and federal share of the costs incurred by the counties for administering the following programs: Food Stamps, California Food Assistance Program, Foster Care, and Refu- gee Cash Assistance. In addition, the budget provides funds for the ongoing maintenance and development of county welfare automation systems. For 2008-09, the budget proposes an appropriation of $429 million from the General Fund for county administration and automation systems. This represents a reduction of $20.8 million, primarily attributable to proposed budget balancing reductions which (1) cancel the Interim Statewide Au- tomated Welfare System (ISAWS) Migration Project and (2) reduce Food Stamps administrative funding by 10 percent. thE futurE of County wElfarE autoMation Consortia Each county uses one of four automated systems to administer California’s human services programs. To reduce costs and increase efficiency, we recommend enactment of legislation establishing a goal of standardizing the state’s human services programs on no more than two automated systems. In addition, we recommend increasing legis- lative oversight of information technology consortia contracts that support these systems. Background The Department of Social Services oversees the administration of California’s social services programs. The actual delivery of services at the local level is carried out by 58 separate county welfare departments. Since the 1970s, the state has made various efforts to develop a single, statewide automated welfare system. County adMinistration and autoMation projECts County Administration and Automation Projects C 155 Legislative Analyst’s Office Establishment of the County Consortia Structure In the 1990s, the state was working with certain counties to develop an automation system which came to be known as ISAWS. At the same time, Los Angles County was pursuing its own system called the Los Angeles Eligibility Automated Determination, Evaluation, and Reporting System (LEADER). Meanwhile other counties came together to pursue their own automated systems. Each group was attempting to demonstrate that its system could be the one statewide system. There was active discussion about this in the 1995 budget hearings and the Legislature ultimately decided that one statewide system was not feasible. The 1995 Budget Act instructed the Health and Welfare Data Center (which is now called the Office of System Integration [OSI]) to collaborate with the County Welfare Directors’ Association (CWDA) on a consortia strategy for statewide welfare automation. Specifically, the Legislature required that there be no more than four county consortia, including ISAWS and LEADER. During the fall of 1995, OSI worked with CWDA and the counties to develop an agreement on the consortia systems and their member counties. They decided there would be two more consortia in addition to ISAWS and LEADER. An existing system, which included Bay Area counties, would be renamed CalWIN and the Merced County system would be renamed Consortium IV (C-IV). The remaining, unaligned counties selected the consortium they each wanted to join and the four county consortia were formed. Figure 1 shows the relative size of each consortium. Figure 1 California Welfare Automation Consortia 2007 Estimated Caseloada Consortium Number of Counties Cases Percentage CalWIN Counties 18 363,532 36% C-IV Counties 4 146,774 14 ISAWS Counties 35 166,097 16 LEADER (Los Angeles) 1 346,958 34 Totals 58 1,023,361 100% a Although certain consortia systems process many programs, this estimate is limited to CalWORKs and Food Stamps cases which are processed by all consortia. ISAWS = Interim Statewide Automated Welfare System LEADER = Los Angeles Eligibility Automated Determination, Evaluating, and Reporting System. C 156 Health and Social Services 2008-09 Analysis Consortia Systems Technology The technology used to develop large automated systems has evolved rapidly over the past 20 years. Several evolutionary cycles have greatly changed the way these systems function. Systems of the size and com- plexity of the consortia take years to complete and cannot be redesigned midstream in order to take advantage of evolving technology. Therefore, the technology employed to develop each consortia system reflects the time period during which the system was designed. The older systems do not have the ease of function and support commonly available with more current technology. Below we summarize the technology status of each consortium. ISAWS. The ISAWS was designed in the late 1980s and uses hardware and software that is nearing the end of vendor support. The programmers needed to support the software are not readily available because the pro- gramming language is not commonly used today. Therefore, programmers must be trained specifically for this purpose. In addition, the software must reside on hardware that is available from only one vendor and so it cannot be competitively replaced. The state enters into sole source contracts for this ISAWS support. LEADER. The Los Angeles County LEADER system uses the same technology as the ISAWS system. Over the years, Los Angeles County has entered into a number of sole source contracts to maintain and update its system. CalWIN. The technology used to develop CalWIN is referred to as client\/server. With this technology, the data is stored in a database on a large mainframe. This data interacts with an application on the desktop personal computer (PC). For client\/server systems, as the amount of soft- ware on the PC grows, the PC must also grow. Therefore, the PC’s capacity must be increased periodically via an upgrade or replacement. This drives up the cost of maintaining client\/server systems. C-IV. As use of the Internet increased, vendors began to develop ap- plications that could be accessed over the web, referred to as web enabled. Web enabled applications do not require special software on a PC to access the application like client\/server applications. At the time C-IV was being formulated, vendors also changed the way they develop large systems. Now a series of smaller applications are developed and each performs a discreet function or service. This is referred to as service-oriented architecture and it allows for system changes to be accomplished more quickly. The C-IV system takes advantage of these more current technolo- gies. This makes it easier to maintain and less expensive to adapt the C-IV system to process and regulatory changes. County Administration and Automation Projects C 157 Legislative Analyst’s Office Recent Re-Procurement Decisions ISAWS Migration to C-IV. With respect to the 35 ISAWS counties, the Legislature concluded that it was more efficient to consolidate ISAWS counties into the existing C-IV system, rather than procure a new system. This consolidation, approved by the Legislature in 2006, is known as the ISAWS Migration Project and has an estimated cost of $245 million over four years. In light of California’s budget deficit, the 2008\u201109 Governor’s Budget proposes to cancel the ISAWS Migration Project. The administra- tion has stated that it plans to resume this project when it can be accom- modated within the state budget. The outcome of this budget proposal is unknown at this time. LEADER: A New Procurement. As LEADER was approaching the end of its useful life, the initial (2005) procurement strategy was for Los Angeles to receive a replacement system based on either C-IV or CalWIN. In 2007 the county and the administration changed this approach to open the procurement to all viable vendor proposals. The Legislature approved this change, thus allowing Los Angeles to procure a new system. Where We Stand Today. California has four disparate welfare automa- tion systems. We view the proposed cancellation of the ISAWS migration to C-IV as a temporary delay on a path toward potentially three systems. Each of these systems processes caseload using different business processes, even though they each adhere to the same laws and program regulations. In addition, the consortia systems don’t talk to each other; meaning they do not share data, and caseload information cannot be transferred among consortia systems. These siloed business operations have further divided county human services operations across the state. How Many Consortia Systems in the Future? The 1995\u201196 Budget Act stated that there would be no more than four consortia. With the decision to move ISAWS to C-IV, the Legislature previously expressed a preference for reducing the number to three: C-IV, CalWIN, and Los Angeles. Benefits of Further Consolidation. Reducing the number of consor- tia reduces maintenance costs that are incurred because there are fewer systems that must be modified for regulatory and legislative changes. In addition, there are other administrative savings. Currently, when a client moves to another county with a different system, client information must be recreated. This increases workload and the opportunity for fraud. Hav- ing fewer systems reduces the frequency of this occurrence. While it is difficult to quantify total savings, reducing the number of consortia will result in ongoing annual savings for system changes that are currently costing between $10 million and $20 million per system. C 158 Health and Social Services 2008-09 Analysis Setting a Consolidation Goal. By setting a goal for reducing the number of consortia systems, the Legislature would provide clear guid- ance for future consortia system proposals. The administration could then make the appropriate plans for current consortia systems as they come to the end of their useful life. This could reduce the cost of future consortia planning activities. Legislative Oversight of Consortia Contracts Under Budget Control Section 11.00, state-managed information tech- nology (IT) projects must provide legislative notification 30 days prior to entering into a contract that will increase the project budget by 10 percent, or $500,000, whichever is less. This provides the Legislature an opportu- nity to review proposed contract terms and conditions. For some state IT projects, vendor contract terms have been renegotiated because of concerns expressed by the Legislature under Control Section 11.00 reviews. However, consortia procurements are conducted at the county level and, while the resulting contracts undergo OSI review, they can be entered into without any legislative notification and review. These county consortia contracts can exceed $100 million and have very limited legislative oversight. Given the substantial state investment in these consortia systems, we believe the Legislature should increase its oversight of consortia contracts. Analyst’s Recommendation Establish a Goal of Only Two Welfare Consortia Systems. We rec- ommend enactment of legislation which sets a goal to further standard- ize California’s welfare operations by ultimately reducing the number of consortia to two systems. As we discuss above, further consolidation can produce efficiencies and reduce system support costs. By moving in this direction, one-time development costs of $80 million (based on recent state experience) could be saved for each consortia system that is consolidated rather than replaced. Similarly, for each system that is consolidated, there are annual savings in the tens of millions of dollars for ongoing applica- tion maintenance. Enhance Legislative Oversight of County Consortia. Legisla- tive review of consortia contracts should be consistent with Control Section 11.00 requirements to provide 30-day legislative notification prior to contract signature. County consortia contracts are funded, in total, with state and federal funds. Accordingly, the Legislature should be afforded the opportunity to review the contractual arrangements that obligate those funds, consistent with state IT contracting procedures. Specifically we recommend amending Control Section 11.00 notification requirements to include county welfare consortia contracts. Community Care Licensing C 159 Legislative Analyst’s Office The Community Care Licensing (CCL) Division of the Department of Social Services (DSS) develops and enforces regulations designed to protect the health and safety of individuals in 24-hour residential care facilities and day care. The CCL oversees the licensing of about 86,000 facilities, including child care centers, family child care homes, foster family and group homes; adult residential facilities; and residential facilities for the elderly. Counties who have opted to perform their own licensing opera- tions monitor approximately 11,000 of these facilities. The Governor’s budget proposes total expenditures of $118.2 mil- lion ($37.3 million General Fund) for CCL in 2008-09. This is an increase of $1.7 million ($1.3 million General Fund) from the current year. These amounts include state operations and local assistance for the five coun- ties that perform their own licensing operations. Most of the increase is due to the extension of limited-term staff to complete a backlog of facility inspections. Proposed Reduction in Random Inspections Could Impact Compliance With Existing Statute The Governor’s budget proposes to reduce the Community Care Li- censing (CCL) random visits from 30 percent to 14 percent of facilities, resulting in estimated General Fund savings of $2.3 million in 2008-09. Under this proposal, the majority of facilities would receive an inspec- tion approximately once every seven years. We provide background information on existing inspection statutes, describe the potential impact of the proposed reduction on CCL’s ability to meet current law, and provide the Legislature with two alternatives. Current Law. The CCL Division of DSS performs different types of inspection visits to licensed facilities. Facilities with complaints filed against them or those with new applications receive prompt inspections. Those facilities that require close monitoring, due to their compliance history or because they care for developmentally disabled clients, receive CoMMunity CarE liCEnsing C 160 Health and Social Services 2008-09 Analysis annual inspections. Approximately 10 percent of community care facilities require these annual visits. The remaining 90 percent of community care facilities are subject to a routine unannounced inspection only if selected as part of a 30 percent random sample of facilities. This equates to about 21,300 facilities per year. In practice, this sampling procedure means that most of the licensed facili- ties in California would receive a routine visit once every three years. In addition to the 30 percent random inspection protocol, there is a separate statutory requirement that a community care facility be visited at least once every five years. Governor’s Proposal. The Governor’s budget proposes to reduce the current 30 percent random inspection protocol to 14 percent of facilities. This would result in a reduction of 33 positions and an estimated General Fund savings of $2.3 million in 2008-09, increasing to an annualized sav- ings of $4.7 million General Fund and 66 positions in the following year (these amounts include local assistance). Under this proposal, facilities with complaints would continue to receive prompt attention and those 10 percent of facilities that require close monitoring would continue to receive annual inspections. The remaining 90 percent of facilities would receive inspections at a substantially reduced frequency, as part of a 14 percent random sample of facilities. This proposal will require a change in statute, reducing the current random sample of unannounced visits from 30 percent to 14 percent of facilities. The Governor proposes to retain the existing statutory requirement to visit a facility at least once every five years. Reduced Random Inspections May Impact Compliance With Exist- ing Statute. Based on our review of CCL’s workload and staffing levels, we believe the proposed reduction in random inspections would result in a maximum of 70 percent of facilities receiving a visit at least once every five years. In other words, this proposed staffing level is sufficient to sup- port one facility visit every seven years. Thus, this proposal would be in conflict with the existing statutory requirement to visit every facility at least once every five years. Alternatives for Legislative Consideration. The proposed reduction to random inspections to community care facilities means that CCL would be unable to comply with the existing statute to visit a facility at least once every five years. To meet the current law standard, CCL would most likely ask for additional resources as it approaches 2013 (five years from now). The Legislature has two options for resolving this issue. First, the Legislature could reduce the current 30 percent random inspection level to 14 percent and amend the existing five-year statute to a minimum requirement of at least one facility visit every seven years. Second, the Legislature could raise Community Care Licensing C 161 Legislative Analyst’s Office the random inspection level from the Governor’s proposed 14 percent to 20 percent, to fund CCL at a level that corresponds with the existing five- year statute. This second alternative would reduce General Fund savings from $2.3 million to approximately $1.4 million. C 162 Health and Social Services 2008-09 Analysis Legislative Analyst’s Office FinDings anD recOmmenDatiOns Health and Social Services Analysis Page Department of Alcohol and Drug Programs C-19 n Reductions to Drug Diversion Programs Likely to Result in In\u2011 creased State Costs. Increase Item 4200\u2011105\u20110001 by $3.3 Million in the Current Year and $10 million in the Budget Year. Increase Item 4200\u2011101\u20110001 by $1.7 Million in the Current Year and $5.1 Million in the Budget Year. The Governor’s proposal to reduce Proposition 36 and drug court programs funding in the current and budget years is likely to result in offsetting increases in state criminal justice system and child welfare services costs, including state prison expenditures. Based on the demonstrated cost-effectiveness of these programs to the state, we recommend funding these programs at 2007\u201108 Budget Act spending levels. C-22 n Reductions to Proposition 36 and Drug Court Programs Could Be Offset With Other Funds. The Governor proposes to cut funding for Proposition 36 and drug court programs that have been shown to reduce overall state costs. We recommend the Legislature consider alternative funding sources for these substance abuse treatment ser- vices as follows: (1) redirecting advertising funds from the California Methamphetamine Initiative and (2) using a portion of proceeds from state and federal narcotic asset forfeitures. These alternative funding sources could help maintain current spending levels for cost-effective substance abuse treatment services. Department of Health Care Services (DHCS) C-30 n Overall Caseload Estimate Is Reasonable. Reduce Item 4260 \u2011 001\u2011 0001 by $12 ,980,000 and Reduce Item 4260\u2011001\u20110890 by $12,980,000. We find that the budget’s case- load estimate for the Medi-Cal Program is reasonable, but there are both upside and downside risk factors to the forecast that could result in the projection being overestimated or underestimated. We recommend delaying the implementation of a pilot program allowing Medi-Cal applicants to self-certify their income and assets for savings of $13 million General Fund. C 164 Health and Social Services 2008-09 Analysis Analysis Page C-34 n Proposed Rate Reductions Could Reduce Access to Care. Recom- mend that the Legislature not adopt the proposed reductions to any providers except hospitals, as these reductions may limit enrollees’ access to care in Medi-Cal and other health programs. Recommend that the Legislature shift federal funds for certain hospital payments to backfill General Fund spending for various other health programs. C-40 n Pay\u2011for\u2011Performance (P4P) Could Reduce Medical Costs and Im\u2011 prove Patient Care. Recommend the enactment of legislation directing DHCS to implement a statewide P4P program for Medi-Cal managed care. Further recommend the Legislature adopt supplemental report language directing DHCS to explore the feasibility of implementing P4P in fee-for-service Medi-Cal. C-49 n Providing HIV\/AIDS Medications Should Be a Prior\u2011 ity. Decrease Item 4260\u2011001\u20110001 by $2,655,000 and Increase Item 4264\u2011111\u20110001 by $2,655,000. Recommend that the Legislature allow the HIV\/AIDS Pharmacy Pilot to sunset June 30, 2008, and redirect the funds to the AIDS Drug Assistance Program. Department of Public Health (DPH) C-52 n Reforming Public Health Funding. The state’s existing system for administering and funding over 30 public health programs at the local level is fragmented, inflexible, and fails to hold local health jurisdic- tions (LHJs) accountable for achieving outcomes. This reduces the effectiveness of these programs because these services are not coor- dinated or integrated and LHJs cannot focus on meeting the overall goal of improving the public’s health. Recommend the consolidation of certain programs into a block grant and the enactment of legislation that would direct DPH to develop a model consolidated contract and outcomes and work with counties interested in using this approach. C-64 n Failure to Promulgate Regulations Leads to State Laws Not Being Enforced. The Legislature relies on departments to promulgate regu- lations to implement laws. The DPH is behind in its promulgation of regulations and; consequently, state laws are not being enforced or applied consistently across the state. Recommend the department report at budget hearings on its status in developing and promulgat- ing regulations. C-66 n Direct Sexual Health Services Should Be Priority. Reduce Item 4265\u2011001\u20110001 by $127,000. Increase Item 4265\u2011111\u20110001 by $127,000. The 2008-09 budget plan proposes $127,000 General Fund and one position to ensure that the state’s sexual health education programs are comprehensive and not based on abstinence-only. Recommend the delay of this proposal and redirect the proposed increase in funding Findings and Recommendations C 165 Legislative Analyst’s Office Analysis Page to offset budget-balancing reductions for teen pregnancy and sexual health services. Managed Risk Medical Insurance Board (MRMIB) C-68 n Withhold Recommendation on Budget\u2011Balancing Reductions. With- hold recommendation on the proposed budget-balancing reductions pending completion of rate and contract negotiations with the health plans. C-70 n Federal Funding for the Healthy Families Program (HFP) Expires in Budget Year. Federal funding for HFP expires in March 2009. In light of this funding uncertainty, recommend the Legislature enact legislation that directs how MRMIB should maintain HFP enrollment at a level that is consistent with funding. Developmental Services C-78 n Regional Center (RC) Estimate Fails to Take Into Account Increases in Costs and Utilization. Recommend the Legislature take into account that in the budget year RCs are likely underbudgeted by as much as $113 million General Fund. Department of Mental Health C-82 n Sexually Violent Predator (SVP) Caseload Likely to Be Below Pro\u2011 jected Levels. Reduce Item 4440\u2011011\u20110001 by $12.6 in the Current Year and $13.8 Million in the Budget Year. Updated caseload data indicate that the amount of General Fund needed for support of the state hospital system is likely to be overstated in both the current year and budget year. We recommend the Legislature recognize current- year savings of $12.6 million and budget-year savings of $13.8 million General Fund to reflect that the SVP caseload is unlikely to grow as fast as projected. C-83 n Mental Health Managed Care Caseload Possibly Overstated. Reduce Item 4440\u2011103\u20110001 by $2.5 Million. Our analysis of the Medi-Cal caseload shows that the Governor’s mental health managed care budget proposal is likely overstated in the budget year. Based on a reduction of 172,000 eligible mental health managed care beneficiaries, we recommend a corresponding reduction of $2.5 million in the budget year. We will monitor caseload trends and recommend any needed adjustments at the May Revision. C-84 n Expanded Efforts Could Reduce Cost of Mental Health Drugs. The cost of mental health drugs in the Medi-Cal Program continues to grow. We estimate the state can save about $5 million General Fund C 166 Health and Social Services 2008-09 Analysis Analysis Page annually by reducing inappropriate prescribing practices. Accord- ingly, we recommend the Legislature consider the following two options: (1) encourage county participation in the California Mental Health Care Management (CalMEND) Program and (2) expand the use of fixed annual allocations to counties that include the cost of prescription drugs. We further recommend the Legislature approve the Governor’s CalMEND proposal to support three limited-term positions and expand program activities. Department of Child Support Services (DCSS) C-91 n Increasing the Child Support Pass\u2011Through. We recommend delaying the Governor’s proposal to increase the child support pass-through from $50 to $100 until July of 2010. This saves $5.6 million in General Fund Revenue in 2008-09 and $11.2 million in 2009-10. C-93 n Revenue Losses Exceed Savings for Some Proposals. We recommend the rejection of the Governor’s budget balancing reductions where estimated General Fund revenue loss exceeds estimated savings. C-94 n Fiscal Risks of Delayed Single System Implementation. The DCSS applied for certification of a single statewide automation system. We review system implementation, certification, and the risks associated with a delay in federal certification. California Work Opportunity and Responsibility to Kids (CalWORKs) C-98 n Budget Underestimates Cost of CalWORKs Grant COLA. The Gover- nor’s budget provides $131 million to fund the CalWORKs cost-of-living adjustment (COLA) based on an estimated California Necessities Index (CNI) of 4.25 percent. Our review of the actual data indicate the CNI will be 5.26 percent, which raises the cost of the CalWORKs COLA by $31 million, to a total of $162 million. C-98 n Maintenance\u2011of\u2011Effort (MOE) and Caseload Reduction Credit (CRC). Pursuant to federal law, any spending above the federally required MOE level results in a CRC which reduces California’s work partici- pation requirement in the CalWORKs program. We review the MOE requirement, the impact of the recent federal guidance concerning the calculation of the credit, and forecast CRC through 2010-11. C-102 n Current Work Participation Requirement and Status. Federal law requires that states meet a work participation rate of 50 percent for all families and 90 percent for two-parent families, less a CRC. We esti- mate California’s work participation rate and find that absent policy changes, California is out of compliance with federal requirements. Findings and Recommendations C 167 Legislative Analyst’s Office Analysis Page C-105 n Governor’s Reforms Address Participation Shortfall and Achieve Budgetary Savings. In order to increase work partici- pation and achieve budgetary savings, the Governor proposes a series policy changes for the CalWORKs program. These are (1) a graduated full-family sanction that increases to 100 percent of the grant after one year in sanction status, (2) a five-year time limit on children whose parents cannot meet federal work participation requirements, (3) a nutritional supplement for working poor families, and (4) a five-year time limit for other child-only cases. We review the Governor’s proposals and comment on them. C-113 n Alternatives to the Governors Proposal. Pre-assistance programs focusing on preparing recipients to enter the labor force within four months and a community service requirement for adults who have received five years of assistance are two policies which would in- crease participation with less budgetary savings than the Governor. We discuss these alternatives, estimate their impacts, and present an alternative package of CalWORKs reforms which meet the anticipated work participation shortfall. Child Welfare Services (CWS) C-118 n Reduction in CWS Allocations to Counties. The budget proposes to reduce CWS county allocations, resulting in General Fund savings of $83.7 million in 2008-09. We describe the potential impact of this pro- posed reduction on social worker caseloads and possible subsequent policy consequences resulting from fewer resources. We provide three alternatives to the Governor’s proposal that more narrowly target the reductions in CWS expenditures. C-124 n Rethinking the Future of CWS Automation. The Governor’s budget proposes to spend another $247 million over the next seven years to procure a new Child Welfare computer system to meet additional business requirements. Our review indicates that the requirements can be met by updating the current system. We recommend cancelling the New System project and updating the current system, resulting in total (all funds) savings of $184 million over the next seven years. Foster Care C-129 n Reduction to Foster Care Rates. The budget proposes to reduce most Foster Care, Adoption Assistance, and Kinship Guardianship Assistance Payment (Kin-GAP) rates by 10 percent, effective June 1, 2008. This proposed reduction will save an estimated $6.8 million General Fund in the current year and $81.5 million General Fund in 2008-09. We pro- vide background information on existing rates and describe potential impacts of the proposed reductions on the supply of care providers. In addition, we present two alternatives to the Governor’s proposal. C 168 Health and Social Services 2008-09 Analysis Analysis Page Supplemental Security Income\/State Supplementary Program C-134 n Budget Deletes State Cost\u2011of\u2011Living Adjustments (COLAs). The Governor’s budget proposes to delete the June 2008 and 2009 state statutory COLAs and pass-through the federal COLAs. The Governor estimates that the deletion of these COLAs will result in savings of $23.3 million in 2007-08, and $300.3 million in 2008-09. Based on more recent data, we estimate savings in 2008-09 will increase by $5.3 mil- lion to a total of $305.6 million in the budget year. In-Home Supportive Services (IHSS) C-139 n Reducing Domestic and Related Care Service Hours for IHSS Re\u2011 cipients. The Governor’s budget includes General Fund savings of about $120 million by proposing to reduce the hours of IHSS domestic and related care services by 18 percent, and reduce county adminis- trative funding and workload. We highlight the key features of the Governor’s proposal, present some concerns, and provide alternatives for achieving savings. C-146 n Improving IHSS Workforce Through Tiered Wages. Although IHSS wages represent a significant cost to the state, current law grants local county boards the flexibility to establish IHSS wage levels and require- ments for providers who choose to be listed on county registries. In order to improve the IHSS labor force and services to recipients, we recommend, prior to 2010-11, enactment of legislation to modify the structure for state participation in wages to reflect the training and tenure of IHSS providers. County Administration and Automation Projects C-154 n The Future of County Welfare Automation Consortia. To reduce costs and increase efficiency, we recommend enactment of legisla- tion establishing a goal of standardizing the state’s human services programs on no more than two automated systems. In addition, we recommend increasing legislative oversight of information technology consortia contracts that support these systems. Community Care Licensing (CCL) C-159 n Reduction in Random Inspections. The budget proposes to reduce CCL random visits from 30 percent to 14 percent of facilities, resulting in estimated General Fund savings of $2.3 million in 2008-09. We provide background information on exist- ing inspection statutes, describe the potential impact of the proposed reduction on CCL’s ability to meet current law, and provide the Leg- islature with two alternatives. Overview Caseload Trends Spending by Major Program Major Budget Changes Department of Alcohol and Drug Programs Department of Health Care Services Department of Public Health Managed Risk Medical Insurance Board Developmental Services Department of Mental Health Department of Child Support Services California Work Opportunity and Responsibility to Kids Child Welfare Services Foster Care Supplemental Security Income\/State Supplementary Program In-Home Supportive Services County Administration and Automation Projects Community Care Licensing ”

” 2007-08 Analysis LAO 65 YEARS OF SERVICE Legislative Analyst’s Office Major Issues Health and Social Services CalWORKs Sanction and Time Limit Proposals Not Necessary to Avoid Federal Penalties In order to increase work participation to avoid federal penalties, the Governor proposes new time limits and sanctions on chil- dren whose parents cannot or will not comply with CalWORKs work participation requirements. However, under the budget’s own assumptions, California will meet federal participation re- quirements by FFY 2008. Thus, these policy changes are not needed to avoid federal penalties, and we recommend their rejection. We offer an alternative to the Governor’s full-family sanction proposal (see pages C-124 and C-132). Enhancing In-Home Supportive Services (IHSS) Program Integrity IHSS recipients are assigned hours of service by their social worker. Because there is no explicit prohibition on reallocat- ing hours across tasks or weeks, recipients may believe that the hours they receive are flexible and treat them as a block grant. We make several recommendations that clarify IHSS program expectations and increase the likelihood that IHSS recipients will receive the care they need to avoid nursing home placement (see page C-142). Redirect SSI\/SSP COLA Funds to CalWORKs For 2007-08, the budget proposes to provide COLAs for SSI\/ SSP recipients whose grants are currently above the federal poverty guideline, while it suspends COLAs for CalWORKs families whose grants are currently below the guideline. To more effectively utilize General Fund resources to reduce poverty, we recommend redirecting $124 million of the funds proposed for the SSI\/SSP COLA to provide the CalWORKs COLA (see page C-19). \uf0fe \uf0a7 \uf0fe \uf0a7 \uf0fe \uf0a7 C – \ufffd Health and Social Services 2007-08 Analysis Governor’s Health Care Reform Proposal Has Both Merit and Risks The Governor has announced a comprehensive health care reform proposal aimed at ensuring that all Californians have health care coverage. While not reflected in the budget plan, the proposal is an important starting point for discussions on health care expansion in California, although it contains a number of fiscal risks and uncertainties. (See Part V of The 2007-08 Budget: Perspectives and Issues.) Short Term Savings in Proposition 36 Could Result in Long Term Costs We review the administration’s proposal for a net reduction of $25 million for Proposition 36 programs, discuss why this reduction might eventually result in increased prison costs, and recommend redirecting funds in order to support Proposi- tion 36 programs at their current level (see page C-29). Department of Public Health Reorganization: Cost Neutrality Uncertain The budget plan implements Chapter 241, Statutes of 2006 (SB 162, Ortiz) that creates a new Department of Public Health (DPH) and Department of Health Care Services (DHCS) from the existing Department of Health Services. We recommend the Legislature require the administration provide additional information to ensure cost neutrality as required under Chapter 241 (see page C-63). Data Match Increases Veterans’ Access to Benefits and Reduces State Costs We estimate a shift of veterans from Medi-Cal to the federal Vet- erans Administration (V.A.) health system could save the state up to $250 million annually, while providing those veterans with quality health care services. We recommend that California join 42 other states participating in a federal data matching process that would facilitate achieving these goals (see page C-42). \uf0fe \uf0a7 \uf0fe \uf0a7 \uf0fe \uf0a7 \uf0fe \uf0a7 Legislative Analyst’s Office Table of ConTenTs Health and Social Services Overview………………………………………………………………………. C-7 Crosscutting Issues…………………………………………………….. C-19 Evaluating.COLAs.for.Cash.Assistance.Programs…. C-19 Departmental Issues…………………………………………………… C-27 Alcohol.and.Drug.Programs.(4200)………………………… C-27 Medi-Cal.(4260)……………………………………………………… C-36 Department.of.Public.Health.(4265)……………………….. C-61 Developmental.Services.(4300)………………………………. C-81 Department.of.Mental.Health.(4440)……………………… C-95 Department.of.Rehabilitation.(5160)…………………….. C-105 Department.of.Child.Support.Services.(5175)………. C-107 California.Work.Opportunity.and.. . Responsibility.to.Kids.(5180)……………………………..C-113 In-Home.Supportive.Services………………………………. C-137 C – \ufffd Health and Social Services 2007-08 Analysis Supplemental.Security.Income\/. . State.Supplementary.Program………………………….. C-153 Child.Welfare.Services………………………………………….. C-157 Community.Care.Licensing………………………………….. C-168 Findings and Recommendations……………………………… C-171 Legislative Analyst’s Office Overview Health and Social Services Compared to the prior year, proposed General Fund spending for health and social services programs in 2007\u201108 remains essentially unchanged at approximately $29.9 billion (an increase of 0.2 percent). This tiny increase in spending is due primarily to a variety of caseload and cost increases that are offset by reductions in the California Work Opportunity and Responsibility to Kids (CalWORKs) grant payments for children, a shift of Proposition 98 funds for CalWORKs child care, and federal penalty relief in child support automation. The Governor’s proposed health care reform is not reflected in the budget plan. ExpEnditurE proposal and trEnds Budget Year..The.budget.proposes.General.Fund.expenditures.of.$29.9.bil- lion.for.health.and.social.services.programs.in.2007-08,.which.is.29.percent. of. total.proposed.General.Fund.expenditures..Figure.1. (see.next.page). shows.health.and.social.services.spending.from.2000-01.through.2007-08.. The.proposed.General.Fund.budget.for.2007-08.is.$55.million.(0.2.percent). above.estimated.spending.for.2006-07..Special.funds.spending.for.health. and.social. services. is.proposed. to. increase.by.$1.4.billion. (21.percent). to. about.$8.1.billion..Most.of.this.special.funds.growth.is.due.to.an.increase.in. revenues.dedicated.by.Proposition.63.for.mental.health.services. Historical Trends..Figure.1.shows.that.General.Fund.expenditures. (current.dollars).for.health.and.social.services.programs.are.projected.to. increase.by.$10.1.billion,.or.51.percent,.from.2000-01.through.2007-08..This. represents.an.average.annual.increase.of.6.percent..Similarly,.combined. General.Fund.and.special.funds.expenditures.are.projected.to.increase.by. about.$13.9.billion.(58.percent).from.2000-01.through.2007-08,.an.average. annual.growth.rate.of.6.7.percent.. Adjusting for Inflation..Figure.1.also.displays.the.spending.for.these. programs.adjusted.for.inflation.(constant.dollars)..On.this.basis,.General. Fund.expenditures.are.estimated.to.increase.by.23.percent.from.2000-01. C 8 Health and Social Services 2007-08 Analysis Figure 1 Health and Social Services Expenditures Current and Constant Dollars 2000-01 Through 2007-08 (In Billions) Constant 2000-01 Dollars Total State Spending General Fund Spending Percent of General Fund Budget Special Funds General Fund Current Dollars 5 10 15 20 25 30 35 $40 00-01 02-03 04-05 06-07 5 15 25 35% 00-01 07-08 Proposed through.2007-08,.an.average.annual.rate.of.3.percent..Compared.to.the. prior.year,.General.Fund.spending.for.2007-08.is.proposed.to.decline.by. 2.4.percent.in.constant.dollars..Combined.General.Fund.and.special.funds. expenditures.are.estimated. to. increase.by.29.percent.during. this.same. period,.an.average.annual.increase.of.3.7.percent. CasEload trEnds Caseload.trends.are.one.important.factor.driving.health.and.social. services. expenditures.. Figures.2. and.3. illustrate. the. budget’s. projected. caseload.trends.for.the.largest.health.and.social.services.programs..Fig- ure.2.shows.Medi-Cal.caseload.trends.over.the.last.decade,.divided.into. four.groups:.(1).families.and.children,.(2).refugees.and.undocumented. persons,.(3).disabled.beneficiaries,.and.(4).aged.persons.(who.are.primarily. recipients.of.Supplemental.Security.Income\/State.Supplementary.Program. [SSI\/SSP])..Figure.3.shows.the.caseloads.for.CalWORKs.and.SSI\/SSP. Medi\u2011Cal Caseload..The.Governor’s.budget.plan.assumes.that. the. current.year.caseload.for.Medi-Cal.will.fall.short.by.almost.71,000.indi- viduals,.or.1.percent.of.the.number.assumed.in.the.2006\u201107 Budget Act.. Legislative Analyst’s Office Overview C \ufffd Legislative Analyst’s Office Figure 2 Budget Forecasts Continued Growth in Medi-Cal Caseloads 1997-98 Through 2007-08 (In Millions) 1 2 3 4 5 6 7 8 97-98 99-00 01-02 03-04 05-06 07-08 Aged Disabled Refugees\/ Undocumented Persons Families\/ Children Figure 3 CalWORKs Caseload to Decline SSI\/SSP Caseloads Increasing Slightly 1997-98 Through 2007-08 (In Millions) 0.2 0.4 0.6 0.8 1.0 1.2 1.4 97-98 99-00 01-02 03-04 05-06 07-08 CalWORKs SSI\/SSP C 10 Health and Social Services 2007-08 Analysis As.shown.in.Figure.2,.the.Governor’s.budget.plan.assumes.that.a.modest. increase.in.caseload.will.occur.during.the.budget.year.in.the.Medi-Cal. Program..Specifically,.the.overall.caseload.is.expected.to.increase.by.about. 107,000.average.monthly.eligibles.(1.6.percent).to.a.total.of.about.6.7.mil- lion.in.2007-08..This.would.be.a.higher.pace.of.growth.than.the.minimal. growth.projected.for.2006-07..The.caseload.projections.for.2007-08.take. into.account.Medi-Cal.enrollment.procedure.changes.mandated.by.Chap- ter.328,.Statutes.of.2006.(SB.437,.Escutia),.to.implement.a.two-county.pilot. program.allowing.for.self-certification.of.income.and.assets..This.change. is.expected.to.result.in.a.caseload.increase.of.almost.16,500.individuals. in.2007-08..The.Medi-Cal.budget.proposal.also.reflects.growth.in.several. eligibility.categories,.primarily.medically.needy.beneficiaries.and.welfare. families. Healthy Families Program (HFP) Caseload..The.Governor’s.budget. plan.assumes.that.the.current-year.enrollment.for.HFP.will.fall.short.by. about.17,000.children.compared.to.the.number.assumed.in.the.2006\u201107 Budget Act..However,.the.spending.plan.further.assumes.that.the.program. caseload.will.increase.by.about.74,000.children,.or.almost.9.percent,.during. the.budget.year..Of.this.increase,.about.13,000.children.are.forecast.to.be. due.to.the.implementation.of.SB.437.which.will.allow.the.self-certifica- tion.of.income.at.annual.eligibility.review.beginning.January.1,.2008..The. budget.proposal.estimates.that.a.total.of.almost.916,000.children.will.be. enrolled.in.HFP.as.of.June.2008. The CalWORKs and SSI\/SSP Caseloads..Figure.3.shows.the.case- load.trend.for.CalWORKs.and.SSI\/SSP..The.SSI\/SSP.cases.are.reported. as.individual.persons,.while.CalWORKs.cases.are.primarily.families..For. 2007-08,.the.budget.assumes.that.CalWORKs.will.serve.just.over.1.million. individuals.. As.Figure.3.shows,.the.CalWORKs.caseload.declined.steadily.from. 1997-98,.essentially.bottoming.out.in.2003-04..This.period.of.substantial. CalWORKs. caseload. decline. was. due. to. various. factors,. including. the. improving.economy,.lower.birth.rates.for.young.women,.a.decline.in.legal. immigration.to.California,.and,.since.1999-00,.the.impact.of.CalWORKs. program. interventions. (including. additional. employment. services).. In. 2004-05.the.caseload.experienced.its.first.year-over-year.increase.(about. 2.percent). in.almost.a.decade.. In.2005-06. the.caseload. resumed. its.de- cline,.about.3.percent..For.2006-07.the.budget.projects.a.modest.decline.of. 1.5.percent..In.2007-08,.the.caseload.is.projected.to.drop.by.about.12.percent. mostly.due.to.policy.proposals.which.(1).increase.sanctions.on.families. where.the.parents.do.not.meet.program.participation.requirements.and. (2).impose.new.time.limits.on.children.. Legislative Analyst’s Office Overview C 11 Legislative Analyst’s Office The.SSI\/SSP.caseload.can.be.divided.into.two.major.components\u2014the. aged.and.the.disabled..The.aged.caseload.generally.increases.in.proportion. to.increases.in.the.eligible.population\u2014age.65.or.older.(increasing.at.about. 1.5.percent.per.year)..This.component.accounts.for.about.30.percent.of.the. total.caseload..The.larger.component\u2014the.disabled.caseload\u2014typically. increases.by.just.under.3.percent.per.year..Since.1998,.the.overall.caseload. has. been. growing. moderately,. between. 2.percent. and. 2.5.percent. each. year..For.2006-07.and.2007-08,. the.budget. forecasts.caseload.growth.of. 2.3.percent.and.2.1.percent.respectively. spEnding by Major prograM Figure.4.(see.next.page).shows.expenditures.for.the.major.health.and. social. services. programs. in. 2005-06. and. 2006-07,. and. as. proposed. for. 2007-08..As.shown.in.the.figure,.three.major.benefit.payment.programs\u2014 Medi-Cal,. CalWORKs,. and. SSI\/SSP\u2014account. for. a. large. share. (about. 66.percent).of.total.spending.in.the.health.and.social.services.area.. As.Figure.4.shows,.General.Fund.spending.is.proposed.to.increase.in. all.major.health.programs.except.for.community.mental.health.services.. The. decrease. in. community. mental. health. services. spending. between. 2006-07.and.2007-08.is.due.primarily.to.a.prior-year.deficiency.of.$243.mil- lion. General. Fund. in. the. Early. and. Periodic. Screening. Diagnosis. and. Treatment.program.that.significantly.increases.the.current-year.funding. request. In.regard.to.major.social.services.programs,.General.Fund.support. will.increase.for.SSI\/SSP.(9.9.percent).and.In-Home.Supportive.Services. (1.9.percent).. Conversely,. the. budget. proposes. to. reduce. General. Fund. support.for.Child.Welfare.Services\/Foster.Care.(-6.percent),.Child.Support. Services.(-48.percent),.and.CalWORKs.(-34.percent)..Overall,.the.budget. proposes.to.decrease.General.Fund.spending.on.social.services.by.about. $560.million.(5.8.percent).compared.to.2006-07..Most.of.this.year-over-year. savings.is.in.CalWORKs.and.child.support,.as.discussed.below. In.contrast,.most.health.programs.would.be.funded.in.a.way.that.is. consistent.with.existing.eligibility,.benefits,.and.other.requirements,.and. recent.legislation.expanding.Medi-Cal.and.HFP.caseloads. C 12 Health and Social Services 2007-08 Analysis Figure 4 Major Health and Social Services Program Budget Summarya (Dollars in Millions) Change From 2006-07 Actual 2005-06 Estimated 2006-07 Proposed 2007-08 Amount Percent Medi-Cal General Fund $12,362.9 $13,648.9 $14,656.7 $979.8 7.2% All funds 31,463.6 35,415.5 37,341.1 1,914.2 5.4 CalWORKs General Fund $1,962.8 $2,014.2 $1,323.6 -$690.6 -34.3% All funds N\/A 5,118.4 5,006.7 -111.7 -2.2 Foster Care\/Child Welfare Services General Fund N\/A $1,245.6 $1,171.2 -$74.4 -6.0% All funds N\/A 4,052.0 4,076.3 24.3 0.6 SSI\/SSP General Fund $3,427.3 $3,542.8 $3,892.9 $350.1 9.9% All funds 8,429.5 8,729.5 9,395.2 665.7 7.6 In-Home Supportive Services General Fund $1,355.4 $1,443.7 $1,471.4 $27.7 1.9% All funds 3,937.7 4,274.0 4,373.5 99.5 2.3 Regional Centers\/Community Services General Fund $1,831.3 $2,142.1 $2,188.6 $46.5 2.2% All funds 2,884.3 3,314.7 3,566.0 251.3 7.6 Community Mental Health Services General Fund $313.6 $1,026.7 $762.9 -$263.8 -25.7% All funds 1,817.8 2,863.9 3,425.9 562.0 19.6 Mental Hospitals\/Long-Term Care Services General Fund $802.1 $1,030.0 $1,132.3 $102.3 9.9% All funds 892.6 1,105.0 1,233.8 128.8 11.7 Healthy Families Program General Fund $316.7 $359.7 $392.2 $32.5 9.0% All funds 875.2 1,014.5 1,090.2 75.7 7.5 Child Support Services General Fund $459.1 $521.9 $274.0 -$247.9 -47.5% All funds 972.2 1,138.3 744.6 -393.7 -34.6 a Excludes administrative headquarters support. N\/A=not available. Legislative Analyst’s Office Overview C 13 Legislative Analyst’s Office Major budgEt ChangEs Figures.5.and.6.(see.next.page).illustrate.the.major.budget.changes. proposed.for.health.and.social.services.programs.in.2006-07..(We.include. the.federal.Temporary.Assistance.for.Needy.Families.[TANF].funds.for. CalWORKs.because,.as.a.block.grant,.they.are.essentially.interchangeable. with.state.funds.within.the.program.).Most.of.the.major.changes.can.be. grouped.into.five.categories: (1).funding.caseload.changes,.(2).suspending. certain.welfare.cost-of-living.adjustments.(COLAs),.(3).funding.shifts,.(4). federal.penalty.relief,.and.(5).other.policy.changes. Caseload Changes..The.budget.funds.caseload.changes.in.the.major. health.and.social.services.programs..For.example,.the.Medi-Cal.budget.re- duces.spending.for.lower-than-anticipated.caseload.in.the.current.year.but. adds.resources.for.the.cost.of.caseload.increases.expected.in.the.budget.year.. Also,.the.Medi-Cal.budget.would.be.adjusted.upward.by.$465.million.for. significant.growth.in.the.baseline.costs.and.utilization.of.services.by.vari- ous.groups.of.eligibles,.but.especially.the.aged.and.disabled..General.Fund. support.for.regional.centers.(RCs).that.serve.the.developmentally.disabled. would.continue.to.grow.due.mainly.to.caseload.growth.and.utilization. increases.in.these.services..Funding.would.be.adjusted.downward.in.the. current.year.for.HFP.to.reflect.lower.than.anticipated.caseload.in.2006-07,. but.increased.in.the.budget.year.for.anticipated.strong.caseload.growth.. Cash Grant COLAs. Pursuant. to.current. law,. the.budget.provides. $217.million.to.fund.the.six-month.cost.of.January.2008.state.COLA.for. the.SSI\/SSP..The.budget.proposes.to.suspend.the.CalWORKs.July.2007. COLA,.resulting.in.a.cost.avoidance.of.$140.million..The.budget.does.not. provide.the.discretionary.Foster.Care.COLA.. Funding and Program Shifts. The.budget.proposes.to.spend.$269.mil- lion.in.Proposition.98.funds.on.CalWORKs.child.care..This.proposal.frees. up.TANF.child.care.funds.which.are.then.redirected.to.CalWORKs.grants,. creating.an.identical.General.Fund.savings.in.the.CalWORKs.program,. with.no.impact.on.service.levels..The.budget.achieves.additional.savings. ($56.million).by.using.TANF.funds.to.replace.General.Fund.expenditures. in.child.welfare.services..Increases.in.General.Fund.support.for.RCs.would. be.partly.offset.by.a.one-time.shift.of.Public.Transportation.Account.funds. ($144.million).to.pay.the.transportation.costs.of.RC.clients.that.previously. were.paid.for.with.General.Fund.. Elimination of Federal Child Support Penalty..In.2006-07,.the.state. budgeted.$220.million.to.pay.the.federal.penalty.for.the.state’s.failure.to. have.a.single.statewide.child.support.automation.system..The.Department. of.Child.Support.Services.requested.federal.certification.for.an.interim. automation.system.in.August.2006,.and.during.the.certification.process,. C 1\ufffd Health and Social Services 2007-08 Analysis all.penalties.are.held.in.abeyance..Accordingly,.the.budget.reflects.a.sav- ings.of.$220.million.related.to.this.penalty.relief.. Figure 5 Health Services Programs Proposed Major Changes for 2007-08 General Fund Requested: $14.7 billion Medi-Cal (local assistance) Increase: $1 billion (+7.2%) + $465 million from increases in caseload, costs and utilization of services, mainly for aged and disabled beneficiaries + $97 million from rate increases for certain skilled nursing facilities + $87 million from increased costs for premiums paid by Medi-Cal on behalf of beneficiaries who are also enrolled in the federal Medicare Program + $81 million from growth in the number of enrollees in Medi-Cal managed care $44 million from lower drug costs achieved through implementation of the federal Deficit Reduction Act of 2005 $23 million from the state paying lower Medicare Part D clawback payments to the federal government Requested: $2.2 billion Department of Developmental Services (local assistance) Increase: $46.5 million (+2.2%) + $46.5 million primarily for increases in regional center caseloads, and costs and utilization $144 million from using Public Transportation Account funds in lieu of General Fund for regional center transportation costs $44 million from drawing down a federal funds match for Intermediate Care Facilities services previously paid for with 100 percent General Fund Legislative Analyst’s Office Overview C 15 Legislative Analyst’s Office Figure 6 Social Services Programs Proposed Major Changes for 2007-08 General Fund Requested: $1.4 billion CalWORKs Decrease: $691 million (-34%) + $28 million for child care and services for families who comply with work requirements in response to the full-family sanction $17 million in grant savings for families who remain out of compliance and experience a full-family sanction $42 million for caseload decrease $269 million by using Temporary Assistance for Needy Families funds (freed up by a Proposition 98 shift to CalWORKs child care) to offset General Fund costs for grants $336 million from grant savings due to imposing a five-year time limit for children whose parents cannot or will not comply with work participation requirements Requested: $3.9 billion SSI\/SSP Increase: $350 million (+9.9%) + $217 million for providing the January 2008 state cost-of-living adjustment + $75 million for caseload increase Requested: $1.5 billion In-Home Supportive Services Increase: $28 million (+1.9%) + $79 million for caseload increase $45 million from full-year implementation of quality assurance initiative C 1\ufffd Health and Social Services 2007-08 Analysis Other Policy Changes Increasing CalWORKs Sanctions..Currently,.when.an.able-bodied. adult.does.not.comply.with.CalWORKs.participation.requirements,.the. family’s.grant.is.reduced.by.the.adult.portion,.resulting.in.a. child-only . grant..The.budget.proposes.a. full.family.sanction .whereby.the.reduced. grant.for.the.children.is.eliminated.if.an.adult.is.out.of.compliance.with. program.participation.requirements.for.three.months..In.response.to.this. increased.sanction,. the.budget.estimates. that.many. families.will.enter. employment,. resulting. in. child. care. and.employment. services. costs. of. $28.million..In.cases.where.families.do.not.comply,.the.budget.estimates. grant.and.administrative.savings.of.$17.million,.so. the.net.cost.of. this. proposal.is.about.$11.million.. Time Limits for Aided Children..Currently,.after.five.years.of.assis- tance,.a.family’s.grant.is.reduced.by.the.adult.portion,.and.the.children. continue.to.receive.a.child-only.grant.in.the.safety.net.program..The.bud- get.proposes.to.eliminate.the.safety.net.grant.for.children.whose.parents. fail.to.comply.with.the.federal.work.participation.requirements.(20.hours. per.week.for.families.with.a.child.under.age.6.or.30.hours.per.week.for. families.where.all.children.are.at.least.age.6)..The.budget.also.proposes. to.limit.assistance.to.five.years.for.most.other.child-only.cases.(such.as. those.with.parents.who.are.undocumented.or.ineligible.due.to.a.previous. felony.drug.conviction)..These.time.limit.policies.are.estimated.to.result. in.savings.of.about.$336.million.in.2007-08. Limit State Participation in IHSS Provider Wages..Under.current. law,.the.state.participates.in.IHSS.provider.wages.up.to.$11.10.per.hour. during.2006-07,.rising.to.$12.10.per.hour.in.2007-08..The.budget.proposes. to.freeze.state.participation.in.wages.to.the.level.provided.in.each.county. as.of.January.10,.2007..However,.the.administration.indicates.that.it.will. continue.to.participate.in.post.January.10,.2007.wage.increases,.until.its. urgency.legislation.proposal.prospectively.limiting.state.participation.is. enacted.by.the.Legislature..The.budget.scores.savings.of.$14.1.million.in. 2007-08. Department of Public Health (DPH)..Effective.July.1,.2007,.the.budget. plan. implements.Chapter.241,.Statutes.of.2006.(SB.162,.Ortiz),. that.cre- ates.a.new.DPH.and.Department.of.Health.Care.Services.(DHCS).from. the.existing.Department.of.Health.Services..The.DPH.will.administer.a. broad.range.of.public.and.environmental.health.programs.while.DHCS. will.administer.the.Medi-Cal.Program..This.change.is.intended.to.result. in. increased. accountability. and. improvements. in. the. effectiveness. of. public. health. programs. and. the. Medi-Cal. Program. by. allowing. each. department.to.administer.a.narrower.range.of.programs..The.legislation. Legislative Analyst’s Office Overview C 17 Legislative Analyst’s Office creating.the.two.new.departments.requires.that.the.change.be.cost.neutral. to.the.state.. Proposition 36 Programs..The.budget.proposes.a.net.reduction.of. $25.million. General. Fund. for. Proposition.36. drug. rehabilitation. pro- grams..This.would.be.achieved.by.reducing.funding.by.$60.million.for. the.Substance.Abuse.and.Treatment.Trust.Fund.(SATTF),.established.by. Proposition.36.. Funding. for. the. Substance. Abuse. Offender. Treatment. Program\u2014established. to. improve. the. outcomes. of. Proposition.36. Pro- grams\u2014would.increase.by.$35.million..The.increased.funding.would.be. used.for.drug.treatment.activities.that.are.not.permitted.under.Proposi- tion.36.and.cannot.be.funded.through.SATTF.. Eliminate Integrated Services for Homeless Adults With Serious Mental Illnesses..The.Governor’s.budget.plan.proposes.the.elimination. of.the.Integrated.Services.for.Homeless.Adults.with.Serious.Mental.Ill- nesses.program.in.order.to.reduce.state.costs.by.almost.$55.million.from. the.General.Fund..This.program.provides.funding.to.local.mental.health. agencies.that.coordinate.the.service.needs.of.individuals.who.have.a.seri- ous.illness.and.are.homeless,.or.are.at.risk.of.homelessness. Governor’s Proposal for Health Care Reform Independent From the Budget..On.January.8,.2007,.the.Governor.announced.a.health.care.reform. proposal.aimed.at.ensuring.that.all.Californians.have.health.care.coverage.. This.proposal.did.not.provide.a.timeline.for.implementation.and.is.not. reflected.in.the.budget.plan..However,.we.note.that.the.Governor’s.pro- posal.would.have.a.significant.impact.on.future.funding.for.state.health. programs.if.it.were.enacted.as.proposed. C 18 Health and Social Services 2007-08 Analysis Legislative Analyst’s Office CrOssCutting issues Health and Social Services For 2007\u201108, the Governor proposes to provide the statutory Janu\u2011 ary 2008 cost\u2011of\u2011living adjustment (COLA) for Supplemental Security Income\/State Supplementary Program (SSI\/SSP) recipients and suspend the July 2007 California Work Opportunity and Responsibility to Kids (CalWORKs) COLA for low\u2011income families with children. Under the Governor’s proposal, grants for SSI\/SSP recipients would move further above the federal poverty guideline while the grants for CalWORKs families would move further below the poverty guideline. In order to more effectively utilize General Fund resources to reduce poverty, we recommend redirecting $124.4 million of the funds proposed for the SSI\/SSP COLA to provide the CalWORKs COLA.. How Are COLAs Calculated? California Necessities Index (CNI)..Current.law.requires.that.Cal- WORKs.and.SSI\/SSP.grants.be.increased.each.year.by.the.percentage.in- crease.in.CNI..The.CNI.is.based.on.the.change.from.December.to.December. of.five.components.of.the.federal.consumer.price.index.(CPI)..By.statute,. the.five.components.are.food,.rent,.fuel\/utilities,.apparel,.and.transpor- tation..From.December.2005.to.December.2006,.the.weighted.average.of. the.costs.for.these.components.increased.by.3.7.percent,.based.on.actual. data.available.in.January.2007..(The.Governor’s.budget,.prepared.prior.to. the.release.of.this.price.data,.estimated.that.the.December.to.December. increase.in.CNI.would.be.4.2.percent). Evaluating Colas for Cash assistanCE prograMs C 20 Health and Social Services 2007-08 Analysis Timing of COLAs..The.statutory.COLA.for.CalWORKs.goes.into.effect. each.July,.the.start.of.the.fiscal.year..The.statutory.COLA.for.SSI\/SSP.is. provided.each.January,.along.with.the.federal.statutory.COLA,.resulting. in.a.six-month.cost.for.the.COLA..The.full-year.cost.of.the.SSI\/SSP.COLA. is.double.the.first.year.cost. Calculation of CalWORKs COLAs..The.CalWORKs.COLA.is.cal- culated.by.multiplying.the.CalWORKs.maximum.grant.by.the.change.in. CNI..The.CalWORKs.has.a.system.of.regionalized.grants..In.lower-cost. counties.(generally.inland.counties.with.lower.comparative.rental.costs),. the.grant.is.4.9.percent.less.than.in.higher-cost.counties..The.SSI\/SSP.COLA. calculation.is.more.complicated,.as.discussed.below. Calculation of the SSI\/SSP COLA..The.SSI\/SSP.grant.is.comprised. of.two.components,.a.federal.portion.known.as.SSI.(currently.$623.per. month.for.an.individual).and.a.state.portion.known.as.SSP.(currently.$233. per.month.for.an.individual)..There.are.separate.grant.levels.for.couples. and.for.other.living.situations.(for.example,.individuals.residing.in.non- medical.boarding.homes)..The.COLAs.are.funded.by.both.the.federal.and. state.governments..The.state.COLA.is.based.on.the.CNI.and.is.applied.to. the.combined.SSI\/SSP.grant..The.federal.COLA.(based.on.CPI.for.Urban. Wage.Earners.and.Clerical.Workers).is.applied.annually.to.the.SSI.portion. of.the.grant..The.remaining.amount.needed.to.cover.the.state.COLA.on. the.entire.grant.is.funded.with.state.monies. Governor’s Proposal The. Governor. proposes. to. provide. the. SSI\/SSP. COLA. and. to. sus- pend. the. state. CalWORKs. COLA.. Based. on. preliminary. estimates. of. CNI.(4.2.percent),.the.Governor’s.budget.reflects.a.cost.of.$216.7.million. to.provide.the.SSI\/SSP.COLA.and.a.cost.avoidance.of.$140.3.million.from. suspending. the. CalWORKs. COLA.. Based. on. the. actual. CNI. (3.7.per- cent),.the.cost.for.providing.the.SSI\/SSP.COLA.is.now.estimated.to.be. $171.6.million,. a. savings. of. $45.1.million. compared. to. the. Governor’s. budget.. Similarly,. the. cost. avoidance. from. suspending. the. CalWORKs. COLA.would.be.$124.4.million,.rather.than.the.$140.3.million.estimated. in.the.Governor’s.budget. Figure.1. shows. the. maximum. monthly. SSI\/SSP. and. CalWORKs. grants.in.2006-07.and.as.proposed.by.the.Governor.for.2007-08..The.grants. shown. reflect. the. actual. CNI. of. 3.7.percent. and. an. estimated. CPI. (the. basis.for.the.federal.SSI.COLA).of.1.4.percent..Pursuant.to.the.Governor’s. proposal. to.suspend.the.CalWORKs.COLA,.maximum.monthly.grants. remain.unchanged.for.CalWORKs.families,.however.food.stamps.benefits. Crosscutting Issues C 21 Legislative Analyst’s Office increase.due.to.federal.inflationary.adjustments..(The.SSI\/SSP.recipients. are.categorically.ineligible.for.food.stamps..The.CalWORKs.families.are. entitled. to. food. stamps,. and. their. estimated. maximum. allotments. are. included.in.Figure.1.) Figure 1 Maximum Monthly CalWORKs and SSI\/SSP Grants Governor’s Proposal 2006-07 and 2007-08 Change Program\/Recipient Type 2006-07 2007-08 Amount Percent SSI\/SSP Individual SSI $623 $632 $9 1.4% SSP 233 256 23 9.9 Totals $856 $888 $32 3.7% SSI\/SSP Couple SSI $934 $947 $13 1.4% SSP 568 611 43 7.6 Totals $1,502 $1,558 $56 3.7% CalWORKs Family of 3a CalWORKs grant $723 $723 \u2014 \u2014 Food Stamps 319 342 $23 7.2% Totals $1,042 $1,065 $23 2.2% CalWORKs Family of 3b CalWORKs grant $689 $689 \u2014 \u2014 Food stamps 334 358 $24 7.2% Totals $1,023 $1,047 $24 2.3% a High-cost county. b Low-cost county. The.CalWORKs.grants.shown.in.Figure.1.assume.that.the.state.will. successfully.appeal.the.Guillen.law.suit..For.a.more.detailed.discussion.of. the.potential.impact.of.the.Guillen.case.on.CalWORKs.grants,.please.refer. to.the. California.Work.Opportunity.and.Responsibility.to.Kids .section. in.this.chapter. C 22 Health and Social Services 2007-08 Analysis Comparing Grant Levels One.of.the.objectives.of.the.CalWORKs.and.SSI\/SSP.programs.is.to. provide.recipients.with.a.minimum.standard.of.living..One.way.of.assess- ing.whether.this.objective.is.being.achieved.is.to.compare.the.maximum. monthly.grants.with.the.federal.poverty.guideline..In.order.to.make.the. comparison.on.an.equal.basis,.maximum.food.stamps.allotment.must.be. added.to.the.CalWORKs.grant..Figure.2.compares.CalWORKs.and.SSI\/SSP. grants.to.the.poverty.guideline.from.1994-95.through.2007-08..Figure.2. shows.that.each.recipient.category.has.maintained.a.steady.relationship. with.respect.to.the.federal.poverty.guideline..By.this.measure,.SSI\/SSP. couples. have. faired. best,. as. their. maximum. grant. has. been. typically. between. 130.percent. and. 140.percent. of. the. federal. poverty. guideline.. (In.other.words,.the.purchasing.power.of.their.grant.was.30.percent.to. 40.percent.above.the.federal.poverty.level.).The.SSI\/SSP.individuals.faired. second.best,.with.their.maximum.grant.typically.between.99.percent.and. 107.percent.of. the. federal.guideline..The.CalWORKs. families.were. the. furthest.below.the.poverty.level,.with.combined.maximum.monthly.grant. and.food.stamps.benefits.typically.in.the.range.of.75.percent.to.80.percent. of.the.federal.poverty.guideline..Figure.3.summarizes.in.table.format,.the. relationship.of.each.grant.to.poverty.as.proposed.for.2007-08. Figure 2 Maximum Monthly Cash Assistance Payments As Percent of the Federal Poverty Guideline a Includes food stamps. 1994-95 Through 2007-08 20 40 60 80 100 120 140 160% 94-95 96-97 98-99 00-01 02-03 04-05 06-07 SSI\/SSP Couple SSI\/SSP Individual CalWORKs Family of Threea Crosscutting Issues C 23 Legislative Analyst’s Office Targeting Anti-Poverty Funds COLA Funding.. As. discussed. above,. the. Governor’s. budget. sus- pends.the.CalWORKs.COLA.and.includes.$217.million.for.the.SSI\/SSP. COLA,.based.on.an.estimated.CNI.of.4.2.percent..Given.the.actual.CNI. of.3.7.percent,.however,.the.cost.of.the.SSI\/SSP.COLA.has.been.reduced. to.$171.6.million..Funding.of.cash.assistance.COLAs.is.a.policy.decision. for.the.Legislature..We.discuss.an.approach.to.targeting.these.funds.in. tough.budget.times.below. Figure 3 Maximum Monthly CalWORKs and SSI\/SSP Grants Compared to Estimated Federal Poverty Guideline 2007-08 Program\/Recipient Type Maximum Monthly Benefit Estimated Poverty Guidelinea Percent of Estimated Poverty Guideline SSI\/SSP individual $888 $851 104% SSI\/SSP couple 1,557 1,141 137 CalWORKs family of 3, high-cost countyb 1,065 1,430 74 CalWORKs family of 3, low-cost countyb 1,047 1,430 73 a 2007 federal poverty guideline. b The CalWORKs benefit includes maximum food stamps allotment. Legislative Analyst’s Office (LAO) Approach.. Given. the. state’s. fiscal.condition,.our.approach.to.allocating.assistance.payment.COLAs. would.be.to.target.the.funds.to.reduce.poverty..Specifically,.additional. resources.would.be.provided.first.to.CalWORKs.families.(who.are.well. below.poverty),.second.to.SSI\/SSP.individuals.(who.are.just.above.the.pov- erty.guideline),.and.third.to.SSI\/SSP.couples.(who.are.significantly.above. the.poverty.guideline)..Using. the.$171.6.million.as.a.budget.guideline,. greater.poverty.alleviation.could.be.achieved.by.redirecting.$124.4.mil- lion.to.provide.a.3.7.percent.CalWORKs.COLA,.and.using.the.remaining. $47.2.million.to.provide.a.1.9.percent.COLA.for.SSI\/SSP.individuals..The. SSI\/SSP.couples.would.receive.the.pass.through.of.the.federal.COLA,.but. no.separate.state.COLA. Comparing the LAO Approach to the Governor’s Proposal..Figure.4. (see. next. page). compares. the. costs. and. benefits. of. the. LAO. approach,. described.above.to. the.Governor’s.proposal..As. the. top.portion.of.Fig- C 2\ufffd Health and Social Services 2007-08 Analysis ure.4.shows,.under.the.LAO.approach,.benefits.are.higher.for.CalWORKs. families.and.lower.for.SSI\/SSP.recipients.than.under.the.Governor’s.ap- proach..The.bottom.portion.of.the.figure.compares.the.fiscal.impact..Both. approaches.have.identical.General.Fund.costs.of.$171.6.million.in.2007-08.. However,.in.2008-09,.the.LAO.approach.costs.less.than.the.Governor’s.. This.is.because.the.SSI\/SSP.COLA.is.provided.in.January.of.2008,.result- ing.in.six.months.of.costs..The.costs.for.2008-09.for.the.SSI\/SSP.COLA. double.to.account.for.a.full-year.of.paying.higher.benefits..Because.the. CalWORKs.COLA.is.provided.in.July.2007.for.an.entire.fiscal.year,.there. is.no.corresponding.increase.in.2008-09. Figure 4 Comparison of Governor’s Budget and LAO Approach to Providing Cash Assistance COLAs DifferenceGovernor’s Proposal LAO Approach Amount Percent Benefit Levels CalWORKs Benefita $1,065 $1,080 $15 1.4% Compared to poverty 74% 75% SSI\/SSP Individuals 888 872 -16 -1.8 Compared to poverty 104% 102% SSI\/SSP Couples 1,558 1,515 -43 -2.8 Compared to poverty 137% 133% Fiscal Impacts (Dollars in Millions) General Fund cost 2007-08 CalWORKs \u2014 $124.4 $124.4 \u2014 SSI\/SSP $171.6 47.2 -124.4 -72.5% Totals $171.6 $171.6 \u2014 \u2014 General Fund cost 2008-09 CalWORKs \u2014 $124.4 $124.4 \u2014 SSI\/SSP $343.2 94.4 -248.8 -72.5% Totals $343.2 $218.8 -$124.4 -36.2% a The CalWORKs family of 3, high-cost county. Crosscutting Issues C 25 Legislative Analyst’s Office Analyst’s Recommendation In.order.to.more.effectively.utilize.General.Fund.resources.to.reduce. poverty,.we.recommend.redirecting.$124.4.million.of.the.funds.proposed. for.the.SSI\/SSP.COLA.to.provide.the.CalWORKs.COLA..With.the.remain- ing.$47.2.million,.we.recommend.providing.a.partial.COLA.to.SSI\/SSP. individuals,.while.passing.through.the.federal.COLA.for.both.individuals. and.couples..This.approach.is.budget.neutral.in.2007-08.and.results.in.out- year.savings.of.about.$124.million.compared.to.the.Governor. California Work Opportunity and Responsibility to Kids C 113 Legislative Analyst’s Office In. response. to. federal. welfare. reform. legislation,. the. Legislature. created. the. California. Work. Opportunity. and. Responsibility. to. Kids. (CalWORKs).program,.enacted.by.Chapter.270,.Statutes.of.1997.(AB.1542,. Ducheny,.Ashburn,.Thompson,.and.Maddy)..Like.its.predecessor,.Aid.to. Families.with.Dependent.Children.(AFDC),.the.new.program.provides. cash.grants.and.welfare-to-work.services.to.families.whose.incomes.are.not. adequate.to.meet.their.basic.needs..A.family.is.eligible.for.the.one-parent. component.of.the.program.if.it.includes.a.child.who.is.financially.needy. due.to.the.death,.incapacity,.or.continued.absence.of.one.or.both.parents.. A.family.is.eligible.for.the.two-parent.component.if.it.includes.a.child.who. is.financially.needy.due.to.the.unemployment.of.one.or.both.parents. The. budget. proposes. an. appropriation. of. $4.9.billion. ($1.4.billion. General.Fund,.$136.million.county.funds,.$35.million.from.the.Employ- ment.Training.Fund,.and.$3.4.billion.federal.funds).to.the.Department.of. Social.Services.(DSS).for.the.CalWORKs.program.in.2007-08..In.total.funds,. this.is.a.decrease.of.$207.million,.or.4.4.percent,.compared.to.estimated. spending.of.$5.1.billion.in.2006-07..This.decrease.is.primarily.attributable. to.estimated.savings.from.the.Governor’s.proposed.policy.changes.to.es- tablish.time.limits.for.children.whose.parents.cannot.or.will.not.comply. with.participation.requirements. General.Fund.spending.for.2007-08.is.proposed.to.be.$690.million,. 34.percent,.less.than.estimated.spending.for.2006-07..This.substantial.re- duction.is.due.to.(1).the.savings.from.the.proposed.time-limit.policy.noted. above.and.(2).shifting.$269.million.in.Proposition.98.funds.to.CalWORKs. child.care..For.a.discussion.of.this.fund.shift,.please.see.the. Proposition. 98. Priorities . write-up. within. the. Crosscutting. Issues . section. of. the. Education .chapter.of.this.Analysis.. California worK opportunity and rEsponsibility to Kids (5180) C 11\ufffd Health and Social Services 2007-08 Analysis budgEt suspEnds statutory Cola By suspending the statutory cost\u2011of\u2011living adjustment (COLA), the budget achieves a cost avoidance of $124.4 million. Current. law. requires. that. the. CalWORKs. grant. be. adjusted. each. July.based.on.the.change.in.the.California.Necessities.Index.(CNI)..From. December.2005.to.December.2006,.the.CNI.increased.by.3.7.percent..For. a. typical. family. of. three. receiving. CalWORKs. assistance,. this. COLA. would.increase.the.maximum.monthly.grant.by.about.$27..Suspending. the.COLA.eliminates.this.grant.increase.and.results.in.cost.avoidance.of. $124.4.million..(The.Governor’s.budget,.prepared.prior.to.the.release.of. the.final.CNI.data,.estimated.the.CNI.to.be.4.2.percent,.and.scored.a.cost. avoidance.of.$140.3.million.). Guillen Lawsuit. A.superior.court.has.ruled.in.the.Guillen.court.case. that.the.October.2003.COLA.(which.was.tied.in.statute.to.reductions.in. the.vehicle.license.fee).is.required.by.current.law..In.December.2006,.an. appellate.court.heard.the.state’s.appeal.and.a.decision.is.anticipated.in. early.2007..Unless.the.appellate.court.overturns.the.lower.court.decision,. the.state.faces.one-time.CalWORKs.grant.costs.of.$434.million,.plus.ongo- ing.costs.of.$114.million,.neither.of.which.are.included.in.the.Governor’s. budget..The.one-time.costs.refer.to.45.months.of.grant.payments.(October. 2003.through.June.2007).owed.to.recipients.on.aid.during.this.time.period.. The.ongoing.costs.of.$114.million.represent.the.cost.of.providing.the.grant. increase.during.2007-08..The.one-time.costs.are.typically.subject.to.a.settle- ment.agreement.and.which.cannot.be.modified.by.the.Legislature..With. respect.to.the.ongoing.costs,.the.Legislature.could.prospectively.reduce. grants.by.the.amount.of.the.October.COLA,.thereby.avoiding.the.ongoing. costs.of.$114.million. Governor’s Proposed Grant Levels Compared to Current Law..At. the.time.this.Analysis.was.prepared,.the.outcome.of.the.Guillen. lawsuit. was.unknown..Figure.1.compares.combined.cash.grant.and.food.stamps. benefits.under.the.Governor’s.proposal.to.the.grant.levels.required.by.cur- rent.law..The.top.portion.of.the.figure.shows.the.grants.if.the.state.prevails. in.its.appeal.of.the.Guillen.case..The.bottom.portion.shows.grants.if.the. Guillen.case.is.upheld.by.the.appellate.court..Combined.cash.grant.and. Food.Stamps.benefits.are.about.$15.less.per.month.under.the.Governor’s. proposal.than.under.current.law. California Work Opportunity and Responsibility to Kids C 115 Legislative Analyst’s Office Figure 1 CalWORKs Maximum Monthly Grant and Food Stamps Current Law and Governor’s Proposal Family of Three 2007-08 Change From Current Law Current Law Governor’s Budget Amount Percent Scenario 1: Guillen Decision Is Reversed on Appeal (Governor’s Budget) High-Cost Counties Grant $750 $723 -$27 -3.6% Food stamps 330 342 12 3.6 Totals $1,080 $1,065 -$15 -1.4% Percent of poverty 75% 74% Low-Cost Counties Grant $714 $689 -$25 -3.5% Food stamps 347 358 11 3.2 Totals $1,061 $1,047 -$14 -1.3% Percent of poverty 74% 73% Scenario 2: Guillen Decision Is Upheld on Appeal High-Cost Counties Grant $776 $748 -$28 -3.6% Food stamps 319 331 12 3.8 Totals $1,095 $1,079 -$16 -1.4% Percent of poverty 77% 75% Low-Cost Counties Grant $739 $713 -$26 -3.6% Food stamps 336 347 11 3.3 Totals $1,075 $1,060 -$15 -1.4% Percent of poverty 75% 74% Figure.1.also.compares.the.combined.grant.and.food.stamp.benefits. to.the.federal.poverty.guideline.for.2007..Under.the.Governor’s.proposal,. the.combined.cash.grant.and.food.stamps.benefit.would.be.74.percent.of. the.federal.poverty.guideline.for.a.family.of.three.in.a.high-cost.county. and.73.percent.of.the.guideline.for.a.family.of.three.in.a.low-cost.county. C 11\ufffd Health and Social Services 2007-08 Analysis (assuming.the.Guillen.case.is.overtuned)..Under.current.law,.combined. benefits.would.be.about.1.percent.closer.to.the.federal.poverty.guideline. than.the.Governor’s.proposal. rEdirECting ssi\/ssp Cola funding to CalworKs In.order.to.more.effectively.utilize.General.Fund.resources.for.pov- erty. reduction,. we. recommend. redirecting. $124.4.million. of. the. funds. proposed. for. the. Supplemental. Security. Income\/State. Supplementary. Program.(SSI\/SSP).COLA.to.provide.the.CalWORKs.COLA..Please.see. the. Crosscutting.Issues .section.of.this.chapter.for.the.rationale.for.this. recommendation. lEadEr CoMputEr systEM rEplaCEMEnt Rather than joining one of the other two recently completed automa\u2011 tion consortia, the budget proposes $2 million for planning activities for replacing the Los Angeles Eligibility, Automated Determination, Evaluation and Reporting (LEADER) computer system with an entirely new system. We recommend that the Department of Social Services and the Health and Human Services Agency’s Office of System Integration report at budget hearings on why joining an existing system is not fea\u2011 sible and the costs and benefits of an entirely new system. We further recommend that the Legislature withhold funding for planning activities until a cost\u2011benefit analysis for a new system is provided. Background.. The. Statewide. Automated. Welfare. System. (SAWS). is. divided.into.four.consortia:.(1).ISAWS.(Interim.SAWS),.comprised.of.35. small.and.medium.size.counties,. (2).CalWIN.(CalWORKs.Information. Network).which.covers.18.middle-sized.counties.that.are.part.of.the.Wel- fare.Client.Data.System,.(3).C-IV.(Consortium.IV),.which.is.comprised. of.San.Bernardino,.Riverside,.Merced,.and.Stanislaus.counties,.and. (4). LEADER,.which.is.the.system.for.Los.Angeles.County..These.automated. welfare.systems.support.the.delivery.of.social.services.programs.includ- ing.CalWORKs,.Food.Stamps,.and.Medi-Cal..Each.system.cost. several. hundred.million.dollars.to.develop..The.ISAWS.counties.are.in.the.process. of.migrating.to.C-IV..When.this.migration.to.C-IV.is.complete,.there.will. be.three.consortia. LEADER Replacement. The.budget.proposes.a.total.of.$2.million.for. planning.activities.for.replacing.LEADER..The.stated.goal.is.to.award.a. contract.for.the.new.system.in.June.2008..Los.Angles.County.has.viewed. demonstrations.of.the.other.consortia.systems.and.has.concluded.these. systems.are.inappropriate.solutions.for.replacing.LEADER..The.DSS.con- California Work Opportunity and Responsibility to Kids C 117 Legislative Analyst’s Office curs.with.this.finding,.but.has.not.provided.an.explanation.as.to.why.the. other. two.consortia.cannot.be.modified.to.become.a.LEADER.replace- ment.solution. Analyst’s Recommendation..Given.the.substantial.costs. (probably. over.$200.million.total.funds).associated.with.developing.a.new.system,.we. recommend.that.DSS.and.the.Office.of.System.Integration.(which.oversees. the.development.of.human.services.automation.systems.and.is.part.of.the. Health.and.Human.Services.Agency).report.at.budget.hearings.on.why. Los.Angeles.County.cannot.join.one.of.the.existing.systems.(potentially. with.some.modifications).and.the.costs.and.benefits.associated.with.the. development.of.a.new.system..We.further.recommend.withholding.fund- ing.for.additional.LEADER.planning.activities.until.a.cost-benefit.analysis. is.provided.to.the.Legislature. tanf transfEr to Cws Contrary to lEgislativE approaCh By using federal Temporary Assistance for Needy Families (TANF) block grant funds to replace General Fund support for certain Child Welfare Services (CWS) emergency assistance costs, the Governor’s budget achieves General Fund savings of $56 million in 2007\u201108. The Legislature should assess whether this proposed fund shift meets its priorities for limited TANF block grant funds. TANF Expenditures May Offset General Fund Costs in Other Pro\u2011 grams..Each.year.California.receives.$3.7.billion.in.federal.TANF.block. grant. funds.. The. majority. of. these. funds. are. used. for. the. CalWORKs. program..However,.federal.law.permits.the.expenditure.of.TANF.funds. on.a.variety.of.programs.and.activities..Specifically,.the.TANF.block.grant. funds.may.be.expended.on.any.program.designed.to.(1).provide.assistance. to.needy.families.and.children;.(2).end.the.dependence.of.needy.parents. on.government.benefits.by.promoting. job.preparation,.work,.and.mar- riage;.(3).prevent.and.reduce.the.incidence.of.out-of-wedlock.pregnancies;. and.(4).encourage.the.formation.and.maintenance.of.two-parent.families.. Moreover,.TANF.funds.can.be.spent.for.any.purpose.permitted.under.the. AFDC.program.or.under.AFDC-Emergency.Assistance.(EA)..(For.example,. AFDC-EA.could.be.used.for.juvenile.probation.).Finally,.up.to.10.percent. of.TANF.funds.may.be.transferred.to.the.Title.XX.Social.Services.Block. Grant.and.then.expended.in.accordance.with.the.federal.rules.pertaining. to.Title.XX..Unexpended.TANF.funds.can.be.carried.over.indefinitely.into. future.years. C 118 Health and Social Services 2007-08 Analysis Legislative Action in 2006\u201107. For.2006-07,.the.Legislature.shifted. $100.million.in.TANF.funds.proposed.for.CWS.back.to.the.CalWORKs. program..This.funding.shift.required.a.backfill.of.$100.million.from.the. General.Fund.to.CWS..The.purpose.of.the.shift.was.to.ensure.scarce.TANF. block.grant.funds.were.used.in.the.CalWORKs.program.. Governor’s Proposal and Legislative Oversight. For.2007-08,. the. budget.proposes.to.replace.General.Fund.monies.for.CWS.emergency.as- sistance.activities.with.$56.million.in.TANF.federal.funds..This.results.in. General.Fund.savings.of.$56.million,.but.is.contrary.to.legislative.action. in.the.current.year,.which.used.General.Fund.support.in.lieu.of.TANF. funds.for.CWS. The.Governor’s.proposal.to.save.$56.million.General.Fund.by.using. TANF.funds.for.emergency.assistance.costs.in.child.welfare.services.is. permissible.under.federal.law..Whether.to.make.this.fund.shift.is.a.policy. issue.for.the.Legislature..Because.TANF.can.be.used.for.both.CalWORKs. and.non-CalWORKs.purposes,.the.Legislature.should.review.this.proposal. to.determine.if.it.is.consistent.with.its.priorities.for.TANF.and.the.Gen- eral.Fund..If.the.Legislature.rejects.the.Governor’s.fund.shift.proposal,.it. would.need.to.adopt.some.offsetting.budget.solution.to.avoid.increasing. the.state’s.structural.deficit. MaintEnanCE-of-Effort and CasEload rEduCtion CrEdit The budget proposes to spend above the federally required mainte\u2011 nance\u2011of\u2011effort (MOE) level, thereby achieving a caseload reduction credit (CRC) which reduces California’s work participation require\u2011 ment in the California Work Opportunity and Responsibility to Kids (CalWORKs) program. We review the MOE requirement, the impact of the Deficit Reduction Act (DRA) of 2005 on countable MOE spending, and the Governor’s proposal to obtain a CRC. TANF MOE Requirement..To.receive.the.federal.TANF.block.grant,. states.must.meet.a.MOE.requirement.that.state.spending.on.assistance.for. needy.families.be.at.least.75.percent.of.the.federal.fiscal.year.(FFY).1994. level,.which.is.$2.7.billion.for.California..(The.requirement.increases.to. 80.percent.if.the.state.fails.to.comply.with.federal.work.participation.re- quirements.).Countable.MOE.expenditures.include.those.made.on.behalf.of. CalWORKs.recipients,.as.well.as.for.families.who.are.eligible.for.CalWORKs. but.are.not.receiving.cash.assistance..Although.the.MOE.requirement.is. primarily.met.through.state.and.county.spending.on.CalWORKs.and.other. California Work Opportunity and Responsibility to Kids C 11\ufffd Legislative Analyst’s Office programs.administered.by.DSS,.state.spending.in.other.departments.is. also.counted.toward.satisfying.the.requirement. DRA Expands Definition of MOE Spending..The.DRA.expands.the. definition.of.what.types.of.state.spending.may.be.used.to.meet.the.MOE. requirement..Previously,.countable.state.spending.had.to.be.for.aided.fami- lies.or.for.families.who.were.otherwise.eligible.for.assistance..The.DRA. allows.state.expenditures.designed.to.prevent.out-of-wedlock.pregnancies. or.promote.the.formation.of.two-parent.families.to.count.toward.the.MOE. requirement,.even.if.the.program.participants.are.not.otherwise.eligible.for. aid..Essentially,.the.act.removes.the.requirement.that.countable.spending. for.these.purposes.be.on.behalf.of.low-income.families.with.children.. We.would.note.that.some.states.have.already.claimed.expenditures. for.these.types.of.services.as.part.of.their.MOE.spending..Because.of.this. change,.California.can.now.count.some.existing.spending.on.higher.edu- cation.tuition.assistance.(CalGrants.and.community.college.fee.waivers). and.after.school.programs.toward.the.MOE.requirement..The.rationale. for.tuition.assistance.is.that.higher.education.is.generally.associated.with. better.employment.and.life.outcomes,.which.in.turn.may.result.in.fewer. out-of-wedlock.births..Similarly,.after.school.programs.are.associated.with. better.school.attendance.and.achievement,.which.in.turn.improves.employ- ment.and.life.outcomes,.potentially.resulting.in.fewer.teen.pregnancies.. Excess MOE Spending Results in Caseload Reduction Credit..As. discussed. more. fully. in. the. next. section,. pursuant. to. the. DRA,. states. must.meet. federal.work.participation. rates. (50.percent. for.all. families). less.a.caseload.reduction.credit.based.on.the.decline.in.their.caseloads. since.FFY.2005..Current.federal.regulations.allow.states.that.spend.above. their.required.MOE.level.to.subtract.out.cases.funded.with.excess.MOE. for.the.purpose.of.calculating.the.CRC..States.first.used.this.regulation. during.FFY.2005..Based.on.the.amount.of.excess.MOE.spending.during. FFY.2006,.California.increased.its.CRC.from.3.5.percent.to.4.7.percent.on. an.FFY.basis..Pursuant.to.federal.rules,.the.CRC.percentage.that.is.due. to.excess.MOE.spending.during.FFY.2006,.is.subtracted.from.the.federal. work.participation.requirement.for.the.subsequent.year.(FFY.2007).. We.note.that.the.authority.to.increase.the.CRC.based.on.excess.MOE. spending.is.part.of.current.regulations,.not.current.law..Accordingly,.the. federal.administration.could.end.this.authority.by.changing.the.regula- tions,.and.some.observers.believe.this.may.happen.in.future.years..Also,. the.federal.government.has.not.yet.approved.California’s.methodology. for.determining.the.amount.of.excess.MOE.cases..Thus,.we.would.caution. that.long-term.plans.for.attaining.compliance.with.federal.work.participa- tion.rates.should.not.overly.rely.on.the.excess.MOE.caseload.reduction. regulations.. C 120 Health and Social Services 2007-08 Analysis Figure.2.shows.base.MOE.spending.and.excess.MOE.spending.propos- als.for.2006-07.and.2007-08..For.both.years,.base.MOE.spending.will.be. approximately.$2.7.billion..With.respect.to.excess.MOE,.the.budget.pro- poses.a.reduction.from.$470.million.to.$203.million..Figure.2.also.shows. that.based.on.the.Governor’s.proposed.spending.levels,.the.CRC.would. be.12.6.percent.in.2006-07,.falling.to.5.4.percent.in.2007-08..As.a.point.of. reference,.we.show.estimated.excess.MOE.spending.in.2007-08.under.cur- rent.law.(if.the.Legislature.rejects.the.Governor’s.time.limit.aid.sanction. proposals)..(These.CRCs.are.estimates.on.a.state.fiscal.year.basis,.and.will. differ.from.the.actual.CRCs.which.are.calculated.on.an.FFY.basis.) Figure 2 CalWORKs Maintenance-of-Effort (MOE) Spending 2006-07 and 2007-08 (In Millions) 2007-08 2006-07 Governor’s Budget Current Law Base MOE Spending CalWORKs program $2,033.6 $1,356.0 $1,680.4 DSS Non-CalWORKs programs 20.9 23.4 23.4 MOE from other departments 478.2 1,133.1 808.7 County spending 135.4 136.8 136.8 State support 2.8 2.7 2.7 Subtotals ($2,670.8) ($2,652.1) ($2,652.1) Excess MOE Spending CDE child care programs $30.4 $75.0 $87.1 After school programs 225.3 128.0 225.3 CalGrants 215.0 \u2014 215.0 Subtotals ($470.7) ($203.0) ($527.4) Estimated caseload reduction credit from excess MOE 12.6% 5.4% 14.1% Grand Totals $3,141.5 $2,855.1 $3,179.5 CalWORKs = California Work Opportunity and Responsibility to Kids; DSS = Department of Social Services; CDE = California Department of Education. California Work Opportunity and Responsibility to Kids C 121 Legislative Analyst’s Office CurrEnt worK partiCipation rEquirEMEnt and status Federal law requires that states meet a work participation rate of 50 percent for all families and 90 percent for two\u2011parent families, less a caseload reduction credit (CRC). The Deficit Reduction Act of 2005 and associated regulations significantly changed the calculation of the participation rate and the CRC. Background Required Hours of Work for Adults. To.comply.with.federal.work. participation.rates,.adults.must.meet.an.hourly.participation.requirement. each.week..For.single-parent.families.with.a.child.under.age.6,.the.weekly. participation.requirement.is.20.hours..The.requirement.goes.up.to.30.hours. for.single.parents.in.which.the.youngest.child.is.at.least.age.6..For.two-par- ent.families.the.requirement.is.35.hours.per.week..The.participation.hours. can.be.met.through.unsubsidized.employment,.subsidized.employment,. certain.types.of.training.and.education.related.to.work,.and.job.search. (for.a.limited.time.period). Work Participation Penalties for States..If.a.state.fails.to.meet.the. work. participation. rates,. it. is. subject. to. a. penalty. equal. to. a. 5.percent. reduction. of. its. federal. TANF. block. grant.. For. each. successive. year. of. noncompliance,. the. penalty. increases. by. 2.percent. to. a. maximum. of. 21.percent..For.California,.the.5.percent.penalty.would.be.approximately. $149.million.annually,.potentially.growing.by.up.to.$60.million.per.year.. Penalties. are. based. on. the. degree. of. noncompliance.. For. example,. if. a. state.is.in.compliance.with.the.all-families.rate,.but.is.out.of.compliance. for.the.two-parent.rate,.the.penalty.would.be.prorated.down.based.on.the. percentage.of.cases.that.are.two-parent.cases. State Impact of Penalties..States.that.fail.to.meet.their.work.partici- pation.requirements.are.required.to.(1).backfill.their.federal.penalty.with. state. expenditures. and. (2). increase. their. MOE. spending. by. 5.percent.. States.out.of.compliance.may.enter.into.corrective.action.plans.which.can. reduce.or.eliminate.penalties,.depending.on.state.progress.in.meeting.the. negotiated.goals.of.the.corrective.plan. Prior Law Work Participation Requirements for States.. Prior. to. enactment.of.DRA,.states.had.to.meet. two.separate.work.participation. rates\u2014an.all-families.rate.of.50.percent.and.a.two-parent.rate.of.90.percent.. Both.of.these.rates.were.adjusted.downward.to.reflect.the.caseload.decline. since.FFY.1995..From.1995.through.2004,.California’s.caseload.declined.by. approximately.46.percent,.but.has.been.relatively.stable.since.then..Thus,. California.achieved.a.substantial.CRC.pursuant.to.prior.law..Specifically,. C 122 Health and Social Services 2007-08 Analysis this.46.percent.reduction.reduced.California’s.required.participation.rate.to. about.4.percent.(the.50.percent.requirement,.less.the.46.percent.credit). With.respect.to.two-parent.families,.prior.law.permitted.states.to.create. state-only.funded.programs,.and.families.served.in.such.programs.were. removed. from. TANF. work. participation. calculations.. Given. this. prior. flexibility,.California.served.two-parent.families.in.a.separate.state-only. program,.and.thus.was.not.subject.to.the.90.percent.two-parent.family.rate.. (The.two-parent.families,.however,.are.subject.to.state.work.participation. requirements.) Deficit Reduction Act Effectively Increases Participation Requirements for States The.DRA.increased.participation.requirements.on.states.in.three.dif- ferent.ways..First,.it.moved.the.base.period.for.calculating.the.CRC.from. 1995.to.2005..Because.California’s.caseload.decline.mostly.occurred.before. 2005,.this.substantially.reduces.the.CRC,.from.about.46.percent.to.about. 3.5.percent..Second,.it.made.families.served.in.separate.state.programs.sub- ject.to.federal.participation.rates..Thus,.beginning.in.FFY.2007.California. is.subject.to.the.90.percent.federal.work.participation.rate.for.two-parent. families..Third,.it.provided.the.Secretary.of.Health.and.Human.Services. with.broad.authority. to.adopt. federal. regulations. (which.he.exercised). to.(1).narrow.the.definition.of.work.and.participation.and.(2).expand.the. number.of.families.who.are.included.in.work.participation.calculations. Figure.3. summarizes. how. the. DRA. and. associated. regulations. changed.the.work.participation.mandate.on.states..The.two.middle.col- umns.compare.prior.law.and.regulations.to.the.new.law.and.regulations. under.the.DRA..The.final.column.summarizes.the.impact.on.the.partici- pation.calculation.for.California..A.state’s.actual.work.participation.rate. is.calculated.as.follows: =.participation.rate number.of.families.meeting.participation.requirement number.of.families.subject.to.participation.requirement As.Figure.3.indicates,.new.regulations.pertaining.to.cases.in.sanction. status.(child-only.cases.where.the.adult.is.removed.from.aid.for.noncom- pliance),.and.safety.net.cases.(child-only.cases.where.the.adult.is.removed. from.aid.for.hitting.the.five-year.time.limit).make.an.additional.86,100. cases. subject. to. the.work.participation.calculation..On. the.other.hand,. the.state.may.now.exclude.those.caring.for.an.ill.or.incapacitated.family. member.from.the.calculation.(about.5,000.cases)..Also,.about.9,000.cases. California Work Opportunity and Responsibility to Kids C 123 Legislative Analyst’s Office which.have.received.aid.for.five.years.and.are.in.the.safety.net.are.now. counted.as.participating.in.the.numerator. Figure 3 Deficit Reduction Act of 2005 Major Changes to Work Participation Calculation Provision Prior Law\/Regulations Deficit Reduction Act\/ Associated Regulations Impact on Participation Rate Calculation Calculation of caseload reduction credit (CRC) Based on reduction since FFY 1995 (46%) Based on reduction since FFY 2005 (3.5%) Reduces CRC by 42 percentage points Separate State Programs (SSP) Cases in SSP excluded from a work participation calculation Cases in SSP must be included in work participa- tion calculation State may no longer avoid 90 percent rate for two-parent families through SSP Adults in sanction for more than 90 days When adult is removed from case for sanction, the case is excluded from work participation calculation Must be included in work participation calculation Adds 40,100 cases to participation calculation (+40,100 in denominator) Safety net for children of parent hitting five- year time limit When adult is removed from a case for time limit, the case is excluded from work participation calculation Must be included in work participation calculation Adds 46,000 cases to participation calculation, 9,000 of which are meet- ing work requirement (+9,000 to numerator, +46,000 to denominator) Caring for ill or incapacitated family member Included in work partici- pation calculation Excluded from work participation calculation Removes 5,000 cases from work participation calculation (-5,000 from denominator) FFY = federal fiscal year. Current Participation Status The.most.recent.participation.data.for.California.is.from.FFY.2005.. Figure.4.(see.next.page).shows.the.calculation.of.the.all.families.participa- tion.rate.under.prior.law.and.under.current.law.with.DRA.regulations.. In.both.calculations,. the. two-parent. families.have.been.added.into. the. numerator.and.denominator,.pursuant.to.the.DRA.which.prevents.their. exclusion.through.a.separate.state.funded.program..As.Figure.4.shows,. under.prior.rules,.California’s.participation.rate.would.be.almost.28.per- cent..Under.the.new.rules,.the.rate.falls.to.just.over.23.percent..Most.of. the.decline.is.attributable.to.adding.sanctioned.cases.and.safety.net.cases. C 12\ufffd Health and Social Services 2007-08 Analysis to.the.participation.rate.in.the.denominator.(81,153.cases)..For.two-par- ent.families.(not.shown.in.Figure.4),.the.participation.rate.is.33.6.percent. based.on.data.from.FFY.2005. Figure 4 Work Participation Status\u2014All Familiesa Under Prior and Current Law Prior Law and Regulations Current Law\/DRA Regulations Change From Prior Law Families meeting requirements 60,148 69,174 9,026 Families subject to participation 215,822 296,975 81,153 = = Participation rate 27.9% 23.3% -4.6% a Based on California data from federal fiscal year 2005. DRA = Deficit Reduction Act of 2005. iMpaCt of rECEnt poliCy ChangEs on partiCipation In recent years, California has made significant changes in the California Work Opportunity and Responsibility to Kids program in order to increase work participation among recipients. Estimates by the administration of the participation increases associated with recent policy changes, in conjunction with the caseload reduction credit, sug\u2011 gest that California would likely be in compliance with federal work participation requirements in federal fiscal year 2008. Over. the.past. two.years,. the.Legislature.has.made.significant.pro- gram.changes.that.should.increase.work.participation.to.some.unknown. extent.among.CalWORKs.families..First,.Chapter.68,.Statutes.of.2005.(SB. 68,.Committee.on.Budget.and.Fiscal.Review),.created.the.Pay-for.Perfor- mance.program.for.counties..This.program.creates.a.performance.incentive. system.whereby.counties.earn.a.share.of.$40.million.based.on.improving. performance.on.three.specified.measures.related.to.employment,.earnings,. and.participation..Then,.Chapter.75,.Statutes.of.2006.(AB.1808,.Committee. on.Budget),.made.the.following.changes.designed.to.improve.program. operations.and.engagement.of.clients.with.participation: California Work Opportunity and Responsibility to Kids C 125 Legislative Analyst’s Office County Plan Addenda..Each.county.is.required.to.indicate.how. it.intends.to.meet.program.goals.and.work.participation.require- ments,.by.amending.it.CalWORKs.plan. County Penalty Pass\u2011On..Statute.requires.that.counties.backfill. their. share. of. any. federal. penalties. the. state. might. receive. for. failing.to.meet.federal.participation.requirements. Data Master Plan..Among.other.changes,.the.master.plan.pre- pared.by.the.state.will.result.in.a.new.monthly.report.which.tracks. hourly.participation.rates.in.each.country..It. is.anticipated.that. this.will. focus. case.managers.and.administrators.on. the.work. participation.status.of.their.caseloads. Ending Durational Sanctions..Chapter.75.allows.recipients.to.end. their.sanction.immediately.after.coming.into.compliance..Under. prior.law,.recipients.being.sanctioned.for.the.second.or.third.time. would.be.required.to.remain.in.sanction.status.and,.thereby,.ex- cluded.from.the.participation.rate.even.if.they.are.employed.. Expanding Homeless Assistance Eligibility.. Under. prior. law,. CalWORKs. recipients. were. entitled. to. a. once-in-a-lifetime. as- sistance.payment. if. they.became.homeless..Chapter.75.permits. this.payment.to.be.provided.upon.threat.of.eviction..This.should. stabilize.housing.situations,.enabling.more.families.to.participate. in.work. Temporary Assistance Program (TAP)..Chapter.75.created.a.non- MOE.funded.TAP.for.CalWORKs.recipients.who.are.exempt.from. work.participation.(usually.temporarily.disabled)..This.program. would.have.increased.the.participation.rate.and.resulted.in.a.CRC.. However,.as.discussed.below,.the.program.cannot.be.implemented. as.intended.by.the.Legislature. Budget Estimate of Work Participation Impact..With.the.exception. of.the.TAP.program.(which.cannot.be.implemented.at.this.time),.all.of.the. changes.described.above.should.increase.work.participation..The.difficult. question.is.estimating.the.magnitude.of.the.impact.on.participation..The. Governor’s. budget. estimates. that. together. these. changes. will. increase. California’s. work. participation. rate. by. just. over. 5.percent. in. FFY. 2007. and.11.4.percent.in.FFY.2008,.as.shown.in.Figure.5.(see.next.page)..The. administration.specifically.estimates.that.the.homeless.assistance.policy. change.will.stabilize.housing.for.certain.CalWORKs.recipients.resulting. in.about.700.and.1,400.cases.meeting.work.participation.in.FFY.2007.and. FFY.2008,.respectively..Based.on.the.change.in.durational.sanctions,.the. budget.estimates.further.respective.participation.increases.of.3,000.and. 3,750.over.the.next.two.years..Finally,.from.all.other.changes,.the.budget. C 12\ufffd Health and Social Services 2007-08 Analysis anticipates. 12,000. cases. will. meet. work. participation. in. FFY. 2007. and. 29,600.cases.in.FFY.2008..Figure.5.estimates.how.these.policy.changes.will. increase.participation.to.34.7.percent.in.FFY.2008.. Figure 5 Estimated Work Participation Rates\u2014 Based on Current Law Federal Fiscal Year 2007 2008 Base participation rate 23.3% 23.3% Projected increase from policy changes Homeless assistance 0.2% 0.5% Ending durational sanctions 1.0 1.0 All other policies 4.0 10.0 Subtotals 5.3% 11.4% Total Estimated Participation Rate 28.6% 34.7% Totals may not add due to rounding. LAO Comments on Increased Participation Estimates..Estimating. the.impact.of.policy.changes.on.work.participation.is.difficult..The.ad- ministration’s.estimates.for.homeless.assistance.stabilization.(0.5.percent). and.ending.durational.sanctions.(1.percent).appear.reasonable..However,. the.estimate.that.all.other.changes.will.increase.participation.by.10.per- centage.points.may.be.overstated,.given.the.magnitude.of.this.estimated. growth..The.administration.provides.no.specific.evidence.explaining.how. these. changes.will. increase.participation.among.recipients..To.assume. an.increase.of.10.percent.in.a.single.year.from.what.are.essentially.better. incentives.for.counties.(pay-for-performance,.potential.county.penalties,. and.better.data.tracking),.may.be.risky. California Likely to Meet Work Participation Requirements in FFY 2008 As.described.above,.California.is.required.to.meet.a.work.participation. rate.of.50.percent,.less.a.CRC..Currently,.participation.is.about.23.percent,. but.the.budget.assumes.as.existing.law.changes.are.implemented,.par- ticipation.will. increase.by.11.4.percent.by.FFY.2008..Figure.6.compares. the.net.participation. requirement. (after.CRC). to. the.estimated. level.of. participation.in.FFY.2007.and.FFY.2008..As.the.figure.shows,.California. California Work Opportunity and Responsibility to Kids C 127 Legislative Analyst’s Office is.projected.to.be.16.7.percent.below.the.net.requirement.in.FFY.2007,.but. to.exceed.the.requirement.by.1.7.percent.in.FFY.2008..Although.California. is.projected.to.be.in.compliance.as.of.FFY.2008,.there.are.risks.associated. with.this.projection..First,.much.of.the.compliance.is.based.on.the. excess . MOE.CRC..This.credit.is.based.on.regulations,.not.statute,.and.could.be. terminated.by.the.federal.administration..Moreover,.California’s.method. for.calculating.the.excess.MOE.credit.has.not.yet.been.approved.by.the. federal.Government..Finally,.California’s.rate.of.34.7.percent.is.dependent. on. the. assumption. that. existing. policies. will. increase. participation. by. 11.4.percent. Figure 6 Estimated Work Participation Shortfall(-)\/Surplus Federal Fiscal Year (FFY) 2007 2008 Federal requirement 50.0% 50.0% Caseload reduction credit Natural caseload decline since FFY 2005 3.5% 4.1% Excess MOE reduction 1.2 12.9 Total Credit 4.7% 17.0% Net requirement 45.3% 33.0% Estimated participation rate (see Figure 5) 28.6% 34.7% Estimated Participation Shortfall(-)\/Surplus -16.7% 1.7% MOE = maintenance-of-effort. TAP Implementation Issues As. noted. above,. TAP. cannot. be. implemented. as. planned.. Before. describing.the.implementation.issues,.we.discuss.the.potential.benefits. of.TAP. Potential Benefits of TAP..Currently,.certain.CalWORKs.recipients. (such.as.those.temporarily.disabled,.caring.for.a.disabled.relative,.or.over. age. 60). are. statutorily. exempt. from. work. participation. requirements.. Chapter.75. created. a. separate. state. program. funded. exclusively. with. state.monies.which.are.not.used.to.meet.the.MOE.requirement..The.TAP. would.serve.CalWORKs.recipients.who.are.exempt.from.participation.. Because.of.the.exclusive.state.funding,.the.recipients.of.this.program.are. C 128 Health and Social Services 2007-08 Analysis outside. the. federal. TANF. program. and. are. excluded. from. the. federal. work.participation.rate.calculation..If. implemented,. it. is.estimated.that. this.program.would.have.increased.the.work.participation.rate.by.about. 1.5.percent..It.is.also.estimated.that.the.program.would.have.resulted.in. a.CRC.of.about.5.percent,.because.the.families.would.have.exited.TANF.. Given. these. positive. impacts. on. participation. and. caseload. reduction,. TAP. would. be. an. effective. way. of. achieving. compliance. with. federal. work.participation.requirements..The.Legislature.required.that.TAP.be.a. voluntary.program.providing.identical.benefits.and.obligations.for.TAP. recipients.as.for.CalWORKs.participants.. Child Support Issues Threaten Implementation.. This. voluntary. program.was.to.be.implemented.in.April.2007..Chapter.75.authorizes.the. administration.to.delay.implementation.until.October.2007.under.speci- fied.circumstances..Since.enactment.of.this.program,.a.working.group.of. legislative.staff,.administration.representatives,.county.staff,.and.advo- cates.have.learned.that.federal.law.appears.to.require.that.TAP.receive. a.pass-through.of.all. child.support.collected.on.behalf.of.participants.. Because.this.requirement.differs.from.the.way.child.support.payments. are. treated. with. respect. to. CalWORKs. families. (where. child. support. beyond.$50.is.retained.by.the.government),.TAP.cannot.be.implemented. as.scheduled..Pursuant.to.Chapter.75,.DSS.notified.the.Joint.Legislative. Budget.Committee.in.January.2007.that.TAP.implementation.would.be. delayed.indefinitely. On.a.very.preliminary.basis,.the.Department.of.Child.Support.Services. indicates. that. to. resolve. the.child.support.distribution. issues,. substan- tial.automation.changes.are.necessary,.and.these.changes.could.not.be. implemented.until.after.Phase.2.of.the.child.support.automation.project. is.completed.in.2008..Accordingly,.it.is.likely.that.implementation.will.be. delayed.beyond.October.2007..Because.current.law.requires.that.TAP.be. implemented.no.later.than.October.2007,.the.Legislature.will.need.to.ad- dress.the.issue.of.when.and.whether.to.implement.TAP. govErnor’s sanCtion proposal In order to increase work participation, the Governor’s budget proposes new sanctions on children whose parents cannot or will not comply with California Work Opportunity and Responsibility to Kids participation requirements. We review the sanction proposal’s impact on work participation, families, and the state budget. We recommend rejecting the sanction proposal because by the administration’s own estimates it is not needed to meet federal work participation require\u2011 ments. California Work Opportunity and Responsibility to Kids C 12\ufffd Legislative Analyst’s Office The.budget.proposes.a.full-family.sanction.(eliminating.all.cash.as- sistance).for.families.in.which.the.adult.has.been.out.of.compliance.with. program.requirements.for.at.least.three.months..The.Governor’s.budget. states.that.a.stronger.sanction.is.necessary.to.increase.the.work.participa- tion.rate.so.that.the.state.can.avoid.substantial.federal.penalties..However,. as.discussed.above,.based.on.the.Governor’s.own.assumptions.about.the. impacts.of.current.law.and.the.ability.of.the.state.to.obtain.a.CRC,.it.ap- pears.that.this.change.is.not.necessary.to.attain.federal.compliance.by. FFY.2008..Below.we.discuss.the.sanction.proposal.in.terms.of.its.impact. on.the.budget,.work.participation,.and.families. Full-Family Sanction Policy Description..Currently,.when.an.able-bodied.adult.does.not. comply.with.CalWORKs.participation.requirements,.the.family’s.grant.is. reduced.by.the.adult.portion,.resulting.in.a. child-only .grant..The.budget. proposes.a.full-family.sanction.whereby.the.reduced.grant.for.the.children. is.eliminated.if.an.adult.is.out.of.compliance.with.participation.require- ments.for.at.least.three.months..In.order.to.restore.the.family’s.grant,.the. noncompliant.adult.would.need.to.sign.an.agreement.to.come.into.compli- ance.and.then.complete.the.terms.of.the.agreement.for.up.to.30.days.. The.agreements.are.to.address.the.specific.reason.for.noncompliance.. For.example,.if.the.sanction.was.due.to.failing.to.complete.a.job.club\/job. search.program,.the.agreement.would.typically.require.the.individual.to. complete.the.job.club..Once.completed,.aid.would.be.fully.restored.back. to.the.day.the.client.signed.the.agreement..These.procedures.are.the.same. as.current.law.. The.Governor.proposes. that. this.policy.would.be. implemented.on. November.1,.2007..Families.would.be.entitled.to.food.stamp.benefits.dur- ing.the.period.that.they.were.not.receiving.a.grant..For.a.family.of.three,. we.estimate.that.their.monthly.food.stamps.allotment.would.increase.by. about.$10.to.a.total.of.$408,.after.the.full-family.sanction.was.imposed. Impact on Families..According.to.sample.data.from.2005,.there.are. about.36,400.cases.that.have.been.in.sanction.status.for.three.months.or. more..These.cases.have.an.average.of.1.9.children,.so.potentially.about. 70,000.children.could.lose.cash.aid.unless.their.parents.met.work.participa- tion.requirements..The.Governor’s.budget.assumes.that.70.percent.of.cases,. facing.a.full-family.sanction,.would.fully.participate.through.unsubsidized. employment.or.a.combination.of.other.eligible.participation.activities.so. as.to.avoid.the.sanction..The.budget.estimates.that.it.will.take.12.months. for.these.changes.to.occur.as.recipients.may.appeal.their.sanctions..As.of. November.2008,.DSS.estimates.that.25,450.families.would.have.avoided. the.sanction.through.compliance.and.that.10,950.families.would.receive. C 130 Health and Social Services 2007-08 Analysis the.full.family.sanction..The.10,950.families.include.about.21,000.children.. Below,.we.discuss.why.this.70.percent.success.rate.is.overly.optimistic. Impact on Work Participation. Based.on.the.Governor’s.70.percent. assumption,.there.are.two.impacts.on.the.state’s.work.participation.rate.. First,. the. 70.percent. of. families. meeting. work. participation. raise. the. numerator. in. the.work.participation.fraction..Second,. the.30.percent.of. families.unable.to.meet.participation.will.exit.the.program.and.reduce. the.denominator..Together,.the.budget.estimates.that.these.changes.will. increase.the.work.participation.rate.by.about.3.percent.in.FFY.2008,.rising. to.9.6.percent.in.FFY.2009..We.note.that.regardless.of.the.success.rate.of. this.policy.in.encouraging.families.to.work,.the.policy.will.increase.the. work.participation.rate,.because.families.who.experience.the.full-family. sanction.will.be.excluded.from.the.denominator..The.only.question.is.the. number.who.will.be.excluded.. Impact on Budget..Because.of.the.estimated.increase.in.compliance. and.work. participation,. the. budget. estimates. increased. child. care. and. welfare-to-work. services. costs. of. about. $27.8.million. in. 2007-08.. These. costs.would.be.offset.by.grant.savings.($16.4.million).from.the.families. that.experience.the.full-family.sanction..Thus,.the.Governor’s.budget.es- timates.these.net.costs.to.be.$11.4.million.in.2007-08,.rising.to.$81.million. in.2008-09.. Comments on the Governor’s Full-Family Sanction Proposal Estimated Behavioral Response Is Overly Optimistic..We.believe.the. Governor’s.assumption.that.70.percent.of.those.cases.already.in.sanction. status.will.meet.the.federal.participation.requirements.in.response.to.a. full-family.sanction.is.substantially.overstated..Using.sanction.data.from. 1999-00,.the.administration.developed.a. sanction.cure.rate .of.45.percent… It.obtained.this.compliance.rate.by.dividing.the.average.number.families. ending.their.sanction.by.the.average.number.of.new.sanctions.per.month.. This.45.percent.rate.is.overstated,.however,.because.it.is.based.on.aggregate. data,.not.the.individual.behavior.of.families.returning.to.compliance..(As. we.discuss.below,.Riverside.County,.tracking.individual.families,.found. that.27.percent.of.sanctioned.families.eventually.came.into.compliance.). Moreover,. compliance .was.not.exclusively.defined.as.meeting.the.fed- eral.work.requirements.(20.to.30.hours.per.week).but.included.signing.an. agreement.and.completing.the.required.activity,.such.as.attending.orien- tation..It.could.also.mean.that.the.family.was.found.to.be.exempt..Based. on.our. review,.although.some. families. coming. into.compliance.would. participate.sufficiently.to.meet.federal.requirements.(20.to.30.hours.per. week),.far.less.than.45.percent.of.those.ending.would.be.at.this.high.level. of.participation..Finally,.the.administration.presents.no.specific.evidence. California Work Opportunity and Responsibility to Kids C 131 Legislative Analyst’s Office that.a.full-family.sanction.would.increase.their.estimated.rate.of.attaining. compliance.from.45.percent.to.70.percent.. Available Research Does Not Directly Address Relationship of Sanc\u2011 tions to Work Participation..There.is.no.consensus.in.the.research.com- munity.on.whether.stronger.sanctions.correlate.with.better.employment. outcomes.for.families..This.is.mostly.because.there.have.been.no.controlled. studies.that.compare.the.impacts.of.randomly.assigned.participants.to. weaker.and.stronger.sanctions..Changes.in.sanction.policy.are.typically. accompanied.by.other.changes,.such.as.time.limits.and.work.incentives. (such.as.allowing.recipients.to.keep.more.of.their.cash.grant.even.as.their. earnings.increase)..Nevertheless,.there.is.research.on.the.characteristics. of.sanctioned.cases.and.what.happens.to.them.over.time. Longitudinal and Characteristics Data..Research.from.California. and.other.states.consistently.finds.that.sanctioned.cases.face.more.barri- ers.to.employment.than.their.nonsanctioned.counterparts..Given.that.the. sanctioned.caseload.faces.greater.barriers.to.employment,.there.is.no.basis. to.conclude.that.their.estimated.participation.(assumed.to.be.70.percent). would.be.greater.than.the.nonsanctioned.caseload,.which.currently.has. a. work. participation. rate. of. about. 24.percent.. A. longitudinal. study. by. Riverside.County.showed.that.within.ten.months,.27.percent.of.sanction. cases. ended. their. sanction. and. participated. . However,. in. this. study,. participation .meant.any.level.of.participation,.for.example,.attending. job.club..It.did.not.necessarily.mean.participating.for.sufficient.hours.to. meet.federal.requirements..We.note.that.a.full-family.sanction.represents. a.greater.financial.hardship.and,.therefore,.a.greater.incentive.to.comply. than.the.current. adult-only .sanction..Nevertheless,.our.review.of.the. research.on.sanction.impacts.suggests.that.the.success.rate.from.a.full- family.sanction.is.likely.to.be.substantially.less.than.70.percent.. What Happens to Sanctioned Families?.Some.studies.indicate.that. families.experiencing.a.full-family.sanction.have.greater.material.hard- ships.(such.as.utility.shut.off),.than.nonsanctioned.families..However,.none. of.the.studies.finding.greater.hardship.could.establish.a.causal.relationship. between.the.sanctions.and.the.hardship. Research.from.some.states.with.graduated.full-family.sanctions.in- dicates.that.some.sanctioned.families.turned.to.other.sources.of.support,. primarily.other.family.members.when.they.were.removed.from.aid. Some.observers.predicted.that.sanctions.and.time.limits.associated. with.the.1996.federal.welfare.reform.legislation.would.increase.child.wel- fare.caseloads.nationally..However,.an.Urban.Institute.study.from.2001. found.no.such.impacts. C 132 Health and Social Services 2007-08 Analysis Because.there.are.no.controlled.studies.of.states.that.increased.their. sanction.from.adult.only.to.full.family,.it.is.difficult.to.generalize.about. how.a.full-family.sanction.might.impact.families.and.work.participation. in.California. Analyst’s Recommendation..Because.the.full-family.sanction.policy. is.not.necessary.to.meet.federal.work.participation.rates.and.would.sub- stantially. reduce. the. income. for. children. in. families. where. the. adult. is. unwilling. to. participate,. we. recommend. that. the. Legislature. reject. the. Governor’s. proposal.. Below. we. present. an. alternative. approach. to. strengthen.and.improve.the.sanction.policy. Alternative Approach to Strengthening the CalWORKs Sanction We recommend an in\u2011person engagement strategy for each case that is in sanction status for three or more months. If upon being contacted by a caseworker, the family does not have good cause, cannot meet an exemption criteria, and is unwilling to participate, we recommend reducing the family’s grant to one\u2011half of its original total. There. are. some. CalWORKs. families. headed. by. able-bodied. adults. who.could.meet.program.participation.requirements,.but.choose.not.to.do. so.and.accept.the.current.sanction..In.order.to.engage.the.adults.in.these. families.in.work.participation,.we.propose.a.reengagement.strategy,.in.part. modeled.on.a.sanction.prevention.project.in.Los.Angeles.County. Los Angeles County Approach to Preventing Sanctions.. In.order. to.improve.compliance.with.work.participation.and.avoid.sanctions,.Los. Angles. County. developed. a. project. designed. to. engage. noncompliant. families..Specifically,.within.ten.days.of.sending.the.notice.of.noncompli- ance,.a.telephone.contact.is.attempted..If.the.phone.contact.fails,.a.letter. notifying.them.of.a.home.visit.is.mailed.to.the.recipient..(Recipients.may. decline.the.home.visit.).Then,.by.phone.or.home.visit,.welfare.caseworkers. provide. information.about.supportive.services,.program.requirements,. program.exemptions,.and.the.sanction.process..Based.on.the.discussion. with.the.client,.the.caseworker.attempts.to.resolve.the.pending.sanction.. The.majority.of.the.cases.contacted.in.this.project.were.able.to.avoid.a. sanction.because: The.recipient.agreed.to.participate.(20.percent).or.went.to.work. (6.percent); The. caseworker. determined. that. the. client. met. the. criteria. for. good.cause.for.nonparticipation.(20.percent),.or.met.an.exemption. criteria.(9.percent);.or Compliance.was.met.through.other.means.(22.percent). California Work Opportunity and Responsibility to Kids C 133 Legislative Analyst’s Office Long\u2011Term Sanctions..Many.cases.resolve.their.sanction.sometime. after.entering.sanction.status..Over.a.24-month.period,.Riverside.County. found.that.69.percent.of.cases.never.experienced.a.sanction.while.31.per- cent.had.at.least.one.month.in.sanction.status..Of.the.31.percent.that.were. sanctioned,.about.62.percent.resolved.their.sanction.at.some.point.over. the.two.years..The.remaining.38.percent.of.sanctioned.cases.never.ended. their.sanction,.apparently.because.they.were.unwilling.to.do.so. A Stronger Sanction for Those Unwilling to Comply..We. think.a. sanction.more.narrowly.targeted.at.those.unwilling.to.comply.has.merit.. Specifically.we.believe.that.those.in.sanction.status.for.over.three.months. should.be.contacted,.by.phone.or.home.visit,.based.on.the.Los.Angeles. County.engagement.model.described.above..If.upon.making.contact.with. a.caseworker,.the.family.does.not.have.good.cause,.cannot.meet.an.exemp- tion.criteria,.and.is.unwilling.to.participate,.their.grant.could.be.reduced. to.one-half.of.its.original.total..If.this.stronger.sanction.were.adopted.by. the.Legislature,.we.recommend.requiring.DSS.to.report.on.the.impacts. on.families.of.this.increased.sanction..Based.on.the.results.of.the.report,. the.Legislature.could.further.modify.the.sanction.policy. Analyst’s Recommendation We.recommend.enactment.of.legislation.(1).requiring.a.home.visit.or. other.in-person.contact.with.each.family.who.is.out.of.compliance.for.three. months.or.more,.and.(2).increasing.the.sanction.to.50.percent.of.a.family’s. grant.if.the.adult.refuses.to.comply.with.participation.requirements. govErnor’s tiME-liMit proposals In order to increase work participation, the Governor’s budget proposes new time limits on children whose parents cannot or will not comply with the California Work Opportunity and Responsibility to Kids participation requirements. We review the impact of these time limits on work participation, families, and the state budget. We recom\u2011 mend rejecting the proposed time limits because they are not needed to meet federal work participation requirements. Safety Net Time Limit.. Currently,. after. five. years. of. assistance,. a. family’s.grant.is.reduced.by.the.adult.portion,.and.the.children.continue.to. receive.a.child-only.grant.in.the.safety.net.program..The.budget.proposes. to.eliminate.the.safety.net.grant.for.children.whose.parents.fail.to.comply. with.the.federal.work.participation.requirements.as.of.November.1,.2007.. Families.currently.on.the.safety.net.would.be.given.90.days.to.increase. their.work.hours.to.remain.eligible..Families.unable.to.meet.federal.re- quirements.would.be.terminated.from.aid. C 13\ufffd Health and Social Services 2007-08 Analysis Working Families Could Not Reenter Safety Net..We.note.that.fami- lies.who.are.unable.to.sufficiently.increase.their.work.participation.within. the.90-day.window.described.above.would.generally.be.unable.to.return. to.the.safety.net.even.if.they.later.worked.sufficient.hours..This.is.because. the.income.ceiling.for.families.applying.for.CalWORKs.is.below.the.income. one.would.typically.earn.if.one.met.federal.participation.requirements.. This.represents.a. catch-22 .because.the.family.will.be.unable.to.return. to.the.safety.net.regardless.of.work.effort. Child\u2011Only Time Limit..The.budget.also.proposes.to.limit.assistance. to.five.years.for.most.other.child-only.cases.(such.as.those.with.parents. who.are.undocumented.or.ineligible.due.to.a.previous.felony.drug.convic- tion)..These.time-limit.policies.are.estimated.to.result.in.savings.of.about. $336.million.in.2007-08. Time\u2011Limit Impacts on Safety Net Recipients..In.the.current.year,. the.budget.estimates.that.there.are.45,100.families.in.the.safety.net,.rising. to.about.50,000.in.2007-08..The.budget.assumes.that.in.2007-08,.26.percent. of.these.families\u201413,000.cases\u2014will.work.sufficient.hours.to.maintain. eligibility.for.the.safety.net..The.DSS.bases.this.26.percent.rate.on.data. indicating.that.currently.about.19.percent.of.safety.net.cases.are.meeting. the.federal.participation.requirements,.and.that.when.faced.with.complete. benefit.termination,.an.additional.7.percent.who.are.working.part.time. would.increase.their.hours.so.as.to.remain.eligible..The.budget.estimates. that.the.other.37,000.cases,.with.94,400.children,.would.lose.aid.as.of.No- vember.2007,.rising.to.39,600.cases.(101,000.children).by.June.2008. Time\u2011Limit Impacts on Other Child\u2011Only Cases..The.budget.esti- mates.that.there.are.approximately.38,000.child-only.cases.with.undocu- mented.parents.or.parents.with.felony.convictions.making.them.ineligible. for.CalWORKs,.that.have.received.aid.for.five.or.more.years..These.cases. have.approximately.73,300.children..As.of.November.1,.2007,.the.budget. proposes.to.eliminate.the.grants.for.these.73,300.children. Fiscal Impacts..The.budget.estimates.that.the.safety.net.time.limit. will.result.in.savings.of.$176.million.in.2007-08.based.on.part-year.imple- mentation,.rising.to.$268.million.in.2008-09..The.child-only.time.limit.is. estimated.to.result.in.savings.of.$160.million.in.2007-08.rising.to.$239.mil- lion.in.2008-09. Impacts on Work Participation Rate..The.safety.net.time.limit.would. increase.participation.in.two.ways..First,.it.modestly.increases.the.num- ber.of.families.working.enough.hours.to.meet.federal.requirements.(the. 7.percent.of.families.on.the.safety.net.who.are.working.part-time.and.are. assumed.to.reach.the.federally.required.levels.in.response.to.potential. benefit.termination)..Second,.those.unable.to.meet.federal.participation. would.have.their.benefits.terminated..By.removing.these.cases.from.as- California Work Opportunity and Responsibility to Kids C 135 Legislative Analyst’s Office sistance,. it. reduces. the. denominator,. thus. increasing. the. participation. rate.. The. budget. estimates. that. these. combined. impacts. will. raise. the. work.participation.rate.by.3.percent.in.FFY.2008,.and.just.over.4.percent. in.FFY.2009..These.estimates.appear.reasonable..Time.limiting.benefits. for.other.child-only.cases.(where.the.parents.are.ineligible.because.they. are.drug.felons.or.undocumented).has.no.impact.on.work.participation.. This. is.because. they.are.already.excluded. from.the.work.participation. calculation..If.the.Legislature.were.to.reject.these.time-limit.proposals,.the. CalWORKs.budget.would.increase.by.$336.million.in.2007-08..We.note.that. this.increase.in.expenditures.would.increase.the.CRC.by.approximately. 9.percent.due.to.the.additional.excess.MOE.spending. Analyst’s Recommendation.. Because. the. proposed. five-year. time. limits.for.safety.net.cases.and.other.child-only.cases.are.not.necessary.to. meet.federal.work.participation.rates.and.would.substantially.reduce.the. income.for.children.in.these.families,.we.recommend.that.the.Legislature. reject.these.time.limit.proposals..We.note.that.these.proposals.provide.sav- ings.of.$336.million.in.2007-08,.rising.to.$507.million.in.2008-09..Rejecting. these.policies.will.require.the.Legislature.to.identify.alternative.budget. solutions.elsewhere. inCrEasing partiCipation through food staMps bEnEfits By providing additional state\u2011funded food stamps to families who are working sufficient hours to meet federal participation requirements but are not on California Work Opportunity and Responsibility to Kids, California could increase its work participation rate by nearly 10 percent. Based.on.data.from.Los.Angeles.County,.we.estimate.that.there.are. approximately.42,000.families.statewide.who.are.working.enough.hours. to.meet.federal.participation.requirements.and.are.receiving.food.stamps. but.no.CalWORKs.grant..Some.of.these.families.are.former.CalWORKs. families.while.others.are.not..If.California.were.to.increase.the.food.stamps. allotment.for.these.families.(for.example,.by.$50.per.month).using.MOE. funds,.these.cases.would.become.assistance.cases.for.purposes.of.calculat- ing.the.federal.work.participation.rate..By.adding.them.to.the.calculation,. California’s. work. participation. rate. would. increase. by. approximately. 9.5.percent..We.note.that.adding.these.cases.would.increase.the.caseload,. thus.reducing.CRC.by.about.3.5.percent..The.net.benefit.in.terms.of.work. participation.would.be.about.6.percent.(9.5.percent.participation.increase. less.a.3.5.percent.reduction.in.the.CRC). C 13\ufffd Health and Social Services 2007-08 Analysis Impacts on Recipients..Receiving.this.benefit.(which.does.not.involve. a. cash. grant,. only. food. stamps). would. be. seamless. to. recipients.. The. benefits.would.be.added.to.their.regular.food.stamps.allotment.which.is. currently.provided.through.Electronic.Benefit.Transfer.(EBT).cards.which. work.like.debit.cards.at.food.retailers..Recipients.already.complete.a.quar- terly.report.regarding.their.income.and.eligibility.status.in.order.to.receive. food.stamps..It.may.be.necessary.to.make.minor.modifications.to.this.form,. but.completing.the.form.would.not.be.an.additional.burden.for.recipients.. Because.these.are.state.funded.benefits,.there.would.be.no.impact.on.the. federal.five-year.time.limit.for.receiving.TANF-funded.benefits. Implementation Issues..The.most.significant.barrier.to.implementa- tion.of.this.change.is.making.the.necessary.programming.changes.to.the. EBT.system.and.to.the.four.welfare.automation.consortia..Costs.for.repro- gramming.are.unknown..A.DSS.sponsored.workgroup.(comprised.of.state. staff,.legislative.staff,.county.representatives,.and.advocates).is.currently. examining.these.implementation.issues..The.annual.cost.of.the.enhanced. benefit.would.be.about.$25.million.if.it.were.set.at.$50.per.month..The.exact. food.stamp.level.would.be.a.policy.decision.for.the.Legislature. Analyst’s Recommendation..Although.the.Governor’s.budget.projects. that.California.will.attain.federal.compliance.by.FFY.2008,.there.are.risks. associated.with.this.projection..First,.attaining.compliance.is.dependent. on.receiving.the.excess.MOE.CRC..This.credit.is.part.of.current.regula- tions.and.may.be.eliminated.administratively.in.future.years..Moreover,. the.federal.government.has.not.yet.approved.California’s.methodology.for. estimating.the.credit..If.there.is.disagreement,.the.magnitude.of.the.credit. could.be.smaller..Second,.attaining.compliance.assumes.that.current.law. policies.will.increase.participation.by.10.percent.by.FFY.2008..Although. this.is.possible,.we.believe.this.10.percent.increase.may.be.overly.optimistic.. Given.the.potential.risk.that.California.may.not.be.in.compliance.in.FFY. 2008.(resulting.in.federal.penalties.of.up.to.$149.million),.the.Legislature. may.wish.to.consider.this.strategy.which.would.improve.participation. compliance. by. about. 6.percentage. points,. and. provide. additional. food.. stamp.benefits.for.the.working.poor.. In-Home Supportive Services C 137 Legislative Analyst’s Office The.In-Home.Supportive.Services.(IHSS).program.provides.various. services.to.eligible.aged,.blind,.and.disabled.persons.who.are.unable.to. remain.safely.in.their.own.homes.without.such.assistance..An.individual. is.eligible.for.IHSS.if.he.or.she.lives.in.his.or.her.own.home\u2014or.is.capable. of.safely.doing.so.if.IHSS.is.provided\u2014and.meets.specific.criteria.related.to. eligibility.for.the.Supplemental.Security.Income\/State.Supplementary.Pro- gram..In.August.2004,.the.U.S..Department.of.Health.and.Human.Services. approved.a.Medicaid.Section.1115.demonstration.waiver.that.made.about. 93.percent.of.IHSS.recipients.eligible.for.federal.financial.participation.. Prior.to.the.waiver,.about.25.percent.of.the.caseload.were.not.eligible.for. federal.funding.and.were.served.in.the.state-only. residual .program. The. budget. proposes. nearly. $1.5.billion. from. the. General. Fund. for.support.of. the.IHSS.program.in.2007-08,.an. increase.of.$27.million. (1.9.percent).compared.to.estimated.expenditures.in.the.current.year..This. increase.is.attributable.to.caseload.growth.partially.offset.by.increased. savings.from.full.implementation.of.the.quality.assurance.reforms.enacted. in.2004-05. ihss CasEloads ovErbudgEtEd We recommend that proposed General Fund spending for In\u2011 Home Supportive Services be reduced by $26.9 million in 2006\u201107 and $33.9 million for 2007\u201108 because the caseload is overstated. (Reduce Item 5180\u2011111\u2011001 by $33.9 million.) Governor’s Budget..For.2006-07,.the.revised.budget.for.IHSS.assumes. that.the.caseload.will.grow.by.6.4.percent.over.the.previous.year..As.a.re- sult,.the.budget.estimates.the.average.number.of.IHSS.cases.to.be.375,000. in.2006-07,.as.shown.in.Figure.1.(see.next.page)..The.Governor’s.budget. estimates.that.the.IHSS.caseload.will.reach.395,000.cases.in.the.budget. year,.an.increase.of.5.4.percent.over.the.current.year. in-hoME supportivE sErviCEs C 138 Health and Social Services 2007-08 Analysis LAO Estimate..Based.on.our.review,.we.conclude.that.the.Governor’s. caseload.projections.for.the.current.and.budget.year.are.overstated..Our. conclusion.is.based.on.an.examination.of.the.actual.caseload.for.the.first. six.months.of.2006-07,.which.indicates.that.the.average.monthly.caseload. is.significantly.below.the.Governor’s.current.estimate.for.that.six.month. period..We.have.adjusted.the.budget’s.caseload.downward.to.account.for. the.most.recent.actual.monthly.caseload.(December.2006)..Figure.1.reflects. this.adjustment,.and.shows.that.the.total.caseload.is.overstated.by.2.percent. for.2006-07.and.by.2.5.percent.for.2007-08..Because.the.caseload.is.over- stated,.we.estimate.that.the.IHSS.program.is.overbudgeted.by.$77.6.million. ($26.9.million.General.Fund).in.2006-07,.and.$97.7.million.($33.9.million. General.Fund).in.2007-08..Accordingly,.we.recommend.that.the.Legislature. recognize.a.General.Fund.savings.of.$26.9.million.in.2006-07.and.reduce. the.IHSS.budget.by.$33.9.million.General.Fund.in.2007-08. Figure 1 IHSS Caseload Governor’s Budget and LAO Estimate Difference Year Governor’s Budget LAO Estimate Amount Percent 2005-06 352,386 352,386 \u2014 \u2014 2006-07 374,999 367,362 -7,637 -2.0% 2007-08 395,100 385,391 -9,709 -2.5 A.separate.analysis.of.unaudited.monthly.cash.expenditures.for.the. program.indicates.that.IHSS.savings.may.be.even.greater.than.indicated. above..Six.months.into.the.year,.monthly.cash.expenditures.are.running. below.where.one.would.expect.them.to.be,.given.the.amount.of.funding. appropriated. for. the. program.. The. lower-than-expected. expenditures. suggest.that.the.IHSS.cost.per.case.is.declining..However,.we.are.reluctant. to.recognize.additional.savings.at.this.time.because.(1).the.expenditures. are.unaudited.and.(2).the.budget.already.reflects.a.reduction.in.the.cost. per.case.due.to.full.implementation.of.the.quality.assurance.initiative..We. will.continue.to.monitor.expenditures.and.report.to.the.Legislature.on.the. IHSS.caseload.and.expenditures.at.the.May.Revision. In-Home Supportive Services C 13\ufffd Legislative Analyst’s Office frEEzing statE partiCipation in providEr wagEs The budget proposes to limit state participation in provider wages and benefits. This proposal results in General Fund savings of at least $14 million in 2007\u201108, plus substantial cost avoidance in future years. We review current law regarding state participation in wages, describe the General Fund exposure associated with current law, and provide alternatives to the Governor’s proposal. Program Funding..The.federal,.state,.and.local.governments.share.in. the.cost.of.the.IHSS.program..The.federal.government.pays.for.50.percent. of.program.costs.that.are.eligible.for.reimbursement.through.the.Medicaid. Program..Under.the.recently.approved.Medicaid.demonstration.waiver,. about.93.percent.of.cases.receive.federal.funding..The.state.pays.65.per- cent.and.the.counties.pay.35.percent.of.the.nonfederal.share.of.provider. wages.. State Participation in Wage Increases. Chapter.108,.Statutes.of.2000. (AB.2876,.Aroner),.authorized.the.state.to.pay.65.percent.of.the.nonfederal. cost.of.a.series.of.wage.increases.for.IHSS.providers.working.in.counties. that.have.established. public.authorities. .The.public.authorities,.on.behalf. of.counties,.negotiate.wage.increases.with.the.representatives.of.IHSS.pro- viders..The.wage.increases.began.with.$1.75.per.hour.in.2000-01,.potentially. to.be.followed.by.additional.increases.of.$1.per.year,.up.to.a.maximum. wage.of.$11.50.per.hour..Chapter.108.also.authorizes.state.participation.in. health.benefits.worth.up.to.60.cents.per.hour.worked.. State.participation.in.wage.increases.after.2000-01.is.contingent.upon. meeting.a.revenue. trigger .whereby.state.General.Fund.revenues.and. transfers.grow.by.at. least. 5.percent. since. the. last. time.wages.were. in- creased..Pursuant.to.this.revenue.trigger,.the.state.currently.participates. in.wages.of.$10.50.per.hour.plus.60.cents.for.health.benefits,.for.a.total. of.$11.10.per.hour..Based.on.current.revenue.estimates,.the.final.trigger. increasing.state.participation.in.wages.to.$12.10.per.hour.would.be.pulled. for.2007-08. Future General Fund Exposure. Although. the. state. participates. in. wages.up.to.$11.10.per.hour,.current.county.wages.range.from.$7.50.to. $13.30.per.hour..Figure.2.(see.next.page).shows.that.several.large.counties,. such.as.Los.Angeles,.San.Diego,.and.Riverside.have.wages.below.$11.10.. Given.that.these.large.counties.are.below.$11.10,.the.state.General.Fund. faces.significant.exposure.to.increased.costs.if.counties.increase.wages.. Specifically,.if.all.counties.were.to.increase.their.wages.to.$11.10.per.hour,. the.increased.annual.cost.to.the.General.Fund.would.be.about.$225.million.. Once.the.final.wage.trigger.is.pulled,.allowing.state.participation.in.wages. up.to.$12.10.per.hour,.the.General.Fund.exposure.increases.by.$125.million. C 1\ufffd0 Health and Social Services 2007-08 Analysis to.a.total.of.about.$350.million.annually..It.is.difficult.to.estimate.how.fast. wages.will.increase,.as.wage.increases.are.largely.dependent.on.county. fiscal.health.and.collective.bargaining.outcomes..Nevertheless,.we.believe. it.will.take.several.years.to.reach.the.$350.million.in.additional.annual. costs..As.a.point.of.reference,.from.July.to.November.2006,.the.General. Fund.costs.from.increased.wages.and.benefits.was.about.$20.million. Figure 2 IHSS Hourly Wages and Benefits by County Approved by January 10, 2007 Alameda $11.42 Orange $9.00 Alpine 7.50 Placer 9.60 Amador 8.85 Plumas 8.75 Butte 8.75 Riverside 9.60 Calaveras 8.98 Sacramento 11.10 Colusa 7.50 San Benito 9.50 Contra Costa 11.83 San Bernardino 9.23 Del Norte 8.75 San Diego 9.67 El Dorado 9.10 San Francisco 12.30 Fresno 9.80 San Joaquin 9.53 Glenn 7.75 San Luis Obispo 9.60 Humboldt 7.50 San Mateo 11.38 Imperial 7.50 Santa Barbara 10.60 Inyo 7.50 Santa Clara 13.30 Kern 8.55 Santa Cruz 11.10 Kings 8.60 Shasta 7.50 Lake 7.50 Sierra 8.75 Lassen 7.50 Siskiyou 7.50 Los Angeles 8.96 Solano 11.10 Madera 7.50 Sonoma 11.10 Marin 11.10 Stanislaus 8.85 Mariposa 7.75 Sutter 8.85 Mendocino 9.60 Tehama 8.10 Merced 8.10 Trinity 7.50 Modoc 7.50 Tulare 8.10 Mono 7.50 Tuolumne 7.50 Monterey 11.10 Ventura 9.60 Napa 11.10 Yolo 11.10 Nevada 8.75 Yuba 9.10 In-Home Supportive Services C 1\ufffd1 Legislative Analyst’s Office Governor’s Proposal. The.budget.proposes.to.freeze.state.participa- tion.in.wages.and.benefits..Such.a.freeze.results.in.a.savings.of.$14.million. in.2007-08..This.is.because.some.counties.already.pay.providers.over.$11.10,. and.absent.this.proposal,.the.state.would.have.to.increase.its.participation. in.those.wages..Depending.on.the.degree.to.which.the.remaining.counties. would.have.increased.wages.absent.this.proposal,.the.Governor’s.approach. would.result.in.additional,.unknown.cost.avoidance.in.2007-08..Finally,. the. Governor’s. proposal. eliminates. the. $350.million. future. exposure. discussed.above. We.note.that.the.Governor’s.proposal.does.not.limit.the.wages.paid. to.IHSS.providers;.rather,.it.caps.state.participation.to.the.level.in.effect. on.the.date.the.freeze.is.enacted..Counties.that.elect.to.pay.wages.above. what.they.were.paying.as.of.the.wage.freeze.would.share.such.wage.cost. increases.with.the.federal.government.(50.percent.county.and.50.percent. federal)..The.state.would.continue.to.pay.its.65.percent.share.of.the.nonfed- eral.costs.of.wages.up.to.the.county.wage.in.place.on.the.date.of.the.wage. freeze..This.means.that.the.counties.that.have.higher.wages.in.place.at. the.time.of.the.freeze.would.lock.in.a.greater.degree.of.state.participation. prospectively.than.the.counties.with.lower.wages.as.of.that.date.. Current\u2011Year Wage Increases..The.administration.believes.it.has.the. authority.to.freeze.state.participation.in.wages.to.January.10,.2007.levels. during.2006-07..However,. the.administration.now.indicates. that. it.will. continue.to.participate.in.post-January.10,.2007.wage.increases.until.its. urgency.legislation.proposal.prospectively.limiting.state.participation.is. enacted.by.the.Legislature. Impacts on Recipients and Providers..In.the.short.term,.we.believe. that.freezing.wages.at.their.current.levels.will.have.minimal.influence. on.the.supply.of.available.IHSS.providers..However,.in.the.long.run,.if. counties.decide.that.they.cannot.afford.to.increase.wages.without.state. participation,.there.may.be.a.reduction.in.the.supply.of.providers..This. could.impact.the.quality.of.care.for.IHSS.recipients,.as.it.may.be.more. difficult.to.find.skilled.providers..Additionally,.about.43.percent.of.IHSS. providers. are. immediate. family. members,. and. assuming. the. provider. lives.with.the.recipient,.a.long-term.wage.freeze.may.limit.the.household. income.of.the.provider.and.the.recipient. Alternatives to the Governor’s Proposal By. freezing. state. participation. in. wages,. the. Governor’s. proposal. eliminates.the.state’s.current.exposure.of.about.$350.million.from.future. wage.increases..Below.we.present.some.alternatives.to.this.proposal.which. offer.less.budgetary.savings. C 1\ufffd2 Health and Social Services 2007-08 Analysis Alternative 1: Reject the Governor’s Proposal. The. Legislature. could.reject.the.proposal,.and.allow.the.final.wage.trigger.to.increase.state. participation.in.wages.and.benefits.up.to.$12.10.per.hour..This.alternative. would.result.in.(1).costs.of.$14.million.in.2007-08,.(2).unknown.additional. costs. in.2007-08.depending.on.county.wage.increases,.and.(3).a.future. exposure.of.about.$350.million. Alternative 2: Eliminate Final Wage Trigger. The.Legislature.could. eliminate.the.final.wage.trigger,.but.allow.state.participation.in.wages.up. to.the.currently.established.combined.level.of.$11.10.per.hour..This.would. result.in.a.savings.of.$14.million.in.2007-08,.and.would.limit.future.state. exposure.to.about.$225.million.as.counties.increase.their.wages.towards. $11.10..One.advantage.of.this.alternative.is.that.it.would.give.all.counties. that.are.currently.below.$11.10.per.hour.an.opportunity.to.increase.wages. and.obtain.state.participation..The.disadvantage.is.that.it.allows.unknown. additional.costs.in.2007-08.and.leaves.an.exposure.of.$225.million,.which. is.significantly.more.than.the.Governor’s.approach. Alternative 3: Delay Final Wage Trigger. Another.option.is.delaying. the.final.wage.increase.indefinitely..This.would.allow.all.counties.to.receive. state.participation.in.wages.up.to.the.currently.established.$11.10.per.hour. in.2007-08,.and.would.leave.the.decision.of.raising.state.participation.to. $12.10.to.future.years,.when.the.state’s.fiscal.health.may.have.improved..In. the.short.run,.this.would.limit.the.General.Fund.exposure.to.$225.million.. However,.it.adds.unknown.costs.to.2007-08,.compared.to.the.Governor’s. proposal,.depending.on.the.number.of.counties.that.increase.their.hourly. IHSS.provider.wage.up.to.$11.10.. Conclusion. The. Governor’s. proposal. to. freeze. wages. results. in. budgetary.savings.of.$14.million. in.2007-08..Additionally,. it.eliminates. potential.future.annual.costs.of.about.$350.million.for.provider.wages.. In.deciding.whether.to.adopt.this.proposal,.the.Legislature.should.weigh. the.budgetary.savings.against.the.potential.for.a.long.term.county.wage. freeze.which.may.make.it.somewhat.more.difficult.for.recipients.to.find. skilled.providers. EnhanCing prograM intEgrity Chapter 229, Statutes of 2004 (SB 1104, Committee on Budget and Fiscal Review), created an In\u2011Home Supportive Services quality assur\u2011 ance (QA) initiative designed to improve the accuracy of needs assess\u2011 ments and program integrity. Although the QA initiative has improved the accuracy and standardization of service hour authorizations by social workers, there are limited controls assuring that recipients receive their service hours in accordance with their case plan. Furthermore, In-Home Supportive Services C 1\ufffd3 Legislative Analyst’s Office current law and regulations are unclear as to whether recipients are permitted to reallocate their total approved hours in a way that devi\u2011 ates from the allocation determined by the social worker. We review the department’s implementation of the quality assurance initiative, and provide recommendations to enhance program integrity and increase the likelihood that recipients receive services in accordance with their case plans. Background The.IHSS.program.provides.various.services.to.eligible.aged,.blind,. and.disabled.persons.who.are.unable.to.remain.safely.in.their.own.homes. without.such.assistance..Figure.3.(see.next.page).shows.specific.tasks.for. which.IHSS.recipients.may.receive.assistance..The.IHSS.program.relies.on. county.social.workers.to.determine.the.number.of.hours.for.each.type.of. IHSS.task.that.a.recipient.needs.in.order.to.remain.safely.in.his\/her.own. home..Typically,.social.workers.conduct.reassessments.once.every.year.to. determine.whether.the.needs.of.a.recipient.have.changed..After.the.social. worker.has.determined.the.appropriate.tasks,.and.time.needed.for.each,. a.notice.of.action.(NOA).is.sent.informing.the.recipient.of.the.number.of. assigned.hours.for.each.task.. Quality Assurance Initiative Chapter.229.outlined.a.number.of.quality.assurance.(QA).activities.to. be.performed.by.the.Department.of.Social.Services.(DSS),.the.counties,. and.the.Department.of.Health.Services.to.improve.the.accuracy.of.IHSS. needs.assessments,.enhance.program.integrity,.and.detect.and.prevent. program.fraud.and.abuse..A.key.feature.of.the.QA.initiative.is.improving. the.accuracy.of.assessments.for.service.hours..This.is.important.because. the.correct.assignment.of.service.hours.by.task.is.critical.if.recipients.are. to.remain.in.their.own.homes..For.similar.reasons,.as.we.discuss.later,.it. is.important.for.recipients.to.use.their.authorized.hours.as.allocated.. Below.we.discuss. the.most.significant.QA.changes.concerning. the. development.of.hourly.task.guidelines.and.county.QA.units. Hourly Task Guidelines Prior.to.the.QA.initiative,.social.workers.relied.significantly.on.their. own.judgment.when.determining.the.number.of.service.hours.to.provide. to.IHSS.recipients..As.a.result,.IHSS.recipients.with.similar.disabilities,. but.residing.in.different.counties.may.not.have.been.granted.similar.hour. allocations..Another.way.to.identify.social.worker.variance.in.assigning. C 1\ufffd\ufffd Health and Social Services 2007-08 Analysis Figure 3 In-Home Supportive Services Task Categories Tasks Examples Domestic Services Cleaning; dusting; picking up; changing linens; changing light bulbs; wheelchair maintenance; taking out garbage Laundry Sorting; washing; hanging; folding; mending and ironing Shopping and Errands Purchasing groceries, putting them away; picking up prescriptions; buying clothing Meal Preparation Planning menus; preparing food; setting the table Meal Cleanup Washing dishes and putting them away Feeding Assistance with food and fluid intake Ambulation Assisting recipient with walking or moving in home or to vehicle Bathing, Oral Hygiene, Grooming Cleaning the body; getting in or out of the shower; hair care; shaving; grooming Routine Bed Baths Cleaning the body Dressing Putting on\/ taking off clothing Medications and Assistance with Prosthetic Devices Medication administration assistance; taking off\/putting on, maintaining, and cleaning prosthetic devices Bowel and Bladder Bedpan\/ bedside commode care; application of diapers; assisting with getting on\/off commode or toilet Menstrual Care External application of sanitary napkins Transfer Assistance with standing\/ sitting Repositioning\/ Rubbing Skin Circulation promotion; skin care Respiration Assistance with oxygen and oxygen equipment Protective Supervision Ensuring recipient is not harming themselves hours.is.to.compare.the.average.hour.allocations.per.case.among.the.ten. largest. counties.. As. shown. in. Figure.4,. among. California’s. ten. largest. counties.in.2006-07,.average.hours.per.case.ranged.from.69.to.101.hours.. We. assume. that. these. large. counties. are. serving. similar. populations.. Thus,.differences.in.the.average.hours.assigned.are.likely.to.be.the.result. of.social.worker.discretion.and.practice. In-Home Supportive Services C 1\ufffd5 Legislative Analyst’s Office Figure 4 IHSS Service Hours Vary Substantially Across Largest Counties 2006-07 County Average Hours Per Casea Average Monthly Cases Santa Clara 69.6 11,202 Orange 69.7 11,557 San Diego 79.7 19,027 Los Angeles 80.6 149,806 San Francisco 82.1 16,209 California 83.9 344,484 San Bernardino 86.3 14,935 Alameda 91.6 13,279 Riverside 94.0 10,229 Sacramento 98.5 16,681 Fresno 101.1 11,019 a These averages are from the IHSS Personal Care Services Program (PCSP) which is approximately 93 percent of the total IHSS caseload. To.meet.the.requirements.of.Chapter.229,.DSS.lead.a.workgroup.com- posed.of.state.representatives,.county.staff,.legislative.staff,.and.advocacy. groups..The.workgroup.collected.information.from.each.county.on.the. average.number.of.hours.granted.per.IHSS.case..They.then.considered. various. levels. of. IHSS. recipient. ability,. and. developed. corresponding. ranges.of.times.that.would.be.appropriate.to.grant.for.each.task..From.this. workgroup,.hourly.task.guidelines.(HTG).were.created.to.provide.social. workers.with.a.standard.tool.to.ensure.that.service.hours.are.authorized. consistently.and.accurately.throughout.the.state.. Since.September.2006,.HTG.have.been.used.statewide.by.social.workers. during.their.assessments..The.guidelines.help.social.workers.to.determine. a.recipient’s.level.of.ability.to.perform.each.IHSS.task..After.determining.a. recipient’s.level.of.ability,.the.social.worker.decides.if.the.number.of.hours. of.assistance.needed.per.week.is.within.the.HTG.range.for.a.particular. task..The.HTG.do.not.take.away.the.individualized.assessment.process,. but.instead.require.a.social.worker.to.provide.a.written.justification.if.a. recipient.is.assessed.as.needing.hours.that.are.outside.(either.above.or. C 1\ufffd\ufffd Health and Social Services 2007-08 Analysis below).the.range.established.by.HTG…These.task.guidelines.increase.the. probability.of.consistent.assessments.throughout.the.state.. In.a.further.effort.to.achieve.uniformity,.the.IHSS.Social.Worker.Train- ing.Academy.was.developed.as.a.standardized.method.to.educate.social. workers. in. QA. and. the. proper. usage. of. HTG.. Interviews. with. county. workers.suggest.that.HTG.and.uniform.training.will.likely.increase.the. uniformity.of.assessments.among.counties.so.that.IHSS.recipients.moving. from.one.county.to.another.will.not.likely.experience.large.increases.or. decreases.in.their.hour.allocations. County Quality Assurance Units and Reviews Prior. to. the.QA.initiative,.county.efforts. to. review.IHSS.cases.and. hours.varied..Some.counties.dedicated.resources.to.reviewing.cases.and. promoting.uniformity,.while.others.did.not..Pursuant.to.QA.requirements,. each.county.has.now.established.a.QA.unit.to.review.and.investigate.cases.. The.2006\u201107 Budget Act.funded.a.total.of.110.QA.positions,.which.were.al- located.to.the.58.counties..The.QA.units.conduct.desk.reviews,.home.visits,. and.targeted.reviews..Although.QA.reviews.began.in.2005-06,.legislative. reporting.requirements.were.not.in.place.until.2006-07..As.a.result,.DSS. indicates.that.it.is.now.compiling.quarterly.reports.on.these.reviews,.and. these.results.will.be.available.during.budget.hearings.in.2007. Mandatory Desk Reviews..Chapter.229.requires.counties.to.complete. 250.randomly.selected.desk.reviews.each.year.for.each.QA.worker.in.a. given.county..Thus,.a.total.of.about.27,500.desk.reviews.will.be.conducted. during.the.current.year..During.a.desk.review,.a.QA.worker.reviews.a.case. to.verify.the.presence.and.accuracy.of.all.required.forms,.necessary.hour. calculations,.and.documentation..This.type.of.review.is.used.to.ensure.that. caseworkers.accurately.apply.the.IHSS.rules.and.procedures.for.assessing. a.recipient’s.need.for.services..A.desk.review.may.be.supplemented.with. a.phone.call.or.home.visit,.but.interaction.with.the.program.recipient.is. not.required. Home Visits. Counties.are.required.to.complete.50.home.visits.per.al- located.QA.worker.per.year..A.home.visit.requires.QA.workers.to.schedule. an.in-person.meeting.with.an.IHSS.recipient.to.validate.the.information. in.the.case.file.and.verify.that.the.services.authorized.are.consistent.with. the.needs.of.the.recipient.. Targeted Reviews..Chapter.229.requires.counties.to.develop.a.sched- ule.under.which.QA.staff.will.periodically.perform.targeted.case.reviews.. The.purpose.of.such.reviews.is.to.look.more.closely.at.individuals.and. situations.that.raise.concerns.about.the.delivery.of.IHSS.services..Coun- ties.may.use.broad.discretion.in.determining.the.types.of.cases.to.target.. In-Home Supportive Services C 1\ufffd7 Legislative Analyst’s Office Counties.have.used.information.gathered.during.home.visits.and.desk. reviews.to.determine.which.cases.to.target.. One.example.of.cases.some.counties.have.chosen.to.target.involves. providers. who. are. paid. for. delivering. over. 300. hours. of. services. each. month..Working.over.300.hours.per.month.is.the.equivalent.of.working. 10.hour.days,.seven.days.per.week..Although.the.program.does.not.pre- vent.providers.from.working.over.300.hours,.there.is.some.concern.that.it. would.be.difficult.to.provide.this.much.service.to.a.recipient.if.the.provider. does.not.live.in.the.same.household..As.such,.some.counties.have.opted.to. target.cases.involving.a.provider.that.is.paid.for.over.300.hours.of.services. per.month,.but.is.not.living.with.the.recipient..These.cases.were.chosen. to.verify.that.quality.care.was.actually.being.provided.in.the.reported. amounts..Counties.believed. that. targeting. this.population.might.yield. results.that.could.lead.to.IHSS.improvements.. Expanding Quality Assurance to Service Delivery Through. a. standardized. assessment. process,. the. QA. initiative. in- creases.the. likelihood.that.recipients.with.similar. impairments.will.be. provided.similar.service.hours.to.meet.their.needs..However,.there.has. been.no.parallel.effort.to.ensure.that.the.hours.granted.are.being.provided. in. accordance. with. how. they. were. allocated.. Current. law. and. current. practice.are.unclear.as.to.whether.it.is.appropriate.for.recipients.to.real- locate.their.hours.among.tasks,.or.across.weeks,.as.long.as.they.do.not.go. over.their.total.approved.monthly.hours..At.the.assessment,.recipients.are. given.documents.suggesting.that.the.intent.of.the.program.is.to.use.hours. according.to.the.hour.allocations.assigned.by.the.social.worker,.but.there. are.no.penalties.for.reallocating.hours.without.social.worker.approval.. Below.we.review.current.law.and.current.practice.regarding.the.use.of. authorized.hours. Current Law State.law.provides.that.the.purpose.of.the.IHSS.program.is.to.provide. supportive.services.to.eligible.aged,.blind,.and.disabled.individuals.who. cannot.safely.remain.in.their.homes.without.these.services..Current.law. further.states.that.a.recipient.of.IHSS.services.shall.receive.a.description.of. each.specific.task.authorized.and.the.number.of.hours.allotted. .Current. law.also.requires.that.county.welfare.departments.reassess.each.recipient’s. need.for.service.at.least.once.every.12.months.with.limited.exceptions.. Finally,.counties.must.reassess. a.recipient’s.need.for.supportive.services. anytime.that.the.recipient.notifies.the.county.of.a.need.to.adjust .service. hours.. C 1\ufffd8 Health and Social Services 2007-08 Analysis Given.current.law.requirements.that.each.client.(1).receive.notifica- tion.of.the.tasks.and.hours.authorized,.and.(2).be.reassessed.anytime.an. adjustment.in.service.hours.is.needed,.it.appears.that.legislative.intent.is. for.clients.to.use.their.hours.of.service.as.authorized..Although.a.recipient’s. reallocating.hours.from.one.task.to.another.(for.example,.from.bathing.to. domestic.services).seems.contrary.to.current.statutory.provisions,.there. is.no.explicit.statutory.prohibition.against.such.reallocation.. Current Practice The.IHSS.program.is.designed.to.provide.individuals.with.the.services. necessary. to.allow. them. to. remain. safely. in. their.own.homes..Several. documents.provided.to.IHSS.recipients.and.providers.reinforce.the.intent. that.tasks.authorized.and.the.hours.allocated.should.be.used.in.the.way. in.which.they.were.assigned..Ultimately,.however,.this.expectation.may. be.unclear.to.recipients.and.providers. Notice of Action. After.a.social.worker.completes.an.assessment,.the. recipient.is.notified.of.the.number.of.hours.for.each.IHSS.task.they.were. granted..Currently,.this.information.is.provided.through.a.NOA.that.is. sent.only.to.the.recipient..It.then.becomes.the.responsibility.of.the.recipi- ent.to.direct.his.or.her.care.by.informing.the.provider.of.the.number.of. hours.authorized.for.each.task..As.a.result.of.this.practice,.IHSS.providers. may.only.know.what.their.clients.tell.them..For.example,. if.a.recipient. who.is.assessed.as.needing.three.hours.of.bathing.and.four.hours.of.meal. preparation.per.week.instructs.his\/her.provider.to.perform.seven.hours.of. meal.preparation.and.no.bathing,.the.provider.would.likely.not.know.that. bathing.was.a.task.approved.by.the.IHSS.social.worker..We.note.that.some. counties.have.changed.this.practice,.and.now.send.providers.a.document. that.provides.varying.details.of.the.hours.assigned.to.each.task..However,. there.is.no.established.statewide.method.for.counties.to.inform.providers. of.the.care.that.was.authorized.by.the.social.worker..The.NOA.states.that. recipients.must.notify.their.social.worker.of.any.changes.in.their.condition. that.may.affect.their.hour.allocations..However,.this.does.not.indicate.that. there.is.any.prohibition.on.reallocating.approved.hours. IHSS Recipient\/Employer Responsibility Checklist. The.recipient\/ employer.responsibility.checklist.explains.IHSS.rules.and.responsibilities,. and.is.intended.to.be.discussed.between.the.IHSS.social.worker,.recipient. (who.is.also.considered.the.employer),.and.provider..The.form.provides. places.for.these.three.parties.to.sign.to.indicate.that.they.have.discussed. the.information.provided..However,.the.form.is.often.only.signed.by.the. recipient.and.the.social.worker.at.the.time.of.the.assessment..Although.DSS. considers.this.form.to.be.required,.there.are.currently.no.consequences.if. a.provider.does.not.sign.the.form.. In-Home Supportive Services C 1\ufffd\ufffd Legislative Analyst’s Office The.form.states.that.the. recipient.has.informed.their.provider.of.the. services.authorized.and.the.time.given.to.perform.those.services. .This. statement.suggests.that.reallocating.assessed.hours.is.not.allowed.in.IHSS,. but.it.does.not.include.a.statement.that.prohibits.reallocating.hours.across. tasks.or.across.weeks. Time Cards. In.order.to.receive.payment,.recipients.and.providers.sign. and.return.timecards.to.their.counties.every.two.weeks..These.timecards. require.the.recipient.and.provider.to.report.the.total.number.of.hours.that. were.provided.each.day.of.the.pay.period,.but.do.not.ask.them.to.indicate. the.number.of.hours.they.spent.on.each.specific.task.. Since.DSS.regulations.require. that.social.workers.assess.hours.per. task.on.a.weekly.basis,.it.may.be.implied.that.hours.are.intended.to.be. used.weekly..In.other.words,.a.person.needing.100.hours.per.month.of.a. particular.service.would.be.assessed.as.needing.that.service.25.hours.per. week,.and.should.presumably.use.their.hours.accordingly..However,.there. is.currently.no.prohibition.against.reallocating.hours.across.weeks. We.are.aware.of.one.county.which.is.concerned.about.clients.reallo- cating.hours.across.weeks,.and.follows.up.with.recipients.when.they.see. that.more.than.59.percent.of.the.approved.hours.per.month.were.used. in.any.two-week.period..This.county.acknowledges.that.IHSS.recipients. may.have.weeks.where.they.need.to.use.more.or.less.of.their.approved. hours,.and.as.a.result.they.are.not.overly.concerned.when.hours.vary.by. 9.percent.or.less..It.is.the.belief.of.this.county.that.when.a.recipient.and. provider.claim.over.59.percent.of.their.hours.in.a.two-week.pay.period,.it. may.be.possible.that.the.condition.of.the.recipient.has.changed.so.drasti- cally.that.a.reassessment.is.necessary.. Bottom Line: Unclear Expectations for Recipients and Providers Program.design.and.documents.imply.that.hours.should.be.used.as. they.were.allocated..However,.because.there.is.no.explicit.prohibition.on. reallocating.hours.across.tasks.or.weeks,.recipients.and.providers.may.not. be.aware.that.the.intent.of.the.program.is.to.have.them.use.their.hours. as.assigned.by.the.social.worker..In.other.words,.recipients.may.believe. that.the.hours.they.receive.are.flexible.and.reallocate.them.amongst.tasks,. thereby.treating.them.as.a.block.grant.of.hours..Local.officials.indicate. that.some.IHSS.recipients.reallocate.their.total.approved.hours.between. tasks.without.social.worker.approval..This.practice.could.result.in.either. inadequate.or.unneeded.care.. In. the. former.case,.a. recipient. receiving. inadequate.care.could.be.in.jeopardy.of.being.placed.in.a.nursing.home.if. his\/her.condition.deteriorated..In.the.latter.case,.the.state.would.be.paying. for.services.that.were.unneeded.. C 150 Health and Social Services 2007-08 Analysis Analyst’s Recommendations Below.we.recommend.changes.to.current.law.and.practices.that.are. likely.to.result.in.clearer.expectations.for.IHSS.recipients,.providers,.social. workers,.and.administrators..Figure.5.provides.a.brief.summary.of.the. proposed.recommendations..If.adopted,.these.recommendations.would. enhance.program.integrity.and.the.delivery.of.services.by.ensuring.that. recipients.receive.the.level.and.type.of.services.authorized.by.the.social. worker. Figure 5 Summary of LAO Recommendations Clarify Expectations in Statute. Clarify in statute that reallocation of hours across tasks is prohibited without social worker approval, and place limits on reallocation of hours across weeks. Notify Provider of Authorized Tasks. Require counties to inform providers of the authorized hours by task, and require providers to acknowledge receipt of this information. Inform Recipients of Program Requirements. Modify the recipient\/ employer checklist to inform In-Home Supportive Services recipients of the requirement to use services as authorized by their social worker, and require recipients to sign this form prior to the receipt of IHSS services. Clarify Expectations in Statute As.discussed.above,.although.current.law.and.practice.suggest.that. recipients. should. not. reallocate. their. hours. among. tasks,. and. across. weeks,.such.action.is.not.prohibited..Moreover,.documented.reallocation. is.not.grounds.for.nonpayment..Therefore,.we.recommend.enactment.of. legislation. that. sets.clear.expectations. for. the.use.of.authorized.hours.. This.legislation.would.(1).prohibit.reallocation.across.tasks.without.social. worker.approval,.(2).limit.reallocation.across.weeks,.and.(3).provide.that. documented.misuse.of.hours.is.grounds.for.nonpayment..With.respect.to. reallocation.across.weeks,.we.believe.the. 59.percent .approach.discussed. above.provides.sufficient.flexibility.for.recipients.to.use.services.as.needed. while.maintaining.program.integrity. In-Home Supportive Services C 151 Legislative Analyst’s Office Make Certain Certifications Mandatory to Establish Payment In.order.to.assure.that.providers.know.the.number.of.hours.assigned. to.each.IHSS.task,.we.recommend.(1).that.providers.indicate.in.writing. that.they.have.reviewed.a.document.stating.the.hours.per.task.and.(2).that. clients.sign.the.recipient\/employer.checklist.as.a.condition.for.processing. the.first.payment..We.discuss.these.certifications.and.our.recommenda- tions.below. Notify the Provider of Authorized Tasks. We.recommend.enactment. of. legislation. requiring. the.provider.be.given.a.copy.of. the.NOA,.or.a. similar.document,.which.identifies.the.tasks.and.the.number.of.hours.per. task.that.were.approved.by.the.social.worker..The.provider.would.have.to. indicate.in.writing.that.he\/she.has.seen.the.authorized.hours.by.task,.and. understands.that.service.hours.are.to.be.delivered.as.authorized..Currently,. the.provider.must.sign.an.enrollment.form.that.provides.the.county.with. general.information,.such.as.name,.address,.and.social.security.number.. Because.the.provider.must.already.supply.the.county.with.an.enrollment. form.prior.to.receiving.payment,.requiring.this.new.or.modified.form,. would.not.represent.an.additional.burden..This.signed.form.will.increase. the.probability.that.recipients.will.receive.the.services.that.they.need.to. avoid.institutionalization.. A. further. benefit. of. this. requirement. is. that. it. would. allow. coun- ties.to.hold.providers.accountable.in.instances.of.IHSS.recipient.neglect.. Currently,.because.providers.rely.completely.on.the.recipients.to.inform. them.of.the.approved.tasks.and.hours,.it.is.difficult.to.hold.providers.ac- countable.when.neglect.occurs.due.to.inadequate.service..This.is.because. providers.can.claim.that.they.were.not.aware.of.the.services.authorized. by.the.social.worker,.and.were.following.the.instructions.given.to.them. by. the. recipients.. By. requiring. the. providers. to. review. the. authorized. services,.counties.will.be.able.to.hold.providers.responsible.for.provid- ing.those.services..Additionally,.providers.will.know.when.the.recipients. are.asking.for.unauthorized.activities,.and.providers.will.not.be.able.to. claim.that.they.were.unaware.of.the.services.they.were.authorized.and. paid.to.provide. Inform Recipients of Program Requirements. As.discussed.earlier,. there.are.a.couple.of.flaws.with.the.IHSS.recipient\/employer.checklist..First,. although.recipients.receive.this.form.each.time.they.are.assessed,.there.is. currently.no.consequence.when.either.a.recipient.or.a.provider.does.not. sign.and.return.an.IHSS.recipient\/employer.checklist..Second,.this.form. implies.that.hours.should.be.used.in.accordance.with.the.way.in.which. they.were.allocated,.but.does.not.indicate.that.there.are.any.consequences. for.reallocating.such.hours.. C 152 Health and Social Services 2007-08 Analysis In.order.to.address.these.shortcomings,.we.make.several.recommenda- tions..First,.we.recommend.that.recipients.be.required.to.have.these.signed. forms.on.file.in.order.to.process.payment..Second,.we.recommend.that.this. form.be.modified.to.only.be.signed.by.the.recipient.and.social.worker.since. the.provider.must.already.acknowledge.their.understanding.of.program. expectations.when.they.sign.the.recommended.form.mentioned.above.. Third,.we.recommend.that.this.form.be.modified.to.indicate.a.recipient’s. responsibility.to.use.hours.as.allocated.and.seek.social.worker.approval. before.reallocating.such.hours..Finally,.the.form.should.indicate.that.re- allocating.hours.across.tasks.and.weeks.without.social.worker.approval. could.be.grounds.for.nonpayment..We.note.that.requiring.recipients.to. sign.this.modified.form.should.not.create.an.additional.burden,.as.it.is. current.practice.for.the.recipient.to.sign.the.current.recipient\/employer. checklist.form.at.the.time.of.assessment.and.reassessment.. Setting.clearer.expectations.for.recipients.and.providers.increases.the. probability.that.hours.will.be.used.as.authorized..Ultimately,.using.hours. as.authorized.by.the.social.worker.increases.the.likelihood.that.recipients. will.receive.the.services.necessary.for.remaining.in.their.own.homes. Fiscal Impacts. The.recommendations.above.will.most.likely.result.in. savings.in.payments.for.services,.which.will.be.partially.offset.by.increases. in.workload.as.recipients.request.more.reassessments.and.modifications.. We.estimate.the.net.General.Fund.savings.could.range.between.$2.million. and.$5.million..Currently,.recipients.and.providers.claim.about.96.per- cent.of.the.hours.they.are.authorized.each.month..We.believe.that.most. recipients.want.to.comply.with.the.rules.of.the.program,.and.that.with. clearer.rules.against.reallocating.hours.there.will.be.a.slight.decrease.in. the.utilization.of.authorized.service.hours..This.is.because.when.recipi- ents.do.not.need.all.of.the.hours.assigned.to.a.specific.task.in.a.given.pay. period,.they.will.know.that.they.are.not.permitted.to.ask.their.provider.to. spend.the.extra.time.on.another.task.and.will.instead.claim.fewer.hours. in.the.pay.period. Supplemental Security Income\/State Supplementary Program C 153 Legislative Analyst’s Office The. Supplemental. Security. Income\/State. Supplementary. Program. (SSI\/SSP).provides.cash.assistance.to.eligible.aged,.blind,.and.disabled. persons..The.budget.proposes.an.appropriation.of.$3.9.billion.from.the. General.Fund.for.the.state’s.share.of.SSI\/SSP.in.2007-08..This.is.an.increase. of.$350.million,.or.9.9.percent,.over.estimated.current-year.expenditures.. This.increase.is.due.primarily.to.caseload.growth,.the.cost-of-living.ad- justment.(COLA).to.be.provided.in.January.2008,.and.an.increase.in.the. federal.administrative.fee. In.2007-08,.it.is.estimated.that.there.will.be.an.average.of.370,600.aged,. 21,600.blind,.and.872,600.disabled.SSI\/SSP.recipients..In.addition.to.these. federally.eligible.recipients,.the.state-only.Cash.Assistance.Program.for. Immigrants.(CAPI).is.estimated.to.provide.benefits.to.an.average.of.11,400. legal.immigrants.in.2007-08,.for.whom.federal.financial.participation.is. not.available. Budget Overestimates Cost of Providing Statutory COLA The General Fund cost of providing the statutory Supplemental Security Income\/State Supplementary Program cost\u2011of\u2011living adjust\u2011 ment (COLA) will be $45 million below the budget estimate due to a downward revision in the California Necessities Index and an upward revision of the Consumer Price Index. We recommend that proposed General Fund spending to provide the 2008 COLA be reduced by $45 mil\u2011 lion in 2007\u201108. (Reduce Item 5180\u2011111\u2011001 by $45 million.) Background..Pursuant.to.current.law,.the.Governor’s.budget.provides. the.statutory.COLA.in.January.2008..The.state.COLA.is.based.on.the.Cali- fornia.Necessities.Index.(CNI).and.is.applied.to.the.combined.SSI\/SSP. grant..It.is.funded.by.both.the.federal.and.state.governments..The.federal. COLA.(based.on.the.Consumer.Price.Index.for.Urban.Wage.Earners.and. Clerical.Workers,.or.the.CPI-W).is.applied.annually.to.the.SSI.portion.of.the. grant..The.remaining.amount.needed.to.cover.the.state.COLA.is.funded. supplEMEntal sECurity inCoME\/ statE supplEMEntary prograM C 15\ufffd Health and Social Services 2007-08 Analysis with.state.monies..Based.on.its.assumptions.concerning.both.the.CNI.and. CPI-W,.the.budget.includes.$217.million.for.providing.the.statutory.COLA. for.six.months,.effective.January.2008. The CNI Revised..The.January.2008.COLA.is.based.on.the.change.in. the.CNI.from.December.2005.to.December.2006..The.Governor’s.budget,. which.is.prepared.prior.to.the.release.of.the.December.CNI.figures,.esti- mates.that.the.CNI.will.be.4.2.percent,.based.on.partial.data..Our.review. of.the.actual.data,.however,.indicates.that.the.CNI.will.be.3.7.percent. The CPI Underestimated..The.January.2008.federal.SSI.COLA.will.be. based.on.the.change.in.the.CPI-W.from.the.third.quarter.(July.to.Septem- ber).of.calendar.2006.to.the.third.quarter.of.calendar.2007..The.Governor’s. budget. estimates. that. the. change. in. the. CPI-W. for. this. period. will. be. 1.2.percent..Based.on.our.review.of.the.consensus.economic.forecasts.for. 2007,.we.estimate.that.the.CPI-W.will.be.1.4.percent..This.increase.in.the. CPI-W.(compared.to.the.Governor’s.budget).slightly.reduces.the.state.cost. of.providing.the.statutory.COLA.because.it.effectively.increases.federal. financial.participation.toward.the.cost.of.the.state.COLA. Cost of Providing COLA Is Overestimated.. Taken. together,. the. changes.in.CNI.and.CPI-W.(in.relation.to.the.Governor’s.budget).decrease. the.General.Fund.cost.of.providing.the.statutory.COLA.by.approximately. $45.million..Accordingly,.we.recommend.that.the.Legislature.reduce.the. SSI\/SSP.budget.by.$45.million.in.2007-08,.to.reflect.a.more.recent.estimate. of.the.amount.of.funds.needed.to.fund.the.SSI\/SSP.COLA. Redirecting SSI\/SSP COLA Funding to the California Work Opportunity and Responsibility to Kids (CalWORKs) In.order.to.more.effectively.utilize.General.Fund.resources.for.cash. assistance.program.COLAs.to.reduce.poverty,.we.recommend.redirecting. $123.7.million.of.the.funds.proposed.for.the.SSI\/SSP.COLA.to.provide.the. CalWORKs.COLA..Please.see. the. Crosscutting. Issues .section.of. this. chapter.for.the.details.of.this.recommendation. SSI\/SSP Grant Levels Figure.1.shows.SSI\/SSP.grants.on.January.1,.2008,.for.both.individu- als.and.couples.as.displayed. in. the.Governor’s.budget.and.adjusted.to. reflect.the.actual.CNI.and.our.estimate.of.the.CPI-W..As.the.figure.in- dicates,.grants.for.individuals.will.increase.by.$32.to.a.total.of.$888.per. month,.and.grants.for.couples.will.increase.by.$56.to.a.total.of.$1,558.per. month..As.a.point.of.reference,.we.note.that.the.federal.poverty.guideline. for.2007.is.$851.per.month.for.an.individual.and.$1,141.per.month.for.a. couple..Thus,.the.grant.for.an.individual.would.be.4.percent.above.the. Supplemental Security Income\/State Supplementary Program C 155 Legislative Analyst’s Office 2007.poverty.guideline.and.the.grant.for.a.couple.would.be.37.percent. above.the.guideline. Figure 1 SSI\/SSP Maximum Monthly Grants Governor’s Budget and LAO Projections (January 2007 and January 2008) January 2008 LAO Projection Change From 2007 Recipient Category January 2007 Governor’s Budget LAO Projectiona Amount Percent Individuals SSI $623 $630 $632 $9 1.4% SSP 233 262 256 23 9.9 Totals $856 $892 $888 $32 3.7% Percent of povertyb 101% 105% 104% Couples SSI $934 $946 $947 $13 1.4% SSP 568 619 611 43 7.5 Totals $1,502 $1,565 $1,558 $56 3.7% Percent of povertyb 132% 137% 137% a Based on actual California Necessities Index increase (3.7 percent) and projected U.S. Consumer Price Index increase (1.4 percent). b 2007 U.S. Department of Health and Human Services Poverty Guidelines. The guidelines are adjusted annually for inflation. Caseload Overstated for CAPI We recommend that proposed General Fund spending for the Cash Assistance Program for Immigrants be reduced by $5.3 million in 2006\u201107 and $3.3 million for 2007\u201108 because the caseload is overstated. (Reduce Item 5180\u2011111\u2011001 by $3.3 million.) Background. Pursuant.to.current.law,.since.September.2006,.sponsored. immigrants.who.have.lived.in.the.United.States.for.at.least.ten.years.no. longer.have.their.sponsor’s.income.counted.when.determining.their.eli- gibility..If.they.meet.the.financial.eligibility.rules.for.SSI\/SSP,.and.have. not.attained.citizenship,.they.became.eligible.for.CAPI. Budget Estimate..The.2006\u201107 Budget Act.assumes.that.the.end.of.the. ten-year.deeming.period.would.result. in.approximately.250.sponsored. C 15\ufffd Health and Social Services 2007-08 Analysis noncitizens.becoming.eligible.for.CAPI.each.month.beginning.in.Septem- ber.2006..This.increase.in.the.CAPI.caseload.results.in.a.General.Fund.cost. of.$13.million.in.2006-07,.and.$46.million.in.2007-08. Actual Caseload..Our.review.of.the.actual.CAPI.caseload.from.July. through.November.2006.indicates.that.these.sponsored.immigrants.have.not. yet.joined.the.CAPI.program..Specifically,.the.CAPI.caseload.through.No- vember.2006.is.about.750.cases.(4.percent).below.the.budgeted.caseload. LAO Caseload Estimate.. We. have. adjusted. the. budget’s. caseload. trend.downward.to.account.for.the.most.recent.actual.data..To.account. for.the.possibility.that.some.sponsored.immigrants.may.enter.the.casel- oad.later.than.expected,.our.revised.forecast.adds.back.250.such.cases.in. the.spring.and.fall.of.2007..After.these.adjustments,.we.estimate.that.the. CAPI.caseload.is.overstated.by.5.6.percent.in.2006-07,.and.2.6.percent.in. 2007-08..Based.on.our.revised.caseload,.we.further.estimate.that.CAPI. is.overbudgeted.by.$5.3.million.in.2006-07.and.$3.3.million.in.2007-08.. Therefore,.we.recommend.that.the.Legislature.recognize.a.General.Fund. savings.of.$5.3.million.in.the.current.year,.and.reduce.the.CAPI.budget. by.$3.3.million.in.2007-08..We.will.continue.to.monitor.the.CAPI.caseload. and.report.to.the.Legislature.at.May.Revision.on.any.changes. Child Welfare Services C 157 Legislative Analyst’s Office California’s.state-supervised,.county-administered.Child.Welfare.Ser- vices.(CWS).program.provides.services.to.abused.and.neglected.children,. children. in. foster.care,.and.their. families..The.CWS.program.provides. (1).immediate.social.worker.response.to.allegations.of.child.abuse.and. neglect;.(2).ongoing.services.to.children.and.their.families.who.have.been. identified.as.victims,.or.potential.victims,.of.abuse.and.neglect;.and.(3).ser- vices.to.children.in.foster.care.who.have.been.temporarily.or.permanently. removed.from.their.family.because.of.abuse.or.neglect.. The.2007\u201108 Governor’s Budget.proposes.$2.4.billion.from.all.funds.and. $714.million.from.the.General.Fund.for.the.Child.Welfare.System..This. amount.includes.an.estimated.$1.4.billion.in.federal.funds..This.represents. an.increase.of.slightly.less.than.1.percent.in.total.funds.and.a.decrease.of. 8.percent.General.Fund.from.the.current.year..The.General.Fund.decrease. is.primarily.due.to.the.budget.proposal.to.use.$56.million.in.Temporary. Assistance.for.Needy.Families.(TANF).funds.to.offset.a.like.amount.of. CWS.General.Fund.costs.in.2007-08.. dEspitE substantial iMprovEMEnt, fEdEral finanCial pEnaltiEs liKEly in 2007-08 Federal law requires California to improve its performance on outcome measures established for the child welfare system. We provide an update on the state’s recent improvement on federal outcome measures, and an estimate of the risk of penalties based on current performance. Federal Review System for Child Welfare and Foster Care The. federal. Adoption. and. Safe. Families. Act. (ASFA). of. 1997. made. significant.changes.to.state.CWS.and.foster.care.programs..Among.other. changes,.ASFA.required.that.the.federal.Department.of.Health.and.Human. Services.develop.a.set.of.outcome.measures.and.create.an.ongoing.state. Child wElfarE sErviCEs C 158 Health and Social Services 2007-08 Analysis performance.review.process.for.these.programs..The.Child.and.Family. Service.Reviews,.resulting.from.ASFA.directives,.include:.(1).a.focus.on. outcomes.for.children.and.families,.(2).the.use.of.multiple.quantitative.and. qualitative.measures.to.evaluate.outcomes.and.performance,.and.(3).joint. federal.and.state.review.teams. Federal Child Welfare Performance Requirements..In.2002,.the.fed- eral.Administration.for.Children.and.Families.(ACF).conducted.its.first. performance.review.of.California’s.child.welfare.system..At.the.time.of.the. review,.California.failed.all.seven.of.the.outcome.measures.pertaining.to. child.safety,.well-being,.and.permanency..Child.safety.outcomes.focus.on. the.protection.of.children.from.abuse..Permanency.outcomes.measure.the. state’s.success.at.providing.stable.foster.care.placements.for.a.child.and\/ or.permanent.resolutions.for.children.who.cannot.return.home..Finally,. well-being.outcomes.pertain.to.meeting.children’s.educational,.physical,. and.mental.health.needs,.and.maintaining.connections.to.their.family.and. communities..Each.outcome.may.contain.a.number.of.subgoals,.all.of.which. must.be.met.in.order.to.receive.a. passing .grade.for.the.measure.. Corrective Action..Because.California.failed.the.2002.federal.review,. the.state.was.required.to.develop.and.implement.a.Performance.Improve- ment.Plan.(PIP).in.order.to.avoid.penalties.in.the.form.of.reductions.in. federal.funding..In.our.Analysis of the 2006\u201107 Budget Bill,.we.reviewed.the. most.recent.data.available,.from.the.second.quarter.of.2005,.and.found.that. at.that.time.the.state.was.still.failing.all.seven.of.these.measures.. California’s Current Performance The. federal. government. will. review. the. state’s.performance. on. its. PIP.in.April.2007.(examining.data.from.the.3rd.quarter.of.2006)..Because. 3rd.quarter.data.are.not.yet.available.for.review,.we.have.compared.the. state’s.performance.in.the.2nd.quarter.of.2005.with.the.same.quarter.in. 2006..Figure.1.shows.that.the.state.has.made.notable.improvement.and.is. now.passing.in.four.of.seven.outcome.areas,.while.continuing.to.fail.in. the.remaining.three.. Partial Credit for Permanency Outcome?.As.Figure.1.shows,.within. the.permanency.outcome.(#3),.the.state.is.passing.four.and.failing.two.out. of.the.six.required.subgoals..As.mentioned.above,.normally,.all.subgoals. within.an.outcome.must.be.met.in.order.for.the.state.to. pass .the.outcome. measure..However,.it.is.possible.that.California.could.receive.partial.credit. for.this.outcome..The.precedent.for.this.occurred.with.the.review.of.the. District.of.Columbia,.where.federal.penalties.were.decreased.based.on.the. number.of.subgoals.that.the.district.had.met.at.the.time.of.its.final.PIP.re- view..From.this.perspective,.California.could.be.determined.to.have.passed. four.of.the.outcomes.completely,.and.one.(permanency).partially.. Child Welfare Services C 15\ufffd Legislative Analyst’s Office Figure 1 Child Welfare Services California’s Performance Improvement Status Performance Second Quarter 2005 Performance Second Quarter 2006 Performance Outcomes Result Pass\/ Fail Result Pass\/ Fail Safety (1) Children are protected from abuse and neglect (two goals) F P Children with repeat maltreatment 8.7% P 8.4% P Maltreatment of children in foster care 0.78 F 0.66 P (2) Children are safely maintained in their homes F P Children with repeat maltreatment 22.6% F 22.1% P Permanency (3) Children have permanency and stability in their living situations F F Children who reenter foster care after exit 10.7% F 10.9% F Children\/family reunified within 12 months 68.2 P 68.2 P Children adopted within 24 months 29.3 P 29.7 P Children with two or less placements in 12 months 85.2 F 85.7 F Timely establishment of permanency goals 74.3 P 77.8 P Proportion of children with goal of long-term foster care 31.3 P 28.8 P Well-Being (4) Children whose family relationships and connections are preserved F P (5) Families have enhanced capacity to provide for their children’s needs F F (6) Children receive appropriate services to meet their educational needs F F (7) Children receive adequate services to meet their physical and mental health needs F P Arrows indicate direction of desired performance improvement. Estimate of Penalty Exposure..Figure.2.(see.next.page).presents.our. estimate.of.the.potential.federal.penalties.facing.California..Our.estimate. is.based.on.the.most.recent.performance.data.from.the.second.quarter.of. 2006,.and.it.is.possible.that.California.will.improve.further.in.the.third. quarter.of.2006..We.calculate.the.state’s.penalty.exposure,.assuming.there. is.no.improvement. C 1\ufffd0 Health and Social Services 2007-08 Analysis Figure 2 Potential Federal Penalties Child Welfare Services Program (In Millions) Federal Fiscal Year Estimated Annual Penalty Interest Oweda Total Estimated Penalty With Interest 2002 $4.5 $0.6 $5.1 2003 5.0 0.6 5.6 2004 4.7 0.6 5.2 2005 4.4 0.5 4.9 2006 4.4 0.5 4.9 Totals $23.0 $2.8 $25.8 a Based on federal Department of Health and Human Services Office of Finance interest rate of 12.25%. The.federal.penalties.are.assessed.based.on.whether.the.state.meets. its.goal.for.each.outcome..For.each.outcome.not.met,.a.penalty.of.1.percent. is.assessed.on.a.portion.of.the.state’s.federal.fund.allocation..This.penalty. formula.is.applied.to.each.year’s.federal.funding,.beginning.with.federal. fiscal.year.2002..Because.the.state.has.a.PIP,.the.federal.government.holds. these.penalties.in.abeyance.until.the.final.review,.however,.interest.and. the.penalties.continue.to.accumulate.for.each.year..We.estimate.that.the. full.penalty.amount.for.the.failure.of.three.outcome.measures.(along.with. interest).to.be.about.$26.million,.as.shown.in.Figure.2..This.estimate.does. not.reflect.the.possibility.of.receiving.partial.credit.for.the.Permanency. outcome.subgoals,.as.discussed.earlier..If.the.state.received.partial.credit,. penalties.would.be.reduced.to.approximately.$20.million. When Will Penalties Be Applied?.Once.ACF.receives.the.final.data. for.review.of.the.PIP.in.April,.sanctions.and.penalties.could.be.applied. as.soon.as.May.or.June.2007..The.state.may.at.that.time.begin.an.appeal. of.these.sanctions..We.cannot.estimate.how.long.an.appeal.would.take.. However,.during.appeal,.interest.on.any.penalties.will.continue.to.accrue. at.a.rate.of.12.25.percent. Another Federal Review to Occur in 2008..The.federal.government. is.scheduled.to.conduct.another.review.sometime.in.2008..Although.there. will.be.some.significant.changes.to.the.design.of.the.review’s.outcome.stan- dards,.the.state.will.still.be.held.responsible.for.outcomes.not.met.under. the.first.review.and.PIP..Once.the.second.review.is.completed,.penalties. Child Welfare Services C 1\ufffd1 Legislative Analyst’s Office for.outcome.areas.still.below.federal.standards.double.to.2.percent.for.each. outcome.area.not.in.compliance..Because.of.the.ongoing.risk.of.penalties,. the.Legislature.should.continue.to.monitor.closely.the.state’s.performance. on.federal.child.welfare.outcomes. balanCing thE risK and potEntial of thE fEdEral iv-E waivEr projECt Over the next five years, the state will participate in a federal IV\u2011E funding waiver demonstration project. The waiver caps the amount of federal funding available to the state during this period, while also providing an opportunity for the state to use these federal funds more flexibly. However, the limit on federal funding could pose some risk to the state. We review the implementation status of the waiver project, and recommend adopting budget bill language in order to better balance the risks to children with the opportunities to improve outcomes. Federal Funding of CWS Federal IV\u2011E Funds Provide Limited Flexibility.. Title. IV-E. of. the. Social.Security.Act,.provides.the.majority.of.the.federal.funding.dedicated. to.child.welfare.programs,.such.as.foster.care,.adoptions.assistance,.and. independent.living..These.funds.are.normally.an.open-ended.entitlement. which.may.be.used.to.cover.costs.for.board,.care,.and.related.administra- tion.for.eligible.children.in.foster.care.(including.social.worker.salaries. and.support)..Federal.IV-E.funds.may.be.used.for.case.management.activi- ties,.including.referral.to.services,.but.not.for.services.themselves,.such.as. counseling.or.treatment.that.would.be.used.to.prevent.child.abuse,.speed. reunification,.or.maintain.safety.for.children.who.remain.in.their.homes.. There.are.other. federal. funds,. (those.authorized.under.Title. IV-B). that. may.be.used.for.these.types.of.services.and.prevention.activities..However. funding.under.IV-B.is.capped,.and.the.majority.of.these.funds.are.usually. spent.by.the.end.of.the.second.quarter.of.each.fiscal.year.. IV\u2011E Funding Waiver Granted..On.March.31,.2006,.the.federal.gov- ernment.approved.the.state’s.request.to.waive.certain.provisions.of.Title. IV-E.under.a.IV-E.waiver.demonstration.project..Under.the.terms.of.the. federal.IV-E.waiver,.up.to.20.counties.can.participate,.using.federal.funds. for.services.that.would.not.normally.be.eligible.for.federal.reimbursement.. The.purpose.of.the.waiver.is.to.encourage.and.allow.the.use.of.innovative. strategies.or.intensive.services.in.order.to.prevent.or.limit.placement.in. foster.care..Two.counties.have.chosen.to.opt.into.the.waiver.demonstra- C 1\ufffd2 Health and Social Services 2007-08 Analysis tion,.Los.Angeles.and.Alameda..Together.these.two.counties.account.for. 37.percent.of.the.child.welfare.caseload.in.California. Waiver Opportunity..The.waiver.presents.a.unique.opportunity.for. the.state.to.end.what.is.described.by.some.as.a.perverse.funding.incentive.. This.perverse.incentive.results.from.the.availability.of.uncapped.federal. funding.for.the.costs.of.foster.care.placement.while.capping.federal.funds. for.services.that.might.avoid.foster.care.placements..These.services.usually. involve.mental.health.and.substance.abuse.assessment.and.treatment,.or. other.types.of.family.supports.that.address.underlying.causes.of.abuse. and.neglect..The.waiver.will.allow.the.state.to.use.IV-E.funds.for.such. services..Foster.care.placement.is.generally.the.most.costly.intervention. for.a.case.of.child.abuse.or.neglect..As.a.result,.if.the.waiver.project.suc- cessfully.decreases.the.use.of.foster.care.placement.it.will.result.in.sav- ings.which.the.participating.counties.may.re-invest.in.a.broader.variety. of.services.for.children. How Will the Title IV-E Waiver Work? Capped Allocation. Participating.counties.will.receive.a.capped.al- location.of.IV-E.funds..The.allocation.amount.is.an.average.of.the.county’s. IV-E.expenditures.for.federal.fiscal.years.2003.through.2005..The.capped. allocation.of. federal. funds. is.combined.with. the.state’s.contribution.of. General.Fund.support.to.create.a. block.grant .to.the.participating.counties. to.fund.child.welfare.and.foster.care.services..The.participating.counties. may.not.claim.more.than.this.annual.allocation..Any.unspent.allocation. will.be.available.to.the.county.in.the.subsequent.year.. For.the.two.counties.who.have.chosen.to.participate.in.the.waiver,. this.funding.allocation.is.higher.than.it.otherwise.would.be.without.the. waiver..This.is.because.both.counties.have.experienced.a.decrease.in.their. IV-E-eligible. foster. care. caseload. relative. to. the. amount.of. block. grant. funding.established.under.the.waiver..We.estimate.that.approximately. $81.million.in.additional.flexible.funds.will.be.available.over.the.five-year. waiver.period.for.both.counties.. Year\u2011to\u2011Year Funding Growth. The.state’s.agreement.with.the.fed- eral.government.allows.the.funding.amount.for.the.counties.to.increase. by.2.percent.for.each.of.the.five.years.of.the.waiver.period..In.addition,. counties.may.opt.to.use.up.to.5.percent.of.their.year-five.allocation.during. their.first.year.for.start-up.related.expenses.. Legislative Direction. Chapter.75,.Statutes.of.2006.(AB.1808,.Com- mittee.on.Budget),.authorized.the.department.to.develop.memoranda.of. understanding.(MOUs).with.participating.counties,.which.would.include. among.other.provisions,.the.allocation.methodology.for.state.funds.and. Child Welfare Services C 1\ufffd3 Legislative Analyst’s Office the.required.county.share.of.cost..Chapter.75.provided.broad.authority.to. the.administration.to.manage.the.implementation.of.the.waiver,.includ- ing.the.elements.of.the.agreements.between.the.counties.and.the.state.. These.agreements.define.how.the.state.and.the.counties.share.the.risks. posed.by.a.capped.allocation.and.the.state’s.total.funding.commitment. over.the.five.years.. Risks and Opportunities Opportunities of Waiver Project..Increased.funding.flexibility.offers. an.opportunity.to. lock.in .an.historical.amount.of.federal.funds.that.is. higher.than.current.baseline.estimates,.and.to.provide.more.preventive. services,.using. savings.generated. from. lowering.dependence.on. foster. care.. Further,. if. these. strategies. are. successful,. the. waiver. project. will. likely.improve.the.system’s.performance.on.both.federal.and.state.out- come.measures.. Alameda.County’s.plan.provides.a.good.example.of.how.the.waiver. may.present.an.opportunity.to.improve.performance.on.these.outcome. measures..Currently,.Alameda.County.performs.well.on.its.rate.of.timely. reunification.for.children.in.its.foster.care.system..However,.the.county. also.has.a.high.rate.of.reentry.to.foster.care..The.county.plans.to.expand. the.services.it.offers.to.support.children.and.families.after.reunification,. in.an.attempt.to.prevent.a.reoccurrence.of.abuse.or.neglect..If.successful,. the.county’s.waiver.project.will.impact.the.county’s.performance.on.the. related. federal.and.state.outcome.measure,.as.well.as.avoid.additional. costs.of.subsequent.foster.care.placements.for.a.child.. Similarly,.Los.Angeles.County.plans.an.expansion.of.assessments.and. access.to.mental.health.or.substance.abuse.services,.at.the.initial.investiga- tion.of.abuse.or.neglect..Such.assessments,.now.used.on.a.limited.basis,. would.be.eligible.for.funding.under.the.IV-E.waiver..This.type.of.service,. conducted.early.in.a.case,.can.identify.when.an.underlying.issue.might.be. present.that,.if.left.untreated,.could.affect.the.safety.of.a.child.remaining. at.home..The.early.identification.of.such.issues.may.also.reduce.the.time. it.otherwise.might.take.for.the.county.social.worker.to.identify.these.is- sues,.thus.decreasing.the.amount.of.time.a.child.spends.in.foster.care..If. successful,.this.intervention.could.improve.both.safety.and.permanency. measures. Financial Risk.. Because. the. waiver. shifts. funding. from. an. open. ended.entitlement.to.a.capped.allocation,.it.could.pose.a.financial.risk.to. participating.counties..If.project.strategies.do.not.produce.the.anticipated. reduction.in.foster.care.and.resulting.cost.avoidance,.participating.coun- ties.may.be.unable.to.provide.the.foster.care.services.within.the.capped. funding.level..Some.of.this.risk.is.the.result.of.external.factors,.over.which. C 1\ufffd\ufffd Health and Social Services 2007-08 Analysis neither.the.state.nor.the.counties.have.any.control..For.example,.significant. increases.in.a.particular.type.of.substance.abuse.or.other.unforeseen.social. or.policy.changes.could.create.conditions.leading.to.higher.rates.of.child. abuse.and.neglect.or.demand.for.foster.care.placement.during.the.five- year.period..If.this.occurs,.and.a.participating.county.overspends.its.cap,. there.could.be.pressure.on.the.state.to.make.up.the.difference..Though.the. final.MOUs.with.the.counties.had.not.yet.been.completed.at.the.time.this. analysis.was.prepared,.it.appears.that.the.Department.of.Social.Services. (DSS).has.placed.the.liability.for.all.costs.that.exceed.the.federal.cap.on. the.counties.. Child Safety Risk..Another.potential.risk.stems.from.capped.funding. for.foster.care.placement.in.the.event.of.a.caseload.spike..To.the.extent.that. limited.funding.creates.an.incentive.to.reduce.caseload,.there.is.a.risk.that. the.county.could.favor.the.use.of.other.interventions.instead.of.removal. from.the.home.when.removal.might.be.the.most.appropriate.alternative. to.prevent.further.abuse.or.neglect.. Balancing Risks and Opportunities.. The. federal. funding. waiver. presents.a.significant.opportunity.for.the.state.to.meet.a.number.of.its.most. important.goals.with.respect.to.child.welfare.programs..With.the.increased. funding.flexibility,.the.counties.can.potentially.provide.a.mix.of.services. to.families.and.children.that.will.enable.them.to.improve.their.perfor- mance.on.child.welfare.outcomes..As.discussed.earlier.in.this.chapter,.the. consequences.of.not.improving.on.federal.outcomes.is.federal.penalties.. Moreover,.a.continued.decrease.in.the.use.of.costly.foster.care.placement. is.a.longer.term.financial.benefit.to.counties.as.well.as.the.state.. Thus.far,.the.Legislature.has.provided.broad.authority.to.the.admin- istration.to.define.the.terms.of.the.waiver.and.manage.the.opportunities. and.risks..Below.we.describe.the.elements.of.the.state’s.plan,.as.they.were. available.at.the.time.this.analysis.was.prepared..We.also.recommend.ways. the.Legislature.could.mitigate.potential.risks.and.increase.its.oversight.of. the.waiver.project.in.general.. Current Plans for State Implementation Amount of State General Fund Provided for the Waiver Project.. Normally,.state.funds.are.provided.for.foster.care.and.the.administration.of. child.welfare.programs.based.on.caseload..Like.the.federal.funds.described. earlier,.these.funds.are.not.capped.and.increase.based.on.the.number.of. cases.the.county.is.managing..Under.the.IV-E.waiver.project,.DSS.will. freeze.the.state.General.Fund.portion.of.foster.care.grant.payments.going. to.the.participating.counties.at.the.2005-06.levels,.while.providing.an.an- nual.growth.rate.of.2.percent.for.child.welfare.administrative.costs..This. is.in.contrast.to.the.federal.funds,.which.will.increase.for.both.types.of. Child Welfare Services C 1\ufffd5 Legislative Analyst’s Office costs,.by.2.percent.each.year..By.freezing.the.General.Fund.allocation.for. foster.care,.the.state’s.plan.decreases.the.pool.of.flexible.funds.available. to.the.participating.counties.for.reinvestment.in.waiver.services,.while. conserving.state.General.Fund.resources.. Provisions to Opt\u2011Out of Capped Allocation.. The. counties. participating. in. the.waiver.project.may.opt-out. if. the.demonstration. is. unsuccessful.and.the.capped.allocation.proves.to.be.insufficient.to.meet. the.counties’.costs.for.services.and.grants..There.are.two.main.features. of.the.opt-out.policy:.(1).a.county.must.provide.six-month.notice.to.the. state.of.its.intention.to.opt-out.of.the.waiver.project.and.(2).the.county.is. responsible.for.reimbursing.any.federal.fund.liabilities.for.services.that. would.not.have.normally.been.eligible.for.IV-E.funding..This.feature.of. the.state’s.plan.shifts.to.the.counties.any.risk.that.these.additional.costs. would.pose.to.the.state.General.Fund.. Most Risk Is Shifted to Counties..Both.the.arrangement.for.state.Gen- eral.Fund.allocation.and.the.opt-out.policies.essentially.shift.the.financial. risks.of.the.capped.allocation.to.the.counties..Because.the.benefits.from. successful.use.of.the.waiver.would.accrue.to.both.the.counties.and.the.state,. we.think.that.the.Legislature.should.modify.these.policies.to.ensure.that. the.children.in.the.child.welfare.system.benefit.as.much.as.possible.from. the.waiver’s.opportunities,.while.controlling.General.Fund.exposures.. Analyst’s Recommendation Provide Reserve for State Foster Care Allocation. Overall,.the.state’s. cost.for.foster.care.assistance.payments.is.forecast.to.increase.over.the.next. five.years.by.slightly.less.than.1.percent.each.year..In.a.county.that.is.not. participating.in.the.waiver,.these.additional.funds.will.support.increases. in.foster.care.payments..Under.the.current.arrangement,.waiver.counties. will.not.receive.this.additional.funding.each.year,.which.somewhat.limits. the.advantages.to.them.of.participating.in.the.project..The.Legislature.could. offer.to.the.waiver.counties.these.growth.funds.(an.average.of.$1.4.million. each.year,.over.the.five.years).as.an. emergency.reserve .that.could.be. triggered.by.an.increase.in.foster.care.caseload,.if.it.occurs..Absent.such. a.reserve,.counties.would.have.to.absorb.these.costs..Thus,.this.reserve. would.alleviate.some.of.the.program.risks.to.child.safety.described.earlier.. Accordingly,.we.recommend.the.adoption.of.budget.bill. language.that. establishes.this.reserve.fund.and.sets.out.conditions.for.its.use.. Monitor Outcomes for Increased Safety Risk.. Though. it. is. likely. that.participating.counties.will.monitor.caseload.and.outcome.changes,. we.believe.the.potential.impacts.of.the.waiver.on.children.merit.further. attention..Accordingly,.we.will.review.reported.outcomes.for.Alameda.and. Los.Angeles.Counties.and.notify.the.Legislature.of.significant.changes.. C 1\ufffd\ufffd Health and Social Services 2007-08 Analysis Cws budgEt MEthodology Although statute requires the Department of Social Services to provide the Legislature with an updated budget methodology for child welfare services by February 1, 2007, this methodology had not been provided at the time this analysis was prepared. We withhold recommendation on the methodology, pending receipt of this proposal. We provide key issues for the Legislature to consider when reviewing the department’s proposal. Current CWS Budget System Funding.for.the.CWS.program.comes.from.a.variety.of.state,.federal,. and.local.sources..Listed.below.are.the.main.components.of.state.funding. for.core.CWS. CWS Base Funding. The.state.currently.allocates.base.funding. to.CWS.by.applying.caseload.standards.(that.is,.number.of.cases. handled.by.a.caseworker).to.average.monthly.case.counts.to.de- termine.the.number.of.workers.necessary.to.provide.services.in. the.program..The.current.methodology.uses.caseload.standards. agreed.upon.in.1984.. Hold Harmless Funding..In.preparing.the.budget.for.CWS,.DSS. adjusts.funding.upward.when.the.caseload.increases,.but.does. not.adjust.funding.downward.when.the.caseload.declines..The. practice.of.not.adjusting.the.budget.to.reflect.caseload.decline.is. known.as.the. hold.harmless .approach.and.provides.substantial. additional.funding.to.counties.with.declining.caseloads.. CWS Augmentation..The.Legislature.has.been.concerned.about. the.size.of.social.worker.caseloads.and.its.effect.on.services..As.a. result,.the.Legislature.established.the.CWS.augmentation.in.1998,. increased.the.amount.available.in.2000,.and.added.an.additional. $98.million.in.2006-07.to.be.continued.on.an.ongoing.basis..There. is.no.county.matching.requirement.for.these.funds.. Concerns About High Social Worker Caseloads There.has.been.an.ongoing.effort.to.determine.how.many.cases.a.social. worker.can.carry.and.still.effectively.do.his.or.her.job..In.1984,.the.County. Welfare.Directors.Association.and.DSS.established.an.agreed.upon.level. of.cases.per.social.worker..In.2000,.the.Child.Welfare.Services.Workload. Study,.required.by.Chapter.785,.Statutes.of.1998.(SB.2030,.Costa),.deter- mined.that.social.workers.carried.too.many.cases.to.effectively.ensure.the. safety.and.well-being.of.California’s.children..The.SB.2030.Study,.as.it.is. Child Welfare Services C 1\ufffd7 Legislative Analyst’s Office commonly.called,.proposed.minimum.and.optimum.caseload.standards. for.social.workers..The.state.has.yet.to.adopt.these.standards.for.caseload. budgeting,.although.the.other.funding.adjustments.described.above.have. been.made.with.the.intention.of.decreasing.caseload.sizes.. Legislature Requested Review of Budgeting Chapter.75. required. DSS. to. report. to. the. Legislature. with. a. new. methodology.for.budgeting.CWS.funds..The.legislation.requires.that.the. department’s.review.include.the.SB.2030.study,.other.research.literature,. as.well.as.models. from.other. states..Moreover,. the. legislation. requires. that.the.revised.methodology.be.incorporated.into.the.May.Revision.of. the.Governor’s.budget.for.implementation.in.2007-08. Key Questions for Assessing CWS Budgeting Changes Because.the.details.of.the.administration’s.proposal.are.not.yet.avail- able,.we.cannot.comment.on.the.proposed.changes.at.this.time..However,. we.recommend.that.the.Legislature.consider.the.following.questions.in. assessing.this.proposal.. How Does the Plan Adjust for the Effects of the Hold Harmless Policy?.County.funding.through.the.hold.harmless.policy.varies.widely.. Some.counties.may.already.have.significantly.lower.caseload.ratios.as.the. result.of.hold.harmless.gains,.and.as.a.result,.may.reach.recommended. caseload.standards.with.less.additional.funds..It.would.be.more.cost.ef- fective.for.the.state.to.target.its.resources.on.counties.with.the.greatest. caseloads. per. worker. than. to. provide. increases. regardless. of. current. county.caseloads.. Does the Proposal Connect Funding and Performance on Outcome Measures?.Chapter.75.states.that.the.$98.million.for.outcome.improve- ment. be.linked.to.improved.outcomes. .Given.the.Legislature’s.interest. in.outcome.improvement,.does.the.proposal.link.the.allocation.of.funds. to.a.county’s.CWS.outcomes? C 1\ufffd8 Health and Social Services 2007-08 Analysis The.Community.Care.Licensing.(CCL).Division.of.the.Department.of. Social.Services.(DSS).develops.and.enforces.regulations.designed.to.protect. the.health.and.safety.of.individuals.in.24-hour.residential.care.facilities. and.day.care..The.CCL.oversees.the.licensing.of.about.86,000.facilities,. including.child.care.centers,.family.child.care.homes,.foster.family.and. group.homes;.adult.residential.facilities;.and.residential.facilities.for.the. elderly..Counties.who.have.opted.to.perform.their.own.licensing.opera- tions.monitor.approximately.11,000.of.these.facilities.. The. Governor’s. budget. proposes. total. expenditures. of. $119.9.mil- lion.($38.2.million.General.Fund).for.CCL.in.2007-08..This.is.an.increase. of.18.percent,.or.slightly.less.than.$6.million.in.General.Fund.from.the. current.year..Most.of.the.increase.is.due.to.the.addition.of.staff.for.more. facility.inspections..This.is.pursuant.to.a.requirement.in.current.law.that. triggers.increased.random.inspections.if.violations.increase.by.more.than. 10.percent.from.the.prior.year. autoMation projECt doEs not MEEt lEgislaturE’s goals The Governor’s budget proposes $1.7 million ($1.5 General Fund) in 2007\u201108 and $1.4 million ($1.2 million General Fund) in 2008\u201109 for an automation project that is part of an overall Information Technology Strategic Plan.for the Community Care Licensing (CCL). We find that the project does not meet the schedule set out in the strategic plan and as a result, will not address the Legislature’s concerns. We recommend that CCL report at budget hearings on the costs and time that would be required to adhere to the schedule in the strategic plan. Background Legislative Interest..The.Legislature.has.expressed.interest.in.two. areas.with.regard.to.CCL..These.are.(1).ensuring.that.CCL.is.effectively. CoMMunity CarE liCEnsing Community Care Licensing C 1\ufffd\ufffd Legislative Analyst’s Office monitoring.and.enforcing.facility.safety.and.(2).providing.facility.compli- ance.information.on.the.Internet..In.2006-07,.CCL.could.not.provide.key. information.related.to.enforcement.activities.with.noncompliant.facilities.. As.a.result,.in.the.Supplemental Report of the 2006 Budget Act, the.Legislature. required.that.the.department.provide.a.report.on.the.costs.to.track.this. information.in.the.future..In.the.same.year,.the.Legislature.added.$366,000. to.the.budget.in.order.to.place.facility.inspection.reports.on.the.Internet.. These.funds.were.subsequently.vetoed.by.the.Governor. CCL Information Technology Strategic Plan..The.CCL.has.provided. to.the.Legislature.an.Information.Technology.Strategic.Plan.that.describes. upgrades.to.automation.that.will.improve.its.operations.and.enable.it.to.ad- dress.the.concerns.of.the.Legislature.mentioned.above..The.plan.estimates. that.this.improvement.will.take.a.total.of.four.years,.and.will.be.completed. in.two.phases..Phase.One.is.scheduled.to.be.complete.in.2008-09.. According.to.the.strategic.plan,.CCL.lacks.sufficient.automation.infra- structure.to.accurately.report.on.its.monitoring.activities..The.plan.cites.the. May.2006.Bureau.of.State.Audits.report,.which.indicates.that.because.of. flawed.collection.and.tracking.of.licensing.data,.the.information.reported. to.the.Legislature.regarding.visits.and.violations.in.the.past.may.have. been.unreliable..The.first.two.years.of.the.plan.(Phase.One).would.correct. these.problems,.allowing.CCL.to.accurately.track.data,.access.necessary. management.reports,.and.manage.the.activities.of.licensing.field.analysts.. Phase.One.of.the.plan.also.includes.developing.the.ability.to.display.facil- ity.inspection.reports.and.file.facility.complaints.on.the.Internet..Phase. Two.adds.functions.such.as.online.fee.payment.and.access.to.licensing. information.for.licensees.. Automation Project.. The. governor’s. budget. proposes. $1.7.million. ($1.4.million.General.Fund).in.2007-08.and.$1.4.million.($1.2.million.Gen- eral.Fund).in.2008-09.for.the.Licensing.Automation.Reform.Project..The. proposal.includes.ten.positions.and.approximately.$800,000.in.consulting. contracts.to.upgrade.CCL’s.existing.automated.systems..According.to.CCL,. the.automation.project.is.the.first.phase.of.the.strategic.plan. .Automation Project Misses Key Legislative Goal..The.goal.of.the. strategic.plan. is. to. improve. the.management.and.efficiency.of.CCL.. If. implemented,.some.of.the.key.features.outlined.in.the.plan.would.address. the.concerns.of.the.Legislature..Specifically,.the.automation.proposal.indi- cates.that.by.October.of.2008,.CCL.will.be.able.to.track.the.effectiveness.of. monitoring.and.enforcement..However,.the.proposed.automation.project. does.not. include.providing.access. to.any.licensing.information.via.the. Internet,.which.is.also.a.key.interest.of.the.Legislature..The.department. contends.that.because.it.must.first.make.fundamental.improvements.to. the.basic.tracking.and.management.of.licensing.operations,.providing.in- C 170 Health and Social Services 2007-08 Analysis formation.on.the.Internet.cannot.be.done.within.current.fiscal.constraints.. As.such,.this.automation.project.will.not.meet.the.schedule.outlined.in. the.strategic.plan,.and.will.not.address.a.key.legislative.goal. Analyst’s Recommendation Because. the. automation. project. does. not. completely. address. the. Legislature’s. goal. of. providing. public. information. regarding. licensing. compliance,.we.recommend.that.DSS.report.at.budget.hearings.on.the. estimated.time.and.cost.to.complete.all.of.the.features.outlined.in.Phase. One.in.the.strategic.plan,.including.making.licensing.information.avail- able.on.the.Internet.. Legislative Analyst’s Office FinDings anD reCOmmenDatiOns Health and Social Services Analysis Page Crosscutting Issues Evaluating Cost-of-Living Adjustments (COLAs) For Cash Assistance Programs C-19 n Targeting Anti-Poverty Funds. In.order.to.more.efficiently. utilize.General.Fund.resources.for.cash.assistance.program. COLAs,. we. recommend. redirecting. $124.4.million. of. the. funds.proposed.for.the.Supplemental.Security.Income\/State. Supplementary.Program.COLA.to.provide.the.California. Work.Opportunity.and.Responsibility.to.Kids.COLA. Alcohol and Drug Programs C-29 n Proposition 36 Under Policy Change. Increase Item 4200-105-0001 by $60 Million, Reduce Item 4200-101-0001 by $35 Million. Recommend. increase. General. Fund. ap- propriation.for.transfer.to.the.Substance.Abuse.and.Treat- ment.Trust.Fund.by.$60.million.and.reduce.funding.to.the. Substance.Abuse.and.Treatment.Program.by.$35.million.. Further.recommend.the.Legislature.seek.legal.guidance.from. Legislative.Counsel.about.Proposition.36.policy.changes. C 172 Health and Social Services 2007-08 Analysis Analysis Page Medi-Cal C-40 n Budget Projects Modest Caseload Growth. We. find. that. the.budget’s.overall.estimate.for.the.Medi-Cal.caseload.is. reasonable.but.shows.risk.of.being.slightly.higher.than.jus- tified..We.will.continue.to.monitor.the.caseload.trends.and. will.recommend.any.appropriate.adjustments.to.the.caseload. estimate.at.the.May.Revision. C-42 n Data Match Increases Veterans’ Access to Benefits and Reduces Cost of Health and Social Services Programs. We. recommend.the.Legislature.appropriate.the.necessary.funds. to.implement.the.federal.Public.Assistance.Reporting.Infor- mation.System.(PARIS).matching.process,.provided.that.the. costs.of.implementing.PARIS.and.the.ongoing.cost.of.partici- pating.in.PARIS.are.offset.by.reduced.costs.in.certain.health. and.social.services.programs,.resulting.in.net.savings..We. further.recommend.the.Legislature.require.the.Department. of.Health.Care.Services.(DHCS).to.report.at.budget.hearings. on.the.estimated.costs.for.implementing.the.federal.Public. Assistance.Reporting.and.Information.System. C-51 n Significant Medi-Cal Fraud Continues. Recommend.that.the. Legislature.adopt.supplemental.report.language.requiring. the.department.to.submit.to.the.Legislature.the.antifraud. evaluation.report.being.prepared.by.a.consultant.by.August. 15,.2007. C-53 n Requests for Added Staff Excessive. Reduce Item 4260-001- 0001 by $1.9 Million and Item 4260-101-0001 by $2.7 Mil- lion..Increase Item 4260-001-0995 by $504,000 and Item 4265-001-3098 by $504,000..The.budget.request.for.DHCS. includes.various.proposals.for.additional.staff.and.contract. funding.generally.related.to.the.administration.of.the.Medi- Cal.Program..Recommend.that.some.of.the.requests.for.fund- ing.for.additional.staff.and.contract.resources.be.approved,. but.that.others.be.reduced.or.deleted.because.they.are.not. justified.on.a.workload.basis. Findings and Recommendations C 173 Legislative Analyst’s Office Analysis Page Department of Public Health (DPH) C-63 n New DPH. The.Governor’s.budget.plan.implements.enacted. legislation.that.creates.a.new.DPH..We.find.the.administra- tion’s.proposed.organization.structure.to.be.reasonable,.but. find.that.the.department.should.be.more.transparent.in.its. budgeting..For.this.reason,.we.withhold.recommendation. on.this.proposal.pending.receipt.of.key.budget.documenta- tion. C-69 n Licensing and Certification Proposal. Reduce Item 4265-001-3098 by $291,000..The.Governor’s.budget.proposes. 77.5.additional.staff.to.implement.enacted.legislation.and.to. implement. the. administration’s. proposals. to. improve. the. state’s.oversight.of.certain.health.care.facilities..Recommend. the.Legislature.approve.the.proposals,.but.reduce.the.level. of.staff.proposed. C-73 n Foodborne Illness Proposal. Reduce Item 4265-001-0001 by $800,000..We.recommend.a.reduction.on.a.workload.basis. of. five. of. nine. positions. requested. to. expand. emergency. response.capabilities.to.foodborne.illness..We.recommend. approval. of. four. positions. and. research. funds. to. prevent. foodborne.illness.outbreaks. C-78 n Prostate Cancer Treatment Program. The.Governor’s.budget. includes. $3.5.million. General. Fund. to. provide. treatment. services.through.the.prostate.cancer.treatment.program..We. withhold.recommendation.on.this.proposal.pending.receipt. from. the. administration. of. a. statutorily. required. report. evaluating.the.cost-effectiveness.of.the.program. C-78 n Health Care Infection Control Program. Reduce Item 4265-001-0001 by $1.4 million and Increase 4265-001-3098 by $1.4 million..The.Governor’s.budget.includes.$2.million. ($1.6.million.General.Fund).and.14.positions.to.implement. a.health.care.associated.infections.surveillance.and.preven- C 17\ufffd Health and Social Services 2007-08 Analysis Analysis Page tion.program..We.find.that.there.is.an.alternative.funding. source.to.implement.this.program.that.would.result.in.lower. General.Fund.costs. C-80 n Oral Health Assessment. Reduce Item 4265-001-0001 by $221,000..The.Governor.proposes.$221,000.General.Fund.and. two.limited.term.positions.to.complete.a.report.regarding.the. improvements.in.the.oral.health.of.children.resulting.from. recently.enacted. legislation..We.recommend.denial.of. the. proposal.and.find.that.the.department.should.seek.private. funds.to.contract.out.for.this.report.resulting.in.a.General. Fund.savings.of.$221,000. Developmental Services C-86 n Regional Center (RC) Caseload Below Projected Levels. The.administration.is.requesting.an.additional.$33.million. General.Fund.to.address.a.deficit.in.the.current-year.fund- ing.for.the.RC.system.due.to.cost.increases.and.utilization.of. services..We.recommend.the.Legislature.require.the.depart- ment.to.report.in.budget.hearings.on.the.specific.causes.for. increased.utilization.and.costs.. C-88 n Intermediate Care Facility for the Developmentally Dis- abled (ICF\/DD) Rate Restructure Would Leverage Federal Funds. We. recommend. the. Legislature. assume. that. the. ICF\/DD. state. plan. amendment. will. be. submitted. by. the. Department.of.Health.Care.Services.(DHCS).to.the.federal. Center.for.Medicare.and.Medicaid.Services.in.April.of.2007. and.that.it.will.be.approved..We.estimate.that.this.would. result.in.an.additional.$11.million.in.federal.reimbursements. for.2006-07.and.allow.for.a.commensurate.reduction.in.state. General.Fund.support.for.the.RC.system.. Findings and Recommendations C 175 Legislative Analyst’s Office Analysis Page C-90 n Rate Reform Progressing Slowly. We.recommend.that.the. Department. of. Developmental. Services. report. at. budget. hearings.on.the.implementation.of.the.rate.reform.initiative. including. the. timeline. for. proposing. revised. regulations. packages.and.the.estimated.savings.for.implementing.rate. reform.for.specified.services. C-91 n Residential Care Models Allow Shift From Institutions to the Community. We.recommend.the.Legislature.adopt. supplemental. report. language. requiring. DHCS. to. report. on. the. intermediate. care. facility. for. the. developmentally. disabled-continuous.nursing.pilot.program. Department of Mental Health (DMH) C-97 n The Early and Periodic Screening Diagnosis and Treatment (EPSDT) Projection Methodology Is Broken. We.withhold. recommendation. on. both. the. funding. requested. for. the. current.year.and.the.budget.year.until.DMH.presents.their. revised.EPSDT.estimate.methodology..We.recommend.the. Legislature.require.the.Office.of.State.Audits.and.Evaluations. within.the.Department.of.Finance.to.report.at.budget.hear- ings.on.the.findings.from.their.review.of.the.EPSDT.estimate. methodology.and.DMH’s.administrative.practices. C-99 n New Sexually Violent Predator (SVP) Laws Drive Increased Costs. We.recommend.the.Legislature.recognize.current-year. savings.of.$6.million.General.Fund.due.to.lower-than-pro- jected. SVP. caseload.. We. also. recommend. the. Legislature. wait.until.more.information.is.available.before.taking.action. to.fund.additional.administrative.and.caseload.costs. C 17\ufffd Health and Social Services 2007-08 Analysis Analysis Page Department of Rehabilitation C-105 n Automation Proposal Poses Future General Fund Risk. Our. review.indicates.that.this.automation.proposal.(1).is.based. on.an.overly.optimistic.development.schedule,.and.(2).will. likely.require.General.Fund.support.in.future.years.because. there.is.no.ongoing.federal.fund.source..Recommend.that. the.department.report.at.budget.hearings.on.the.availability. of.federal.funds.in.subsequent.years,.and.how.they.intend. to.meet.their.schedule. Department of Child Support Services (DCSS) C-107 n Federal Penalty Held in Abeyance. In.September.2006,.DCSS. applied.for.federal.certification.of.the.California.Child.Sup- port.Automated.System..Once.the.state.applied.for.certifica- tion,.federal.penalties.were.placed.in.abeyance..We.discuss. the.current.automation.system.and.certification.process. C-108 n Budget Proposes to Absorb Federal Administration Fee. Pursuant. to. the. Deficit. Reduction. Act. (DRA). of. 2005,. the. federal.government.will.begin.to.assess.an.annual.fee.on. the.state.of.$25.for.most.never.assisted.child.support.cases.. We.review.the.decision.to.use.state.funds.to.cover.the.fee. in.2007-08,.and.recommend.supplemental.report.language. requiring.the.department.to.provide.a.report.to.the.Legisla- ture.in.2008.on.the.costs.and.benefits.of.collecting.this.fee. C-110 n Child Support Pass-Through Options. The.DRA.increases. federal.participation.in.the.amount.of.child.support.passed. through.to.families.who.currently.receive.welfare.assistance.. We.discuss.the.costs.and.benefits.of.various.pass-through. options. Findings and Recommendations C 177 Legislative Analyst’s Office Analysis Page California Work Opportunity and Responsibility to Kids (CalWORKs) C-114 n Budget Suspends Statutory Cost-of-Living Adjustment (COLA). By. suspending. the. statutory. COLA,. the. budget. achieves.a.costs.avoidance.of.$124.4.million. C-116 n LEADER Computer System Replacement. Rather. than. joining.one.of.the.other.two.recently.completed.automation. consortia,.the.budget.proposes.$2.million.for.planning.activi- ties.for.replacing.the.Los.Angeles.Eligibility,.Automated.De- termination,.Evaluation.and.Reporting.(LEADER).computer. system.with.an.entirely.new.system..Recommend.that.the. Legislature.withhold.funding.for.planning.activities.until. a.cost-benefit.analysis.for.a.new.system.is.provided. C-117 n TANF Transfer to CWS Contrary to Legislative Approach. By.using.federal.Temporary.Assistance.for.Needy.Families. (TANF).block.grant.funds.to.replace.General.Fund.support. for.certain.Child.Welfare.Services.(CWS).emergency.assis- tance.costs,.the.Governor’s.budget.achieves.General.Fund. savings. of. $56.million. in. 2007-08.. The. Legislature. should. assess.whether.this.proposed.fund.shift.is.consistent.with. its.priorities.for.limited.TANF.block.grant.funds. C-118 n Maintenance-of-Effort (MOE) and Caseload Reduction Credit (CRC). By. spending. above. the. federally. required. MOE. level,. the. budget. proposes. to. achieve. a. CRC. which. has. the. effect. of. reducing. California’s. work. participation. requirement.for.CalWORKs.families..We.review.the.MOE. requirement,.the.impact.of.the.Deficit.Reduction.Act.(DRA). of. 2005. on. countable. MOE. spending,. and. the. Governor’s. proposal.to.obtain.a.CRC. C 178 Health and Social Services 2007-08 Analysis Analysis Page C-121 n Current Work Participation Requirements and Status. Fed- eral.law.requires.that.states.meet.a.work.participation.rates. of.50.percent.for.all.families.and.90.percent.for.two-parent. families,.less.a.CRC..The.DRA.and.associated.regulations. significantly.changed.the.calculation.of.participation.rates. and.the.CRC. C-124 n Impact of Recent Policy Changes on Participation. California. has.made.significant.changes.in.the.CalWORKs.program.in. order.to.increase.work.participation.among.recipients..Es- timates.by.the.administration.of.the.participation.increases. associated.with.recent.policy.changes,.in.conjunction.with. the.caseload.reduction.credit,.suggest.that.California.would. likely.be.in.compliance.with.federal.work.participation.re- quirements.in.federal.fiscal.year.2008. C-128 n Governor’s Sanction Proposal. In.order. to. increase.work. participation,.the.Governor’s.budget.proposes.a.full-family. sanction.for.children.whose.parents.cannot.or.will.not.com- ply.with.CalWORKs.participation.requirements..We.review. the. impact. of. the. Governor’s. sanction. proposal. on. work. participation,.families,.and.the.state.budget..We.recommend. rejecting.the.sanction.proposal.because.it.is.not.needed.to. meet.federal.work.participation.requirements. C-132 n Alternative Approach to Strengthening the CalWORKs Sanction. Recommend.enactment.of.legislation.(1).requir- ing.a.home.visit.or.other.in-person.contact.with.each.family. who.is.out.of.compliance.for.three.months.or.more,.and.(2). increasing.the.sanction.to.50.percent.of.a.family’s.grant.if.the. adult.refuses.to.comply.with.participation.requirements. C-133 n Governor’s Time-Limit Proposals. In.order.to.increase.work. participation,. the. Governor’s. budget. proposes. new. time. limits.on.children.whose.parents.cannot.or.will.not.comply. with.CalWORKs.participation.requirements..We.review.the. impact.of.these.time.limits.on.work.participation,.families,. Findings and Recommendations C 17\ufffd Legislative Analyst’s Office Analysis Page and.the.state.budget..We.recommend.rejecting.the.proposed. time.limits.because.they.are.not.needed.to.meet.federal.work. participation.requirements. C-135 n Increasing Participation by Enhancing Food Stamps Ben- efits. By.providing.an.additional.state-funded.allotment.of. food.stamps.to.families.who.are.working.sufficient.hours. to.meet. federal.participation.requirements.but.are.not.on. CalWORKs,.California.could.increase.its.participation.rate. about.10.percent..We.review.the.costs.and.benefits.of. this. approach. In-Home Supportive Services (IHSS) C-137 n IHSS Caseloads Overbudgeted. Reduce.Item.5180-111-001. by.$33.9.Million..Recommend.that.proposed.General.Fund. spending.for.IHSS.be.reduced.by.$33.9.million.for.2007-08. due.to.an.overstatement.of.the.caseload. C-139 n Freezing State Participation in Wages. The.budget.proposes. to.freeze.state.participation.in.provider.wages.and.benefits,. resulting.in.General.Fund.savings.of.at.least.$14.million.in. 2007-08,.plus.substantial.cost.avoidance.in.future.years..We. review.current.law.regarding.state.participation.in.wages,. describe.the.General.Fund.exposure.associated.with.current. law,.and.provide.alternatives.to.the.Governor’s.proposal. C-142 n Enhancing Program Integrity. Although.the.quality.assur- ance..(QA).initiative.has.improved.the.accuracy.and.stan- dardization.of.service.hour.authorizations.by.social.workers,. there. are. limited. controls. assuring. that. recipients. receive. their.service.hours.in.accordance.with.their.case.plan..We. review.the.department’s.implementation.of.the.QA.initiative,. and.provide.recommendations.to.enhance.program.integrity. and.increase.the.likelihood.that.recipients.receive.services. in.accordance.with.their.case.plans. C 180 Health and Social Services 2007-08 Analysis Analysis Page Supplemental Security Income\/ State Supplementary Program C-153 n Budget Overestimates Cost of Providing Statutory Cost- of-Living Adjustment (COLA). Reduce Item 5180-111-0001 by $45 Million..Recommend.that.proposed.General.Fund. spending.for.the.2008.COLA.be.reduced.by.$45.million.in. 2007-08.due.to.a.downward.revision.of.the.California.Neces- sities.Index.and.an.upward.revision.of.the.Consumer.Price. Index. C-155 n Caseload Overstated for CAPI. Reduce Item 5180-111-0001 by $3.3 Million..Recommend.that.proposed.General.Fund. spending.for.Cash.Assistance.Program.for.Immigrants.be. reduced.by.$3.3.million.for.2007-08.due.to.an.overstatement. of.the.caseload. Child Welfare Services C-157 n Despite Substantial Improvement, Federal Financial Penalties Likely in 2007-08. We.provide.an.update.on.the. state’s. recent. improvement. on. federal. outcome. measures. and.an.estimate.of. the. risk.of.penalties.based.on.current. performance. C-161 n Balancing the Risk and Potential of the Federal IV-E Waiver Project. We.review.the.implementation.status.of.the.waiver. project,.and.recommend.adopting.budget.bill.language.in. order.to.better.balance.the.risks.to.children.with.the.oppor- tunities.to.improve.outcomes. C-166 n Child Welfare Services Budget Methodology Proposal. We. withhold.recommendation,.pending.details.of.this.proposal.. However,.we.suggest.key.questions. for. the.Legislature. to. consider.when.reviewing.the.department’s.proposal. Findings and Recommendations C 181 Legislative Analyst’s Office Analysis Page Community Care Licensing (CCL) C-168 n Automation Project Does Not Meet Legislature’s Goals. We.find.that.the.project.does.not.meet.the.schedule.set.out. in. the.strategic.plan.and,.as.a.result,.will.not.address. the. Legislature’s.concerns..We.recommend.that.CCL.report.at. budget.hearings.on.the.costs.and.time.that.would.be.required. to.adhere.to.the.schedule.in.the.strategic.plan. C 182 Health and Social Services 2007-08 Analysis Findings and Recommendations C 183 Legislative Analyst’s Office C 18\ufffd Health and Social Services 2007-08 Analysis Overview Crosscutting Issues Evaluating COLAs for Cash Assistance Programs Departmental Issues Alcohol and Drug Programs Medi-Cal Department of Public Health Developmental Services Department of Mental Health Department of Rehabilitation Department ofChild Support Services California Work Opportunity and Responsibility to Kids In-Home Supportive Services Supplemental Security Income\/State Supplementary Program Child Welfare Services Community Care Licensing Findings and Recommendations ”

” Presented to: Senate Budget and Fiscal Review Committee Hon. Mark Leno, Chair Analysis of the Governor’s CalWORKs Proposal L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE 1L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Governor Proposes Signifi cant Budget Reductions in CalWORKs. The Governor proposes a package of California Work Opportunity and Responsibility to Kids (CalWORKs) budget reductions which total $985 million General Fund. The bulk of these savings ($890 million) are achieved by a reduction in cash grants for the majority of recipients and restricted eligibility for welfare-to-work services. These policy changes are encompassed in a redesign of the CalWORKs administrative structure. \uf0fe Handout Organization. This handout (1) provides background on the CalWORKs program, (2) reviews recent program history including work participation and budgetary reductions enacted in recent years, (3) discusses and assesses each of the Governor’s proposals, (4) presents some other options not proposed by the Governor to achieve savings in CalWORKs, and (5) concludes with illustrative budget packages which would achieve three levels of savings ($500 million, $750 million, and $1 billion). Overview 2L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe CalWORKs Supports Low-Income Families. The CalWORKs program provides cash grants and welfare-to-work services for families whose income is inadequate to meet their basic needs. \uf0fe Cash Grants Levels Vary by Family Size and Place of Residence. Maximum monthly cash grants, known as the maximum aid payment (MAP), vary by family size and place of residence. The current MAP for a family of three living in a high- cost county is $638 per month. \uf0fe Recipients May Remain Eligible Despite Having Earned Income. Once on CalWORKs, a family may remain eligible despite having additional earnings, as a portion of earned income (the fi rst $112 plus 50 percent of additional income) is not counted when determining a family’s cash grant. Aid is discontinued when a family’s earned income (minus the earned income disregard) exceeds its cash grant. \uf0fe Recipients Must Meet Work Requirements. The CalWORKs program requires adults in single-parent\/two-parent families to participate in certain categories of work activities (including approved education or training activities) for 32\/35 hours per week. However, some adults can be exempted from work requirements when disabled, of advanced age, or caring for a very young or ill child. Children in families without a work-eligible adult (such as children of undocumented immigrants or recipients of Supplemental Security Income) may still receive aid and are referred to as child-only cases. \uf0fe Welfare-to-Work Services Are Provided to Assist With Work. CalWORKs recipients are eligible to receive employment services (such as assessment and development of a welfare- to-work plan), subsidized child care, and additional funding for transportation and ancillary work expenses. CalWORKs Background: Program Benefi ts and Eligibility Requirements 3L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Recipients That Do Not Meet Work Requirements Are Subject to Sanctions. The sanction for failure to participate in work activities is elimination of the adult portion of a family’s cash grant. \uf0fe Adult Aid Is Time Limited. After four cumulative years on aid, a family’s cash grant is reduced by the portion for the adult. After the adult is removed from the grant, the children continue to receive aid and are informally referred to as safety-net cases. CalWORKs Background: Program Benefi ts and Eligibility Requirements (Continued) 4L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Three Sources of Funding Support the CalWORKs Program. The CalWORKs program is supported by a combination of federal, state (General Fund), and local funds\u2014in that order of magnitude. \uf0fe State Receives a Federal Block Grant. Each year, California receives a $3.7 billion federal Temporary Assistance for Needy Families (TANF) block grant. The TANF funding can be used on any activities that are reasonably calculated to meet the four purposes of the TANF program. To continue receiving its full TANF block grant, the state must meet maintenance-of-effort (MOE) and work participation requirements, described further below. \uf0fe TANF Program Has Four Purposes. The four purposes of TANF are: (1) assisting needy families so that children can be cared for in their own homes; (2) reducing the dependency of needy parents by promoting job preparation, work, and marriage; (3) preventing out-of-wedlock pregnancies; and (4) encouraging the formation and maintenance of two-parent families. \uf0fe California Must Meet an MOE Requirement. To receive its full TANF block grant, California must expend $2.9 billion annually on specifi ed activities. The MOE requirement is primarily met through expenditures in the CalWORKs program. Some state expenditures on subsidized child care also count towards the state’s MOE. \uf0fe Federal Law Requires the State to Meet Work Participation Requirements. Federal law requires states to have 50 percent of their overall TANF caseload (and 90 percent of their two- parent TANF caseload) engaged in work activities for a specifi ed number of hours. States can receive caseload reduction credits that reduce these requirements. Failure to meet these requirements results in penalties of up to 5 percent of the state’s TANF block grant (increasing in subsequent years). CalWORKs Funding 5L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe In Recent Years, California’s Work Participation Rate (WPR) Has Averaged 24 Percent. Since 2004, California’s WPR has been in the mid-20s. As a result of the federal Defi cit Reduction Act, California’s caseload reduction credit was reduced dramatically beginning in 2007. Since that time, California has failed to meet its federal work requirement. For the foreseeable future, California is expected to fall signifi cantly short of its federal work participation requirement by having a WPR in the range of 25 percent to 30 percent. \uf0fe California Has Been Assessed Penalties for 2008 and 2009. California has been notifi ed that it will be assessed penalties of $47 million and $113 million for failure to meet federal work requirements in 2008 and 2009, respectively. The state has appealed these penalties and to date no penalties have been collected. Work Participation Status Federal Work Participation Requirement and California Work Participation Rate 2004 Through 2009 2004 2005 2006 2007 2008 2009 Federal requirement 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% Caseload reduction credit -46.1 -45.5 -44.9 -17.7 -21.0 -21.0 Effective requirement 3.9 4.5 5.1 32.3 29.0 29.0 Work participation rate 23.1 25.9 22.2 22.3 25.1 26.8 Surplus\/Shortfall 19.2% 21.4% 17.1% -10.0% -3.9% -2.2% 6L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe CalWORKs Has Experienced Signifi cant Reductions in Recent Years. During the past three years, the state has made signifi cant reductions ($780 million in ongoing reductions) to the CalWORKs program, including the following savings measures: \uf06e Lowering cash grants for families (total of a 12-percent reduction). \uf06e Reducing employment services and child care funding. \uf06e Shortening the adult time limit for assistance from 60 months to 48 months. \uf06e Reducing the earned income disregard. \uf06e Suspending intensive case management for pregnant and parenting teens. \uf06e Reducing funding for substance abuse and mental health treatment. \uf0fe Despite Rising Caseloads, CalWORKs Expenditures Have Been Relatively Flat Over Past Three Years. Total CalWORKs expenditures (all funds) remained relatively fl at between 2008-09 ($5.3 billion) and 2011-12 ($5.4 billion), as the above noted savings measures largely offset the growth in costs due to rising caseloads. Recent CalWORKs Reductions 7L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Governor Proposes Three Signifi cant Policy Changes. To achieve $890 million (out of a total of $985 million) in budget- year savings in the CalWORKs program, the Governor has proposed three major policy changes: (1) reducing cash grants for the majority of recipients, (2) shortening the adult time limit, and (3) modifying work requirements. We discuss each of these policy changes in subsequent pages. \uf0fe Policy Changes Accompanied by a Redesign of the CalWORKs Administrative Structure. The Governor’s proposed policy changes are accompanied by an administrative redesign of CalWORKs that would replace the current CalWORKs program with a three-part system, consisting of two CalWORKs subprograms\u2014CalWORKs Basic and CalWORKs Plus\u2014and a Child Maintenance program. The fi gure below provides a fl owchart of the Governor’s proposed administrative restructuring. Governor’s Proposed CalWORKs Redesign Flowchart of Restructured CalWORKs Program Meeting federal work requirements through unsubsidized employment? Received cash assistance for less than 24 months? CalWORKs Basic Begins meeting federal work requirements through unsubsidized employment within 24 months of recieving assistance? CalWORKs Plus Begins meeting federal work requirements through unsubsidized employment. Child Maintenance Program YES NO YES NO YES NO YES NO CalWORKs Family Work-eligible?a a A work-eligible family includes an able-bodied parent who may legally work in the state. 8L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE Governor’s Proposed CalWORKs Redesign (Continued) \uf0fe Recommend Rejecting Administrative Structure Changes as They Are Unnecessary to Implement Governor’s Proposed Policy Changes. The Governor’s proposed policy changes could be adopted and associated savings achieved without changing the administrative structure of the program. We believe that the proposed changes to the administrative structure do not yield any apparent programmatic benefi ts in and of themselves. 9L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Governor’s Proposal. The Governor proposes to reduce the MAP by 27 percent for child-only, safety-net, and chronically sanctioned (sanctioned three or more months in a 12-month period) families, resulting in full-year savings of approximately $610 million. LAO Assessment \uf0fe Reduced Cash Grant Combined With CalFresh (Food Stamps) Benefi ts Put Average Child-Maintenance Family at 56 Percent of the Federal Poverty Level (as Compared to 65 Percent Currently). \uf0fe Proposed Reductions Could Increase the Incentive for Recipients to Work By increasing the difference in cash assistance between families that are working and those that are not, the Governor’s proposal could increase the incentive for families to work. \uf0fe But Target Population May Face More Barriers to Employment. However, our review of caseload characteristics and relevant research suggests that child-only and safety-net families may face more barriers to self-suffi ciency, such as limited education or work experience, physical or mental health problems, or issues with transportation, than other CalWORKs families. These barriers dampen the potential for the Governor’s proposed cash grant reduction to serve as a work incentive. Options to Consider \uf0fe An Across-the-Board Reduction Would Avoid Concentrating the Impact on a Particular Set of Cases. A 17 percent reduction in MAP levels for all current families would achieve roughly the same level of savings as the Governor. Governor’s Proposed Cash Grant Reduction 10L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Phased-In Reduction Could Mitigate Immediate Impact on Recipients. Phasing in a 27 percent reduction in MAP levels for child-only, safety-net, and chronically sanctioned families over a six-month period would result in budget-year savings of roughly $390 million ($70 million less than under the Governor’s proposed time line). Governor’s Proposed Cash Grant Reduction (Continued) 11L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Governor’s Proposal. The Governor proposes to shorten the adult time limit to 24 months, except for those meeting federal work requirements through unsubsidized employment, resulting in full-year savings of $380 million. LAO Assessment \uf0fe An Estimated 131,050 Adults Would Lose Aid. In April 2013, 131,050 adults that have received aid for more than 24 months and are not working suffi cient hours in unsubsidized employment would lose aid. \uf0fe Shortened Time Limit Will Likely Have Positive, but Limited, Effect on Employment of CalWORKs Recipients. \uf0fe Recommend Not Counting Prior Months in Exemption Toward Time Limit. Counting prior months in exemption would be inconsistent with prior policy under which exempt recipients may have elected not to volunteer for welfare-to-work with the understanding that employment and child care services would be available in the future. Option to Consider \uf0fe Adult Time Limit Could Be Aligned With Average Time on Aid. Reducing the adult time limit to 36 months\u2014roughly the historical average time on aid among CalWORKs recipients\u2014 without counting prior months in exemption would result in annual savings of $140 million. Governor’s Proposed Shortening of the Adult Time Limit 12L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Governor’s Proposal. The Governor proposes to align the current CalWORKs work requirements with federal TANF work requirements. This proposal would reduce required hours of participation for single parents (a majority of the caseload) but restrict the scope and time line for higher education activities and mental health, substance abuse, and domestic violence treatment. LAO Assessment \uf0fe Fiscal Impact Is Diffi cult to Determine. The Governor’s budget does not directly attribute any fi scal effect to this proposal. The ultimate fi scal effect is diffi cult to predict due to uncertain behavioral responses. However, it would likely somewhat reduce the risk of future federal WPR-related penalties. \uf0fe Governor’s Proposal Would Likely Increase the State’s Ability to Meet Federal Work Requirements. \uf0fe Recommend Not Adopting Federal Limitations for Mental Health, Substance Abuse, and Domestic Violence Treatment. Federal time limitations for mental health, substance abuse, and domestic violence treatment are impractical and detrimental to the successful implementation of these treatments. We therefore recommend rejection of the proposal to align the state with this component of federal work requirements. Governor’s Proposed Changes to Work Requirements 13L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Continue the Current-Year Single Allocation Reduction. A reduction in county single allocation funding for employment services and child care and associated work exemptions will expire at the end of 2011-12, resulting in increased CalWORKs expenditures of $377 million in the budget year. These expenditures could be avoided by continuing the single allocation reduction. This option would not result in a new service level reduction, but would likely have a negative effect on CalWORKs work participation. \uf0fe Reduce the Earned Income Disregard. Modifying the earned income disregard to not count the fi rst $225 and 25 percent of all other earned income would result in savings of roughly $70 million. This option would reduce or eliminate assistance for CalWORKs families with the highest levels of earned income while maintaining roughly the same disregard for families with lower levels of earned income. \uf0fe Increase the Severity of Sanctions. Reducing a family’s cash grant by 50 percent after three months in sanction would result in savings of roughly $40 million. This option would involve the trade-off of likely increases in work participation with equally likely increases in poverty among some families. \uf0fe Reduce Cash Assistance After Long Periods of Aid. Reducing cash grants by 10 percent after eight or ten years of aid would result in savings of $30 million or $50 million, respectively. While many long-term cases are likely to face signifi cant barriers to self-suffi ciency, their needs could be weighed against families that have received comparatively less aid\u2014especially newer cases. Alternative Options for Achieving Savings In CalWORKs 14L E G I S L A T I V E A N A L Y S T ‘ S O F F I C E March 1, 2012 LAO 70 YEARS OF SERVICE \uf0fe Budget Package Will Depend Upon Magnitude of Savings Sought. In light of recent reductions to CalWORKs, as well as the nature of the program and the vulnerable population it serves, the Legislature may wish to implement a lesser level of reductions than proposed by the Governor. The fi gure above provides illustrative packages of CalWORKs budget reductions to achieve various levels of savings. \uf0fe Trade-Offs Should Be Weighed Carefully. In evaluating reductions to CalWORKs, the Legislature will have to weigh the impact of reductions on recipients against the need for budgetary savings. Additionally, we suggest that the Legislature balance efforts to increase CalWORKs work participation with a recognition of the barriers to working that some families face. Recommend Legislature Adopt a Package of Reductions Based on Its Priorities Example of CalWORKs Budget Packages Savings of Approximately $500 Million Continue the current-year single allocation reduction Eliminate higher work-exempt cash grants Eliminate Cal-Learn case management Reduce the earned income disregard Savings of Approximately $750 Million All items above Reduce cash grants for all families by 6 percent Savings of Approximately $1 Billion All items above Reduce cash grants by 10 percent after eight years of aid Reduce cash grants by 15 percent after ten years of aid Shorten adult time limit to 36 months ”

” 2004-05 Analysis LAO 60 YEARS OF SERVICE Legislative Analyst’s Office MAJOR ISSUES Health and Social Services Better Care Reduces Health Care Costs for Aged\/Disabled Aged and disabled persons who would benefit the most from receiving coordinated health care have been excluded from many Medi-Cal managed care plans. This group offers the state the greatest opportunity to contain Medi-Cal costs. We recommend the enactment of legislation to gradually shift certain beneficiaries to a managed care setting. (See Part V of The 2004-05 Budget: Perspectives and Issues.) Remodeling the Drug Medi-Cal Program California’s program for substance abuse treatment services for Medi-Cal beneficiaries is a patchwork of services. We recommend an approach which would provide greater authority and resources for community-based treatment services, contain the fast-growing costs of methadone treatment, and integrate a potentially more cost-effective mode of treatment into the program without a net increase in state General Fund resources. (See Part V of The 2004-05 Budget: Perspectives and Issues.) Moving Toward a Model Antifraud System Although the Legislature has approved significant increases in resources to combat Medi-Cal fraud, fraud remains a major concern. In our analysis, we explain the structure of the Department of Health Services’ (DHS) antifraud program and how it compares to national models of fraud control, identify areas in which the DHS could become more effective in combating Medi-Cal fraud, and offer recommendations to improve antifraud efforts. (See page C-111 of this Analysis.) Enrollment Caps and Block Grants Raise Concerns The Governor proposes to (1) cap enrollments for certain specified health and social services programs and (2) block C – 4 Health and Social Services 2004-05 Analysis grant funds to county for certain state-only programs serving immigrants. We recommend that the Legislature reject (1) the block grant proposal because the programs proposed for transfer are not well-suited for local control and (2) most of the cap proposals because administrative difficulties, equity issues, and other concerns outweigh the potential benefits. (See pages C-37, page C-47, C-147 and C-198 of the Analysis.) Governor’s Welfare Reform Proposal May Increase Par- ticipation, but Limits County Flexibility The Governor’s budget proposes to increase CalWORKs participation by imposing further sanctions on non-compliant families and requiring that recipients engage in employment or on-the-job training within 60 days. The administration’s assumptions concerning program participation improvement are overly optimistic and the proposal unnecessarily limits county flexibility to find the optimal mix of work, training, and employment activities to help recipients become self-sufficient. (See page C-227 of the Analysis.) Child Care Reforms Moving in Right Direction, but More Work Needed The Governor proposes a number of significant reforms to California’s subsidized child care system including eligibility restrictions and higher family fees. Although the proposals set priorities for limited child care resources, they lack important policy and implementation details that would help the Legislature weigh state savings against reducing child care services for a significant number of lower-income families. (See page C-19 of the Analysis.) Evaluating the Governor’s IHSS Proposal The Governor proposes to eliminate the residual In-Home Supportive Services (IHSS) program, limit state participation in provider wages, and reduce services to recipients lliving with relatives. The proposal to limit services for recipients living with family members merits approval because it is a reduction in services that can probably be absorbed by family members. With respect to the other proposals, we make no recommendation. (See page C-267 of the Analysis.) Legislative Analyst’s Office TABLE OF CONTENTS Health and Social Services Overview …………………………………………………………………….. C-7 Expenditure Proposal and Trends …………………………… C-7 Caseload Trends ……………………………………………………… C-9 Spending by Major Program …………………………………. C-12 Major Budget Changes ………………………………………….. C-12 Crosscutting Issues ……………………………………………………. C-19 Child Care …………………………………………………………….. C-19 Health and Social Services Enrollment Caps …………. C-37 County Block Grant Proposal ……………………………….. C-47 Quality Improvement Fees ……………………………………. C-52 Senate Bill 2 …………………………………………………………… C-60 Indigent Adult Program ……………………………………….. C-62 Departmental Issues …………………………………………………. C-63 Department of Aging (4170) ………………………………….. C-63 C – 6 Health and Social Services 2004-05 Analysis Department of Alcohol and Drug Programs (4200) ……………………………………….. C-66 California Medical Assistance Program (4260) ……… C-70 Public Health ………………………………………………………. C-130 Managed Risk Medical Insurance Board (4280) ……………………………………. C-144 Department of Developmental Services (4300) ……. C-166 Department of Mental Health (4440) …………………… C-192 Department of Child Support Services (5175) ……… C-213 Department of Social Services CalWORKs Program (5180) …………………………….. C-220 Adoptions Program …………………………………………….. C-254 In-Home Supportive Services ……………………………… C-266 Supplemental Security Income\/ State Supplementary Program ………………………… C-276 Food Stamps Program…………………………………………. C-279 Child Welfare Services ………………………………………… C-282 Foster Care ………………………………………………………….. C-292 Community Care Licensing ………………………………… C-298 Findings and Recommendations …………………………….. C-301 Legislative Analyst’s Office OVERVIEW Health and Social Services Although General Fund spending for health and social servicesprograms is projected to increase by 7.9 percent to $24.6 billion in 2004-05, this year-over-year increase is misleading because General Fund spending in 2003-04 is artificially depressed by one-time federal funds and accounting savings. After adjusting for these one-time savings, health and social services expenditures are essentially the same between the current and budget years. However, this assumes that the budget avoids increased spending in 2004-05 through a combination of grant and provider rate reductions, eligibility restrictions, and caps on enrollment in certain programs. EXPENDITURE PROPOSAL AND TRENDS Budget Year. The budget proposes General Fund expenditures of $24.6 billion for health and social services programs in 2004-05, which is 31 percent of total proposed General Fund expenditures. Figure 1 (see next page) shows health and social services spending from 1997-98 through 2004-05. The health and social services share of the budget as proposed would increase about 1 percent in the budget year, to just over 31 percent. Although the proposed General Fund budget for 2004-05 is $1.8 billion (7.9 percent) above estimated spending for 2003-04, nearly all of this increase is attributable to one-time federal fiscal relief and ac- counting changes which artificially depressed General Fund spending in 2003-04. After backing out these changes, General Fund spending in 2004-05 is virtually identical to the level in 2003-04. Special funds spend- ing for health and social services is proposed to decrease by $190 million (4.5 percent) to a total of $4.1 billion. Historical Trends. Figure 1 shows that General Fund expenditures (current dollars) for health and social services programs are projected to increase by $10 billion, or 68 percent, from 1997-98 through 2004-05. This C – 8 Health and Social Services 2004-05 Analysis 5 10 15 20 25 30 $35 97-98 99-00 01-02 03-04 Figure 1 Health and Social Services Expenditures Current and Constant Dollars 1997-98 Through 2004-05 (In Billions) Constant 1997-98 Dollars Total Spending General Fund Spending Special funds General Fund Current Dollars Percent of General Fund Budget 5 10 15 20 25 30 35% 97-98 04-05 Proposed represents an average annual increase of 7.7 percent. Most of this growth (about 85 percent) occurred from 1997-98 through 2002-03. In contrast, special fund expenditures have been decreasing since reaching a peak of $4.7 billion in 2001-02. For 2004-05, special fund spend- ing is projected to decrease by $190 million (4.4 percent) to just less than $4.1 billion. Most of this decrease is attributable to reduced spending of funds administered by the Children and Families Commission and re- duced Proposition 99 funds, both supported by tobacco tax revenues which have been in decline. Combined General Fund and special funds expenditures are projected to increase by about $10.6 billion (59 percent) from 1997-98 through 2004-05. This represents an average annual increase of 6.8 percent. Adjusting for Inflation. Figure 1 also displays the spending for these programs adjusted for inflation (constant dollars). On this basis, General Fund expenditures are estimated to increase by 38 percent from 1997-98 through 2004-05, an average annual rate of 4.7 percent. Combined Gen- eral Fund and special funds expenditures are estimated to increase by Overview C – 9 Legislative Analyst’s Office 31 percent during this same period, an average annual increase of just less than 4 percent. CASELOAD TRENDS Caseload trends are one important factor driving health and social services expenditures. Figures 2 and 3 (see next page) illustrate the budget’s projected caseload trends for the largest health and social ser- vices programs. Figure 2 shows Medi-Cal caseload trends over the last decade, divided into three groups: families and children (primarily re- cipients of California Work Opportunity and Responsibility to Kids [CalWORKs], refugees and undocumented persons, and disabled and aged persons (who are primarily recipients of Supplemental Security In- come\/State Supplementary Program [SSI\/SSP]). Figure 3 (see next page) shows the caseloads for CalWORKs and SSI\/SSP. Figure 2 Budget Forecasts Upturn in Medi-Cal Caseloads 1994-95 Through 2004-05 (In Millions) 1 2 3 4 5 6 7 94-95 96-97 98-99 00-01 02-03 04-05 Aged Disabled Undocumented Persons\/Refugees Families\/Children Medi-Cal Caseloads. As shown in Figure 2, the Governor’s budget plan assumes that a modest increase in caseload will occur during the budget year in the Medi-Cal program. Specifically, the overall caseload C – 10 Health and Social Services 2004-05 Analysis is expected to increase by about 220,000 average monthly eligibles (3.3 per- cent). This would continue a growth trend, although at a slightly slower pace, that has occurred in prior years. Figure 3 CalWORKs Caseload Decline Ending; SSI\/SSP Caseloads Increasing Slightly 1994-95 Through 2004-05 (In Millions) 0.2 0.4 0.6 0.8 1 1.2 1.4 94-95 96-97 98-99 00-01 02-03 04-05 CalWORKs SSI\/SSP The caseload projections for 2004-05 take into account the following budget proposals and assumptions that would increase the caseload: (1) new procedures to help transfer children receiving screening and im- munization services under the Child Health and Disability Prevention (CHDP) program into more comprehensive Medi-Cal coverage and (2) an assumption of rapid growth (6.8 percent) in 2004-05 in the caseload of medically needy aged, blind, and disabled persons. These increases would be partially offset by the following proposals and assumptions that re- duce the caseload: (1) a proposal to limit the number of recent immigrants and undocumented persons who can receive nonemergency services, starting January 1, 2004; (2) a measure adopted last year for mid-year reporting of eligibility for certain adults; and (3) another measure adopted last year to require counties to process annual eligibility redetermina- tions in a more timely manner. Healthy Families Caseload. The Governor’s budget plan assumes that the entire caseload for the Healthy Families Program will be limited Overview C – 11 Legislative Analyst’s Office commencing January 1, 2004, and further assumes that this enrollment cap would continue at least through the end of 2004-05. Only about 5,000 infant children who would be shifted to Healthy Families coverage from their present health coverage under the Access for Infants and Mothers program would be exempted from the enrollment limits. The CalWORKs and SSI\/SSP Caseloads. Figure 3 shows the caseload trend for CalWORKs and SSI\/SSP. While the number of cases in SSI\/SSP is greater than in the CalWORKs program, there are slightly more persons in the CalWORKs program\u2014about 1.21 million compared to about 1.17 million for SSI\/SSP. (The SSI\/SSP cases are reported as individual persons, while CalWORKs cases are primarily families.) As Figure 3 shows, the CalWORKs caseload peaked in 1994-95 (after the recession of the early 1990s). Since then, the caseload has declined steadily for several years, essentially bottoming out in 2002-03, with slight decreases estimated for 2003-04 and 2004-05, mostly attributable to the proposed grant reduction and stricter work participation requirements. As discussed in our annual California’s Fiscal Outlook report, the CalWORKs caseload decline was due to various factors, including the improving economy, lower birth rates for young women, a decline in le- gal immigration to California, changes in grant levels, behavioral changes in anticipation of federal and state welfare reform, and, since 1999-00, the impact of CalWORKs program interventions (including additional employment services). The recent end to the caseload decline may be attributable to the composition of the remaining caseload and the extent to which it includes adults who face substantial barriers to employment. The SSI\/SSP caseload can be divided into two major components\u2014 the aged and the disabled. The aged caseload generally increases in pro- portion to increases in the eligible population\u2014age 65 or older (about 1.5 percent per year). This component accounts for about 30 percent of the total caseload. The larger component\u2014the disabled caseload\u2014grew rapidly in the early 1990s, but more recently has experienced steady moderate growth of about 2.5 percent since 1997-98. In the mid-to-late 1990s, the total SSI\/SSP caseload leveled off and actually declined in 1997-98, in part because of federal changes that re- stricted eligibility. Since March 1998, however, the caseload has been grow- ing moderately, about 2 percent each year. C – 12 Health and Social Services 2004-05 Analysis SPENDING BY MAJOR PROGRAM Figure 4 shows expenditures for the major health and social services programs in 2002-03 and 2003-04, and as proposed for 2004-05. As shown in the figure, three major benefit payment programs\u2014Medi-Cal, CalWORKs, and SSI\/SSP\u2014account for a large share (about 69 percent) of total spending in the health and social services area. As discussed earlier, much of the increase in 2004-05 reflects making up for the loss of one-time savings (federal funds and accounting changes) which artificially depressed General Fund spending in 2003-04. As Fig- ure 4 shows, General Fund spending is proposed to increase in most health programs (though not as much as is required by current law), while four of the five largest social services programs (CalWORKs, In-Home Sup- portive Services [IHSS], Foster Care, and Child Welfare) will experience budget reductions. In-Home Supportive Services is proposed for the larg- est reduction in percentage terms (13 percent). MAJOR BUDGET CHANGES Figures 5 and 6 (see page 14 and 15) illustrate the major budget changes proposed for health and social services programs in 2004-05. (We include the federal Temporary Assistance for Needy Families [TANF] funds for CalWORKs because, as a block grant, they are essentially inter- changeable with state funds within the program.) Most of the major changes can be grouped into five categories: (1) funding most caseload changes, (2) suspending cost-of-living adjustments (COLAs), (3) grant and provider rate reductions, (4) capping growth in certain programs and shifting the immigrant-related portion of these programs to counties, and (5) other policy restrictions. Caseload Changes. With the exception of proposed caps on enroll- ment discussed below, the budget funds caseload changes in the major health and social services programs. COLA Suspensions and Grant Reductions. The budget proposes to suspend statutory COLAs for CalWORKs and SSI\/SSP, and does not pro- vide the discretionary COLA for Foster Care and related programs. Also, the budget proposes to not pass-through the federal SSI COLA. In ad- dition, the budget proposes no inflation adjustment for county adminis- tration of CalWORKs, Foster Care, Food Stamps, and Child Welfare Ser- vices. In addition to the COLA suspensions, the budget achieves signifi- cant savings from a 5 percent grant reduction in CalWORKs. Overview C – 13 Legislative Analyst’s Office Figure 4 Major Health and Social Services Programs Budget Summarya (Dollars in Millions) Change From 2003-04 Actual 2002-03 Estimated 2003-04 Proposed 2004-05 Amount Percent Medi-Cal General Fund $10,554 $9,765 $11,569 $1,804 18.5% All fundsb 29,790 29,215 31,216 2,002 6.9 CalWORKs General Fund $2,078 $2,060 $1,995 -$64 -3.1% All funds 5,869 5,421 4,866 -555 -10.2 Foster Care General Fund $511 $487 $426 -$60 -12.4% All funds 1,645 1,744 1,723 -21 -1.2 SSI\/SSP General Fund $3,004 $3,144 $3,346 $202 6.4% All funds 7,549 8,116 8,284 168 2.1 In-Home Supportive Services General Fund $1,086 $1,033 $897 -$137 -13.2% All funds 2,813 3,215 2,763 -452 -14.1 Regional Centers\/Community Services General Fund $1,511 $1,671 $1,779 $108 6.5% All funds 2,299 2,554 2,709 154 6.0 Developmental Centers General Fund $345 $365 $370 $5 1.4% All funds 647 715 690 -25 -3.5 Healthy Families Program General Fundc $24 $294 $306 $11 3.8% All funds 693 803 839 36 4.5 Child Welfare Services General Fund $588 $628 $610 -$18 -2.8% All funds 1,952 2,013 2,058 45 2.2 Children and Families Commission General Fund \u2014 \u2014 \u2014 \u2014 \u2014 All funds $533 $755 $566 -$189 -25.1% Child Support Services General Fund $432 $434 $463 $29 6.7% All funds 1,075 1,129 1,167 38 3.4 a Excludes departmental support. b Includes some costs for other departments and miscellaneous funds. c Some program costs temporarily shifted to Tobacco Settlement Fund in 2002-03. C – 14 Health and Social Services 2004-05 Analysis Figure 5 Health Services Programs Proposed Major Changes for 2004-05 General Fund Requested: $11.6 billion Medi-Cal Increase: $1.8 billion (+18.5%) + $958 million due to the 2003-04 shift from accrual to cash + $655 million to offset the loss of one-time federal funds + $253 million for a net increase in costs for pharmacy benefits + $164 million for rate increases for certain clinics and hospitals $341 million from a provider rate reduction and other rate changes $279 million from shifting some provider payments into 2003-04 and $144 million from delaying some payments until 2005-06 $184 million due to prior actions to reduce costs for drugs, medical supplies, and services Requested: $2.2 billion Department of Developmental Services Increase: $115 million (+5.6%) + $105 million net increase from the transfer of habilitation services $100 million from establishing statewide standards for the purchase of services in Regional Centers Requested: $306 million Healthy Families Program Increase: $11 million (+3.8%) $32 million from imposing a cap on program enrollment Requested: $911 million Department of Mental Health Increase: $32 million (+3.6%) + $28 million to prepare to open Coalinga State Hospital in 2005-06 $20 million to eliminate Children’s System of Care Overview C – 15 Legislative Analyst’s Office Figure 6 Social Services Programs Proposed Major Changes for 2004-05 General Fund Requested: $2 billion CalWORKs Decrease: -$64 million (-3.1%) + $136.5 million for child care and automation costs associated with the Governor’s welfare reform + $94.4 million for TANF transfers to achieve General Fund savings in other programs $132.5 million from the full-year impact of proposed 5 percent grant reduction effective April 2004 $162.9 million from grant savings attributable to Governor’s welfare reform $67.8 million because welfare-to-work match obligation is satisfied $53.7 million for grant savings associated with more adults reaching their five-year time limit Requested: $3.3 billion SSI\/SSP Increase: $202 million (+6.4%) + $238.1 million to replace one-time federal fiscal relief funds + $57.9 million for caseload increase $62.5 million from not passing through the federal COLA Requested: $897 million In-Home Supportive Services Decrease: -$137 million (-13%) + $147.4 million for caseload increase + $61.4 million to replace one-time federal funds $277 million net savings from the full-year impact of eliminating the residual (state-only) program $98 million from limiting state participation in provider wages to the minimum wage, rather than $10.10 per hour C – 16 Health and Social Services 2004-05 Analysis Enrollment Caps and County Block Grant Enrollment Caps. The Governor’s budget proposes to cap enrollment for some or all caseloads in the following health and social services pro- grams: Medi-Cal Healthy Families, AIDS Drug Assistance Program, the Breast and Cervical Cancer Treatment Program, California Children’s Services (CCS), the Genetically Handicapped Persons Program (GHPP), state mental hospitals, the Cash Assistance Program for Immigrants (CAPI, state-only SSI\/SSP), the California Food Assistance Program (CFAP, state-only Food Stamps), and CalWORKs for post-August 1996 immigrants. The budget scores savings of about $60 million in 2004-05 from these enrollment caps. County Block Grants. The budget plan proposes to achieve addi- tional savings by restructuring and consolidating some of these capped programs into a single block grant to counties. Affected by this proposal are the following programs which serve legal immigrants: CalWORKs, CFAP, CAPI, and Healthy Families. The budget assumes savings of $6.6 million (5 percent of the proposed block grant) from efficiencies as- sociated with county block grant administration. Other Policy Changes IHSS. The budget includes several proposals which restrict services, eligibility, and provider wages. Specifically, the Governor proposes to (1) eliminate the residual program, which is funded exclusively with state and county dollars; (2) limit state participation in provider wages to the minimum wage (that is $6.75, rather than the $10.10 per hour currently authorized); and (3) reduce services for recipients living with able-bod- ied relatives. CalWORKs. The Governor proposes state welfare reforms including (1) a 25 percent grant reduction for cases in sanction status, (2) stricter work requirements for recipients and applicants, and (3) a 25 percent grant reduction for families who have reached their five-year time limit and are unemployed. Child Care. The budget proposes several changes to state child care programs including increases in family fees, reductions in payments to providers, eligibility limits, and an elimination of dedicated funding for child care for families who have been off cash assistance for three years or more. Medi-Cal. The Governor’s budget proposal reflects the continuation into the budget year of various reductions that were proposed to begin in the current year (but that have not been enacted at the time this analysis was written). These proposals would reduce the reimbursement rates paid Overview C – 17 Legislative Analyst’s Office to specified providers, which were already set to decrease by 5 percent, by a total of 15 percent; impose the enrollment caps discussed above; and eliminate funding earmarked to increase pay for nursing home workers. Additional reductions proposed in the spending plan to commence in the budget year would reduce Medi-Cal expenditures by delaying pay- ments to providers by one week; establishing a quality improvement fee for managed care health plans; and reducing the reimbursements paid to certain clinics and hospitals. The administration also proposes to pursue a federal waiver to achieve additional ongoing Medi-Cal savings in 2005-06 by simplifying eligibil- ity standards, imposing copayments for services, modifying benefit pack- ages for certain optional populations, expanding managed care plans, and implementing other changes. Department of Developmental Services (DDS). The January budget plan dropped administration proposals presented in November to cap caseloads for Regional Center (RC) community services. Funding is pro- vided for a shift of habilitation services from the Department of Rehabili- tation to DDS that was adopted last year. Also, the budget reversed an earlier proposal to end certain community services, such as respite care. State savings would be achieved in 2004-05 through such steps as estab- lishing copayments to families of certain children receiving services and standardizing statewide the services that are provided in the commu- nity. The administration is also proposing to pursue the development of additional cost-saving measures for implementation in 2005-06, includ- ing an expansion of copayments, statewide standardization of the rates paid for the major services purchased by RCs, and implementation of a proposed waiver program to cap individual allowances for client ser- vices while giving them increased client control over their services. The administration intends to proceed with closing Agnews Devel- opmental Center and indicated it will review whether additional facility closures are warranted. Healthy Families Program. The budget plan continues into 2004-05 the proposal first outlined by the administration in November to cap caseloads and reduce provider rates for various programs starting in 2003-04. Benefits for recent immigrants would become part of a block grant to counties (as discussed above). The premiums and benefits pro- vided for children of families with higher incomes would be modified to establish a two-tier program structure by 2005-06. Public Health. The budget proposes a series of program reductions. All TANF funding for the Community Challenge Grant program to re- duce the number of teenage and unwed pregnancies and to promote re- sponsible parenting would be eliminated. Allocations for the CHDP pro- C – 18 Health and Social Services 2004-05 Analysis gram would decline dramatically as clients are shifted to the Medi-Cal and Healthy Families programs. A provider rate reduction comparable to the one imposed for Medi-Cal would be imposed for CCS, CHDP, and GHPP, so that a 5 percent rate cut for these programs that was enacted in the 2003-04 Budget Act would increase to a total of 15 percent under the Governor’s spending plan. The administration proposes to again sus- pend the state’s annual contribution to the County Medical Services Pro- gram. Department of Mental Health. State funding would be provided in the budget year for the staffing needed to open a new state hospital pri- marily to house Sexually Violent Predators in Coalinga early in 2005-06. A series of measures are proposed to limit the population of certain crimi- nal offenders to the state hospital system, and counties (rather than state hospitals) would henceforth be responsible for holding individuals who were being considered for commitment to the state hospital system as Sexually Violent Predators after their parole from state prison. Funding for mental health services for certain children in the Medi-Cal Program would grow significantly, but all funding for the state-supported Children’s System of Care program would be eliminated. Senate Bill 2. No resources are provided in the budget for any state agencies to commence the implementation of Chapter 673, Statutes of 2003 (SB 2, Burton), a measure expanding health insurance coverage. Department of Alcohol and Drug Programs. The Office of Problem and Pathological Gambling, a newly created state office to help gambling addicts that is funded with Indian gaming revenues, would be abolished. Legislative Analyst’s Office CROSSCUTTING ISSUES Health and Social Services CHILD CARE The Governor’s budget proposes a number of significant reforms to California’s subsidized child care system. These proposals effectively prioritize limited child care resources. However, the Governor’s proposals lack important policy, implementation, and administrative details that would help the Legislature weigh state savings against reducing child care services for a significant number of lower-income families. We evaluate the proposals’ effect on children, families, and the state budget, and present some alternative approaches. BACKGROUND California’s subsidized child care system is primarily administered through the State Department of Education (SDE) and the Department of Social Services (DSS). A limited amount of child care is also provided through the California Community Colleges. Figure 1 (see next page) sum- marizes the funding levels and estimated enrollment for each of the state’s various child care programs as proposed by the Governor’s 2004-05 budget. As the figure shows, the Governor’s 2004-05 budget proposes about $3 billion ($1.8 billion General Fund) for the state’s child care programs. This is a decrease of about $60 million from the estimated current-year level of funding for these programs. About $1.4 billion (49 percent) of total child care funding is estimated to be spent on child care for current C – 20 Health and Social Services 2004-05 Analysis or former California Work Opportunity and Responsibility to Kids (CalWORKs) recipients. The total proposed spending level will fund child care for approximately 684,100 children statewide in the budget year. Figure 1 California Child Care Programs 2004-05 (Dollars in Millions) Program State Controla Estimated Enrollment Governor’s Budget CalWORKs Stage 1b DSS 89,000 $510.4 Stage 2b SDE 93,500 546.2 Community Colleges (Stage 2) CCC 3,000 15.0 Stage 3 SDE 57,000 368.8 Subtotal (242,500) (1,440.4) Non-CalWORKs General Child Care SDE 86,100 $593.4 Alternative Payment Programs SDE 29,800 182.3 Pre-School and After-School SDE 308,500 511.0 Other SDE 17,200 225.1 Subtotal (441,600) (1,511.8) Totals\u2014All Programs 684,100 $2,952.2 a Department of Social Services (DSS); State Department of Education (SDE); California Community Colleges (CCC). b Includes holdback of reserve funding which will be allocated during 2004-05 based on actual need. CalWORKs Child Care System State law requires that adequate child care must be available to CalWORKs recipients receiving cash aid in order to meet their program participation requirements (a combination of work and\/or training ac- tivities). If child care is not available, then the recipient does not have to participate in CalWORKs activities for the required number of hours, until child care becomes available. The CalWORKs child care is deliv- ered in three stages: Stage 1. Stage 1 is administered by county welfare departments (CWDs) and begins when a participant enters the CalWORKs Crosscutting Issues C- 21 Legislative Analyst’s Office program. In this stage, CWDs refer families to resource and re- ferral agencies to assist them with finding child care providers. The CWDs then pay providers directly for child care services. Stage 2. The CWDs transfer families to Stage 2 when the county determines that participants’ situations become stable. In some counties, this means that a recipient has a welfare-to-work plan, or employment, and has a child care arrangement that allows them to fulfill their CalWORKs obligations. In other counties, stable means that the recipient is off aid altogether. Stage 2 is administered by SDE through a voucher-based program. Partici- pants can stay in Stage 2 while they are in CalWORKs and for two years after the family stops receiving a CalWORKs grant. Stage 3. In order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year time limit, the Legislature created Stage 3 in 1997. Recipients timing out of Stage 2 are eligible for Stage 3 if they have been unable to find other subsidized child care. Assuming funding is available, former CalWORKs recipients may receive Stage 3 child care as long as their income remains below 75 percent of the state me- dian income (SMI) level and their children are below age 13. Non-CalWORKs Child Care System As discussed above, CalWORKs recipients are guaranteed child care in certain programs that are reserved for current and former CalWORKs recipients. In contrast, non-CalWORKs child care programs (primarily administered by SDE) are open to all low-income families at little or no cost to the family. Access to these programs is based on space availability and income eligibility. This is because child care for low income non- CalWORKs families is not fully funded and waiting lists are common. Families receive child care subsidized by SDE in one of two ways, either by (1) receiving vouchers from the Alternative Payment (AP) program pro- viders that offer an array of child care arrangements for parents or (2) being assigned space in public or private child care centers or family child care homes that contract with SDE to provide child care. (Family child care homes provide care in the home of the provider.) Current-Year Child Care Reforms As part of the 2003-04 budget package, the Legislature approved a number of child care reforms that affected both CalWORKs and non- CalWORKs child care. These changes to eligibility and provider reim- bursement rates are described below. C – 22 Health and Social Services 2004-05 Analysis Elimination of Child Care Eligibility for 13-Year Olds. Budget trailer bill provisions eliminated child care services for 13-year olds. This age group could previously receive subsidized care if they were in families with incomes below 75 percent of the SMI level. Elimination of Child Care Eligibility for Grandfathered Families. In 1997, the Legislature reduced the family income eligibility require- ments for subsidized child care from 100 percent to 75 percent of the SMI, adjusted for family size pursuant to Chapter 270, Statutes of 1997 (AB 1542, Ducheny). However, Chapter 270 specified that children from families with incomes between 75 percent and 100 percent of SMI that were already receiving subsidized care could maintain (be grandfathered in) their right to such care as long as their family income did not exceed 100 percent of SMI. The 2003-04 budget package eliminated this eligibil- ity exception. Changes in Regional Market Rates. The state reimburses AP child care providers based on the regional market rate (RMR). The RMR is a survey of what child care providers charge in each region. This informa- tion is used to determine the maximum reimbursement rate the state will pay providers in any given region. Separate rates are calculated depend- ing on provider type, age of children, and time in care. The Legislature lowered the maximum reimbursement rate from the 93rd percentile to the 85th percentile of the RMR. This means that under the new policy, the state will fully reimburse about 85 percent of regional providers, and will not fully reimburse the 15 percent of providers with the highest costs. GOVERNOR’S BUDGET PROPOSES ADDITIONAL REFORMS Figure 2 compares the Governor’s child care reform proposals to cur- rent law. The Governor’s budget proposes a number of reforms to the CalWORKs and non-CalWORKs subsidized child care systems includ- ing changes in program eligibility, family fees, and provider reimburse- ment, which we describe below. Eligibility Restrictions The Governor’s budget proposes several child care eligibility changes. The administration estimates that these changes would result in com- bined savings of about $84.8 million and approximately 20,000 children los- ing eligibility for subsidized child care. (The Governor’s budget assumes that the 11 and 12 year olds that lose eligibility for subsidized child care Crosscutting Issues C- 23 Legislative Analyst’s Office Figure 2 Administration’s Child Care Proposals Compared to Current Law\/Current Practice Current Law\/Current Practice Administration’s Proposal (and Budget-Year Impact) Eligibility Income Eligibility Family income up to 75 percent of the SMI (for a family of four). Implement a three-tiered eligibility structure. Maximum income eligibility in high cost county would remain the same. Income eligibility in medium and low cost counties would decrease. Annual adjustments based on CNI. ($9.3 million savings; 1,900 children lose eligibility.) Age Eligibility Children up to age 13 are eligible for both CalWORKs and non- CalWORKs child care. Eliminate eligibility for 11 and 12 year olds if after-school programs are available (for which they would receive priority placement). ($75.5 million savings; 18,000 children lose eligibility and move to after-school programs.) Stage 3 Child Care Former CalWORKs participants are eligible for Stage 3 as long as they meet income and age eligibility. Current practice prevents fami- lies from applying for non-CalWORKs child care while receiving aid. Limit Stage 3 child care to one year (in addition to two years in Stage 2). Families currently in Stage 3 would receive one additional year. CalWORKs families could sign up for non- CalWORKs care as soon as they have income. (No impact in the budget year.) Eligibility for Nonworking Parents No time limit as long as families remain eligible. Limit eligibility to two years. (No savings scored; caseload impact unknown.) Continued C – 24 Health and Social Services 2004-05 Analysis Other Proposals Reimbursement Rates Providers are reimbursed at up to 85th percentile of the RMR. Creates a six-level reimbursement rate structure that reimburses providers between 40th and 85th percentile of the RMRa, depending on licensure, training, and whether they serve private pay clients. ($57.7 million savings; 95,592 children impacted.) Family Fees Families with income over 50 percent of SMI pay fees up to 8 percent of their gross income. Families with income over 40 percent of SMIb pay fees up to 10 percent of gross income. ($22.3 million savings; fees increased for 77,250 children.) Totals Savings (All Funds) $164.8 million Children Losing Eligibility 20,000 (including those children switching to after-school care) Children Subject to Increased Fee 77,250 a RMR=Regional Market Rate. b SMI=State Median Income. would receive after-school care under the proposal.) The proposed eligi- bility restrictions achieve savings by eliminating the funding associated with the freed-up child care slots that are vacated due to eligibility restrictions rather than redirecting the savings to fund child care for chil- dren on waiting lists. We summarize the proposals, describe the impact of the proposed eligibility changes on children and families, and offer issues for legislative consideration. Income Eligibility The Governor’s proposal to create a three-tiered child care eligibility structure reflecting the cost-of-living differences among counties has merit. The proposed eligibility structure would, however, lower the income eligibility threshold for subsidized child care in medium- and lower-cost counties, resulting in an estimated 1,900 children losing Crosscutting Issues C- 25 Legislative Analyst’s Office eligibility for subsidized child care programs for a state savings of $9.3 million in 2004-05. While the proposal lowers the eligibility threshold, it does maintain eligibility for families with the lowest income. Proposal Creates a Three-Tiered Income Eligibility Structure. Under current law, income eligibility (last increased in September 2000) for child care is based on the SMI (adjusted for family size). The administration pro- poses creating a three-tiered income eligibility structure that reflects the dif- ferences in cost of living among counties. Current eligibility levels for fami- lies in high-cost counties would remain the same, while eligibility for fami- lies in all other counties would be reduced. Figure 3 shows the proposed income eligibility levels for subsidized child care. As the figure shows, a family of three in a medium-cost county with monthly income above $2,729 would no longer be eligible for subsidized child care. Figure 3 Proposed Maximum Monthly Subsidized Child Care Income Eligibilitya Family Size 1 and 2 3 4 5 6 or More High cost countyb $2,730 $2,925 $3,250 $3,770 $4,290 Medium cost countyc 2,606 2,792 3,102 3,599 4,095 Lower cost countyd 2,482 2,659 2,954 3,427 3,900 a Current income eligibility is the same as the high cost county figures. b High cost counties: Marin, San Francisco, and Santa Clara. c Medium cost counties: Alameda, Contra Costa, Los Angeles, Monterey, Napa, Orange, San Diego, San Luis Obispo, Santa Barbara, Santa Cruz, Solano, Sonoma, and Ventura. d Lower cost counties: All other counties. The Governor’s budget proposes basing income eligibility thresh- olds on the fixed dollar amount shown in Figure 3 beginning in October 2004. This amount would be adjusted annually in accordance with changes in the California Necessities Index (CNI). The income eligibility changes would result in an estimated 1,900 children losing eligibility for child care for a total state savings of $9.3 million. Child Care Costs Vary by Region. Like the cost of living, child care costs vary across the state. A recent study done by the Public Policy Insti- tute of California and the SPHERE Institute showed that both family- C – 26 Health and Social Services 2004-05 Analysis based care and center-based care was significantly more expensive in the Bay Area, with the highest statewide costs in Santa Clara, San Francisco, and Marin Counties. Furthermore, the study showed that child care costs varied across the state. Conclusion. We believe that an income eligibility system that takes regional cost of living into account has merit because a family living in a high cost region of the state will, on average, need to spend more on housing, child care, food, and other necessities. In considering the administration’s proposal, the Legislature should first evaluate the merits of a differential income eligibility system, and then determine the level of savings it would want to achieve with such a policy. The administration has devised a differential income eligibility system by adopting the current income eligibility threshold as the eligi- bility ceiling in high cost counties and then lowering eligibility thresh- olds in low and medium cost counties. As a result, the administration’s proposal generates General Fund savings. Alternatively, a state income eligibility system that recognizes differences in regional costs of living could be developed in a fiscally neutral way. Age Eligibility The administration proposes to eliminate subsidized child care for 11 and 12 year olds, except when after-school programs are not available to serve these children. Under the proposal, 11 and 12 year olds would be given priority in after-school programs. Although we believe that the proposal is reasonable given the state’s fiscal constraints, our analysis indicates that the administration has significantly overestimated savings resulting from this proposal. In addition, the proposal lacks key details regarding the definition of available as it applies to after-school programs, as well as important implementation details. Proposal Restricts Eligibility for 11 and 12 Year Olds. Under current law, children age 12 or below from families with incomes below 75 per- cent of the SMI are eligible for child care. The administration proposes to eliminate child care eligibility for 11 and 12 year olds when after school programs are available for an estimated savings of $75.5 million. The administration estimates that about 18,000 children ages 11 and 12 would lose subsidized child care eligibility and obtain after-school care. Governor’s Proposal Lacks Detail. The proposal lacks key details that are necessary to evaluate both the number of children that might be affected by this proposal as well as projected savings. For example, the administration’s policy states that 11 and 12 year olds will lose child care eligibility only if after-school programs are available to the child. How- Crosscutting Issues C- 27 Legislative Analyst’s Office ever, it is unclear what constitutes availability. After-school programs typically operate for only a limited time period, often no later than 7:00 p.m., and usually not on the weekends and during the summer. About 70 percent of the working adults receiving CalWORKs are employed in the service or retail trade industries that often require nontraditional work hours. The administration’s policy is unclear as to whether or not the defini- tion of available would include a standard that after-school programs be available to CalWORKs participants even on nights and weekends. Another area needing clarification is how the proximity of after-school programs to the child’s residence or a parent’s employer would be fac- tored into determining availability. For example, some families may face transportation or other barriers that prevent them from accessing after- school programs. Availability of Current After-School Programs. The state and fed- eral governments currently fund two major before and after-school pro- grams\u2014the After School Education and Safety Program and the 21st Cen- tury Community Learning Centers\u2014for K-12 students in California. The Governor’s budget includes $121.6 million (Proposition 98) for the After School Education and Safety Program to serve about 133,000 students. At some time in the future, Proposition 49 (passed by the voters in No- vember 2002) will require an additional $429 million annually for the program. (Please see the discussion below.) Federal 21st Century Learn- ing Centers also provide before- and after-school services. In the current year, California received about $76 million in federal funds to serve about 79,000 students. Although schools currently offer an array of after-school programs, it remains uncertain whether these programs have the capacity to accom- modate the 18,000 11 and 12 year olds estimated to lose child care eligi- bility under the Governor’s proposal. In some areas, there may be wait- ing lists for after-school programs. If the programs have the capacity, these additional students would in effect displace generally younger students currently being served by the program. This is because the 11 and 12 year olds would have priority in publicly supported after-school programs under the Governor’s proposal. Estimated Savings Not Likely to Be Achieved. The administration’s stated intention is that either 11 and 12 year olds should receive care in after-school programs, or when after-school programs are not available, through the existing subsidized child care system. Yet, the administration’s savings estimate assumes that all 11 and 12 year olds will be eliminated from the child care system. We believe that this expectation is unrealistic given that many CalWORKs recipients work in industries often requiring C – 28 Health and Social Services 2004-05 Analysis nontraditional work hours, when traditional after-school programs may not be available. Conclusion. The Governor’s proposal to eliminate subsidized child care eligibility for 11 and 12 year olds when after-school care is available, significantly overestimates savings and lacks important details the Leg- islature needs to evaluate the proposal. Stage 3 Eligibility Limits The Governor’s budget proposes to limit Stage 3 CalWORKs child care to one year (in addition to two years in Stage 2) once a family has left cash aid, and allow CalWORKs families to sign up for a slot in the non-CalWORKs child care system as soon as they begin to earn income. Those families currently in Stage 3 child care would have one more year of eligibility. Given limited child care resources, we believe the proposal is reasonable because it addresses the differential treatment of working poor families and families previously in CalWORKs. However, limiting eligibility for Stage 3 child care creates a transition problem for families currently in Stages 2 or 3 of the CalWORKs child care system. We offer two options that would help address this transition problem. Proposal Would Limit Stage 3 Child Care to One Year. Generally, families are eligible for Stage 3 child care after they have been in Stage 2 child care for two years. Under current budgeting practices, families may remain in Stage 3 until their income exceeds 75 percent of the SMI or until their children are 13 years old or older. The Governor’s budget pro- poses restricting the amount of time that a family can receive Stage 3 child care to no more than one year after they have left cash aid and have exhausted their two-year transitional eligibility in Stage 2. Under the pro- posal, families who began receiving Stage 3 services on or before June 30, 2004 and meet other eligibility standards will be allowed to continue re- ceiving services until July 1, 2005. As a result, the administration esti- mates that budgetary savings and Stage 3 caseload reductions will not be realized until 2005-06. Proposal Allows CalWORKs Families to Apply for Non-CalWORKs Child Care as Soon as They Have Income. Current practice generally pro- hibits CalWORKs families from signing up on a waiting list for non- CalWORKs child care until they no longer receive CalWORKs aid. The Governor’s budget proposes to allow CalWORKs families to apply for such care as soon as they have some income, even while they are still on aid. This change is intended to help ensure that these CalWORKs fami- lies would not be disadvantaged in accessing child care once they leave CalWORKs. Crosscutting Issues C- 29 Legislative Analyst’s Office Stage 3 Reforms May Disadvantage Certain Current and Former CalWORKs Families. This proposal would disadvantage some current and former CalWORKs families because these families would not have had the benefit of putting their names on a non-CalWORKs child care waiting list at the time they started earning income. Generally, the low- est-income families on a non-CalWORKs child care waiting list are given priority for available child care slots. These current and former CalWORKs families may have higher incomes then other families on a child care waiting list and, therefore, they may be given lower priority for available child care slots. Also, current Stage 3 families may simply have less time to move up the waiting list. We view the disadvantages for current Stage 2 and 3 families as a transition problem that the Legislature may want to address. If the Legis- lature decides to accept the administration’s proposal to limit Stage 3 to one year, it may want to consider the following options that would help to mitigate some of the barriers to child care that some families might experience as a result of the proposed Stage 3 reforms. Allow Families in Stages 2 and 3 Child Care to Remain Eligible. This option would allow current CalWORKs families to sign up for non-CalWORKs child care immediately, but remain eligible for Stage 3 eligibility until they are able to find a slot in the broader subsidized child care system. Under this option the Governor’s one year limit on Stage 3 only applies to future Stage 3 families. This option would assist CalWORKs families, but would lower out-year savings. Allow Families in Stage 2 and 3 Child Care to Remain Eligible for Up to Three Years. As a variation of the above option, for three years after implementation of the proposed change CalWORKs families would maintain Stage 3 eligibility, after which time they would not be able to extend their time in Stage 3, regardless of whether or not they secured other arrangements. Again, this op- tion would smooth the transition to regular subsidized child care for CalWORKs families, but would lower out-year savings, com- pared to the Governor’s budget. Although the above alternatives reduce out-year savings, they also re- duce the potential that families will return to CalWORKs to obtain needed child care. In addition, these alternatives would reduce future Stage 3 child care costs once the respective transition periods conclude. Conclusion. The current child care system provides differential eligi- bility for CalWORKs and non-CalWORKs families. Specifically, families that leave CalWORKs receive child care until they are no longer income or age eligible, while working poor families receive subsidized child care C – 30 Health and Social Services 2004-05 Analysis only if space is available. The Governor’s Stage 3 proposal addresses this differential treatment. Accordingly, we believe that the Governor’s pro- posal is reasonable. However, we do recognize that there is a transition issue for families currently in Stage 2 or 3 child care, and provide two options to address that circumstance. Eligibility Limits for Nonworking Parents The administration proposes to limit eligibility for families who are eligible for child care based on their participation in education and training activities to two years. All families would receive two additional years of eligibility after the policy is implemented. Given limited child care resources, we believe this proposal is reasonable. The administration proposes to limit eligibility for families who are eligible for child care based solely on their participation in education or training-related activities to two years. Currently, there is no time limit on eligibility for this group. Upon implementation of the proposed change, families would receive an additional two years of eligibility regardless of how many years they had been receiving child care. The administration does not anticipate out-year savings because it will make the vacated child care slots available to other families. The administration was unable to provide information on the num- ber of children who are eligible for subsidized child care based solely on parental participation in education and training activities. Similarly, the administration was unable to estimate how many children would be im- pacted by this change. Given limited child care resources, however, we believe that it is reasonable to limit eligibility for families that are not working, but participating in education and training activities. Weighing the Costs and Benefits of Restricting Child Care Eligibility As the Legislature considers whether to adopt the child care eligibil- ity changes contained in the Governor’s budget proposal, it should ex- amine the impact on the state budget, families, and children. The state is facing a difficult financial situation that may necessitate limiting the level of service provided through public programs. The proposed child care eligibility restrictions are estimated to save $164.8 million (all funds), which could help address the budget shortfall or be used for other legis- lative priorities. On the other hand, research has shown that access to reliable, afford- able child care is an important part of employment stability for low-in- come families. Eliminating eligibility for child care for some low-income Crosscutting Issues C- 31 Legislative Analyst’s Office families may make them more susceptible to employment disruptions that could increase their likelihood of needing CalWORKs and other in- come dependent public aid programs. This is especially relevant begin- ning in 2005-06 under the budget plan, as transition funding would end and Stage 3 families would lose their CalWORKs child care eligibility. The Governor’s budget does not propose any additional non-CalWORKs child care spending related to his proposed child care reforms. Under the Governor’s proposals, children who had formerly received care through the CalWORKs child care system would begin moving into the non- CalWORKs system in 2005-06. This could result in increased demand for child care in a system that often has waiting lists for eligible families. As a result, additional families may not be able to secure subsidized child care, which could result in additional employment disruptions for some families. Provider Reimbursement While we believe the policy objective is sound, we withhold recommendation on the administration’s proposal to create a tiered- provider reimbursement rate structure pending additional detail from the administration regarding health, safety, and education standards as well as implementation and administration issues. Proposal Creates a Tiered Reimbursement Rate Structure. Generally, AP providers are reimbursed under current law up to the 85th percentile of the rates charged by other providers in the area offering the same type of child care. Figure 4 (see next page) shows the administration’s pro- posed reimbursement rate structure. The Governor’s proposal creates a six-tiered child care reimbursement rate structure that reimburses pro- viders from the 40th to 85th percentile of the RMR, depending on licensing and accreditation, health, safety, and childhood development training, and the mix of subsidized or unsubsidized families served. This means that under the proposed new structure, licensed exempt providers with- out specialized education or training will be reimbursed by the state at a rate no greater than the 40th percentile of the rate charged by child care providers in the region. At the other end of the proposed reimbursement rate structure, licensed, accredited providers with specialized training will be reimbursed by the state at a rate up to the 85th percentile of the rate charged by regional child care providers. We believe that the policy of basing reimbursement rates on a provider’s level of training, education, and other factors has merit in that it (1) reflects the reimbursement structure in the nonsubsidized child care market and (2) better reflects the cost of providing care. C – 32 Health and Social Services 2004-05 Analysis Legislature Needs Additional Detail to Evaluate Merits and Impact of Proposal. The administration’s proposal does not provide adequate detail that would allow the Legislature to fully evaluate how the pro- posed changes will affect child care providers, families, and quality of care. The administration includes a provision that SDE and DSS, in con- sultation with the Department of Finance (DOF) shall establish a stan- dardized process for documenting a provider’s early childhood educa- tion, health and safety training, and accreditation for purposes of deter- mining a reimbursement limit. However, the true impact of the proposal on families, counties, and state finances cannot be fully evaluated until the Legislature receives more information regarding these and other de- tails such as rate determination and the oversight process. Figure 4 Proposed Child Care Provider Reimbursement Schedule Provider Type Maximum Reimbursement Rate Licensed Accredited: specialized education and\/or training; serve subsidized and unsubsidized children. Up to 85th percentile of RMRa No specialized education and\/or training; serve subsidized and unsubsidized children. Up to 75th percentile of RMR. Accredited: specialized education and\/or training; serve only subsidized children. Up to 75th percentile of RMR. No specialized education and\/or training; serve only subsidized children. Up to 50th percentile of RMR. License Exempt Specialized education and\/or training. Up to 50th percentile of RMR. No specialized education and\/or training. Up to 40th percentile of RMR. a RMR=Regional Market Rate. Crosscutting Issues C- 33 Legislative Analyst’s Office Analyst’s Recommendation. We believe the policy of tying reimburse- ment rates to the level of training, education, and other factors has merit. However, we withhold recommendation on the administration’s proposal to create a tiered child care provider reimbursement structure given un- certainties regarding important definitional, implementation, and admin- istrative details. Family Fees The administration proposes to lower the income threshold at which a family must begin paying fees, raise the maximum amount a family would have to pay for child care, and limit fee deferral for certain children at risk for neglect or abuse. The combined policy changes would result in state savings of about $22.3 million and would increase fees for about 77,250 children. In considering this proposal the Legislature may want to examine linking the amount of family fees paid to the provider’s cost of providing care, level of training, licensure, and other factors. Proposal Increases the Number of Families Required to Pay a Fee and Increases Maximum Amount of Fees. Currently, families are required to pay a fee for child care once their income reaches 50 percent of the SMI. The fees are not to exceed 8 percent of their total income. The administration’s proposal would instead require families to pay a fee once they exit cash aid\u2014approximately 40 percent of the SMI\u2014in an amount not to exceed 10 percent of family income. For example, under the Governor’s proposal a family of three with an annual income of about $25,000 would pay about $56 more for child care each month. Figure 5 (see next page) shows the proposed new fee schedule. The Governor’s budget further proposes that families pay the family fees directly to providers to achieve administrative simplicity. Currently, counties have some flexibility in the way fees are collected. In most coun- ties fees are collected through an AP Program or county agency which then reimburses providers. In some counties, fees may also be collected directly by providers. In most cases, the administration’s proposal will shift the burden of collecting the fees from the counties to child care pro- viders. To the extent that providers are unable to collect these fees, it would effectively result in a provider rate reduction. Fee Limitation for CWS Referred Kids. Under the Governor’s pro- posal, families receiving a referral for child care services from Child Wel- fare Services (CWS) because the child is considered to be at risk for ne- glect or abuse are exempt from family fees for no more than one year. Currently they are exempt indefinitely. Children who are considered at C – 34 Health and Social Services 2004-05 Analysis risk and are referred by a non-CWS professional will be exempt from family fees for no more than three months. Weighing the Costs and Benefits of Fees. Increasing family fees will allow the state to fund child care for more children at the same level of state funding. Although the Governor’s proposal recognizes the ability of families to pay for child care through its sliding scale fee structure, increasing fees puts an additional financial burden on relatively low-in- come families. Figure 5 Family Child Care Feesa Administration’s Proposed New Monthly Fee Schedule Full-Time Care Part-Time Care Income Fee Percent of Income Income Fee Percent of Income $1,564 $22 1% $1,564 $9 1% 1,994 100 5 1,994 40 2 2,216 151 7 2,216 60 3 2,438 210 9 2,438 84 3 2,659b 266 10 2,659b 106 4 2,792c 279 10 2,792c 112 4 2,925d 293 10 2,925d 117 4 a Family of three full-time care. b Income limit for lowest cost counties. c Income limit for high cost counties. d Income limit for highest cost counties. Linking Fees to Cost of Care. When considering this proposal, the Legislature may also wish to consider basing the fee structure on the cost of care, thereby enabling families to make decisions about the type of care they utilize related to the amount they pay. Requiring families in the subsidized child care system to pay a portion of the cost of care more accurately reflects the reimbursement arrangements they will be subject to once they leave the subsidized system. Conclusion. The administration’s child care fee proposals would in- crease fees for about 77,250 children. As the Legislature considers this proposal, it may want to also consider linking the amount of family fees Crosscutting Issues C- 35 Legislative Analyst’s Office paid to the provider’s level of training, licensure, the cost of providing care, and other factors. PROPOSITION 49: AFTER SCHOOL EDUCATION AND SAFETY PROGRAM We find that, based on the Governor’s proposed budget and our fiscal forecast, Proposition 49 would not trigger an increase in funding for the After School Education and Safety Program until 2007-08. In part, the exact timing of when Proposition 49 will require additional spending depends on (1) how the state solves the structural imbalance between General Fund expenditures and revenues and (2) future growth in General Fund revenues. As approved by voters in 2002, Proposition 49 requires that the state appropriate additional funding for the After School Education and Safety Program beginning as early as 2004-05. The state must increase funding for the program from the $121.6 million provided in 2003-04 to $550 million (a $428.4 million increase) when certain conditions are met, which we describe below. The funding for Proposition 49 is continuously appropriated (that is, there is no need for annual legislative action to appropriate funds). When additional funds are provided for the program, they will be on top of the state’s minimum guarantee funding requirement for Proposition 98 for that year (referred to as an overappropriation ). When Will Proposition 49 Trigger? Proposition 49 requires the state to provide additional funding for the After School Education and Safety Program when specified General Fund spending reaches a required level. The Proposition 49 trigger funding level is determined by (1) establishing a base year between 2000-01 and 2003-04 in which the nonguaranteed General Fund appro- priation level was the highest and (2) adding $1.5 billion to that base year funding level. Our interpretation of the initiative is that nonguaranteed General Fund appropriations are non-Proposition 98 General Fund appropriations plus any over-appropriations of the Propo- sition 98 minimum guarantee. Figure 6 (see next page) shows the calculation of the nonguaranteed General Fund appropriation level that would trigger the additional $428 million in spending on after-school programs. The figure shows that 2001-02 is the base year, and that the base appropriation level is $54.7 bil- lion. This means that the state would not have to spend additional dol- lars to meet the proposition’s requirement until nonguaranteed General C – 36 Health and Social Services 2004-05 Analysis Fund appropriations in any year exceeded this amount. At such time, all spending above the base amount would go to after-school programs un- til the $550 million cap was reached. In 2004-05, the Governor’s budget proposes a nonguaranteed appropriation level of $49.3 billion, $5.4 bil- lion less than the trigger level. Figure 6 What Is the Proposition 49 Trigger? (In Billions) 2000-01 2001-02 2002-03 2003-04 Non-Proposition 98 appropriations $47.9 $47.2 $48.6 $44.8 Proposition 98 appropriations above minimum 0.5 6.1 \u2014 \u2014 Nonguaranteed appropriations $48.3 $53.2 $48.6 $44.8 Add-on amount 1.5 1.5 1.5 1.5 Potential Trigger Amounts $49.8 $54.7 $50.1 $46.3 a As the highest amount during the four base years, this amount would serve as the \”trigger\” level. Based on our revenue forecast and assuming implementation of the Governor’s budget, we estimate that the state would not be required to augment after-school spending until 2007-08. However, when the initia- tive will actually trigger will depend largely on two factors: Solution to the Structural Deficit in 2004-05 and Beyond. The Governor has proposed to solve the 2004-05 structural imbalance between General Fund expenditures and revenues through a com- bination of expenditure reductions, a property tax shift from lo- cal governments, borrowing, and deferrals. To the extent the fi- nal budget resolution involves less expenditure reductions, the state would trigger the Proposition 49 appropriations sooner. Growth in the Economy. If General Fund revenue grows faster than either the LAO or the Department of Finance have forecasted, the augmentation requirements could trigger earlier than 2007-08. Crosscutting Issues C – 37 Legislative Analyst’s Office HEALTH AND SOCIAL SERVICES ENROLLMENT CAPS MOST ENROLLMENT CAP PROPOSALS FLAWED The Governor ‘s budget plan proposes to establish limits on enrollments ( caps ) for certain specified health and social services programs. We recommend that the Legislature consider the Governor’s enrollment cap proposal on a case-by-case basis, weighing the potential fiscal benefits of capping each identified health and social services program against the complexities and issues relating to the creation of caseload caps. Based upon such an analysis, we recommend that nine be rejected, propose one be approved with some modifications, and make no recommendation regarding one cap proposal. Governor’s Proposal The Governor’s spending plan assumes the continued implementa- tion in 2004-05 of a proposal in his mid-year budget reduction package to impose enrollment limits for specified health and social services programs. His proposal, which is summarized in Figure 1 (see next page), is antici- pated to result in General Fund savings of about $1.2 million in the cur- rent year and almost $60 million in the budget year. The caseload caps would affect selected programs and, in some cases, selected groups of individuals within programs operated by four agen- cies\u2014the Department of Health Services (DHS), the Managed Risk Medi- cal Insurance Board (MRMIB), the Department of Mental Health (DMH), and the Department of Social Services (DSS). For DHS, the affected pro- grams are the AIDS Drugs Assistance Program (ADAP), the Breast and Cervical Cancer Treatment Program, California Children’s Services (CCS), the Genetically Handicapped Persons Program (GHPP), and Medi-Cal (for legal immigrants and undocumented immigrants). Certain popula- tions of forensic patients served by DMH would be capped, as would be C – 38 Health and Social Services 2004-05 Analysis Figure 1 Proposed Health and Social Services Enrollment Limits (Dollars In Thousands) General Fund Savings Department, Program, and Enrollees Affected 2003-04 2004-05 Capped Enrollment Levela 2004-05 Effect On Recipients DSS: CalWORKs for legal immigrants \u2014 \u2014 5,200 No effect because caseload expected to remain below limit. California Food Assistance Program \u2014 $100 10,230 Caseload 273 fewer by 6\/30\/05. Cash Assistance Program for Immigrants $153 4,175 8,645 Caseload 984 fewer by 6\/30\/05. DHS: Medi-Cal (full-scope services for recent legal immigrants) \u2014 $5,631 113,139 Average monthly waiting list of 11,439. Medi-Cal (nonemergency services for undocumented immigrants) \u2014 9,770 794,700 Average monthly waiting list of 65,900. Breast and Cervical Cancer Treatment Program (\”state-only\” patients) \u2014 1,781 1,658 Average monthly waiting list of 525. California Children’s Services (\”CCS- only\” children) $121 1,895 37,594 Average monthly waiting list of 1,256. AIDS Drug Assistance Program 275 550 23,891 Waiting list of 1,392 by 6\/30\/05. Genetically Handicapped Persons Program (GHPP) [\”GHPP-only\” participants] 245 194 842 Average monthly waiting list of 3. MRMIB: Healthy Families Program (all populations) \u2014 $31,523 732,344 Waiting list of 159,374 by 6\/30\/05. DMH: State hospitals (Only Not Guilty by Reason of Insanity and Incompetent to Stand Trial forensic admissions) $361 $3,745 2,045 42 fewer hospital admissions by 6\/30\/05. Totals $1,155 $59,364 a Administration estimate as of November 2003. Most caps would be based on January 1, 2004 caseload. Crosscutting Issues C – 39 Legislative Analyst’s Office all enrollment of children in the Healthy Families Program administered by MRMIB. The DSS programs that would be affected are the Cash Assis- tance Program for Immigrants (CAPI), the California Food Assistance Program (CFAP), and the California Work Opportunity and Responsibil- ity to Kids (CalWORKs) program (for legal immigrants). As Figure 1 indicates, most components of the Governor’s proposal limit participation in these programs for recent immigrants and undocu- mented persons whose benefits may not qualify under federal law for federal reimbursement. However, the Governor’s plan also would affect nonimmigrant children and adults, including children in the Healthy Families Program whose health coverage is eligible for federal matching funds. (The Governor’s budget plan does not include a November mid- year budget reduction proposal, which was withdrawn in December, to limit the enrollment of persons with developmental disabilities in com- munity services provided by regional centers.) The proposed enrollment limits were all to have gone into effect during the first part of calendar 2004, with the first caps proposed to take effect in January and the last intended to take effect in April. At the time this analysis was prepared, however, the Legislature had not taken action regarding the Governor’s proposals, and thus no caps had gone into effect. Caseload Limits a Standard Practice In concept, there is some merit to the approach of addressing part of the state’s serious fiscal problems by imposing limits on caseloads. Such a strategy could be less disruptive to program beneficiaries than other approaches (for example, eliminating entire eligibility categories and ser- vice categories) for achieving state savings. Also, if the caps are ongoing, they would generally be effective in addressing the state’s structural bud- get problem. We discuss these issues in more detail below. Such caps are already commonplace in other states and for other California programs, although federal law limits a state’s ability to apply caps to programs funded with federal Medicaid reimbursements. Other States and Programs Limit Caseloads. The concept of cap- ping enrollments in public programs is not a new idea. For example, the number of subsidized child care slots provided is effectively capped by budget allocations. With the exception of CalWORKs recipients, low-in- come families are placed on waiting lists for child care. Families with the lowest income levels are prioritized for subsidized child care slots when they become available. Such limits on participation are less common for health and social services programs, but others do exist. For example, unlike California, C – 40 Health and Social Services 2004-05 Analysis Illinois limits the availability of community services for persons with de- velopmental disabilities in accordance with the state’s resources avail- able for their support. Illinois residents are placed on waiting lists when resources run short, with residential services prioritized for those who are in crisis situations, wards of the state approaching the age of 22, and individuals who reside in state institutions. Six of the 35 states with separate State Children’s Health Insurance Programs (the equivalent of the Healthy Families Program in California) have frozen enrollments because of budgetary problems. Two of the six closed their program rolls to new applicants, while the other four estab- lished waiting lists of applicants. Most of the states provide some limited exceptions to their enrollment caps, such as for children who automati- cally lose their Medicaid eligibility as they grow older. California has already imposed some limits on services. The Man- aged Risk Medical Insurance Program operated by MRMIB, a program which provides affordable health coverage for individuals who have been denied coverage in the private insurance market, limits its admissions to stay within the program’s annual General Fund appropriation. Federal Law Limits Cap Options. One reason such limits are less common for publicly supported health programs is the constraints im- posed on this approach under federal Medicaid rules. Medicaid, the main state-federal health program for the poor (known as Medi-Cal in Califor- nia), is a source of financial support for a variety of specialized health- related programs, including drug treatment, mental health, nursing homes, and in-home supportive services, in addition to regular health care services. In order to be eligible for federal reimbursement under Medicaid, federal law generally requires that all eligible persons receive any medi- cally necessary services. Thus, waiting lists are generally precluded, ex- cept for federal waiver programs that permit states to cap the number of individuals receiving the specific services included under the waiver. Notably, the Governor’s proposals for capping enrollment do not involve any programs or Medi-Cal services that would risk the loss of federal Medicaid reimbursement. The caps affecting Medi-Cal services only limit those services that are provided on a state-only basis with- out any federal Medicaid match. For example, only nonemergency ser- vices, such as long-term care and family planning services, are capped for undocumented immigrants; no change is made for emergency ser- vices for undocumented persons, for which federal reimbursement is per- missible. The Governor’s budget plan similarly would only cap full-scope Medi-Cal services for legal immigrants who are not deemed federally qualified for federal reimbursement under Medicaid. Crosscutting Issues C – 41 Legislative Analyst’s Office Less Impact on Current Recipients. In one respect, the Governor’s proposal to achieve savings through the imposition of caps could be less disruptive than other approaches to achieving state savings in health and social services programs. The nature of enrollment caps is that no one currently receiving services through that program would be at risk of losing them so long as they complied with eligibility and other program rules. Such continuity of benefits obviously could be important for per- sons who are in the midst of medical treatment or who are temporarily relying on state assistance for the support for their family. Fiscal Effect of Caps Would Grow Over Time. The imposition of caseload caps could help address the state’s long-term structural budget problem by providing an ongoing budget solution that would probably grow in its fiscal impact over time. We would note that this may not be the case for each program af- fected by the Governor’s enrollment cap proposal. For example, growth in one of the two populations of forensic patients in state hospitals that would be capped (known as Not Guilty by Reason of Insanity, or NGI commitments) has been fairly flat so far in 2003-04. That is also the situa- tion for the proposed limit on CalWORKs assistance for legal immigrants. However, a number of the other programs have caseloads that have grown significantly in the past or are likely to accelerate in the future. One example is the Healthy Families Program, which is projected to in- crease by 16 percent in 2004-05 if an enrollment limit is not adopted. While the CAPI caseload would remain relatively stable in 2004-05 without a cap in place, state law makes it likely that a surge in the num- ber of persons receiving assistance will occur beginning in September 2006 as immigrants reach the end of a ten-year deeming period that has the effect of making many individuals ineligible for cash assistance due to a presumption that they are supported by their sponsors. Previ- ous administration estimates suggest that the future cost to the state for their cash benefits could be in the tens of millions, and could eventually exceed $100 million annually. The state stands to avoid a significant in- crease in the cost of these programs if their enrollment is limited at this time. However, these post-2006 cost increases could also be avoided by further extending the deeming period, the approach taken by the Legis- lature in 2001. Capping Enrollments Raises Issues The Governor’s enrollment-cap proposal raises a number of signifi- cant issues. Specifically, these include questions pertaining to the equity of enrollment limits, their administrative cost and difficulty, the poten- C – 42 Health and Social Services 2004-05 Analysis tial for offsetting costs that could negate the intended savings, risks to the implementation of program changes previously enacted by the Leg- islature, and an inaccurate savings estimate. A detailed discussion of the effect of the enrollment caps for the Healthy Families and DMH hospitals can also be found, respectively, in the MRMIB and DMH sections of this chapter of the Analysis. We discuss some of the more general issues relating to health and social services program caseload limits in more detail below. Equity Issues. In one sense, enrollment caps are equitable, in that all persons on waiting lists would be treated alike. However, such caps also put in place an all or nothing approach to providing services, in which individuals or families who meet the same eligibility requirements are treated unequally. Some get services because they qualified first, while others just like them do not. The Governor’s budget proposal raises several equity issues, in par- ticular. It relies upon a first-come, first-served approach in determin- ing which individuals on waiting lists would be enrolled as current pro- gram enrollees drop off the rolls and room is created for new appli- cants. Those who were poorer and therefore with fewer resources to seek alternative assistance, or with a more serious need for services, would not be prioritized for services. The choice of programs subject to enroll- ment caps also raises equity questions. For example, the Governor’s plan proposes to cap state-only CCS, a program for children who are gener- ally the sickest and most medically fragile, while not limiting services for other children with less intensive medical needs. The Governor’s proposal also creates gaps in coverage that raise equity concerns. For example, some children in poorer families may have to wait for months to obtain Healthy Families coverage while children in families with higher incomes might be able to obtain coverage without delay in counties participating in the Children’s Health Initiative Match- ing Fund (CHIM) program which is not subject to a cap. Similarly, young children in poor families who are automatically disenrolled from Medi- Cal as they grow older would not be allowed to shift immediately to the Healthy Families Program, but would go on waiting lists, while children in higher-income families in CHIM counties would retain coverage. Administrative Cost and Difficulty. In general, the imposition of enrollment caps makes programs somewhat more costly and difficult to administer. For example, procedures for the establishment of waiting lists, and for dealing with disputes with program applicants over the disenrollment and reenrollment in a program, can be a complex process to administer. Crosscutting Issues C – 43 Legislative Analyst’s Office The savings expected from some of the enrollment caps are fairly minor when compared to the overall program costs. For example, the budget assumes savings of $194,000 in 2004-05 from limiting enrollment in the $49 million GHPP program. Moreover, the administrative cap pro- posed for the CalWORKs for Immigrants program would result in no savings at all while generating costs. Likewise, the enrollment limit for CFAP would save an estimated $100,000 from a denial of benefits to a total of 188 persons during the budget year. Also, several of the programs proposed for enrollment caps are af- fected by a separate administration proposal to transfer funding in cer- tain programs for services for immigrants to the counties in the form of a block grant. (We discuss the block grant proposal in the Crosscutting Issues section of this chapter.) Under the Governor’s budget plan, the state would go through the administrative process of establishing wait- ing lists for these individuals, only to subsequently eliminate their eligi- bility for the state program. Making all of these program changes within a matter of months would probably result in extra administrative costs. In general, the Legislature should consider whether the savings re- sulting from an enrollment limit are worth the operational problems and administrative costs that such a change could create. False Economies Possible. In some cases, the savings achieved in the short term directly due to the imposition of a caseload cap risks a result of greater state costs in the long run. This is a risk inherent in the pro- posal to cap participation in ADAP. Delaying assistance to low-income individuals with the HIV virus could result in their inability to purchase expensive AIDS cocktail medications. If their medical condition subse- quently deteriorated because of AIDS to the point where they became disabled, they would become eligible for Medi-Cal coverage and might need costly inpatient hospital care. These additional costs over time might offset or exceed the savings from the enrollment cap. Cap Places Program Changes at Risk. Establishment of an enroll- ment cap places at risk the implementation of program changes previ- ously enacted by the Legislature. These policy impacts could be signifi- cant. For example, limiting enrollment for children in the Healthy Fami- lies Program could jeopardize prior federal approval of a future expan- sion of the program to eligible parents authorized by the Legislature. It could also hinder the implementation of a new effort to establish a gate- way to shift children in the Child Health and Disability Prevention (CHDP) program to more comprehensive coverage in the Medi-Cal and Healthy Families programs. Savings Estimate May Be Understated. The ADAP enrollment limit appears likely to have a larger effect and result in greater savings than C – 44 Health and Social Services 2004-05 Analysis the administration has estimated in its budget plan. Instead of impacting 1,392 individuals, this change appears likely to affect 2,100 and the state savings from the cap in 2004-05 would likely be about $2 million, rather than the $550,000 figure assumed in the Governor’s plan. Analyst’s Recommendation We recommend that the Legislature consider the Governor’s enroll- ment cap proposal on a case-by-case basis, weighing the potential fiscal benefits of capping each identified health and social services program against the issues relating to that program that we have identified in this analysis. Based upon our own such analysis, we: (1) recommend that nine of the enrollment caps be rejected, (2) propose that one be approved with some modifications by the Legislature, and (3) make no recommenda- tion regarding one cap proposal. We believe caps are a reasonable ap- proach for the Legislature to consider for CAPI and DMH state hospitals, although alternative approaches to achieving savings warrant consider- ation and are feasible. Figure 2 summarizes our reasons for our recommendations. In most cases, we recommend rejection because we found equity problems, risks to the implementation of policy changes previously approved by the Leg- islature, administrative costs and complexity, and the likelihood that sav- ings would be offset by other costs. In the case of the state hospitals, we believe the proposed cap for selected populations is a reasonable interim step but that additional actions should be considered to prioritize the use of expensive inpatient beds for patients who are amenable to treatment. We discuss this issue in more detail in our discussion of the DMH budget request in this chapter of the Analysis. In regard to CAPI, we have concluded that the enrollment cap is a policy call for the Legislature, given the state’s fiscal difficulties. The Leg- islature must resolve the fundamental question as to whether limiting participation for these services is an appropriate public policy. If it deter- mines it does not wish to adopt such an approach, we believe there are alternative approaches to containing future growth in the program, such as the option discussed above of modifying its deeming policies for such immigrants. We recommend that the Healthy Families and Medi-Cal enrollment limits be rejected. The inequitable gaps in coverage that such limits would create, as well as the conflicts with the CHDP gateway and other prior legislative decisions, would be problematic and difficult to resolve. In our view, there are better alternatives for achieving program savings that we believe warrant legislative consideration. We identify these in this Crosscutting Issues C – 45 Legislative Analyst’s Office Figure 2 LAO Recommendations on Governor’s Enrollment Cap Proposals Department, Program, and Enrollees Affected Recommendation\/Comments DSS: CalWORKs for Legal Immigrants Reject. No savings would be achieved to offset administrative costs. California Food Assistance Program Reject. Minor savings achieved from caseload cap probably not worth increased administrative costs and operational problems. Cash Assistance Program for Immigrants No recommendation. A reasonable option to consider but raises fundamental policy question about limiting services for this population. There are alternatives for containing the cost of this program. DHS: Medi-Cal (full-scope services for recent legal immigrants Reject. Could be difficult to administer and would create inequitable gaps in coverage. Medi-Cal (nonemergency services for undocumented immigrants) Reject. Could be difficult to administer and would create inequitable gaps in coverage. Breast and Cervical Cancer Treatment Program (\”state-only\” patients) Reject. Savings from caseload cap could be offset by increased future costs for treatment services. California Children’s Services (\”CCS-only\” children not also in Medi-Cal or Healthy Families) Reject. Would create inequitable situation in which CCS children with intensive medical needs would lack coverage while children needing only routine care would have coverage. AIDS Drug Assistance Program Reject. Savings from caseload cap could be offset by increased future costs for treatment services. Genetically Handicapped Persons Program (GHPP) [\”GHPP-only\” participants not also in Medi-Cal] Reject. Minor savings achieved from caseload cap probably not worth increased administrative costs and operational problems. MRMIB: Healthy Families Program (all populations, including recent legal immigrants) Reject. Would create inequitable gaps in coverage and conflict with implementation of policy changes, such as the CHDP gateway. DMH: State Hospitals (Only Not Guilty by Reason of Insanity and Incompetent to Stand Trial forensic admissions) Approve as interim step to prioritize use of inpatient beds for persons amenable to treatment. C – 46 Health and Social Services 2004-05 Analysis Analysis (including within the Medi-Cal and MRMIB sections of this chapter) and in The 2004-05 Budget: Perspectives and Issues. Should the Legislature choose to proceed with enrollment caps for these programs, we would recommend that the Legislature examine al- ternative approaches that would make them more workable. For example, the Legislature may wish to consider allowing targeted exceptions to the enrollment limits, such as allowing poor children who are disenrolled from Medi-Cal as they get older to be enrolled in Healthy Families. Ad- ministrative costs might be reduced if certain programs were closed to new enrollment without the establishment of waiting lists. If waiting lists are to be established, the Legislature could establish criteria to prioritize the enrollment of individuals with the lowest incomes or greatest need for medical care or public assistance. Finally, if the Legislature chooses to adopt the CAPI and ADAP enrollment limits, it should increase the ADAP savings to $2 million. Crosscutting Issues C – 47 Legislative Analyst’s Office COUNTY BLOCK GRANT PROPOSAL PROGRAMS PROPOSED FOR BLOCK GRANT WOULD BE A POOR FIT FOR COUNTIES The Governor proposes to consolidate into a single block grant, funding for state-only programs which serve immigrants, and transfer these programs to the counties effective October 1, 2004. The proposal assumes that counties will achieve administrative efficiencies, so proposed block grant funding has been reduced by 5 percent. We recommend that the Legislature reject the proposal because the programs proposed for transfer to the counties are not well-suited for local control. Key Features of the Governor’s Proposal The Governor’s 2004-05 budget plan proposes to consolidate into a block grant about $132 million in state spending and programs for immi- grants, and transfer funding and program responsibility to counties. Fig- ure 1 (see next page) summarizes the programs and funding levels for the programs affected by the block grant proposal. Key features of this proposal include: Enrollment Caps. All of the programs proposed for the county block grant would have their enrollments capped in the first part of calendar year 2004 (although program responsibility would remain with the state until October 1). For the Healthy Families Program (HFP) for immigrants, the cap is proposed to take effect on January 1, 2004. For the Cash Assis- tance Program for Immigrants (CAPI), California Work Opportunity and Responsibility to Kids (CalWORKs) for legal noncitizens, and the Cali- fornia Food Assistance Program ([CFAP] state-only Food Stamps for im- migrants), the cap would take effect April 1, 2004. (For a more detailed discussion of the proposed enrollment caps for health and social services programs, please see the Crosscutting Issues section of this chapter.) C – 48 Health and Social Services 2004-05 Analysis Figure 1 Programs for Immigrants Governor’s Block Grant Proposal 2004-05 (In Thousands) Program Proposed Block Grant Funding Assumed Administrative Savings Cash Assistance Program for Immigrants $59,837 $3,148 CalWORKs for legal immigrants 45,847 2,414 California Food Assistance Program 8,995 320 Healthy Families for legal immigrants 16,118 850 Totals $130,757 $6,732 Block Grant. As of October 1, 2004, the Governor proposes to con- solidate all funding for the above referenced programs for immigrants into a single block grant for transfer to the counties. Subject to some re- strictions noted below, counties would have freedom to move funds among the existing programs and to restructure benefit and eligibility rules. Counties could have the greatest degree of discretion with the CAPI and the Healthy Families (for immigrants) components, because there are no federal requirements and any state requirements could be elimi- nated through the state legislation creating the block grant. With respect to all programs, counties would be free to continue the enrollment caps established earlier in the year, or they could fund caseload increases through benefit and service reductions or the addition of their own re- sources. The Governor’s budget summary indicates that the May Revision is likely to include a proposal for a combined appropriation for these pro- grams. As shown in Figure 1, the total block grant for counties would be about $131 million reflecting nine months of services in 2004-05. (In 2005-06, the first full fiscal year of block grant implementation, the total amount of transferred program funds would be about $174 million.) The proposal is silent with respect to how funds will be allocated among coun- ties, but it is our understanding that the starting point for the allocation discussion would be the respective caseloads within each county. Five Percent Reduction for Assumed Efficiencies. The proposal as- sumes that counties will be able to achieve efficiencies in delivering block Crosscutting Issues C – 49 Legislative Analyst’s Office grant programs to legal immigrants. To account for these efficiencies, state expenditures have been reduced by 5 percent ($6.7 million) compared to the amount that would have been budgeted for the transferred programs from October 2004 through June 2005. The proposal does not indicate how counties would achieve the assumed efficiencies. Some Federal and State Requirements Remain. Although counties would have some flexibility to restructure the programs and move fund- ing among the programs, certain state and federal restrictions would re- main. For example, the CalWORKs program is California’s version of the federal Temporary Assistance for Needy Families (TANF) program. Un- der the TANF program, states must meet specified work participation requirements and are subject to a maintenance-of-effort (MOE) spending requirement. Under the block grant proposal, counties would be required to expend the funds associated with CalWORKs in accordance with fed- eral law so that the expenditures would count toward the MOE. For this to work, counties would have to expend the funds on low-income fami- lies with children in ways that are consistent with the state TANF plan, and would need to meet federal reporting requirements. For technical reasons, some of the funds for CFAP would also be required expendi- tures because they are used to satisfy the TANF MOE requirement. Stakeholders Group to Work on Details. As noted above, the pro- posal lacks many details including (1) how much flexibility counties will have to restructure programs and move funding among programs in ac- cordance with county priorities, (2) the allocation of the block grant funds among counties, and (3) how counties will achieve budgeted efficiencies so as to not further reduce benefits and services for immigrants. Another open question is how the amount of the block grant would be adjusted in future years. Although the proposal is silent in this regard, the fact that these programs are subject to proposed enrollment caps suggests that future adjustments to the block grant would not reflect caseload growth. Whether to adjust for inflation is another key issue for the Legislature to consider. Given the complexity of the proposal, the administration has indicated it will establish a stakeholders group to discuss its details. Evaluating the Governor’s Block Grant Proposal Compared to the total amount of resources now spent for the pro- grams affected by the proposal, the Governor’s block grant plan would achieve some state savings. If the administration’s intention is not to ad- just block grant levels in the future to keep pace with continued caseload growth for these services, the level of savings could grow significantly in future years. C – 50 Health and Social Services 2004-05 Analysis However, our analysis of the block grant plan indicates that there are some significant policy concerns about the measure that the Legislature may wish to consider. We discuss these policy concerns in more detail below. Income Redistribution Programs Should Usually Be at State Level. The CAPI, CalWORKs for legal immigrants, and the CFAP are essen- tially income support programs for low-income immigrant Californians. As these programs are cash (or cash equivalent) programs, the state has an interest in maintaining uniformity in benefit levels. Otherwise, varia- tion in benefit levels could lead to migration effects, whereby one county’s reduction in benefits spurs others to reduce benefits in order to avoid becoming a benefit magnet. Given the state’s interest in uniform ben- efits for income redistribution programs, the CAPI, CFAP, and CalWORKs for immigrants are poor candidates for transfer into a block grant and should be left as state responsibilities. Achieving Administrative Efficiencies Will Be Difficult. As noted above, the proposal does not explain how counties will achieve adminis- trative efficiencies equal to 5 percent of the proposed block grant. Our review suggests that counties are unlikely to achieve the assumed sav- ings administratively, and will probably need to reduce services or ben- efits to stay within the proposed block grant amount. Listed below are specific concerns with the affected programs: Healthy Families. Currently, the state administers the HFP and contracts directly with insurance plans for coverage of children, including the immigrant children affected by this block grant pro- posal. The counties’ role in the program is minimal. Counties choosing to continue health coverage for these children compa- rable to what they are now provided under the HFP would have to develop a new program infrastructure that would result in added administrative costs. In addition, because such counties would be arranging for health coverage for a much smaller group of children than the state, the cost per child for the purchase of this coverage would probably be much greater than the rates to insurers through Healthy Families. CAPI. Counties currently administer CAPI and have already formed consortia in order to more efficiently deliver cash ben- efits through automated systems. There is nothing in the Governor’s proposal to suggest that further county control will lead to more administrative savings. CalWORKs for Immigrants. Like CAPI, CalWORKs is currently administered by the counties. CalWORKs funding for adminis- tration, welfare-to-work services and child care are part of an existing block grant to counties. As noted above, this spending is Crosscutting Issues C – 51 Legislative Analyst’s Office counted toward the TANF MOE requirement. As such, counties would be required to expend these funds in a manner that is con- sistent with the federal TANF program and meet federal report- ing requirements. In summary, block granting CalWORKs for immigrants does not materially increase county flexibility and would be unlikely to result in administrative savings. CFAP. Currently, the state purchases food stamps coupons through an existing agreement with the federal government. It is unlikely that the federal government would agree to 58 separate agreements, so counties would need to continue operations un- der the existing state agreement. Accordingly, putting CFAP funds in a block grant would not appear to increase county flexibility, again making administrative savings unlikely. For the reasons stated above, the proposal appears to provide little in additional county flexibility and is therefore unlikely to result in admin- istrative savings. We believe that counties are most likely to reduce ser- vices or benefits in order to stay within the proposed block grant amount. In other words, the proposed 5 percent reduction is more likely to result in a reduction in services to low-income immigrants, rather than admin- istrative streamlining in the delivery of these services. Analyst’s Recommendation We believe there is merit generally in the concept of reexamining which programs now operated by the state could be more effectively and efficiently operated by shifting greater responsibility and authority to local governments. In the past, and again this year, we have offered a number of proposals for restructuring state programs (such as substance abuse treatment services) that we believe would improve the quality of the public services provided while also reducing state costs. However, we recommend that the Legislature reject the proposed county block grant for immigrant programs because the programs are not well-suited for local control. Counties are unlikely to achieve the ad- ministrative efficiencies assumed in the Governor’s proposal. The 5 per- cent savings proposed to be achieved through the block grant ($6.7 mil- lion) represent a further reduction in services or benefits for low-income immigrants. In order to offset the loss of the savings associated with the block grant proposal, the Legislature may wish to consider other options and recommendations for reducing state program costs that are presented in The 2004-05 Budget: Perspectives and Issues as well as in the Health and Social Services chapter of this Analysis. C – 52 Health and Social Services 2004-05 Analysis QUALITY IMPROVEMENT FEES ADDITIONAL FEDERAL FUNDS AND STATE SAVINGS POSSIBLE THROUGH PROVIDER FEE MECHANISM The Governor’s budget plan offers a modified proposal for a quality improvement assessment fee on Medi-Cal managed care health plans to enable the state to draw down additional federal funds for support of the program. We recommend approval of the Governor’s proposal to impose such a fee for Medi-Cal managed care health plans. In addition, we recommend that the Legislature explore the option of extending such a fee to mental health managed care. Background Unique Fee Mechanism Generates Additional Federal Funds. Fed- eral Medicaid law permits states to impose fees on certain health care service providers and in turn repay the providers through increased re- imbursements. Because the costs of Medicaid reimbursements to health care providers are split between states and the federal government, this arrangement provides a mechanism by which states can draw down ad- ditional federal funds for the support of their Medicaid programs. These funds can then be used to offset state costs. The Governor’s 2004-05 budget plan proposes to impose such a charge, which it terms a quality improvement assessment fee, for Medi- Cal managed care health plans. (A similar proposal for Medi-Cal man- aged care was enacted as part of the 2003-04 Budget Act, but the Depart- ment of Health Services (DHS), has indicated that technical problems will prevent its implementation this year.) The administration estimates that the current proposal will result in net state savings of $75 million in 2004-05 while also providing additional reimbursements to health plans. (The fees are also commonly called quality improvement or quality assurance fees.) We will discuss the Governor’s fee proposal later in this analysis. Crosscutting Issues C – 53 Legislative Analyst’s Office Under federal law, the fees must be imposed on all members of that class of providers. For example, a fee on hospitals must apply to all pub- lic and private hospitals, and not just psychiatric hospitals. Such a fee mechanism was adopted and is already being successfully implemented by DHS in regard to Intermediate Care Facilities for the Developmen- tally Disabled (ICF\/DDs) in order to generate an estimated $17.5 million in savings for the state. More than a dozen other states have also im- posed such fees for various types of medical providers in keeping with the provisions of federal law. Federal Laws Limit Use of Fees. Federal Medicaid law recognizes a state’s authority to levy such assessments on a broad range of Medicaid providers. These providers are: (1) inpatient hospital services; (2) outpa- tient hospital services; (3) nursing facility services; (4) services of ICF\/ DDs; (5) physicians’ services; (6) home health care services; (7) outpatient prescription drugs; (8) services of a Medicaid managed care organiza- tion; and (9) other services as established by federal regulation. The policy of federal authorities has been to limit such fees to 6 percent of provider payments. Federal statute indentifies a number of conditions that must be met by a state in order to qualify such a provider fee for federal reimburse- ment under the Medicaid Program. For example, under federal rules, all providers that deliver the same class of services must be assessed the fee. The fee must be broad-based, meaning that it is applied to all Medi- Cal and non-Medi-Cal payments going to the same provider. Also, all providers must be assessed the fee uniformly\u2014a 2 percent fee cannot be assessed to some providers while a 6 percent fee is assessed to others. Finally, federal law does not allow the state to guarantee to the pro- viders subject to a quality improvement fee that they will be compen- sated with a rate increase sufficient to hold them harmless from any net increase in costs. In effect, the imposition of the fee and the authoriza- tion of any increases in reimbursements to providers must be handled as separate actions. How Does the Fee Mechanism Work? Figure 1 (see next page) pro- vides a simplified explanation of how such fees can be structured to draw down additional federal funds, reduce state costs, and provide additional resources to medical providers to improve the quality of health care. In our example, a state imposes a 6 percent quality improvement fee on the gross revenues of certain health care providers who currently are reimbursed at a rate of $100 per day (Step 1). As a result, the state collects about $6 in revenues for each $100 of revenues received from the provid- ers subject to the fee. These fee revenues would be deposited in the state’s General Fund. Continuing with our example, the state, in turn, agrees to C – 54 Health and Social Services 2004-05 Analysis Figure 1 Example of How Quality Improvement Fees Can Benefit Both a State and a Medicaid Provider 1. State Charges Fee. The state charges and collects a 6% fee from a provider on its gross revenues of $100 per day.a 2. Provider Receives Offsetting Rate Increase. The cost of the fee is added to the rates paid to the provider, bringing its total reimbursements to $106 per day, an increase of $6. Because Medicaid costs are split 50-50 between the state and the federal government, half of the additional money ($3) comes from the state and the other half ($3) comes from the federal government. 3. Provider Receives Further Rate Increase. At this point, the state has a net gain of $3 (It collected $6, but paid only $3 toward provider rate increase). The state chooses to use part of its revenue gain ($1) to provide a further rate increase for providers which is matched by $1 more from the federal government. The state uses the remaining $2 gain in revenue to help offset state costs for the Medicaid program. 4. Financial Gain. The net result the state and the Medicaid provider have a net $2 financial gain, while more funding ($4) is drawn down from the federal government. -$3 -$1 -$4 +$6 -$3 -$1 +$2 -$6 +$3 +$3 +$1 +$1 +$2 Federal Government State Medicaid Program Medicaid Provider aTo simplify our example, the amount of fee revenues depicted here does not include a small additional amount of revenues that would be received by the state (48 cents) as a result of applying the 6% fee to additional revenues of $8 per day that would be received by providers. Crosscutting Issues C – 55 Legislative Analyst’s Office increase its Medicaid reimbursements to $106 per day. Under this sce- nario, a Medicaid provider would receive a new, higher reimbursement rate for its services that equals the cost of the fee (Step 2). The state benefits from this transaction because the federal govern- ment shares in the cost of the Medicaid program. The split between Cali- fornia and the federal government in 2004-05 for Medi-Cal Program costs is expected to be 50-50. Thus, in our example, the state would pay only half the additional cost of the reimbursements for providers ($3 per day of health care services) and the federal government would pay the other half of these costs (also $3 per day). This leaves the state with $3 of the $6 that it collected originally. States have generally chosen to use part of their financial gain\u2014$3 in our example\u2014from such transactions to invest in improvements in the quality of health care provided under their Medicaid programs. In our example (Step 3), the state does so by increasing rates for providers sub- ject to the fee by the equivalent of $2 per day, bringing their total reim- bursement rate to $108. The state uses $1 of its $3 revenue gain, plus a $1 match in federal Medicaid funds\u2014to pay the $2 rate increase. This leaves the state with a net revenue gain of $2. To sum up our example, (1) additional federal funding is drawn down that was not previously available, (2) the state experiences a net financial gain by receiving new quality improvement fee revenues that exceed the state cost of the rate increases it authorizes for Medicaid providers, and (3) the providers experience a net financial gain due to rate increases that exceed their new fees. As noted earlier, our explanation of how the fee mechanism works in this analysis has been slightly simplified. Our example slightly under- states the potential gain to a state and slightly overstates the gain to pro- viders. Implementation Procedures. The DHS must complete a number of complex steps before such fees can be imposed. These procedures include the review and, if necessary, modification of a state’s federally-approved Medicaid plan to ensure that it allows a quality improvement fee to be assessed. In some cases, state law changes may be necessary. The DHS must also draft and publish new regulations, policies, and procedures to collect a new provider fee, including procedures to address any fee pay- ment disputes, and, in some cases, coordinate these arrangements with affected state departments. Fees Can Create Winners and Losers. In our example above, we showed how a Medicaid provider could be held harmless, or actually receive a rate increase, through the simultaneous imposition of a quality C – 56 Health and Social Services 2004-05 Analysis improvement fee and rate increases. Notably, the fee now being imposed in California for operators of ICF\/DDs almost entirely affects providers who are already participating in the state’s Medi-Cal Program. Opera- tors of ICF\/DDs will pay a 6 percent quality assurance fee but receive an 8.8 percent rate increase. However, quality improvement fees can also be imposed in a way that affects medical providers who are not participating in the Medi-Cal Program. Because federal law requires that such a fee apply to all provid- ers within a defined class of providers, any providers within that class that do not provide services to Medi-Cal beneficiaries would not benefit from an increase in funding allocations that was made possible with the state’s receipt of new fee revenues. The imposition of charges on provid- ers who will not receive any offsetting benefit would probably constitute a tax increase under state law. Thus, this approach raises important tax policy issues. When such a fee is imposed across a class of medical service provid- ers, any non-Medicaid providers, in effect, indirectly share part of the burden of caring for Medicaid beneficiaries through their fee payments. While some would contend that it is only fair that the burden of provid- ing health care for the poor be shared in this way, other providers are likely to object to such an arrangement. Ultimately, it is a policy call for the Legislature whether such a tax is an appropriate source of revenue to help support the Medi-Cal Program, or whether more general sources of revenue, such as the income or sales tax, are a more appropriate basis for providing financial support of health care for the poor. The imposition of fees in such circumstances could be advantageous to the state in at least one other respect: Such fees could provide a greater incentive for providers who are not doing so to accept Medi-Cal benefi- ciaries. Overall access to services for beneficiaries could improve as a result. The Governor’s Managed Care Fee Proposal As noted earlier, the 2003-04 Budget Act included a proposal to imple- ment a quality improvement fee on Medi-Cal managed care plans begin- ning January 2004. The fee was expected to result in net financial gain to the state of $37.5 million in 2003-04 and $75 million in 2004-05. The Governor’s 2004-05 budget plan proposes to delay the imple- mentation of the fee (now called a quality improvement assessment fee ) until July 2004. The delay relates to as-yet unresolved technical issues affecting how the fee would be imposed on managed care health plans. Crosscutting Issues C – 57 Legislative Analyst’s Office As noted earlier, federal law requires that quality improvement fees be broad-based, and applied to all members of a class of providers, including both those participating in Medi-Cal and those who are not. Some large managed care plans provide services to both Medi-Cal and to commercial beneficiaries within the same business entity. At the time the Legislature adopted the fee proposal last year, DHS believed it would be possible to assess the fee only on the Medi-Cal part of their business. However, we are advised that federal authorities indicated in subsequent discussions with DHS that any fees would have to be imposed on their entire line of business in order to receive federal approval. The 2004-05 budget plan addresses this objection of federal authori- ties by proposing that all Medi-Cal managed care plans establish a sepa- rate business entity for their Medi-Cal line of business. Some plans are already structured in this way, and DHS has indicated that all plans could do so by 2004-05. At the time this analysis was prepared, DHS was con- tinuing to discuss these implementation issues with managed care plans. LAO Comments. Our analysis indicates that the DHS proposal would probably result in fee revenues and a net General Fund gain to the state of the magnitude indicated in the Governor’s 2004-05 budget plan. Spe- cifically, the budget plan assumes that the imposition of a 6 percent fee on managed care plans would result in about $300 million in revenues that would be deposited in the General Fund. It further assumes that these providers would receive rate increases of about 9 percent that would increase Medi-Cal Program expenditures by about $225 million. The end result would be a net financial gain to the state of about $75 million an- nually. These net state savings would be ongoing and would change over time in accordance with managed care plan revenues. State Has Opportunity to Expand on Fee Strategy Greater State Financial Gain Possible. Our analysis indicates that it may also be possible for the state to impose quality improvement fees on mental health managed care plans to achieve a net General Fund finan- cial gain for the state of as much as $70 million annually while providing a net increase in resources available to counties for mental health care of as much as $23 million. We would note that our estimate is presented for illustrative pur- poses only. The financial gains which can result from drawing down ad- ditional federal funds through quality improvement fees could be split differently between the state and providers than the figures we have pre- sented in this analysis. C – 58 Health and Social Services 2004-05 Analysis Currently, the state Department of Mental Health (DMH) contracts with county entities, identified in state law as Medicaid managed care plans, to provide specialty mental health services for certain groups of children and adults specified in state law. These contracts are a voluntary arrangement for counties. Were a county to decline to contract with the state for this purpose, DMH would contract instead with other private or public entities to provide specialty mental health services within that ju- risdiction. At present, however, nearly all counties are serving as the managed care plans for their respective jurisdictions. About $2.6 billion would be available for counties from a combina- tion of federal, state, and county funds for specialty mental health ser- vices in 2004-05 under the Governor’s budget plan. This includes ser- vices both for Medi-Cal beneficiaries and others not eligible for Medi- Cal. Our estimate assumes that a 6 percent quality improvement fee could be imposed on the total expenditures for this entire class of services pro- vided by the counties. Our estimate also assumes that the state would use part of its fee revenue to increase the separate allocations that the state provides for mental health managed care plans by about 45 percent. This increase in state funding would be matched by an increase in match- ing federal funds. Thus, counties would collectively receive an additional amount of mental health managed care funds that would more than off- set the quality improvement fees they would collectively pay to the state. While our estimate assumes that mental health managed care alloca- tions would generally be increased to offset the cost of the fee, other ap- proaches are possible. For example, the additional funding provided by the state could be targeted to improve the mental health services pro- vided to specific Medi-Cal populations. One implementation issue warrants further study to determine if our approach is feasible. Based on our initial discussions of the quality im- provement fee concept with DMH and DHS, it is not clear at this time whether any of the counties would have to restructure their mental health managed care operations to separate out the provision of specialty men- tal health services from the other health services provided within that jurisdiction. Some restructuring of such operations might be necessary to formally establish mental health managed care plans as a separate class of providers of services under federal law. Analyst’s Recommendations In order to draw down additional federal funds to offset the cost to the state of the Medi-Cal Program, we recommend approval of the Crosscutting Issues C – 59 Legislative Analyst’s Office Governor’s modified proposal to establish a quality improvement assess- ment fee for Medi-Cal managed care plans. Our analysis indicates that, while DHS was unable to implement such a fee in the current fiscal year, progress is being made in structuring the fee program so that it will ob- tain federal approval in time for implementation in the budget year. Given the state’s serious fiscal problems and the growing cost of the Medi-Cal Program, we further recommend the Legislature explore the option of imposing a quality improvement fees on mental health man- aged care plans. Specifically, we recommend that DHS and DMH report at budget hearings on the feasibility of imposing quality improvement fees for these providers, the potential revenues that could be generated from such fees, and any significant operational issues that would affect their implementation. A similar quality improvement fee proposal for In-Home Supportive Services (IHSS) is discussed in our analysis of the IHSS program later in this chapter. Such fees are also possible for other classes of medical services pro- vided as part of the Medi-Cal Program. C – 60 Health and Social Services 2004-05 Analysis SENATE BILL 2 BUDGET LACKS FUNDING TO IMPLEMENT HEALTH INSURANCE EXPANSION MEASURE The Governor’s budget proposal does not include funding to implement recent legislation creating a pay or play system to expand health coverage for employees and, in some cases, their dependents. The legislation went into effect on January 1, 2004, but was put on hold by a pending referendum that is now expected to be decided by voters in a November 2004 statewide election. We recommend that the administration provide the Legislature with information at budget hearings on the funding and personnel that might be needed in 2004-05 to implement the new law. Background. In 2003, the Legislature approved and the Governor signed SB 2 (Chapter 673, Burton), which enacted a pay or play system of health coverage for certain employers. Under the measure, specified Cali- fornia employers would be required to pay fees to the state commencing in 2006 to provide health insurance for their employees and, in some cases, for their dependents. Alternatively, the employer could choose to arrange directly with health insurance providers for coverage for these individu- als. The measure would also establish a state program to assist lower- income employees to pay for their share of health care premiums. Senate Bill 2 took effect on January 1, 2004. However, opponents of the measure collected and submitted signatures for a referendum that would put SB 2 to a statewide vote of the public. Supporters of SB 2 con- tested the legality of the referendum in court. In January, a state appellate court ruled that the referendum effort was valid and placed the measure on the November 2004 ballot. (At the time this analysis was prepared, an appeal of that decision remained a possibility.) Because the referendum qualified for the ballot, SB 2 was put on hold and will take effect only if subsequently upheld by voters. If it were approved by voters, SB 2 would take effect immediately. Crosscutting Issues C – 61 Legislative Analyst’s Office Advance Activities Required to Implement Legislation. Our analy- sis indicates that three state agencies\u2014the Managed Risk Medical Insur- ance Board, the Department of Health Services, and the Employment Development Department\u2014bear major administrative responsibilities related to the implementation of SB 2. Although some components of the new programs established by the measure would not commence opera- tion until 2006, these agencies would require resources during 2004-05 for work related to establishing new information technology systems, program regulations, and staffing in order to implement a number of provisions of SB 2. Senate Bill 2 does not include an appropriation for these administra- tive activities, and the Governor’s budget plan also does not provide fund- ing to any state agency for this purpose. The administration has indi- cated it did not include funding for SB 2 in the budget because of the referendum. Analyst’s Recommendation. Because it is possible that SB 2 will go into effect during the budget year, the administration should be directed to provide the Legislature with information at budget hearings regard- ing the funding and personnel that might be needed in 2004-05 for ad- ministrative activities to implement the new law. C – 62 Health and Social Services 2004-05 Analysis INDIGENT ADULT PROGRAM Medically Indigent Adult Program And the Vehicle License Fee (VLF) We recommend that the Legislature approve the administration’s proposal to retain the current vehicle license fee depreciation schedule and preserve revenue support for locally realigned programs. In 1991, the Legislature approved a realignment of funding and re- sponsibilities for various health and social services programs from the state to counties, supported in part with a transfer of increased VLF rev- enues. A September 2003 appellate court ruling relating to the Medically Indigent Adult Program, one of the programs transferred to counties, could trigger a loss of $1.5 billion in VLF realignment revenues. The ad- ministration has proposed a statutory change to prevent the loss of these funds for the support of realigned programs. We discuss the so-called poison pill provisions of realignment that could affect VLF revenues in our discussion of Tax Relief (Item 9100) provisions of the budget plan in the General Government chapter of this Analysis. Legislative Analyst’s Office DEPARTMENTAL ISSUES Health and Social Services DEPARTMENT OF AGING (4170) The California Department of Aging (CDA) administers funds allo- cated to California under the federal Older Americans Act (OAA). These funds are used to provide services to seniors, including supportive ser- vices, nutrition programs, employment services, and preventive health services. In addition, CDA administers a range of programs, supported by state and federal funds, that provide noninstitutional services for older Californians and functionally impaired adults, including the Multipur- pose Senior Services Program, Linkages, Adult Day Health Care, and the Alzheimer’s Day Care Resource Centers. Finally, CDA administers the Foster Grandparent, Senior Companion, Respite Purchase of Services, Respite Registry, and Brown Bag programs. The budget proposes total expenditures of $185.3 million for 2004-05 ($33.4 million General Fund, $139.5 million federal funds, $9.2 million in reimbursements, and $3.3 million from special funds) which is unchanged from the current year. General Fund spending is proposed to be $33.4 mil- lion in 2004-05, a reduction of $1.7 million (4.7 percent) compared to esti- mated expenditures in 2003-04. This reduction is primarily due to the proposal to convert all funding for local assistance into a block grant and reduce the block grant by 5 percent. C – 64 Health and Social Services 2004-05 Analysis Consolidating Local Assistance Into Single Block Grant Currently, the Department of Aging oversees the administration of Older Americans Act (OAA) programs and Community Based Services Programs (CBSP). Area Agencies on Aging (AAAs) deliver services to California seniors at the local level. The budget proposes to (1) eliminate the requirements for CBSP, (2) consolidate funding for both CBSP and the OAA programs into a single block grant for the AAAs, and (3) reduce the proposed block grant by 5 percent. We recommend approval of the consolidation proposal and make no recommendation on the proposed 5 percent reduction. Background. The CDA operates the OAA programs and the CBSP. The OAA programs authorized by federal law are: Supportive Services, Congregate Nutrition, Home Delivered Meals, National Family Caregiver Support Program, Preventive Health, Senior Employment, and Ombuds- man\/Elder Abuse Prevention. Total General Fund support for OAA pro- grams is $16.4 million in 2003-04. The CBSP authorized in state law are: Foster Grandparent, Brown Bag Network, Senior Companion, Linkages, Alzheimer’s Day Care Resource Centers, Respite Registry, and Health Insurance Counseling and Advocacy Program. General Fund support of CBSP is $15 million in 2003-04. Although state legislation establishes stan- dards and goals for the CBSP, these programs could be operated by the existing AAAs under the authority of the OAA. Governor’s Proposal. The Governor proposes to (1) make CSBP op- tional, (2) consolidate all funding for OAA programs and CSBP into one block grant to the AAAs, and (3) reduce funding for the block grant by 5 percent. Because the consolidation will reduce administrative overhead at CDA, the budget proposes to eliminate 1.5 positions in administrative support and achieves General Fund savings of $107,000 in state opera- tions. Eliminating the requirement to operate the CSBP should provide some administrative relief at the local level (in the form of reduced ac- counting and reporting requirements). We note however, that the admin- istrative relief is likely to be less than the proposed 5 percent reduction in the block grant. Proposal Makes CBSP a Local Option. Although the proposal would delete the requirement that AAAs operate the CBSP, all of the individual programs that make up CBSP may be operated under the authority of the supportive services programs within the OAA. Whether to continue the CBSP would be a local decision under the proposal. Comments on the Governor’s Proposal. The consolidation and 5 per- cent reduction proposals present the Legislature with two issues. First is Department of Aging C – 65 Legislative Analyst’s Office the fiscal question of whether funding for California’s programs for se- nior citizens should be reduced by 5 percent. Second is the policy ques- tion of whether the decision to operate CBSP should be devolved to the local level. Fiscal Considerations. Whether to reduce funding for the consoli- dated funding stream by 5 percent is a question of fiscal priorities for the Legislature. We believe that the proposal will relieve the AAAs from some accounting and reporting requirements specifically associated with the CSBP, but such savings are likely to be less than the $1.6 million (5 per- cent) reduction. As a point of reference, we would note that total funding for the CDA peaked at $189 million in 2002-03 (compared to $185 million proposed for 2004-05). In contrast, General Fund support for CDA has decreased substantially from its peak of $60 million in 2000-01 to the $33 million proposed for 2004-05. The General Fund decrease is attribut- able to program eliminations and budget reductions made during the current period of fiscal distress. Increases in federal funds have offset most of the General Fund reductions over the past few years. Consolidation Proposal Has Merit. The consolidation proposal would eliminate the legislative mandate to operate CSBP. We think the proposal has merit because it increases local flexibility to structure pro- grams for senior citizens in ways that reflect local priorities. In general, this proposal would provide local governments greater ability to adjust programs to meet the needs of their communities and experiment to de- termine which efforts improve program outcomes. In general, local gov- ernments are in a better position than the state to discern what works in their community and preserve the programs yielding the best outcomes during tight fiscal times. Accordingly, we recommend approval of the block grant proposal. We would further note that this proposal stands in sharp contrast to the county block grant proposal discussed in the Crosscutting Issues section of this chapter. The proposed consolidation of aging programs does not involve income maintenance where devolution of such programs raises concerns about intercounty migration effects if counties establish varying grant levels. In addition, the CBSP consolidation proposal pro- vides the AAAs with real flexibility to modify programs to meet local priorities, whereas the county block grant proposal does not contain such flexibility. C – 66 Health and Social Services 2004-05 Analysis DEPARTMENT OF ALCOHOL AND DRUG PROGRAMS (4200) The Department of Alcohol and Drug Programs (DADP) directs and coordinates the state’s efforts to prevent or minimize the effects of alco- hol-related problems, narcotic addiction, and drug abuse. Services in- clude prevention, early intervention, detoxification, and recovery. The DADP estimates that its treatment system will provide services to ap- proximately 396,000 clients in 2004-05. The DADP administers the Drug Medi-Cal Program, which provides substance abuse treatment services for beneficiaries of the Medi-Cal Program. It also allocates other funds to local governments (including funds provided under the Substance Abuse and Crime Prevention Act, the 2000 initiative also known as Proposi- tion 36) and contract providers and negotiates service contracts. The de- partment also coordinates the California Mentor Initiative, a multidepartmental effort targeting youth at risk of substance abuse, teen pregnancy, educational failure, and criminal activity. Governor’s Budget Proposal. The Governor’s budget proposes $598 million from all fund sources in the current fiscal year, with $233 mil- lion in General Fund support. That is slightly below the level of state spending authorized in the 2003-04 Budget Act. The budget plan for 2004-05 for DADP proposes $591 million in spending from all fund sources. General Fund support for DADP pro- grams, including about $120 million in funding appropriated by Propo- sition 36, would be budgeted at a total of $238 million. That amounts to an increase of about $4.6 million, or 2 percent, above the revised expen- diture plan for the current fiscal year proposed by the Governor. The proposed increase in General Fund spending on alcohol and drug treatment programs in the budget year is primarily the result of revised estimates for the Drug Medi-Cal Program. This includes caseload and utilization changes in substance abuse treatment services, and the phase- Department of Alcohol and Drug Programs C – 67 Legislative Analyst’s Office out of one-time federal funding that had temporarily increased the share of program costs borne by the federal government. The budget plan also reflects a proposed one-time rollback in the rates paid to Drug Medi-Cal providers in 2004-05 to 2002-03 levels. The funding that would be provided in the budget year for drug treat- ment programs established under Proposition 36 is set by the terms of the voter-approved initiative at $120 million annually and remains un- changed. The Governor’s budget plan requests authority to spend about $3.5 million in federal grant funds for a new program, known as Screen- ing, Brief Intervention, Referral, and Treatment, which would attempt to reduce substance abuse through intervention with individuals who have been brought to medical facilities, including emergency departments and trauma centers. Finally, the budget plan proposes to eliminate the Office of Problem and Pathological Gambling, a program established last year with a $3 mil- lion allocation of Indian gaming funds. The office had been established to assist individuals who are addicted to gambling. Federal Funding Requirement May Not Be Met Current-year expenditures for community treatment services now appear likely to fall short of the level that would be required to satisfy a maintenance-of-effort requirement imposed on the state as a condition of receiving certain federal grant funds. As a result, the state is at risk of being penalized with the loss of as much as $3.2 million in federal grant funds in the future. State Has Maintenance-of-Effort (MOE) Obligation. The Governor’s budget plan for DADP reflects a proposed decrease in General Fund spending for substance abuse treatment programs in the current fiscal year of about $2.2 million below the amount appropriated in the 2003-04 Budget Act. This reduction in current-year spending is the result of (1) re- ductions in state administrative spending mandated by Control Section 4.10 of the act, (2) technical budget adjustments that re- flect the state’s receipt in 2003-04 of one-time federal funding that tempo- rarily increased the federal share of support for Drug Medi-Cal services and reduced General Fund expenditures, and (3) downward adjustments in caseload and costs in the Drug Medi-Cal Program. Primarily as a result of these budget changes, the Governor’s revised 2003-04 spending plan now appears likely to be insufficient to meet the state’s obligation under a federal grant program to maintain a specified level of state support for community substance abuse treatment programs. C – 68 Health and Social Services 2004-05 Analysis The DADP calculations that we have reviewed indicate that, were the proposed current-year level of spending to stand, the state would fall short by about $3.2 million in the current fiscal year of meeting MOE requirements for the federal Substance Abuse Prevention and Treatment (SAPT) block grant program. The SAPT block grants are provided to states on the condition that they maintain a specified ongoing level of state sup- port for their drug or alcohol programs. States that violate their MOE requirement are at risk of losing one federal dollar of SAPT block grant funding in the future for every state dollar they spend below the required MOE level. In this case, then, the state is at risk of subsequently losing $3.2 mil- lion of its future SAPT allocation. We would note that, under the Governor’s budget proposal, the state would exceed the MOE funding requirement in 2004-05. Situation Could Change in May. The DADP has indicated that it will review this situation prior to the May Revision to determine whether the state is still at risk of violating the SAPT MOE requirement. It is possible, for example, that unanticipated increases in the caseload in the Drug Medi- Cal Program would prompt the administration to seek additional Gen- eral Fund spending authority in the current fiscal year. Depending on the amount of additional funding involved, the potential federal sanctions could be reduce or even eliminated if the Legislature concurred in such a budget change. The DADP also indicates that it could seek federal relief from the MOE requirement on the grounds that is within material compliance with the MOE rule. However, it is not certain that federal authorities would actually agree to waive the MOE requirements. We will continue to monitor the situation and will provide the Legislature with informa- tion about the matter at the time of the May Revision. Remodeling the Drug Medi-Cal Program California’s program for substance abuse treatment for Medi-Cal, known as Drug Medi-Cal, provides a patchwork of services with an inconsistent level of support for different modes of treatment and for different treatment populations. Based on our analysis, we recommend an approach for addressing these concerns which would provide greater authority and resources for community-based services, contain the fast- growing costs of methadone treatment, and integrate a new and potentially more cost-effective mode of treatment into Drug Medi-Cal that does not require a net increase in state General Fund resources. Department of Alcohol and Drug Programs C – 69 Legislative Analyst’s Office The Supplemental Report of the 2002-03 Budget Act directed the Legis- lative Analyst’s Office to examine the operations of the Drug Medi-Cal Program. Our analysis was to include, but was not limited to, an exami- nation of what barriers exist to broaden provider participation and ben- eficiary access to Drug Medi-Cal, as well a review of the options and recommendations available to the Legislature to maximize federal finan- cial participation for its support. Our analysis of the program can be found in Part V of The 2004-05 Budget: Perspectives and Issues. C – 70 Health and Social Services 2004-05 Analysis CALIFORNIA MEDICAL ASSISTANCE PROGRAM (4260) In California, the federal Medicaid Program is administered by the state as the California Medical Assistance Program (Medi-Cal). This pro- gram provides health care services to welfare recipients and other quali- fied low-income persons (primarily families with children and the aged, blind, or disabled). Expenditures for medical benefits are shared about equally by the General Fund and by federal funds. The Medi-Cal budget also includes federal funds for (1) disproportionate share hospital (DSH) payments, which provide additional funds to hospitals that serve a dis- proportionate number of Medi-Cal or other low-income patients, and (2) matching funds for state and local funds in other related programs. At the state level, the Department of Health Services (DHS) adminis- ters the Medi-Cal Program. The California Medical Assistance Commis- sion negotiates contracts with hospitals and health plans for the provi- sion of Medi-Cal services. Other state agencies, including the Depart- ment of Social Services, the Department of Mental Health, the Depart- ment of Developmental Services, the California Department of Aging, and the Department of Alcohol and Drug Programs receive Medi-Cal funding from DHS for eligible services that they provide to Medi-Cal beneficiaries. At the local level, county welfare departments determine the eligibility of applicants for Medi-Cal and are reimbursed by DHS for the cost of those activities. The federal Centers for Medicare and Medic- aid Services oversees the program to ensure compliance with federal law. Proposed Spending. The budget for DHS proposes Medi-Cal expen- ditures totaling $31 billion from all funds for state operations and local assistance in 2004-05. The General Fund portion of this spending ($11.6 bil- lion) increases by $1.8 billion, or 19 percent, compared with estimated General Fund spending in the current year. The remaining expenditures for the program are mostly federal funds, which are budgeted at a level California Medical Assistance Program C – 71 Legislative Analyst’s Office ($17.8 billion) that is about 3 percent more than estimated to be received in the current year. More than half of the overall increase in General Fund spending is due to the inclusion in 2003-04 of a program accounting change that re- duces program costs on a one-time basis. In addition, one-time savings result from increased federal funds in 2002-03 and 2003-04. Adjusting for these one-time savings, underlying General Fund expenditures for Medi- Cal are projected to grow by $191 million, or about 2 percent, in 2004-05. These additional costs are proposed to be more than offset by spending reductions. The spending total for the Medi-Cal budget includes an estimated $1.8 billion (federal funds and local matching funds) for payments to DSH hospitals, and about $4.7 billion budgeted elsewhere for programs oper- ated by other departments, counties, and the University of California. MEDI-CAL BENEFITS AND ELIGIBILITY What Benefits Does Medi-Cal Provide? Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nurs- ing care, doctor visits, laboratory tests and x-rays, family planning, and regular examinations for children under the age of 21. California also has chosen to offer 34 optional services, such as outpatient drugs and adult dental care, for which the federal government provides matching funds. Certain Medi-Cal services\u2014such as hospitalization in many circum- stances\u2014require prior authorization from DHS as medically necessary in order to qualify for payment. How Medi-Cal Works Based on recent caseload information, 42 percent of the Medi-Cal caseload consists of participants in the state’s two major welfare programs, which include Medi-Cal coverage in their package of benefits. These pro- grams are (1) the California Work Opportunity and Responsibility to Kids (CalWORKs) program, which provides assistance to families with chil- dren; and (2) the Supplemental Security Income\/State Supplementary Program (SSI\/SSP), which assists elderly, blind, or disabled persons. Counties administer the CalWORKs program through county welfare offices that determine eligibility for CalWORKs benefits and Medi-Cal coverage concurrently. Counties also determine Medi-Cal eligibility for persons who are not eligible for (or do not wish) welfare benefits. The federal Social Security Administration determines eligibility for SSI\/SSP, C – 72 Health and Social Services 2004-05 Analysis and the state automatically adds SSI\/SSP beneficiaries to the Medi-Cal rolls. Generally, persons determined eligible for Medi-Cal benefits (Medi- Cal eligibles ) receive a Medi-Cal card, which they use to obtain ser- vices from providers. Medi-Cal provides health care through two basic types of arrangements\u2014fee-for-service and managed care. Fee-for-Service. This is the traditional arrangement for health care in which providers are paid for each examination, procedure, or other ser- vice that they furnish. Beneficiaries generally may obtain services from any provider who has agreed to accept Medi-Cal payments. The Medi- Cal Program employs a variety of utilization control techniques (such as requiring prior authorization for some services) designed to avoid costs for medically unnecessary or duplicative services. Managed Care. Prepaid health plans generally provide managed care. The plans receive monthly capitation payments from the Medi-Cal Pro- gram for each enrollee in return for providing all of the covered care needed by those enrollees. These plans are similar to health plans offered by many public and private employers. More than half (3.3 million of the total of 6.4 million Medi-Cal eligibles in July 2003) are enrolled in man- aged care plans. Beneficiaries in managed care choose a plan and then must use providers in that plan for most services. Since payments to the plan do not vary with the amount of service provided, there is much less need for utilization control by the state. Instead, plans are monitored to ensure that they provide adequate care to enrollees. Who Is Eligible for Medi-Cal? Almost all Medi-Cal eligibles fall into two broad groups of people. They either are aged, blind, or disabled or they are in families with chil- dren. More than half of Medi-Cal eligibles are welfare recipients. Fig- ure 1 shows, for each of the major Medi-Cal eligibility categories, the maximum income limit for eligibility for health benefits, the estimated caseload, and the annual benefit cost per person for 2003-04. The figure also indicates, for each category, whether an asset limit applies and whether eligible persons with incomes over the limit can participate on a spend down basis. If spend down is allowed, then Medi-Cal will pay the portion of any qualifying medical expenses that exceed the person’s share-of-cost, which is the amount by which that person’s income ex- ceeds the applicable Medi-Cal income limit. California Medical Assistance Program C – 73 Legislative Analyst’s Office Figure 1 Major Medi-Cal Eligibility Categories 2003-04 Maximum Monthly Income Or Granta Asset Limit Imposed? Spend Downb Allowed? Enrollees (Thousands) Annual Benefit Costs Per Personc Aged, Blind, or Disabled Persons Welfare (SSI\/SSP) $1,419 \u2014 1,301 $7,938 Medically needy 954 247 7,355 133 percent of poverty equivalent 1,419 \u2014d \u2014d Medically needy\u2014long-term care Special Limits 64 43,843 Families Welfare (CalWORKs)e $1,150 \u2014 1,479 $1,459 Section 1931(b)-onlyf 1,624 \u2014 2,605 1,531 Medically needy 1,190 \u2014g \u2014g Children and Pregnant Women 200 percent of poverty\u2014 pregnancy service and infants $3,157 \u2014 \u2014 203 $3,488 133 percent of poverty\u2014 ages 1 though 5 2,130 \u2014 \u2014 117 1,260 100 percent poverty\u2014 ages 6 though 18 1,624 \u2014 \u2014 111 1,005 Medically indigent\u2014 ages 6 though 18 1,190 221 1,329 Medically indigent adults\u2014 all services 1,190 6 12,001 Emergency Only Undocumented immigrants may qualify in any category and are lim- ited to emergency services (including labor and delivery and long- term care) 822 $1,231 a Amounts are for an aged or disabled couple (including the standard $20 disregard) or a four-person family with children (including a $90 work expense disregard). b Indicates whether persons with higher incomes may receive benefits on a share-of-cost basis. c Combined state and federal costs. d Enrollment and costs included in amounts of Medically Needy Aged, Blind, or Disabled persons. e Income limit to apply for CalWORKs (including a $90 work expense disregard). After becoming eligible, the income limit increases to $1,903 (family of four) with the maximum earned-income disregard. f Includes Transitional Medi-Cal, which extends coverage for families who leave CalWORKs or 1931(b)-only for up to 12 months. g Enrollment and costs included in amounts for Section 1931(b) family coverage. C – 74 Health and Social Services 2004-05 Analysis Aged, Blind, or Disabled Persons. About 1.6 million low-income per- sons who are (1) at least 65 years old or (2) blind or disabled of any age receive Medi-Cal coverage. This group constitutes about 24 percent of the estimated total Medi-Cal caseload for the current year. Overall, the disabled make up more than half (61 percent) of this portion of the Medi- Cal caseload. Most of the aged, blind, or disabled persons on Medi-Cal (80 percent) are recipients of SSI\/SSP benefits and receive Medi-Cal cov- erage automatically. The other aged, blind, or disabled eligibles are in the medically needy category. They have low incomes, but do not qualify for, or choose not to participate in, SSI\/SSP. For example, aged low-income noncitizens generally may not apply for SSI\/SSP (although they may continue on SSI\/SSP if they already were in the program as of August 22, 1996). As another example, some of the medically needy persons have incomes above the Medi-Cal limit and participate on a share-of-cost basis. Included in the number of eligibles in the medically needy category are aged, blind, and disabled persons with incomes up to 133 percent of the pov- erty level. Beginning January 1, 2001, these persons could receive Medi- Cal coverage without a share-of-cost. More than 900,000, or about 56 percent, of the aged or disabled Medi- Cal eligibles are also beneficiaries of Medicare\u2014the federal health insur- ance program for persons 65 and older and for younger persons with disabilities who cannot work. Medi-Cal generally pays the Medicare pre- miums and any copayments or deductibles for these dual eligibles, and Medi-Cal pays for services not covered by Medicare, such as pre- scription drugs and long-term care. Medi-Cal also provides some limited assistance to a small number of dual eligibles with incomes somewhat higher than the medically needy standard. The number of Medi-Cal eligibles in long-term care is small\u2014only 64,400 people, or 1 percent of the total caseload. Because long-term care is very expensive, benefit costs for this group total $2.8 billion, or 12 per- cent, of total Medi-Cal benefit costs. Families With Children. Medi-Cal provides coverage to families with children in three eligibility categories. The first two categories were cre- ated by Section 1931(b) of the Social Security Act, which required states to grant Medicaid eligibility to anyone who would have been eligible for cash-assistance under the welfare requirements in place on July 16, 1996. One of these categories consists of CalWORKs welfare recipients who automatically receive Medi-Cal. The second category\u2014referred to as the 1931(b)-only group\u2014consists of families who are eligible for CalWORKs, but who choose only to receive Medi-Cal services. The income limit for families in this second category is 100 percent of the federal poverty level California Medical Assistance Program C – 75 Legislative Analyst’s Office (FPL). However, once enrolled in Section 1931(b) coverage, families may work and remain on Medi-Cal at higher income levels (up to about 155 percent of the FPL indefinitely, or a higher amount for up to two years). A third eligibility category, referred to as the medically needy, con- sists of families who do not qualify for CalWORKs, but nevertheless have relatively low incomes. These families have incomes up to 80 percent of the FPL, have less than $3,300 in assets, and meet additional require- ments. Families whose incomes are above the medically needy limits, but who meet all of the other medically needy qualifications, may re- ceive Medi-Cal benefits on a share-of-cost basis. About 39 percent of all Medi-Cal eligibles are 1931(b)-only and medi- cally needy families. Although these families constitute the largest single group of Medi-Cal eligibles by far, they account for only 17 percent of total Medi-Cal benefit costs. This is because almost all are children or able-bodied working-age adults, who generally are relatively healthy. Similarly, CalWORKs welfare recipients who receive Medi-Cal account for 22 percent of all Medi-Cal eligibles and only 9 percent of total benefit costs. Women and Children. Medi-Cal includes a number of additional eli- gibility categories for pregnant women and for children. Medi-Cal cov- ers all health care services for poor pregnant women in the medically indigent category, which has the same income and asset limits and spend- down provisions as apply to medically needy families. However, preg- nancy-related care is covered with no share-of-cost and no limit on assets for women with family incomes up to 200 percent of the FPL (an annual income of about $36,800 for a family of four). The medically indigent category also covers children and young adults under age 21. Several special categories provide coverage without a share-of-cost or an asset limit to children in families with higher in- comes\u2014200 percent of the FPL for infants, 133 percent of the FPL for chil- dren ages 1 through 5, and 100 percent of the FPL for children ages 6 through 18. Pregnant women and the FPL-group children also may use a simplified mail-in application to apply for Medi-Cal or Healthy Families Program coverage (for children above the Medi-Cal income limits). Medi- Cal also provides family planning services for women or men with in- comes up to 200 percent of FPL who do not qualify for regular Medi-Cal. Emergency-Only Medi-Cal. Noncitizens who are undocumented immigrants, or are otherwise not qualified immigrants under federal law, may apply for Medi-Cal coverage in any of the regular categories. How- ever, benefits are restricted to emergency care (including labor and deliv- ery). Medi-Cal also provides prenatal care and long-term care to undocu- mented immigrants. These services, as well as nonemergency services C – 76 Health and Social Services 2004-05 Analysis for recent legal immigrants, do not qualify for federal funds and are sup- ported entirely by the General Fund. The Governor’s mid-year reduction proposal included changes in eligibility for certain immigrants that are discussed later in this section. Most Medi-Cal Spending Is for the Elderly or Disabled The average cost per eligible for the aged and disabled Medi-Cal caseload (including long-term care) is much higher than the average cost per eligible for families and children on Medi-Cal. As a result, almost two-thirds of Medi-Cal spending is for the elderly and disabled, although they account for only about one-fourth of the total Medi-Cal caseload, as shown in Figure 2. Figure 2 Most Caseload Is Families\/Children Most Spending Is for Elderly\/Disabled 2003-04 10 20 30 40 50 60 70 80% Elderly\/Disabled a Families\/Children Percent of Spending Percent of Caseload a Includes long-term care. MEDI-CAL EXPENDITURES Further Decrease in Current-Year Spending Figure 3 presents a summary of Medi-Cal General Fund expenditures in the DHS budget for the past, current, and budget years. California Medical Assistance Program C – 77 Legislative Analyst’s Office The budget estimates that for the current year the General Fund share of Medi-Cal local assistance costs will decrease by about $789 million (7.5 percent), compared with 2002-03. The bulk of this decrease is for ben- efit costs, which will total an estimated $9 billion in 2003-04. Figure 3 Medi-Cal General Fund Budget Summarya Department of Health Services (Dollars in Millions) Expenditures Change From 2003-04 Actual 2002-03 Estimated 2003-04 Proposed 2004-05 Amount Percent Local Assistance Benefits $9,941 $9,082 $10,825 $1,743 19.2% County administration (eligibility) 509 592 631 39 6.6 Fiscal intermediaries (claims processing) 103 91 113 22 24.5 Totals, local assistance $10,554 $9,765 $11,569 $1,804 18.5% Support (state operations) $92 $95 $104 $9 9.9% Caseload (thousands) $6,380 $6,620 $6,840 $220 3.3% a Excludes General Fund Medi-Cal budgeted in other departments. General Fund Reduction in 2003-04. The 2003-04 Budget Act decreased General Fund spending from 2002-03 by about $602 million (5.7 percent) with the inclusion of significant one-time savings such as shifting the budgeting for Medi-Cal benefits from an accrual to a cash basis of ac- counting. The act also included a temporary increase in the federal share of support for the program that reduced General Fund costs in 2003-04 by nearly $570 million. Mid-Year Reduction Proposals. As noted earlier, a package of mid- year budget reductions proposed by the Governor would result in addi- C – 78 Health and Social Services 2004-05 Analysis tional Medi-Cal savings in the current year of nearly $207 million Gen- eral Fund. The Governor’s budget plan would reduce by 10 percent the rates paid for physician services, pharmaceuticals, dental services, managed care plans, home health care, medical transportation, and certain other medical services. This rate reduction also affects certain non-Medi-Cal programs, including the California Children’s Services Program; the Fam- ily Planning, Access, Care and Treatment Program; the state-only Family Planning Program; the Genetically Handicapped Persons Program; and the Breast and Cervical Cancer Early Detection Program. The proposed change is expected to reduce state costs by about $160 million in the cur- rent year. This rate reduction would be in addition to the 5 percent rate cut included in the 2003-04 Budget Act, and would result in a total rate reduction of 15 percent if adopted. The Governor has also proposed the elimination of a special rate increase for long-term care providers to achieve an estimated state savings of $46 million. The savings from the two reduction proposals discussed above would be partly offset by a mid-year reappropriation of $60 million General Fund from 2000-01. The Governor’s mid-year reduction package also included several proposals to cap the number of undocumented immigrants, as well as legal immigrants living in the country for less than five years, that re- ceive services from Medi-Cal and the Breast and Cervical Cancer Treat- ment Program. The budget plan assumes that this proposal will not re- sult in state savings until 2004-05. January Proposals to Reduce Current-Year Costs. The Governor’s January budget plan includes various proposals to achieve a net reduc- tion of $40 million General Fund in the current year. Most of the savings, about $351 million, are attributable to four proposals that are one-time in nature. The first is a reduction in the amount paid to the Department of Men- tal Health for mental health services provided to Medi-Cal children and youth, due mostly to the shift from accrual to cash budgeting in 2003-04, but also due to a modest caseload reduction. The second reduction re- sults from the Governor’s proposal to modify and delay from 2003-04 to the budget year the imposition of a quality improvement fee on man- aged care plans. Third, the Governor proposes to achieve savings from the recovery of inappropriate payments to the federal government for certain providers. Finally, the budget reflects larger overall savings than expected from the shift in accounting from accrual to cash. California Medical Assistance Program C – 79 Legislative Analyst’s Office The remainder of the proposals are ongoing in nature. These include a reduction in the interim rate paid to certain hospitals, a change in the methodology used to set rates for clinics, and various rate reductions. Savings of about $26 million would be achieved in the current year, with increased savings expected in 2004-05. Increased Caseload and Other Costs. The proposed savings discussed above are partially offset by several factors. One of these factors includes greater-than-anticipated growth in the number of children and youth who are participating in Medi-Cal because of the Child Health and Disability Prevention program gateway to Medi-Cal, which commenced opera- tion in July 2003 and which is expected to increase costs by more than $39 million. Other increases in Medi-Cal benefit costs in the current year are due to an increase in the utilization of nursing facilities that is expected to increase state costs by about $20 million and the settlement of three fed- eral audits related to inpatient hospital psychiatric claims that will re- quire the state to repay the federal government about $16 million in 2003-04. Prepayment of Checkwrite Increases Costs. The Governor proposes that the payments to Medi-Cal providers scheduled for July 1, 2004 be paid instead on June 30, 2004. While this action increases General Fund costs in the current year by $135 million, it would result in one-time sav- ings of $8.5 million in 2004-05. That is because the shift allows the state to take advantage of the temporary increase in federal Medicaid funding that will end in June 2004. The federal government will pay nearly 53 per- cent of Medi-Cal Program costs until June 30, but will only pay 50 per- cent of costs as of July 1. Unrealized Savings Increase Costs. The Governor’s budget antici- pates that about $91 million in savings from cost-containment activities assumed in the 2003-04 Budget Act will not be realized. If it were not for the current-year reduction proposals there would have been a deficiency in the current year. The DHS has determined that the delay in the enactment of the 2003-04 Budget Act and the mid-year elimination of budgeted positions have de- layed the implementation of certain cost-containment activities, thereby increasing state costs for Medi-Cal services in the current year. Specifi- cally, about $59 million was added to 2003-04 spending because of an anticipated erosion of savings from efforts to reduce fraud, contract for durable medical equipment and lab services, closely manage the care of certain persons, and implement other strategies to recover funds that have been paid inappropriately. The cost increases also include $32 million in savings assumed in the budget act from the addition of staff to resolve C – 80 Health and Social Services 2004-05 Analysis aged drug rebate payment disputes. An additional $29 million in antici- pated savings in dental services are not expected to be achieved because of a legislative decision to alter a new requirement for X-rays for dental restorations. Budget-Year Expenditure Reduction The Governor’s proposed budget estimates that total General Fund spending for Medi-Cal local assistance will be about $11.6 billion in 2004-05, a net increase of $1.8 billion, or 19 percent, above the estimated spending in the current year. About $1.6 billion of the General Fund in- crease in spending reflects the budget-year effect of the shift from accrual to cash accounting ($958 million) and the temporary increase in the level of federal funding in 2003-04 ($655 million). Without these one-time sav- ings in 2003-04, the 2004-05 increase in Medi-Cal expenditures from the previous year would be much smaller\u2014$191 million or 2 percent, rather than the much larger increase shown in Figure 3. Additional increases in expenditures are the result of increases in the price and utilization of services and caseload growth. The budget plan also takes into account an increase in the Medi-Cal caseload in 2004-05 of about 220,000 average monthly eligibles (3.3 percent). This would bring the total number of individuals receiving assistance to 6.8 million\u2014 roughly 19 percent of the state’s population. These spending increases are partly offset by a series of proposals to reduce program costs through cuts in rates and services and certain one-time savings. Figure 4 summa- rizes the major components of the change in benefit costs, which we dis- cuss below. Increased Price and Utilization of Services. In line with a continuing trend that has significantly bolstered Medi-Cal Program expenditures in recent years, the 2004-05 budget plan assumes an increase in the cost of pharmaceuticals of $253 million. The Governor’s budget also includes about $164 million for rate in- creases for certain clinics and hospitals that offer services to Medi-Cal patients, including the final of a series of rate increases to hospitals that provide outpatient services to fulfill a 2001 legal settlement. Medi-Cal buy-in payments for Medicare premiums would also continue to grow. The Medi-Cal Program pays Medicare premiums for Medi-Cal enrollees who also are eligible for Medicare (dual eligibles) in order to obtain 100 percent federal funding for those services covered by Medicare. The budget estimates that the General Fund cost of these so- called buy-in payments will increase by $109 million in 2004-05. California Medical Assistance Program C – 81 Legislative Analyst’s Office Figure 4 Medi-Cal Benefits Major General Fund Spending Changes Governor’s Budget 2004-05 (In Millions) One-Time Increases Funding shift to counties to reduce costs $958 Reduction in federal share of Medicaid funding 655 Increases in Price and Utilization of Services Increased pharmacy costs $253 Various rate adjustments 164 Increased cost for Medicare and Medicare HMO premiums 109 Nurse to patient ratios 31 Caseload Increases Caseload shift due to implementation of the Child Health and Disability Prevention program gateway to Medi-Cal $110 Ongoing Savings From Proposals Additional 10 percent provider rate reductions, revised rates for clinics, and reduced interim rate for some hospitals -$341 Increased savings from various 2002 and 2003 proposals to reduce costs for drugs, supplies, and services -184 Quality improvement fee for managed care plans (net savings to General Fund) -75 One-Time Savings Checkwrite prepayment in 2003-04 -$278 Checkwrite prepayment in 2004-05 -144 Chapter 945, Statutes of 1999 (AB 394, Kuehl), requires hospitals to maintain specific staffing levels (established by DHS) for various hospi- tal units, such as critical care units, beginning January 1, 2004. The bud- get plan includes about $31 million to offset the cost of the mandate for hospitals that provide services to Medi-Cal patients. In addition to the cost increases identified in Figure 4, costs are also expected to go up for some of the health programs that are passed through the DHS Medi-Cal budget but actually administered by other state de- partments. Notably, the cost of mental health services administered by the Department of Mental Health, including children’s services provided C – 82 Health and Social Services 2004-05 Analysis under the Early and Periodic Screening, Diagnosis and Treatment Pro- gram, are expected to increase by about $126 million. The increase is due partly to continued growth in program caseload and costs, as well as to technical adjustments related to the shift in Medi-Cal accounting and the anticipated end of a one-time increase in the federal share of cost for the Medicaid Program. Caseload Increases. The Governor’s budget plan anticipates that caseload costs would increase in 2004-05 by $110 million due to the imple- mentation of a program in July 2003 that will preenroll children in Medi- Cal and the Healthy Families Program who are screened for medical prob- lems through the Child Health and Disability Prevention program. Some of these costs would be offset by the continued effect of steps taken last year to tighten eligibility procedures. Last year’s budget plan included provisions intended to reduce caseloads by (1) ensuring that county workers completed redeterminations of Medi-Cal eligibility on a timely basis and (2) establishing a process that requires adult beneficia- ries to report on their eligibility for Medi-Cal or be disenrolled from ser- vices. Also, the Governor’s mid-year reduction proposal to impose caps on caseloads for various immigrant programs as discussed earlier is expected to result in savings of $23 million in the budget year. Ongoing Savings From Proposals to Reduce Costs. The spending plan takes into account the estimated ongoing effect of several reductions pro- posed to reduce rates paid to Medi-Cal providers in the current year and budget year that would achieve combined savings of $341 million in 2004-05. As discussed above, the Governor’s mid-year reduction plan included a 10 percent rate cut in the current year on selected providers in addition to the 5 percent provider rate cut imposed in the 2003-04 Budget Act. The mid-year proposal would achieve a total of $460 million in state savings in 2004-05\u2014$300 million more than the $160 million in savings to be achieved in 2003-04\u2014because they would be in effect for the full fiscal year. Also included in the Governor’s $341 million in proposed savings are two other actions that would reduce rates. One would modify the reimbursement rates for certain clinics that provide services to Medi-Cal patients to achieve estimated savings of $28 million. The proposal would base rates on audited cost reports from 1999 and 2000 rather than on un- audited cost reports from 2000. The budget plan also assumes a 10 per- cent reduction in the interim amount initially paid to noncontract hospi- California Medical Assistance Program C – 83 Legislative Analyst’s Office tals that serve Medi-Cal patients (the amounts paid to hospitals are later adjusted to reflect actual costs) for an estimated savings of $13 million. Additional state savings of $184 million are expected to result from the full-year implementation in 2004-05 of various strategies adopted in the 2002-03 and 2003-04 Budget Acts to reduce costs and utilization for prescription drugs, durable medical equipment, and medical supplies. The Governor’s budget plan proposes to levy a quality improvement fee on managed care health plans. The fee would generate additional revenues of $300 million that would be offset by a $225 million increase in Medi-Cal expenditures to provide a rate increase to health plans, for a net savings to the state General Fund of $75 million. This proposal is a modification of a measure in the 2003-04 Budget Act that the administra- tion indicates could not be implemented in 2003-04 because of federal restrictions. One-Time Savings. The budget plan assumes significant General Fund savings from one-time actions that shift the timing of payments to pro- viders. One proposal, discussed above, is to shift the provider payment ordinarily made on July 1, 2004 to June 30, 2004 to take advantage of a greater federal Medicaid cost-sharing ratio that expires on the latter date. This shift in payments would have the effect of reducing state expendi- tures in the budget year by $278 million. In a separate, but similar action, the Governor’s budget plan pro- poses to delay all other checkwrites to providers during the budget year by one week. Since Medi-Cal is now budgeted on a cash basis, this change would result in one-time state savings of $144 million in 2004-05 because the last checkwrite of the fiscal year would be shifted to 2005-06. The extra week would also allow the department additional time to review the payments to detect fraudulent claims. MEDI-CAL COST AND CASELOAD TRENDS Figure 5 (see next page) illustrates how the Medi-Cal caseload and per-eligible costs have changed since 1994-95, along with projections of these measures for 2003-04 and 2004-05 based on the budget estimates. Budget Forecasts Caseload Increase and Dropping Costs The budget projects that in the current year the number of eligibles will grow and the cost of benefits per eligible will decline. The increase in caseload and decline in the cost per eligible for the program is projected to continue in the budget year. C – 84 Health and Social Services 2004-05 Analysis Figure 5 Medi-Cal Caseload Would Increase And Costs Decline Under Budget Plan 1994-95 Through 2004-05 2 4 6 8 94-95 96-97 98-99 00-01 02-03 04-05 500 1,000 1,500 2,000 2,500 3,000 $3,500 Eligibles (In Millions) Cost Per EligibleEligibles Cost Per Eligible Caseload. Between 1994-95 and 1996-97, the Medi-Cal average monthly caseload was relatively constant, averaging about 5.4 million eligibles. The Medi-Cal caseload subsequently dropped by almost 300,000 eligibles (5 percent) in 1997-98. The change in the Medi-Cal caseload roughly paralleled changes in the CalWORKs welfare caseload. The caseload began a sharp drop at that time in response to the turnaround in the state’s economy, and greater emphasis on moving families from wel- fare-to-work in the wake of the enactment of state and federal welfare reform legislation. Another factor contributing to declining welfare and Medi-Cal caseloads was probably the reluctance among immigrant Cali- fornians to make use of public benefits because of concerns about whether such use might adversely affect their ability to naturalize or to sponsor the immigration of family members in the future. From 1997-98 through 2000-01, the Medi-Cal caseload remained rela- tively flat even though the CalWORKs caseload continued to decline. The Medi-Cal caseload did not decline during this period primarily be- cause of the backlog of eligibility determinations for former CalWORKs recipients that resulted from the delay in implementation of Section 1931(b) Medi-Cal eligibility by DHS and the counties. California Medical Assistance Program C – 85 Legislative Analyst’s Office The caseload began to grow rapidly during 2001-02 and 2002-03 pri- marily due to a variety of eligibility expansions and simplified eligibility processes. Growth in eligibles is expected to continue in 2003-04 and 2004-05, but at a slower rate. Cost Per Eligible. The average annual growth rate of the estimated cost of benefits per eligible (excluding pass-through funding to other departments and local governments) is 4 percent during the period of 1994-95 through 2004-05. This is greater than the rate of general inflation during this period (nearly 2 percent) as measured by the Gross Domestic Product deflator. While the caseload has gone up and down over the past decade, the cost trend per eligible had been almost steadily upward until 2001-02. While the number of families on welfare in the Medi-Cal population de- clined during this period, the proportion of relatively higher-cost aged and disabled beneficiaries had increased, driving up the average cost per eligible for the Medi-Cal population as a whole. The turnaround in the trend seen since that time appears to be partly the result of an increase in the number of healthy beneficiaries rather than a decrease in health care costs. The simplification that has occurred in the eligibility process means that the Medi-Cal Program probably is retaining a greater number of children and families on its caseload who do not regularly need health care services compared to other beneficia- ries, such as the aged, blind, and disabled. Based on the Governor’s budget plan, these costs would decrease by about 1 percent in the current year and further decrease by nearly 4 per- cent in the budget year. This decrease can be partly attributed to the Governor’s proposals to phase in additional provider rate reductions in the current year and budget year. Overall Caseload Estimate Reasonable We find that the budget’s overall estimate for the Medi-Cal caseload is reasonable, but believe that there is both upside and downside risk to the estimate. While it is possible that the population of aged beneficiaries will be greater than budgeted, it is also possible that the population of nonwelfare families and children will be less than assumed in the Governor’s budget plan. We will monitor caseload trends and recommend appropriate adjustments at the time of the May Revision. Figure 6 (see next page) shows the budget’s forecast for the Medi-Cal caseload in the current year and 2004-05. The majority of the projected Medi-Cal caseload increase occurs in the families and children eligibility categories. The budget plan estimates that the caseload for this group C – 86 Health and Social Services 2004-05 Analysis will increase by 4 percent in the current year and an additional 3 percent in the budget year. Nonwelfare families account for most of the changes in Medi-Cal eligible families and children. The budget estimates that the caseload of Medi-Cal eligible nonwelfare families will increase by about 7 per- cent in the current year, and then increase by 6 percent in the budget year. Figure 6 Medi-Cal Caseload Governor’s Budget Estimate (Eligibles in Thousands) Change From 2002-03 Change From 2003-04 2002-03 2003-04 Amount Percent 2004-05 Amount Percent Families\/children 4,572 4,741 169 4% 4,890 148 3% CalWORKs 1,549 1,479 -70 -5 1,453 -26 -2 Nonwelfare families 2,434 2,605 171 7 2,769 164 6 Pregnant women 203 208 5 3 215 6 3 Children 386 449 63 16 453 4 1 Aged\/disabled 1,549 1,617 68 4% 1,679 62 4% Aged 584 616 31 5 650 34 6 Disabled (includes blind) 965 1,001 37 4 1,029 28 3 Undocumented Persons 259 262 3 1% 271 10 4% Totals 6,380 6,620 240 4% 6,840 220 3% Some of the projected current-year and budget-year growth in the nonwelfare families and children caseload is the result of the implemen- tation of a gateway in the Child Health and Disability Prevention (CHDP) program. The Governor’s budget estimates that efforts to expe- dite the enrollment of CHDP children into more comprehensive health care coverage will result in nearly 146,000 eligibles being added to the Medi-Cal Program in 2004-05. Additional caseload growth is expected to result from the enactment of two laws in 2003 that simplified eligibility processes for children who receive free meals through the National School Lunch Program or are eligible for Food Stamps. The overall projection of nonwelfare families and children caseload growth is consistent with past trends. However, the effect of ongoing changes in the Medi-Cal Program is hard to predict and there could be significant revisions to the projection for various reasons. For example, these changes include modifications of eligibility determination proce- California Medical Assistance Program C – 87 Legislative Analyst’s Office dures adopted in the 2003-04 Budget Act with the intent of reducing caseloads and implementation of the CHDP gateway. Caseloads for the aged, blind, and disabled are expected to grow by about 68,000 beneficiaries or 4 percent in the current year and by an ad- ditional 62,000 beneficiaries or about 4 percent in the budget year. The growth in the current year is due to underlying caseload growth trends as well as a projected increase in caseload due to a Superior Court ruling in a case known as Craig v. Bonta. This ruling requires DHS to provide Medi-Cal benefits to persons terminated from the federal SSI\/SSP pro- gram retroactively to June 30, 2002. Caseload increases for the aged are being driven primarily by those aged individuals who qualify as medically needy. This eligibility category is expected to grow by 29,100 or nearly 18 percent to 191,900 in 2004-05. This is a substantially larger year-to-year caseload growth increase than the 7 percent increase that is estimated will occur between 2002-03 and 2003-04. The most recent data that we have reviewed suggest that caseload in this category may be growing even faster than projected and that the current-year and budget-year estimate may understate funding require- ments for these eligibles. However, in discussions with DHS, the depart- ment has indicated that the most recent data may be skewed by the effect of Craig v. Bonta and that updated information would be provided at the time of the May Revision. Potential Risks to Accuracy of Caseload Projections and Cost Esti- mates. The accuracy of the department’s caseload projections and cost estimates are dependent upon a number of other more general factors not discussed above. Among the factors that could cause the Medi-Cal program’s caseload and costs to vary from the projections are: Federal actions such as a continuation of the temporary increase in federal funding relief or the potential effect of the enactment of federal legislation such as the recent Medicare bill on the Medi- Cal program. Further changes in state laws and regulations adopted by the Legislature and the Governor or through the initiative process. For example, state law was changed to expand health insurance coverage for employees and dependents of certain employers, a step which would eventually have an effect on Medi-Cal Pro- gram caseloads. Effect of Lawsuits on the Governor’s Budget Proposals. As dis- cussed earlier, the 2003-04 Budget Act included a proposal to re- duce certain provider rates by 5 percent. However, a preliminary injunction issued by a federal district court has blocked, at least C – 88 Health and Social Services 2004-05 Analysis for now, part of the rate reduction that was to take effect on Janu- ary 1, 2004. If the rate reduction is prevented from occurring, the state could lose hundreds of millions of dollars in savings and it would be less likely that the additional 10 percent rate reduction proposed by the Governor could be imposed. Analyst’s Recommendation. In summary, we do not recommend any specific budget adjustment for caseload at this time because we believe that there is both upside and downside risk to the estimate. While it is possible that the population of aged beneficiaries will be greater than budgeted, it is also possible that the eligibility determinations and CHDP gateway implementation will result in fewer eligibles than assumed in the Governor’s budget plan. Given this situation, we will continue to monitor the Medi-Cal caseload trends and the Legislature’s actions on the Governor’s mid-year proposals, and will recommend appropriate adjustments at the time of the May Revision. We will address various aspects of the Governor’s estimates of pro- gram costs later in this analysis. ASSESSING THE GOVERNOR’S 2004-05 BUDGET PROPOSALS As discussed above, the Governor’s 2004-05 budget plan proposes a series of actions to help address the state’s fiscal problems and operate the Medi-Cal Program. We discuss his proposals to reduce program costs through the establishment of a quality improvement fee for managed care health plans and to cap enrollment for certain groups of immigrant ben- eficiaries in the Crosscutting Issues section of this Analysis. Our assess- ment of his proposal to transfer eligibility determinations for the Breast and Cervical Cancer Treatment Program to the counties is discussed in the Public Health section of this Analysis. Finally, our assessment of his proposals to reduce reimbursements for various Medi-Cal providers, re- form the Medi-Cal Program, and increase staff to process prior authori- zations for prescription drugs and medical services are discussed below. Litigation Places Savings From Some Rate Reductions in Doubt The Governor’s budget plan proposes a 10 percent rate cut for certain providers in addition to a 5 percent cut enacted in the 2003-04 Budget Act for combined current-year and budget-year state savings of $960 million. There is a significant risk whether the state would achieve California Medical Assistance Program C – 89 Legislative Analyst’s Office this level of savings because of ongoing litigation over the issue. As it considers the Governor’s proposal for deeper rate cuts, we recommend that the Legislature examine alternative approaches that would strike a balance between concerns over how such reductions would affect access to care and quality of care for Medi-Cal beneficiaries and the need to address the state’s serious fiscal problems. Further Reductions Proposed. As discussed earlier in this analysis, the 2003-04 Budget Act and related budget legislation adopted a 5 per- cent cut in the rates paid for physician services, pharmaceuticals, dental services, managed care plans, home health care, medical transportation, and certain other medical services delivered to Medi-Cal beneficiaries. The rate cut, which was to have taken effect on January 1, 2004, was ex- pected to reduce state costs by about $103 million in the current year. The savings in 2004-05 from full-year imposition of the 5 percent reduction would have been roughly $237 million. As shown in Figure 7 (see next page), the Governor’s mid-year bud- get reduction package includes a proposal to reduce rates by another 10 percent, bringing the total rate reduction to 15 percent and the total savings assumed in the current fiscal year to $263 million. The Governor’s 2004-05 budget plan assumes that the full 15 percent reduction would continue at least through the end of 2004-05 and generate $697 million in savings in 2004-05. The rate reductions would be in effect until January 2007. Thus, the Governor’s budget plan, if adopted by the Legislature and upheld by the courts, would result in combined current-year and budget-year savings amounting to $960 million. Ruling Blocks Implementation of First Rate Reduction. Litigation initiated by the state’s Medi-Cal providers means it is possible that the state will achieve only some of the savings assumed to result from pro- vider rate reductions. A preliminary injunction issued by a federal district court in Decem- ber has partly blocked, at least for now, the implementation of the first 5 percent reduction in rates for providers who serve fee-for-service pa- tients. The decision was based on a claim that the rate cuts violated a federal law requiring that the rates paid to Medicaid providers be ad- equate to ensure quality care and access to care for beneficiaries. The court held that DHS had failed to analyze the potential effects of the rate cut in regard to these factors. The ruling means it is almost certain that legal action will be brought challenging the Governor’s proposal to re- duce rates an additional 10 percent. The December court ruling did not apply to all providers who were subject to the 5 percent rate reduction; the cut enacted for managed care health plans was allowed to remain in effect. Thus, as things now stand, C – 90 Health and Social Services 2004-05 Analysis Figure 7 Provider Rate Reductions: Proposed General Fund Savings (In Millions) Total Pharmacy Managed Care All Other 2003-04 5 percent $103 $46 $31 $27 10 percent 160 92 9 59 Totals ($263) ($137) ($40) ($86) 2004-05 5 percent $237 $99 $62 $76 10 percent 460 199 99 162 Totals ($697) ($299) ($160) ($238) Two-Year Savings $960 $436 $200 $324 Detail may not total due to rounding. the state would still be able to achieve General Fund savings from man- aged care rate cuts of at least $40 million in 2003-04 and an additional $160 million in 2004-05 if the Governor’s proposal for a full 15 percent rate reduction were adopted by the Legislature. However, managed care plans have filed a notice of dispute with DHS challenging the department’s rate calculation methodology which, if successful, would jeopardize the potential savings. The state appealed the court’s decision in early January in its entirety, and has also taken steps to attempt to win the immediate reinstatement of at least part of the savings by submitting to the court a DHS analysis of the adequacy of Medi-Cal pharmacy rates that had been completed in 2002. The court is expected to rule on the issue within 60 days of the filing of the ap- peal. As shown in Figure 7, restoration of the 5 percent rate reduction for pharmacies, and adoption of the Governor’s proposal for an additional 10 per- cent rate reduction for pharmaceutical providers, would enable the state to achieve savings of nearly $436 million over two years. At the time this analysis was prepared, the Legislature had not yet acted upon the Governor’s mid-year reduction proposal, which was to have taken effect in January 2004. Even if the department ultimately pre- California Medical Assistance Program C – 91 Legislative Analyst’s Office vails on any portion of the litigation and the injunction is lifted, some of the savings assumed in the mid-year proposal from the 10 percent cut would be lost. Federal and state rules do not permit rates to be cut retro- actively when providers have not received advance notice of such a change. However, since advance notice was given to providers regard- ing the 5 percent rate reduction, the savings could be achieved retroac- tively to January 1, 2004, if this reduction were subsequently permitted by the courts. Analyst’s Recommendation. In our February 2001 report, A More Ratio- nal Approach to Setting Medi-Cal Physician Rates, we took note of evidence from health research conducted nationally indicating that the rates paid to medical providers can affect the quality of care and access to care provided to Medicaid patients. We also acknowledged, however, that there is no simple formula that relates rate levels to health care access and quality. The rate reductions proposed by the Governor, in our view, are likely to have significant effects on the operation of the Medi-Cal Program. The Legislature, however, faces the difficult choice of balancing these con- cerns against the state’s serious fiscal problems. We would recommend that, as the Legislature examines the Governor’s rate cut proposal, it also consider some alternatives that would enable it to strike a balance between these competing concerns. The Leg- islature could moderate the size of the rate reduction; apply it selectively to certain providers and moderate the impact on others, depending on the available evidence as to how quality of care and access to care might be affected; or further limit by statute the time period the rate reductions would be in effect. Any of these approaches would diminish at least somewhat the level of savings proposed by the administration from rate reductions. Thus, if it were to reject or significantly modify the Governor’s plan, the Legisla- ture should also consider ways to achieve alternative budgetary solu- tions in order to address the state’s fiscal problems. Our office has identi- fied a number of options and recommendations for reducing state costs or increasing state revenues in The 2004-05 Budget: Perspectives and Issues and this Analysis. Such a review of alternative budget solutions may prove necessary, in any event, if the state is unable to overcome legal challenges now pending that could prevent a portion of the provider rate reductions from taking effect. C – 92 Health and Social Services 2004-05 Analysis Reject Staff to Process Authorization Requests, But Provide Necessary Flexibility on Workload We recommend rejection of the Governor’s request for 36 additional positions to process treatment authorization requests (TARs) because our analysis shows that increasing the number of staff who process TARs is not the most cost-effective way to address the growth in TAR volume. We propose instead steps to give the Department of Health Services the authority it needs to better manage its TARS workload and to improve the TARS process. (Reduce Item 4260-001-0001 by $1 million.) Governor’s Budget Proposal Would Add Staff. State law requires Medi-Cal providers to submit TARs to obtain authorization for reimburse- ment for specific procedures and services. Some of the services that re- quire TARs include certain prescription drugs, long-term care claims, and inpatient hospital claims. The volume of TARs has increased significantly during the past three years. The number of TAR reviews conducted by DHS increased 17 percent in calendar year 2002, and another 17 percent in 2003. The department anticipates the upward trend in TARs reviews will continue, primarily driven by a surge in the number of TARs sub- mitted for drug prescriptions. The Governor’s 2004-05 budget plan would increase by 36 the num- ber of staff that review prior authorizations for certain prescription drugs and medical services for Medi-Cal patients. The additional staff are ex- pected to cost $4 million ($1 million from the General Fund) in 2004-05. These additional resources would bring the total budget for TARS re- views to roughly $70 million ($20 million General Fund) and the total staffing level to 685. The budget plan also proposes statutory language that would give DHS the discretion to examine a sample of TARs for medical services and prescription drugs, instead of the current requirement that every such request be reviewed. Recent Study Found Significant Problems With TARs Processing. A study commissioned last year by the Medi-Cal Policy Institute (which recently became part of the California Healthcare Foundation), a non- profit group which studies Medi-Cal and other state health programs, found significant problems with the Medi-Cal TAR process. Among the study’s findings: Relatively Larger State Staff. The DHS uses a relatively larger staff than private health plans to process TARs. This may be partly justified by Medi-Cal’s sicker and older patient population, which is more likely to require services subject to prior authorization. California Medical Assistance Program C – 93 Legislative Analyst’s Office Nevertheless, the program’s staff positions for this function ap- pear to be excessive. Lack of Cost-Benefit Evaluations. The DHS does not conduct routine cost-benefit evaluations to determine if requiring prior authorization for specific services and drugs helps to contain overall program costs. For example, state law requires that any prescription for drugs exceeding the limit of six per month be subject to a TAR. This requirement is a major factor driving up the TAR workload. However, DHS has not determined if this limit reduces prescription drug costs for the state. Given that only 10 percent of such TARs are disallowed, and that drugs address- ing chronic conditions are routinely approved, it is possible that requiring TARs for selected drugs and medical services might be a better approach. Inconsistent Decision Making. The study also found that deci- sion making on TARs is inconsistent and often lacking formal criteria. An Internet-based system called Service Utilization Re- view Guidance and Evaluation (SURGE), now in development by DHS, should result in faster TAR decisions, uniform criteria for decision making, and a reduction in the number of DHS staff needed to process TARs. The DHS indicates that the technology and data systems are now available to implement the system for pharmacy TARs, but that the department has not implemented the system for this purpose. It is not clear from our discussions with the department why this is the case. The state would also benefit if SURGE were placed in service to process medical claims. However, it will most likely be a couple of years before the nec- essary data systems for such an effort would be available. Proposed Language and Other Steps Could Reduce TAR Volume. As we noted above, the Governor’s budget plan proposes statutory changes to give DHS greater flexibility in terms of how many TARs must be re- viewed for certain services and drugs. Our analysis indicates that this language would be effective in help- ing the department to better manage its workload. For example, under the proposal DHS could choose to review only a sample of certain drugs, such as over-the-counter drugs, that generate a high volume of prescrip- tions but that are low-cost and low-risk to patients. Similarly, DHS could spend less staff time reviewing hemodialysis or other services that have high TARs approval rates and are less likely to be abused. While the legislative changes sought by the administration appear to be warranted, our review of the DHS request for 36 additional personnel indicates that it does not fully take into account the potential reduction C – 94 Health and Social Services 2004-05 Analysis in workload and staffing needs that could result from adoption of the statutory changes. Analyst’s Recommendation. Based on our analysis, we believe that DHS could better address the increasing volume of TARs by focusing initially on actions that reduced its workload rather than by increasing the number of staff who process TARs. Accordingly, we recommend that the Legislature adopt the statutory changes proposed by the administra- tion giving the department the discretion it needs to manage this workload more effectively, but deny at this time the request for additional posi- tions. The Legislature could reconsider the request next year after the effect of the statutory changes on TARs workload trends had been deter- mined. We also recommend that the Legislature direct DHS to take addi- tional steps to reduce its TAR workload. For example, the Legislature may wish to consider directing DHS to conduct routine analyses of the various types of claims subject to TAR reviews based upon such criteria as the medical risks for patients and the costs and benefits of the reviews to the Medi-Cal Program. The DHS should also be directed to implement the SURGE system for pharmacy claims on a statewide basis by the end of the 2004-05 fiscal year. AN AGENDA FOR LONG-TERM REFORM OF THE MEDI-CAL PROGRAM Proposals to Reform Medi-Cal Should Be Pursued The Governor’s budget plan offers a package of proposals for long- term reform of the Medi-Cal Program that it estimates would achieve General Fund savings of $400 million beginning in 2005-06. In general, the proposal warrants careful consideration by the Legislature given our projections of continued caseload and expenditure growth in the program and the state’s fiscal difficulties. However, some key details of the proposal are still lacking. We recommend that the Legislature direct the Department of Health Services to present more detailed information about the reform plan at budget hearings so that it will be in a better position to assess the policy implications and savings that would actually be achieved by the administration’s plan. We also recommend changes to (1) the request for staffing and funding to develop the proposal and (2) managed care enrollment procedures. California Medical Assistance Program C – 95 Legislative Analyst’s Office Governor Proposes Sweeping Reforms Two Major Components. The Governor’s budget plan presents two major proposals to reform the Medi-Cal Program for the stated purpose of providing the state with the flexibility to meet the essential needs of program beneficiaries at costs that are affordable to the state. The budget plan requests $3.2 million ($1.5 million from the General Fund) for addi- tional resources for DHS to initiate such a reform effort, including 15 positions and funding for two contracts. No savings from the adoption of the proposal are anticipated in the budget year, but the Governor’s budget plan estimates that the proposal would result in state savings of $400 million in 2005-06. We summarize the Governor’s two major proposals as follows: Restructuring the program to allow for a multitiered eligibility and benefits structure with components that more closely re- semble private health coverage. Expanding managed care coverage on a mandatory basis for fami- lies and children into additional counties where these services are now provided primarily on a fee-for-service basis, and also encouraging additional aged, blind, and disabled beneficiaries in these counties to volunteer for enrollment in managed care. We describe the Governor’s proposals in more detail below. How- ever, we note that the administration proposals, at this point, represent only broad and conceptual options for legislative consideration. The bud- get plan offers few details to explain many aspects of the Governor’s plan, indicating instead that these are to be developed by the administra- tion in consultation with the Legislature and stakeholders with an in- terest in the operation of the Medi-Cal Program, such as beneficiaries and providers. In our discussion below, we provide background infor- mation that may assist the Legislature in assessing the Governor’s plan once more details are forthcoming. Restructuring Medi-Cal Eligibility and Benefits Some Federal Provisions Can Be Waived. The Centers for Medicare and Medicaid Services (CMS), the federal government agency that ad- ministers the Medicaid Program, has the authority to grant to states waiv- ers of certain Medicaid statutes to enable them to explore innovative ser- vice delivery and financing approaches to providing health care services. Under the Governor’s proposal, the DHS would obtain a Section 1115 Medicaid Demonstration Waiver that would allow the state to implement changes in the structure of Medi-Cal. C – 96 Health and Social Services 2004-05 Analysis While the changes proposed in such waivers can be sweeping, they are subject to renewal every five years and states must be able to demon- strate that the changes will not increase federal government costs for the Medicaid program. Some states have already obtained waivers compa- rable in many respects to the one proposed by the administration. Medi-Cal Eligibles Could Be Divided Into Categories. The DHS in- dicates that one element of its waiver request may be to split Medi-Cal eligibles into three categories. One category would include beneficiaries who are guaranteed eligi- bility for Medicaid services under federal law. This category would pre- sumably include children and adults who are eligible to receive CalWORKS cash grants and persons who receive SSI\/SSP benefits. A second, separate group could be Medi-Cal eligibles who are man- dated to get coverage under federal law except for the fact that their in- come slightly exceeds federal eligibility standards. The third category could be medically needy eligibles\u2014both chil- dren and adults in families to whom the state at its option has chosen, without any federal requirement, to expand health coverage. This cat- egory could include families who do not qualify for CalWORKS cash assistance but nevertheless have relatively low incomes. Benefits Could Vary by Eligibility Category. The administration has suggested that it might seek to create a three-tiered benefit structure that would provide varying levels of benefits for the three categories of eli- gibles described above. Beneficiaries who received coverage entirely at the state’s option, for example, might receive a more restricted package of benefits that more strongly resembled private insurance and that in- cluded financial limits on the services covered by the state. Eligibles for whom the federal government mandates health coverage would presum- ably receive a more elaborate package of Medi-Cal benefits. Additional Waiver Features Possible. The administration has indi- cated that it also contemplates an effort through the waiver to simplify and align eligibility standards for Medi-Cal with other programs that assist low-income persons. Another possible waiver component identi- fied by the administration is the implementation of more effective re- quirements that patients contribute copayments to partly offset the cost of certain services, such as a provision allowing a physician to require a copayment as a condition of receiving nonemergency medical services. The administration is also proposing to seek a federal waiver which would allow it to redefine federal requirements for Early and Periodic Screen- ing, Diagnosis and Treatment, which have been interpreted to require a broad and costly array of services for children and youth. California Medical Assistance Program C – 97 Legislative Analyst’s Office Costs and Savings From Implementation. The budget plan requests ten additional staff positions for DHS in 2004-05 at a cost of about $700,000 ($350,000 General Fund), as well as an additional $250,000 in funding ($125,000 from the General Fund) for professional consultants, as well as $4.3 million ($1.5 million General Fund) to make changes to existing in- formation technology systems to help prepare this component of the waiver request and to begin to implement a multitiered structure for the Medi-Cal Program. The Governor’s proposal indicates that additional resources may be needed for these purposes in 2005-06 and subsequent years. The administration anticipates that these costs will be more than offset by future savings from the implementation of the reforms. Expansion of Managed Care From 22 Counties to 36. Under the Governor’s reform proposal, the DHS would also seek to expand enrollment for parents and children in the Medi-Cal managed care system into 14 additional counties that cur- rently operate under the fee-for-service system. This would bring the to- tal number of counties operating under the Medi-Cal managed care sys- tem to 36 and result in the transition of about 414,000 beneficiaries from fee-for-service into managed care. Henceforth, enrollment of these fami- lies into managed care would become mandatory upon enrollment in the Medi-Cal Program. This geographic expansion of managed care would require modifi- cation of various federal waivers, federal approval of the state’s plan, the execution of contracts with additional managed care health plans, and efforts to resolve concerns with the various groups affected by such a change, including beneficiaries and providers. Costs and Savings From Implementation. The budget plan proposes to increase DHS staff by five to implement this expansion at a cost of $400,000 ($200,000 General Fund), as well as $250,000 ($126,000 General Fund) in additional funding for a state contractor that enrolls Medi-Cal beneficiaries in managed care plans. The 2004-05 budget plan assumes that no savings would result from the adoption of this proposal in the budget year, due to the time needed to develop a plan, to subsequently secure federal approval of the modifi- cation of existing waivers to permit the expansion, and to obtain state and federal approval of nonbid contracts with managed care plans. Implementation would be phased in beginning in 2005-06. Net sav- ings of $16 million ($8 million from the General Fund) are projected for 2005-06, with annual ongoing savings of $33 million ($16.5 million from the General Fund) anticipated in 2006-07 and thereafter. These savings C – 98 Health and Social Services 2004-05 Analysis are based on the assumption that the state will pay capitation rates to health plans equivalent to 95 percent of what it would cost the state to provide medical services to these beneficiaries under the fee-for-service system. The budget plan also assumes some funding would be set aside for a contractor who would be responsible for enrolling beneficiaries in managed care. In addition to expanding mandatory managed care to families and children, the administration indicates that it will develop a strategy to encourage the voluntary enrollment of additional aged, blind, and dis- abled persons into Medi-Cal managed care plans. Managed Care Proposal Raises Some Concerns While we believe the Governor’s proposals for expansion of man- aged care warrant consideration by the Legislature, we do have concerns about three aspects of this proposal. Some Positions Not Needed Yet. Our review of the Governor’s pro- posals indicates the administration is requesting full and immediate staff- ing to address a workload that will actually phase in more gradually over the budget year and 2005-06. Specifically, we believe that three of the five positions will not be needed until after DHS has obtained the necessary federal approvals for the expansion and has entered into new contracts with managed care plans. The DHS does not expect these steps to be completed until 2005-06. Deletion of the three unneeded positions from the 2004-05 budget would reduce the DHS request by $200,000 ($100,000 General Fund). Some Existing Managed Care Plans in Trouble. At least two of the existing Medi-Cal managed care plans (both County Organized Health System [COHS] plans) have indicated that they face serious financial prob- lems. It appears likely that other COHS plans may also encounter prob- lems in the future. At the same time that the administration examines an expansion of managed care, it should also consider what steps the state should take to ensure that the existing managed care system remains fi- nancially stable. We discuss this issue and our recommendations to the Legislature in more detail later in this section of our Analysis. Contractor Costs for Enrollment Could Be Reduced. As noted ear- lier, the Governor’s reform plan would increase funding for the state con- tractor that enrolls Medi-Cal beneficiaries in managed care. The current three-year contract is scheduled to expire as of September 2004. The DHS has the option of authorizing three one-year extensions of the contract at an estimated cost of about $50 million per year ($25 mil- lion General Fund). The Governor’s proposal to expand Medi-Cal man- California Medical Assistance Program C – 99 Legislative Analyst’s Office aged care into additional counties assumes that this contract will be ex- tended for several years, and further assumes an increase in the cost of the contract of about $7.5 million ($3.8 million General Fund) in 2005-06. Under the current process that exists in certain counties, a person who enrolls in Medi-Cal is given up to 30 days after enrollment to choose a man- aged care plan. To assist the enrollee in making this decision, the enrollment contractor mails each participant a package containing information about the health plans in that county at a cost of about $5 per mailing. An identical second enrollment package is sent out later in the month. The state currently spends about $8 million on such mailings each year. Our analysis indicates that the state could achieve significant sav- ings on the costs of these mailings by allowing new enrollees who have already decided on a health plan to enroll in that plan at the time they apply for Medi-Cal benefits. Such a change would reduce the contractor’s mailing and enrollment processing costs and expedite the enrollment of beneficiaries into managed care health plans. We estimate the state would achieve savings in the low millions of dollars annually from such a change. Analyst’s Recommendations In general, the administration’s proposal to reform the Medi-Cal Pro- gram warrants careful consideration by the Legislature, given our pro- jections of continued caseload and expenditure growth in the program and the state’s fiscal difficulties. However, many of the details the Legis- lature needs to fully understand and assess the proposals were not avail- able at the time this analysis was prepared. Consequently, we cannot say at this time whether the proposal will achieve the overall savings level of $400 million in 2005-06 that was estimated in the budget plan. This is also the case in regard to the proposal to establish a multitiered restruc- turing of eligibility and benefits as part of a federal waiver. For this rea- son, we withhold recommendation at this time on the request for fund- ing to implement this component of the reform package until more infor- mation is available. According to the administration, additional information about this proposal will be provided to the Legislature at the time of the May Revi- sion. We recommend that DHS be directed instead to present more de- tailed information about its reform plan at budget hearings prior to the May Revision so that the Legislature will be in a better position to assess its policy implications and the savings that would result from adoption of the administration’s plan. The May Revision timeline proposed by the administration is so late in the budget process it may not provide the Legislature with sufficient time to examine the proposal and, if warranted, consider modifications and improvements to the suggested approach. C – 100 Health and Social Services 2004-05 Analysis We also recommend that the Legislature modify the administration’s proposal for funding and staffing to expand managed care to delete three of the five positions and $200,000 ($100,000 General Fund) associated with these positions because, as we discussed earlier in this analysis, these resources will not be needed until 2005-06. We further recommend that the Legislature direct DHS to modify its current arrangements with its managed care enrollment contractor. Specifi- cally, individuals applying for Medi-Cal in managed care counties who have decided on a health plan should be able to enroll in a plan at the same time that they apply for Medi-Cal. The DHS should estimate the potential sav- ings from this change, so that the Legislature can enact an appropriate and corresponding reduction to the Medi-Cal Program budget. Additional Opportunities for Reform Worth Considering In addition to the concepts proposed by the Governor for reforming the Medi-Cal Program, we believe that the Legislature should consider other opportunities that we have identified to improve the program and achieve savings. These include providing coordinated care to the aged and disabled, simplifying eligibility for families by combining Medi-Cal and Healthy Families coverage, improving the eligibility determination process, studying the impact of Medicare legislation, and advocating for federal changes in the Medicaid Program. Broader Reform Approach Warranted. The Governor’s approach for longer-term reform of Medi-Cal addresses some of the key factors affect- ing the quality of services and the continuing growth in the cost of the program. Our analysis indicates that this concept, while substantive, does not fully address all of the major problems which affect the operation of Medi-Cal and all of the major cost-drivers that are increasing state ex- penditures for these benefits. The Legislature may wish to consider a more comprehensive approach to reform that examines other opportunities that we have identified to improve the program and to achieve state savings. These proposals, which are discussed in more detail below, include: Providing coordinated care to aged and disabled (including the blind) persons to reduce costs. Restructuring Medi-Cal and Healthy Families into a family cov- erage model. Improving county eligibility determinations. California Medical Assistance Program C – 101 Legislative Analyst’s Office The Legislature should also consider the impact of federal Medicare legislation enacted this fall in its deliberations over how to reform Medi- Cal and consider advocating for federal government changes to the Med- icaid Program that could result in a reduction in state costs. Coordinating Care for the Aged and Disabled to Reduce Costs. The Legislature may wish to consider the concept of expanding enrollment in managed care plans to the group of Medi-Cal beneficiaries who would probably benefit the most from a shift away from fee-for-service cover- age\u2014the aged or disabled. In our companion document to this Analysis, The 2004-05 Budget: Per- spectives and Issues, we describe the current Medi-Cal health care delivery system and evaluate its strengths and weaknesses in regard to address- ing the health care needs of these beneficiaries. We identify which addi- tional groups of aged or disabled Medi-Cal beneficiaries are good candi- dates for an expansion of managed care, and offer recommendations to improve the operation of the existing Medi-Cal managed care system that could facilitate their shift from fee-for-service medicine to a more coordi- nated system of care. Our proposal would go beyond the Governor’s plan which proposes to expand managed care chiefly by extending such cov- erage to families in additional counties. Restructure Medi-Cal and Healthy Families Into a Family Coverage Model. As the Legislature considers the Governor’s reform proposal, it may also want to consider opportunities to combine and restructure the Medi-Cal and Healthy Families programs into a new family health plan that would unify coverage. Many families who are eligible for these pro- grams are not enrolled in them because of their complex and confusing eligibility requirements and procedures. Furthermore, the current struc- ture of the programs often results in situations in which parents and chil- dren within the same family must be enrolled in separate programs with differing program requirements and choices of health care providers. We presented a model approach for addressing these concerns in our June 1999 report, A Model for Health Coverage of Low-Income Families. The model of coverage that we describe in our report could result in increased state costs because there would be an overall increase in the number of persons receiving health benefits. However, this model could be designed so that it would be cost-neutral or result in net savings if the Legislature combined some of its components with some of the strate- gies for reform that the administration has proposed, such as a multit- iered eligibility and benefits package. For example, aligning the health care benefit package that Medi-Cal beneficiaries receive with the benefits offered under Healthy Families coverage, and imposing copayments and premiums for certain beneficiaries, would reduce state costs. C – 102 Health and Social Services 2004-05 Analysis County Eligibility Determinations: Options Exist for Savings. In our discussion of Medi-Cal expenditures in the Analysis of the 2003-04 Budget Bill, we identified significant problems with the present system by which counties administer determinations of program eligibility with funding provided by the state. Our analysis raised concerns about the growing cost to the state of eligibility activities and about the performance of these functions by the counties. We proposed in that analysis that the Legislature examine several options for reform of this aspect of the Medi-Cal Program, such as cen- tralizing eligibility determinations at the state level using the Internet- based system called Health-e-App. We found that such an approach might significantly reduce the cost of eligibility determinations and ensure greater uniformity in the processing of applications. Federal Medicare Prescription Drug Reform Act. In December 2003, the President signed the Medicare Prescription Drug Reform Act, a mea- sure that will take full effect on January 1, 2006. The act will result in major changes in both the Medicare and Medicaid programs. Most sig- nificantly, the new federal law will require the Medicare program to pay some of the pharmaceutical costs for dual eligibles (that is, Medicare- eligible persons who are also enrolled in Medicaid). Until then, state Medicaid programs, including Medi-Cal, will be responsible (with the help of federal Medicaid matching funds) for the cost of prescription drugs for dual eligibles. The measure also implements a number of other sig- nificant program changes, including requirements that state Medicaid programs contribute some state funding to the federal government after drug coverage shifts to Medicare. The measure also increased the premi- ums charged to persons enrolled in Medicare, which, in some cases, are paid for by Medi-Cal. Because of the complex and interacting effects of the different provi- sions of the new federal legislation, its net fiscal effect on the Medi-Cal Program is not clear at this time. We are advised that DHS is now con- ducting a detailed analysis of how its provisions will affect California. The results of that review and the effect of the law on the way the Medi- Cal Program is operated should be taken into account as reform of the Medi-Cal Program is considered by the Legislature. Options for Federal Medicaid Reform. Our analysis indicates that reforms could be implemented at the federal level in the Medicaid pro- gram which, if adopted, could eventually reduce state Medi-Cal costs by as much as hundreds of millions of dollars annually. For example, one of these potential changes directly relates to the Governor’s Medi-Cal reform proposal to encourage the voluntary en- rollment of aged and disabled persons (which may include dual eligibles) California Medical Assistance Program C – 103 Legislative Analyst’s Office into Medi-Cal managed care plans. Currently, the state is somewhat lim- ited in its ability to manage the care of dual eligibles because of the diffi- culty in coordinating the Medicaid and Medicare programs. Both the fed- eral and state governments might reduce their future Medicaid costs if the federal government changed its rules to allow states to share in sav- ings they were able to achieve through better coordination of care for dual eligibles, such as through disease management services. Because states like California have no way now to share in the savings from such activities, they have little financial incentive to implement such changes. Analyst’s Recommendation. The Governor’s plan to reform the Medi- Cal Program intends to address some of the key factors affecting the qual- ity of services and the continuing growth in the cost of the program. In reviewing the Governor’s proposal, we believe that the Legislature should also consider other opportunities that we have identified to improve the program and achieve savings. These include providing coordinated care to the aged and disabled, simplifying eligibility for families by combin- ing Medi-Cal and Healthy Families coverage, and improving the eligibil- ity determination process. The Legislature should also consider study- ing the impact of Medicare legislation, and advocating for federal changes in the Medicaid Program. FAILURE OF COUNTY ORGANIZED HEALTH SYSTEMS WOULD INCREASE STATE COSTS The Governor’s budget plan assumes that the Health Plan of San Mateo (HPSM), which provides services to roughly 50,000 Medi-Cal beneficiaries, will not be in operation in 2004-05. The HPSM is one of the County Organized Health System (COHS)\u2014a form of managed care\u2014 that contracts with Medi-Cal in eight counties. At least two of these plans reportedly face financial problems and others may in the future. The failure of HPSM or other COHS plans could prove costly to the state. Accordingly, we recommend that the Legislature initially reject the administration proposal to budget for the phase-out of HPSM and direct the Department of Health Services to explore alternatives that would permit it to remain in operation. The Legislature should also consider several options to address the COHS plan’s financial problems in order to avoid an increase in General Fund costs and the other serious consequences of their loss for Medi-Cal beneficiaries. C – 104 Health and Social Services 2004-05 Analysis Background COHS Model of Managed Care. The first Medi-Cal managed care system to be organized was the COHS model. (The other two systems are known as the Geographic Managed Care [GMC] model and the Two- Plan model.) The COHS model allows a county to establish a county- controlled health plan to arrange for the provision of medical services, utilization control, and claims administration for Medi-Cal beneficiaries. About 550,000 Medi-Cal beneficiaries received care from COHS plans in 2003. This accounts for nearly 9 percent of all Medi-Cal enrollees and about 16 percent of Medi-Cal managed care enrollees. The COHS model operates in eight counties (Monterey, Napa, Orange, San Mateo, Santa Barbara, Santa Cruz, Solano, and Yolo). The COHS counties are different from the counties that operate the other two types of Medi-Cal managed care systems in that enrollment in a COHS plan is mandatory for nearly all the Medi-Cal beneficiaries re- siding in that county. This includes families, children, and aged, blind, and disabled persons. In contrast, enrollment in managed care in the coun- ties that operate the GMC and Two-Plan models is voluntary for aged, blind, and disabled persons but mandatory for families and children. Because the aged, blind, and disabled populations are much more likely to utilize high-cost medical services, COHS plans receive higher capita- tion rates, on average, than health plans in the other two systems of Medi- Cal managed care. Some Plans Facing Financial Problems. The COHS plans are subject to licensure under the Knox-Keene Health Care Service Plan Act (Act) by the Department of Managed Health Care (DMHC). In addition, under the Act, COHS plans are obligated to meet certain state requirements meant to ensure their continued financial stability and solvency in order to continue in operation. Generally, these requirements obligate a health plan to demonstrate that it can achieve a positive cash flow from its op- erations and can show fiscal soundness by assuming full financial risk during its history of operation. If these requirements are not met, DMHC ordinarily would conduct a detailed examination of the health plan and recommend steps that should be taken to ensure the plan’s continued operation. A couple of COHS plans have reported recently to the state that they face a risk of fiscal insolvency within the next several years. One COHS in particular, HPSM, has indicated that it is near to falling out of compli- ance with DMHC’s cash flow requirement. The health plan has proposed to close several times and most recently reported that it will remain open only until the summer of 2004. The Santa Barbara Regional Health Au- California Medical Assistance Program C – 105 Legislative Analyst’s Office thority (SBRHA) has also reported that it might be unable to meet DMHC’s requirements in the near future. The Governor’s Budget Proposal. The Governor’s 2004-05 budget plan assumes that HPSM will cease operation at the end of June 2004 and that the county would revert to the fee-for-service system for the delivery of Medi-Cal services in the budget year. This health plan was one of the first Medi-Cal managed care plans and has been serving Medi-Cal patients since 1982. As a result, the approximately 50,000 enrollees would no longer receive services from the managed care plan, but would receive services from fee-for-service providers. We estimate that costs would increase by no more than $30 million ($15 million General Fund) under this proposal because it is more expensive to provide health care services in a fee-for- service system. Why Are COHS Plans in Bad Fiscal Health? We have identified several factors that have likely contributed to the COHS plans’ fiscal challenges. These include an outdated capitation rate- setting methodology, capitation rates that we are advised have not kept pace with inflation, the redirection of Medi-Cal profits to serve per- sons and provide services outside of the Medi-Cal system, rates paid to health care providers that are greater than Medi-Cal fee-for-service rates, and DHS’ failure to adequately monitor COHS plans’ finances. Rate-Setting Methodology Is Outdated. The methodology DHS uses to determine capitation rates is outdated in that it is based on historical fee-for-service rates rather than any current information about the actual cost of health care services being provided by health plans to individuals in a managed care environment. This means that rates are based on a mix and utilization rate of medical services that may not reflect those of Medi- Cal beneficiaries receiving care from COHS plans. As a consequence, rates could be too high for some beneficiaries and too low for others. The DHS is in the process of changing its rate-setting methodology. However, this may prove difficult, because Medi-Cal data systems do not collect accu- rate and complete information about the cost and utilization of health care services by COHS patients. These data are critical to setting appro- priate rates for COHS plans. Capitation Rates Reportedly Lagging Inflation. Although COHS plans’ rate data are confidential and not available for our review, we have been advised by some plans that their capitation rates have not kept pace with inflation. Thus, COHS plans might be facing financial challenges because they serve large numbers of aged, blind, and disabled Medi-Cal beneficiaries for whom medical costs are generally growing the fastest. These C – 106 Health and Social Services 2004-05 Analysis patients are most likely to be heavy prescription drug and hospital users\u2014 two of the most rapidly growing components of health care spending. Profits Used for Services and Persons Outside of Medi-Cal. A num- ber of COHS plans have generated some level of excess revenue or prof- its because, for some years, the cost of the medical services they provided was less than the Medi-Cal capitation rates they received from the state. Some of these profits have gone into COHS plans’ reserves and were used to shore up their operations during periods when their expenditures ex- ceeded revenues. However, some plans have also used their profits to expand health coverage to low-income uninsured persons who are not eligible for Medi-Cal, as well as to provide services beyond those ordi- narily covered by Medi-Cal. While using Medi-Cal revenues for these purposes is permitted under state rules, it may have resulted in some COHS financially overextending themselves. Rates Paid to Health Care Providers Are Greater Than Fee-for-Ser- vice Rates. Some COHS plans have used the profits that have resulted from high capitation payments to reimburse providers at rates greater than the amount the same provider would have been paid under fee-for- service Medi-Cal. For example, HPSM and SBRHA reimburse providers at 120 percent of Medi-Cal fee-for-service rates. This policy has helped these plans entice additional providers into participation in the Medi- Cal Program and improved access to medical care for Medi-Cal benefi- ciaries. However, this approach also appears to be creating cost pressures that are contributing to the financial instability of these plans. Lack of Monitoring of COHS Finances. Another factor that appears to be contributing to the problems now facing some COHS plans is the state’s lack of an adequate system to monitor the plans’ financial condi- tion for Medi-Cal-specific operations. At present, DHS does not require plans to provide detailed supplemental financial reporting for Medi-Cal activities that would enable the state to fully understand why some of the plans are in financial trouble and to what extent Medi-Cal rates con- tribute to the problem. The DHS also does not conduct financial exami- nations and on-site reviews to determine when financial problems exist or the proper remedies when problems are discovered. Under state law, plans are not required to provide such financial reporting and DHS is not required to conduct such in-depth reviews. These types of intensive moni- toring activities would also go beyond the current role of DHS and DMHC for regulating the basic financial solvency of health plans. What Would Happen if COHS Plans Ceased Operation? If COHS plans were, for some reason, to discontinue operation, we have concluded, based upon our analysis, that the resulting shift of Medi- California Medical Assistance Program C – 107 Legislative Analyst’s Office Cal patients from COHS plans to a fee-for-service system would have a negative fiscal impact on the state, could also reduce the access to care for patients, and would eliminate the monitoring of the quality of patient care. Our analysis focused on a shift to a fee-for-service system, rather than to some other form of managed care, because significant barriers exist to shifting patients to another system of managed care in nearly all COHS counties. These barriers include the lack of other managed care plans in such counties and federal restrictions on the operation of managed care plans absent a federal waiver allowing expansion that could be difficult and time-consuming to secure. Medi-Cal Program Costs Would Increase. Our analysis indicates that net state costs for the Medi-Cal Program would probably increase if COHS plans stopped operating and, as a result, Medi-Cal beneficiaries in those counties received their care instead from fee-for-service providers. Enrolling Medi-Cal beneficiaries in COHS plans instead of fee-for- service for their health care has resulted in significant savings to the state. The DHS estimates that Medi-Cal beneficiaries typically receive health care services from a COHS plan at about 81 percent of the cost of fee-for- service providers. These savings would presumably erode if the COHS plans were terminated and replaced with a fee-for-service system. We estimate the closure of HPSM would result in an increase in state costs of $15 million. If all COHS plans ceased operation, the net cost to the state could be as much as $300 million ($150 million General Fund). The COHS plans save money for the state because the capitation rates paid to them result in an average cost of care per Medi-Cal beneficiary that is less than the equivalent cost of fee-for-service coverage. The plans provide health care services for a lower cost and stay within their capita- tion rates in part by better coordinating patient care, such as offering pre- natal care that subsequently saves on emergency room costs, and by pro- viding preventative care, such as tobacco cessation programs. The COHS plans also help to control the duplicative or unnecessary use of medical services. The fee-for-service system, in contrast, generally allows patients to receive care from any number of providers as frequently as they wish, and does not necessarily ensure that the health care services they do re- ceive are the ones that are medically necessary. Access to Providers Could Be at Risk. As we noted earlier, the clo- sure of COHS plans would result in a shift of Medi-Cal beneficiaries to fee-for-service health care providers. Our analysis indicates that such a change could reduce their access to doctors and hospitals and in some cases increase the period of time that they would have to wait to receive care. C – 108 Health and Social Services 2004-05 Analysis In some counties, COHS plans reimburse providers at rates that ex- ceed Medi-Cal fee-for-service rates for the same medical services. Upon the closure of such a COHS plan, some providers may be unwilling to treat Medi-Cal patients at fee-for-service rates that were lower than those they previously received for these same patients from a COHS plan. If a significant number of providers opted out of providing care for Medi- Cal patients, access to care could become more difficult for participants in the program. There is additional evidence (although not necessarily specific to COHS plans) that suggests that a Medicaid managed care approach can increase access to care for Medi-Cal beneficiaries that shift from fee-for- service medicine. One recently published national study found that dis- abled and aged patients receiving care from fee-for-service providers wait longer for appointments and must travel further to obtain care than those enrolled in managed care. Another recent California study found that patients who are enrolled in Medicaid managed care subsequently expe- rience improved access to care and become less reliant on emergency rooms for routine care. Several factors help to explain why enrollment in a COHS plan often equates to better access to care for patients than under a fee-for-service system. First, under program rules, Medi-Cal patients enrolled in managed care (including COHS plans) must be ensured access to a network of pri- mary care and specialist health care providers. Providers participating in the Medi-Cal Program on a fee-for-service basis are not subject to these provisions. Second, health plans licensed by the state (including COHS plans) are required to comply with various state standards to ensure timely patient access to care. Third, federal law requires that Medicaid man- aged care plans (including COHS plans) take specific steps to help po- tential enrollees in Medicaid to understand their health care benefits. For example, health plans must make available free interpretation services for enrollees who are not fluent in English, and to publish health plan information in the prevalent non-English language in the area. Monitoring of Quality of Care Would End. A shift of patients from COHS plans to a fee-for-service system would mean that the state would no longer monitor the quality of their health care. The DHS, as part of its oversight responsibilities for Medi-Cal man- aged care plans, including the COHS plans, conducts annual external quality reviews to measure health plan performance in regard to the qual- ity of health care services provided to Medi-Cal beneficiaries. These stud- ies include the measurement of more than 40 individual quality indica- tors. A summary of health plans performance in regard to these mea- California Medical Assistance Program C – 109 Legislative Analyst’s Office sures is publicly reported annually by DHS. In addition to this process, Medi-Cal managed care plans are rated by the DMHC on their quality (together with their commercial plans) and the results are included in an annual Quality of Care Report Card that is made available to the public on the Internet. The DHS does not comparably attempt to measure the quality of care that is delivered by fee-for-service health care providers. The state, in effect, assumes that if Medi-Cal beneficiaries do not like the quality of care they receive from one fee-for-service provider, they will seek out another. However, this assumption does not take into account the possi- bility that the number of fee-for-service providers participating in the Medi-Cal Program could be insufficient to give Medi-Cal beneficiaries a real opportunity to change providers in response to problems in the quality of their services. Options for Addressing COHS Plans’ Financial Problems There are some strategies counties could pursue on their own to ad- dress their financial problems. For example, some COHS plans have in- dicated that they could improve their fiscal condition through such ac- tions as reducing rates paid to health care providers and pharmacies, and diversifying their revenue sources by providing coverage for other patients in addition to Medi-Cal beneficiaries. To diversify their revenue sources these plans might be able to contract, for example, with counties to provide health care coverage for county employees. There are other options the Legislature may wish to consider to help address the financial crisis that some of the COHS plans could face in the near future. We would note that the options outlined below are not mu- tually exclusive. One or more of them could be implemented together. In addition, several of the options would result in additional costs. These costs, however, should be viewed in the context of an even greater cost to the state from the potential failure of COHS plans. Improve Outdated Rate-Setting Methodology. The capitation rates that COHS plans are paid are an important component of ensuring their financial stability. One option is to ensure that DHS reforms its process for setting rates for capitation payments paid to COHS plans, particu- larly for their aged, blind, and disabled populations. This would require modifying DHS data gathering systems to collect accurate and complete information about the cost and utilization of services provided to COHS members. To obtain this information, DHS could provide incentives to encourage the plans’ submission of complete and accurate data to the C – 110 Health and Social Services 2004-05 Analysis state. The DHS could use the improved data to develop appropriate capi- tation rates. Given the inadequacy of the data now collected by the state, it is not clear at this time whether these changes would result in a net increase or decrease in Medi-Cal capitation rates. Reduce the Financial Risk of COHS Plans. One option for helping to ensure the continuation of the COHS plans would be to modify the COHS model to reduce their financial risk. For example, the state could decide that COHS plans would no longer be financially responsible for the cost of some or all prescription drugs, or certain other fast-growing medical costs. Such a shift in financial responsibilities would result in a reduction in costs for COHS plans and an increase in costs for fee-for-service Medi- Cal expenditures. The exact fiscal impact of such a change is unknown. Limit COHS Plans Use of Profits for Non-Medi-Cal Activities. As we noted earlier, the state has been allowing Medi-Cal managed care plans, including COHS plans, to use Medi-Cal profits to cover services not available under Medi-Cal and to provide services to persons not eligible for Medi-Cal. To some extent, this issue is dwindling as COHS plans become less able to generate excess revenues. The DHS could be asked to examine whether the state could achieve savings by prohibiting this practice. Monitor Health Plan Financial Condition. Oversight of COHS plans and other plans that participate in Medi-Cal managed care could be in- creased in two respects. First, legislation could be enacted that would direct managed care health plans that contract with Medi-Cal to provide supplemental financial reporting for Medi-Cal. Second, legislation could be enacted that would require DHS to conduct regular and thorough in- dependent examinations of the financial condition of these plans. This examination could include on-site, in-depth reviews of health plans, in regard to their administrative efficiency, and operational cost-effective- ness. As we noted above, the DHS does not conduct such reviews at this time. The information obtained by DHS through detailed financial re- ports and examinations could be used to ensure that problems are cor- rected before they affect the financial health of COHS plans and the qual- ity of care received by Medi-Cal beneficiaries. Analyst’s Recommendation The state should encourage COHS plans to develop their own solu- tions to their financial problems. However, as our analysis indicates, the loss of COHS plans could result in a significant net increase in state ex- penditures once clients in failed COHS plans reverted to more expensive fee-for-service coverage. As we have discussed, there could be other con- California Medical Assistance Program C – 111 Legislative Analyst’s Office sequences too for Medi-Cal beneficiaries\u2014including less access to pro- viders, and an end to regular monitoring of the quality of their care. As a first step to address this issue, we recommend that the Legisla- ture initially reject the administration proposal to budget for the phase- out of the Health Plan of San Mateo (HPSM). Instead, the Legislature should direct DHS to explore cost-effective alternatives that would per- mit the HPSM to remain in operation. The DHS should report back to the Legislature regarding the outcome of these efforts prior to the May Revi- sion. We recommend that the Legislature also consider the options for state actions to help mitigate the financial problems affecting HPSM and other COHS plans. These options include directing DHS to improve its rate- setting methodology for COHS plans, reducing the financial responsibil- ity of COHS plans, directing DHS to examine the plans’ practice of using profits for non-Medi-Cal activities, and enacting legislation to increase the state’s financial oversight of COHS plans. The Legislature may wish to conduct hearings examining the financial problems of HPSM and the other COHS plans in the appropriate health policy committees, and di- rect DHS to comment at those hearings on the various options we have identified for addressing these issues. MOVING CALIFORNIA TOWARD A MODEL ANTIFRAUD APPROACH During the past four years, the Legislature has approved significant increases in resources to combat fraud in the Medi-Cal Program. While these actions have resulted in increased savings and allowed the state to avoid some additional program costs, fraud remains a major concern in the Medi-Cal program. In this analysis, we explain the structure of the Department of Health Services’ (DHS) antifraud program and how it compares to national models of fraud control in fee-for-service Medicare and Medicaid. We identify areas in which the DHS could be more effective in combating Medi-Cal fraud and offer recommendations as to how DHS could better manage and structure its antifraud efforts. We also review the Governor’s 2004-05 budget proposals for expansion of antifraud efforts and recommend changes. Reduce Item 4260-001-0001 by $2,354,000. Background Defining Medi-Cal Fraud. Medi-Cal fraud occurs when either Medi- Cal providers or beneficiaries engage in activities that result in the wrong- C – 112 Health and Social Services 2004-05 Analysis ful expenditure of Medi-Cal funds. Beneficiary fraud generally results when individuals provide false information to become eligible for Medi- Cal or when they otherwise obtain benefits improperly. Provider fraud generally occurs when Medi-Cal providers deliberately misrepresent themselves or intentionally deceive the Medi-Cal program for their own financial gain. Estimates vary on the amount of fraud in the national health care system and in Medi-Cal. One national expert on the subject has estimated the level of provider fraud in the fee-for-service portion of California’s Medi-Cal Program to be roughly 10 percent. This estimate is consistent with those of the U.S. General Accounting Office in regard to the perva- siveness of fraud generally in government health care programs. If that 10 percent estimate were correct, provider fraud in fee-for-service Medi- Cal would total about $1.8 billion dollars in 2003-04, with a loss of about $850 million to the General Fund, before any savings and cost avoidances achieved by DHS through its antifraud efforts were taken into account. Most indicators point to provider fraud as being a larger concern in terms of its current fiscal impact on the Medi-Cal Program than benefi- ciary fraud. Provider fraud schemes typically include over-billing, double- billing, billing for services not provided, false claims, and falsification of diagnoses to support billing for unnecessary medical services. In fact, the range of Medi-Cal fraud schemes that have come to light as a result of increased scrutiny during the past few years is extensive. The state has responded with a significant expansion of its antifraud efforts, and has focused mainly on provider fraud. Federal Requirements. Under federal law, the single state agency administering the Medicaid program, which is DHS for California, is re- quired to conduct investigations of possible fraud and abuse. Where fraud is suspected, DHS is also required by federal law to refer cases to the state’s chief prosecutory agency, which in California is the Attorney Gen- eral. The state is also required by federal law to maintain a separate en- tity to conduct criminal investigation and prosecution of Medi-Cal fraud, which in California is the State Medicaid Fraud Unit in the Attorney General’s office. The Centers for Medicare and Medicaid Services (CMS), which over- sees the Medicaid program at the federal level, issues reports to states providing them guidance and information on best practices to follow in their fraud control efforts, and reviews and reports on state antifraud activities. In addition, the Office of Inspector General in the U.S. Depart- ment of Health and Human Services assesses and reports on the annual performance of state Medicaid fraud control units. California Medical Assistance Program C – 113 Legislative Analyst’s Office Antifraud Approaches in Fee-for-Service and Managed Care System. Medi-Cal provides health care services through two basic types of ar- rangements\u2014fee-for-service and managed care. Fee-for-service is the tra- ditional arrangement for health care in which providers are paid for each examination, procedure, or other service they furnish. The providers bill the state Medi-Cal system for their services and are paid by the state through a state contractor, which is often called a fiscal intermediary. Most states have focused their antifraud efforts on the fee-for-service part of the Medi-Cal program. Under managed care, health care plans, primarily Health Mainte- nance Organizations, contract with the Medi-Cal Program and receive a monthly capitation payment or a predetermined monthly amount per- person. The health plans in return assume financial risk for providing a defined package of health care benefits to beneficiaries. Under this arrangement, physicians and other health care providers are directly paid by the managed care health plans, not the state, as is the case in fee-for-service Medi-Cal. Thus, this arrangement has the effect of shifting most of the burden for detecting and eliminating provider fraud from the state to the managed care plans. A health plan that failed to control provider fraud would place itself at risk of becoming unprofit- able, because the state payments to them for beneficiaries are set in ad- vance. We discuss managed care fraud and strategies for addressing this problem in more detail later in this analysis. Antifraud Program Expansion. As recently as 1999-00, DHS had 89 staff performing functions related to provider overutilization, provider educa- tion, and audits for recovery. As can be seen in Figure 8, the state signifi- cantly increased its antifraud efforts since that time, beginning in 2000-01. Figure 8 Department of Health Services Medi-Cal Antifraud Staffing Positions 2000-01 2001-02 2002-03 2003-04a 2004-05a Change 192.2 -9.0 40.0 130.5b 61.0 Totals 233.2 224.2 264.2 394.7b 455.7 a Governor’s 2004-05 budget proposal. b Reflects position reductions resulting from the implementation of Control Section 4.10 of the 2003-04 Budget Act. C – 114 Health and Social Services 2004-05 Analysis The most recent expansion, authorized as part of the 2003-04 budget plan, added 161.5 new positions and $16.5 million ($8.1 million General Fund) to DHS for this effort. However, we are advised by the Depart- ment of Finance that 31 antifraud positions have been eliminated in re- sponse to Control Section 4.10 of the 2003-04 Budget Act, leaving a net gain of about 131 positions in place. The department is currently in the process of filling these positions. At the time this analysis was prepared, DHS reported that 47 positions had been filled and that hiring offers had been extended to candidates for most of the remaining unfilled positions. The Governor’s proposed 2004-05 budget plan proposes to consoli- date 20 auditor positions from the State Controller’s Office into DHS to continue ongoing antifraud activities currently performed by an inter- agency agreement. In addition, 41 more positions would be added to in- crease the number of field audits of hospitals and related billings. Fi- nally, the Governor’s budget plan would convert 15 previously approved limited-term positions that would otherwise expire to permanent status. (We discuss the Governor’s proposed expansion in more detail below.) How DHS Antifraud Efforts Are Organized. The DHS’ complement of antifraud staff is distributed among several separate offices and divi- sions within the department. Most are assigned to the following organi- zations: (1) the payment systems division; (2) the managed care division; (3) the office of legal services; (4) the licensing and certification division; (5) the Medi-Cal fraud prevention bureau, and (6) the audits and investi- gations division. Audits and investigations is the central coordination point for anti- fraud activities. It tracks fraudulent providers and beneficiaries involved in various fraud schemes, gathers referrals of cases for investigation, ana- lyzes data, audits providers, conducts antifraud investigations, and coordi- nates antifraud activities with other governmental agencies. It also serves as the central referral point for suspected Medi-Cal fraud to the Department of Justice, the Federal Bureau of Investigation, and other agencies. State Contracts Out Some Antifraud Activities. In addition to DHS’s antifraud staff, the state contracts out some antifraud functions to three separate vendors. Electronic Data Systems (EDS) is the state’s Medi-Cal fiscal intermediary, performing the claims processing function. Included in EDS’s contract is funding for the EDS’s provider review unit that per- forms antifraud functions. The EDS contract contains an incentive clause that allows EDS to keep 10 percent of the program savings that it gener- ates through its antifraud efforts. The DHS contracts with Delta Dental, a managed care health plan which processes Medi-Cal dental claims and treatment authorization re- California Medical Assistance Program C – 115 Legislative Analyst’s Office quests (TARs) for certain dental services, and maintains a surveillance and utilization review unit. Finally, the DHS also contracts with the MEDSTAT Group, a firm which has developed a database of Medi-Cal claims from all the entities that pay Medi-Cal claims, such as EDS, county mental health, and the Child Health and Disability Prevention (CHDP) program. The MEDSTAT Group uses its database to conduct checks on the existing claim systems and to look for overpayments to providers that may be due to fraud. Cost Avoidances and Savings. One of the primary measures used by DHS to gauge the effectiveness of its antifraud efforts is the amount of cost avoidances and savings that these efforts generate. A cost avoidance is deemed to have resulted primarily when new providers who are po- tentially fraudulent are prevented from enrolling in the Medi-Cal Pro- gram. Savings are deemed to occur when providers already enrolled in the program are found to be engaging in fraud or abuse and their activi- ties are stopped. The DHS estimates that cost avoidances amounting to $316 million for the General Fund will be achieved in 2003-04 as a result of the anti- fraud efforts implemented since 2000-01. These cost avoidances for the General Fund are projected to increase by $93 million in 2004-05 to a total of $409 million. Similarly, General Fund savings are estimated to reach $371 million in 2003-04 as a result of antifraud efforts undertaken since 2000-01, and these savings are expected to grow by $203 million in 2004-05 to $574 million. (Later in this analysis, we discuss whether the savings and cost avoidance estimates are reliable.) Toward a Model Fraud Control Strategy Although the DHS Medi-Cal antifraud program has grown rapidly in recent years, our analysis indicates that these resources have not al- ways been allocated in the most efficient or cost-effective manner. In part, as we will discuss further in this analysis, this is due to a lack of informa- tion regarding the pervasiveness of fraud in various aspects of the Medi- Cal program\u2014information critically necessary to targeting fraudulent activity. California is not alone in the fight against fraud, however. Other states and national experts have studied the problem and identified a number of best practices for addressing the provider fraud problem which, as referenced earlier, appears to be the most significant fraud problem at this time. Below we describe a model fee-for-service fraud control strat- egy, and compare DHS’s antifraud efforts with these best practices. C – 116 Health and Social Services 2004-05 Analysis Characteristics of a Model Fraud Control Strategy Professor Malcolm K. Sparrow from Harvard’s John F. Kennedy School of Government, one of the nation’s leading experts on health care fraud, has outlined a model fraud control strategy with seven main com- ponents for fee-for-service programs. We summarize these seven compo- nents below. Measure the Prevalence of Fraud. Sparrow indicates that routine and systematic measurement is the foundation of a model fraud control strat- egy. This requires: (1) the selection of a statistically valid sample of claims; (2) an audit of each claim; and (3) rigorous external validation of the claim information sufficient to identify any fraudulent claims. The important measure is the proportion of total claims paid that are fraudulent\u2014which is assumed to roughly represent the proportion of program costs lost to fraud. Allocate Resources Based Upon Measurement of the Problem. Un- der the model fraud control strategy, the amount of resources and per- sonnel dedicated to antifraud efforts should be directly related to the size of the problem as determined by measurement. Under this approach, the state would cease adding resources at the point at which the state would achieve a diminishing return on its antifraud expenditures. In the ab- sence of measurement, Sparrow indicates, antifraud resources are typi- cally based on best guess estimates of the size of the problem and the workload increases generated by fraud-detection and referral systems. Neither of these factors necessarily indicates the amount of resources warranted to address the fraud problem. Clearly Designate Who Is Responsible for Fraud Control. Sparrow indicates that one entity should have overall responsibility for and com- mand of the state’s antifraud efforts. A loosely coordinated effort between separate departments and divisions will not result in a coherent anti- fraud strategy, in his view. Without an overall coordinated approach, he indicates, the state will miss opportunities to achieve efficiencies and in some cases engage in redundant activities. If these functions are dispersed, one governmental division may be unaware that the same work is being done in another division. Take a Problem-Solving Approach. Sparrow advocates adopting a problem-solving approach to fraud control that places emphasis on fraud control rather than on functions such as investigation and detec- tion. Instead of measuring output in terms of caseload, the problem-solv- ing approach focuses resources on the most critical fraud control prob- lems. For example, if a new type of fraud scheme were discovered, the conventional approach might be to focus on detecting additional cases and prosecuting those who were caught. In contrast, under the problem- California Medical Assistance Program C – 117 Legislative Analyst’s Office solving approach, once a specific fraud scheme is identified, the fraud control team’s focus would be on developing preventative measures and controls that would make it impossible to continue the fraud scheme and to ensure that it could not be successful in the future. Under this approach, what Sparrow terms the unit of work changes from measuring fraud control in terms of caseload, to looking at the overall problem and devel- oping broad-based, permanent solutions. This more flexible approach to fighting fraud is intended to facilitate efforts by state agencies to seek out and identify new and emerging fraud schemes. Focus on Early Detection. The problem-solving approach allows for early detection and intervention before too much damage is done by fraud schemes. The objective is to discover emerging fraudulent practices so that the control operation can counteract them in their early stages of development. This proactive approach makes identifying emerging prob- lems and taking preemptive action a priority, as opposed to permitting fraud problems to become endemic and antifraud efforts to be reactive in nature. Strengthen Prepayment Controls. Sparrow indicates that an effective strategy must provide controls that help prevent the loss of state funds in payments to fraudulent providers. This involves, at a minimum, auto- matic suspension of large payments (above a predetermined amount) pending review of suspicious claims. Providers would also be monitored for sudden increases in the amount of their claims as well as for claim totals that exceed the reasonable norms for their medical specialty. Also, a small proportion of claims should routinely and randomly be selected for validation. Every Claim Should Face Risk of Review. According to Sparrow, payment systems should be established so that every claim should be at some risk of review regardless of its dollar amount, its nature, or the reputation of the claimant. When prepayment inquiries can be conducted which can show a claim to be suspicious, and can do this quickly, the fraud-control team can then suspend all claims pending from the same source and place them under intense scrutiny. This reduces the vulner- ability of payment systems to large-scale computerized billing schemes. A Report Card for the State’s Fee-for-Service Antifraud Efforts Some Components Missing. How does California’s fee-for-service Medi-Cal antifraud effort compare with the model for fraud control de- scribed above? Our analysis indicates that the state’s existing program contains some of its specific components, but that others are missing or incomplete. Our findings are summarized in Figure 9 (see next page). C – 118 Health and Social Services 2004-05 Analysis Figure 9 LAO’s Comparison of California’s Antifraud Efforts to a Model Program Implemented Under Implementation Commitment to routine systematic measurement. Resource allocation based on the seriousness of the problem.a Clear designation of responsibility for fraud control. Adoption of a problem-solving approach to fraud control. Deliberate focus on early detection of new types of fraud. Prepayment, fraud-specific controls. Some risk of review for every claim. a Contingent on implementation of routine systematic measurement. One of the key antifraud components that DHS is now implementing is an effort to measure the extent of fee-for-service provider fraud within Medi-Cal. Part of the 2003-04 expansion of antifraud activities was for funding and staff positions to conduct an error rate study in order to estimate the extent of fraudulent claims through a random sampling pro- cess. Since the enactment of the budget plan, the state has received an additional $601,000 in federal funds from CMS to participate in an effort to determine by November 2004 how much of the state’s fee-for-service provider payments for health care are not legitimate. The DHS currently does not have a system to allocate resources based on the seriousness of the problem. However, once the results of the error rate study are available, the DHS will have the information necessary to allocate resources more efficiently. In addition, the DHS currently does not have a clear designation of responsibility for all fraud control activi- ties within the department, according to a recent Bureau of State Audits (BSA) report. We are advised by the department that it is currently working to implement all the identified components of the model strategy for fraud control. However, until the ongoing study of the prevalence of fraud within the Medi-Cal Program is completed in November 2004, DHS will not have all of the data it needs to implement all components of a model program. California Medical Assistance Program C – 119 Legislative Analyst’s Office Combating Fraud in Managed Care The Model Fraud Control Strategy and Managed Care. The model fraud control strategy outlined above applies primarily to fee-for-service Medicaid programs. However, Sparrow indicates that some components of the strategy apply equally well to managed care plans. For example, the idea that fraud-control resources should be allocated in accordance with measurements that objectively determine the size and seriousness of the problem is equally as true in managed care as it is for fee-for-ser- vice medicine. Some differences in approach, however, are necessary. In traditional fee-for-service cases, Medi-Cal provider fraud investigations typically focus on the overutilization of services and fraudulent billings. Fraud in managed care typically involves the unwarranted delay of care or denial of care to beneficiaries, practices that encourage the underutilization of services. In essence, this is an intentional violation of the managed care company’s contract with the state to provide specified health services. To ensure that the managed care organizations are fulfilling their contrac- tual obligations, the DHS already has some measures in place to monitor whether managed care providers are promptly delivering appropriate care. However, the state does not collect reliable encounter data\u2014records of the health care services provided to beneficiaries that managed care plans are required to report. The data now being collected from health plans are often incomplete. Fraud can also be committed against the managed care organization by providers or beneficiaries that, as we noted earlier, can negatively af- fect the health plan’s profitability. The health plans thus have a strong incentive to control this type of fraud in order to remain profitable. How- ever, this does not mean that the health plans will necessarily be effective in controlling fraud within their own organizations, nor does it mean that they will not commit any fraud themselves. Effectively Targeting Managed Care Fraud. The CMS, the federal agency that oversees state Medicaid programs, has identified six broad areas in which fraud and abuse pose a risk for managed care systems. These are: (1) improper procurement of managed care contracts; (2) mis- leading consumers to get them to enroll in managed care programs while inappropriately disenrolling high-cost beneficiaries; (3) causing an underutilization of services by making them unduly difficult for legiti- mate beneficiaries to obtain; (4) the submission of improper claims and improper billing procedures; (5) fee-for-service type fraud by providers against health plans; and (6) embezzlement and theft. C – 120 Health and Social Services 2004-05 Analysis None of these schemes involves the submission of false claims di- rectly to the state, as is typically seen under fee-for-service fraud. Thus, many of the detection and investigative strategies and techniques devel- oped to combat fee-for-service fraud are largely ineffective against the abuses that are more typical in a managed care setting. Some Antifraud Controls in Place. There are currently some mea- sures in place to ensure that health plans fulfill their contractual obliga- tions to provide care. Medi-Cal managed care health plans are obligated to report information about the quality of the services they are providing to beneficiaries according to a commonly used Health Plan Employer Data and Information Set standards. The DHS conducts the Consumer Assessment of Health Plans Survey to assess Medi-Cal members’ satis- faction with their health coverage. In addition, most Medi-Cal managed care plans are Knox-Keene licensed and regulated by the state’s Depart- ment of Managed Health Care. More Could Be Done. As noted earlier, fraud in managed care typi- cally involves the unwarranted delay of care or denial of care to benefi- ciaries. The DHS does monitor managed care organizations through the measures described above. However, a recent BSA report recommended that the DHS complete an assessment (now under way) of how it can use encounter data to monitor managed care plan performance and identify areas where it should conduct more focused studies to investigate poten- tial plan deficiencies. Our analysis indicates that, without reliable en- counter data, DHS does not have sufficient information to adequately determine whether or not managed care providers are promptly deliver- ing appropriate care. According to federal guidelines for addressing fraud in Medicaid, accurate and complete encounter data should be used to monitor utiliza- tion of health care, access to care, and the quality of care. In addition, encounter data can be used as a management tool to monitor whether managed care companies are in compliance with their contract terms. A Systematic, Coordinated Antifraud Approach The state’s antifraud program has periodically expanded during the past four years in reaction to growing concern about the level of fraud in the Medi-Cal Program. A recent examination by the BSA concluded that antifraud activities are not adequately coordinated within DHS. As de- scribed above, antifraud functions are spread across several units at DHS and require coordination with other state, local, and federal agencies. Notably, the DHS was unable to provide an organization chart identify- ing specific positions dedicated to antifraud activities within various DHS California Medical Assistance Program C – 121 Legislative Analyst’s Office units. Thus, we agree with the BSA report and believe the lack of coordi- nation is partly due to the rapid expansion of the program. Given the size of the program and the potential magnitude of the fraud problem, the state should consider a systematic, coordinated, and long-term approach to curtailing Medi-Cal fraud in keeping with legislative intent and the recommendations of national experts and federal agencies. Strategic Planning Necessary. The approach we propose would be in accord with CMS guidelines, which suggest that each state Medicaid agency should identify all of the state’s fraud and abuse prevention and detection activities, its key partners and stakeholders, and their respec- tive roles and responsibilities. The CMS guidelines indicate that antifraud measures should apply to both fee-for-service and managed care cover- age; should include clearly defined, measurable goals and outcomes for antifraud activities; and should include systems to measure and assess areas of vulnerability to fraud and ways to address them. These CMS guidelines are intended to ensure that the state’s antifraud efforts are comprehensive, coordinated, and that any future increase in funding and positions are at appropriate levels. The model fraud control strategy we described above is aligned with CMS guidelines. Savings as a Measurement of Effectiveness. The DHS currently mea- sures the effectiveness of its antifraud efforts in terms of savings and cost avoidances. Effective antifraud efforts do result in savings and an avoid- ance of costs. However, the recent BSA audit found the DHS estimates are unreliable and, in some cases, potentially overstate actual savings. Instead of measuring the effect of antifraud efforts just in terms of savings, the effectiveness of antifraud activities should also be measured on an ongoing basis against the overall extent of fraud. Specifically, the performance of a fraud control unit could be mea- sured by its success in lowering or suppressing the level of fraudulent claims the system pays, a factor which could be measured periodically. A target level for prevalence of fraud within a particular part of the Medi- Cal Program could be set, and lowered over time. Fight Against Fraud Requires Realistic Expectations. Increasing re- sources to combat Medi-Cal fraud will not usually produce overnight results, but is more likely to pay off in the long run. For example, the expansion of 161.5 antifraud positions approved by the Legislature last year is projected to generate $20 million in General Fund savings in 2003-04, but is expected to provide more than triple that level of state savings\u2014about $75 million\u2014in 2004-05. Savings can take time to achieve because of the sometimes lengthy process involved in hiring additional staff, training the staff, and placing C – 122 Health and Social Services 2004-05 Analysis them in the field where they can begin to have an effect on fraud. For this reason, expansion of antifraud activities does not tend to have a signifi- cant immediate impact, and expansions should be carefully planned and considered based on their long-term impact on the Medi-Cal Program. Achieving several hundreds of millions of dollars in additional anti- fraud savings annually from such efforts may be an appropriate long- term goal for the Medi-Cal Program. But it is highly unlikely that such an outcome could be achieved as a short-term solution to the state’s current fiscal difficulties. Later in this analysis, we make recommendations as to how the state could improve the overall effectiveness of its efforts by taking a systematic and coordinated long-term approach to addressing the fraud problem. The Governor’s 2004-05 Antifraud Proposal Nine New Antifraud Initiatives Proposed. The Governor’s 2004-05 budget plan includes nine initiatives to combat Medi-Cal fraud. Three of these would provide an increase in resources for DHS, either through shifts of personnel from other departments, adding staff and funding, or the conversion of limited-term positions that would otherwise expire to permanent status. The proposals are as follows: Under the budget plan, 15 limited-term positions currently as- signed to provider fraud prevention activities would be converted to permanent positions. This would not require an increase in funding above current-year expenditures. Absent this change, the positions would expire and state expenditures for these positions would decrease by $464,000. Six auditor positions at the State Controller’s Office (SCO) that currently perform Medi-Cal antifraud functions would be elimi- nated, and 20 more would be transferred from SCO to DHS. The budget plan assumes that fewer auditors would be required to handle the same workload because DHS would no longer have to expend resources for the review of work by an outside state agency. The budget plan would add 41 auditors to the DHS staff to ex- amine the claims of hospitals serving Medi-Cal beneficiaries at an estimated $2.4 million cost to the General Fund. The DHS es- timates that these positions will generate net General Fund sav- ings of $1.5 million in 2004-05 in excess of the cost of the posi- tions and $12.9 million in net General Fund savings in 2005-06. California Medical Assistance Program C – 123 Legislative Analyst’s Office Five additional antifraud initiatives proposed in the 2004-05 spend- ing plan are to be accomplished within DHS’ existing resources. These include: Enhancing Medi-Cal estate recoveries by closing a loophole used by middle income persons to prevent the state from recovering assets from their estates to help offset the cost of their medical care. Savings from this action are unknown. Contacting Medi-Cal providers with suspicious billing patterns. This effort is projected to result in decreased billings from those providers for a savings of $2.5 million to the General Fund in 2004-05. Confirming with beneficiaries through mail or on-site visits that they actually receive services and products that Medi-Cal has been billed. This activity is projected to result in savings of $1 mil- lion General Fund in the budget year. Restricting billing for certain neurological tests to specialists who have received specialized training to perform these tests. This is expected to result in $625,000 General Fund savings in 2004-05. Delay checkwrites to Medi-Cal providers by one week to allow DHS additional time to investigate potentially fraudulent claims before checks are issued. This change is expected to result in one- time General Fund savings of $144 million in 2004-05 due to the shift of some Medi-Cal payments to 2005-06. The additional sav- ings from a reduction in fraud have not been identified. In addition to these antifraud efforts that would be implemented during the budget year, the Governor’s budget plan proposes to imple- ment counterfeit-proof prescription pads in 2005-06 to reduce forgery and altering of prescriptions. The significant lead-time to implement this change means that it is projected to result in no savings in 2004-05, but savings to the General Fund in 2005-06 are expected to range between $7 million and $14 million. Hospital Auditing Positions Appear to Be Premature. We believe all but one of the Governor’s antifraud proposals warrant approval by the Legislature at this time. The exception is the proposal to add 41 auditors to the DHS staff in 2004-05 to conduct additional reviews of hospital claims. As noted above, the Legislature authorized a total of 161.5 additional positions for antifraud activities for 2003-04. At the time this analysis was prepared, we were advised that DHS was still recruiting and filling many of these positions. As a result, we believe it would be premature to C – 124 Health and Social Services 2004-05 Analysis approve further expansion of the DHS audits and investigations unit before the department has fully implemented the sizable expansion ap- proved for the prior year and demonstrated that it can achieve the sav- ings that were to have resulted from these additional positions. This fur- ther expansion should also wait until the error rate study is completed that will shed light on which types of antifraud activities warrant a greater focus. Analyst’s Recommendations Our analysis has identified areas in which the Department of Health Services (DHS) could improve the overall effectiveness of its antifraud efforts by taking a systematic and coordinated long-term approach to addressing the fraud problem. Based on these principles we recommend: (1) denial of the Governor’s proposal to increase staffing for audits of hospitals; (2) that DHS report at budget hearings regarding how encounter data could be used to prevent managed care fraud; and (3) increased legislative oversight of DHS antifraud efforts through additional reporting requirements. Specifically, we recommend the following actions: Governor’s 2004-05 Antifraud Initiatives. We recommend that the Legislature deny the Governor’s proposal to expand hospital audits at this time. Any significant increase in DHS staffing to expand the audits and investigations unit, in our view, should await the outcome of the error rate study which will allow the DHS to identify specific fraud prob- lems and target resources in the most cost-effective manner. At that time, the Legislature will have the additional data it will need to determine whether further expansion of the state’s antifraud program is justified or whether resources already provided for the overall antifraud effort should be redirected within the program to expand audits of hospitals. We recommend approval of all of the Governor’s other budget pro- posals. Improved Encounter Data Could Help Reduce Fraud in Managed Care. We recommend that DHS be directed to report at budget hearings regarding how it could improve the accuracy and completeness of en- counter data from managed care plans, and how that data could be used to monitor the performance of managed care and prevent fraud. Improve Legislative Oversight to Ensure Strategic Planning. We rec- ommend that the DHS be directed to report to the Legislature by January 2005 regarding: (1) the results of the error rate study, (2) its proposed fraud reduction targets established in response to the data from the error rate California Medical Assistance Program C – 125 Legislative Analyst’s Office study, (3) the proposed timeframe for achieving these targets, (4) the cost- effectiveness of ongoing antifraud activities, and (5) DHS’ progress to- wards implementing the components of a model fraud control program. Adoption of the following supplemental report language is consis- tent with this recommendation: The Department of Health Services (DHS), shall report to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees for both houses of the Legislature, information regarding the state’s Medi-Cal antifraud program. The DHS shall include, but not be limited to (a) the results of the error rate\/payment accuracy measurement study, (b) fraud reduction target(s) that have been established based on the data from the error rate\/payment accuracy study, (c) the time frame for achieving the target(s), (d) the cost- effectiveness of antifraud activities, and (e) progress towards implementing the components of a model fraud control program. The department’s findings shall be reported to the Joint Legislative Budget Committee and the fiscal and policy committees of both houses of the Legislature by January 1, 2005. OTHER BUDGET AND POLICY ISSUES Additional Oversight Needed for Data Systems Contract A Department of Finance (DOF) audit has raised significant concerns about how the Department of Health Services (DHS) is managing a more than $230 million a year contract for Medi-Cal claims processing activities. Although DOF’s audit unit presented recommendations to address the weaknesses identified by its review, our analysis indicates that there has been insufficient follow-up efforts to ensure that DHS implements the necessary changes. We recommend that the Legislature take steps to ensure that DHS is held accountable and that the problems identified in the audit are fully addressed. Background. The DHS contracts with a private firm, EDS, for claims processing services and other Medi-Cal Program functions related to the management of the Medi-Cal Program. An audit was conducted by the Office of State Audits and Evaluations (OSAE), a DOF auditing unit, last year because of concerns about the growing scope, size, complexity, and cost of the California Medicare\/Medi-Cal Information Systems (CA- MMIS), the information technology system maintained and operated by EDS to carry out these functions. State payments to EDS have risen about 23 percent a year during each of the last five years. Total payments to EDS are expected to be $232 mil- lion ($69 million General Fund) in 2004-05. C – 126 Health and Social Services 2004-05 Analysis OSAE Audit Findings. An audit completed in June 2003 by OSAE raised significant concerns with regard to DHS’ management of the EDS contract. The audit found weaknesses in DHS’ oversight of the contract that, in our view, raise a concern that the state could potentially overpay the contractor for the services it provides. Some of the key audit findings were as follows: State IT Processes Sidestepped. The DHS incorporated informa- tion technology (IT) systems with little or no connection to the Medi-Cal Program into EDS’ Medi-Cal contract to sidestep nor- mal IT development and procurement procedures. By adding these projects into the EDS contract, DHS sidestepped the prepa- ration of Feasibility Study Reports which would have helped to determine if DHS was choosing the most cost-effective alterna- tive to develop these systems. In doing so, DHS also circumvented the competitive procurement process without explicitly obtain- ing an exemption, making it difficult to ensure that the state re- ceived the best price and best value for the development of these systems. Expenditure Information Not Provided. As changes to CA-MMIS were authorized by DHS, DOF budget staff were not provided timely or adequate information about the expenditures being made for these modifications. The DHS did not separately track the cost to the state of the specific changes that were being made to the CA-MMIS system. Thus, there was no way for the state to determine whether these modifications were cost-effective. Lack of Oversight. No internal audit function existed within DHS to ensure that EDS is complying with the terms of the contract and that CA-MMIS is operating as intended. No Payment Resolution Process. In the event that EDS disagrees with the amount paid to it by the state for its services, there were no procedures in place to resolve disputes with the contractor. DHS Has Taken Some Steps, But More Are Needed. The DHS submit- ted to OSAE its response to the audit in December 2003. The response indicates that DHS is in agreement with the findings and recommenda- tions, and identifies some steps that it will take to comply with the audit’s recommendations. However, in respect to many of the recommendations, DHS generally notes its agreement but does not indicate what specific steps it will take to implement the recommendation. At the time our analysis was prepared, OSAE had not required DHS to submit a corrective action plan or reports about its progress towards implementing the recommendations, an approach we understand is cus- California Medical Assistance Program C – 127 Legislative Analyst’s Office tomary for most OSAE audits. The DOF has indicated that it will instead monitor DHS’ management of the contract through the state budget pro- cess. The DHS also has indicated that it does not intend to develop a corrective action plan on its own. We are concerned that this approach will prove insufficient to ensure that DHS corrects the problems identified in the audit and is held ac- countable for achieving progress in these efforts. For example, absent the preparation of a corrective action plan, DHS will lack a standard man- agement tool to guide its audit compliance activities and to ensure that the department’s strategy to implement the recommendations has been thoughtfully developed and therefore more likely to be successful. In addition, the lack of such a plan or any regular reporting on audit com- pliance activities we believe prevents OSAE and DOF budget staff from being able to effectively monitor DHS’ progress toward implementation of the OSAE recommendations. Analyst’s Recommendation. The OSAE audit indicated that, absent corrective action, the state is at risk for overpaying EDS for Medi-Cal Program activities. Accordingly, we recommend that the Legislature adopt supplemental report language directing DHS to develop and submit a corrective action plan to OSAE and the Legislature, and submit reports to OSAE and the Legislature every six months, beginning July 1, 2004, regarding its progress towards implementation of the audit recommen- dations. In addition, we recommend that the Legislature request BSA to conduct a follow-up audit by July 2005 to assess DHS’ progress towards improving the management of its contract with EDS. The following supplemental report language is consistent with this recommendation: It is the intent of the Legislature that the Department of Health Services (DHS) develop and submit a corrective action plan to the Department of Finance’s Office of State Audits and Evaluations and to the Legislature that identifies the actions it plans to take toward implementing the recommendation described in the report entitled, Final Audit Report\u2014 Examination of the Department of Health Services Fiscal Intermediary Contract With Electronic Data Systems for Medi-Cal Claims Processing. It is also the intent of the Legislature that on July 1, 2004, January 1 and July 1, 2005, that DHS submit semiannual reports to the Office of State Audits and Evaluations and to the Legislature regarding its progress towards implementation of the audit recommendations. The legislative reports shall be provided in writing to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees of both houses of the Legislature. C – 128 Health and Social Services 2004-05 Analysis Contract to Monitor Los Angeles County Health Care System Terminated Los Angeles County has been receiving additional funding from the state and federal government under a federal waiver project to help financially stabilize the county’s health care system. The Legislature provided funding to the Department of Health Services (DHS) for an independent contractor to monitor the project. However, this contract was recently terminated. We recommend that the Legislature take steps to ensure that DHS will continue to adequately monitor the project. Background. At the start of the 1995-96 fiscal year, Los Angeles County faced a $655 million budget deficit in health services operations and the potential collapse of its medical safety net programs. Basically, these programs provided health care services to low-income individuals who were also uninsured. State, federal, and county officials collaborated to develop a five-year plan to address the crisis by financially stabilizing the county health system and, over time, moving it away from expensive hospital-based services toward community-based primary care and pre- ventative services. The federal government approved the plans as a Med- icaid demonstration project that was to end during 1999-00. The project was renewed for another five years for the period of 2000-01 through 2004-05 and included $900 million in federal funds that would be phased out over the five-year extension period, $150 million in state funds, and $400 million in county funds. According to the county, it has met many of the reform objectives. However, without a further extension of the demonstration project or alternative revenues, the county anticipates its public health care system will face future budget shortfalls. The county estimates its health ser- vices budget will have a positive balance in the current year through 2005-06, but will incur shortfalls beginning in 2006-07 that will grow to $655 million by the end of 2007-08. State Monitoring Effort Reduced. Unlike the previous waiver, the most recent waiver required the state to provide a General Fund contri- bution estimated to be about $30 million annually. Given the state’s fi- nancial commitment and vested interest in the county’s success in estab- lishing a more cost-effective and efficient health care system, DHS com- mitted to hiring an independent contractor to measure Los Angeles County’s compliance with the waiver goals. To date, the contractor has submitted two draft annual reports to DHS for fiscal years 2000-01 and 2001-02. It is anticipated that these two re- ports will be finalized within the next 60 days, at which time they will be made available to the Legislature. In addition, DHS expects to receive California Medical Assistance Program C – 129 Legislative Analyst’s Office one additional status report. However, no further activities by the con- tractor will occur, we have been advised, because DHS has terminated the contract as of November 2003 as part of an overall response to a re- quirement in Section 4.10 of the 2003-04 Budget Act for reductions in state program operations. Lack of Oversight Could Place State at Risk. The threat of growing deficits for the Los Angeles County health care system beginning in 2006-07, and the anticipated phase-out of hundreds of millions of dollars in annual federal subsidies puts the state at risk of being called upon to provide substantial financial assistance to the county after the waiver program expires. The DHS has indicated that, despite its termination of the monitoring contract, it intends to use its own staff to conduct limited monitoring of the county’s demonstration project activities. The DHS in- dicates that this will involve reviewing documents, participating in con- ference calls about the project, and attending oversight committee meet- ings. However, it is not clear that this level of oversight will be adequate or as rigorous as the Legislature had intended when it approved funding for the contractor. For example, the contractor had been expected to moni- tor the county’s procedures for ensuring that health care providers have adequate training and qualifications. It does not appear that DHS will perform these more detailed monitoring activities. Analyst’s Recommendation. It appears likely that the termination of the contract will reduce the state’s oversight of the Los Angeles County project. Given the state’s major stake in the county’s success in transitioning to a financial stable health care system, we recommend that the Legislature take steps to ensure that DHS continues to adequately monitor these efforts. Specifically, we recommend that DHS be directed to report at budget hearings on the findings of the final monitoring re- ports prepared by the contractor. The Legislature should also direct DHS to provide more detailed information on the specific monitoring activi- ties it will carry out during the remainder of the project to help ensure that the goals of the restructuring effort are met. C – 130 Health and Social Services 2004-05 Analysis PUBLIC HEALTH The Department of Health Services (DHS) delivers a broad range of public health programs. Some of these programs complement and sup- port the activities of local health agencies in controlling environmental hazards, preventing and controlling disease, and providing health ser- vices to populations who have special needs. Other programs are solely state-operated programs such as those that license health facilities. The Governor’s budget proposes $2.6 billion (all funds) for public health programs in the budget year, a 10 percent ($293 million) decrease from the previous year. The budget proposes $485 million from the Gen- eral Fund in the budget year, a 4 percent ($22.6 million) decrease from the current year. This decrease is largely due to the administration’s pro- posals that would cap enrollment and reduce provider rates and expen- ditures for various public health programs. BUDGET PROPOSALS The Governor’s proposed budget for public health programs includes the following significant changes. Community Challenge Grant Program (CCG): Elimination. The CCG provides grants to community-based organizations for programs intended to reduce the number of teenage and unwed pregnancies and to promote responsible parenting. In the past, federal Temporary Assistance for Needy Families funds to support CCG have been included within the budget of the Department of Social Services (DSS) and subsequently transferred to DHS for the operation of the program. The proposed 2004-05 DHS bud- get, however, does not include the $20 million in federal funding to con- tinue the CCG. Child Health and Disability Prevention Program (CHDP): Gateway Implementation. The CHDP provides preventive health, vision, and den- tal screens to children and adolescents in families with incomes at or be- low 200 percent of the Federal Poverty Level (FPL). The Governor’s bud- Public Health C – 131 Legislative Analyst’s Office get proposes $4.2 million ($3.9 million General Fund) in total expendi- tures for CHDP. This is a 76 percent decrease in all funds and a 48 per- cent decrease in General Fund expenditures from the previous year. This dramatic reduction is primarily due to the implementation of the CHDP gateway program. Later, in this section of the Analysis, we provide more details regarding this proposal. California Children’s Services (CCS): Enrollment Cap and Rate Re- duction. The CCS program provides diagnostic and treatment services, medical case management, and medical and occupational therapy ser- vices to eligible children and young adults under 21 years of age. The Governor’s budget includes $142 million ($67 million from the General Fund) in funding for the CCS. This reflects a 3 percent decrease in all funds and a 10 percent decrease in General Fund expenditures compared to the previous year. The budget plan includes two measures intended to decrease expen- ditures in the CCS program. The administration has proposed to cap en- rollment in the CCS program for CCS-only children\u2014those who are not eligible for benefits under Medi-Cal or the Healthy Families Pro- gram\u2014at the January 2004 caseload level. The enrollment cap is projected to total 37,600 children and result in approximately $1.9 million in state savings. The administration projects that on average the enrollment cap would result in a monthly waiting list of 1,256 children in 2004-05. Cli- ents on the CCS waiting list would be served on a first-come, first-served basis once the cap has been reached and existing clients leave the pro- gram. The administration has also proposed comparable caseload limits for other health and social services programs. We provide a more de- tailed analysis of enrollment caps as an approach to reducing state costs in the Crosscutting Issues section of this chapter of the Analysis. Additionally, the administration has proposed a provider rate reduc- tion of 10 percent, which in addition to the previous 5 percent provider rate reduction included in the 2003-04 Budget Act would result in ap- proximately $5.4 million in savings ($2.7 million from the General Fund). Genetically Handicapped Persons Program (GHPP): Enrollment Cap. The GHPP provides health coverage for Californians 21 years of age and older who have certain specific genetic diseases, including cystic fibro- sis, hemophilia, and certain neurological and metabolic diseases. The GHPP also serves children under the age of 21 with GHPP-eligible medi- cal conditions who are not financially eligible for CCS. Although there are no maximum income eligibility requirements, families with incomes exceeding 200 percent of the FPL pay program fees based upon their fam- ily size and income. C – 132 Health and Social Services 2004-05 Analysis The Governor’s proposal provides $49.5 million for GHPP ($49.3 mil- lion from the General Fund) in 2004-2005, which reflects a 13 percent decrease compared to the previous year. As in the CCS program, the ad- ministration has proposed to cap enrollment for GHPP-only clients and reduce provider rates by 10 percent in GHPP. The proposal would cap enrollment at the January 2004 caseload level (estimated to be 842 cli- ents) and is projected to result in approximately $194,000 in savings. The administration projects that on average the enrollment cap would result in a monthly waiting list of three clients in 2004-05. Additionally, the Governor’s budget includes the implementation of a GHPP copayment structure. Under this proposal, the copayment would be deducted from the amount that the state pays the provider for each service. The pro- vider in turn would collect the copayment from the patient. Clients would be required to pay $10 per service providing approximately $576,000 in savings to the General Fund. AIDS Drug Assistance Program (ADAP): Enrollment Cap. The ADAP is a drug subsidy program for persons with HIV with incomes up to $50,000 annually who have no health insurance coverage for prescrip- tion drugs and are not eligible for Medi-Cal. Currently, clients with in- comes up to 400 percent of the FPL (about $36,000 for a single childless adult) pay no copayment or premium, while individuals with incomes above that level pay a sliding scale copayment that increases with a client’s income level. The budget proposes about $207 million for ADAP ($64 million from the General Fund) in 2004-05. While this would provide a $8.3 million increase in overall funding for the program over the previous year, Gen- eral Fund support for the program would decrease by $550,000. The spending plan would cap enrollment of ADAP clients at about 24,000 individuals beginning January 2004. Individuals applying for ADAP benefits once the cap has been reached would be placed on a wait- ing list and served on a first-come, first-served basis as existing clients left the program. The administration estimates that the waiting list would total 1,392 by the end of the budget year. The administration estimates that the cap would result in savings totaling $550,000 in the budget year. California Nutrition Network for Healthy, Active Families: Increased Federal Funds. The California Nutrition Network for Healthy, Active Families is a broad-based marketing campaign that focuses on encourag- ing low-income Californians to adopt healthy eating and physical activ- ity patterns. Currently, $15.6 million is provided for the support of the network, with this funding provided on a one-time basis. The Governor’s budget Public Health C – 133 Legislative Analyst’s Office proposal would permanently increase the funding level by $39.7 million with federal funds awarded by the U.S. Department of Agriculture to the DSS. Expansion of Federally Funded Bioterrorism Efforts. In response to the September 11, 2001 terrorist attacks and a heightened threat of bioterrorism, the federal government authorized funding through the Centers for Disease Control and Prevention and the Health Resources and Services Administration to support state and local activities that would strengthen states’ public health systems and improve the coordi- nation of emergency response in the event of bioterrorist acts or outbreaks of infectious disease. The Governor’s budget plan includes an additional $66 million in the current year and $77 million in the budget year in federal funds to complete a number of threat assessment, planning, and preparedness activities at the state and local levels. About $29 million of the additional 2004-05 funds would be appropriated for state operations and $47 mil- lion would be distributed as local assistance to counties and other local government entities. Proposition 99: Declining Resources. The Tobacco Tax and Health Protection Act (Proposition 99, enacted by voter initiative in 1988) as- sessed a $0.25 per pack tax on cigarette products that is allocated for speci- fied purposes. These include various tobacco education and prevention efforts, tobacco-related disease research, environmental protection and recreational resource programs, and health care services for low-income uninsured Californians. The success of anti-smoking initiatives, includ- ing tax increases on cigarette purchases, has resulted in a 44 percent de- cline in Proposition 99 revenues\u2014from the $573 million received in 1989-90 to an estimated $321 million in 2004-05. The Governor’s proposed budget would align 2003-04 and 2004-05 expenditures with this anticipated revenue. For 2003-04, the administra- tion has proposed reductions totaling $4.9 million in the anti-tobacco media campaign ($2.2 million), tobacco cessation competitive grants ($1 million), and the California Healthcare for Indigents Program known as CHIP ($1.7 million). The Governor’s proposal for 2004-05 includes a total reduction of about $23 million affecting the anti-tobacco media cam- paign ($3.7 million), tobacco cessation competitive grants ($3.7 million), certain local contracts for tobacco control activities ($3.7 million), CHIP ($5.9 million), and the Breast Cancer Early Detection Program ($6.1 mil- lion). County Medical Services Program (CMSP): General Fund Suspen- sion. The CMSP provides medical and dental care to low-income adults between 21 and 64 years of age who are not eligible for the state’s Medi- Cal Program and reside in one of 34 participating small California coun- C – 134 Health and Social Services 2004-05 Analysis ties. Funds from the 34 counties are pooled to provide services to CMSP clients. The CMSP governing board sets eligibility requirements, benefit levels, and provider reimbursement rates, but contracts with DHS to ad- minister a program offering uniform benefits and to provide claims pro- cessing functions. Funding for CMSP includes realignment revenues (from the 1991-92 realignment), Proposition 99 revenues, county funds, and hospital settle- ments (audit recoveries for overpayments to hospitals). Until 1999-00, the state General Fund was also a fund source, with the amount capped at $20.2 million. The General Fund appropriation for CMSP was sus- pended in 1999-00, and in subsequent fiscal years. The Governor’s bud- get proposes legislation to again suspend in 2004-05 the state’s General Fund appropriation of $20.2 million to CMSP. Cancer Treatment and Research Programs: General Fund Reductions. The budget plan reflects a reduction of $4.3 million in General Fund support for a prostate cancer treatment program, as well as the elimination of the remaining $3.1 million for cancer research activities. Both of these reductions were accomplished in response to requirements in Control Section 4.10 of the 2003-04 Budget Act. Repeal of Prior Legislation. The administration indicated that it will propose a repeal of various statutory requirements for DHS activities for which no new funding would be provided in the 2004-05 budget. The legislation that would be repealed include the following measures: Stem Cell Guidelines. This statute, Chapter 506, Statutes of 2003 (SB 322, Ortiz), requires DHS, on or before January 1, 2005, to develop guidelines for stem cell research and would require the Director of Health Services to establish a Human Stem Cell Re- search Advisory Committee, comprised of specified members, for purposes of developing these guidelines. Donor Consent Forms. This statute, Chapter 464, Statutes of 2003 (SB 617, Speier), requires tissue banks to revise existing informed consent forms and procedures to advise donors that tissue banks work with both nonprofit and for-profit tissue processors and dis- tributors, and that the donated tissue may be used for cosmetic or reconstructive surgery purposes. Additionally, the statute requires DHS to report to the Legislature by January 1, 2004, on the status of regulations governing the administration and enforcement of new regulations pertaining to tissue donor consent forms. HIV Testing Information. This statute, Chapter 749, Statutes of 2003 (AB 1676, Dutra), requires DHS, in consultation with other Public Health C – 135 Legislative Analyst’s Office specified organizations, to develop, by December 31, 2004, cul- turally sensitive informational material concerning HIV testing to assist medical care providers. The statute would require that the materials provide information on available referral and con- sultation resources of experts in prenatal HIV treatment. Tobacco Sale Licensure. This statute, Chapter 890, Statutes of 2003 (AB 71, Horton), provides for the licensure by the State Board of Equalization of manufacturers, distributors, wholesalers, import- ers, and retailers of cigarette or tobacco products that are engaged in business in California. The statute would require DHS to pro- vide training on tobacco control laws to noncompliant retailers. Multiyear Spending Authority. Budget trailer bill language adopted last year provided DHS the authority to use appropria- tions from Proposition 99 over multiple fiscal years. Repeal of these provisions would mean that unspent allocations of Propo- sition 99 funding would become available for other programs at the end of the fiscal year. Local Government Mandates. These state mandates for local government require that coroners notify local health officers within 24 hours of a Sudden Infant Death Syndrome (SIDS) death, (Chapter 453, Statutes of 1974 [AB 409, Crown]), and that local health officers immediately contact the family of a child who has died of SIDS to provide follow-up services, (Chapter 268, Stat- utes of 1991 [AB 362, Boatwright]). Both of these mandates were suspended in 2003-04. BREAST AND CERVICAL CANCER TREATMENT PROGRAM Transfer of Eligibility Work to Counties Would Be More Expensive The 2004-05 budget plan proposes to transfer eligibility determinations for the Breast and Cervical Cancer Treatment Program to the counties effective January 1, 2005, and to increase funding for the program to address a backlog in processing applications for these benefits. We recommend that the Legislature reject the administration’s proposal and adopt a less costly approach that would maintain this function within the Department of Health Services. Background. The 2001-02 Budget Act and related legislation estab- lished two new state programs for individuals who have a diagnosis of C – 136 Health and Social Services 2004-05 Analysis breast or cervical cancer. The two programs together are known as the Breast and Cervical Cancer Treatment Program (BCCTP). The first new program expanded Medi-Cal eligibility to specified women who were previously ineligible for these benefits. Specifically, full-scope services became available for women under age 65 with no other health coverage, who are in need of treatment for breast and cervi- cal cancer, and whose incomes are below 200 percent of the federal pov- erty level (FPL). Federal matching funds equal to about 66 percent of the cost of these services are used to match state funds. The second step was the expansion of existing state programs to pro- vide a comparable state-only breast and cervical cancer treatment pro- gram for individuals who did not qualify for Medi-Cal. The state-only program provides only cancer treatment and cancer-related services that are limited to 18 months of coverage for breast cancer treatment and 24 months of coverage for cervical cancer treatment. Women and men of any age including undocumented persons who may or may not have another source of health coverage, and whose incomes are below 200 per- cent of the FPL, are eligible for the state-only program. The new Medi-Cal program is unusual in that most applicants are granted immediate, temporary Medi-Cal eligibility from the doctor’s office through an internet-based application and eligibility determination process admin- istered by Department of Health Services (DHS) staff. (The same process is also followed for the state-only program.) In contrast, most eligibility deter- minations for Medi-Cal are administered by the counties with funding pro- vided by the state. The Governor’s 2004-05 Budget Proposal. The budget plan proposes to transfer BCCTP eligibility determinations for both components of the pro- gram to the counties effective January 1, 2005, because the caseload for both is much higher than originally anticipated\u2014almost triple the estimate ini- tially used to determine the staffing needs. As a result, there are now insuffi- cient state staff to complete eligibility determinations on time. As we noted earlier, some BCCTP applicants were supposed to re- ceive only temporary admission (two months) to Medi-Cal, with a sub- sequent determination during that period to assess whether they were eligible for ongoing Medi-Cal benefits. However, some applicants have remained in this temporary status for more than a year, even though they may not be eligible to do so. In addition, ongoing regular redetermi- nations of eligibility are not being completed for these Medi-Cal benefi- ciaries as required by federal law. The state is at risk of disallowances of claims for federal Medicaid reimbursements because it is not complying with these and other federal eligibility rules. Public Health C – 137 Legislative Analyst’s Office The DHS currently has 12 staff dedicated to completing BCCTP eligibil- ity determinations and redeterminations at a cost of about $1 million ($480,000 General Fund). The administration proposal is to eliminate one of these po- sitions beginning January 2005 and to strike all but two of the remaining positions by June 30, 2005. The budget plan estimates that this would result in General Fund savings of $20,000 in the budget year, increasing signifi- cantly to about $800,000 ($400,000 General Fund) in 2005-06. The administration further proposes to increase Medi-Cal program spending for county eligibility activities by $2.4 million ($1.2 million General Fund) in 2004-05 and by $5.4 million ($2.7 million General Fund) in 2005-06 due to the shift to counties of the BCCTP workload. The state would continue to operate and financially support the Internet-based application system, so that signed applications for BCCTP benefits could be forwarded to counties for completion of the eligibility process. Governor’s Proposal Increases State Costs More Than the Addition of State Staff. The DHS indicates that if eligibility determinations are not shifted to the counties, it would need at least 11 new positions to manage the BCCTP workload at an estimated cost of $460,000 in 2004-05 and $920,000 in 2005-06. Combined with the annual cost of the existing staff, this would bring the total cost to DHS for administering BCCTP eligibil- ity to $1.5 million ($710,000 General Fund) in 2004-05 and about $1.9 mil- lion ($940,000 General Fund) in 2005-06. The Governor’s proposal, however, to shift most eligibility process- ing activities for BCCTP to the counties would be more expensive. The total cost (including the retention of some DHS activities) would be $3.3 million ($1.7 million General Fund) in 2004-05 and $5.6 million ($2.8 million General Fund) in 2003-04. A comparison of the cost of the two alternatives is shown in Figure 1 (see next page). The Governor’s proposal would cost nearly $1.9 million more (about $950,000 General Fund) in 2004-05 and about $3.6 million more ($1.8 million General Fund) in 2005-06 than adding DHS staff for the same purpose. Trend in Caseload Growth Is Uncertain. The DHS’ estimates of the additional staff persons it will need to manage the BCCTP workload could be either too high or too low. The estimate of the Medi-Cal and state-only program caseload of 6,400, as of June 2003, is at risk of being in error because of the present backlog of eligibility determinations and redeterminations. Once this backlog is resolved, the BCCTP caseload numbers could change abruptly, as some individuals were granted ongoing eligibility in Medi-Cal and others were removed from the program because they were determined to C – 138 Health and Social Services 2004-05 Analysis Figure 1 Retaining State Eligibility Process for BCCTP Costs Less Than Shift to Counties (In Thousands) 2004-05 2005-06 Eligibility Process General Fund Total Funds General Fund Total Funds State Staffa Current staff (12 positions) $480 $1,000 $480 $1,000 Additional staff (11 positions) 230 460 460 920 Total costs $710 $1,460 $940 $1,920 Governor’s Proposalb $1,660 $3,310 $2,780 $5,560 Net Savings From Keeping Eligibility Work at DHS -$950 -$1,850 -$1,840 -$3,640 a Current process. b Shift eligibility process to the counties. For comparison purposes, includes cost of staff that would be retained by the state after the shift. be ineligible. The caseload growth trend is also at a significant risk of projection error because the program is new. As we noted, the demand for services so far has been much higher than originally anticipated. Analyst’s Recommendation. We recommend that the Legislature not adopt the Governor’s proposal to shift BCCTP eligibility determinations to the counties because, as we have discussed above, this approach is more costly than the alternative of increasing DHS staff for this same purpose. Accordingly, we recommend that the proposed increase in the Medi-Cal budget for county eligibility activities be deleted. Because the existing DHS staff is clearly insufficient to handle the BCCTP workload, we recommend that the Legislature instead approve 11 additional staff. This would require an augmentation to the DHS operations’ budget of $460,000 ($230,000 General Fund) for 2004-05. We estimate that the adoption of our proposal would result in net savings to the state General Fund of $950,000 ($1.9 million all funds) in 2004-05 in comparison to the Governor’s budget proposal. We further propose that any new DHS positions for BCCTP be estab- lished as two-year limited-term positions. During the next two years, DHS should be able to complete the processing of the backlog of BCCTP eligi- Public Health C – 139 Legislative Analyst’s Office bility determinations and redeterminations and to more clearly assess the caseload growth trend for the program. At that point, DHS and the Legislature would be in a better position to assess whether more or fewer DHS staff are needed to administer BCCTP. CHILD HEALTH AND DISABILITY PREVENTION PROGRAM Background Medical Screens and Immunizations Provided. The state CHDP pro- gram was established by Chapter 1069, Statutes of 1973 (AB 2068, Brown), to provide preventive health, vision, and dental screens to children and adolescents in low-income families who do not qualify for Medi-Cal. The CHDP program reimburses providers for completing health screens and immunizations for children and youth less than 19 years of age with fam- ily incomes at or below 200 percent of the FPL. The program is jointly administered by the state DHS and county health departments. The DHS provides statewide oversight of the pro- gram, including making payments to providers. The county health de- partments develop local plans to recruit CHDP providers, ensure CHDP provider outreach and education, and handle client referrals and follow- up. State Implements CHDP Gateway. Almost all children receiving CHDP services are eligible to enroll either in the Medi-Cal or Healthy Families programs, unless they are ineligible for these programs, most often because they are undocumented immigrants. The 2002-03 Budget Act provided the initial funding and staffing to DHS to improve CHDP’s role as a gateway to move children into Medi-Cal and Healthy Fami- lies. This was done by establishing an Internet-based system to more sys- tematically identify and bill the Medi-Cal and Healthy Families programs for services to children who are already enrolled in those programs. The gateway program also preenrolls in Medi-Cal any child who is not already enrolled in Medi-Cal or Healthy Families. For preenrolled children, the costs of the CHDP screen as well as the medical services they receive are partially paid through the Medi-Cal Program using ei- ther federal Medicaid or State Children’s Health Insurance Program funds. By contrast, if the CHDP health screens and immunizations are paid for under CHDP, the state pays for almost all of these costs. C – 140 Health and Social Services 2004-05 Analysis The gateway program aims to permanently enroll preenrolled chil- dren in either Medi-Cal or Healthy Families by providing families with an application for these programs. Children who are determined not to be eligible for coverage in either program would continue to be able to receive CHDP services consistent with the allowable number of doctor’s visits. Moreover, the same children are permitted to preenroll again in Medi-Cal each time they receive a CHDP screen. Governor’s Budget Proposal Budget Plan Reduces CHDP Funding Due to Gateway. The Governor’s budget proposes to allocate approximately $17 million from all fund sources ($8 million from the General Fund) in the current year for an estimated 300,000 CHDP health screens. For the budget year, about $4.2 million would be provided from all fund sources ($3.9 million from the General Fund) for an estimated 71,000 CHDP health screens. A small part of this dramatic decrease in proposed program expendi- tures is due to the proposed reductions in reimbursement rates for CHDP providers. The 2003-04 Budget Act reduced provider rates by 5 percent, and a further 10 percent rate reduction is proposed in the Governor’s budget plan. By far, most of the proposed decrease in the CHDP budget is due to the assumed full implementation of the CHDP gateway in the budget year. We discuss this budget assumption in more detail below. Major Uncertainties in Gateway Budget Proposal The budget’s assumption of a sharp decline in the size of the CHDP program due to the implementation of the gateway to the Medi-Cal and Healthy Families programs is based largely on preliminary data and assumptions about how this major program change will be implemented. As a result, it is possible that the budget request significantly overestimates or underestimates the funding needed for these programs. Accordingly, we withhold recommendation at this time on the funding requests related to the CHDP gateway, pending receipt of the May Revision. Budget Assumes the Gateway Reduces CHDP Expenditures. As noted above, the Governor’s budget plan assumes that the gateway will shift children from CHDP to the Medi-Cal and Healthy Families programs. Accordingly, the Governor’s budget plan proposes to reduce the General Fund budget for CHDP by more than $54 million in 2004-05. Public Health C – 141 Legislative Analyst’s Office These savings in the CHDP budget would be more than offset under the Governor’s budget plan by increased expenses in the Medi-Cal and Healthy Families programs. The budget would provide $405 million in additional funds for Medi-Cal ($197 million in state funds) and $42 mil- lion for Healthy Families ($15 million in state funds) due to implementa- tion of the gateway. After taking into account previous reductions already incorporated into the CHDP budget, these increases in Medi-Cal and Healthy Families program expenditures result in a net fiscal cost to the state of $358 million when all fund sources are considered (with a $122 mil- lion net cost in state funds). Impact of Caseload Shifts Still Uncertain. The administration esti- mates that about 712,000 children will be temporarily preenrolled in Medi- Cal, about 76,000 children will be enrolled on an ongoing basis in Medi- Cal, and that about 39,000 children will be enrolled in the Healthy Fami- lies Program in the budget year as a result of the gateway program. Because the gateway has only been fully implemented since January 2004, the caseload and funding estimates are based on preliminary data and various assumptions regarding the number and characteristics of the children enrolling through the gateway. For example, the estimates contain significant assumptions about the rate at which parents of chil- dren who have received CHDP services will submit an application for their child’s permanent enrollment in the Healthy Families or Medi-Cal programs. To the extent that the actual application rate was lower or higher than assumed in the budget, the amount of funding required for the Medi- Cal and Healthy Families programs could be underbudgeted or overbudgeted, potentially in the tens of millions of dollars. Analyst’s Recommendation. As we have noted, the budget plan pro- poses a substantial reduction in the CHDP program, as well as signifi- cant increases in Healthy Families and Medi-Cal, based on largely un- proven assumptions regarding the gateway program’s impact on caseloads. More information about these impacts will be available to the Legislature in the coming months. Accordingly, we withhold recommen- dation at this time on the CHDP budget proposal, as well as the pro- posed budget adjustments related to the gateway in the Medi-Cal and Healthy Families programs, until more information is available to assess how much funding will be needed for these purposes. We will monitor gateway enrollment trends and recommend appropriate adjustments at the time of the May Revision. C – 142 Health and Social Services 2004-05 Analysis GENETIC DISEASE TESTING PROGRAM Reports on Information System Project Not Submitted The Department of Health Services (DHS) has not provided to the Legislature reports detailing the costs, schedules, and status of the Genetic Disease Branch Screening Information System Project required as a condition of its approval last year. Since these reports would have provided needed information about the finances and status of the project, we recommend that the Legislature deny a proposal for an additional $5 million loan from the General Fund for this project unless the reports are submitted and DHS is able to demonstrate its ability to manage the project. (Delete Item 4260-011-0001.) The budget proposes a $5 million General Fund loan to the Genetic Disease Testing Fund for the ongoing development of the Genetic Dis- ease Branch Screening Information System (GDB SIS) Project. The pur- pose of the project is to replace an obsolete automation system used to screen newborns for genetic diseases. Project Funding. In 2002, the GDB SIS Project was estimated to cost $32 million ($17 million for its development and $15 million to maintain and operate the system over seven years). That same year, the adminis- tration increased the fees collected through the Genetic Disease Testing Fund by $4 per newborn for each screening test to fund the project’s costs. Since this special fund did not have a sufficient revenue balance to pay the project’s up-front costs, the Legislature approved a $5.3 million Gen- eral Fund loan as part of the 2003-04 Budget Act to help fund the project. The Governor’s 2004-05 budget plan proposes an additional $5 million General Fund loan to pay for additional development costs. By June 2009, it is anticipated that sufficient revenues would be available from the Ge- netic Disease Testing Fund to repay the two General Fund loans. Project and Financial Reports Have Not Been Received. As a condi- tion of approval of the initial loan, DHS is required by law to provide several reports to the Legislature detailing costs, schedule, and status of the GDB SIS Project. At the time the project started in 2003, up-to-date costs and a schedule for the project were unknown. For this reason, the first report, due July 2003, was to provide updated project schedules and cost estimates. In addition, since DHS has struggled in the past in its management of a number of other information technology projects, the Legislature has been concerned about DHS’ ability to manage the project. For this rea- Public Health C – 143 Legislative Analyst’s Office son, a second set of reports was required to be submitted quarterly to the Legislature, beginning in October 2003, to provide (1) project status and oversight reviews and (2) expenditures, revenues, and the overall fund condition status of the Genetic Disease Testing Fund. While DHS has shared a report containing some preliminary infor- mation about the project’s costs and schedule with our office, the Depart- ment of Finance has advised us that the report neither represents its deci- sions on these matters, nor does it constitute a response to the legislative reporting requirements established last year. Thus, the department has not complied with the reporting requirements that were a condition of the loan approved last year by the Legislature. Analyst’s Recommendation. Because the Legislature has not been provided with the information it needs to assess the status of the project and the financial condition of the Genetic Disease Testing Fund, we rec- ommend that the Legislature deny the proposed $5 million General Fund loan for the GDB SIS Project unless (1) the required reports are submitted and (2) DHS is able to demonstrate in those reports its ability to manage the project. C – 144 Health and Social Services 2004-05 Analysis MANAGED RISK MEDICAL INSURANCE BOARD (4280) The Managed Risk Medical Insurance Board (MRMIB) administers several programs designed to provide health care coverage to adults and children. The Major Risk Medical Insurance Program (MRMIP) provides health insurance to California residents unable to obtain it for themselves or their families because of preexisting medical conditions. The Access for Infants and Mothers (AIM) program currently provides coverage for pregnant women and their infants whose family incomes are between 200 percent and 300 percent of the federal poverty level (FPL). The Healthy Families Program provides health coverage for uninsured children in families with incomes up to 250 percent of the FPL who are not eligible for Medi-Cal and, beginning in the budget year, will provide health cov- erage for certain uninsured infants born to AIM mothers. The MRMIB also administers the County Health Initiative Matching Fund (CHIM), a program established last year as a component of Healthy Families. Under CHIM, counties, County Operated Health System man- aged care health plans, and certain other locally established health pro- grams are authorized to use county funds as a match to draw down fed- eral funding to purchase health coverage for children in families with incomes between 250 percent and 300 percent of the FPL. No state funds are used to support CHIM. Budget Proposal. The budget proposes $1.2 billion from all fund sources ($314 million General Fund) for support of MRMIB programs in 2004-05, which is an increase of $35 million or about 3.1 percent ($10.3 mil- lion General Fund) over estimated current-year expenditures. The relatively small budget increase for MRMIB is due primarily to the administration’s proposal to cap enrollment in the Healthy Families Program effective January 1, 2004, and to keep the enrollment cap in place at least through 2004-05. (At the time this analysis was prepared, this Managed Risk Medical Insurance Board C – 145 Legislative Analyst’s Office proposal had not been adopted by the Legislature.) Another budget pro- posal intended to slow Healthy Families spending growth would make the benefits now provided for certain legal immigrants part of a health and social services block grant to counties. Also, the administration has proposed that premiums and benefits provided for Healthy Families chil- dren of families with higher incomes be modified to establish a two- tier program structure by 2005-06. The budget reflects the continuation of funding for CHIM at the same level as budgeted for the current fiscal year\u2014about $154 million ($54 mil- lion in reimbursements from counties and $100 million in federal funds). The budget further reflects the implementation of statutory budget language which specifies that infants born to AIM mothers who enroll in the program on or after July 1, 2004, will be enrolled into the Healthy Families Program at birth. Under this new measure, health coverage for the infant’s mother would continue to be provided through AIM. The budget plan proposes only minor changes in the spending levels for the AIM and MRMIP programs. It also does not contain any propos- als to initiate administrative activities to implement Chapter 673, Stat- utes of 2003 (SB 2, Burton). This measure (1) requires certain employers to pay a fee to the state to support a State Health Purchasing Pool to be administered by MRMIB unless the employer directly provided health insurance coverage for employees or, in some cases, for an employee’s dependents; and (2) establishes a new state program to assist low-income employees with children enrolled in Healthy Families (as well as family members eligible for Medi-Cal) in paying premiums to obtain employer- based health coverage. We discuss issues relating to the enrollment cap proposal below and also in the Crosscutting Issues section of the Health and Social Ser- vices chapter of this Analysis. We also discuss the block grant proposal and the implementation of SB 2 within the Crosscutting Issues section. HEALTHY FAMILIES PROGRAM Background Program Draws Down Federal Matching Funds. The federal Balanced Budget Act of 1997 (BBA) made available approximately $40 billion in fed- eral funds over ten years to states to expand health care coverage for children under the State Children’s Health Insurance Program (SCHIP). The BBA also provided states with an enhanced federal match as a finan- cial incentive to cover children in families with incomes above the previ- C – 146 Health and Social Services 2004-05 Analysis ous limits of their Medicaid programs. Under SCHIP, the federal govern- ment provides states with flexibility in designing a program California decided in 1997 to use its approximately $4.5 billion share of SCHIP funding to implement the state’s Healthy Families Program. Funding for the program generally is on a 2-to-1 federal\/state matching basis. Families pay a relatively low monthly premium and can choose from a selection of managed care plans for their children. Coverage is similar to that offered to state employees and includes dental, vision, and basic mental health care benefits. The Healthy Families Program also cov- ers more intensive mental health services for children with serious emo- tional disturbances, which are directly provided through county mental health systems and supported primarily with county and federal funding. State Implements Program Expansions. The program began enroll- ing children in July 1998. In 1999, the program was expanded to include children with family incomes up to 250 percent of the FPL, as well as legal immigrant children, who are not eligible to receive federal funds and therefore do not draw federal matching funds. In January 2002, the state was granted a waiver by the federal gov- ernment to expand the Healthy Families Program to uninsured parents of children eligible for the Healthy Families or Medi-Cal programs in families with incomes up to 200 percent of the FPL. (State law authorizes the expansion of coverage to parents with incomes up to 250 percent of the FPL, but this further change is not being pursued at this time.) The previous administration had proposed to delay implementation of the Healthy Families parent eligibility expansion until July 2006 due to the state’s fiscal problems. The new administration has not proposed any change in this timeline. Recently, the state initiated additional expansion efforts outside of the state’s Healthy Families Program to provide health care coverage for uninsured children. The 2003-04 Budget Act implemented the CHIM to allow counties to receive federal SCHIP matching funds to provide health coverage on a county-by-county basis to uninsured children living in fami- lies earning incomes between 250 percent and 300 percent of the FPL. The implementation of this program is awaiting federal approval. (We discuss the CHIM program later in this analysis.) The Budget Proposal. As shown in Figure 1, the January budget pro- poses $844 million (all funds) in Healthy Families Program expenditures in the budget year. This is an increase of about 4.4 percent over estimated current-year expenditures. The budget proposes $311 million in General Fund support for the Healthy Families Program, a $14.3 million increase above the current-year level. The budget proposal represents a relatively modest increase in Healthy Families expenditures in comparison with Managed Risk Medical Insurance Board C – 147 Legislative Analyst’s Office six years of much more rapid growth in the program. The slowdown in the rate of program growth can be largely attributed to the Governor’s proposal to cap enrollment in the program beginning in the current year. Figure 1 Managed Risk Medical Insurance Board Healthy Families Expenditures (In Millions) 2003-04 Budget Act Revised 2004-05 January Budget Local Assistance $800.1 $803.0 $839.1 State operations 5.3 5.4 5.2 Totalsa $805.3 $808.4 $844.3 Tobacco Settlement Fund \u2014 \u2014 \u2014 General Fund $297.1 $297.0 $311.3 Federal funds 499.5 504.2 527.1 Reimbursements 8.8 7.3 6.0 a Detail may not total due to rounding. Enrollment Cap Proposal Raises Policy Concerns The Governor’s budget proposal to cap Healthy Families Program enrollment, while feasible and effective in addressing the state’s fiscal problems, raises a number of issues. We recommend against this approach because other alternatives are available to the Legislature to hold down the cost of the Healthy Families Program. Budget Reflects Capped Enrollment in the Healthy Families Program Waiting Lists for Applicants. The Governor’s budget plan proposes to cap enrollment in the Healthy Families Program beginning January 1, 2004, at the estimated caseload level for that date, about 732,000 chil- dren. Once the program reaches this limit, children applying for Healthy Families coverage would be placed on a waiting list and enrolled on a first-come, first-served basis as attrition occurs in the program. The enrollment cap would not apply to infants transferring to the Healthy Families Program from AIM. Children on the waiting lists and in need of C – 148 Health and Social Services 2004-05 Analysis medical care would either access uncompensated medical care through community clinics, emergency rooms, or, in some cases, forgo medical treatment altogether. The proposed enrollment cap would require fed- eral approval as well as state legislative and regulatory changes. Cur- rently, six of the 35 states with separate SCHIP programs (the equivalent of the Healthy Families Program in California) have frozen enrollments because of budgetary problems. Based on past enrollment trends (including the rate at which chil- dren are sometimes disenrolled from coverage for various reasons), the administration projects that the cap would result in a waiting list of ap- proximately 159,000 children by the end of 2004-05. The waiting period for coverage is expected to grow over time, reaching as long as six months by the end of the budget year. Our analysis indicates that the waiting list would grow to approximately 280,000 by the end of 2005-06 and the last child to enroll before June 30, 2006 would not receive coverage until June 2007. The proposed cap on enrollment would curtail caseload growth in the Healthy Families Program and, subsequently, lower overall state expenditures. The administration estimates that the state would achieve only minor savings from this measure in 2003-04, in part because of one- time administrative costs to carry out the change. But the budget plan assumes it would reduce Healthy Families expenditures by approximately $86 million ($32 million from the General Fund) in the budget year. Governor’s Proposal Has Some Advantages Savings Would Be Realized. The overall administration proposal to cap health and social services program caseloads is discussed generally in the Crosscutting Issues section of this chapter. Policy issues of par- ticular importance to the Healthy Families Program are discussed below. Our analysis of the Governor’s proposal indicates that it is techni- cally feasible and would probably generate program savings of the mag- nitude estimated by the administration. Assuming the cap were main- tained, the amount of savings achieved from a freeze on enrollment would grow significantly over time and contribute to addressing the state’s struc- tural imbalance between revenues and expenditures. The administration’s approach would also be less disruptive to the ongoing operation of the program than other possible approaches for achieving savings. No child now receiving coverage through the Healthy Families Program would lose his or her benefits. It is also possible that the prospect of long waiting lists would provide additional incentive for parents of Healthy Families children to become more diligent about sub- Managed Risk Medical Insurance Board C – 149 Legislative Analyst’s Office mitting annual eligibility documents in a timely fashion, and reduce the high rate of disenrollment of children from the program. Several Issues Warrant Consideration The Governor’s proposal to cap program enrollment in Healthy Fami- lies (as well as comparable caps on other health and social services pro- grams) raises a number of significant policy issues that the Legislature may wish to consider. Waiting Lists Could Create Inequities. The administration’s proposal raises some distinct equity issues. First, children who entered the pro- gram before January 1, 2004 would be treated differently than children who applied after that date even though they met the same eligibility criteria. Also, the administration proposal is for a first-come, first-served approach in which the first person on a waiting list would be added to the Healthy Families Program caseload as children were disenrolled and room was created for additional children on program rolls. While this approach is equitable\u2014all children on the waiting list would be treated alike\u2014it also raises other questions of fairness, in that children would be added to program enrollment in the future regardless of a child’s medi- cal needs or family income level. Another equity issue pertains to how this cap would be implemented in the context of other publicly supported health programs. For instance, while enrollment would be capped for children in families under 250 per- cent of FPL in the Healthy Families Program, the Governor’s budget plan proposes to continue implementation of the CHIM Fund for counties to use to support their county health initiatives to provide coverage to chil- dren in families with incomes between 250 percent and 300 percent of the FPL. Thus, the Governor’s budget proposal means that, in some coun- ties, some higher-income children might receive health coverage more quickly through county health initiatives than lower-income children enrolled in Healthy Families who would face a wait of six months or longer for coverage. Time on Waiting List May Be Underestimated. Another concern is that the waiting time for an applicant to actually receive health coverage could turn out to be longer than the maximum of six months estimated by the administration. That estimate is based on current disenrollment and enrollment trends. To the extent that parents’ behavior changed, as discussed above, so that disenrollment rates in the program decreased, the waiting period for coverage could be longer than projected. As noted earlier, the waiting period for enrollees would be likely to exceed one year by June 2006. C – 150 Health and Social Services 2004-05 Analysis Cap Places Program Changes at Risk. Establishment of an enroll- ment cap places at risk the implementation of the Legislature’s previous decisions to (1) authorize the future expansion of the Healthy Families Program to parents, (2) expand health coverage and establish premium assistance through a pay or play system of health coverage, and (3) es- tablish a gateway from the Child Health and Disability Prevention Pro- gram (CHDP) to Healthy Families. The federal government approved California’s waiver request to ex- pand SCHIP-funded coverage for low-income uninsured parents on the condition that the state continue its efforts to enroll low-income unin- sured children. The establishment of an enrollment cap and waiting lists may place the previous federal approval of California’s parent expan- sion at risk. An enrollment cap would also conflict with the provisions of SB 2, which enacted a pay or play system of health coverage commencing in 2006. Among other provisions, SB 2 provides premium assistance and wraparound coverage through the Healthy Families Program for cover- age of eligible dependents. Implementation of SB 2 would be compli- cated by the imposition of enrollment limits that would hinder the ex- pansion of health coverage intended in the measure. The Legislature provided approximately $9.7 million ($3.8 million state funds) in the 2002-03 Budget Act for information technology and other procedural changes, referred to as a gateway, to expedite the en- rollment of children receiving services under the state’s CHDP program into Medi-Cal or Healthy Families coverage. However, the proposed Healthy Families enrollment cap and subsequent waiting lists would slow the movement of children through the CHDP gateway to Healthy Fami- lies. (The gateway would, however, continue to facilitate the transfer of children into the Medi-Cal Program, except for certain immigrant groups.) State Would Lose Additional SCHIP Funds. The proposal to cap en- rollment in the Healthy Families Program would result in state savings, but also reduce by about $55 million the amount of federal SCHIP funds being drawn down for health coverage of the uninsured. Since the incep- tion of the Healthy Families Program, California has struggled to fully utilize its federal allotment of SCHIP funds. To date, the state has re- verted $1.1 billion in unspent funds back to the federal government, which was redistributed to other states that were able to expend their allotment within the specified time period. As of May 2003, California had approxi- mately $1.9 billion in unspent SCHIP funds remaining. We would ac- knowledge, however, that some other strategies for containing state costs for Healthy Families coverage would also add to the amount of SCHIP funds that would go unspent. Managed Risk Medical Insurance Board C – 151 Legislative Analyst’s Office Some Children Would Lose Insurance Coverage. The Healthy Fami- lies Program was established to operate in tandem with Medi-Cal to en- sure seamless health care coverage for children ages 0 to 19 living in fami- lies earning up to 250 percent of the FPL. Due to the income and age- based eligibility structure for both programs, the proposed enrollment cap would place certain children who were enrolled in Medi-Cal at risk of losing insurance coverage. Specifically, upon reaching their first and sixth birthday, children who would traditionally transition to the Healthy Families Program because their families’ incomes would no longer qualify them for Medi-Cal would instead be placed on a waiting list for coverage. Analyst’s Recommendation Other Alternatives Available. . . After weighing the advantages of imposing an enrollment cap on Healthy Families against the issues dis- cussed above, we recommend against the Governor’s proposal because, in our view, other alternatives are available to the Legislature to hold down the cost of the Healthy Families Program. As we will discuss later in this analysis, we believe there are other strategies that could be adopted to reduce program spending that would be more equitable to beneficia- ries, more consistent with other state efforts to assist the uninsured, and that would make more effective use of the available federal SCHIP funds. . . . But if Proposal Is Adopted. Should the Legislature decide to adopt the Governor’s proposal, there are several steps it could take to address some of the issues we have outlined. In that event, we would recom- mend that the Legislature consider the following actions: Modify the first-come, first-served approach to prioritize for Healthy Families coverage the poorest eligible children, and-or those with the most significant medical needs. These actions would partly reduce the savings but ensure that state funds are used for those who are most needy. Modify the CHIM program to allow coverage of individuals oth- erwise eligible for Healthy Families but placed on a waiting list. This could address the inequity by which CHIM children in fami- lies with higher incomes would receive coverage quickly, while those in families with lower incomes would remain on waiting lists. Adopt supplemental report language directing MRMIB to pro- vide the Legislature with a quarterly report providing a statisti- cal summary of the number of children placed on waiting lists, the period of time applicants must wait for coverage, and the effect of waiting lists on program enrollment rates. This informa- C – 152 Health and Social Services 2004-05 Analysis tion would enable the Legislature to assess the impact of the en- rollment caps upon their implementation. Direct MRMIB to report at budget hearings on how conflicts with the CHDP gateway, parent expansion of Healthy Families, and SB 2 should be addressed. Choice of Two-Tier Benefit System Worth Considering Although our preliminary analysis indicates that the proposal to fund activities to establish a two-tier benefit system represents a reasonable alternative for reducing Healthy Families Program costs to help address the state’s fiscal problems, we withhold recommendation on the associated funding request for administrative resources until the administration has fully developed the proposal and provided updated cost and savings estimates to the Legislature. Higher Premium, Greater Benefits. The Governor’s proposal requests $750,000 in funding ($263,000 from the General Fund) for administrative activities to implement a two-tier benefit structure for the Healthy Fami- lies Program in 2005-06. Under this proposed approach, children in families with incomes of more than 200 percent of the FPL would henceforth have a choice of two types of health care coverage for their child. (Children in families earn- ing less than 200 percent of the FPL would not be impacted by this pro- posal.) A family choosing to pay premiums comparable to what they now pay (ordinarily ranging from $4 to $9 per month per child) would receive basic medical coverage for their child, but would no longer receive vi- sion or dental coverage. A child in a family choosing to pay a higher premium of about $15 per month would receive all of the services he or she now receives under the Healthy Families Program, including vision and dental benefits. The proposal would be contingent upon federal ap- proval, require state regulatory changes, and not be implemented until 2005-06. The administration estimates that its proposal would initially save $12.2 million ($6.6 million from the General Fund) beginning in 2005-06 and $25 million ($11 million from the General Fund) in 2006-07. The ad- ministration has indicated that this estimate is based on a number of as- sumptions that will need to be modified as the proposal is further refined in budget trailer bill language and the Healthy Families caseload esti- mate is updated for the May Revision. A Reasonable Concept. Because the proposal has not yet been fully developed, the Legislature is not in a position at this time to fully assess Managed Risk Medical Insurance Board C – 153 Legislative Analyst’s Office the merit of this approach. In concept, however, the Governor’s proposal represents a reasonable alternative for reducing Healthy Families Pro- gram costs to help address the state’s fiscal problems. A two-tier benefit system could result in savings while also providing families with the flex- ibility to choose the benefit package they need and desire for their child. The proposal is also equitable, in that a higher-income family (earning more than 200 percent of the FPL) whose child qualified for Healthy Fami- lies would contribute more toward health care coverage than a lower- income family. One potential drawback to the proposal is its effect on the health care of some Healthy Families children. Some children might receive vision and dental care less frequently. Because the families affected by this change are those with higher incomes, however, it is also possible that many children would continue to receive the services with out-of-pocket pay- ments for care by their parents. Analyst’s Recommendation. Although our initial analysis indicates that the two-tier benefit proposal has merit in concept, the administra- tion has indicated that the details of the proposal and the cost and sav- ings estimates are still being refined. As such, we withhold recommenda- tion on this approach pending the further development of this proposal. Alternatives for Reducing Healthy Families Program Costs The January budget plan proposes several measures to contain the costs of the Healthy Families Program. We recommend that the Legislature also consider alternative approaches to those of the Governor, including program consolidation with Access for Infants and Mothers, changes in premium levels, trimming benefits, or shifting coverage of children in families with higher incomes to county coverage. The Governor’s budget proposes to reduce costs of the Healthy Fami- lies Program through an enrollment cap, a block grant for immigrant ser- vices, and development of a two-tier benefit structure. Given the state’s fiscal difficulties, we recommend that the Legislature also consider al- ternatives to the Governor’s budget proposal. We discuss some of these options below. Shifting AIM Mothers Into Healthy Families Could Save State Resources Our analysis indicates that it would be possible for the state to shift some or all of the caseload of mothers in the AIM program to the Healthy Families Program in a way that would maintain their health care while C – 154 Health and Social Services 2004-05 Analysis eventually generating as much as $42 million in state savings. We de- scribe this alternative in further detail in our discussion of the AIM pro- gram later in this chapter. Family Contributions Could Be Increased Parent Contributions Unchanged Since Program Began. As noted earlier, families which enroll their child in the Healthy Families Program typically pay between $4 to $9 per child each month (with a monthly maximum of $27 per family) for insurance coverage. The amount paid varies according to a family’s income, the region of the state where they reside, and the health plan they selected. The premium levels set for Healthy Families have not changed since the program began in 1998. However, as Figure 2 indicates, the average monthly cost per child receiving coverage has increased from $38 in 1998-1999 to a projected $95 in 2004-05. Within certain limitations in federal law, the state could in- crease premiums for program enrollees generally to help offset part of the increase in costs. For example, increasing premiums to levels ranging from $6 to $12 (varying depending upon income, region, and health plan selected) would result in savings of as much as $8 million to the state Figure 2 Monthly Cost Per Child of Healthy Families Benefits Has Increased Significantly Over Time 20 40 60 80 $100 98-99 99-00 00-01 01-02 02-03 03-04 04-05 Fiscal Year $38 $60 $73 $79 $88 $91 $95 Managed Risk Medical Insurance Board C – 155 Legislative Analyst’s Office ($22 million all funds). In contrast to the Governor’s two-tier proposal, which would increase premiums only for higher-income families, this alternative approach would increase premiums across-the-board for most enrollees. To the extent the higher premiums prompted families to dis- continue coverage, the state would achieve additional savings. Currently, several states set monthly premium rates for SCHIP cov- erage that are significantly higher than the premium levels set in Califor- nia. As indicated in Figure 3 (see next page), Arizona, Illinois, Texas, and New York have monthly premium levels that range between $5 and $11 higher than California’s premium rates. Raising California’s premiums would bring the state’s Healthy Families Program more in line with other states across the country. Benefits Package Could Be Trimmed One alternative for reducing state costs for the Healthy Families Pro- gram would be to reduce the scope of coverage that all Healthy Families enrollees receive. If this approach were substituted for the Governor’s proposed enrollment cap, no eligible child would be denied coverage and placed on a waiting list, but the coverage each child would receive would be reduced in scope. For example, the elimination of vision and dental care across the board for all enrollees would result in state savings of as much as $75 million in 2004-05. Some Children Could Be Shifted to County Coverage The Legislature has the option of reducing costs in the Healthy Fami- lies Program by partially or completely reversing the expansion of cover- age to higher income families that occurred after the program was ini- tially created and shifting coverage of those children to the CHIM pro- gram. If this alternative were substituted for the Governor’s proposed two- tier structure for the program, the existing benefit package, including dental and vision care, could be preserved for all enrollees, but the num- ber of children eligible for the program would be scaled back. In contrast to the Governor’s first-come, first-served enrollment cap, this alternative approach would prioritize coverage for poorer families. This alternative could result in significant state savings. For example, reducing coverage for children in families with incomes above 200 per- cent of the FPL could save the state as much as $65 million in 2004-05. The savings to the state would be significantly lower initially if those already enrolled in coverage were permitted to remain in the program. In order to provide an alternative source of health coverage for these chil- C – 156 Health and Social Services 2004-05 Analysis dren in higher-income families, the state could adjust the CHIM program (subject to federal approval) to allow counties to provide coverage for children of families in this income group. Figure 3 California Premiums Low Compared to Other States Comparison of SCHIP Premiums\u2014Fiscal Year 2004 State Premium or Fee California Monthly premium of $4 to $9 per month per child depending upon family size and income.a Arizona Income under 150 percent FPL, children do not have a premium. Income between 150 percent to 175 percent FPL $10 per month for one child. $15 per month for two or more children. Illinois $15 per month for one child. $25 per month for two children. $30 per month for three or more children. New York No premium for children between 0 percent to 160 percent of FPL. $9 per child for families between 161 percent to 222 percent of FPL (maximum per family is $27 per month). $15 per child for families between 222 percent to 250 percent of FPL (maximum paid per family is $45 per month). Texas $15 per month for families between 101 percent to 150 percent of FPL. $20 per month for families between 151 percent to 185 percent of FPL. $25 per month for families between 186 percent to 200 percent of FPL. Annual copayment cap set at 1.25 percent of income for families below 100 percent of FPL. Annual copayment cap set at 2.5 percent of income for families between 151 percent to 200 percent of FPL. Source: Smith, Vernon K., et al. SCHIP Program Enrollment: June 2003 Update. The Kaiser Commission on Medicaid and the Uninsured. December 2003. a In general, families below 150 percent of the FPL are charged monthly premiums as low as $4 per child. Families above 150 percent of the FPL are charged monthly premiums as low as $6, and no more than $9 per child. Managed Risk Medical Insurance Board C – 157 Legislative Analyst’s Office Block Grant May Not Be Feasible The Governor proposes to consolidate funding for state-only pro- grams, which serve immigrants into a single block grant for counties effective October 1, 2004. The proposal assumes that counties will achieve administrative efficiencies, so proposed block grant funding has been reduced by 5 percent. We recommend that the Legislature reject the pro- posal because the programs proposed for transfer to the counties are not well-suited for local control. The Governor’s budget plan proposes to create an Immigrant Ser- vices block grant for counties with funding that is currently budgeted for the support of various health and human services provided to certain legal immigrants. Among other programs, the block grant would include approximately $16.3 million in funding the state would have otherwise spent for health coverage for certain legal immigrant children enrolled in the Healthy Families Program. We discuss this proposal in the Cross- cutting Issues section of this chapter. COUNTY HEALTH INITIATIVE MATCHING FUND Background State Established Program for Counties to Access SCHIP Funds. Chapter 648, Statutes of 2001 (AB 495, Diaz), established the CHIM Fund program. Through this program counties would be able to access federal SCHIP matching funds to provide health coverage on a county-by-county basis to uninsured children living in families earning incomes between 250 percent and 300 percent of the FPL. In accordance with Chapter 648, the 2003-04 Budget Act included about $150 million to fund the CHIM. As approved by the Legislature, CHIM relies on no state funding but only on federal and county resources\u2014approximately $54 million in re- imbursements from counties and $100 million in federal SCHIP funds. A portion of these funds ($280,000) would be used to reimburse the state for its anticipated administrative expenses. In effect, counties would le- verage local funds to draw down some of the unspent portion of California’s federal SCHIP allotment according to the same 2-to-1 matching rate used by the state. The implementation of this program, however, is con- tingent upon federal approval of an amendment to the state’s SCHIP plan. The Governor’s budget proposes to maintain the current-year level of funding for the CHIM Fund in 2004-05. Specifically, the budget plan includes $54 million in the CHIM Fund and $100 million in federal funds. C – 158 Health and Social Services 2004-05 Analysis (As discussed below, the program has not operated in the current year because federal approval is pending.) Federal Approval of CHIM Still Pending The implementation of the County Health Insurance Matching Fund is contingent upon federal approval. We withhold recommendation at this time on the Governor’s budget proposal to continue the program at its current funding level because a decision by federal authorities on the state’s request may be known by this May. The MRMIB submitted a state plan amendment to the federal gov- ernment in May 2003 which included the state’s proposal to establish the CHIM Fund and specific proposals developed by four Bay Area coun- ties. The administration expects a final decision on its request for ap- proval in May 2004. Currently, four pilot counties are implementing county health initiatives to expand health coverage for children indepen- dent of the CHIM, and are awaiting federal approval of the new pro- gram, which would allow them to leverage their existing resources by drawing down federal SCHIP funding. Analyst’s Recommendation. We concur with the Governor’s budget proposal to continue efforts to take advantage of uncommitted federal funds available through SCHIP to support county health coverage initia- tives for children. However, we withhold recommendation on the administration’s budget request pending further information on the sta- tus of federal approval of the state plan amendment. ACCESS FOR INFANTS AND MOTHERS Background Pregnancy and Postpartum Health Coverage. The AIM program pro- vides comprehensive health care for low-to-moderate income women throughout their pregnancy, delivery, and 60 days after delivery. The pro- gram currently also provides health insurance to infants born to women enrolled in AIM until their second birthday. To be eligible for the pro- gram, women must be no more than 30 weeks pregnant, have no health coverage for their pregnancy, and have incomes between 200 percent and 300 percent of the FPL. The Medi-Cal Program provides coverage to preg- nant women and their infants in families with incomes up to 200 percent of the FPL. In accordance with statutory budget language adopted last year, in- fants born to AIM mothers who enroll in the program after July 1, 2004, Managed Risk Medical Insurance Board C – 159 Legislative Analyst’s Office will be enrolled in the Healthy Families Program at birth, while the moth- ers will remain covered through the AIM program. Over time, this shift of new AIM infants into the Healthy Families Program will result in an AIM program consisting only of mothers. Currently, program participants pay a fee of 2 percent of their family income toward the costs of services received by the mother and an infant up to one year of age. (For example, coverage for an AIM mother and her infant would cost $449 per pregnancy for a family with an annual in- come of $22,450.) Infants born to AIM mothers can continue to receive coverage for a second year through the AIM program for an additional $100, or $50 if their recommended one-year vaccinations are up to date. Under the new law, which transfers certain infants to Healthy Families, the family fee for AIM will be reduced to 1.5 percent of family income to reflect the family’s new and additional payment of a premium for enroll- ment of the infant in Healthy Families. Governor’s Proposal Minor Changes in Spending. As summarized in Figure 4, the Governor’s budget proposes about $118 million from all funds (includ- ing $6.5 million from the General Fund and $99.5 million in Proposition 99 funds) for the AIM program. This is a small decrease in spending of $600,000 (or less than 1 percent) from 2003-04. As in the past, the AIM program would be financed primarily with various state fund sources. A relatively small amount of federal funds is currently available to help pay for coverage for infants in their first year in the AIM program. Figure 4 Access for Infants and Mothers Program Budget Summary (In Millions) 2002-03 2003-04 2004-05 Perinatal Insurance Fund (Proposition 99) $81.4 $97.6 $99.5 General Fund 0.4 7.4 6.5 Tobacco Settlement Funds 3.9 \u2014 \u2014 Federal funds 8.0 13.7 12.1 Totals $93.6 $118.7 $118.1 Detail may not total due to rounding. C – 160 Health and Social Services 2004-05 Analysis Caseload Shifts. In accordance with the recent changes in statute, the Governor’s budget reflects discontinued AIM coverage of infants who will be redirected to coverage under the Healthy Families Program. Fig- ure 5 summarizes the impact this new law is projected to have on AIM caseloads in the budget year. Figure 5 Access for Infants and Mothers Caseload Summary Projected Total Enrollment 2003-04 2004-05 Percentage Change Women 8,268 8,783 6.2% First-year infants 84,339 75,562 -14.0 Second-year infants 75,226 88,318 17.4 Totals 167,833 172,663 2.9% While caseloads for women are expected to increase by 6.2 percent in 2004-05, the number of infants in their first year of AIM coverage is pro- jected to decline by 14 percent. Two factors explain this decline. First, this group of infants consists of those who, in the past, would have received coverage in AIM, but who now would be admitted instead to the Healthy Families Program. (As we noted earlier, infants of mothers who were enrolled before the change takes effect will remain in AIM as long as they are eligible.) Second, program officials indicate that part of the decline in the number of infants in this group is due to prior budget decisions to eliminate funding for outreach activities. Nonetheless, a temporary increase in caseload of about 17 percent is projected for the budget year for the group of infants who are in their second year of AIM coverage. Because the shift to Healthy Families af- fects only new admissions to AIM, the number of infants in this second- year group will not be affected by this change until 2005-06. The number of infants in the second-year group is expected to subsequently decline. All infant caseload in the AIM program will be gone by the end of 2006-07 as the children reach age two and are automatically disenrolled from the AIM program. Managed Risk Medical Insurance Board C – 161 Legislative Analyst’s Office AIM Mothers Could Also Be Shifted to Maximize Use of Federal Funds We recommend that the Legislature take steps to shift all new Access for Infants and Mothers-eligible mothers to the Healthy Families Program possibly as soon as the budget year. The Legislature also has the option of shifting this group of enrollees to Medi-Cal coverage. Our analysis indicates that either approach would maximize the state’s use of available federal funds and result in significant state savings. Federal Law Allows Expansions of Care for Pregnant Women. As noted earlier, California’s Healthy Families Program implements a fed- eral law, SCHIP, enacted in 1997. This program generally provides fund- ing to states on a 2-to-1 federal\/state matching basis. In September 2002, the Bush administration issued a regulation that permits states to utilize federal SCHIP funding to provide coverage to unborn children (and their mothers) in families with low incomes up to 200 percent of FPL. (States are authorized to submit waiver requests to exceed this income level.) As of September 2003, six states have received federal approval to expand their state’s SCHIP-funded insurance pro- grams to include pregnant women and unborn children. The SCHIP stat- ute currently provides states with broad flexibility in defining the ser- vices to include under their state plan. Through the new regulation, states have the flexibility to provide expectant mothers services related to preg- nancy or conditions that could complicate a pregnancy. The Medi-Cal Program (the federal Medicaid program in California) provides health care services to low-income persons who meet the program’s specific eligibility criteria including special populations of preg- nant women and infants. Under longstanding state law, pregnant women in families earning up to 200 percent FPL are eligible under Medi-Cal for no-cost coverage of pregnancy-related health care. Nothing in federal Medicaid law precludes the state from expanding this coverage to in- clude pregnant women up to 300 percent of FPL. Our analysis indicates that it would be possible for the state to shift some or all of the caseload of mothers who would otherwise remain in the state-funded AIM program to either Healthy Families or Medi-Cal in a way that would maintain their health care while generating significant state savings by drawing down additional federal funds. However, there are significant policy advantages and disadvantages for each approach that the Legislature should consider in authorizing such a change. We discuss these policy tradeoffs in more detail below. C – 162 Health and Social Services 2004-05 Analysis Benefits From Shift to Healthy Families. Merging the population of AIM mothers with Healthy Families would result in both fiscal and pro- grammatic benefits to the state and the persons now enrolled in AIM. This alternative would help the state to maximize the use of the two- for-one federal matching funds currently available through SCHIP that have gone unused in recent years. (To date, California has reverted ap- proximately $1.1 billion in SCHIP funds.) Thus, health coverage (at least pregnancy services and possibly more) could be provided for the popu- lation of mothers now covered by AIM at a substantially lower cost to the state. We estimate that the state would eventually draw down as much as $42 million in additional SCHIP dollars annually for health coverage, resulting in an equivalent net savings to the state. The state could ini- tially achieve net state savings in 2004-05 of as much as $20 million. The actual savings achieved by the state would depend upon a number of factors, including future state and federal decisions about which AIM mothers, on the basis of their family income, could be transferred to Healthy Families coverage; the timetable for accomplishing this change; and whether the state chose to use some of the savings from this proposal to keep health coverage for mothers under Healthy Families comparable to what they now receive under AIM. (We discuss these health coverage issues in more detail below.) The costs avoided by the state by accom- plishing such a shift would grow over time, given the upward trend in AIM enrollment seen in recent years. The achievement of savings in costs for AIM would free up Proposi- tion 99 funds that could either be (1) used in conjunction with funding for other health programs to help achieve General Fund savings for the state, or (2) used to help preserve funding for Proposition 99 programs which would otherwise face reduction or elimination because of the con- tinued decline in tobacco tax revenues. Finally, the recommended consolidation of programs would result in programmatic efficiencies over time by combining the administrative responsibilities from two programs into one. Shift to Healthy Families Has Some Complications. One potential disadvantage of this alternative is that certain nonpregnancy related health care services (such as vision) covered under AIM are not now included in the Healthy Families Program. Additionally, some postpartum medical care is not now covered under Healthy Families. The state could provide such coverage under Healthy Families, but it would reduce the savings the state could achieve from a shift to Healthy Families by approximately $8 million. Managed Risk Medical Insurance Board C – 163 Legislative Analyst’s Office Another concern is that, under federal regulations, the state would ordinarily not be able to draw down SCHIP funding for expectant moth- ers earning incomes between 250 percent and 300 percent of FPL. The state might either have to keep these mothers in AIM coverage or estab- lish another state-only component of the Healthy Families Program (such as now exists for certain legal immigrant children) to provide ser- vices for these expectant mothers. The MRMIB, however, has already re- quested federal approval to use SCHIP funds to cover infants of AIM mothers up to 300 percent FPL. If federal authorities approved this change in coverage for children, the state would be able to draw down federal funds for coverage of all women now eligible for AIM. Such a federal approval would permit the state to achieve the estimated maximum sav- ings of $42 million annually cited earlier in this analysis. Benefits and Tradeoffs From Shift to Medi-Cal. Expanding Medi-Cal to include pregnant women up to 300 percent of FPL would likewise maximize the use of available federal funds. This match would result in one federal dollar for each state dollar used to provide coverage for moth- ers in the income group who would be eligible for AIM. We estimate that the state could eventually draw down additional federal funds of as much as $25 million annually, and achieve a commensurate amount of state savings. Initial savings to the state of up to $12 million could be achieved by such a switch in coverage in 2004-05, again depending on a number of key implementation details. For instance, the level of savings would de- pend on whether the state provided a benefit package that was similar to or less comprehensive than what the pregnant women receive in AIM. If the state were to provide similar coverage as available through AIM, sav- ings would be reduced by approximately $8 million. Analyst’s Recommendation. After weighing the alternatives, we rec- ommend that the Legislature change state law to permit the gradual shift of some or all mothers in the AIM program to Healthy Families (which could include women up to 300 percent of the FPL depending upon fed- eral approval of the state’s plan amendment). Our proposal would not affect anyone now receiving AIM benefits, but would change how cover- age for this population is provided in the future. While a shift of this population to Medi-Cal also has merit, and war- rants consideration, the Healthy Families potentially offers greater state savings as well as administrative efficiencies through the consolidation of programs. That is primarily because Healthy Families draws down federal funding at a federal match of two-to-one, whereas coverage un- der Medi-Cal would result in a one-for-one match of federal dollars to the state’s contribution. C – 164 Health and Social Services 2004-05 Analysis The Legislature should also direct MRMIB to report at budget hear- ings regarding the feasibility, operational ramifications, and potential timetable for implementing this change and the options for covering some or all mothers now eligible for AIM within the Healthy Families Pro- gram. The review should include an examination of the options, and cost implications to the state of maintaining postpartum coverage and non- pregnancy services now provided to mothers under the AIM program. In our view, this information would provide the Legislature with the guid- ance needed to determine whether the state could begin to achieve sav- ings from the implementation of this change in health coverage, as we believe possible, beginning in 2004-05. Reserve Requirement Unnecessary We recommend that the Legislature repeal the statutory requirement that the Managed Risk Medical Insurance Board maintain a reserve in the Perinatal Insurance Fund for the Access for Infants and Mothers pro- gram, thereby achieving state savings of about $1 million in Proposi- tion 99 funds. (Reduce Item 4280-111-0232 by $998,000.) State Law Mandates a Reserve. The Perinatal Insurance Fund is used to receive funding appropriated by the Legislature and subscriber con- tributions to cover the operating expenses incurred by the AIM program. Under current state law, MRMIB is required to maintain a prudent re- serve in the Perinatal Insurance Fund, which is funded from Proposi- tion 99 tobacco tax revenues. Although current law does not specify the level of a prudent reserve, MRMIB has historically been budgeted with a reserve equal to 3 percent of projected program expenditures supported by the fund. The January budget plan includes a reserve for the Perinatal Insur- ance Fund totaling $1 million, equal to roughly 1 percent of program ex- penditures supported by the fund. The administration has indicated that the customary reserve level was decreased because of the state’s fiscal problems. However, our analysis indicates that there is no need for a separate and special reserve fund for AIM. In the event that AIM program expen- ditures exceeded the 2004-05 budgeted amount, an alternative source of funding is available to fund unanticipated expenses. Specifically, a sepa- rate reserve is maintained for state programs funded through Proposi- tion 99. The Governor’s 2004-05 budget plan sets aside $10.7 million for the Proposition 99 reserve. Analyst’s Recommendation. In light of the state’s fiscal difficulties, and the availability of the Proposition 99 reserve for any deficiencies for Managed Risk Medical Insurance Board C – 165 Legislative Analyst’s Office the support of AIM, we recommend that the Legislature repeal the state law requiring a separate Perinatal Insurance Fund reserve. The Legisla- ture could then use these funds in coordination with other health pro- grams to achieve an equivalent savings for the state General Fund or to backfill part of the proposed reductions in other Proposition 99 programs. C – 166 Health and Social Services 2004-05 Analysis DEPARTMENT OF DEVELOPMENTAL SERVICES (4300) A developmental disability is defined as a severe and chronic dis- ability, attributable to a mental or physical impairment that originates before a person’s eighteenth birthday, and is expected to continue indefi- nitely. Developmental disabilities include, but are not limited to, mental retardation, cerebral palsy, epilepsy, autism, and disabling conditions closely related to mental retardation. The Lanterman Developmental Dis- abilities Services Act of 1969 forms the basis of the state’s commitment to provide developmentally disabled individuals with a variety of services, which are overseen by the state Department of Developmental Services (DDS). Unlike most other public social services or medical services pro- grams, services are generally provided to the developmentally disabled at state expense without any requirements that recipients demonstrate that they do not have the financial means to pay. The Lanterman Act establishes the state’s responsibility for ensuring that persons with developmental disabilities, regardless of age or degree of disability, have access to services that sufficiently meet their needs and goals in the least restrictive setting. Individuals with developmental dis- abilities have a number of residential options. Slightly more than 98 per- cent receive community-based services and live with their parents or other relatives, in their own houses or apartments, or in group homes that are designed to meet their medical and behavioral needs. The remaining 2 per- cent live in state-operated, 24-hour facilities. Community Services Program. This program provides community- based services to clients through 21 nonprofit, corporations known as regional centers (RCs) that are located throughout the state. The RCs are responsible for eligibility determinations and client assessment, the de- velopment of an individual program plan, and case management. The RCs are supposed to be the payer of last resort. They generally pay for services only if an individual does not have private insurance or they cannot refer an individual to so-called generic services that are pro- vided at the local level by counties, cities, school districts, and other agen- Department of Developmental Services C – 167 Legislative Analyst’s Office cies. The RCs also purchase services, such as transportation, health care, respite, day programs, and residential care provided by community care facilities. The department contracts with the RCs to provide services to more than 190,000 clients each year. Developmental Centers (DC) Program. The department operates five DCs, and two smaller facilities, which provide 24-hour care and supervision to approximately 3,500 individuals. All the facilities provide residential and day programs as well as health care and assistance with daily activities, train- ing, education, and employment. More than 7,800 permanent and tempo- rary staff serve the current population at all seven facilities. Budget Proposal. The budget proposes $3.4 billion (all funds) for support of DDS programs in 2004-05, which is a 4 percent increase over estimated current-year expenditures. General Fund expenditures for 2004-05 are proposed at $2.2 billion, an increase of $114 million, or 5.6 per- cent, above the revised estimate of current-year expenditures. The budget proposes $2.7 billion from all funds ($1.8 billion from the General Fund) for support of the Community Services Program in 2004-05. This represents a $108 million General Fund net increase, or 6.5 percent, over the revised estimate of current-year spending primarily as a result of caseload growth, higher utilization rates for services, and other pro- gram changes. The increases would be partly offset by proposed reduc- tions in the budget, including policy initiatives to impose cost-contain- ment measures on RC purchase of services and RC operations. (We dis- cuss these policy proposals in more detail later in this analysis.) The 2004-05 Community Services Program includes a net increase of $104 mil- lion in General Fund support due to the scheduled transfer of the Habili- tation Services Program from the Department of Rehabilitation to DDS on July1, 2004. The budget proposes $690 million from all funds ($370 million from the General Fund) for support of the DCs in 2004-05. This represents a net increase of $5 million General Fund, or 1.4 percent, over the revised estimate of current-year expenditures. The increase in General Fund re- sources is mainly due to increases for employer retirement contributions and additional funding for employee compensation. However, these in- creases are largely offset by reductions in DC staffing due to population decline; implementation of Section 4.10, a provision in the 2003-04 Bud- get Act that mandated reductions in state operations; and the elimination of funding for one-time costs associated with the Bay Area Project, an effort to help move clients at the Agnews DC, which is closing, to relo- cate to the community. The budget proposes $31 million from all funds ($20 million from General Fund) for support of headquarters. About 60 percent of head- C – 168 Health and Social Services 2004-05 Analysis quarters funding is for support of the community services program with the remainder for support of the DC program. THE REGIONAL CENTER SYSTEM: SPENDING GROWTH RATE REMAINS A FISCAL CONCERN The cost to the state of operating regional centers (RCs) for persons with developmental disabilities has continued to escalate at a rapid pace, with General Fund spending more than doubling in the past five fiscal years despite efforts to obtain more federal funds to offset state support. In this analysis, we analyze recent caseload and program spending trends to determine what is driving this growth, review the major initiatives to date to address the situation, consider the Governor’s proposal to address these issues, and offer additional approaches for containing RC program costs. Background The Regional Center System Two Types of Expenditures. The RC system provides community-based services to clients through the 21 RCs located throughout the state. The RC budget is mainly comprised of two major types of expenditures. The first major category of RC expenditures consists of purchase of services, such as transportation, day programs, and residential care. The Governor’s budget proposes $2.3 billion for RC purchase of services in 2004-05. The other major category of RC expenditures consists of RC opera- tions, which includes eligibility determinations and client assessment, the development of individual program plans for clients, service coordina- tion (also known as case management), as well as associated administra- tive and personnel costs. The Governor’s budget proposes $420 million for RC operations, although $23.8 million of these funds represent pass- throughs for various contracts, programs, and projects not directly con- trolled by RCs. Over the past five years, RC operations have comprised about 18 percent to 21 percent of the total RC budget, with RC purchase of services making up most of the remainder. Fund Sources. The RC budget is supported primarily by the state General Fund as well as by reimbursements that are drawn down under a federal Medicaid waiver program, which is discussed in more detail below. After adjusting for a recent program shift to DDS, General Fund has typically accounted for about 65 percent of the RC budget in recent years, while Medicaid waiver reimbursements are the source of about Department of Developmental Services C – 169 Legislative Analyst’s Office 21 percent of RC support. Other major sources of funding include: (1) federal Title XX Social Services Block Grant funds; (2) federal Targeted Case Management funds; and (3) other federal funds, mainly related to Early Start services for infants, and various other minor sources of funding. Home and Community-Based Services (HCBS) Waiver. The HCBS waiver is a federal funding mechanism that allows developmentally dis- abled persons to live at home or in the community rather than having to live in an institutional setting. Costs for these community-based services are jointly funded by the federal government’s Medicaid program (known as Medi-Cal in California) and the state. Under the HCBS waiver, certain federal Medicaid rules are waived to allow states to provide services to persons with developmental dis- abilities that are not otherwise available to a typical Medicaid recipient. Many services received by RC clients who are enrolled under the waiver are partially paid for in this way by the federal Medicaid program. Un- like some other states, California provides the full scope of RC services to its clients, whether or not they are enrolled under the waiver. By agreement with federal authorities, enrollment under the waiver is capped. Currently there are about 57,000 RC clients enrolled under the waiver, which is capped at 60,000 RC clients until October 2004. The waiver cap will grow to 65,000 clients in October 2005 and to 70,000 cli- ents in October 2006. In order to be eligible for the waiver, the client or the client’s family must either be Medi-Cal-eligible or be deemed eligible for Medi-Cal under special rules that allow an individual to qualify regardless of his or her parent’s or spouse’s personal income. The client must have a for- mal diagnosis of a developmental disability and be a RC consumer. Also, the client must undergo an evaluation that determines that, were they not maintained in the community, they could otherwise be placed in a licensed health care facility for persons with mental retardation. Regional Center Caseload Trends Growth Trend Still Strong. Between 1999-00 and 2004-05, the RC caseload is projected to grow from about 155,000 to more than 199,000 clients, at an average annual growth rate of about 5.2 percent. For pur- poses of comparison, however, California’s population increased by an average of about 1.7 percent annually during that same period. The caseload trend can be seen in Figure 1 (see next page). C – 170 Health and Social Services 2004-05 Analysis Figure 1 Regional Center (RC) Caseload Growth Fiscal Year RC Caseload Year-to-Year Difference Percent Increase 1999-00 154,962 N\/A N\/A 2000-01 163,613 8,651 5.6% 2001-02 172,505 8,892 5.4 2002-03 182,175 9,670 5.6 2003-04a 190,030 7,855 4.3 2004-05a 199,295 9,265 4.9 a Reflects the Governor’s mid-year proposal for 2003-04 and budget proposal for 2004-05. Why Caseload Is Growing. Several key factors appear to be driving these growth trends. Improved medical care and technology has increased life expectancies for the developmentally disabled. It is also possible that medical professionals are identifying more developmentally disabled individuals at an earlier age, and referring more persons to DDS pro- grams. The RC caseload growth also reflects a significant increase in the diagnosed cases of autism, the causes of which are not yet fully under- stood. Autism is a neurological disorder characterized by impairments in social relating, language, and by the presence of repetitive and stereo- typed behaviors. The caseload for persons professionally diagnosed with full syndrome autism, and excluding children less than three years of age and persons with less common forms of autism, increased between 1998-99 and 2002-03 from about 10,300 to about 20,300 or by almost 97 per- cent. (During that same period, the caseload of persons with mental re- tardation increased by 20.4 percent, those with epilepsy increased 16.4 per- cent, and those with cerebral palsy increased by 15.9 percent.) Other states have reported growth trends in their autistic caseloads similar to those seen in California. Department of Developmental Services C – 171 Legislative Analyst’s Office Program Expenditure Trends Overall Spending and Cost Per Client Growing. Despite recent legis- lative initiatives to control costs, which we discuss in more detail below, General Fund spending (again, after adjusting for a program shift to DDS) has increased by $332 million or by 25 percent since 2001-02. As shown in Figure 2, while the overall level of RC spending has increased, the pro- portion of RC support coming from the General Fund has remained fairly stable in recent years. The proportion of RC funding coming from the federal Medicaid waiver has also remained steady over time. Figure 2 Funding Sources for Regional Center System Have Remained Constant (In Billions) 0.5 1.0 1.5 2.0 2.5 $3.0 01-02 02-03 03-04c 04-05c Other Fundsa b Medicaid Waiver Fundsa b General Fundb aDoes not reflect reimbursements received after closing of the fiscal year. bData adjusted to exclude funds for Department of Rehabilitation (DR) and the transfer of the Habilitation Services Program from DR to DDS. cReflects Governor’s mid-year proposal for 2003-04 and budget proposal for 2004-05. The average cost per client (including support from all fund sources) has increased steadily between 1998-99 and 2003-04, from about $9,500 to $13,400. The Governor’s proposed budget, would bring the estimated cost per client in 2004-05 to about $13,600. Why Spending Is Escalating. As can be seen in Figure 3 (see next page), total spending for RC services is growing more quickly than RC caseloads. Several factors help to explain why this may be occurring. C – 172 Health and Social Services 2004-05 Analysis Figure 3 Regional Center Budget Growth Outpacing Caseload Growth 10 30 50 70 90% 98-99 99-00 00-01 01-02 02-03 03-04ba 04-05b Caseload Total Fundsa aData adjusted to exclude funds for Department of Rehabilitation (DR) programs in the DDS budget, and the transfer of the Habilitation Services Program from DR to DDS. bReflects Governor’s mid-year proposal for the 2003-04 and budget proposal for 2004-05. One factor is an aging RC client population which requires more in- tensive and more costly services and supports. Another probable factor pushing costs upwards is the increase in diagnosed autism caseloads dis- cussed earlier, and the comparatively higher costs of treating autistic in- dividuals. Also, as new medical technology, treatments, and equipment become available, the scope of services and supports that DDS is able to provide to developmentally disabled individuals is broadening. In addi- tion, increased spending is, to some extent, a result of rate increases pro- vided for community care facilities that were intended to provide the facilities with sufficient resources to meet federal requirements for qual- ity of care and staffing. Major Initiatives to Control Costs Show Progress The Legislature has adopted a series of significant budget actions in recent budget deliberations in an attempt to slow the upward trend in General Fund expenditures for the support of RC programs. These measures include steps to: (1) enhance federal funding for the support of the RC system, (2) impose unallocated reductions and rate freezes; (3) suspend the startup of new community programs; (4) extend intake and Department of Developmental Services C – 173 Legislative Analyst’s Office assessment periods; (5) take steps toward expanding parental copayments, and (6) changing program eligibility rules. Several of these actions (although not all) have helped in preventing the significant increases in RC spending from being even greater. The growth in caseload and costs for RC services has occurred at a time when the state has been experiencing fiscal difficulties. As a result, the Legislature has concurred with a series of changes proposed by the prior administration, and taken other actions on its own, in an attempt to hold down further growth in spending for RC services. Some, although not all, of these actions are proving to be effective in preventing the sig- nificant increases in RC spending from being even greater. We discuss these actions in more detail below. Enhancing Federal Financial Participation. The 2002-03 budget plan adopted proposals to increase the amount of federal financial participa- tion received by the state by enrolling additional RC clients under the HCBS waiver. The DDS was subsequently successful in adding approxi- mately 12,000 additional consumers to the waiver who previously were receiving RC services mainly at General Fund expense. Additional fed- eral funds have also resulted from the reinstatement of some RCs for federal reimbursements. Since 2001-02, the annual amount of federal fund- ing from the HCBS waiver used for support of the RC system has grown by more than $100 million. The increased level of federal funding is as- sumed to continue in 2004-05 and subsequent fiscal years. The 2003-04 budget plan assumed the implementation of several ad- ditional proposals to increase federal financial participation for the sup- port of RC services. These steps included: (1) enrollment of additional RC clients under the waiver; (2) increasing the number of contracted ser- vices eligible for reimbursement; (3) implementing a system to capture funding for RC waiver administration costs; (4) revising the state’s tar- geted case management rate methodology, and (5) redefining selected services so that they can be added to the waiver. The DDS originally estimated that this initiative would generate ad- ditional federal reimbursements of about $100 million in 2003-04. How- ever, the department has since revised its estimate downward to about $87 million due to (1) delays in adding certain services to the waiver, and (2) the determination that some of the additional federal funding sought was already being collected for targeted case management services. The administration’s 2004-05 proposed budget does not contain any new initiatives to increase federal funds under the waiver. The adminis- tration has indicated that recent reductions in headquarters staffing has limited the ability of DDS to undertake additional efforts at this time to increase reimbursements from federal funds. C – 174 Health and Social Services 2004-05 Analysis Unallocated Reductions and Rate Freezes. For 2002-03 the adminis- tration proposed to achieve $52 million in General Fund savings by imple- menting statewide purchase of services standards. (We discuss this ap- proach in more detail later in this analysis.) The Legislature rejected the proposal and instead approved an unallocated reduction of $52 million. Each RC was assigned a portion of the unallocated reduction and required to submit a plan detailing how it would achieve the savings. The effectiveness of the 2002-03 unallocated reduction appears to have been limited. Instead of a reduction in overall RC expenditures, the RC system experienced about a $79 million deficiency in purchase of ser- vices in 2002-03. Part of the deficiency\u2014exactly how much is unclear\u2014 appears to have been due to the failure by RCs to achieve the savings target. The administration again proposed the implementation of statewide purchase of service standards for 2003-04, this time with a goal of achieving $100 million in General Fund savings (it later revised its estimate down- ward to $50 million). The Legislature again rejected this proposal and adopted various substitute cost-containment actions. These included setting limits for certain provider rates (for estimated General Fund savings of $25.9 mil- lion), adjustments to service coordinator ratios ($13.9 million General Fund), elimination of the pass-through of an SSI\/SSP rate increase to community care facility providers ($1.5 million), and an unallocated reduction of $10 mil- lion General Fund for purchase of services. The Governor’s January budget plan generally assumes that these measures will be effective and does not contemplate a deficiency request for additional funding for RC services for the current fiscal year. Suspension of Startup Programs. The 2002-03 budget as enacted sus- pended the expenditure of purchase of services funds for the startup of any new RC programs, with the exception of community placement plan programs, unless the expenditure was deemed necessary to protect the consumers’ health or safety and had prior authorization from the depart- ment. This change was expected to result in savings of $6 million Gen- eral Fund. The suspension of the new program startups was continued as part of the 2003-04 budget plan, and a continued suspension is pro- posed as part of the 2004-05 budget plan. Intake and Assessment. The 2002-03 budget plan extended from 60 to 120 days the amount of time permitted under state law for RCs to complete the assessment of clients after their initial intake. This was to have resulted in savings of $4.6 million General Fund. The extension of the assessment period was continued in 2003-04 and is proposed to be maintained in the 2004-05 spending plan. Department of Developmental Services C – 175 Legislative Analyst’s Office Parental Copayments. Currently, less than 1 percent of RC clients or their families pay any share of the cost of the services they receive. The Governor’s 2003-04 budget plan initially proposed that DDS develop and implement an expanded copayment program to assess and collect reim- bursements from the families of developmentally disabled children who live at home and receive certain services purchased by the RCs. The Leg- islature did not approve the implementation of broader parental copayments in 2003-04, but did adopt budget trailer bill language that directs DDS to submit a plan for implementing parental copayments meeting specific criteria by April 1, 2004. The statutory language speci- fies that the copayment program cannot be implemented without subse- quent statutory authorization by the Legislature. The administration has indicated it is proceeding to develop the proposal for submittal to the Legislature, and is considering additional copayment options. We dis- cuss the Governor’s recent copayment proposals later in this analysis. Change in Eligibility. The 2003-04 budget as enacted contains a pro- posal to achieve savings of $2.1 million General Fund by more closely conforming the state’s definition of what constitutes a substantial dis- ability to a comparable standard established under federal law. The state’s prior definition granted more latitude in determining whether a person was developmentally disabled. The DDS has estimated that about 400 persons per year would not be eligible for services under the new definition. These would generally be higher functioning individuals with mild mental retardation, or another disability and without severe medical or behavioral needs. While the immediate fiscal impact of the change in definition is relatively small, the cumulative effect may be substantial over the next ten years. The Governor’s 2004-05 budget plan assumes continued savings from this action. Evaluating the Governor’s 2004-05 Budget Proposals The Governor’s 2004-05 budget plan for RC community services has several components, including (1) an RC caseload estimate, (2) a pro- posal to again use federal social services block grant funds to offset state costs for community services, and (3) both budget year and longer term proposals to contain program costs. We explain and evaluate each of these proposals below. C – 176 Health and Social Services 2004-05 Analysis Caseload Assumptions May Be Low We withhold recommendation on the administration’s caseload estimate for regional centers, which assumes a significant slowdown in the rate of growth in the current fiscal year. While recent caseload trends indicate that the Governor’s proposal is reasonable, it is not yet clear whether this moderation in caseload growth is an ongoing trend or only temporary. If it turns out to be only temporary, then General Fund support for RC caseload could be underbudgeted by as much as $20 million in both the current and the budget year. Caseload Counts Below Budget Target. The DDS budget estimate for 2004-05 is partly based on an assumption that RC caseload in the current year will be 190,030, or 3,070 below the caseload of 193,100 assumed when the 2003-04 budget was approved. This would represent year-over-year growth of 4.3 percent. The Governor’s budget plan further assumes that the RC caseload will increase in 2004-05 by 9,265 clients, or 4.9 percent, to a total of 199,295. If the estimate is accurate, it would reflect a slowdown in caseload growth, although the growth rate would remain significant. The previ- ous caseload projection, presented at the time of the 2003-04 May Revi- sion, assumed a significantly higher year-to-year growth rate of about 6 percent. The projection of a somewhat moderating rate of caseload growth is reasonable, given the trend seen in caseload and the adoption of cost- control measures adopted by the Legislature in recent years. However, there is not sufficient data available at this time to determine whether the moderation in caseload growth is a temporary change or an ongoing trend. If the previous trend of higher growth were to resume, the Governor’s budget plan could be underbudgeted by as much as $20 million General Fund in both the current and budget year. Analyst’s Recommendation. We withhold recommendation on the Governor’s budget proposal at this time. Because of the relatively high degree of uncertainty over the caseload projection, it is possible that the budget proposal may understate the amount of state funding required for the program in both 2003-04 and 2004-05. The administration will update its projections this spring. We will continue to monitor caseload growth trends and recommend adjustments, if necessary, following our review of the May Revision. Department of Developmental Services C – 177 Legislative Analyst’s Office Title XX Funding Shift Appears Viable Now The Governor’s budget plan proposes to use $48 million in federal Title XX Social Services Block Grant funds in place of General Fund for specified regional center expenditures. Although a similar fund switch had been halted in the past because of technical issues, it should be possible to accomplish these General Fund savings in 2004-05. Title XX Funds Contingent on Copayment Data. The 2002-03 budget plan included provisions intended to achieve General Fund savings by (1) transferring Temporary Assistance for Needy Families funds into the state’s federal Title XX Social Services Block Grant, and then (2) substi- tuting block grant funds for General Fund support in the DDS budget for RC programs. The administration subsequently withdrew the proposal and the Legislature agreed to reverse the funding shift to DDS. At the time, the administration cited a lack of data on the income levels of fami- lies receiving RC services as a technical flaw inconsistent with federal rules that precluded the shift of these federal funds to DDS. However, the Governor’s 2004-05 budget plan again proposes to ac- complish a similar fund switch, this time to generate General Fund sav- ings of $48 million. The administration believes that income data on the families of RC clients that will be obtained as part of the proposed expan- sion of parental copayments would resolve this technical flaw, thereby permitting the state to use the Title XX funds to support the RC budget. Analyst’s Recommendation. We concur in the Governor’s proposal to accomplish this funding shift in order to achieve General Fund sav- ings. We would note, however, that the success of this proposal is condi- tioned on a successful effort by DDS to collect and tabulate data that would provide the needed information about client family incomes. We intend to monitor the situation to ensure that the proposed funding shift remains a technically effective solution. Cost Containment Measures Lacking Key Details The Governor’s budget proposes several cost containment measures that would reduce budget year growth in RC purchase of services by $100 million in state funds. The Governor’s budget also proposes longer- term reforms to contain program costs. We support the Governor’s proposals in concept, but withhold recommendation on the reform plan until more details are available. The Legislature should request that these details be provided at budget hearings, rather than at the May Revision, so it can consider their policy implications and determine whether the savings that are proposed will actually be achieved. C – 178 Health and Social Services 2004-05 Analysis 2004-05 Budget Proposal. The Governor’s budget proposes to reduce growth in 2004-05 RC purchase of services by $100 million in 2004-05. The administration has identified several general cost-containment strat- egies that include: Implementing statewide purchase of services standards that would regulate RC expenditures. Implementing a parental copayment for children 3 to 17 years of age whose parents have the ability to pay for part of the cost of their services. Accessing funds that are currently shielded in special needs trusts which are established for the care of the RC clients. The administration also proposes to make statutory changes that would provide the RCs with the authority and flexibility to achieve the savings and possibly to implement other unidenti- fied actions to constrain RC costs. Longer-Term Reform. The Governor’s budget also proposes to reduce the rate of growth of spending for RC purchase of services in 2005-06 and thereafter by an unspecified amount through three specific cost-contain- ment measures that include: Implementing a standardized, statewide rate system for major categories of services purchased by the RCs. Implementing a self-directed services model of funding and ser- vice delivery commonly known as self-determination that will cap individual budgets in exchange for increased client control over services. Expanding parental copayments to include families of children from birth to 3 years of age who have an ability to pay. Below, we provide some general information regarding several of the Governor’s cost containment proposals as well as some background information to assist the Legislature in assessing the Governor’s plan once more details are forthcoming. Statewide Purchase of Services Standards Standards Warranted to Prevent or Reduce Overspending. As we described above, statewide purchase of services standards were proposed in the Governor’s January budget proposals in both 2002-03 and 2003-04 but rejected by the Legislature in favor of other approaches. At this point it is not clear how or if the 2004-05 proposal will differ from those pro- posed by the previous administration. But there is evidence which indi- Department of Developmental Services C – 179 Legislative Analyst’s Office cates that such standards are warranted in general to prevent or reduce program overspending. A recent study commissioned by the state found that five cost-re- lated factors explain why the cost of services for some clients differ from the costs of caring for others. They are the client’s (1) age; (2) residence type, such as a community care facility or their home; (3) characteristics, such as whether an individual is autistic; (4) level of mental retardation, if any; and (5) their adaptive behavior, such as their independent living skills and social competence. The study also determined that gender had no relation to purchase of service costs, but that client ethnicity had a small influence on such costs. (At the time this analysis was prepared, a follow-up study was nearing public release that will examine whether other factors account for variations in spending patterns.) Some Variations Justified. The study compared RC spending pat- terns and found clear variations in purchase of services expenditures that could not be explained by these five factors. For the five-year period cov- ered by the study, 1995-96 through 1999-00, clients in the three highest spending RCs received more than $8,700 per capita annually in services, while consumers in the lowest spending regional centers received slightly below $6,000 in services. The biggest variations were found in out-of- home services, day programs and transportation. These data suggest that there are differences in spending patterns among RCs that could be ad- dressed by statewide purchase of service standards to ensure that RC clients in one region of the state receive services and supports that are comparable to those received by RC clients in other regions. Some regional variation in the cost of services in RC programs is inevi- table and appropriate, given that the RC system was designed and intended to permit community preferences to be taken into account in the delivery of services. Regional factors such as the rural nature of an area or the availabil- ity to clients of generic services can also affect costs, such as transportation. We believe these concerns could and should be addressed in the develop- ment of statewide standards through the involvement of RC, client advo- cates, service providers, and other interested parties. Implementation of Parental Copayments Last Year’s Copayments to Be Implemented, and More Proposed. In our Analysis of the 2003-04 Budget Bill, we supported copayments in con- cept because of the potential fiscal benefit to the state and because we believe it is a reasonable and appropriate policy that those who can af- ford to do so contribute to the cost of the care provided to members of their family. We did recommend that the Legislature clarify and improve some specific aspects of the plan as it moved forward. We also recom- C – 180 Health and Social Services 2004-05 Analysis mended, among other actions, that the Legislature consider broadening the proposal to include families of children from birth to age 3 as already occurs in some other states. As discussed above, the Legislature last year directed DDS to submit a plan, by April 1, 2004, for implementing parental copayments that meets specific criteria. The Governor’s 2004-05 budget proposal moves forward with the initial expansion authorized by the Legislature, as well as ex- tends copayments to the families of infants. Fiscal Implications. The DDS’s preliminary estimate is that this first copayment expansion (ages 3 through 17) would result in $29.5 million in additional state revenues during the first full year of implementation. The revenue estimate will be revised after DDS obtains income data on the families of the clients that would be assessed the copayment. In addi- tion to the revenues that would directly result from copayments, how- ever, their implementation would probably decrease the demand for cer- tain RC services. Some families would probably elect to receive fewer services once they were required to help pay for them in order to lower their copayment. As long as they are reasonable in their amount and based on a family’s ability to pay them, copayments could help deter excessive use of the available services. Our analysis also indicates that unknown but potentially substantial additional General Fund savings could result from the imposition of copayments on families with infants and the re- sulting changes in utilization patterns. Standardizing Rates Rate-Setting Process Varies. The Governor’s budget proposes to implement a standard statewide rate system for major categories of ser- vices purchased by regional centers beginning in 2005-06. The rates for residential services purchased by RCs are set at the state level. However, RCs have considerable discretion in determining how much they will pay a vendor for some nonresidential services. The rate-setting methods employed by RCs for nonresidential services vary significantly, accord- ing to the type of service. There is also significant variation in the way rates are set for the same types of services, such as for transportation. Some RC service rates are set competitively while others are not. Some rates are based on historical cost data while others are tied to what other similar vendors are paid, or the rates paid under the state’s Medi-Cal health program for the poor, or what the public would pay for the same services. In general, we found the rate-setting approach is often complex, inconsistent, potentially costly to the state, and, in some cases, inequi- table to some providers. For example, a provider who has recently con- Department of Developmental Services C – 181 Legislative Analyst’s Office tracted with an RC to provide day program services may receive a sig- nificantly higher reimbursement rate than another vendor who is pro- viding the identical service, but who signed a contract at an earlier date. Given the varying methods currently used to determine rates for ser- vices purchased by the RCs from their vendors, we believe that the stan- dardization of RC rates contemplated by the administration is feasible in concept and warranted. We would note that while the intent is to con- strain costs, changes to rate-setting mechanisms could in theory result either in state savings or costs depending on the details of the specific proposal. Any proposed change to the rate-setting mechanism should be carefully reviewed by the Legislature to ensure that it will in fact result in net savings to the state. Expansion of the Independence Plus Waiver More Client Control and Lower Costs. Subject to federal approval, the administration has proposed to implement a waiver that will allow a self-directed services model of funding and service delivery, more com- monly known as self-determination, that caps individual budgets in ex- change for increased consumer control over services. In our review of the DDS budget in the Analysis of the 2003-04 Budget Bill, we concluded that expansion of self-determination under the pro- posed waiver represented a potential win-win situation for clients and the state. Clients could gain greater control over their services and their life while the state could potentially hold down growth in program costs. During last year’s budget deliberations, the Legislature adopted language that allowed for continuation of the existing self-determination pilot projects in five RCs as well as for expansion to other RCs when consistent with federal approval of the waiver. Expansion of self-determination is also contingent on the successful implementation of the California Developmental Disabilities Informa- tion System (CADDIS), which is necessary to meet federal billing require- ments. The CADDIS system, which allows for tracking of individual cli- ent budgets, is expected to be fully implemented in all 21 RCs by the end of the current fiscal year. Reductions in Regional Center Operations Regional Center Operations Unallocated Reduction. The Governor’s budget proposes an unallocated reduction to RC operations of $6.5 mil- lion to control administration costs. The administration believes that op- portunities exist to increase operational efficiencies within the RCs which would allow savings to be achieved without adversely affecting program C – 182 Health and Social Services 2004-05 Analysis administration. Accordingly, under the Governor’s plan, DDS will work to develop a long-term strategy to minimize waste and excessive ad- ministrative costs. However, the details of how these efficiencies will be accomplished are not available. Therefore, we are unable to determine at this time how RC administrative functions would be affected and what direct impact, if any, the unallocated reduction would have on the RC’s ability to meet their obligation to provide services to their clients. We would note that several of the administration’s cost-containment proposals for 2004-05 and 2005-06 could potentially increase workload for the RCs. Although there are few details available at this point, it is likely that implementation of statewide purchase of service standards, implementation of parental copayments, and an expansion of self-deter- mination projects would create additional administrative workload for the RCs. In addition, in 2004-05 the Habilitation Services Program will be transferred to DDS from the Department of Rehabilitation, a shift which will also generate additional workload, but occur without an increase in RC operations funding. Analyst’s Recommendation Actual Savings From Governor’s Proposals Indeterminable. In con- cept, the Governor’s proposals appear to have merit, given our own past recommendations to the Legislature for reform (see our analyses of the DDS budget in 2002-03 and 2003-04) and the continuation of rapid RC caseload and expenditure growth trends. However, neither the savings estimates for each of the Governor’s separate cost-containment propos- als for 2004-05, nor detailed information regarding how they would be implemented, was available at the time this analysis was prepared. Ac- cording to the administration, this additional information will be pro- vided in the 2004-05 May Revision. Details are also lacking regarding the proposals for longer-term reform. Consequently, we cannot say at this time whether the 2004-05 pack- age will achieve the contemplated savings or provide a full assessment of any of the proposals. Lacking these details, the Legislature is also not in a position to fully assess all of the policy and operational implications of these changes. Given the complexity of these issues, however, the Legislature should request that the administration present its completed proposals to imple- ment cost-containment measures at budget hearings, and not wait until the May Revision to present these details. An earlier timetable would provide the Legislature with the additional time needed to review, ana- Department of Developmental Services C – 183 Legislative Analyst’s Office lyze, and, in some cases, compare alternative approaches to the plans put forward by the administration. An Agenda for Further Reform The Governor’s budget proposal for a continuing effort to change the way regional center services are delivered in order to improve program accountability and cost-effectiveness represents a reasonable starting point for consideration. There are additional options the Legislature may also wish to consider to broaden the discussion of possibilities for cost containment and program reform, including the improvement of audit functions, clarification of some provisions of the Lanterman Act, modification of the nursing home rate structure, and reductions in certain contracted activities. In our view, the administration’s proposals to study additional cost- saving changes in RC programs and operations constitutes a reasonable initial approach. We believe this discussion should be broadened, how- ever, to include additional opportunities for reform besides those men- tioned in the Governor’s budget plan. We discuss some of those possi- bilities below. State’s Auditing Capabilities Could Be Strengthened Limited State Audit Role. The RC fiscal oversight functions include desk audits in which vendor billings are reviewed for accuracy and com- pleteness or, in some cases, field audits that include a detailed review of some or all of a vendor’s records or financial accounts to check their ac- curacy. In some instances, an RC may request that DDS participate in an audit of a vendor. However, DDS headquarters is neither staffed to per- form vendor audits, nor is this one of its regular functions. As a result, there is little chance that a RC vendor will ever face an audit performed by state auditors. One significant exception is vendors who are also Medi- Cal providers, and therefore subject to state reviews related to the state’s Medi-Cal antifraud efforts. Many RC vendors do not participate in the Medi-Cal Program. Al- though they provide services that are similar or identical in nature to those of Medi-Cal providers, they are not subject to the same statewide, centrally coordinated effort aimed at deterring fraud and abuse to which Medi-Cal providers are subject. We believe this arrangement does not provide an adequate safeguard for the expenditure of very significant amounts of state funds that flow each year through non-Medi-Cal ven- dor contracts. Our analysis indicates that shifting the responsibility for vendor field audits from the RCs to the state would relieve the RCs of C – 184 Health and Social Services 2004-05 Analysis part of their workload and allow them to focus more on providing high- quality services to RC clients. At the same time it would allow the state to achieve stronger fiscal oversight of the RC vendors and to coordinate these efforts on a statewide basis. Under our suggested approach, the RCs would retain their present oversight responsibilities for conducting desk audits. Because the existing DDS audit unit is not staffed to perform field audits of vendors, as much as $2.9 million of the $4.4 million in funding now provided for RC audit functions could eventually be transferred from the RC operations budget to the DDS headquarters budget for this pur- pose. Because this change would require modifications of existing RC contracts, it may be necessary to phase in such a funding shift as the contracts are renewed. Analyst’s Recommendation. Accordingly, we recommend that DDS report at budget hearings on the feasibility of shifting the responsibility and funding for field audits of RC vendors from the RCs to DDS. The DDS should also report at that time on whether it would be more cost- effective to contract out the audits, increase headquarters staff to per- form the audits, or some combination of these two options. The DDS should also report on the timeline necessary for completing such a shift, and recommend the amount of resources that should be transferred to its headquarters operations for this purpose in 2004-05 to begin phasing in this change. Lanterman Act Could Be Clarified Lanterman Act Unclear in Some Respects. The Lanterman Act states the intent of the Legislature to ensure the provision of services to clients and their families be effective in meeting the goals stated in the indi- vidual program plan, reflect the preferences and choices of the client, and reflect the cost-effective use of public resources. Services and sup- ports may include, but are not limited to, more than 20 specific services that are listed in the Lanterman Act. The law is specific that the services available must include diagnosis, evaluation, treatment, personal care, day care, speech therapy, education, recreation, camping, and special- ized medical and dental care, among others. However, the Lanterman Act is not as specific regarding which services, if any, the state is not responsible for providing to clients. At one time, however, state law was clear that RCs were not obligated to pay for services for a client that par- ents would typically be responsible for purchasing for any children. This statutory language sunsetted in 2002. Under the RC system, administrative law judges (ALJs) are empow- ered to hear appeals of cases in which RCs have denied the provision of Department of Developmental Services C – 185 Legislative Analyst’s Office services. In ruling on such appeals, ALJs have recently ordered RCs to fund services and supports for services that are typically paid for by par- ents of children without developmental disabilities. For example, one RC was required to purchase private swimming lessons even though the RC had determined that group swimming lessons with peers with whom the client could socialize would likely be more beneficial to the client. In an- other case, an ALJ ordered an RC to pay a portion of the cost for an addi- tion of a bedroom and bathroom to a house. The RC had denied the re- quest because it believed this expense was one which would normally be assumed by the parents of a nonhandicapped child. Our analysis indicates that the restoration of the language that sun- set in 2002 could eventually, although not immediately, result in signifi- cant savings to the state. The initial fiscal impact of adopting this lan- guage would be relatively modest in terms of reduced RC purchase of services costs\u2014probably less than $1 million annually. However, the cu- mulative effect of this change would probably be greater over time, and could potentially reach several million dollars annually. The savings would occur because RCs would have greater authority to control pro- gram costs. Reinstatement of the prior state law could also reduce RC expendi- tures and workload related to the hearing process to the extent that clari- fication of the Lanterman Act resulted in fewer appeals of RC decisions to deny payment for services that are appropriately the financial respon- sibility of their families. Analyst’s Recommendation. For these reasons, we recommend that the Legislature reinstate statutory language that clarifies that parents of children with developmental disabilities, and not state taxpayers, should be financially responsible for the purchase of goods and services that would normally be purchased by the parents of a child without develop- mental disabilities. Because the impact of this change would be gradual, we recommend no specific budgetary adjustment to the RCs at this time relating to this action. Nursing Home Rate Restructure Could Increase Federal Funds Leveraging Federal Dollars Could Reduce General Fund Costs. Our analysis indicates that the state has the option of drawing down addi- tional federal funds to offset the state costs of services provided to resi- dents of Intermediate Care Facilities for the Developmentally Disabled (ICF\/DDs). This could be achieved by modifying the ICF\/DD rate and implementing other related changes. We estimate that this approach could generate as much as $50 million annually in additional federal funds that C – 186 Health and Social Services 2004-05 Analysis would allow a commensurate reduction in state General Fund support for these nursing homes. Federal regulations allow for a broad definition of the services that can be provided in ICF\/DDs with reimbursement under the Medi-Cal Program. Other states have been successful in defining their ICF\/DD programs more broadly to cover the supports and services for clients with developmental disabilities, thereby increasing their federal reimburse- ment under Medicaid. However, California continues to maintain a more narrow definition of ICF\/DD services than the one permitted under fed- eral law. We believe the state could take the same approach taken by other states to increase its federal reimbursement under Medi-Cal. Specifically, in order to capture these additional federal funds, the state would have to redefine the ICF\/DD program as an all-inclusive service. Currently, the ICF\/DDs are paid a rate based only on the spe- cific nursing care services they provide. Additional services that a client may receive such as transportation or a day program are generally paid for separately by the RC or provided through a generic service provider. Under this option, ICF\/DDs would be redefined to be an all-inclusive service and the responsibility for paying for transportation and day pro- grams and other assistance (in cases where generic services were unavail- able) would shift from the RC to the ICF\/DDs and would be reflected in the rates paid to the ICF\/DDs. The DDS would have to address several significant programmatic and administrative issues to implement this proposal. Implementation would also likely require regulatory changes and would be contingent on federal approval of an amendment to the State Medicaid Plan. How- ever, no change in statute is believed necessary to move forward with this approach. Analyst’s Recommendation. Our analysis suggests that recent staff- ing reductions mean that it would be difficult for DDS headquarters to accomplish the change in ICF-DD rates that we propose without addi- tional positions and resources. Accordingly, we recommend that DDS report at budget hearings on the feasibility, timetable, and staff resources that would be required to proceed with this effort to further maximize the federal funding available to the state for the support of the RC sys- tem. The DDS should also specifically report on the state savings, if any, that could be achieved in this manner in the 2004-05 and 2005-06 fiscal years. Department of Developmental Services C – 187 Legislative Analyst’s Office Contracted Regional Center Services Could Be Reduced Missed Opportunity for RC Operational Savings. The Governor’s 2004-05 spending plan includes significant proposals for reductions in RC operations. This follows the approval by the Legislature in the 2003-04 budget of a $13.9 million reduction in RC operations funding through the modification of staffing ratios for case management, supervisory, and clerical personnel. However, no comparable reductions have been made to various spending items that pass through the RC operations budget and do not directly support RC management activities. We believe it would be reasonable to consider reductions to these items given the state’s current fiscal condition. The proposed 2004-05 budget would provide $22.1 million General Fund for 13 such separate contracts, programs, and projects. A 10 percent reduction in General Fund expenditures would result in General Fund savings of $2.2 million. We would note that, in most cases, reduction or elimination of these contracts, programs, and projects would require a change in statute, federal approval, or both. Analyst’s Recommendation. We recommend that the Legislature di- rect DDS to report at budget hearings on the feasibility of achieving a 10 percent reduction in state expenditures for contracts, programs, and projects included in the RC operations budget as pass-through items. The DDS would identify the savings that could be obtained within par- ticular pass-through items, the steps necessary to reduce costs, and the effect, if any, on the quality of services provided directly to RC clients. Conclusion Even with the recent slowdown that appears to be occurring in caseload growth, it appears likely that RC costs will continue to grow at a significant pace. We believe the Governor’s budget proposals offer a reasonable starting point for discussions with the Legislature and other interested parties about how changes could be made in the RC system that would ensure the most cost-effective use of state funding while main- taining high-quality services for RC clients. However, we recommend that discussion be broadened to include some of the additional strategies we have outlined in this analysis. C – 188 Health and Social Services 2004-05 Analysis DEVELOPMENTAL CENTERS PROGRAM Developmental Centers May Be Underbudgeted Although the caseload estimate for the Governor’s budget plan for developmental centers (DCs) is reasonable, we have identified three factors that make it possible that up to about $80 million in additional funding will be required for their support. These additional costs could result from (1) the Agnews DC closure plan, (2) the possible federal decertification of Lanterman DC, and (3) the possibility that savings from a proposal to contract out food preparation at the DCs may not be realized. Caseload Estimate Reasonable. The Governor’s budget plan assumes that the DC population will average 3,490 clients in 2003-04, and will continue on the present long-term trend and decrease through the re- mainder of the current fiscal year and the budget year. Specifically, the DC estimate projects that the average population actually present at any given time in the DCs, including the state’s two leased facilities, will be 3,367 for the budget year. While the proposed budget for 2004-05 reflects savings from the on- going decline in DC population, these savings are more than offset by increases in retirement costs and other factors, resulting in a net growth in DC expenditures of 1.4 percent in the budget year. Based upon our review of the available caseload data, we believe the Governor’s budget estimate for the DCs is reasonable. In any event, the caseload estimate for DCs will be updated at the time of the May Revision. Our analysis of the budget estimate indicates, however, that three factors could ultimately result in greater expenditures for the DCs in 2004-05 than have been proposed at this time. These factors, which we discuss in more detail below, relate to (1) the Agnews DC closure plan, (2) the possible decertification of Lanterman DC, and (3) the possibility that savings from a proposal to contract out food preparation at the DCs may not be realized. Funding Request Anticipated for Agnews DC Closure. The 2003-04 budget plan included authorization for DDS to redirect existing resources to form a project team that would begin planning efforts to close Agnews DC by July 2005. The project team is currently developing a master plan for Agnew’s closure, and DDS is required to submit a completed closure plan to the Legislature by April 1, 2004. The administration is expected to submit a 2004-05 funding request during the spring for costs to carry out this closure plan. During the bud- get year, all remaining Agnews residents would be transferred to other Department of Developmental Services C – 189 Legislative Analyst’s Office DCs or placed in the community so that the facility would be shut down by July 2005. During this period, negotiations would also begin for the transfer of Agnews to the Department of General Services as potential surplus property. In our discussion of the DC closure issue in the Analysis of the 2003-04 Budget Bill, we estimated that the state would incur initial costs of $10 mil- lion to $15 million in the short term related to the closure of Agnews DC. We assume that the administration will probably present a funding re- quest in that range in the spring. The actual costs of closure activity could vary based upon the extent to which Agnews DC clients could be placed in community settings instead of being transferred to the remaining DCs. Our estimate of the additional net funding takes into account: (1) new costs to assess and place DC residents in community programs, (2) costs for relocation of staff, and (3) the savings to DDS operating costs that would result from movement of individuals from DCs to the community or less expensive DCs. The state would subsequently realize substantial savings from the closure of Agnews\u2014potentially $30 million to $40 million annually\u2014that would more than offset these one-time closure costs. In addition to these ongoing savings on state operations, the closure of Agnews would allow the state to avoid an additional $100 million to $200 million in costs for capital improvements that would otherwise probably be necessary to continue to operate the facility. Finally, the land value of Agnews offers potential one-time income to the state General Fund of an estimated $80 million to $90 million that could be used to offset closure costs. We would note that our Analysis of the 2003-04 Budget Bill recom- mended that the Legislature initiate the process to also close Lanterman DC in addition to Agnews DC given the projected decline of the DC popu- lation. The Governor’s budget plan indicates that the administration in- tends to revisit the issue of whether additional DCs should be closed. Lanterman Federal Funding at Risk. The federal government peri- odically conducts surveys of state institutions, including DCs, to ensure that they are being operated in compliance with federal rules and consti- tutional requirements. A survey conducted at the Lanterman DC in Au- gust 2003 concluded that the facility was out of compliance for five of the eight conditions established for the receipt of federal funding for the part of the DC that is licensed as an ICF\/DD. About 75 percent of Lanterman clients are cared for in the ICF\/DD part of the facility. If the problems identified in the survey are not remedied before a follow-up survey anticipated to occur by March 2004, the federal Cen- ters for Medicare and Medicaid Services (CMS) may decertify the ICF program retroactively to September of 2003. Decertification would result C – 190 Health and Social Services 2004-05 Analysis in a loss of federal funds to the state of approximately $3.2 million per month\u2014potentially as much as $32 million in the current fiscal year and $38.4 million in the budget year. In the past, the state has replaced lost federal funds in the DC program with General Fund support in order to safeguard the health, safety, and welfare of the populations cared for in these 24-hour care facilities. Contract Savings Depend on Constitutional Amendment. The Governor’s spending plan assumes that the state will achieve General Fund savings of $910,000 in the budget year by contracting out DC food services beginning January 1, 2005. However, our analysis indicates that, while the proposal has merit, some hurdles make it uncertain whether these savings can be achieved. The five DCs all have large, institutional kitchens where food for the DC residents is now prepared by state personnel. Because of the fragile medical condition of many of the DC residents, and the resulting dietary restrictions, food preparation at the DCs is more complex than is typi- cally the case for other institutions. Many DC residents have special meal plans prepared for them by dieticians and medical staff. The administration has indicated that it believes contracting-out food preparation will result in more cost-effective and higher-quality service for DC residents. The state currently contracts out for janitorial services at the DCs and has contracted out for food preparation at other state fa- cilities, such as veterans’ homes. However, provisions of the California Constitution and case law limit the practice of contracting-out, especially in regard to programs which already have state staffing in place performing a state governmental func- tion. For this reason, the administration has proposed to place an amend- ment to the State Constitution on the November 2004 ballot so that this proposal, and other contracting-out efforts affecting other departments, could be implemented within the budget year. The Governor’s budget plan assumes both that the Legislature will place such a measure on the November ballot and that it will receive approval by the voters. If either of these actions fails to occur, an additional $910,000 from the General Fund, beyond the funding now proposed in the budget plan, would be needed for the support of the DCs. Analyst’s Recommendation. We will review the Governor’s plan for the closure of the Agnews DC and the anticipated funding request to allow closure of the facility to proceed as the information about these matters becomes available to the Legislature. We will also monitor the Lanterman decertification situation. We recommend no specific actions to the Legislature in regard to these matters at this time, except that we Department of Developmental Services C – 191 Legislative Analyst’s Office continue to recommend that the Legislature consider initiating the clo- sure of Lanterman. We support in concept the Governor’s proposal to contract out food preparation in the DCs because of the potential savings from this ap- proach. However, we withhold recommendation pending the outcome of the Legislature’s deliberations on the constitutional amendment. C – 192 Health and Social Services 2004-05 Analysis DEPARTMENT OF MENTAL HEALTH (4440) The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department’s primary responsibilities are to (1) provide for the delivery of mental health services through a state-county partnership and for involuntary treat- ment of the mentally disabled; (2) operate four state hospitals; (3) man- age state prison treatment services at the California Medical Facility at Vacaville and at Salinas Valley State Prison; and 4) administer various community programs directed at specific populations. The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly com- mitted as Sexually Violent Predators (SVPs), and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections (CDC). Budget Proposal Increases DMH Budget Overall. The budget pro- poses $2.5 billion from all funds for support of DMH programs in 2004-05, which is an increase of more than $165 million, or 7 percent, above esti- mated current-year expenditures. The budget proposes $911 million from the General Fund, which is an increase of about $32 million, or 4 percent, above the Governor’s revised budget plan for the current year. Reim- bursements that would be received by DMH\u2014largely Medi-Cal funding passed through to community mental health programs\u2014would increase $134 million, or 9 percent. The overall proposed increase in DMH expenditures is primarily due to the expansion of the Early and Periodic Screening, Diagnosis and Treat- ment Program (EPSDT) for children with emotional problems. The Governor’s budget plan reflects a proposed $245 million increase in EPSDT reimbursements in the budget year compared to the revised cur- rent-year level of spending ($112 million from the General Fund). We dis- cuss the reasons for the augmentation request (including some signifi- cant technical adjustments that make program growth appear larger than Department of Mental Health C – 193 Legislative Analyst’s Office is actually the case), describe measures that are being proposed by the administration to partly offset the growth in program costs, and provide our response to these proposals later in this analysis. The Governor’s budget proposes about a $28 million increase from the General Fund to continue with preparations to open a new state hos- pital in Coalinga, which is now under construction. This amount includes funding for additional staff, equipment and expenses for the next phases of staffing, and the full-year cost of staff added for activation of the facil- ity in the current year. The administration proposes to open the facility in August 2005. Budget Proposal Includes Some Reductions. Although the budget plan provides for an overall net increase in General Fund spending, it does reflect some significant reductions in mental health program spend- ing, including proposals to: Eliminate all remaining funding for the Children’s System of Care ($20 million) and to reduce funding for the Early Mental Health Initiative (supported with Proposition 98 funds) by $5 million. Defer, for the second year in a row, the payment of more than $226 million in county claims that have accumulated (as of No- vember 2003) for reimbursement for several state-mandated com- munity mental health programs. The two most significant pro- grams affected are the AB 3632 services for special education children and a separate mandate for services for seriously emo- tionally disturbed pupils. (The Governor’s proposal, however, does continue to provide $69 million in federal special education funds within the education budget for these services.) Implement a number of measures to reduce the cost of operating the state hospital system, including: (1) placing caseload limits on certain forensic populations, (2) shifting some individuals who are being considered for commitment to state hospitals as SVPs to the local jails while they await their commitment proceedings, and conducting proceedings at an earlier date before such indi- viduals are due to be released from state prisons; (3) restructur- ing staffing and treatment services to take into account the num- ber of individuals who have been committed as SVPs but are unwilling to participate in treatment; and (4) changing state law to provide for indefinite court commitments of SVPs, instead of two-year commitments that are subject to renewal, in order to reduce the number of evaluations and court commitment pro- ceedings. C – 194 Health and Social Services 2004-05 Analysis We discuss some of these specific proposals in more detail later in this section of the Analysis. STATE HOSPITAL ISSUES Activation of Coalinga Hospital Could Be Delayed The Governor’s budget requests $27.7 million to continue the activation of the Coalinga State Hospital. However, our analysis indicates that the state hospital system currently has sufficient capacity to allow the activation of additional beds at Coalinga to be postponed to reduce costs in the budget year. Accordingly, we recommend that the Legislature delay the activation until March 2006 in order to achieve one-time state General Fund savings of up to $20.1 million. (Reduce Item 4440-011-0001 by $20,143,000.) Background SVP Commitments. In accordance with Chapter 763, Statutes of 1995 (AB 888, Rogan), and Chapter 762 (SB 1143, Mountjoy), California estab- lished a new civil commitment category for SVPs. This law requires that certain criminal offenders who have been committed by the courts as SVPs be placed in state hospitals for inpatient treatment, and then even- tually released into the community for further supervision and treatment. The law’s intent was to ensure that SVPs be confined and treated until they no longer presented a threat to society. Currently, 535 persons who have either an SVP commitment by a court, or who have been temporarily placed in a state hospital pending the outcome of their commitment hearing, have been placed in the state hospitals. The number of SVP commitments has been growing each year, and only a few persons sent to state hospitals as SVPs have thus far been released to the community. New State Hospital for SVPs. Beginning in 2000, the state initiated steps to construct a new 1,500-bed secure mental health treatment facil- ity, to be known as Coalinga State Hospital (CSH), to provide DMH with additional capacity to treat patients involuntarily committed under the SVP law. The DMH began construction in 2001, and construction is sched- uled to be completed by May 2005. The construction project will be funded by lease-revenue bonds, which are scheduled to be sold in the spring or fall of 2004. To date, the state has committed more than $380 million for the construction and preliminary staffing of CSH. Department of Mental Health C – 195 Legislative Analyst’s Office In addition to this construction project, the state has taken several steps in recent years to ensure that there is sufficient space in the state hospital system for the treatment of offenders who require high security, such as SVPs. Among other actions, the Legislature provided $6.9 mil- lion in 2001-02 to purchase modular buildings for placement at Patton State Hospital (PSH) and Atascadero State Hospital (ASH) and to con- vert program areas into temporary patient living space to accommodate up to 500 additional patients. Additional funding for the state hospital system to staff the 500 additional beds has not been provided to date because the overall hospital population has grown significantly less than DMH had previously projected. Evaluating the Governor’s Budget Proposal CSH Activation Would Continue. The Governor’s 2004-05 budget proposal includes $27.7 million from the General Fund for the continued activation of CSH. This funding consists of (1) $8.7 million for what are called phases IV and V of staffing; (2) $12.2 million for operational ex- penses and equipment; (3) $3.2 million for recruitment and retention pay differentials and salaries that would exceed standard levels for certain positions at CHS; and (4) a net increase of $3.6 million to pay the full- year cost in 2004-05 of CSH staff added in 2003-04 to help prepare the facility for its opening. The proposal would add almost 165 new posi- tions for CSH in the budget year. The budget plan also requests an aug- mentation of about $770,000 for about 20 additional positions to activate for the first time 147 of the 500 temporary beds at ASH and PSH. Additional Capacity Not Needed at This Time. Our analysis of the Governor’s budget request indicates that the state could delay the acti- vation of CSH and still have more than sufficient capacity to meet the projected need for secure treatment beds in the budget year, and beyond. According to DMH’s own population projections, the number of pa- tients requiring secured housing will not grow, but will instead decline by 47 patients during the budget year as a result of proposals to (1) cap the populations of two groups of forensic patients and (2) divert from the state hospital system persons who have been referred for SVP commit- ment but have not yet been determined by the court to be SVPs. (We discuss these proposals later in this analysis.) In light of these projected population estimates, our analysis indi- cates that DMH will have a surplus of approximately 600 beds in the budget year. The DMH has estimated it will need to house a total of 3,776 secure patients in the state hospitals by June 2005. However, the state hospitals have the capacity to hold up to 4,376 patients in secured treat- ment settings (including the 500 temporary beds at ASH and PSH) in C – 196 Health and Social Services 2004-05 Analysis 2004-05. The anticipated decline in the state hospital populations and the resulting surplus of beds suggest that a delay in the activation of CSH would be possible. Administration Objections. In our discussions about the possibility of delaying the activation of the facility in order to achieve General Fund savings, the administration has raised several objections. First, the administration has indicated that delaying the activation of CSH could complicate the sale of the lease-revenue bonds if no date for activation of the facility is specified. Bond underwriters, we are advised, may request that such a date be finalized before bonds could be sold. Also, the administration has asserted that allowing the facility to sit idle could generate significant new costs by allowing the condition of unused equipment to deteriorate. It has also voiced concern that students who are expected to complete educational programs at a nearby commu- nity college in preparation for work at CSH could leave the Coalinga area and obtain employment elsewhere. Finally, the administration has raised concerns that the use of the temporary beds at ASH and PSH beyond August 2005 may not be per- mitted by DHS and the State Fire Marshall. The DMH asserts that the continued use of the beds beyond that date could result in licensing vio- lations or require funding to bring the space used for patient care into compliance with licensing, earthquake, and fire safety codes and regula- tions. Analyst’s Recommendations Precedents Exists for Facility Delay. In light of the state’s budget difficulties, we recommend that the Legislature delay the activation of CSH from August 2005 until March 2006 for a state General Fund sav- ings of up to $20.1 million. In the past, the Legislature has delayed the activation of state prison facilities, including a new high-security facility in Delano (Kern County), to help address budgetary shortfalls. We be- lieve a similar approach is warranted for CSH, given the considerable resources being requested to bring the facility on line, the severity of the state’s current fiscal problems, and our findings that the state hospital system has more than enough secure beds to meet patient needs. We also believe it is possible to address most of the concerns voiced by the ad- ministration about a potential delay. Our approach would fund operating expenses and equipment and staff recruitment costs necessary for a March 2006 opening of the hospi- tal to move ahead in the budget year. Our proposal would also provide the additional funding needed to support the Phase III expansion of staff Department of Mental Health C – 197 Legislative Analyst’s Office already authorized for the current fiscal year to proceed without any dis- ruption. Given that these activities would continue in the budget year at CSH, we see little risk that a seven-month delay in the arrival of patients would result in major costs from the deterioration of any equipment pur- chased for the facility. The Legislature could take steps to ensure that the sale of the bonds would proceed. The state recently encountered and resolved a similar issue when it delayed the activation of the Delano II state prison. To en- sure that the state’s intention to occupy the facility is clear to prospective bondholders, we propose that the Legislature adopt the following bud- get bill language: Provision X. In order to address the state’s fiscal problems, it is the intent of the Legislature to achieve savings in the 2004-05 fiscal year by delaying some staffing and funding for activation of Coalinga State Hospital until 2005-06. It is further the intent of the Legislature that patients occupy beds at CSH no later than March 2006. We would acknowledge that a delay in staffing and opening CSH might cause some community college graduates who would otherwise take jobs at the new state hospital to go elsewhere after graduation. How- ever, these nursing and psychiatric technician graduates could be recruited to help address state staffing shortages in these professions, which exist at other state facilities. We believe it is unlikely that the use of ASH and PSH beds for an additional seven months will pose a serious problem. In 2002-03, DMH itself had proposed to activate these beds for almost as long a period of time (15 months) as we are proposing (20 months). In our view, the department’s contention that these beds cannot be used to meet the state’s interim needs for secure beds is inconsistent with its prior funding re- quests for the $6.9 million; the money that was spent to make these 500 beds available for just this purpose. If Activation Proceeds, Request Should Be Reduced. Should the Leg- islature adopt the Governor’s proposal and decide not to delay the acti- vation of CSH, we recommend that it reduce the funding request to ad- dress several concerns. Specifically, we recommend that the Legislature take the following actions: Delete Training-Related Travel Funding for New Hospital Po- lice Officers. The budget proposal includes $1.3 million for the cost of staff travel to ASH for the 88 new hospital police officers for CSH. This funding request translates into approximately $15,000 per new CSH employee, and assumes that every new officer for CSH will require training. This assumption does not appear to be justified, given that some existing staff at ASH and C – 198 Health and Social Services 2004-05 Analysis other state hospitals have indicated an interest in relocating to Coalinga. Therefore, we recommend deletion of the funding in its entirety. The DMH could resubmit a request later this spring for a reduced level of funding for this purpose after it has deter- mined how many new CSH staff will actually be required to travel to ASH for training. Contract Food Service Activities. Generally under current state law, the state may contract personal services to achieve cost sav- ings when the contract does not cause the displacement of civil service employees. It has already done so for other state facili- ties, and the administration proposes to expand on this approach next year. Nevertheless, the budget plan would provide $360,000 in 2004-05 to hire state employees for food service operations in- stead of contracting for these services at CSH beginning in the budget year. Assuming that contracting resulted in a 10 percent savings, the state could achieve $36,000 in savings in the budget year, and approximately $380,000 in annual savings once the hospital is fully operational. Capping Enrollment and Shifting Some SVPs To Counties Could Make Better Use of Beds We recommend that the Legislature approve as an interim measure the Governor’s proposal to limit the population of two groups of forensic patients in state hospitals. While we find that the proposal has merit, we recommend that legislative policy committees consider as a permanent solution the enactment of statutory changes that would provide the Department of Mental Health (DMH) more authority to prioritize the use of expensive hospital beds for patients who are willing and ready to receive treatment. We also concur with the administration’s proposal to shift some individuals who have been referred for commitment as sexually violent predators out of the state hospitals to prioritize the use of beds for patients amenable to treatment. Background Judicially Mandated Groups in State Hospitals. Currently, state law provides authority for courts to place certain mentally ill persons in state hospitals. The courts may determine that a defendant who has been ac- cused of a crime is not guilty by reason of insanity (NGI) in cases when it finds that the defendant was insane at the time the offense was com- mitted. The courts may also find an individual incompetent to stand Department of Mental Health C – 199 Legislative Analyst’s Office trial (IST) when the defendant is unable to understand the nature of the criminal proceedings or assist in their own defense. In the case of either ruling, the court must direct the defendant to be confined in a state hospital or a public or private treatment facility. In some instances, placement in an outpatient treatment program is also an option. Approximately 1,170 NGI patients and 900 IST patients are cur- rently in the state hospital system\u2014roughly half the entire statewide hos- pital population. In general, the state and counties share the responsibil- ity for these two populations of defendants in that state law specifies that offenders who have been determined by the courts to be an IST or an NGI can be placed either in the state hospital system or in a local facility (sometimes a jail). Individuals Referred to SVP Commitments in Hospital Beds. A court determination is required before an individual may be committed to the state hospital system as an SVP. Currently, about 160 of the individuals who are awaiting court proceedings for an SVP commitment are being held in the state hospital system while their cases proceed. Some addi- tional individuals are still being held in state prison as these proceedings occur, while still others who have been released from prison are held in county jails. A number of components of the SVP law have been determined to constitute a state-mandated program for county governments. Among other costs, counties are reimbursed for the cost of holding any person being considered for an SVP commitment in county jails. Governor’s Budget Reduction Proposals The Governor’s budget proposes various measures that would re- sult in General Fund savings totaling approximately $360,000 in the cur- rent year and $10.4 million in the budget year. Specifically, the proposals would (1) place enrollment limits on certain forensic populations to achieve savings of $360,000 in the current year and $2.8 million in the budget year and (2) modify the way the state manages its SVP popula- tion to obtain $7.6 million in state savings in 2004-05. Governor’s Proposal to Limit Certain Forensic Populations. As part of a mid-year budget reduction package to limit the caseloads of various health and social services programs, the administration has proposed to limit the number of NGI and IST patients at the state hospitals. Specifi- cally, the state would cap the NGI population at approximately 1,200 patients and the IST population at 850 patients effective January 1, 2004. (At the time this analysis was prepared, the Legislature had not approved C – 200 Health and Social Services 2004-05 Analysis this proposal.) The caps would continue at least through the 2004-05 fis- cal year. The administration has indicated that the proposed caps would ap- ply only to new patients, and that existing NGI and IST patients would not be transferred out of the hospital system to conform to the limits. In the event that the hospital population exceeded the cap, admissions of these groups of patients to the hospital system would halt until the cen- sus fell to the capped level. In instances where hospital population limits were reached, NGI and IST patients would typically be housed at a county jail at local expense. As a result, adoption of the Governor’s proposal for ISTs and NGIs is likely to increase county costs. Governor’s Proposal for Managing the SVP Population. The Governor’s budget plan also proposes to shift some individuals who are being considered for commitment to state hospitals (precommitment SVPs) to the local jails while they await their commitment proceedings. The budget plan also proposes to conduct these commitment proceed- ings at an earlier date before such individuals are due to be released from state prisons in order to reduce the state hospital population. The Governor’s proposal relating to SVPs would not increase county govern- ment costs, in that, unlike ISTs and NGIs, the entire cost of the SVP popu- lation is the responsibility of the state. Counties could obtain reimburse- ment from the state to offset any additional costs they would incur for holding precommitment SVPs who had been diverted from the state hos- pital system to county jails. Measures Would Be Effective in Reducing State Costs. Absent the Governor’s proposed cap on NGI patients, this population would poten- tially grow by 14 patients in the current year and an additional 42 pa- tients in the budget year. Our analysis of caseload trends indicates that the administration’s estimates of the caseload reductions and savings due to the NGI cap appear reasonable. Due to its assumption of a decline in the IST population, the admin- istration budget plan recognized no additional savings as a result of the enactment of a cap on the IST population. However, our review of recent IST caseload trends indicates that the adoption of the cap probably would result in state savings of as much as $6 million in the budget year. At the time this analysis was prepared, the current IST population exceeded the proposed IST cap by about 39 patients, and further growth in the number of IST patients appeared likely. Our analysis also indicates that the proposal to shift precommitment SVPs from the state hospitals could have a larger impact on caseloads and achieve greater state savings than estimated by the administration. The Governor’s budget plan assumes that the changes that it proposes Department of Mental Health C – 201 Legislative Analyst’s Office would reduce the hospital population by 100 in 2004-05. However, 160 precommitment SVPs are presently in the state hospital system. Thus it is possible that the savings from the Governor’s proposed changes to the SVP statute could be greater than estimated in the budget plan. Using State Beds More Cost-Effectively. The administration has in- dicated that part of its rationale for capping certain populations and for redirecting precommitment SVPs from the state hospitals is an effort to ensure that the state prioritizes the use of costly inpatient hospital re- sources for patients who are willing and ready to accept treatment for their mental illness. The administration has indicated that some NGI and IST patients transferred to the state hospitals by the courts have been unwilling to accept treatment, including medications that could improve their mental condition. Past court rulings have limited the state’s authority to provide such medications to individuals against their will. Under these circum- stances, placing such individuals in intensively staffed treatment facili- ties\u2014at a cost of more than $107,000 per year for each offender\u2014does not appear to be the best use of limited state resources. To the extent that the imposition of a cap on IST and NGI popula- tions prompted some judges to more carefully consider which offenders it transferred to state hospitals, it is possible that this change could result in the more cost-effective use of state resources. However, our analysis suggests that the establishment of such caps would not fully address this concern. This is because it would not remove from the existing state hos- pital population individuals who currently are not amenable to treatment, while potentially keeping out of the hospital system individuals who are ready and willing to accept treatment. The administration’s proposal to shift a portion of the precommitment SVPs would have the effect of prioritizing the use of state hospital beds for persons willing to accept treatment. The DMH has indicated that in- dividuals who are awaiting legal proceedings that could result in their commitment as SVPs are generally unwilling to engage in treatment ac- tivities. This is because standard therapy for sex offenders often involves efforts to get individuals to discuss and admit their history of sex crimes. As a result, many individuals who are being held in the state hospitals while they await their SVP commitment hearings are not actively engaged in treatment, in effect wasting the expensive treatment resources avail- able to them. C – 202 Health and Social Services 2004-05 Analysis Analyst’s Recommendation Given the state’s serious fiscal difficulties, and the merit of limiting the number of NGI and IST patients held at state expense in the hospital system, we recommend that the Legislature concur with the administration’s proposal to establish caps on the NGI and IST populations. However, we recommend that this limit be approved only as an in- terim action. In our view, such a cap should be imposed only as a tempo- rary step until legislative policy committees can consider the enactment of permanent changes in state law that would ensure that expensive state hospital resources are prioritized for mentally ill patients who are ame- nable to treatment. For example, the Legislature may wish to consider providing DMH the legal authority to return to the courts, and to trans- fer out of the state hospital systems back to county custody, NGI or IST patients who have proven over time to be unamenable to treatment. Un- der such legislation, the courts could then place these individuals in the most suitable and cost-effective setting. Accordingly, we propose that the statutory provisions of the administration’s proposal be adopted with amendments that sunset the enrollment caps as of January 2006. We believe this would provide the administration with sufficient time to pursue a legislative solution to the inefficient use of state hospital resources. We also concur with the administration’s recommendation to shift a portion of the precommitment SVPs to the local jails while they await the verdict on their commitment hearing, and to expedite the commitment proceedings of others before their release from state prison. While the budget plan reflects $7.6 million in savings to the General Fund from the shift of 100 SVPs to the local level, we estimate that the state could even- tually achieve as much as $5 million in additional savings from the shift of all precommitment SVPs (currently estimated at 160) to the local level. Finally, we note that there could be some offsets to these SVP-related savings, because more persons would be held in county jails while they were awaiting their commitment hearings in the courts. However, the cost to the state of reimbursing counties for the use of their jail beds would be much lower than the cost of using an equivalent number of state hos- pitals beds\u2014perhaps as much as 20 percent lower. For this reason, we believe this is a sound fiscal approach. Additional Funding for SVP Evaluations Not Justified We believe that the administration’s proposal to eliminate the present requirement that Sexually Violent Predator (SVP) commitments be Department of Mental Health C – 203 Legislative Analyst’s Office renewed every two years is a policy matter for the Legislature to consider. However, a request for a $1.1 million augmentation for a projected increase in SVP evaluations should be rejected because it is not supported by recent caseload trends. (Reduce Item 4440-001-0001 by $1 million.) Background Evaluations Legally Required. State law provides a process by which offenders can be determined by the courts to be SVPs and committed to the state hospital system for treatment. Part of that commitment process involves evaluations by psychiatrists or psychologists to ascertain the mental condition of the criminal offenders. These evaluations are con- ducted upon the referral of cases to DMH by the state Board of Prison Terms (BPT). Once an individual has been committed to the state hospital system by the courts, DMH is required to periodically reevaluate whether the individual still constitutes an SVP who warrants confinement in the state hospital system. Under current law, SVPs are committed for a two-year period and cannot be held beyond that time period unless another peti- tion for commitment and relevant evaluations are filed. The 2003-04 Bud- get Act provides about $5.9 million annually for SVP evaluations and re- lated activities. The state also incurs additional costs to reimburse local governments for the legal proceedings for the SVP commitments, and for subsequent legal proceedings to determine whether these individuals should remain in a state hospital or be released to the community. Governor’s Budget Proposal Indeterminate SVP Commitments. The Governor’s 2004-05 budget proposes to modify state law to eliminate the present requirement that SVP commitments be renewed every two years. Rather, commitments could be made by the courts for an indeterminate period of time. Persons who had been committed as an SVP would be released upon a determi- nation by a court that their mental condition had so improved that it would be appropriate for them to be placed in the community. (The ad- ministration proposes , as under current law, that a person confined as an SVP would continue to have the right to petition the courts once each year for his\/her release from a state hospital.) The administration estimates that this change in law would signifi- cantly reduce the number of recommitment evaluations that would have to be conducted by DMH-paid evaluators. Also, eliminating the two-year recommitment process would reduce the cost to the state for testimony C – 204 Health and Social Services 2004-05 Analysis in local legal proceedings, and reduce future claims by local governments for reimbursement of their costs for their role in the process. We are ad- vised by DMH that, of the 13 states with SVP statutes, California is the only state with a determinate commitment period. The department has indicated that all other states provide for indefinite initial commitments of SVPs. Although the budget of DMH was reduced by $2 million to reflect the effect of these changes in the budget year, the department subsequently has documented a slightly smaller reduction in costs of about $1.9 million. Funding Request for Workload Increase. Partly offsetting this pro- posed reduction in DMH funding is a budget proposal to increase by about $1.1 million the General Fund resources available for SVP evalua- tions. The administration cites as justification, among other factors, his- torical data it has compiled indicating an increasing trend in the number of BPT referrals of SVP cases to DMH, as well as an increasing trend in the number of cases subsequently screened by DMH and assigned to its evaluators. However, more recent caseload data we have reviewed does not jus- tify the administration request. Data available through the end of calen- dar year 2003 indicates that the number of BPT referrals, as well as the number of SVP cases being referred to evaluators, is declining, not in- creasing. If current trends continue, the number of SVP evaluations could stay level or even decrease in the budget year. This data is summarized in Figure 1. ( Figure 1 SVP Referrals and Assignments of Evaluations Are Declining 2002 2003 Percentage Change Referrals of SVP cases from BPT 636 558 -12% Cases referred for evaluation 352 283 -20 Analyst’s Recommendation Because the most recent caseload data available to us at the time this analysis was prepared does not support the budget projection of increas- Department of Mental Health C – 205 Legislative Analyst’s Office ing workload for SVP evaluations, we recommend that the Legislature reject the $1.1 million augmentation proposed by the administration for these activities. We will monitor the trend and, if necessary, recommend any necessary further actions in regard to the budget for SVP evaluations at the time of the May Revision. We view the Governor’s proposal to modify state law to remove the present legal requirement that recommitment evaluations automatically occur every two years for SVP cases as an important policy matter for the Legislature to decide. We would note that, under the administration’s approach, a person confined as an SVP would continue to have the right to petition each year for his\/her release. If the Legislature does choose to approve the Governor’s proposal to eliminate every two-year redetermination of SVP commitments, we would recommend a minor modification. Since DMH has documented savings of about $1.9 million related to this proposal, we recommend that this slightly smaller reduction amount be adopted by the Legislature. Together with our recommendation on the evaluation caseload request, such an action would result in a net reduction of $1 million in General Fund ex- penditures for 2004-05 relative to the amount of funding provided in the Governor’s budget plan. Budget Includes Beds Missing From CDC Budget The Governor’s budget plan includes a $2 million increase in reimbursements to the Department of Mental Health (DMH) from the California Department of Corrections (CDC) to purchase additional state hospital beds at Atascadero. However, the General Fund resources needed for CDC to purchase these beds have not been included in CDC’s 2004-05 budget request. Without prejudice to the possible merit of this proposal, we recommend that this expenditure authority be deleted from the DMH budget until such time as these resources are added to the spending plan for CDC. Governor’s Proposal. The DMH budget plan requests $2 million in reimbursement expenditure authority to reflect a proposal by CDC to contract for an additional 25 acute psychiatric beds at the Atascadero State Hospital. However, the 2004-05 CDC budget request does not in- clude funding for these additional beds. The administration has indicated that this funding for CDC may be requested at the time of the May Revision. C – 206 Health and Social Services 2004-05 Analysis Analyst’s Recommendation. Without prejudice to the possible merit of allowing CDC to obtain additional beds in the DMH hospital system, we recommend that the DMH expenditure authority be deleted because it will not be needed if these resources are not included in the CDC bud- get for 2004-05. If such a request for General Fund spending is presented by the administration at the time of the May Revision, and if the Legisla- ture determines that the request is justified, reimbursement authority for this purpose could be restored to the DMH budget at that time. COMMUNITY PROGRAM ISSUES EPSDT Costs Still Soaring, but Some Progress in Sight The Governor’s budget plan proposes a significant increase in funding for the Early and Periodic Screening, Diagnosis and Treatment (EPSDT) specialty mental health services for children and young adults as well as multiple measures to contain the growth in expenditures of the program. Our analysis indicates that, while the program is still growing significantly, recent efforts to slow the growth in EPSDT expenditures appear to be having some effect. We recommend approval of further efforts to contain program costs by (1) adjusting provider rate limits to better reflect the actual cost of delivering EPSDT services, (2) increasing accountability and oversight through additional auditing of program expenditures, and (3) developing a request for a federal waiver to tighten the definition of what services must be provided by the state. Background State Provides Broad Range of EPSDT Services. The EPSDT, a feder- ally mandated program, requires states to provide a broad range of screen- ing, diagnosis, and medically necessary treatment services to Medi-Cal beneficiaries under age 21, even if the treatment is an optional service under a state’s Medicaid plan. The requirements apply to mental health as well as physical health. Historically, the state’s expenditures for EPSDT mental health ser- vices have grown dramatically\u2014as much as 30 percent annually. In an attempt to slow this growth, state program rules were changed to require counties to be financially responsible for a 10 percent share of the nonfederal cost of program growth. Previously, they were obligated to provide a base level of funding, but bore no share of the cost of the growth of the program. In addition, the Legislature adopted statutory language Department of Mental Health C – 207 Legislative Analyst’s Office in 2002-03 directing DMH to assist counties in implementing managed care principles that would help slow the growth in the program. Governor’s Proposed Budget for EPSDT Increased Funding, but Additional Measures to Reduce Costs. The EPSDT specialty mental health services are budgeted within the DHS budget, and are budgeted as reimbursements in the DMH budget. These services are supported with General Fund and federal funds. As has been the case since the inception of the program, the Governor’s spending plan again proposes significant increases in state spending for EPSDT spe- cialty mental health services. Due mainly to technical adjustments we will discuss in more detail later, the actual amount of state spending for EPSDT specialty mental health services in the current year will be significantly less than the amount appropriated in the 2003-04 Budget Act. The initial budgeted level was about $370 million from the General Fund, but this would be ad- justed to $254 million under the Governor’s budget plan, primarily to reflect a technical shift made in 2003-04 from accrual to cash accounting. State support for EPSDT specialty mental health services would grow to $365 million in 2004-05 under the Governor’s budget proposal, an in- crease of almost $112 million or 44 percent. This spending level takes into account some significant technical adjustments, but also results from con- tinued increases in caseload and costs in the program. The proposed bud- get for 2004-05 also reflects anticipated savings from two proposals that are intended to slow the growth of EPSDT expenditures. Various Adjustments Distort Actual EPSDT Program Growth. A straight comparison of the projected current year and budget year ex- penditures suggests that program expenditures would grow by 44 per- cent in one year. However, various technical adjustments to the budget totals create a somewhat misleading picture of how EPSDT expenditures are changing. The 2003-04 Budget Act and related legislation shifted the Medi-Cal Program from accrual to cash basis of accounting. The Governor’s bud- get plan would adjust the 2003-04 spending level for EPSDT to put the program on the same accounting basis as the rest of the Medi-Cal Pro- gram. This technical change has the effect, on a one-time basis, of reduc- ing the budget for the program in the current year, and making the amount of funding provided for EPSDT services in the budget year look dramati- cally larger. Additionally, the 2004-05 budget reflects a change in the share of costs of the Medi-Cal Program that is supported by the federal government. In C – 208 Health and Social Services 2004-05 Analysis 2003-04, a congressional fiscal relief package for the states bumped up the share of costs borne by the federal government for Medicaid. This had the effect of reducing the state cost of EPSDT services in the current year. However, the federal relief package is scheduled to expire at the end of 2003-04. The Governor’s budget plan takes into account that the state share of EPSDT program costs will increase in 2004-05 from the cur- rent 50 percent to 53.3 percent. This also has the effect of inflating the 2004-05 spending level for EPSDT services. Absent these changes, the actual program growth would still be sig- nificant, about 22 percent, but not nearly as large as the nominal change in the budgeted amounts of 44 percent. Figure 2 shows how state expen- ditures for EPSDT services would grow if the spending figures were ad- justed to exclude the effects of the accounting shifts and the change in the federal share of costs for the program. Figure 2 Adjusted EPSDT Funding Growth Less Dramatic Than Budget Figures (In Millions) General Fund Budget 2003-2004 2004-2005 Percentage Change Budget Act amounts $254 $365 44% Actual program spending after adjustmentsa 349 425 22 a Figures adjusted to (1) compare fiscal years on an accrual basis and (2) to hold federal share of program costs constant. Governor’s Proposals for Reducing EPSDT Costs The Governor’s budget plan includes three proposals to reduce costs in the EPSDT program by (1) adjusting ( re-basing ) provider rate limits to better reflect the actual cost of delivering EPSDT services, (2) increas- ing accountability and oversight through additional auditing of program expenditures, and (3) tightening the definition of what services must be provided by the state Re-Basing Provider Rate Limits. The budget plan includes a reduc- tion of $40 million in General Fund support (a $60 million reduction in all fund sources) from updating provider rates for EPSDT and other men- Department of Mental Health C – 209 Legislative Analyst’s Office tal health services to correspond with current information about the ac- tual cost of providing these services (a process referred to as re-basing). Based on its initial review of more current cost reports, the administra- tion expects that re-basing would reduce the rate limits for all services. If the Legislature considers approving the administration’s estimated $40 million in General Fund savings from re-basing statewide maximum provider rates, it should recognize that there are some risks associated with this estimate. Currently, the maximum rates established for EPSDT and other mental health services provided by the counties are based on cost information dating back to 1989-90, which has been adjusted for in- flation. The state was to have updated these rates at least every three years by using more current cost information, but has not done so. The administration is proposing that the statewide rates be re-based for the first time since 1993. Its estimate of $40 million in state savings is based on a preliminary analysis of 2001-02 cost reports. The actual mag- nitude of the savings, however, is uncertain and will not be known until a consultant to be retained by DMH has completed extensive re-basing calculations. Additional Auditing. Additionally, the administration’s budget plan assumes that the state will achieve savings of $6.4 million for the General Fund ($13 million all funds) from conducting additional audits of coun- ties and their contractors who provide mental health services. The bud- get plan requests an augmentation of $844,000 in state funds ($1.7 mil- lion all funds) for this monitoring and oversight activity. Waiver Proposal. The budget plan also proposes to undertake ef- forts that are intended to result in additional state savings on EPSDT ser- vices beginning in 2005-06. About $236,000 in state funds ($472,000 all funds) is requested for additional DMH staff and contract services to develop an application to the federal government for a waiver of federal requirements for EPSDT services. The waiver would not seek to end the provision of such services overall, but would instead allow the state to establish a more formal definition of which EPSDT services were medi- cally necessary and therefore necessary to provide to eligible Medi-Cal beneficiaries. Absent such a definition, the administration has indicated, the state is subject to a more vague standard of having to provide any services that ameliorate the medical condition of someone with a men- tal health condition. Thus far, the administration has not indicated specifically how it would use this more narrow definition of medical necessity to modify the existing EPSDT services to achieve state savings. The administration has proposed that the effort to reform EPSDT be part of a larger federal waiver request to achieve savings in the Medi-Cal Program. C – 210 Health and Social Services 2004-05 Analysis Additional EPSDT Cost-Reduction Efforts Warrant Consideration Slowing of Expenditures Suggests Progress, but More Effort Needed. Our analysis indicates that the existing cost containment measures have curbed some of the EPSDT expenditure growth. As can be seen in Fig- ure 3, the rate of growth of state expenditures for EPSDT peaked several years ago and has since begun to decline. This decline suggests that the state is making some progress at containing EPSDT expenditures. How- ever, the total cost of the program continues to grow, as can be seen in Figure 4. Under the Governor’s 2004-05 budget proposal, total spending for EPSDT services would surpass $1 billion once all funding sources for the program have been taken into account. Figure 3 EPSDT Expenditures Slowing. . . Annual Percentage Change in Expendituresa 5 10 15 20 25 30 35 40 45% 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04b 04-05b aData source: EPSDT cost-settled cliams 1995-2004. bProjected claims total based on Governor’s 2004-05 budget plan. Analyst’s Recommendation We concur with the administration’s current estimates of EPSDT ex- penditures, and recognize that they will be updated by the administra- tion at the time of the May Revision. Given the continuing growth in the cost of EPSDT services, we concur with the administration’s request for additional staff and contract funding to initiate steps to rebase provider rates in line with current actual costs, to audit county and contract pro- Department of Mental Health C – 211 Legislative Analyst’s Office viders, and pursue a federal waiver to tighten the definition of what ser- vices must be provided. These measures, in our view, would (1) ensure that provider rate limits better reflect actual costs, (2) provide stronger accountability and over- sight of EPSDT expenditures at the local level, and (3) promote a more cost-efficient use of state resources only for medically necessary treat- ment and services. Figure 4 . . .But, More Work Is Needed As Total EPSDT Expenditures Continue to Risea Annual Settled Cost Claims (In Millions) 200 400 600 800 1,000 $1,200 96-97 98-99 00-01 02-03 04-05 aData source: Cost-settled claims 1995-2004. Dotted line indicates projected figures. Additional Federal Funds and State Savings Possible Through Provider Fee Mechanism The Governor’s budget plan proposes a quality improvement assessment fee on Medi-Cal managed care health plans to enable the state to draw down additional federal funds for support of the program. We recommend the Legislature explore the feasibility of establishing such fees for mental health managed care plans to draw down additional federal funds, result in a net financial gain of up to $70 million annually for the state, and provide as much as $23 million in additional funding for mental health care programs. C – 212 Health and Social Services 2004-05 Analysis We discuss our proposal to assess a quality improvement fee for mental health managed care plans in the Crosscutting Issues section of this chapter. Department of Child Support Services C – 213 Legislative Analyst’s Office DEPARTMENT OF CHILD SUPPORT SERVICES (5175) The Department of Child Support Services (DCSS), created on Janu- ary 1, 2000, administers California’s child support program by oversee- ing 58 county child support offices. The primary purpose of the program is to collect from absent parents, support payments for custodial parents and their children. Local child support offices provide services such as locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting and distributing payments. The Governor’s budget proposes expenditures totaling $1.3 billion from all funds for support of DCSS in the budget year. This is an increase of 3.5 percent over 2003-04. The budget proposes $499 million from the General Fund for 2004-05, which is an increase of $30.5 million, or 6.5 per- cent, compared to 2003-04. Most of the increase is attributable to an esti- mated increase in the federal penalty and increased expenditures for the California Child Support Automation System (CCSAS). UPDATE ON REQUIRED BUDGET AND ALLOCATION METHODOLOGY IMPROVEMENTS In the 2003-04 Budget Act, DCSS was required to begin making improve- ments on its county allocation formulas, and its budget methodology and budget display. Since that time, the department has made some progress. Allocation Workgroup. In the fall of 2003, DCSS convened a large group of stakeholders to examine the current county allocation method- ology and recommend changes that would more clearly meet the fund- ing requirements of the counties. As part of the work for those meetings, DCSS undertook a substantial statistical review of the performance and collections data available for each county. Through this review, DCSS was able to connect county performance on some outcome measures to the level of funding provided to counties. They were also able to tie expected C – 214 Health and Social Services 2004-05 Analysis amounts of child support collections to the level of funding available to administer the program. Next Steps for Allocation Workgroup. At the time this analysis was prepared, DCSS was working on a final allocation methodology, which would tie county performance on state and federal outcome measures to the amount of funding allocated for their local programs. We recommend that DCSS report at hearings on the status of this effort. Improving Budget Display. The DCSS was also required to begin work on improving the information provided in its budget documents and improving the methods used to build its budget. The child support budget display for 2004-05 shows significant improvement in terms of the information provided. The department has included auxiliary documents in its budget information, which summarize the amount of the federal child support penalty over time, and which illustrate the spending and collection trends over the last three years. Perhaps more significantly, DCSS’s budget tables are beginning to display the detailed funding changes for the program in a clear way. In prior years, all administrative costs were included in one basic line; there was no way to determine which aspects of the program were being augmented or reduced in the budgets proposed by the administration for DCSS. However, in the current budget, changes are being clearly displayed. For example, the amounts budgeted for implementing the new collections enhancements are clearly separated from the basic cost of running the program. Similarly, anticipated collections associated with this enhancement are also displayed separately. GOVERNOR’S BUDGET PROPOSES KEEPING COUNTY SHARE OF CHILD SUPPORT COLLECTIONS The Governor’s budget proposes that counties give up their current 2.5 percent share of assistance collections. This increases General Fund revenues by $39 million and potentially creates a further disincentive for counties to invest in collecting child support payments for families. We recommend allowing those counties that meet state and federal performance measures to keep their share of the assistance collections. Background. Most child support collections are paid to the custodial parent. However, a portion of the child support dollars collected by the counties are used to pay back the state, federal, and local governments for the cost of grants provided under the California Work Opportunity and Responsibility to Kids (CalWORKs) and the Foster Care programs. (These grants were paid on behalf of the children whose noncustodial parents are now paying child support.) These are known as assistance Department of Child Support Services C – 215 Legislative Analyst’s Office collections. Under current law, 50 percent of those funds are returned to the federal government, 47.5 percent constitute state General Fund rev- enue, and the remaining 2.5 percent reimburse the counties for their share of the CalWORKs grants. A small portion of the assistance collections reimburse foster care expenses. That sharing ratio is slightly different. Governor’s Budget Proposal. The Governor’s budget proposes that the state retain $39 million in collections that constitutes the counties’ share of assistance collections and use it as state General Fund revenue. Along with this $39 million, the Governor’s budget also proposes that counties continue to pay 25 percent of the federal child support automa- tion penalty. The estimated county share of the penalty is $55 million for 2004-05. Other than this share of the penalty, there is no county share in the child support program. Analyst’s Recommendation. The child support program is driven in large part by state and federal performance measures. States receive fed- eral incentive funds based on their ability to achieve the federal perfor- mance measures, and may be penalized for repeated failure of certain measures. Because of the existence of these measurements, we recom- mend that the Governor’s proposal to keep the county share of collec- tions be modified into an incentive for the counties to improve their per- formance. Under our recommendation, counties that meet all of the es- tablished performance measures would be allowed to retain their share of the assistance collections. Our analysis indicates that based upon current federal performance measures, about 50 percent of the counties have met or exceeded the state- wide average for performance and would therefore be able to retain their share of assistance collections. However, none of the six largest counties is among that group. Adopting this recommendation would reduce Gen- eral Fund revenue by $12.4 million in 2004-05. However, by providing the counties with a better performance incentive, it should result in more federal incentive funds coming to the state, which will in part offset the loss of General Fund revenues. Further, stronger county performance should help assure that the state will avoid future federal penalties. WITHHOLD RECOMMENDATION ON CHILD SUPPORT COLLECTIONS We withhold recommendation on estimated child support collections pending the release of the Governor’s May Revision because the estimate of collections may be overstated based upon the department’s new method of projecting collections. C – 216 Health and Social Services 2004-05 Analysis The DCSS has developed a new methodology for estimating the amount of dollars that can be collected based upon the amount of money invested in the program. However, the Governor’s budget does not re- flect this relationship. Based upon the department’s new estimating meth- odology, the collection estimates may be overstated. This is because the increase in the collections estimate is not proportional to the amount of administrative funding proposed. We therefore withhold recommenda- tion on the budget’s estimate of assistance and nonassistance child sup- port collections pending review of the Governor’s May Revision estimates. CALIFORNIA’S CHILD SUPPORT AUTOMATION SYSTEM Federal law requires states to develop statewide child support auto- mation systems. The CCSAS project is intended to be California’s feder- ally required child support system. The CCSAS project is currently esti- mated to cost $1.3 billion ($869 million federal funds and $459 million General Fund) over ten years. Of these costs, $801 million is for a con- tractor to develop and maintain the system with the remainder for asso- ciated state costs. The CCSAS project consists of two phases: (1) Phase I, which will provide a centralized data base and reporting system and (2) Phase II, which will provide a statewide child support enforcement sys- tem. The state began developing Phase I of the project in 2003. Project Background Federal Penalty. Federal law requires states to have completed the development and implementation of statewide child support systems by 1997. Since California did not complete its system by that time, the fed- eral government reduces, in the form of penalties, its share of the costs for administering the state’s child support program. Through 2002-03, the state incurred penalties totaling approximately $562 million. The pen- alties for the current and budget years are expected to be $195 million and $220 million, respectively. Thus, through the budget year, federal pen- alties will have totaled almost $1 billion. When CCSAS is fully imple- mented in 2008, the federal penalties should be eliminated. State Law Requires Franchise Tax Board (FTB) to Manage Project. Chapter 479, Statutes of 1999 (AB 150, Aroner), requires the FTB to act as the agent for DCSS to procure, develop, implement, and maintain the new statewide system. In 1999, the Legislature required FTB to manage the project because (1) FTB had experience procuring and managing large information technology (IT) projects and (2) DCSS would be focusing on Department of Child Support Services C – 217 Legislative Analyst’s Office implementing the state’s newly reformed child support program. The FTB and DCSS staff assigned to CCSAS work together in the same DCSS office building. State’s Child Support Program Implemented. Chapter 479 created DCSS as a separate department responsible for the state’s child support enforcement program. In addition, administrative responsibility at the local level shifted from county district attorneys to new separate county agencies. The local transition was completed in 2003. Potential for Improved Accountability Transferring the California Child Support Automation System from the Franchise Tax Board to the Department of Child Support Services would increase accountability for the project’s success. We recommend that the administration report on potential problems and anticipated savings from implementing this option. Below, we discuss the option of transferring the CCSAS project (in- cluding its project management structure) from FTB to DCSS. Such a trans- fer would offer potential programmatic benefits to both DCSS and FTB. As noted below, a transfer could also offer the opportunity for some bud- get savings. Areas of Potential Benefits and Savings Increase DCSS Accountability. The responsibility for success of the CCSAS project is currently shared between FTB and DCSS. The FTB is responsible for the project’s technical and management success and DCSS is responsible for the project’s program success. Yet, it is difficult to tell where one area of responsibility ends and another area begins. For ex- ample, it will be difficult to determine if any problems are due to com- plex state program requirements or technical problems in the software. By having only DCSS responsible for the success of the CCSAS project, the Legislature can hold DCSS accountable for any problems that the project may experience. Also, by having only one department respon- sible for CCSAS, it eliminates possible finger pointing between the two departments. Reduce Project Staff. Since the CCSAS project is shared by two de- partments, both FTB and DCSS have staff dedicated to the project. For the current year, FTB has 113 staff and DCSS has 58 staff approved to work on the project. From a recent FTB analysis of the CCSAS workload, it appears that some of the DCSS and FTB staff are performing similar and possibly duplicative project tasks. For example, during the project’s C – 218 Health and Social Services 2004-05 Analysis design phase, both departments have staff reviewing and analyzing require- ments for the system. The only difference in their tasks appears to be that FTB staff recommends and DCSS staff approves requirements. In most state IT projects, there is no difference between these two tasks. As long as the two departments share responsibility for the project, blurred lines of responsibil- ity are going to result in duplication of effort. If, however, only one depart- ment was responsible for the project, workload could be reexamined to in- crease efficiencies and reduce duplicative staff assignments. Eliminate Coordination Activities. Both FTB and DCSS have staff coordinating activities between the two departments. For example, FTB staff must keep DCSS staff informed of any budget requests that FTB needs to support the project. After FTB has prepared the request, then DCSS staff must review the request for fund availability and consistency with federal funding requirements. In addition, both FTB and DCSS have staff coordinating technical aspects of the project, such as converting data from the old systems. If the project were transferred to DCSS, these types of coordination activities could be eliminated. Allow FTB to Focus on Revenue Collections. The FTB’s primary re- sponsibility is to administer and collect revenues from the personal in- come and corporation taxes. The FTB is not the state’s child support en- forcement agency nor does it have any unusual expertise in this program area. To ensure CCSAS project success, FTB’s management has had to devote some of its time to the project. By transferring the CCSAS project to DCSS, FTB’s management could refocus on its primary mission of ad- ministering and collecting taxes. Transferred CCSAS Project Must Include Current Staff and Project Management In our view, if the Legislature were to transfer the project, any trans- fer must include the current FTB project staff and the project manage- ment structures that FTB has developed and implemented. One of the reasons that the Legislature designated FTB as the CCSAS project man- ager was FTB’s experience at managing large IT projects and its use of best practices in managing and implementing automation efforts. The FTB has attempted to implement those same best practices in the con- tract and risk management on the CCSAS project. Given that the state’s child support program is now established and the CCSAS procurement is complete, FTB has already contributed most of the advantages origi- nally sought by the Legislature in designating FTB as the project leader. Transferring the project should not mean losing the staff experience and management techniques already implemented. Since FTB project staff is Department of Child Support Services C – 219 Legislative Analyst’s Office already colocated with DCSS, the FTB staff could be easily integrated into DCSS and its management structure. Administration Should Report on Project Transfer Given that the CCSAS project is the state’s largest and most complex state IT project, there is some risk in transferring the system. We believe some of this risk would be minimized if the same project staff and best practices are transferred with the project. We do, however, recommend that the Legis- lature direct FTB and DCSS to analyze the transfer option and report at bud- get hearings on potential problems or project disruptions that could occur as a result of such a transfer. In addition, we recommend that DCSS analyze the CCSAS workload and report at budget hearings on the potential savings that could be achieved as a result of the transfer. C – 220 Health and Social Services 2004-05 Analysis DEPARTMENT OF SOCIAL SERVICES CALWORKS PROGRAM (5180) In response to federal welfare reform legislation, the Legislature cre- ated the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children, the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the one-parent compo- nent of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A fam- ily is eligible for the two-parent component if it includes a child who is financially needy due to the unemployment of one or both parents. The budget proposes an appropriation of $4.9 billion ($2 billion Gen- eral Fund, $147 million county funds, $56 million from the Employment Training Fund, and $2.7 billion federal funds), to the Department of So- cial Services (DSS) for the CalWORKs program in 2004-05. In total funds, this is a decrease of $555 million, or 10 percent, compared to estimated spending of $5.4 billion in 2003-04. This decrease is primarily attribut- able to savings from (1) a proposed 5 percent maximum grant reduction, (2) proposed changes in work participation and sanction policies, (3) sav- ings from adults reaching their 60 month CalWORKS time limit, and (4) savings from proposed child care reforms. We note that Congress extended funding for the Temporary Assis- tance for Needy Families (TANF) block grant through March 31, 2004. The Governor’s budget assumes TANF funding will eventually be ex- tended or reauthorized at current funding levels ($3.7 billion annually for California) at least through state fiscal year 2004-05. Department of Social Services CalWORKs Program C – 221 Legislative Analyst’s Office CASELOAD AND GRANTS Caseload Decline Ends The California Work Opportunity and Responsibility to Kids caseload has declined significantly since 1994-95. Recent caseload trend data suggest that, absent any policy changes, the caseload would increase by about 1 percent in the budget year. However, the administration estimates that implementation of the Governor’s proposed policy changes would result in a 1.3 percent decrease in caseload which would more than offset this baseline 1 percent increase. Caseload Levels in the Budget Year. Actual caseload data shows that the CalWORKs caseload has declined every year from 1994-95, when caseloads reached their peak, through 2002-03. Since October 2002, the caseload has been relatively flat. Absent any changes to the CalWORKs program, the administration projects that the caseload would increase by about 1 percent in the budget year. However, the Governor’s budget an- ticipates that the caseload will decrease by about 1.3 percent from what it would have otherwise been in the budget year as a result of proposed program changes. Figure 1 (see next page) compares the administration’s current law caseload projections with the caseload that would result under the pro- posed policy changes. Under current law, the average monthly caseload would be expected to increase slightly in the current and budget years. However, the administration’s proposed policy changes are estimated to remove 6,363 cases (1.3 percent) from the caseload by 2004-05. The caseload reduction is primarily attributable to a proposed 5 per- cent grant reduction. The proposed grant reduction will eliminate eligi- bility for about 6,000 average monthly cases in the budget year because lowering the grant levels has the effect of lowering the income threshold at which working families become income-ineligible for cash assistance. As a result, families with relatively high earnings would no longer be eligible and would lose aid. Child-Only Cases Increasing, While Cases With Adults Continues to Decrease. While the total caseload is projected to remain relatively flat, the composition of the caseload is changing. Under CalWORKs, adults are generally limited to 60 months of cash assistance. Adults began reach- ing the time limit in January 2003. When a family reaches the time limit, the adult is removed from the assistance unit and the case becomes a child-only case. Caseload trends reflect this shift. The budget estimates that by June 2005, about 57,000 families will have reached the time limit, and be in the safety net. C – 222 Health and Social Services 2004-05 Analysis Figure 1 Projected Average Monthly Caseloada Caseload Actual 2002-03 Estimated 2003-04 Projected 2004-05 Caseload: Current Law 482,736 476,937b 475,175b Impact of policy changes: 5 percent grant reduction -1,531c -6,059 Work participation reforms \u2014 -265 Child Support Assurance Project \u2014 -39 Total Impact -1,531 -6,363 Percent Change From Current Law -0.3% -1.3% Caseload: With Governor’s Policy Proposals 482,736 475,406 468,813 a Figures represent average annualized monthly impact. b Includes previous policy changes. c Reduction only applied to April, May, and June. d Numbers may not add due to rounding. Conclusion. The administration’s monthly caseload projection is con- sistent with our review of the most recent actual caseload data. Because the CalWORKs caseload drives program costs, we will continue to moni- tor caseload trends and advise the Legislature accordingly. Budget Suspends Statutory Cost-of-Living Adjustments and Reduces Grant Payments The Governor’s budget proposes to (1) reduce grant payments by 5 percent and (2) suspend both the October 2003 and July 2004 cost-of- living adjustments. Compared to current law, these proposals result in estimated state savings of $135 million in 2003-04 and $408 million in 2004-05. Cost-of-Living Adjustment (COLA) Suspensions. State law requires that CalWORKs recipients receive a COLA equal to the percent change in the California Necessities Index. The Governor’s budget proposes to sus- pend the July 2004 statutory COLA, and assumes that the October 2003 COLA will not be granted. Department of Social Services CalWORKs Program C – 223 Legislative Analyst’s Office Figure 2 shows the savings in the current and budget years as a re- sult of the proposed grant reductions. Not providing the October COLA results in savings of $91 million in 2003-04 and $126 million in 2004-05, compared to current law. Suspending the July 2004 COLA results in ad- ditional savings of $105 million in 2004-05. These savings estimates as- sume that the October 2003 COLA is required by law. We note, however, that the administration believes that the October 2003 COLA is not part of current law and is arguing the issue in court. Figure 2 CalWORKs Savings From Governor’s Grant Reduction Proposals (In Millions) Proposal 2003-04 2004-05 Assume no October 2003 COLA $91 $126 Delete July 2004 COLAa \u2014 105 Reduce grants by 5 percent 44 177 Totalsb $135 $408 a Savings assume implementation of October 2003 COLA. b Detail may not total due to rounding. CalWORKs COLAs and the Vehicle License Fee (VLF). The state law enacting a VLF rate reduction beginning in 1999 included an accompanying provision stating that from 2000-01 through 2003-04, CalWORKs COLAs would be granted only in fiscal years in which VLF tax relief is granted. In June 2003, the Director of Finance determined that there would be a rate increase for VLF payments due on or after October 1, 2003. Because this tax relief was eliminated, the CalWORKs October 2003 COLA (for 2003-04) was suspended. However, in November 2003, the new administration rolled back the VLF tax rate increase, thereby triggering tax relief and an assumed requirement to provide the October CalWORKs COLA. As noted above, the administration contends that the October 2003 CalWORKs COLA is not required by current law, arguing that the previous administration’s action to increase the VLF was not legal, and that in accordance with the statute, no COLA is required since there was no increase in tax relief. At the time this analysis was prepared, the issue was being litigated. Until this issue is resolved by the courts, we assume throughout this analysis that granting the October 2003 COLA is C – 224 Health and Social Services 2004-05 Analysis part of current law. Finally, we note that the October 2003 COLA has thus far not been included in recipients’ grant payments. Grant Reduction. In addition to the COLA suspensions, the Gover- nor proposes to reduce the maximum monthly aid payment by 5 percent, effective April 1, 2004. As shown in Figure 2, compared to current law, this reduction results in state savings of $44 million in the current year and $177 million in the budget year. The reduction also results in a caseload decline of about 6,000 cases effective April 2004. As discussed previously, lowering the maximum aid payment levels has the effect of lowering the income threshold at which working families become income- ineligible for cash assistance. As a result, families currently receiving a small grant would no longer be eligible for CalWORKs and would lose aid. Figure 3 shows the maximum CalWORKs grant and food stamps benefits for a family of three under current law, and what the maximum grant and benefits would be under the Governor’s reduction proposals. Figure 3 CalWORKs Maximum Monthly Grant and Food Stamps Current Law and Governor’s Proposal Family of Three 2004-05 CalWORKs Grant Food Stamps Totals High-Cost Counties Current grant: includes June 2003 COLA $704 $301 $1,005 With October 2003 COLAa 728 290 1,018 Current law (2004-05): October 2003 and July 2004 COLAs 749 281 1,030 Governor’s proposal: deletes October 2003 COLA and July 2004 COLA, and reduces grants by 5 percent $669 $317 $986 Change From Current Law -$80 -$36 -$44 Low-Cost Counties Current grant: includes June 2003 COLA $671 $316 $987 With October 2003 COLAa 694 305 999 Current law (2004-05): October 2003 and July 2004 COLAs 713 297 1,010 Governor’s proposal: deletes October 2003 COLA and July 2004 COLA, and reduces grants by 5 percent $637 $331 $968 Change From Current Law -$76 -$34 -$42 a October COLA has not been implemented. Department of Social Services CalWORKs Program C – 225 Legislative Analyst’s Office As the figure shows, under the Governor’s proposals, in 2004-05 the maximum CalWORKs grant for a family of three in a high-cost county would be $669, compared to $749 under current law. The maximum CalWORKs grant for a family of three in a low-cost county would be $637 under the Governor’s proposals, compared to $713 under current law. As a point of reference, the federal poverty guideline for 2003 (the latest reported figure) for a family of three is $1,271 per month. (Federal poverty guidelines are adjusted annually for inflation.) Under current law, the combined maximum CalWORKs grant and food stamps benefits in high-cost counties is $1,030 per month (81 percent of the poverty guide- line). Under the Governor’s proposals, combined benefits in high-cost counties would instead be $986 per month (78 percent of poverty guide- line). Combined benefits in low-cost counties would be $1,010 per month (79 percent of poverty guideline) under current law, compared to $968 (76 percent of poverty) under the Governor’s proposals. EXPANDING TANF TRANSFERS RESULTS IN GENERAL FUND SAVINGS State Spending Budgeted at TANF Maintenance-of-Effort (MOE) Floor The Governor’s budget proposes to (1) spend the minimum amount of General Fund monies needed to meet the MOE spending requirement for the CalWORKs program and (2) maintain a $160 million TANF reserve. Because of the MOE requirement, any net augmentation to the Governor’s spending plan would deplete the TANF reserve amount, and\/ or result in General Fund costs. Any net reduction in program spending will generally result in TANF savings, not General Fund savings because the budget proposes spending at the MOE minimum. TANF MOE Requirement. To receive the federal TANF block grant, states must meet an MOE requirement that state spending on assistance for needy families be at least 75 percent of the federal fiscal year (FFY) 1994 level, which is $2.7 billion for California. (The requirement increases to 80 percent if the state fails to comply with federal work participation requirements.) Although the MOE requirement is primarily met through state and county spending on CalWORKs and other programs adminis- tered by DSS, state spending in other departments is also used to satisfy the requirement. The Governor’s budget includes $468 million in countable MOE expenditures outside of the CalWORKs program in the budget year. C – 226 Health and Social Services 2004-05 Analysis Effect of Spending Changes. If spending is augmented for CalWORKs above what is proposed in the Governor’s budget, it would reduce the budgeted $160 million TANF reserve and\/or decrease the amount of TANF funds that would be available for new transfers outside of the CalWORKs program. Reducing the amount of new transfers would re- sult in additional General Fund spending in the programs that were to receive the TANF transfers absent other budget actions by the Legisla- ture. If CalWORKs spending is augmented beyond the Governor’s pro- posal so that both the reserve and the TANF grant have been exhausted, General Fund spending would need to increase above the MOE floor. TANF Transfers The Governor’s budget achieves General Fund savings by increasing Temporary Assistance for Needy Families (TANF) transfers to the Title XX Social Services Block Grant (Title XX) by $41 million in the current year and $120 million in the budget year. The transferred TANF would be used to offset General Fund costs in In-Home Supportive Services (IHSS), Child Welfare Services (CWS), the Department of Developmental Services (DDS), and Foster Care. Budget Increases TANF Transfers to Title XX to Achieve General Fund Savings. The Governor’s budget proposes a series of TANF expenditure reductions discussed in more detail elsewhere in this analysis, which (1) enable CalWORKs spending to stay at the MOE floor, (2) generates funds for new TANF transfers, and (3) provides a $160 million TANF reserve. For 2004-05, the budget proposes $120 million in new TANF trans- fers outside of the program for the purpose of offsetting General Fund spending. Figure 4 shows the amount of the proposed transfers and Gen- eral Fund offset by department and program. Specifically, the budget in- creases TANF transfers to the Title XX Social Services Block Grant by $41 million in the current year and $120 million in the budget year. The Title XX funds are then used to offset General Fund costs in In-Home Supportive Services, Child Welfare Services, DDS, and Foster Care. Based on preliminary information from the administration about the proposal, it appears that the proposed fund transfers are viable options for achieving General Fund savings. (Please see the DDS section of this chapter for a more detailed discussion of implementation issues associ- ated with the proposed transfer.) The federal TANF block grant provi- sions allow the state to transfer up to 10 percent of its TANF funds to Title XX. The transferred TANF funds must be spent on children or their families with incomes under 200 percent of the federal poverty level. Once transferred, the funds may be used to support any programs that meet the stated Title XX goals, including, achieving economic self-sufficiency, Department of Social Services CalWORKs Program C – 227 Legislative Analyst’s Office preventing abuse or neglect, enabling families to stay together, and pre- venting inappropriate institutional care. As noted, the new TANF transfers are designed to achieve General Fund savings. Rejecting the TANF transfers would not change the CalWORKs program or the programs to which the funds are transferred absent other policy decisions. Rejecting the transfers would make more resources available for the CalWORKs program, but would result in Gen- eral Fund costs elsewhere. Figure 4 Governor’s Proposed New TANF Transfers to Achieve General Fund Savings (In Millions) Current Year Budget Year Department of Social Services In-Home Supportive Services $41 \u2014 Child Welfare Services \u2014 $16 Foster Care \u2014 56 Department of Developmental Services Community Services Program \u2014 $48 Totals $41 $120 BUDGET PROPOSES SIGNIFICANT CALWORKS REFORMS The Governor’s budget proposes a number of changes to the CalWORKs program, including stricter work requirements and greater sanctions. These program reforms would result in $167 million in grant savings, partially offset by $134 million in child care costs and $2.5 mil- lion in automation costs in 2004-05. We discuss welfare reform in Califor- nia, summarize the Governor’s reform proposals, present a framework for considering the proposals, and offer comments and recommendations. Welfare Reform in California The 1996 Federal Welfare Reform Legislation. The 1996 federal wel- fare reform law ended the individual entitlement to welfare and replaced C – 228 Health and Social Services 2004-05 Analysis it with a block grant ($3.7 billion annually for California) that gives states significant programmatic flexibility. To receive the block grant, states must meet an MOE requirement that state spending on welfare for needy fami- lies be at least 75 percent of the federal fiscal year FFY 94 level, which is $2.7 billion for California (80 percent, or $2.9 billion, if the state fails to meet the federal work participation requirement). Federal law holds states accountable for moving families from welfare to work by requiring states to meet statewide work participation rates of 50 percent for all families and 90 percent for two-parent families. Federal law allows states to re- duce their required participation rate by applying a caseload reduction credit, which is based on caseload decline since FFY 1995. Failure to meet federal work participation requirements results in a penalty equal to 5 percent of a state’s TANF block grant, which would be $370 million for California. Federal penalties may increase if the state continues to fail to meet participation rates in successive years. Finally, the federal welfare reform legislation set a five-year lifetime limit on an individual’s receipt of federally-funded welfare grants or services. The law permits states to exempt up to 20 percent of its cases from the time-limit for reasons of hardship. CalWORKs Participation and Time Limits. California implemented federal welfare reform by enacting the CalWORKs program. The CalWORKs program requires that adults in single-parent families par- ticipate in work or approved education or training activities for 32 hours each week. Two-parent families must participate at least 35 hours a week, with one adult working at least 20 hours. This emphasis on helping people become employed as quickly as possible is often referred to as a work- first approach. Noncompliance with participation requirements results in a sanction equal to the amount of the adult portion of the grant. In this situation, the adult is removed from the case, the grant is reduced by the adult portion, and the case becomes a child-only case. The CalWORKs program also imposes a time limit on adults. After five cumulative years on aid, a family’s grant is reduced by the adult’s portion and the case becomes a child-only safety-net case. County Control and Flexibility. Counties have broad flexibility in the design and implementation of the CalWORKs program, including administration, employment services, and child care. Each county has a county-designed CalWORKs plan and is responsible for moving CalWORKs recipients into program participation. Counties also share in 50 percent of any financial penalties the federal government assesses for not meeting federal TANF work participation requirements. CalWORKs Outcomes. California has met federal work participa- tion requirements each year since CalWORKs was implemented, thus avoiding federal penalties. We note that the state’s required participation Department of Social Services CalWORKs Program C – 229 Legislative Analyst’s Office rate is significantly reduced by the federal caseload reduction credit. Be- cause California has experienced a significant caseload decline since FFY 1995, the caseload reduction credit reduces the statutorily required level of participation from 50 percent to less than 10 percent. For FFY 2002, California’s actual participation rate was 27 percent, which was above the state’s FFY 2002 required federal participation level of about 7 percent. While California has met the federally required participation rate, and increased the number of people working, the overall percentage of adults who are meeting their CalWORKs participation requirements is much lower than one might expect given the work-first approach envi- sioned in the CalWORKs statute. Figure 5 summarizes the status of work participation in the CalWORKs program. Of particular concern are the 55,500 cases that are neither working, participating in any welfare-to- work activities, nor in sanction or pending sanction status. This 55,500 represents nearly 20 percent of all cases with adults and 28 percent of all cases subject to participation. We refer to these cases as disengaged. Figure 5 CalWORKs Participation Status Cases With Adultsa Cases Percent of Cases Required to Participate Cases Generally Not Expected to Participate Exempt or pending sanction 66,791 NA On-aid less than two months 21,155 NA Subtotal (87,946) NA Cases Subject to Participation In sanction 50,738 26% Working: More than 20 hours\/week 22,920 12 Less than 20 hours\/week 51,062 26 Not Working: Meeting participation 18,496 9 No participation 55,486 28 Subtotal (198,702) (100.0%)b Total Cases With Adults 286,648 a Based on the Department of Social Services’ 2003 Survey Data. b Detail may not total due to rounding. C – 230 Health and Social Services 2004-05 Analysis We note that some of these disengaged cases may in fact be complying with program requirements, but are in between activities. Figure 5 also shows that an additional 18,500 cases are not working, but are meeting program requirements through other activities, such as vocational train- ing or substance abuse treatment. (For more information on the disen- gaged, please see our discussion of CalWORKs participation in the 2002-03 Budget: Perspectives and Issues.) As Figure 5 shows, three-quarters (75 percent) of the cases that are expected to participate are working less than 20 hours per week. About 26 percent are working, but less than 20 hours; 28 percent are disengaged from program participation; and 26 percent are in sanction status. These low participation rates are of concern for two primary reasons. First, fail- ure to meet new higher federal participation rates (please see our discus- sion on federal welfare reauthorization later in this section) could lead to a significant federal financial penalty. Second, low engagement with pro- gram activities indicates that some adults who are facing the five-year lifetime limit on cash assistance may not be receiving the services they need to become self-sufficient as quickly as possible. Framework for Evaluating the Governor’s Proposals The Governor proposes broad reforms to the California Work Opportunity and Responsibility to Kids program designed to increase program participation. In order to assist the Legislature in evaluating these proposals, we summarize the Governor’s approach, and offer a framework for assessing specific aspects of the proposal. The Governor’s Approach to CalWORKs Reform. Figure 6 summa- rizes the Governor’s proposals compared to current law. As the figure shows, the Governor’s budget includes significant changes to fundamen- tal components of the CalWORKs program. Specifically, the Governor’s proposal includes a 25 percent grant reduction (beyond the current law reduction) for families in sanction status more than one month and for nonworking families in which the adult has reached the CalWORKs time limit. The Governor’s proposal also narrows the activities that would count towards meeting the first 20 hours of the individual participation requirement. In addition, the Governor proposes to require job search while applications are pending and to require all nonworking cases to have a welfare-to-work plan within 60 days of receiving aid. The admin- istration estimates that these program reforms would result in $167 mil- lion in savings, offset by $136 million in child care and automation costs in the budget year, for a net savings of about $31 million. Department of Social Services CalWORKs Program C – 231 Legislative Analyst’s Office Figure 6 CalWORKs Current Law vs. Governor’s Proposals Current Law Governor’s Proposal Job Search Four weeks of job search allowed after aid is granted, unless county determines additional job search is needed. Requires all applicants to participate in job search while applications for aid are pending. Welfare-to-Work Plan Counties must complete welfare-to- work plan after job search. Requires all aided adults not meeting work requirements to complete and sign a welfare-to-work plan within 60 days of the receipt of aid. Allowable Participation Activities Counties have broad flexibility in determining participation activities for up to two years. Requires all nonexempt recipients to engage in 20 hours per week of more narrowly defined core work activities within 60 days of entering program. Sanctioned Case Grant Removes the adult portion from the grant. Reduces grant for cases that have been in sanction status for more than one month by an additional 25 percent. Safety-Net Case Grant Removes the adult who has reached the time limit from the grant. Reduces grant for safety-net cases with a nonworking adult by an additional 25 percent. In presenting his proposals, the Governor has offered several rea- sons why these changes are needed, including (1) increasing work par- ticipation and personal responsibility, (2) anticipation of federal welfare reauthorization reforms, and (3) prioritizing funding for core services. In evaluating the Governor’s proposals, we believe the Legislature should consider pending federal welfare reform, and how the proposal impacts county flexibility, work incentives and participation, and the state budget. How Does the Proposal Address Pending Federal Welfare Reform Reauthorization? The 1996 federal welfare reform law authorized the TANF block grant through September 2002. Congress was unable to pass a reauthorization bill before September 2002, and the program is now C – 232 Health and Social Services 2004-05 Analysis being funded through a continuing resolution, which maintains current TANF funding, rules, and regulations through March 31, 2004. In February 2003, The House passed H.R. 4, its version of TANF re- authorization. In September 2003, the Senate Finance Committee passed its version of H.R. 4, but the full Senate has yet to act on reauthorization legislation. Both the Senate and House versions of reauthorization con- tain provisions that require stricter work requirements, including a re- quirement that recipients participate in a minimum number of core work activities. Both bills also incrementally increase minimum state partici- pation rates to 70 percent with varying participation credits. If finally adopted by Congress, and taking into account the participation credit, it appears likely that California would ultimately need to reach a work participation rate of at least 50 percent. (Please see our overview of fed- eral welfare reauthorization later in this section.) Will the Proposal Limit County Flexibility? When the Legislature created the CalWORKs program, it gave the counties broad program- matic flexibility. The program was designed to allow counties to provide a broad array of welfare-to-work service options in order to help recipi- ents become self-sufficient and to meet federal participation requirements. In considering the Governor’s proposals, the Legislature should deter- mine whether proposed reductions in county flexibility will help achieve statewide program goals. Will the Proposal Increase Work Incentives and Participation? Mov- ing families into stable employment is a principle goal of the CalWORKs program. The Governor’s proposed policy changes put an even greater emphasis on moving participants into work quickly. The Legislature should consider the extent to which each proposed policy change is likely to increase employment and participation as well as the policy’s impact on the long-term goals of self-sufficiency. What Impact Does the Proposal Have on Families? The administration’s proposals may result in negative consequences for some CalWORKs families and positive outcomes for others. Designing effec- tive welfare-to-work strategies is difficult because policies can simulta- neously have positive and negative impacts on families. For example a sanction for failure to participate should have the positive effect of im- proving work participation, by presenting families with a negative con- sequence if they choose not to participate. On the other hand, those fami- lies unable or unwilling to comply with a participation requirement will face a reduction in family income, with potential adverse consequences for the children in such a family. The Legislature should consider both the positive impacts of moving families into employment and the poten- tial hardships that grant reductions could have on families. Department of Social Services CalWORKs Program C – 233 Legislative Analyst’s Office What Is the Fiscal Impact of the Proposals. The administration esti- mates that the Governor’s CalWORKs reform proposals would decrease grant costs by $167 million and increase child care and automation costs by an estimated $136 million, for a net savings of about $31 million in 2004-05. Net savings are estimated to increase to about $90 million in 2005-06. Given the state’s difficult fiscal situation, we believe the Legisla- ture should weigh the state fiscal effects of each proposal against the impact on counties, families, and children. Our framework is summarized in Figure 7. Below we discuss each of the Governor’s proposals using this framework. We begin by reviewing the Governor’s proposed work participation reforms and then discuss the proposed sanctions. Figure 7 Framework for Evaluating Governor’s Proposals How does the proposal address potential challenges of federal welfare reform? Will the proposal limit county flexibility? Will the proposal increase work incentives and participation? What impact will the proposal have on families? Work Participation Reforms In the area of work participation, the Governor proposes (1) requir- ing an up-front job search while applications are pending, (2) requiring aided adults to sign a welfare-to-work plan within 60 days of the receipt of aid, and (3) limiting the activities that count as participation. Below we review the Governor’s proposals and offer comments and recommen- dations. C – 234 Health and Social Services 2004-05 Analysis Proposal Requires Job Search While CalWORKs Application Is Pending The Governor’s budget proposes to require applicants to search for a job while their application for California Work Opportunity and Responsibility to Kids aid is pending. Although counties would have broad flexibility in determining job search requirements and verification, this up-front job search would be mandatory for all applicants. We recommend that the Legislature ensure county programmatic and fiscal flexibility by making the policy to require job search as a condition of eligibility, a county option. Governor’s Proposal. Current law prohibits counties from requiring an up-front job search while applications are pending. The administra- tion proposes requiring individuals to participate in job search while their CalWORKs application is pending. The administration has indicated that under the proposal, counties will have broad flexibility in determining the number of hours of job search required, type of search, and required verification. Child care and transportation would be provided to appli- cants while they are searching for a job. Proposal May Help to Increase Participation. The extent to which the Governor’s proposal helps to increase work participation will largely depend on county policy design and implementation. Requiring job search may, among other things, serve to clearly outline the work-first expecta- tion to participants as they enter the CalWORKs program. We note that such high expectations could also be instilled with an up-front program expectations orientation, as is the practice in Riverside County. Research Shows Programs Which Include Flexibility in Determining Initial Activities Are the Most Successful. There has been continued de- bate about the most effective way to help welfare recipients move from welfare to stable employment. Some welfare programs emphasize em- ployment services, while others focus on providing education and train- ing. A 2001 study done by the Manpower Demonstration Research Cor- poration (MDRC) found that welfare programs that offered a mix of work first for some recipients, and education and training for others were the most successful. This research points to the importance of allowing coun- ties to maintain the flexibility to decide on the best course of action for recipients. Proposal May Lead to Additional County Costs. The administration’s proposal could increase county costs for child care, transportation, and administration. The most recent data show that over 50 percent of all CalWORKs applications were not approved. Under the Governor’s pro- posal, counties could potentially be responsible for paying for child care Department of Social Services CalWORKs Program C – 235 Legislative Analyst’s Office and transportation for a significant number of people that do not end up participating in the program. Because the administration’s proposal gives counties flexibility in implementation of up-front job search, the extent to which counties would incur new costs will largely depend on the pro- gram design and requirements that each county establishes. Analyst’s Recommendation. As research has shown, a flexible ap- proach to providing a mix of employment services (including job search), training, and education may be the most effective way to move individu- als from welfare to long-term employment. We recommend that the Leg- islature give counties the option of requiring job search while an individual’s application is pending. This would allow counties to assess what would work best in their communities. Proposal Requires Aided Adults to Complete A Welfare-to-Work Plan Within 60 Days of Aid The administration proposes requiring aided adults who are not already meeting program requirements to complete and sign a welfare- to-work plan within 60 days of the receipt of aid. This proposal may help to engage recipients who are not currently participating in program requirements, but may also limit county flexibility to evaluate the needs of the local labor market as they relate to the abilities and barriers of the participant. We recommend that the Legislature consider modifying the Governor’s proposal to give counties more flexibility in meeting this potentially beneficial requirement. Governor’s Proposal. The administration proposes to require all aided adults who are not already meeting work requirements to sign a welfare- to-work plan within 60 days of the receipt of aid. A welfare-to-work plan specifies the activities in which a participant will be engaged and what services will be provided to the participant in order achieve the stated goals. Currently, counties are required to complete a welfare-to-work plan after a four-week job search. However, if the county determines that ad- ditional job search would help to secure employment, then job search can be extended. Thus currently, some recipients may go a number of months without a signed plan. Proposal May Help Increase Work Participation. Requiring a wel- fare-to-work plan to be completed two months after the receipt of aid may help to increase participation, especially among the caseload that is disengaged from the program. As noted earlier, 55,500 cases are disen- gaged. For these and other cases, the certainty of a welfare-to-work plan may help case managers keep recipients on a path toward self sufficiency. C – 236 Health and Social Services 2004-05 Analysis Proposal May Not Be the Best Use of Limited County Resources. Currently, a welfare-to-work plan is used to help structure a participant’s long-term goals of moving from welfare to work. For many CalWORKs recipients, 60 days would be an adequate amount of time to complete an effective welfare-to-work plan. However, for some individuals, 60 days would not be sufficient time to assess and test the recipient’s abilities and barriers, and how those abilities fit with the needs of the local labor mar- ket. Requiring a completed welfare-to-work plan within 60 days for all participants who are not already meeting program work requirements may hinder county efforts to use job search and other activities to com- plete an effective welfare-to-work plan for some recipients. Moreover, hastily completed welfare-to-work plans could limit county ability to decide the most effective mix of up-front services and activities for a par- ticipant. This may result in the need for counties to reassess and modify the welfare-to-work plan using limited county resources, or lead to less desirable long-term employment outcomes. Analyst’s Recommendation: Modify the Governor’s Approach. The Governor’s proposal addresses an important CalWORKs program issue, that a significant percent of the nonexempt caseload is not participating in program requirements. We concur with the goal that all nonworking recipients have a welfare-to-work plan. However, by allowing only 60 days for plan completion, the Governor’s proposal restricts the tools that counties have to help determine local labor market conditions, as well as a participant’s employment barriers and abilities. This informa- tion helps counties develop a plan that moves participants into stable, long-term employment. Accordingly, we recommend that the Legislature modify the Governor’s proposal to provide counties with the flexibility to extend the 60-day time frame up to 120 days for certain recipients. This would give counties the time needed to more thoroughly explore the needs of the local labor market and the barriers and abilities of the participant. Proposal Requires 20 Hours of Core Work Activities The Governor’s proposal narrows the list of activities that would count towards the first 20 weekly hours of required participation. This limits the counties’ available options to help participants move from welfare to work. In addition, this requirement is more restrictive than both of the Congressional welfare reauthorization proposals currently being considered. We recommend that the Legislature retain as much county flexibility as possible with respect to participation activities. Governor’s Proposal. The Governor’s proposal requires that all nonexempt CalWORKs recipients engage in 20 hours of core work activi- Department of Social Services CalWORKs Program C – 237 Legislative Analyst’s Office ties each week in addition to other approved activities to meet the 32 hour (or 35 for two-parent families) a week work requirement. Fig- ure 8 lists the activities that currently count toward meeting participa- tion requirements and the activities that would be defined as core work activities under the Governor’s proposal. After meeting the core work requirements, recipients could meet the remaining weekly requirement with other current law activities, such as education related to employ- ment, vocational training, English as a second language, and substance abuse and mental health treatment. Figure 8 Qualifying State Welfare-to-Work Activities Activities That Currently Count Toward Participationa Unsubsidized employment. Subsidized employment (public or private sector). Work experience. On-the-job training. Community service. Job search and job readiness assistance (limited time). Provision of child care to community service participants. Vocational education and training. Job skills training directly related to employment. Education directly related to employment. Secondary school or General Education Diploma course of study. Appraisal, assessment, or reappraisal. Grant-based on-the-job training. Work study. Supported work or transitional employment. Domestic violence services. Mental health services. Substance abuse services. Other work activities. a Bold and italicized activities are considered \”core\” work activities under the Governor’s proposal. C – 238 Health and Social Services 2004-05 Analysis The administration estimates that about 97,000 families will increase their work participation in response to stricter work requirements. The administration also estimates that about 530 eligible families will be de- terred from applying for CalWORKs each month as a result of the more stringent requirements. The administration further estimates that the pro- posal would result in $120 million in grant savings, partially offset by additional child care costs of $90 million, for a net savings of about $30 mil- lion. Proposal Limits County Flexibility. Counties currently have broad flexibility in determining the appropriate mix of work, education, voca- tional training, and barrier removal activities (such as mental health and substance abuse) that will help a CalWORKs participant move from wel- fare to work. Under current law, the CalWORKs program allows recipi- ents to participate in work-related activities including barrier removal, education, and training for up to two years after a welfare-to-work plan has been developed. The Governor’s proposal would limit the flexibility that counties have to engage a participant in work-related activities, in- stead requiring nonexempt adults to work 20 hours a week in a core work activity within 60 days of aid. This approach is not likely to be effective for recipients facing up-front employment barriers. For example, about 12,000 cases per month currently receive mental health or substance abuse treatment. Under the Governor’s proposal, such participants would only be able to receive these services if they were also working or participat- ing in community service jobs (CSJ) or on-the-job training (OJT) for 20 hours per week. The Governor’s proposal thereby limits counties’ abil- ity to identify and address these barriers. Unrealistic Assumptions. The department estimates that its proposal to narrow the activities that would count toward meeting participation requirements would impact about 125,000 recipients (51,000 currently working less than 20 hours per week, 18,000 meeting participation through activities other than work, and 55,500 who are not participating). We be- lieve the administration’s assumption that those working less than 20 hours and those that are meeting participation without work will either obtain employment or be able to attend CSJ or OJT is probably somewhat optimistic, but on balance is reasonable. However, with respect to the 55,500 cases who are disengaged, we believe the administration’s assumptions are unrealistic. Specifically, the administration assumed that 82 percent of the disengaged cases would meet the new requirements and 18 percent would be sanctioned. The administration provides no information to support its assumption that such a large percentage of the disengaged cases will begin meeting more rigid participation requirements. Given that this group is already disen- gaged from program participation, it is unlikely that narrowing the al- Department of Social Services CalWORKs Program C – 239 Legislative Analyst’s Office lowable participation activities would result in significantly greater pro- gram participation. In summary, we believe the administration has over- estimated the potential success of this proposed policy change. This means that child care costs and grant savings due to employment are overesti- mated, and sanction savings are underestimated. No Additional Employment Services Funding Included in the Pro- posal. The administration estimates that about 86 percent (64,000 cases) of adults that had previously not been working will meet the new par- ticipation requirements for 20 weekly hours of core work activities within two months. Some of these individuals will obtain nonsubsidized em- ployment, however, while others will be unable to find employment and will need OJT or CSJ slots. The budget includes no additional funding to support OJT and CSJ slots. If for example, 5 percent of adults who had previously not been working need OJT and 5 percent need a CSJ slot, it could result in more than $8 million in additional county costs. In addition, some of those recipients who obtain employment may be working less than 32 hours and may require some other education or training activity to make up the difference between employment hours and the 32 hour requirement. The budget includes no additional funding for these employment services. We note that some of these costs, and costs for OJT and CSJ noted above, could in part be offset by savings from recipients shifting from training activities to unsubsidized employ- ment. Proposal Is More Narrow Than Federal Welfare Reform Proposals. Both the House and Senate reauthorization bills include provisions that increase the minimum hours of work required. In addition, the House bill restricts the types of activities that count toward the first 24 hours of participation. However, both bills also include a provision that allows for up to three months (House) and six months (Senate) of barrier re- moval instead of core work activities within a 24-month period. Proposal to Narrow Participation Activities Is Flawed. As described above, the proposal to narrow the range of participation activities se- verely restricts county flexibility to determine which services and activi- ties are most likely to help recipients become self sufficient. The adminis- tration has not presented evidence how their proposal will not only in- crease participation, but will do so within a more narrowly defined set of activities. The disengaged in particular may have barriers to employment that would need to be resolved before they could successfully engage in 20 hours or more of core work activities. Analyst’s Recommendation. We believe that counties are in the best position to identify which activities will help recipients become self-suf- ficient. Narrowing the list of allowable activities is unlikely to increase C – 240 Health and Social Services 2004-05 Analysis participation among the disengaged to the extent envisioned by the ad- ministration. Under current law, counties have a fiscal incentive to en- sure that recipients are participating in that they are responsible for shar- ing in any federal penalty to the extent the state fails to meet the higher participation rates contemplated in pending versions of federal welfare reform reauthorization. We recommend that the Legislature retain as much county flexibility as possible with respect to participation activities. Our analysis indicates that the Governor’s proposal to narrow the activities that count toward meeting individual participation requirements may excessively limit county flexibility. However, given the current num- ber of people who are not meeting program requirements and given that the state shares in any federal penalty for not meeting requirements, the Legislature may wish to consider some changes to work requirements pursuant to federal proposals. For example, the Legislature may want to consider providing the counties with guidelines for managing their caseloads under the potentially more narrow definitions of participation that may be part of federal welfare reauthorization by limiting the num- ber of recipients who can participate in non-core work activities. Grant Reductions for Sanctioned And Safety Net Cases The administration proposes to reduce grants by 25 percent for cases that have been in sanction status for longer than one month, and for safety net cases with nonworking parents. We discuss each proposal below. Proposal Would Reduce Grant for Sanctioned Cases The administration estimates that reducing child-only grants by 25 percent after one month in sanction status will result in a grant reduction for 26,200 families and will motivate 13,400 families to address and remedy ( cure ) their sanction. Although it is likely that an additional grant reduction will result in some sanctioned adults complying with program requirements, research is inconclusive as to the magnitude of such a work incentive. The Legislature should weigh the benefits of higher participation against any potential negative impact of a grant reduction on children. Governor’s Proposal. The administration proposes to reduce grants by 25 percent for families that are in sanction status for more than one month. Currently, a family’s grant is reduced (on average) by about $146 each month when the adult is removed from the case. This proposal rep- resents a further grant reduction of about $150 per month, leaving the Department of Social Services CalWORKs Program C – 241 Legislative Analyst’s Office total monthly grant for a family of three at about $375 (assuming the Governor’s proposed grant reductions). Currently, there are 39,600 cases with sanctions lasting more than one month. The administration estimates that about 26,200 cases (66 percent) will receive the 25 percent reduction and that 13,400 (34 percent) cases will cure their sanction. This policy change is expected to result in grant savings of $36 million, offset by an estimated $19 million in grant costs attributable to cases curing their sanc- tion to avoid the proposed 25 percent reduction, and by about $45 mil- lion for additional child care costs, for net increased costs of about $28 mil- lion. Research Is Inconclusive as to Whether a 25 Percent Grant Reduc- tion Will Motivate Individuals to Avoid and\/or Cure Their Sanction. The administration assumes that about 13,350 cases will cure their sanc- tion as a result of the more stringent sanction policy. Research is incon- clusive as to how large a sanction must be in order to motivate individu- als to remedy a sanction. As noted above, currently a family’s grant is reduced (on average) by about $146 when the adult is removed from the case. Despite this significant reduction, on average, about 4,000 cases are sanctioned each month. Given inconclusive research, it is difficult to pre- dict how many adults will be motivated to avoid or cure their sanction with an additional $150 grant reduction. The administration provides no basis for its estimate that 34 percent of the cases subject to sanction will cure their sanction status as a result of the proposed policy change. To the extent that recipients do not cure their sanction as anticipated by the administration, there will be greater net savings because the cost of grants as well as the cost of child care will decrease. Proposal Unlikely to Increase Federal Work Participation Rates. When a case is sanctioned, the adult is removed from the case and it becomes a child-only case, thereby excluding the case from the state’s federal work participation rate. Therefore, a case in sanction status does not negatively impact the state’s ability to meet work participation re- quirements. Once the sanction is cured, the adult portion of the grant is restored and the case will once again be included in the federal participa- tion figure. We assume that formerly sanctioned cases have the same work participation behavior as all other cases. Accordingly, bringing such a case back into the caseload will not change the state’s federal participa- tion rate. Analyst’s Comments. The administration’s proposal to reduce the grant for sanctioned cases will probably increase the number of adults that cure their sanctions and begin program participation which could help them become self-sufficient. However, the proposal will not help C – 242 Health and Social Services 2004-05 Analysis the state’s federal work participation rate because sanctioned cases are currently excluded from the participation rate calculation. The Legisla- ture should weigh the potential increased program participation against the potential negative impact to children as a result of the grant reduc- tion. Proposal Would Reduce Grant for Safety Net Cases With a Nonworking Adult The Governor’s proposal to reduce grants by 25 percent for safety net cases in which the adult is not working will reduce program expenditures. However, the policy will not help the state’s work participation rate because the adults in safety net cases are currently not counted toward the state’s work participation rate. The Legislature must weigh the $29 million savings against the negative impact that the grant reduction may have on families and children. Governor’s Proposal. Under current law, when an adult CalWORKs recipient has reached his\/her 60 month time limit, the adult is removed from the assistance unit and the children are moved into the child-only safety net caseload. The administration proposes to further reduce the grant for safety net cases with nonworking adults by 25 percent. On av- erage, this would result in a monthly grant reduction of about $135 in the child-only grant. The administration indicates that the work requirement could be satisfied with any earnings in a quarter. In addition, it is our understanding that employment would be self-certified, but would re- quire some sort of verification (such as a paycheck stub). Counties would not have the flexibility to set more stringent work or verification require- ments. Proposal Will Not Impact Federal Work Participation Rates. Adults in the safety-net case are not counted toward the state’s work participa- tion calculation. As a result, even if adults increased their participation, it would not improve the state’s work participation rate. Minimal Work Incentive. Currently there are 23,600 nonworking safety net cases. The administration assumes that all of these nonwork- ing cases will have their grants reduced by an average of $135 per month, and that no cases will begin work as a result of the grant reduction. This assumption indicates that the expected goal of the policy is grant savings rather than higher levels of employment for adults with children in safety net cases. The administration’s estimated $29 million in savings is prob- ably overstated, in that some recipients may in fact meet the minimal work requirements. Given that the work requirement could be satisfied Department of Social Services CalWORKs Program C – 243 Legislative Analyst’s Office with very little work effort, we anticipate that the proposal will result in only a minor increase in the hours of employment. Analyst’s Comments. The Governor’s proposal would not directly help the state’s federal work participation rate, although it may mini- mally influence the training, education, and employment decisions of current recipients. Given the proposal’s minimal work requirements, we believe that some nonworking adults will meet the new requirements and avoid the grant reduction. Therefore, we believe the administration has overstated savings associated with this proposal, because it assumes no impact on employment behavior. The Legislature should weigh the estimated savings against the potential negative impact to children in families in which the adult is not working and has little or no access to CalWORKs employment support services. UPDATE: FEDERAL WELFARE REAUTHORIZATION As of February 2004, Congress had not completed action on federal welfare reauthorization. We describe the major features of the currently pending House and Senate versions of welfare reform and update our fiscal estimates of these measures. Status of Federal Welfare Reauthorization The 1996 welfare reform law created the TANF block grant program, replacing the Aid to Families with Dependent Children (AFDC) program. The welfare reform law authorized the TANF block grant through Sep- tember 2002. Congress was unable to pass a reauthorization bill before September 2002, and the program has been funded through a series of continuing resolutions, which maintain current TANF funding, rules, and regulations. The current continuing resolution expires at the end of March 2004. In February 2003, the House passed H.R. 4, the Personal Responsi- bility, Work and Family Promotion Act of 2003, its TANF reauthoriza- tion bill. In September 2003, the Senate Finance Committee passed its version of H.R. 4, but the full Senate has yet to act on reauthorization legislation. Both the Senate and House versions of reauthorization make substantial changes to TANF, health care, and child support. We limit our discussion here to the TANF changes, especially provisions that im- pose stricter work requirements and higher participation rates. C – 244 Health and Social Services 2004-05 Analysis Major Provisions of Federal Proposals Common Elements. Figure 9 summarizes the major work participa- tion provisions in current law, and the House and Senate welfare reform proposals. Both the House and Senate proposals maintain current TANF block grant funding levels, state spending requirements, five-year fed- eral time limit, and the 20 percent caseload time-limit exemption option. The proposals share other common elements that differ from current law. Both proposals require a self-sufficiency plan (welfare-to-work type plan) within 60 days of enrollment and increase the state’s participation rate. In addition, both proposals make significant changes to allowable work activities and increase the hourly work requirement. Figure 9 TANF Reauthorization Proposals Major Work Participation Provisions Current Law House Passed Bill Senate Finance Bill Statewide Participation Rates 50 percent of single parent and 90 percent of two-parent families must meet work requirements. Incrementally increases participation requirements to 70 percent for both one- and two-parent families. Same as House. Caseload Reduction\/Employment Credit Statewide participation rate require- ments are reduced by the percentage point decline in a state’s caseload since FFY 1995. Recalibrates credit so that it is eventually based on caseload decline over the most recent four-year period. Replaces caseload credit with an employment credit that is eventually capped at 20 percent. Exclusion From Participation Rate States may exclude single-parent cases with a child under 12 months of age from the participation rate calculation. Current law plus: Allows states to exclude cases in the first month of assis- tance. Current law plus: Allows states to exclude the first month of assistance, and families with a child under 1 year of age. Participation Hours 20 hours per week for single parents with a child under age 6; 30 hours for single parents with older children; 35 hours for two-parent families. No credit for partial participation. Requires all families to participate 40 hours. Par- tial credit for partial participation. Requires single parents to work for 24 hours if they have a child under 6 and 34 hours if children are over 6. Two- parent families are required to work 39 hours (more if they re- ceive subsidized child care). Partial credit for partial participation. Continued Department of Social Services CalWORKs Program C – 245 Legislative Analyst’s Office Key Differences. While sharing some common elements, the House- passed welfare reform proposal differs significantly from the version passed by the Senate Finance Committee. In general, H.R. 4 proposes more stringent work requirements and sanction policies, and less flex- ibility in participation rate credits and exclusions. Below we discuss key features of the two proposals and their potential impact on the CalWORKs program. State Participation Rates Current Law. Figure 10 (see next page) shows the required state par- ticipation rates under the House and Senate proposals. Under current Current Law House Passed Bill Senate Finance Bill Participation Activities Priority activities must account for at least 20 hours per week. Remaining work hours may be met through core activities, job skills training, or educa- tion related to employment. Requires 24 weekly hours of priority work activities. Ex- cludes job search and voca- tional education as countable priority activities. Gives states broad flexibility to count any state-approved activity toward the remaining hours. Requires 24 weekly hours of priority work activities. The remaining hours may in- clude broader activities in- cluding barrier removal and job search. Universal Engagement After 24 months of aid, every family must participate for some hours in welfare-to-work activities. Requires states to establish a welfare-to-work plan for every aided adult within 60 days of receiving aid. Requires states to establish a welfare-to-work plan for every aided adult within 60 days of receiving aid. Flexibility Period No provision. Allows three months in any 24-month period to be spent in substance abuse treatment, re- habilitation services, job search, or work-related education. (May be extended by one month in some circumstances.) Same as House, but may be extended an additional three months in some circum- stances. Job search can count for up to 12 weeks. Sanctions States have flexibility in determining whether to impose a full or partial sanction on noncompliant families States are required to impose a full family sanction for continued noncompliance. Maintains current law with small change in state plan re- quirement and mandates that self-sufficiency plan is re- viewed before sanction is imposed. C – 246 Health and Social Services 2004-05 Analysis law, states must meet a statewide work participation rate requiring that 50 percent of single-parent families and 90 percent of two-parent fami- lies are meeting hourly work participation requirements. California, like many other states, has moved its two-parent caseload into a separate state program that is not subject to the 90 percent participation requirement. Figure 10 TANF Reauthorization Proposalsa Projected Impact on California’s Work Participation Rates Federal Fiscal Year Year 1 Year 2 Year 3 Year 4 Year 5 House Version Work participation requirement 50% 55% 60% 65% 70% Less caseload reduction credit -43 -22 \u2014 \u2014 \u2014 Effective rate 7% 33% 60% 65% 70% California’s estimated participation rate under new provisions 34% 34% 34% 34% 34% Participation Gap \u2014 \u2014 26% 31% 36% Senate Version Work participation requirement 50% 55% 60% 65% 70% Less employment credit -21 -21 -21 -21 -20 Effective rate 29% 34% 39% 44% 50% California’s estimated participation rate under new provisions 34% 34% 34% 34% 34% Participation Gap \u2014 \u2014 6% 10% 16% a Source: the Department of Social Services, using FFY 2002 data. Federal law reduces the required participation rate by applying a caseload reduction credit. This adjustment is based on the percentage decline in each state’s welfare caseload since FFY 1995. California, like most states, has experienced a significant caseload decline since FFY 1995. Consequently, the FFY 2002 required participation rate for California was about 7 percent. In addition, single-parent cases with a child under 12 months of age may be excluded from the participation rate calculation. H.R. 4. The House bill increases the states’ minimum work participa- tion requirement by 5 percent each year from 50 percent to 70 percent Department of Social Services CalWORKs Program C – 247 Legislative Analyst’s Office five years later. The caseload reduction credit is changed so that when fully implemented, the reduction credit is based on caseload decline over the most recent four-year period. Assuming that the caseload remains relatively flat, this would mean that California would not receive a caseload credit after four years (full implementation). Senate. Like the House bill, the Senate bill also increases the state’s minimum work participation requirement by 5 percent each year from 50 percent to 70 percent five years later. The Senate bill replaces the caseload reduction credit with an employment credit that gives states credit for individuals who are diverted from receiving welfare, leave welfare for a job, or find a higher paying job. The credit is capped at 40 percent for the first year, and is reduced to 20 percent over the next five years. Work Participation Requirements Current Law. Figure 11 shows work participation requirements un- der current law, the House proposal, and the Senate proposal. Current federal law requires that single parents with a child under age 6 work for at least 20 hours per week and those with older children work for at least Figure 11 Weekly Work Participation Requirements Single Parent Children Under 6 Children Over 6 Two-Parent Families Current Law 20 hours 30 hours 35 hours Housea Full credit 40 hours 40 hours 40 hours Partial credit Pro-rated for 24-40 hours Pro-rated for 24-40 hours Pro-rated for 24-40 hours Senateb Full credit 24 hours 34 hours 39 hoursc Partial credit .675 credit for 20-23 hours .75 credit for 24-29 hours .875 credit for 30-33 hours .675 credit for 26-29 hours .75 credit for 30-34 hours .875 credit for 35-39 hours a The House proposal requires 24 hours of \”core\” activities, the remaining 16 are up to state discretion. After 24 hours, pro- rated partial credit. b The Senate proposal requires 24 hours of core activities, the remaining hours include a broader list of activities. Extra credit given for families exceeding required hours. c 55 hours if family receives subsidized child care. C – 248 Health and Social Services 2004-05 Analysis 30 hours per week. Two-parent families must work at least 35 hours per week. No credit is given for partial participation. California law requires single-parent families to participate in 32 hours per week and two-par- ent families to participate 35 hours per week. House Proposal. H.R. 4 increases the number of hours that parents are required to work to 40 hours a week for all families. The two-parent family work participation rate is eliminated. A pro-rated partial credit is given for families that participate in core activities for at least 24 hours a week. Senate Proposal. The Senate bill increases the number of required work hours from 20 to 24 hours per week for single parents with a child under age 6 and 30 to 34 hours per week for single parent families with children over age 6. Two-parent families are required to work 39 hours, which is increased to 55 hours per week if the family receives subsidized child care. Partial credit is given for single parents who participate for at least 20 hours and for two-parent families that participate for at least 26 hours per week. Work Activities Current Law. Under current law there are nine core work activities which must account for at least 20 hours of required work participation. These core activities are: unsubsidized employment, job search, vocational educational training, work experience, community service, private sub- sidized employment, public subsidized employment, OJT and childcare for community service participants. House Proposal. The bill increases the number of required core work activity weekly hours from 20 to 24 and narrows the set of allowable core work activities. The allowable core work activities are: unsubsidized employment, subsidized employment, on-the-job training, supervised work experience, and supervised community service. H.R. 4 no longer allows job search\/job readiness or vocational education to count towards the first 24 hours of participation. However, H.R. 4 does allow participa- tion in substance abuse and rehabilitation treatment, job search, and other activities as defined by the state to count toward the core work require- ment for up to three months in a two-year period. While H.R. 4 restricts allowable core work activities, it provides ad- ditional flexibility to states to define work activities above the 24 hours of core work activities. Department of Social Services CalWORKs Program C – 249 Legislative Analyst’s Office Senate. The Senate bill requires 24 weekly hours of priority work activities. The remaining hours may include broader activities including job search, barrier removal, substance abuse, and education. Universal Engagement Current Law. Adults are required to participate in work activities within 24 months on aid. Work activities are defined by the state. It is a state option to develop an individual responsibility plan for recipients. California currently requires the completion of a self-sufficiency plan (welfare-to-work plan) following the completion of the four week job search. Counties can extend job search (and the welfare-to-work plan) if the county determines that additional job search would help to secure employment. The completion of the welfare-to-work plan starts the 18 or 24 month time limit in work-related activities such as education and vo- cational training. House Proposal. The House proposal requires states to develop a self-sufficiency plan, that includes detail on planned work activities for all adults within 60 days of welfare enrollment. A federal sanction may be imposed on states that fail to comply. Senate Proposal. The Senate proposal also requires a self sufficiency plan within 60 days of welfare enrollment. The Senate bill specifies what the plan should contain, including detail about how the recipient intends to engage in work or other sufficiency activities, steps to promote child well-being, and information about support services the state will pro- vide. A federal sanction may be imposed on states that fail to comply with the self-sufficiency plan requirement. Sanctions Current Law. Federal TANF law directs states to sanction clients for failure to participate in work and other program requirements. States that do not sanction noncompliant recipients are subject to a federal fi- nancial penalty. Current federal law gives states flexibility to determine the structure of its sanctions policies. However, federal law prohibits states from penalizing a single parent with a child under age 6 if childcare is not available. California implemented a sanction policy that impacts only the adult portion of the grant, unlike many other states that impose a full family sanction, or cut the entire family grant. In California, when someone has been sanctioned for the first time, benefits are reinstated as soon as the person comes into compliance, known as curing the sanction. A second instance of noncompliance results in a sanction of at least three months C – 250 Health and Social Services 2004-05 Analysis or until the sanction is cured. A third and subsequent instance of noncompliance results in a sanction being imposed for a minimum of six months or until cured. House Proposal. The House bill requires that states terminate assis- tance to all family members (full family sanction) if any adult is not meet- ing program requirements for more than two months. It also requires that the state plan must describe how it will provide services for noncompliant families. Any state funds expended for cases in sanction status more than two months may not be counted toward the state’s MOE spending requirement. Senate. The Senate bill largely maintains current law. However, it requires that the state plan include strategies the state will take to ad- dress services for noncompliant families and requires the state to review the noncompliant persons self-sufficiency plan before imposing the sanc- tion. Child Care Current Law. Currently, states receive a total of $2.7 billion annually in Child Care Development Funds for child care. California’s share of these funds is about $520 million. California law requires that adequate child care be available to all CalWORKS recipients receiving cash aid in order to meet their program participation requirements (a combination of work and\/or training activities). House Proposal. The House bill proposes increasing mandatory (re- quired) child care funding by $1 billion over five years. These funds would require a federal match set at the current federal Medicaid assistance percentage (FMAP) match. The proposal also includes increasing discre- tionary funding by $1 billion over five years. The discretionary funds are subject to appropriation. Senate. The Senate bill also increases mandatory spending by $1 bil- lion and discretionary spending by $1 billion over five years. Impact on the CalWORKs Program Both H.R. 4 and the Senate Finance bill contain new provisions that will have significant fiscal and programmatic effects on the CalWORKs program. As discussed above, the bills differ in several key areas includ- ing the caseload reduction\/employment credit, full family sanction re- quirement, required recipient participation rate, and allowable core work activities. However, the proposals share a number of similar provisions including, an increase in the state participation rate, an increase in the Department of Social Services CalWORKs Program C – 251 Legislative Analyst’s Office number of required hours, and a universal engagement requirement. Below we discuss the potential impacts of these expected federal policy changes on the CalWORKs program. Federal Proposals Likely to Result in Participation Rate Gap Both the House and the Senate proposals impose a significant in- crease in both the number of hours for which families must participate each week, and the percentage of families who must participate. Changes to Definition of Participation. California’s actual partici- pation rate under current law was 27 percent (FFY 2002). The DSS has estimated that under both the House and the Senate proposals, the state’s participation rate would increase to 34 percent. Most of the increase is due to provisions allowing partial credit for partial participation, and the elimination of a separate two-parent rate, which will allow California to move two-parent families (who have higher participation rates) back into the federal participation rate calculation. Currently, no credit is given for those who are participating, but not fully meeting requirement. We note that the Congressional Research Service estimates that California’s actual participation rate will be higher under the Senate pro- posal than the House proposal. This is largely because under the Senate version, partial credit begins at 20 hours, rather than 24 hours, and work participation requirements are lower for single-parent families. Our own preliminary analysis also suggests that the Senate proposal may result in somewhat higher participation rates than the House version for the rea- sons noted above. Nevertheless, we have used the somewhat more con- servative DSS estimates for purposes of estimating the participation gap. Participation Gap. Taken together, the work requirement and state participation rate provisions would result in a significant gap between California’s estimated participation rate and the effective participation rate requirement. Figure 10 shows the DSS estimates of California’s ef- fective participation requirement (participation rate less caseload reduc- tion\/employment credit) under both the House and Senate proposals compared to the state’s current participation rate. As the figure shows, under current state law California would be significantly below the re- quired participation rate under the House bill by the third year of imple- mentation and under the Senate proposal by the fourth year. If the state does not meet its federal participation requirement, it is subject to a sig- nificant federal penalty. C – 252 Health and Social Services 2004-05 Analysis Update on the State Fiscal Impact Estimated Fiscal Impact of H.R. 4. In September 2002, we estimated that once fully implemented, the then pending House version of welfare reform authorization would result in annual state costs of about $750 mil- lion above current expenditures. (For more information, please see our report Fiscal Effect on California: Congressional Welfare Reform Reauthoriza- tion Proposals, August 29, 2002.) From a fiscal impact perspective, H.R. 4 as passed by the House in February 2003 is not significantly different than the version passed by the House in 2002. Based on the same meth- odology we used in 2002 (with updates for caseload, child care utiliza- tion, and county welfare-to-work allocations) we estimate that when fully implemented, H.R. 4 would result in additional annual costs above cur- rent expenditures in the range of $375 million to $450 million. Most of the impact is from employment service and child care costs that the state would likely incur in order to bridge the projected participation gap of about 36 percent. This estimate assumes that California follows current state law and makes only the minimum changes required by the federal measure. It does not reflect the Governor’s proposed welfare reforms. The reduction in our most recent cost estimate from our 2002 estimate is largely due to an increase in the amount of funding that each county receives from the state for employment and related services, and a de- crease in child care utilization. Fiscal Impact of the Senate Version. The Senate Finance Committee bill passed in September 2003 is significantly different than the version passed by the same committee in 2002. Hence, our 2002 estimate of the Senate legislation is not a relevant reference point for estimating the im- pact the current bill. Nevertheless, given that the participation gap under the Senate measure is significantly less than under H.R. 4 (36 percent House gap, 16 percent Senate gap), we would expect that annual cost increases compared to current law expenditures under the most recent Senate version would probably be less than half of the costs that we esti- mated for the H.R. 4. Conclusion Outcome Uncertain. It is not clear when Congress will take final ac- tion on federal welfare reform and what specific provisions will be in- cluded. We will continue to monitor the federal welfare reform debate and keep the Legislature informed of the major changes to the TANF program and their effects on the CalWORKs program. Department of Social Services CalWORKs Program C – 253 Legislative Analyst’s Office CALWORKS AUTOMATION Withhold Recommendation on Proposed Increased to Consortium System The budget proposes to increase funding by $35.6 million ($12.8 million General Fund) for the continued implementation of the Statewide Automated Welfare System C-IV Project. We withhold recommendation on the proposed increase pending additional information on the specific activities being proposed on the project. The budget proposes to increase funding by $35.6 million ($12.8 mil- lion General Fund) for the continued implementation of the Statewide Automated Welfare System (SAWS) C-IV Project. The purpose of SAWS is to provide improved and uniform information technology capability to county welfare operations. The system is being delivered through a state partnership with the counties, which have chosen to be in one of four consortia. The SAWS C-IV consortium consists of Merced, River- side, San Bernardino, and Stanislaus Counties. The SAWS C-IV project has a total project cost of $589 million and it is currently being piloted in Stanislaus. Withhold Recommendation Pending Additional Information. It is our understanding that the increased funding is to continue the imple- mentation of SAWS C-IV. The administration, however, has not identi- fied the specific activities that the additional funding will provide for the project. For this reason, we withhold recommendation on the proposed increase pending additional information from the administration. C – 254 Health and Social Services 2004-05 Analysis ADOPTIONS PROGRAM The department administers a statewide program of services to par- ents who wish to place children for adoption and to persons who wish to adopt children. Adoptions services are provided through state district offices, 28 county adoptions agencies, and a variety of private agencies. Counties may choose to operate the Adoptions Program or turn the pro- gram over to the state for administration. There are two components of the Adoptions Program: (1) the Relin- quishment (or Agency) Adoptions Program, which provides services to facilitate the adoption of children in foster care and (2) the Independent Adoptions Program, which provides adoption services to birth parents and adoptive parents when both agree on placement. In addition to the Adoptions Program, the Adoptions Assistance Pro- gram (AAP) provides grants to parents who adopt difficult to place children. State law defines these children, as those who, without assis- tance, would likely be unadoptable because of their age, racial or ethnic background, handicap, because they are a member of a sibling group that should remain intact, or because they come from an adverse paren- tal background. The Governor’s budget proposes expenditures of $104 million ($59 million General Fund) for the Adoptions Program in 2004-05. This represents a 12 percent increase in General Fund expenditures from the current year. This increase is primarily attributable to offsetting the re- duction of federal incentive funding for adoptions. Overall, program fund- ing for adoptions remains virtually the same. The Governor’s budget proposes expenditures of $577 million ($248 million General Fund) for the AAP in 2004-05. This represents an 11 percent increase in General Fund expenditures from the current year. This increase is primarily attributable to an increase in caseload and an increasing average monthly grant amount. Adoptions Program C – 255 Legislative Analyst’s Office REFORMING THE ADOPTIONS ASSISTANCE PROGRAM The current Adoptions Assistance Program (AAP) provides the maximum foster care grant for virtually every child who is adopted from the foster care program, regardless of whether or not that child would be hard to place in an adoptive home. This policy has turned AAP into one of the fastest growing social services programs in terms of caseload and cost. In order to improve the program’s cost effectiveness, we recommend enactment of legislation that (1) sets grant levels at an amount that recognizes the adoptive parents’ financial responsibility for their adoptive children, (2) better ties benefit levels to the needs of adoptive children, and (3) narrows the definition of special needs so as to focus the program’s financial assistance on those children who are likely to benefit the most from such aid. These changes will save approximately $2 million General Fund in 2004-05, growing to approximately $12 million in 2005-06. (Reduce Item 5180-101-0001 by $2 million.) Background The AAP was established in 1982 to provide monthly cash grants to parents who adopt difficult to place children. State law (Welfare and In- stitutions Code Section 16120) defines difficult to place children as those who, without financial assistance to defray costs associated with the children’s special needs, would likely be unadoptable because they are: Three years of age or older. Members of a racial or ethnic minority. Members of a sibling group that should remain intact. Physically, mentally, emotionally, or medically handicapped. From an adverse parental background. Adoptive parents receive these grants until their child is 18 years of age or until age 21 if the child has a chronic condition or disability that requires extended assistance. The adopted children remain eligible for Medi-Cal benefits as long as their adoptive parents are receiving an Adop- tion Assistance grant on their behalf. Another option is for parents to defer their child’s enrollment in AAP. This option allows parents to avail themselves of the program at a later date, should their child need the assistance payments for unforeseen expenses. Adoption Assistance grants are limited to the amount of the foster family home rate that the child would have received if she or he had remained in foster care. The foster family home rate ranges from $425 to C – 256 Health and Social Services 2004-05 Analysis $597 per month depending on the age of the child. Also, if the child has specialized care needs that would have been covered had the child re- mained in foster care, the adoptions worker can set the grant as high as the foster family home rate plus a specialized care increment. This incre- ment can range up to $2,097 per month. As with foster care grants, the AAP grants are not subject to state or federal income tax. For federally eligible children, the federal government pays 50 per- cent of the grant, the state pays 37.5 percent, and the counties pay 12.5 per- cent. Approximately 87 percent of AAP children are federally eligible. Nonfederally eligible children (referred to as state-only) receive the same benefits in AAP as federally eligible children. The state-only program is funded 75 percent from the state General Fund and 25 percent from county funds. To be federally eligible, a child must come from a family that would have met all of the eligibility requirements for the Aid to Families with Dependent Children (AFDC) program as it was defined as of July 16, 1996. Typically, a child could not come from a two-parent family or a family whose income exceeded specified levels. Other than these two federal requirements, the children in the state-only program are virtually identical to the federally eligible children. Growth of AAP Historical Caseload Growth Rates. The AAP caseload has been grow- ing steadily and rapidly since 1995-96. Until recently, the caseload was growing at an increasingly larger percentage rate each year, peaking in 2000-01 at a 21 percent growth rate. For 2001-02, the rate of increase slowed slightly to 16 percent. Finally, for 2002-03 the growth had slowed to 13 per- cent. Despite the slowing caseload growth, AAP continues to be one of the fastest growing programs in the Department of Social Services (DSS). The department’s most recent forecast projects that the caseload will grow by 13 percent in 2003-04 and 10 percent for 2004-05. Growth in Average Monthly Grants. During the same period, from 1995-96 through 2003-04, the average grant for AAP grew from $447 for federally eligible children and $459 for state-only children, to an esti- mated $704 and $756, respectively. This represents increases of 58 per- cent and 65 percent, or approximately 30 percent more than the rate of inflation. A significant portion of that increase is probably due to the Mark A. et al v. Davis court settlement. This settlement limited the ability of counties to negotiate with adoptive parents for grant amounts that would be lower than the maximum amount that the child would have received in Foster Adoptions Program C – 257 Legislative Analyst’s Office Care. While the Mark A. settlement limits the flexibility of the adminis- tration and counties, it is not binding for the Legislature. The Legislature could choose to make changes to the program, which are contrary to the Mark A. settlement, as long as those statutory changes are consistent with federal law. However, none of the recommendations presented later in this analysis are in conflict with the Mark A. settlement. Increasing General Fund Commitment. While caseload and grant costs have grown rapidly, the General Fund commitment to the program has grown at an even faster rate. In 1995-96, the state spent $57.6 million from the General Fund for AAP grants. On average, the General Fund invest- ment has grown by approximately 20 percent each year. By 2002-03, the General Fund amount had grown to $196 million. That amount is esti- mated to grow by an additional $27 million in 2003-04 and by $25 mil- lion in 2004-05 (as shown in Figure 1). Figure 1 Adoptions Assistance Program State General Fund And County Expenditures 1995-96 Through 2004-05 (In Millions) 50 100 150 200 250 300 $350 95-96 97-98 99-00 01-02 03-04 County State General Fund Examining AAP Eligibility and Payment Levels Universal Eligibility for Foster Care Children. Under the current AAP program, virtually all children being adopted out of the foster care pro- gram are eligible for and receive AAP benefits at least until the age of 18. C – 258 Health and Social Services 2004-05 Analysis In 2000-01 (the latest year for which data are available), 93 percent of the children adopted from foster care received AAP benefits, another 3 per- cent of families opted to defer their AAP benefits, leaving only 4 percent of the children who did not receive AAP benefits. This 4 percent may have been eligible and their parents may have chosen not to apply for benefits or the parents may have been unaware of AAP benefits. No Income Determination Is Used for Eligibility or Grant Levels. Adoptions Assistance is not a means-tested program. This means that eligibility for the program is not based on the adoptive parents’ income nor is the income of the adoptive family considered in determining the monthly payment amount. Eligibility is solely determined by whether or not the child meets California’s definition of special needs. Under cur- rent California law, a child meets the definition of special needs if he or she has one or more of the following characteristics: A member of a minority ethnic group, race, or color. Over 3 years of age. A member of a sibling group that should remain together. Diagnosed with a mental, physical, emotional, or medical disability. Non-English speaking. Comes from an adverse parental background. The inclusion of adverse parental background in the definition of special needs allows virtually all children adopted out of the foster care system to qualify for AAP, regardless of whether or not they would oth- erwise be a hard to place child. This is because any child removed from his or her parents and placed in foseter care, by definition, must have had an adverse parental background. Thus under the current program, a healthy infant would be considered as hard to place as would three teen- age, physically, or developmentally disabled siblings. Both types of chil- dren would be eligible for monthly AAP payments until they reach the age of 18. The most recent statistical information available shows that the larg- est qualifying characteristic of children in AAP is adverse parental back- ground, as shown in Figure 2. The next largest qualifying characteristic is being a member of a sibling group. Adoptions Program C – 259 Legislative Analyst’s Office Figure 2 Adoptions Assistance Program Qualifying Characteristics 2000-01 Adverse Parental Background Sibling Group Disability Ethnicity\/Language Age 3 or Older Profile of a Typical Child and Adoptive Family. According to 2000-01 data, the typical child adopted through the Department of Social Ser- vices Agency Adoption program is white, experienced an adverse paren- tal background, and did not have a sibling placed with them. They began living with their adoptive family at about 2 years old and were adopted when they were 5 years old. The adoptive family is a white, married couple, with some college education. They were not related to the child and had other children in their home. The median age for the adoptive mother and father was 44 years old. Their median gross annual income was $41,000 and they received adoptions assistance benefits for the child. Federal AAP Requirements Provide Latitude in Two Key Areas. The federal government gives states significant latitude in two areas of the AAP program: (1) to define special needs broadly or narrowly and (2) to decide the amount of benefits provided to adoptive parents. Because of this latitude, states vary widely in their definitions of special needs and in the ways that they determine grant amounts. As regards the definition of special needs, a publication of the United States House of Representatives Committee on Ways and Means indi- cates that, generally, hard to place children would include older children, sibling groups, children with physical or mental disabilities, or member- C – 260 Health and Social Services 2004-05 Analysis ship in a minority group. However, under federal law, states are free to define special needs more expansively or restrictively. California has cho- sen to expand eligibility by adding adverse parental background to the definition. As regards the grant amounts, federal law gives states flexibility in the amount of benefits paid to families, although it does restrict the maxi- mum allowable amount to no more than what the child would have re- ceived in a foster family home. States may choose to pay less than that amount. In determining the amount of the AAP grant for an individual fam- ily, federal law requires that the family’s circumstances must be taken into consideration. The law further defines family circumstances to mean the family’s ability to incorporate the child into the household in rela- tion to the lifestyle, standard of living, and future plans and to the overall capacity to meet the immediate and future plans and needs, including education, of the child. Based on our review, we conclude that this defi- nition allows the income of the family to be used in determining the grant amount as long as it is done in conjunction with the needs of the child. As a publication of the United States House of Representatives Committee on Ways and Means states, No means test can be used to determine eligibility of parents for the program; however, States do consider the adoptive parents’ income in determining the payment. In fact, our re- view of other states’ programs shows that in 2000-01, 20 states used in- come in some capacity to determine the grant amount paid to the adop- tive family. The State of Ohio, for example, considers the circumstances of the children, the income of the adoptive parents, and the current ex- penses of the adoptive parents during their grant negotiations. Substantial Variation in Eligibility Among the States. Because of the flexibility allowed by the federal government, there is substantial variation in AAP programs throughout the country. For example, some states choose to limit their caseload by more narrowly defining special needs while others, like California, define special needs in such a way to include every child in the foster care system. Colorado, for example, lim- its special needs to children who are over age 7, a member of a sibling group that should remain intact, have a physical, emotional, or mental disability or have documented hereditary risk factors. On the other hand, Illinois broadly defines special needs. Its definition includes children over age 1; or are members of a sibling group; or have an irreversible physical, mental, or emotional disability or one that is correctable through sur- gery; or have a judicial determination that the child is abused, neglected, or dependent; or where efforts have been made to place the child without providing a subsidy. Both states’ definitions are allowable under federal law. Adoptions Program C – 261 Legislative Analyst’s Office Variation in AAP Benefits Among the States. States also vary signifi- cantly in the amount that they are willing to pay for AAP grants. Many states, including California, have chosen to pay the same amount to AAP families as the child would have received in Foster Care. However, other states have chosen to cap the amount they will pay for AAP. Ohio, for example, has chosen to cap the federal\/state funding at $250 per child. If a county is willing to supplement the nonfederal share with county funds, they may draw down additional federal funds. Another state that has chosen to limit AAP grants is Minnesota. In Minnesota, the maximum basic AAP grant is capped below the foster care basic rate. For example, according to the most recent data available, children younger than age 5 can receive $473 per month in a basic foster care grant. However, in AAP, children in the same age group cannot receive more than $247 per month. Another significant variation among states is in the amount of spe- cialized care funding that the program pays. A specialized care incre- ment is funding provided above and beyond the base foster care amount for children with extraordinary needs. In California and several other states, specialized care increments are established by individual counties and vary significantly across the state. In the case of California, the spe- cialized care increment ranges up to $2,097 per month, depending on the county. However, in Texas, for example, no specialized rates are paid in the adoption assistance program. On the other hand, Michigan has es- tablished a statewide difficulty of care supplement amount, which ranges from $5 to $18 per day depending on the age of the child, medical fragility, and three established levels of medical or behavioral needs. Fi- nally, North Carolina offers a specialized adoptions assistance payment for HIV-positive children only. Other Differences. Other variations among states include whether or not they offer funds to offset adoption expenses, the provision of respite care for adoptive parents, and whether or not benefits are provided for children over 18 years of age. In California, parents are allowed a maxi- mum of $400 for nonrecurring adoption expenses, benefits for children between the ages of 18 and 21 are provided if there are extraordinary needs, and the state does not provide respite care. Summary. The AAP is one of the fastest growing social services pro- grams. It is projected to cost over $500 million in 2004-05, over half of that cost is from the state General Fund. While the federal government provides states significant latitude in terms of defining the eligible popu- lation and in setting grant amounts, California has chosen to develop one of the most generous programs in the country. The current definition of special needs allows virtually every child that is adopted out of the foster care system to qualify for the program. Further, the settlement of the Mark A. court case has probably contributed to our rising grants be- C – 262 Health and Social Services 2004-05 Analysis cause counties can no longer use a family’s resources or income as a tool for determining grant levels. Other states, even when they have gener- ous eligibility requirements, tend to set the grant amount so that it is below the maximum foster family home rate. Overarching Considerations In thinking about how best to restructure the AAP program, we rec- ommend that the Legislature weigh the following considerations. Adoption Means the State Is No Longer the Parent. As children leave the foster care system through adoption, the parenting responsibility shifts from the state to the adoptive parents. Under the foster care system, the state has taken on the financial role of the parent and, as such, the state pays for the basic needs of the child. However, once the child is adopted, the state is no longer functioning as the parent. The responsibility moves to the adoptive parents. Further, legally, adoptive parents take on the same responsibilities as parents who give birth to their own children. Part of that responsibility includes financially providing for their chil- dren. Adoptions literature distributed by DSS echoes this expectation. Specifically, DSS states that the ideal adoptive parents have a regular in- come and the ability to meet the needs of the adoptive child. Parents Adopt Children Out of a Love for the Child and Desire to Be a Parent; Not Because of a Cash Incentive. Parents that adopt children, whether out of the foster care system or not, do so out of a desire to be- come parents and love for the child, not because they will receive on- going, tax-free money from the state. This expectation is supported by CDSS adoptions literature, which notes that the ideal adoptive parent is expected to be loving and willing to deal with changes in their lifestyles as a result of adopting a child. Finally, many people become foster par- ents as a route to adoption. Therefore, the incentive provided by AAP may be unnecessary for many families, especially those adopting chil- dren with no identifiable emotional, mental, or physical problems. Some Children and Families Do Require Ongoing Financial Support From the State. While many children coming out of the foster care sys- tem do not have any special needs which require exceptional levels of care, there are those children that do have special needs and do require additional, ongoing care. For example, a family may not be able to afford to adopt a sibling group. However, with ongoing financial assistance the family may be able to care for siblings and therefore keep the family in- tact. Likewise, there are children that will have ongoing health or emo- tional needs which do require intensive treatment that may be difficult for a family to afford. With adoption assistance payments, those children may be able to find a loving, stable, and permanent home. Adoptions Program C – 263 Legislative Analyst’s Office Benefits Should Be Tied to Need. The AAP benefits should be limited to those children who would truly be hard to place without ongoing fi- nancial assistance, and the level of AAP benefits should be tied to the needs of the child. Children in the State-Only Program Are No Different From Feder- ally Eligible Children. The determination of whether or not a child is eligible for the federal AAP program is based upon the circumstances of their birth parents. The parents must meet the old AFDC eligibility crite- ria in order for the children to receive a federal grant. Those criteria are based upon the income of the parents and evidence of deprivation. Un- der these rules, deprivation means that one parent is absent or incapable of caring for the children. Essentially, the result is that the state-only chil- dren are no different from the federally eligible children. They do not come from more privileged backgrounds, nor do they have fewer special needs. The populations are virtually identical and, in our view, state policy should treat them in an identical manner. Analyst’s Recommendation Based on our review of the program, we conclude that there are sev- eral significant ways in which the Legislature could control the costs of the AAP program. Consistent with the above considerations, we recom- mend enactment of legislation making a series of reforms to AAP, which would improve the cost effectiveness of the program. The specific reforms are presented below. Set Grant Levels to Recognize Adoptive Parents’ Financial Respon- sibility. While states may not pay more than the maximum amount that the child would have received in Foster Care, there is nothing that pre- cludes California from capping the amount of the AAP grant at a level below the maximum foster care rate. This cap would be consistent with an expectation that adoptive parents take over the role of parenting from the state, including some measure of fiscal responsibility. If the state capped the basic rate at 75 percent of the foster care rate, prospectively, the state would save $600,000 in 2004-05 on new children entering the system and $5.5 million in 2005-06 compared to the current program. This savings would increase annually as the pre-AAP reform children age-out of the program and new children are enrolled at the 75 percent level. Better Tie Benefit Levels to Need. Currently, parents have the option of renegotiating the AAP grant they receive for their child at least once every two years. Essentially, these AAP negotiated increases mirror in- C – 264 Health and Social Services 2004-05 Analysis creases in the Foster Care grants that occur as children age. Under the current program, children receive an average of $45 per month more as they age in the program, starting at $425 for 4 year olds and under, and ending at $597 for children over 14 years old (see Figure 3). The state is not required by the federal government to increase the AAP grant amount based upon the age of the child. Figure 3 Foster Family Home\/AAP Grants According to Age of the Child 100 200 300 400 500 600 $700 0-4 years 5-8 years 9-11 years 12-14 years 15-18 years $462 $494 $546 $597 $425 Because these age-driven grant increases are virtually automatic and not based on a demonstration of need, we recommend such increases be eliminated. Instead, the reasons for grant increases should be more nar- rowly defined. That more narrow definition could include increased costs due to physical, mental, emotional, or medical problems that the child may have, which are directly tied to their birth parents or preadoptive circumstances. This reform would save the state approximately $900,000 in 2004-05 and $2 million in 2005-06. Narrow Definition of Special Needs to Children Likely to Benefit the Most. As we noted earlier, inclusion of adverse parental background Adoptions Program C – 265 Legislative Analyst’s Office as part of the definition of special needs means that virtually all children adopted from the foster care system are eligible for AAP assistance, re- gardless of whether they would otherwise be hard to place. In fact, one- third meet the definition through the catchall adverse parental background category. Assuming that a small percentage of those children would also qualify under another category, the incoming AAP caseload could be re- duced by about 25 percent by eliminating the adverse parental back- ground category. Specifically, under this approach, healthy children un- der the age of 3 that are not members of a minority group would no longer be eligible for immediate financial support. However, parents would re- main eligible for deferred benefits. Specifically, if a child subsequently develops a physical, mental, emotional, or medical problem that can be traced directly to his or her birth parents or preadoptive circumstances, then those adoptive parents would be eligible to receive AAP benefits for their child. This is the approach that the State of Ohio has taken in limit- ing special needs, while still allowing those who may need it later to have access to the program. This narrowing of the definition of special needs would save the state approximately $500,000 in 2004-05, growing to $4 million in 2005-06. Implementation. The changes outlined above would require new regulations and county guidance. Assuming mid-year implementation, adopting these recommendations would result in General Fund savings of $2 million in 2004-05 and $12 million in 2005-06. C – 266 Health and Social Services 2004-05 Analysis IN-HOME SUPPORTIVE SERVICES The In-Home Supportive Services (IHSS) program provides various services to eligible aged, blind, and disabled persons who are unable to remain safely in their own homes without such assistance. An individual is eligible for IHSS if he or she lives in his or her own home\u2014or is capable of safely doing so if IHSS is provided\u2014and meets specific criteria related to eligibility for the Supplemental Security Income\/State Supplementary Program (SSI\/SSP). The IHSS program consists of two components: the Personal Care Services Program (PCSP) and the Residual IHSS program. Services pro- vided in the PCSP are federally reimbursable under the Medicaid pro- gram. The PCSP limits eligibility to categorically eligible Medi-Cal re- cipients (California Work Opportunity and Responsibility to Kids and SSI\/SSP recipients) who satisfy a disabling condition requirement. Per- sonal care services include activities such as: (1) assisting with the ad- ministration of medications; and (2) providing needed assistance with basic personal hygiene, eating, grooming, and toileting. The following cases are excluded from the PCSP and, therefore, receive services through the Residual (state-only funded) IHSS program: cases with domestic ser- vices only, protective supervision tasks, spousal providers, parent pro- viders of minor children, income eligibles (generally recipients with income above a specified threshold), advance pay recipients (eligible for payments prior to the provision of services), and recipients covered by third party insurance. The budget proposes just over $1 billion from the General Fund for support of the IHSS program in 2004-05, a decrease of $136 million (13 per- cent) compared to estimated expenditures in the current year. Most of the decrease is attributable to (1) the full-year impact of the Governor’s mid-year proposal to eliminate the residual program, and (2) proposed reductions in state participation in provider wages. In-Home Supportive Services C – 267 Legislative Analyst’s Office GOVERNOR PROPOSES TO RESTRICT ELIGIBILITY AND REDUCE PROVIDER WAGES The Governor’s budget reflects his mid-year proposal to eliminate the residual (state-only) program and presents new proposals to limit state support for provider wages to the minimum wage, and reduce services for recipients living with able-bodied relatives. Together these proposals result in net General Fund savings of $492 million in 2004-05. This is roughly 35 percent of total program costs based on the requirements of current law. The Governor proposes sweeping reductions to the IHSS program in the form of eligibility restrictions, provider wage reductions, and limita- tions on services. The details of each aspect of the proposal are discussed below. In a subsequent discussion, we comment on the Governor’s pro- posal and present alternatives for legislative consideration. Eligibility Restriction The proposed elimination of the residual (state-only funded) program represents a significant eligibility restriction. Eliminating the residual program is estimated to remove 57,000 aged, blind, or disabled individu- als from the caseload and results in estimated net General Fund savings of $366 million in 2004-05. Currently, the residual program provides services to 75,000 recipi- ents who are not eligible for federal reimbursement through Medicaid, which provides 50 percent federal funding for the PCSP. Figure 1 (see next page) shows the reasons the major components of the residual caseload are not eligible for the federally funded PCSP. The three largest components of the residual caseload are (1) those individuals receiving no personal care services (in other words, they only receive domestic ser- vices such as cleaning and meal preparation), (2) those persons who have chosen a responsible relative as their provider (generally the parent of a minor child or a spouse), and (3) those individuals receiving protective supervision services. The Governor’s budget assumes that the approxi- mately 18,000 recipients who have chosen a responsible relative as their provider will switch to a nonrelative provider and will therefore retain eligibility for IHSS by switching to the federally funded PCSP. The bud- get assumes that the remaining 57,000 cases will become ineligible for IHSS services. C – 268 Health and Social Services 2004-05 Analysis Figure 1 IHSS Residual Program Caseload Reason for Federal Ineligibility Percent of Total Type of Case Estimated Caseloada 2004-05 Casesb Expenditures Receives advance pay 837 1.1% 3.8% No personal care services (domestic services only) 29,175 38.9 20.4 Responsible relative provider (spouse or parent) 18,042 24.1 25.5 Protective supervision 14,516 19.4 23.4 Unknown 12,424 16.6 27.0 Totals 74,995 100.0% 100.0% a Based on percentages from September 2001 Department of Social Services (DSS) data applied to the caseload for 2004-05. b Based on DSS September 2001 special data report. In addition to the above proposal to eliminate the state-only residual program, the Governor has two proposals that would impact the PCSP which is in part federally funded through Medicaid. These proposals are reducing provider wages and reducing services for recipients living with able-bodied relatives. Reducing State Participation in Provider Wages Minimum Wage. The Governor’s budget proposes to limit state par- ticipation in provider wages to the California minimum wage ($6.75 per hour). Currently, the state participates in provider wages of $9.50 per hour plus 60 cents per hour worked for health benefits. Some counties pay more than this amount while others pay less. The proposed reduc- tion in state participation in wage payments results in General Fund sav- ings of $98 million in 2004-05. Under the proposed policy, counties would be free to pay wages above the minimum wage, and the federal govern- ment would share in about 50 percent of the cost for wages above the minimum. Implementation of the reduction would begin no sooner than Octo- ber 2004 and would be delayed in any county until such time as their current collective bargaining agreements expire. According to the De- In-Home Supportive Services C – 269 Legislative Analyst’s Office partment of Social Services (DSS), the reduction would phase in between October 2004 and March 2005. Elimination of Related Employer Mandates. Currently, counties are required to designate an entity as the employer of record for IHSS pro- viders for purposes of collective bargaining. Many counties formed pub- lic authorities for this purpose. Current law also requires that counties form advisory committees to assist in this process. The Governor’s bud- get proposes to eliminate the requirement that counties designate an employer of record. This effectively removes the requirement that coun- ties operate public authorities and have advisory committees. Accord- ingly, the budget eliminates funding for advisory committees and the portion of public authority costs attributable to collective bargaining ne- gotiations. The state would continue to pay 70 percent of the nonfederal cost of the remaining public authority costs related to program adminis- tration\u2014the county share is the remaining 30 percent. The net General Fund savings from eliminating these requirements are estimated to be $2.2 million in 2004-05. Reducing Services for Recipients Living With Relatives The budget proposes to eliminate domestic services pertaining to common areas of residences that are shared with relatives. The reduction in services would be phased in during annual eligibility redetermina- tions beginning in October 2004 and is estimated to result in General Fund savings of $26.3 million. Background. Under current law, domestic services (cleaning, cook- ing, laundry, etc.) are provided to the recipient for his or her own room, and for common areas (such as the kitchen, living room, dining room) on a pro-rated basis depending on the number of individuals living in the household. For example, if one recipient occupying one bedroom with its own private bath lived in a household with 3 common rooms and 3 other individuals, current law would assign necessary domestic services for 100 percent of the recipient’s living quarters and a 25 percent share of the necessary upkeep for the three common rooms. The Governor’s budget proposes to eliminate services for common areas when the recipient lives with able-bodied relatives. Future Proposal for Reducing Service Hours The Governor’s budget notes that state level reviews of county de- terminations of service hours indicate that up to 25 percent of authorized service hours may be unnecessary or not actually provided to the re- cipient. The administration has indicated its intent to submit a quality C – 270 Health and Social Services 2004-05 Analysis assurance proposal in the spring to improve the IHSS needs assessment designed to reduce the over-authorization of service hours. We would note that the county reviews did not include Los Angeles County, which tends to assign less hours than the state average. Further, counties indicate that the review methodology did not employ a com- pletely random sample. The 25 percent finding, was based on a subset of cases for which a desk audit first indicated a significant potential for er- ror. For these reasons, the 25 percent figure should probably be viewed as an upper end estimate. Nevertheless, a well-designed quality assur- ance program could result in significant savings. COMMENTS ON THE GOVERNOR’S IHSS PROPOSAL The Governor’s proposal to eliminate the residual program, limit state participation in provider wages, and reduce services to recipients with relatives results in substantial state budgetary savings and a potential hardship for low-income Californians who receive IHSS. We recommend that the Legislature consider each aspect of the proposal on a case-by-case basis, assessing both its impact on recipients and the estimated savings. We believe the proposal to limit services for recipients living with family members merits approval because it is a reduction in services that can probably be absorbed by family members. With respect to the other proposals, we make no recommendation. Finally, we recommend that the administration report at budget hearings on the costs and benefits of a quality assurance program. Below we comment on each aspect of the Governor’s IHSS proposal. To assist the Legislature in evaluating the proposal, we developed a se- ries of considerations which we apply to the relevant elements of the Governor’s proposal. Specifically, the Legislature should consider: Impact on Recipients. What is the impact on recipients? Does the proposal achieve savings through benefit termination, by shifting recipients to the federally funded PCSP, or by reducing services or reducing choices available to the recipients? Increasing Federal Funds. Are there ways to facilitate more re- cipients becoming federally eligible? Shifting recipients from the state-only funded residual program to the federally supported PCSP benefits both the state and recipients. The state benefits from the federal financial participation which effectively reduces state and county costs by 50 percent. Recipients benefit by re- taining their services. In-Home Supportive Services C – 271 Legislative Analyst’s Office Administration Issues. Does the proposal raise implementation concerns? Realistic Savings. Are the savings estimates reasonable and what is the potential for cost shifts to other state programs? Eliminating the Residual Program As discussed earlier, the residual program provides services to those who are not eligible for the federal PCSP. (Please refer to Figure 1 for a breakdown of the reasons recipients in the residual IHSS program are ineligible for federal benefits.) Impact on Recipients. Eliminating the residual program means that some recipients will lose benefits while others may be able to transfer to the federally funded PCSP. The budget assumes that 18,042 recipients with responsible relative providers will switch to nonrelative providers, thereby obtaining eligibility for the federally funded PCSP. (Responsible relative providers are typically a parent providing services to a depen- dent child, or a spouse providing services to a husband or wife.) In addi- tion, 837 recipients who receive their IHSS funds at the beginning of the month and then disburse wages to their provider over the course of the month, will have the option of shifting to PCSP if they are willing to give up their advance payment. Also, some portion of the 29,175 cases which receive only domestic services, and do not receive personal care services (bathing, toileting, etc.), could potentially become federally eligible if a social worker determines that some personal care services may be needed. (The federal government will pay for domestic services, so long as some personal care services are provided as well.) The remaining 27,000 re- sidual cases will probably lose eligibility for the program. Potential Income Loss for Certain Households. As discussed above, recipients with responsible relative providers may obtain eligibility for the federally funded PCSP by choosing a nonrelative to provide their IHSS services. That means the responsible relative would no longer be paid IHSS wages. In order to maintain the household income, the respon- sible relative would need to replace the lost IHSS wages with other earn- ings. However, under current federal regulations, such earnings in cer- tain circumstances would be counted as family income available to the IHSS recipient and could reduce or completely eliminate the IHSS recipient’s SSI\/SSP payment. (Most IHSS recipients receive an SSI\/SSP grant.) The DSS was unable to provide sufficient data to determine how many households might face this potential reduction in SSI\/SSP benefits. Facilitating the Shift to the Federal Program. Although the budget assumes that 18,000 recipients with responsible relative providers will C – 272 Health and Social Services 2004-05 Analysis switch to PCSP by changing to a nonrelative provider, such a massive change in providers may be difficult to achieve in a three-month transi- tion period. If the Legislature were to adopt the Governor’s proposal, it may wish to consider phasing in over a longer period the program change for recipients with responsible relative providers in order to facilitate the transition. Also, some recipients may be uncomfortable with a nonrelative as their IHSS service provider. Accordingly, the Legislature could con- sider a system whereby current responsible relative providers switch and become the provider for other families with IHSS recipients. For example, a mother currently caring for her daughter might be more comfortable with a nonrelative provider if she understood that the provider herself had a daughter receiving IHSS. To this end, the Legislature could pro- vide technical assistance to public authorities to maintain registries of providers who have relatives receiving IHSS. Estimated Savings Appear Reasonable. The administration estimates that net General Fund savings from eliminating the residual program will be $366 million in 2004-05 ($422 million in residual savings offset by cost of $56 million for former responsible relative provider cases shifting to PCSP). It is difficult to anticipate exactly how recipients and social workers would react under this proposal. On the one hand, not all recipi- ents with responsible relative providers may be willing to switch to nonrelative providers. This would tend to increase the savings. Con- versely, some of the advance pay cases are likely to switch to PCSP where the state has a share of costs, which would decrease state savings. Simi- larly, some of the domestic service only cases may switch to PCSP after reapplying for benefits, again potentially reducing the savings. Finally, the earnings of responsible relatives who no longer serve as IHSS work- ers could reduce SSI\/SSP payments to recipients, which would result in state savings on SSI\/SSP grant expenditures. Since the above factors could offset each other, the overall estimated savings appear to be reasonable. Potential for Cost Shifts to Other State Programs. It is difficult to predict what may happen to recipients losing their in-home services. Some recipients may rely on extended family resources and move in with rela- tives or enter private assisted living centers. Others may need state-funded skilled nursing home care. Exit data compiled by DSS indicates that 9 per- cent of IHSS recipients exit to skilled nursing facilities and that 6 percent exit to some other type of out of home care. For illustration purposes, if 9 percent of the 57,000 cases facing service termination ultimately moved into a state-funded skilled nursing facility, the state costs would be about $125 million per year. In-Home Supportive Services C – 273 Legislative Analyst’s Office Reducing Provider Wages Impact on Recipients. The proposal to reduce state participation in provider wages to the minimum wage has no direct impact on services for recipients. Instead, it reduces the income of providers. Reducing pro- vider wages could have indirect impacts on recipients, however, by chang- ing the labor pool available for IHSS. With lower wages, it is possible that some recipients may be unable to find providers and\/or that their providers will be less skilled. Savings Estimates. The administration estimates that limiting state support for provider wages to the minimum wage will result in savings of $98 million in 2004-05 based on part-year implementation. The full- year savings in 2005-06 would be $148 million. Based on our analysis, these savings estimates appear reasonable. Reducing Services for Recipients Living with Relatives Impact on Recipients. The proposal to eliminate domestic services related to the maintenance of common areas of living quarters shared with relatives has no impact on program eligibility. Rather, it results in a reduction in service hours. The impact would largely fall on the able- bodied family members who would need to assume responsibility for common area upkeep. Savings Estimates. The estimated General Fund savings from this proposal are $26 million in 2004-05 based on part-year implementation. Full-year savings in 2005-06 would be $84 million. The amount of sav- ings depends on how many IHSS recipients live with relatives. The DSS assumed that 65 percent of IHSS cases with in common domestic ser- vices lived with relatives, but has no data to support this assumption. Implementation Concerns. In reviewing this proposal, the Legisla- ture needs to carefully consider the definition of common services. For example, if the relatives work during the day, then lunch-time meal prepa- ration and clean-up should probably not be considered a common ser- vice. Finally, under this proposal, recipients living with relatives will face a service reduction while recipients living with a nonrelative will not. This proposed difference in treatment in the PCSP may not be allowable under Medicaid rules pertaining to state wideness and comparabil- ity. Under the state wideness rule, all recipients must have access to similar types and levels of care. Under comparability, Medicaid services must be equal in amount, duration and scope for those who are categori- cally eligible. To implement this proposal, the state may need a waiver of these federal rules. C – 274 Health and Social Services 2004-05 Analysis Establishing a Quality Assurance Program As mentioned earlier, the Governor’s budget indicates that as much as 25 percent of service hours may be unnecessary or not actually pro- vided to the recipient. The budget further indicates that a quality assur- ance proposal designed to address the over-authorization issue will be submitted during the spring of 2004. State staff indicate that county workers in assessing the level of func- tional impairment of IHSS clients often fail to ask follow up questions to better determine the precise need for service hours. As a result, some cases are assigned more hours than necessary to compensate for the func- tional impairment of the IHSS client. Investing in Quality Assurance. Given the potential for county over- authorization of hours, an investment in a quality assurance program could yield significant savings. Quality assurance could take many forms. For example, the Legislature could provide funding for technical assis- tance to better train county social workers who make IHSS assessments and ensure more consistency. In addition, the Legislature could provide increased funding for county social worker positions, so that IHSS intake caseloads could be reduced so as to allow social workers the time needed to be more thorough and assign service hours in a manner more consis- tent with state guidelines. Potential Funding Source for Quality Assurance Activities. One po- tential source of funds to support a quality assurance program would be a fee on providers. Under this approach, providers would be held harm- less because the proposed fee would be offset by a corresponding wage increase. Although all IHSS providers (both residual and federally funded PCSP providers) would pay the fee and receive the wage increase, the wage increase paid to PCSP providers would draw down federal funds through Medicaid. These federal funds would free up some of the fee revenues that otherwise would be needed to fund the wage increase for PCSP providers. The freed-up fee revenues could then be used to fund a quality assurance program. For a complete discussion of quality assur- ance fees (including other caveats and considerations), please see the Crosscutting Issues section of this chapter. Analyst’s Recommendation The Governor’s proposal to eliminate the residual program, limit state participation in provider wages, and reduce services to recipients living with relatives results in substantial state budgetary savings, but a poten- tial hardship on low-income Californians who rely on their IHSS provid- ers. We recommend that the Legislature consider each aspect of the pro- In-Home Supportive Services C – 275 Legislative Analyst’s Office posal on a case-by-case basis, assessing both its impact on recipients and the estimated savings. Whether to adopt any of these proposals is a policy decision for the Legislature. We believe the proposal to limit services for recipients living with family members merits approval because it is a reduction in services that can probably be absorbed by family members. With respect to the other IHSS proposals, we make no recommendation. Finally, we recommend that the administration report at budget hearings on the costs and ben- efits of a quality assurance program. C – 276 Health and Social Services 2004-05 Analysis SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $3.3 billion from the General Fund for the state’s share of SSI\/SSP in 2004-05. This is an in- crease of $202 million, or 6.4 percent, above estimated current-year ex- penditures. This increase is primarily due to costs associated with replac- ing one-time federal fiscal relief funds with General Fund monies and a caseload increase, partially offset by savings due to not passing through the January 2005 federal cost-of-living adjustment (COLA), and elimi- nating the California veterans cash benefit. In December 2003, there were 345,116 aged, 21,753 blind, and 788,331 disabled SSI\/SSP recipients. In addition to these federally eligible recipients, the state-only Cash Assistance Program for Immigrants (CAPI) was estimated to provide benefits to about 8,600 legal immigrants in December 2003. Budget Proposes COLA Suspensions By suspending the January 2005 state cost-of-living adjustment (COLA) and not passing through the January 2005 federal COLA, the budget achieves combined savings of $147 million in 2004-05 compared to current law. Background. Under current law, both the federal and state grant pay- ments for SSI\/SSP recipients are adjusted for inflation each January. The COLAs are funded by both the federal and state governments. The state COLA is based on the California Necessities Index and is applied to the combined SSI\/SSP grant. The federal COLA (based on the Consumer Price Index for Urban Wage Earners and Clerical Workers) is applied annually to the SSI portion of the grant. The remaining amount needed to cover the state COLA on the entire grant is funded with state monies. Governor’s Proposals Achieve $147 Million in Savings. The Gover- nor proposes to suspend the January 2005 state COLA (2.77 percent) which Supplemental Security Income\/State Supplementary Program C – 277 Legislative Analyst’s Office results in a cost avoidance of $84.6 million in 2004-05. In addition, the Governor proposes no pass through of the January federal SSI which re- sults in savings of $62.5 million. Under this proposal the state funded SSP portion of the grant is reduced by the precise amount of the federal increase which becomes effective January 2005. Impact on Recipients. Figure 1 shows the SSI\/SSP grants for January 2005 for individuals and couples under both current law and the Governor’s proposal. Although the total grant remains the same in January 2005, the SSP portion is $22 (9.2 percent) less than the grant under current law. For couples, the SSP grant is $39 (6.8 percent) less than current law. Figure 1 also compares the grants under current law and the Governor’s proposal to the 2003 federal poverty guideline. Specifically, the maximum monthly grant for individuals would be 109 percent of poverty under current law, but would fall to 106 percent under the Governor’s proposal. Grants for couples would be 142 percent of poverty under current law, but would fall to 139 percent under the Governor’s proposal. (We note that poverty guidelines are adjusted annually for inflation.) Figure 1 SSI\/SSP Maximum Monthly Grants Current Law and Governor’s Proposal January 2004 Through January 2005 January 2005 Change From Current Law Recipient Category January 2004 Current Law Governor’s Budget Amount Percent Individuals SSI $564 $574 $574 \u2014 \u2014 SSP 226 238 216 -$22 -9.2% Totals $790 $812 $790 -$22 -2.7 Percent of Povertya 106% 109% 106% Couples SSI $846 $861 $861 \u2014 \u2014 SSP 553 577 538 -$39 -6.8% Totals $1,399 $1,438 $1,399 -$39 -2.7% Percent of Povertya 139% 142% 139% a 2003 U.S. Department of Health and Human Services Poverty Guidelines. We note that the guidelines are adjusted each year for inflation. C – 278 Health and Social Services 2004-05 Analysis About 560 Recipients Would Become Ineligible. Recipients who re- ceive social security payments in excess of the federal SSI grant do not receive SSI but may receive SSP payments, and are known as SSP-only cases. The Governor’s proposal to not pass through the federal COLA has the effect of reducing the maximum monthly SSP grant by $10 for an individual and $15 per couple compared to the current SSP grant. Under this proposal, individuals receiving $10 or less in SSP benefits in Decem- ber 2004 would have their benefits drop to zero and become ineligible for SSI\/SSP in January 2005. (The corresponding figure for couples is $15 per month.) In total, about 560 individuals and couple members would lose eligibility under this proposal. Becoming ineligible for SSI\/SSP may result in a Medi-Cal share of cost for affected individuals. Enrollment Cap and County Block Grant For Program Serving Immigrants The CAPI provides state-only SSI\/SSP for legal noncitizens who are ineligible for federal benefits. The Governor proposes to cap enrollment in this program at 8,645 recipients effective April 1, 2004. As of October 2004, the Governor proposes to shift funding for this program (and other programs that serve immigrants) to counties in the form of a block grant. The budget assumes that counties will achieve service delivery efficien- cies and therefore reduces funding for this program (and the other block grant programs) by 5 percent. For our comments on this proposal, please see the Crosscutting Issues section of this chapter of this Analysis. Food Stamps Program C – 279 Legislative Analyst’s Office FOOD STAMPS PROGRAM The federal food stamps program is estimated to provide about $2 bil- lion in food coupons to approximately 1.8 million low-income families in California in 2004-05. With the exception of the state-only food assis- tance program (discussed below) the cost of the federal food coupons is borne entirely by the federal government. The associated administrative costs are shared between the federal government (50 percent), the state (35 percent), and the counties (15 percent). Generally, individuals and families eligible for food stamps must have a net income (after income deductions are applied) of less than 100 per- cent of the FPL (about $15,260 a year for a family of three). In addition, certain resource restrictions apply, such as a limit on the value of a ve- hicle. Other nonfinancial restrictions also apply. California Food Assistance Program (CFAP) The 1996 federal welfare reform legislation significantly restricted food stamp eligibility for noncitizens. In response, the state created the CFAP in 1997 to provide state-only funded food stamp benefits to quali- fied legal immigrants who are ineligible for federal food stamps. Since 1997, the federal government has incrementally reinstated benefits for some legal noncitizens. Under current federal law, generally all legal noncitizens are eligible for federal benefits except for those who have been residing in the United States less than five years, and are between 18 and 65 years old. The budget estimates that in 2004-05 the average monthly CFAP caseload is expected to decrease to about 10,230 at a total state cost of $10 million for food coupons and $2 million for administrative costs. The budget proposes to cap the CFAP caseload at the April 1, 2004, level for savings of $146,000. In addition, effective October 2004 program funding would be reduced by 5 percent and the funds for CFAP would be given to counties in a block grant. (For more information about the proposed C – 280 Health and Social Services 2004-05 Analysis enrollment cap and the block grant proposal, please see our discussions in the Crosscutting Issues section of this chapter.) Revenue Loss Exceeds Administrative Savings From Governor’s Food Stamp Proposals The Governor’s budget proposes to repeal recent legislation which expanded eligibility for the food stamps program. Eliminating these eligibility expansions would result in (1) combined General Fund administrative and CFAP savings of about $3.5 million in the budget year, and (2) foregoing $203 million in federal food coupons for low- income Californians. In addition, the loss of General Fund revenue associated with these proposals would be about $4.5 million. Accordingly, we recommend (1) rejecting the Governor’s proposal to delete the expansions and (2) recognizing the General Fund revenue associated with the expansions. (Increase Item 5180-001-0001 by $3.5 million in 2004-05 and increase General Fund revenue by $4.5 million.) Recent Food Stamps Program Changes. Chapter 225, Statutes of 2003 (AB 1752, Oropeza), created the Transitional Food Stamps Program (TFS), which provides five months of additional food stamps to families leav- ing welfare without requiring the family to reapply for benefits. In addi- tion, Chapter 743, Statutes of 2003 (AB 231, Steinberg), made TFS rules less restrictive, allowed for the exclusion of the value of a motor vehicle in determining eligibility in the food stamps program, and allowed for the elimination of a face-to-face interview as a requirement of the food stamps application process. These changes to the food stamps program are estimated to increase the federal food stamp and CFAP caseloads by 81,000, increase the amount of federal food coupons the state receives by $203 million, increase ad- ministrative costs by about $1.9 million, and increase CFAP costs by $1.6 million in the budget year. Budget Proposal. The Governor’s budget proposes to eliminate the TFS and repeal the recently enacted program changes include Chapter 743. These changes would result in combined General Fund administrative and CFAP savings of about $3.5 million in the budget year. However, after accounting for one-time administrative costs, the ongoing savings would be $2.2 million. The Governor’s proposals to eliminate these eligi- bility expansions would also result in foregoing about $203 million in federal food coupons. The Budget Proposal Ignores General Fund Revenue Effect. Research shows that low-income individuals generally are not able to save money because their resources are spent on meeting their daily needs, such as Food Stamps Program C – 281 Legislative Analyst’s Office shelter, food, and transportation. Therefore, for every dollar in food cou- pons that a low-income family receives, an additional dollar is available for the consumption of food or other items. Research done at the Univer- sity of California and elsewhere indicates that individuals with income low enough to be eligible for food stamps would, on average, spend about 45 percent of their income on goods for which they would pay sales tax. The state General Fund receives about 5 cents for every dollar that is spent on a taxable good. Local governments and special funds receive the remainder of the sales tax revenue (generally about 2.25 percent). Because additional food coupons would result in low-income families spending more of their other resources on taxable goods, the receipt of federal food coupons helps to generate revenue for the state and for local governments. The administration anticipates that eliminating TFS and the Chap- ter 743 expansions would result in foregone federal food coupons of about $203 million. However, that is not the only loss the state would experi- ence. The state would also lose General Fund sales tax revenue. This is because, based on the research described above, we estimate that the for- gone food coupons would have freed up an equal amount of income that families could spend on other items, including taxable goods. Assuming that 45 percent of the family’s purchases are on taxable goods, about $91 million would be spent on taxable goods. Because the state General Fund receives 5 cents for every dollar that is spent on a taxable good, these purchases would generate about $4.5 million in General Fund rev- enue annually. The revenue loss of $4.5 million annually ($3.7 million associated with TFS and $835,000 associated with Chapter 743) is greater than the esti- mated General Fund administrative savings of about $3.5 million in the budget year. Accordingly, the total impact of the Governor’s proposals is a net loss of about $1 million in the budget year ($4.5 million revenue less $3.5 million costs). The ongoing loss would be about $2.3 million annually ($4.5 million in revenue less $2.2 million in ongoing costs). Analyst’s Recommendation. As described above, the General Fund revenues associated with retaining TFS and Chapter 743 eligibility expansions outweigh the administrative costs. Accordingly, we recommend rejecting the proposed elimination, restoring the necessary administrative and CFAP expenditures to the budget, and recognizing General Fund revenue of $4.5 million. C – 282 Health and Social Services 2004-05 Analysis CHILD WELFARE SERVICES California’s state-supervised, county-administered Child Welfare Services (CWS) program provides services to abused and neglected chil- dren, children in foster care, and their families. The CWS program pro- vides (1) immediate social worker response to allegations of child abuse and neglect; (2) ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect; and (3) services to children in foster care who have been temporarily or per- manently removed from their family because of abuse or neglect. The 2004-05 Governor’s Budget proposes $2.1 billion from all funds and $610 million from the General Fund for CWS. This represents a decrease of 3 percent from the General Fund over current-year expenditures. This decrease is primarily due to a reduction in automation costs and declin- ing emergency shelter and direct services costs. BUDGET FOR IMPROVING CHILDREN’S PROGRAMS SHOULD REFLECT LEGISLATIVE PRIORITIES The Governor’s Budget proposes spending a total of $39 million ($4.6 million General Fund) on a variety of child welfare services and foster care program improvements. The majority of that funding is for continuing the Child Welfare Services (CWS) Redesign planning process including provision of technical assistance to counties as they complete the planning stages of the redesign and for upfront training for county personnel. The funds will not be used to provide additional or new services for children and families. We believe the funding request is premature and that the administration needs to provide more details to the Legislature about the specific goals of the CWS Redesign and the steps and funding needed to reach those goals. Accordingly, we recommend eliminating the proposed funding. (Reduce Item 5180-151-0001 by $558,000. Reduce Item 5180-151-0803 by $3,850,000. Reduce Item 5180- 151-0890 by $14,343,000.) Child Welfare Services C – 283 Legislative Analyst’s Office Governor’s Budget Provides $39 Million for Improving Children’s Programs Background. Over the last few years, California has undertaken three major efforts designed to improve the outcomes for children and families in the CWS program. The first effort was driven by the federal govern- ment when it established a performance-based review of the states to determine the success of their children’s programs. States that failed the reviews were required to develop a Performance Improvement Plan (PIP). The second effort originated with the prior administration, which in the 2000-01 Budget Act obtained authority to establish the CWS Stakeholders group to review the current CWS system in California and make recom- mendations for restructuring the program (referred to as the CWS Rede- sign). The final effort is embodied in the Child Welfare System Improve- ment and Accountability Act (Chapter 678, Statutes of 2001 [AB 636, Steinberg]). This act called for the development of a county review pro- cess to identify strengths and weaknesses in local child welfare services programs and assist in sharing and implementing best practices. The Governor’s Budget provides a total of $39 million in federal funds, state General Fund, county funds, and special funds to implement a variety of changes tied to these three efforts to improve child welfare services. Fig- ure 1 provides details of the funding for the three separate projects. Figure 1 Child Welfare Services Improvements Governor’s Funding Priorities (In Millions) Total Funds General Fund TANFa All Otherb Redesign $19.1 $0.6 $7.0 $11.5 Federal PIP 10.6 0.7 9.0 0.9 Chapter 678 9.5 3.2 2.0 4.3 Totals $39.2 $4.5 $18.0 $16.7 a These Temporary Assistance for Needy Families (TANF) funds are transferred to the Title XX social services block grant and then are expended for specified purposes. b This includes other federal funds ($10.9 million), state special funds ($3.9 million), county funds ($1.6 million), and foundation grants ($375,00). C – 284 Health and Social Services 2004-05 Analysis Funding for the Child Welfare System Improvement and Account- ability Act of 2001. With the enactment of Chapter 678 the Legislature declared that the State of California had failed in its obligation to protect and care for children removed from their homes and placed in the foster care system. As a way of addressing that failure, the Legislature required the development and implementation of an outcome-based system de- signed to evaluate county operations of child welfare services. The sys- tem includes Web-based reporting of county specific program outcomes, and requires counties to conduct self-assessments and to develop system improvement plans. The Governor’s budget proposes spending $9.5 million for improv- ing data gathering for county self assessments, funding six reviewers for the required peer quality case reviews, and hiring 58 county coordina- tors for the county self assessments and system improvement plans. How- ever, there is no funding dedicated to helping the counties implement any corrective actions that may be necessary as a result of the reviews. Funding for Program Improvement Plan Requirements. Federal per- formance reviews of state child welfare services and foster care programs were conducted in California for the first time in the fall of 2002. Califor- nia failed to meet any of the seven safety, permanency, and well-being outcomes measured by the federal government. The state also failed five of the seven systemic factors that measure the quality of services pro- vided to children and families. As a result, the state was required to sub- mit a PIP, with specific, measurable improvements that will be made under specific time frames. (For more detail on this issue see our discussion of California’s performance in the 2003-04 Analysis of the Budget Bill.) Fail- ure to achieve these improvements could result in federal penalties and reduced Title IV-E funding. Specifically, the budget provides a total of $10.6 million for the fed- eral PIP requirements. This includes $3 million to recruit minority foster parents, $6 million to backfill for social workers as they attend training, $1 million for improving data quality in CWS\/Case Management Sys- tem (CMS), and $500,000 for additional positions at the state level to handle the increased data activities. Funding for CWS Redesign. The 2000-01 Budget Act appropriated $800,000 for the development of the Child Welfare Stakeholders’ Group. These stakeholders were charged with reviewing the existing CWS pro- gram and providing recommendations for improvements. This process has come to be known as the CWS Redesign. The prior administration spent three years on the redesign process intended to improve outcomes for children and families involved in the child welfare services program. The first year (2000-01) was set aside for Child Welfare Services C – 285 Legislative Analyst’s Office studying the problems with the current program. The second year (2001-02) was designed to search for solutions and improvements. Fi- nally, the third year (2002-03) was to be focused on developing a detailed implementation plan for the new, redesigned CWS program. Unfortu- nately, only the first two phases were completed during the three-year project. The final CWS Redesign report was released in September 2003. The report offers high-level concepts for improving the child welfare ser- vices program. It also notes that there currently are funding constraints which do not allow many of the concepts to be implemented and that state and federal law changes are necessary to implement many of the Redesign objectives. The Governor’s budget proposes allocating $19 million to counties to continue the planning process begun during the Child Welfare Stake- holders’ Group and to provide upfront training. Redesign Funding Should Be Eliminated Redesign Proposal Lack Necessary Details. The Legislature appro- priated $800,000 in the 2000-01 Budget Act to study the current child wel- fare services system with the expectation that detailed recommendations for improvements would be presented at the end of the study. It was anticipated that the final report would provide a detailed framework for improving the program. With this framework, the administration and the Legislature could then establish priorities and begin making improve- ments to child welfare services. However, as noted above, the final report provides only high level concepts for reforming CWS. In addition, the administration has failed to produce a detailed implementation plan that outlines the specific programmatic changes that will take place and their associated costs and outcomes. The administration proposes $19 million for planning, technical assistance, and training without sufficient detail as to what outcomes can be expected from this investment. Analyst’s Recommendation. In view of the above, we believe that the budget’s funding request is premature, and we recommend that the $19 mil- lion budgeted for the CWS Redesign be eliminated. We also recommend that any future funding for the Redesign be contingent upon the administra- tion presenting an implementation plan that identifies specific activities that will be implemented, their associated costs and the outcomes expected from those activities, and necessary legislation. This type of detailed plan would allow the Legislature to review an array of options designed to improve services. Such information would permit the Legislature to prioritize the program changes and select which improvements should be put into place and along what timeframe. Absent that type of detailed implementation plan, C – 286 Health and Social Services 2004-05 Analysis the Legislature does not have sufficient information to assess the value of the proposed restructuring of CWS. We note that the majority of the funding for the Redesign is federal fund- ing or from special state funds, therefore the General Fund savings resulting from this recommendation are relatively small ($558,000) in the overall con- text of the total expenditure for the Redesign. However, most of this funding could be redirected within the CWS program to fund other legislative priori- ties. Further, $7 million of the proposed amount is Temporary Assistance for Needy Families funding that has been redirected into Title XX. That funding can be redirected to the California Work Opportunity and Responsibility for Kids program and could possibly be used to offset some state General Fund expenditures. CHILD WELFARE SERVICES\/ CASE MANAGEMENT SYSTEM Background The CWS\/CMS provides a statewide database, case management tools, and a reporting system for the state’s CWS program. The system has been in operation for seven years and is maintained and operated by an independent contractor. The CWS\/CMS system costs about $100 mil- lion annually to operate ($70 million for contractor costs and $30 million in other costs). Federal Government Provided Enhanced Funding. In 1993, the federal government offered enhanced funding to any state that agreed to develop a Statewide Automated Child Welfare Information System (SACWIS). A SACWIS system performs certain functions such as processing child abuse investigations and preparing foster care case plans. If a state chose to de- velop such a system, then the federal government provided incentive fund- ing at 75 percent of total costs for the first three years of the project’s devel- opment and then 50 percent for the subsequent years. If a state received in- centive funding but is ultimately unable to meet the SACWIS requirements, the federal government requires that the state return the difference (25 per- cent) in funding. In 1994, the state received federal approval to develop CWS\/ CMS as California’s SACWIS system. CWS\/CMS Does Not Meet SACWIS Requirements In 1997, the state announced the completion of the CWS\/CMS sys- tem when it became operational in all counties. The federal government, however, did not consider CWS\/CMS complete because the system did Child Welfare Services C – 287 Legislative Analyst’s Office not meet all the SACWIS requirements. Since 1999, the federal govern- ment has repeatedly raised concerns about the inability of the CWS\/CMS system to meet SACWIS requirements. We discuss these federal concerns in more detail below. Failure to Address Federal Procurement Requirements. In 1997, the federal government and the Departments of Finance and General Ser- vices directed the Health and Human Services Agency Data Center (HHSDC) to conduct a competitive procurement for a new contract to pay for the ongoing maintenance and operation activities of CWS\/CMS. In 2000, the state began the competitive procurement. It was subsequently cancelled in 2002 because HHSDC was unable to address federal pro- curement requirements. Inability to Implement All SACWIS Functions. In 1999, the federal government conducted a review of CWS\/CMS and determined that the system did not meet the following SACWIS requirements: (1) adequate adoption case management, (2) an automated interface between CWS\/ CMS and the state’s welfare and child support automation systems, (3) authorizations for service provider payments, and (4) foster care eli- gibility determinations. Of these requirements, the state has only begun addressing the adoption component. Lack of Full Project Review. In 2001, the federal government directed the state to conduct a thorough project review of CWS\/CMS. The scope of the review was to include (1) an audit of past and current CWS\/CMS costs and expenditures, (2) an analysis of the state’s procurement strat- egy for the new maintenance and operation contract, and (3) a review of CWS\/CMS project roles and responsibilities. To date, the state has only completed the analysis of the procurement strategy. Failure to Require Full CWS\/CMS Usage. In 2002, the federal gov- ernment conducted a review of the state and counties use of CWS\/CMS. The review found that the state did not require counties to use all of the functions in the system despite the federal requirement that a state use all of the SACWIS functions. Current state policy allows each county some discretion in determining how much of the CWS\/CMS system to use. For example, some counties use the CWS\/CMS health and education data collection system whereas other counties do not use these functions. To meet SACWIS requirements, the state must require use of all CWS\/CMS functions by all counties. Failure to Transfer CWS\/CWS Hardware to HHSDC. The CWS\/CMS system operates at the contractor’s data center in Boulder, Colorado. In June 2003, the federal government directed the state to transfer the CWS\/ CMS hardware to a state facility. The state has not started this effort. C – 288 Health and Social Services 2004-05 Analysis Federal Government Reduces Funding As a result of long-standing concerns, the federal government reduced funding for the maintenance and operation of the Child Welfare Services\/ Case Management System. As the administration does not recognize this drop in federal funds, the budget understates General Fund costs by $43 million for the current and budget years combined. In June 2003, the federal government notified the state that it did not consider CWS\/CMS a SACWIS compliant system for the reasons dis- cussed above. As a result of this decision, the federal government, start- ing in July 2003, reduced its share of funding for CWS\/CMS from roughly 50 percent to 30 percent. (The precise funding ratio is still being deter- mined by the state and federal governments.) In addition, the federal government notified the state that it would not provide any federal fund- ing for the current contract (which, again, is almost three-fourths of total system costs) after August 2005. We discuss the consequences of these funding reductions below. Current-Year Deficiency About $23 Million. As summarized in Fig- ure 2, the 2003-04 Budget Act estimates $56 million will be received in federal funding for CWS\/CMS. This estimate is based roughly on (1) a 50 percent funding ratio and (2) an overall CWS\/CMS cost of $111 mil- lion. Since the lower federal funding ratio began at the start of 2003-04, we estimate that the state share of cost for CWS\/CMS will be about $78 million General Fund\u2014$23 million more than what is estimated in the 2003-04 budget. (If the state took actions to reduce current-year ex- penditures, the state’s share of costs would also decline. As of December Figure 2 Child Welfare Services\/Case Management System Estimated Costs for Current and Budget Years (In Millions) 2003-04 2004-05 Enacted Budget LAO Estimate Proposed Budget LAO Estimate Federal funds $56 $33 $49 $29 General Fund 55 78 47 67 Totals $111 $111 $96 $96 Child Welfare Services C – 289 Legislative Analyst’s Office 2003, the state had not reduced the CWS\/CMS current-year activities.) The administration fails to account for this $23 million increase in pro- jected costs in its spending plan. Additional $20 Million Needed in Budget Year. The budget proposes $96 million for CWS\/CMS ongoing maintenance and operation in 2004-05. This includes a $15 million reduction from estimated current-year expen- ditures due to the completion of one-time computer upgrades and con- tract reductions. The budget again assumes roughly a 50 percent federal funding ratio in 2004-05 ($49 million). Given that the current federal fund- ing ratio is about 30 percent, we estimate the state’s General Fund share of costs in the budget year will be about $67 million\u2014$20 million more than what is proposed in the budget. One-Time Repayment of $50 Million. Since the federal government has determined CWS\/CMS to be a non-SACWIS system, the state will need to eventually repay the federal government for the incentive fund- ing it received in the first three years of CWS\/CMS development. Ac- cording to the administration, this one-time repayment is about $50 mil- lion. In its June 2003 letter, the federal government indicates that the amount and payment time period are open to negotiation. The Governor’s budget does not contain any funding to begin this repayment. Additional Costs Beyond 2004-05. Beginning in August 2005, the fed- eral government will no longer provide any funding for the state’s current CWS\/CMS contract. (The federal government will continue to provide its share of funds for the noncontract costs.) Consequently, the state will be fi- nancially responsible for all costs from the current contract until a new con- tract can be procured. Once a new contract is procured, the federal govern- ment will share in the costs of the new contract. The federal share will de- pend on whether the state is SACWIS compliant. The administration esti- mates that it will complete the procurement for the new contract in 2008. Thus, we estimate the state will incur annual General Fund contract costs of about $75 million from 2005-06 to at least 2007-08. Administration Should Consider Two Alternatives The state has to make a choice about what to do with CWS\/CMS. We believe there are two basic alternatives. One alternative is to make CWS\/ CMS compliant with SACWIS. The other alternative is to acknowledge that the system will not meet SACWIS requirements. Under either alter- native, the state will need to procure a new contract in order to receive any federal funding. As of December 2003, the state had not conducted an analysis of the two alternatives. The administration has so far simply C – 290 Health and Social Services 2004-05 Analysis assumed that pursuing SACWIS compliance is advisable. Since the de- partment has not prepared costs estimates for modifying CWS\/CMS to meet SACWIS requirements, we are unable to recommend which of these two alternatives is the most cost-effective approach and would provide the most benefits to the state. We do, however, discuss below some of the general benefits and cost implications of each alternative. Meeting Federal SACWIS Requirements. To meet SACWIS requirements, the state will need to implement a number of changes to the current CWS\/ CMS system. The federal government believes these SACWIS requirements offer significant program benefits to states’ CWS programs. For example, if the state implemented the SACWIS foster care eligibility requirement, the state would be able to qualify children for foster care and Medi-Cal at the same time. The administration has not completed an analysis of the benefits from the SACWIS functions from the state’s perspective. We do know, how- ever, that the required changes to CWS\/CMS would ultimately increase state costs by tens of millions of dollars. This alternative likely would also result in (1) restoration of increased federal funding and (2) avoidance of the one- time repayment of the incentive funding. Non-SACWIS System. Alternatively, the state could declare CWS\/ CMS a non-SACWIS system. According to the federal government, the benefits of a non-SACWIS system are: (1) elimination of the need for SACWIS modifications, (2) more state control over changes and enhance- ments to the system, and (3) less federal review and oversight. A non- SACWIS system would allow the Legislature more discretion in setting the priorities for the CWS\/CMS system. If the state chose to declare CWS\/ CMS a non-SACWIS system, the state would continue to receive a lower level of federal funding (30 percent). In addition, the state could face the one-time repayment costs for the incentive funding (about $50 million). Administration Should Report on Alternatives and Revise Proposal’s Costs The Legislature must make a decision on how to proceed with the Child Welfare Services\/Case Management System (CWS\/CMS) system. For this reason, we recommend the administration report at budget hearings on (1) the actions it can take to reduce the ongoing costs of the CWS\/CMS system and (2) its analysis of the costs and benefits of the alternatives. In addition, we recommend that the administration provide a revised budget proposal that reflects the current federal funding ratio. It is important that the Legislature set direction for the future of the CWS\/CMS system. From a program standpoint, it is important to ensure that the system meets the needs it was intended to serve. From a budget- Child Welfare Services C – 291 Legislative Analyst’s Office ary standpoint, it is important to know current and future costs. For these reasons, we make recommendations below on how to best move forward with the system. Address Increased Costs. For the current and budget years combined, the Governor’s budget fails to account for a $43 million drop in federal funding (and corresponding increases in General Fund costs). The ad- ministration has existing authority in the current year to implement cost savings strategies to address $23 million of this amount. During budget hearings, we recommend that the administration report on any actions it has taken or could take to reduce CWS\/CMS costs. Require Administration to Analyze and Report on Alternatives. At this stage, the Legislature does not have the necessary information to make an informed decision. Yet, a choice needs to be made. Consequently, we recommend that the administration report at budget hearings on its analysis of the two alternatives, including each alternative’s benefits and costs. The Legislature could then make an informed decision on the pre- ferred alternative. The administration could then provide a revised bud- get proposal in its May Revision. The revised budget proposal should be consistent with the current federal funding ratio and include any costs to implement the proposed alternative. C – 292 Health and Social Services 2004-05 Analysis FOSTER CARE Foster care is an entitlement program funded by federal, state, and local governments. Children are eligible for foster care grants if they are living with a foster care provider under a court order or a voluntary agree- ment between the child’s parent and a county welfare department. The California Department of Social Services provides oversight for the county-administered foster care system. County welfare departments make decisions regarding the health and safety of children and have the discretion to place children in one of the following: (1) a foster family home, (2) a foster family agency home, or (3) a group home. The Governor ‘s budget proposes expenditures of $1.7 billion ($470 million General Fund) for the Foster Care Program in 2004-05. This represents an 11 percent decrease in General Fund expenditures from the current year. This decrease is primarily attributable to a foster care re- form proposal and using Federal Title XX funds to offset General Fund costs, offset by an increase in both the foster care caseload and the aver- age grant. The caseload in 2004-05 is estimated to be approximately 78,652, an increase of 1.2 percent compared to the current year. PROPOSED FOSTER CARE REFORMS LACK NECESSARY DETAILS The administration assumes savings of $72 million ($20 million General Fund) from unspecified foster care reforms, and indicates that a stakeholders group will be formed to develop the reform proposal. Given the magnitude of the reduction and complexity surrounding any reforms, we believe that savings in 2004-05 will be significantly less than has been budgeted. In order to assist the Legislature, we present a series of options regarding foster care reforms. Governor’s Proposal The Governor’s budget document indicates that it is the intent of the administration to propose reforms to the Foster Care Program. The ad- Foster Care C – 293 Legislative Analyst’s Office ministration indicates that the reforms\u2014although yet to be selected\u2014 will generate savings of $72 million ($20 million General Fund) in the budget year. According to the administration, a broad variety of options will be considered to reform the Foster Care Program. The reforms will not take the form of grant reductions, according to the administration. The focus will be on better promoting program goals and improving the efficiency of the program. The administration indicates that its goal is to increase permanence of placement for children and generally improve outcomes for both children and families. The Governor’s budget docu- ment identifies three potential proposals as examples of the types of pro- posals that will be considered. Performance-Based Contracts for Foster Family Agencies (FFA) and Group Homes (GH). This reform would implement perfor- mance-based contracting for the higher cost placements. These contracts would require that FFA and GH providers meet federal and state outcome measures as a condition of employment. While we agree that this may improve oversight over these types of providers and may improve the state’s performance overall, it is unclear whether this type of reform would produce any actual savings. At the time this analysis was prepared, the administra- tion was unable to provide any details on their assumption that this would lead to a savings in foster care. Restructuring Foster Care Rates. The Governor’s budget docu- ment indicates that this proposal would restructure the rates paid by the state to encourage counties to increase the use of less- restrictive, less-costly placements and to establish a standard statewide rate for other high-cost specialized foster care services and payments. There were no details available about the type of restructuring envisioned under this proposal, nor about the amount of associated savings. Pursuing Federal Funding Waiver. The Governor proposes pur- suing a Title IV-E federal waiver, which would allow the state to use a portion of its federal funding for flexible child welfare purposes. Currently, without a waiver, Title IV-E funding is re- stricted for use on eligible foster care children. This waiver, if granted, would allow these funds to be used on prevention and to provide intensive services designed to keep children out of the foster care system. While this type of prevention is valuable, we would note that it does not lead to immediate savings. In fact, these services generally require additional funding up front, with the anticipation of long-term savings as fewer children are re- moved from their homes and foster care caseloads decline. C – 294 Health and Social Services 2004-05 Analysis At the time this analysis was prepared, the administration indicated that the details of the foster care reform proposals would not be available until the May Revision. Evaluating the Reform Proposal $20 Million Savings Unlikely. The administration has stated that the foster care reforms will not take the form of grant reductions. Without rate reductions, the only way to achieve $72 million in savings (all fund sources) is by moving children into less costly placement types or reduc- ing the total number of children entering the foster care system. If chil- dren were moved to a less restrictive, less costly form of care rather than somehow removed from the caseload altogether, the necessary caseload shifts would be substantial. For example, at least 30 percent of the chil- dren currently residing in group homes would need to be shifted to less expensive foster family agencies in order to achieve the stated savings goal. Further, any placement shifts would require funding for additional social worker time because the social workers would need to find appro- priate, less restrictive placements for the children. Therefore, any savings achieved by moving the children to less costly placements would be par- tially offset by the need for additional social worker funding in Child Welfare Services. Alternatively, in order to achieve savings through re- ducing the number of children entering the foster care system would ne- cessitate caseload reductions in the range of 20 percent to 33 percent de- pending on the type of placement. Given the magnitude of the shifts nec- essary to achieve the savings, we conclude that the reform savings are significantly overstated. Options for Reforming Foster Care While the immediate savings associated with foster care reform are likely overstated, we do believe that there is room for reform in the foster care program. If designed properly, foster care reform could improve outcomes for children and families, create efficiencies, and generate sav- ings. However, it is important to note that most significant reforms de- signed to decrease the number of children in foster care or shift them to less costly types of care, may require some up front funding to be suc- cessful. The administration has stated that it will be consulting the Legisla- ture and stakeholders when developing foster care reforms. To assist the Legislature and stakeholders, we offer the following potential areas of reform. Foster Care C – 295 Legislative Analyst’s Office Foster Family Agencies. Previously, we have offered a foster family agency reform proposal which would reduce the length of time a child stays in FFA homes by increasing the incentives to move children toward permanency placement. Our proposed reforms could save the state $5 mil- lion from the General Fund the first year, growing to about $15 million by the second year. (See our Analysis of the 2002-03 Budget Bill for a de- tailed discussion of this proposal.) Specialized Care Increments. We would also recommend that the Legislature consider reforms to the current specialized care increment rate structure. The specialized care increments range from zero in some counties to over $2,000 per month in other counties, depending upon the special needs of the child. The amount of the specialized care increment should have some rational connection to the actual needs of the child and family. Variation in increments should reflect state policy, not his- torical rate structures which vary by county. Increasing the Supply of Foster Family Homes. Finally, we would suggest the development of a detailed plan, which includes funding sources, to increase the number of available foster family homes. One consideration might be providing some form of subsidized childcare for working foster parents. While this would result in up front additional costs, we believe that it would remove a significant barrier for many po- tential foster parents, thus creating more affordable, less restrictive place- ments for children who might otherwise be placed in more expensive group homes. Without additional homes, any reforms designed to shift children to less costly and less restrictive types of care will not succeed. GOVERNOR’S BUDGET UNDERSTATES SAVINGS ASSOCIATED WITH RECENT COURT DECISION The March 2003 Rosales court decision makes many children in state-only foster care eligible for federal funding by invalidating the home of removal criteria when determining federal eligibility. The Governor’s budget in part reflects the fiscal impact of this eligibility change. We estimate however, that a modest investment in foster care redetermination activities will allow California to claim additional federal funding, resulting in a net savings of $5.3 million. (Reduce Item 5180-101-0001 by $5,517,000, and increase Items 5180-141-0001 by $100,000 and 5180-151-0001 by $50,000.) Background. On March 3, 2003, the Ninth Circuit Court of Appeals fundamentally altered the way in which federal Title IV-E eligibility is determined for foster care children in its ruling in Enedina Rosales and the C – 296 Health and Social Services 2004-05 Analysis California Department of Social Services v. Tommy G. Thompson (321 F.3d 835) (Rosales). Impact on Federal Eligibility. Under the Rosales decision, if a child lived, at any time during the six months prior to removal or at the time of removal with a relative, then that child would be federally eligible for foster care because only the child’s income would be taken into account during an Aid to Families with Dependent Children (AFDC) means test. Prior to the court decision, relatives who were caring for children who were deemed ineligible for the federal foster care program were only pro- vided with a California Work Opportunity and Responsibility to Kids (CalWORKs) child-only grant of about $350 per month. Under the new eligibility rules, families will now receive a regular foster care grant (an average of $678 per month). Budget in Part Reflects Fiscal Impact of Rosales. The eligibility change described above reduces CalWORKs costs and increases foster care costs. Specifically, the Governor’s budget reflects a savings of $13 mil- lion in Temporary Assistance for Needy Families funding in CalWORKs and a General Fund cost of $8 million in foster care. Further, it recognizes an additional cost of $11 million in foster care costs for counties, reflect- ing their share of foster care grant payments. Additional Children Affected by Rosales. Based on our review, we conclude that a portion of the current state-only foster care caseload will now be eligible for federal foster care. This is because many of these state- only foster care children lived with relatives prior to their removal to foster care and would now under the court ruling be considered feder- ally eligible. Further, we believe that a portion of the Adoptions Assis- tance Program (AAP) state-only caseload will now be eligible for federal AAP for essentially the same reason. The administration, however, did not include in the budget the General Fund savings that would result from shifting these populations to the federally eligible programs. We estimate the savings associated with that shift below. Investment Needed to Achieve Savings. The estimated costs and sav- ings as a result of the Rosales decision presented in the Governor’s bud- get are only related to those children who were considered CalWORKs child-only cases and could now be considered federally-eligible foster care cases. However, a study done by the MAXIMUS Corporation in San Bernardino County indicates that a portion of the current state-only fos- ter care population would also now be eligible for Title IV-E federal fund- ing as a result of the Rosales decision. (These results were verified by case file reviews conducted by San Bernardino social workers.) Based on this data, almost 5 percent of the state-only foster care population would meet the new federal eligibility criteria. Although San Bernardino County did Foster Care C – 297 Legislative Analyst’s Office not examine their AAP caseload, we believe that the same criteria will apply to this caseload statewide. Children that were once deemed ineli- gible for federal AAP because of the AFDC means test, will now be eli- gible under the revised eligibility criteria. Using the most conservative interpretation of the Rosales decision, our analysis suggests that shifting this portion of the foster care caseload from the state-only program to the federal foster care program would require a minimal investment of about $100,000 to review the eligibility of the state-only cases that were placed in the foster care system after April 1, 2003. This review effort should result in making about 5 percent of the state-only caseload federally eligible. This would result in a Gen- eral Fund savings of $4.2 million and a county savings of $6.3 million. The AAP savings are smaller. We believe that a review of the AAP pro- gram, costing the state approximately $50,000 will lead to a General Fund savings of $1.3 million. This same level of savings for AAP and foster care could be achieved in 2003-04 with a similar level of investment for administration. The savings noted above only take into account the home the child was living in at the time of their placement in foster care. Looking at the six months prior to placement in foster care for all new cases would prob- ably produce significantly higher savings. We note that the President’s budget includes legislation to return foster care eligibility determination to the pre-Rosales rules. Analysts Recommendation. We recommend increasing the adminis- trative funding for the Foster Care Program and AAP by $150,000 to fund required county evaluations of the state-only children under the new Title IV-E eligibility standards. This county redetermination process should save the state $5.5 million General Fund as more children are shifted to the federal program. This shift will be invisible to the children and will have no impact on their funding level or current placements. Adopting this recommendation results in a net state savings of $5.3 million. C – 298 Health and Social Services 2004-05 Analysis COMMUNITY CARE LICENSING The Community Care Licensing Division (CCL) develops and en- forces regulations designed to protect the health and safety of individu- als in 24-hour residential care facilities and day care. Licensed facilities include child care; foster family and group homes; adult residential fa- cilities; and residential facilities for the elderly. The Governor’s budget proposes expenditures of $124.9 million ($42.2 million General Fund) for the CCL in 2004-05. This represents a less than one-half of 1 percent in- crease in General Fund expenditures from the current year. Additionally, the Governor’s budget proposes an increase in CCL fees, which will re- sult in increased General Fund revenues of $5.9 million for 2004-05. Increase Oversight by Establishing a Special Fund The Governor’s budget proposes an increase in Community Care Licensing (CCL) fees over the next three years, which would result in General Fund expenditures in the program being completely offset by fee revenue. We recommend the enactment of legislation to establish a fund for the CCL fees and make the funds available upon appropriation by the Legislature. This will increase legislative oversight by allowing the Legislature to assess the adequateness of the fees and to ensure that the funds generated by these fees are directed into the program. (Reduce item 5180-001-0001 by $21,875,776 and increase new special fund item under 5180 by like amount.) Background. The CCL division of the Department of Social Services oversees the licensing of child care centers, adult residential facilities, group homes, adoption agencies, and foster family homes. The division is also responsible for investigating any complaints lodged against these facilities and for conducting inspections of the facilities. The state moni- tors approximately 92,000 homes and facilities, which provide services for almost 1.4 million individuals. Community Care Licensing C – 299 Legislative Analyst’s Office In order to receive and maintain a license to operate a facility, appli- cants and providers are charged an initial licensing fee and an annual renewal fee. These fees are generally based upon the size of the facility and the number of individuals served. Until 2003-04, CCL fees had not been increased since 1992. However, in 2003-04 the fees were increased anywhere from 25 percent to 100 percent, depending on the type of facil- ity. Prior to that increase, the fee revenues covered approximately 8 per- cent of the total CCL budget. As a result of that increase, fees now cover approximately 40 percent of the General Fund portion of the CCL budget. Governor’s Proposal. The Governor’s budget proposes an increase in most CCL fees. Further, the budget proposes to continue to increase the fees by equal increments each year for the next two years (through 2006-07). Figure 1 shows examples of a few of the various types of facili- ties licensed by CCL and illustrates how the fees have grown and are projected to grow if the Governor’s proposal is adopted. By 2006-07, the fees generated should be enough to fully offset the General Fund costs associated with administering the program. Currently, CCL fees are con- sidered General Fund revenue and offset 40 percent of the General cost of the program. Figure 1 CCL Licensing Fees 2002-03 Through 2006-07 Examples of Facilities 2002-03 2003-04 2004-05 2005-06 2006-07 Family child care home (1-8 children) $25 $50 $67 $83 $100 Child care centers (31 to 60 children) 200 400 533 667 800 Adult day care centers (16 to 30 adults) 100 125 167 208 250 All residential care facilities (7 to 15 people) 450 563 793 1,023 1,253 Recommend Creation of Special Fund. Currently, the CCL fee rev- enues are considered General Fund revenue and as such are deposited into the General Fund along with all other General Fund revenues. This makes it difficult for the Legislature to determine whether or not the fees are adequate or excessive when it comes to funding the General Fund portion of the CCL budget. We believe that greater oversight of these revenues is necessary given the significant fee increases being proposed by the administration. Toward that end, we recommend enactment of legislation to create a special fund into which the fee revenues would be deposited, with expenditures subject to appropriation by the Legislature. C – 300 Health and Social Services 2004-05 Analysis This would increase the Legislature’s oversight of the use of these fees. Further, it would help the Legislature determine the appropriateness of the fee level and whether or not it was keeping pace with or outpacing the cost of administering the program. Legislative Analyst’s Office FINDINGS AND RECOMMENDATIONS Health and Social Services Analysis Page Crosscutting Issues Child Care C-19 \u25a0 Budget Proposes New Child Care Reforms. The Governor’s budget proposes a number of significant reforms to California’s subsidized child care system. Given the state’s difficult fiscal situation, these proposals effectively prioritize limited child care resources. However, the Governor’s proposals lack important policy, implementation, and administrative details that would help the Legislature weigh state savings against reducing child care services for a significant number of lower-income families. We evaluate the proposals’ effect on children, families, and the state budget, and present some alternative approaches. C-35 \u25a0 Proposition 49 Not Likely to Trigger for Several Years. Based on the Governor’s proposed budget and our fiscal forecast, Proposition 49 would not trigger an increase in funding for the After School Education and Safety Program until 2007-08. This assessment, however, depends on (1) how the state solves the structural imbalance between General Fund expenditures and revenues and (2) future growth in General Fund revenues. Health and Social Services Enrollment Caps C-37 \u25a0 Most Enrollment Cap Proposals Flawed. Recommend that the Legislature consider the Governor’s enrollment cap proposal on a case-by-case basis, weighing the potential fiscal benefits against the complexities and issues relating to the creation of caseload caps. Based upon such an analysis, we recommend that most of the limits be rejected because of these concerns. County Block Grant for Immigrants C-47 \u25a0 Programs Proposed for Block Grant Would Be a Poor Fit for Counties. Recommend rejection of the Governor’s proposal to C – 302 Health and Social Services 2004-05 Analysis Analysis Page consolidate funding for certain state programs which serve immigrants into a single block grant for counties because the programs selected are not well-suited for local control. Quality Improvement Fees C-52 \u25a0 Additional Federal Funds Possible Through Fee Mechanism. Recommend approval of the Governor’s proposal to impose quality improvement fees on Medi-Cal managed care health plans. Further recommend that the Legislature explore the options of imposing a quality improvement fee on mental health managed care plans. Senate Bill 2 C-60 \u25a0 Budget Lacks Funding for Health Insurance Measure. We recommend that the administration provide the Legislature with information at budget hearings regarding the funding and personnel that might be needed in 2004-05 to implement the new law for a pay or play system to expand health coverage for employees and, in some cases, their dependents. Department of Aging C-64 \u25a0 Consolidating Local Assistance Into Single Block Grant. The budget proposes to (1) eliminate the requirements for local Area Agencies on Aging (AAAs) to provide Community Based Services Programs (CBSP), (2) consolidate funding for CBSP and the Older Americans Act programs into a single block grant for the AAAs, and (3) reduce the proposed block grant by 5 percent. Recommend approval of the consolidation proposal and make no recommenda- tion on the proposed 5 percent reduction. Department of Alcohol and Drug Programs C-67 \u25a0 Federal Funding Requirement May Not Be Met. Expenditures under the Governor’s budget proposal for community treatment services now appear likely to fall short of the level that would be required in the current fiscal year to satisfy a maintenance-of-effort requirement imposed on the state as a condition of receiving certain federal grant funds. As a result, the state is at risk of being penalized with the loss of as much as $3.2 million in federal grant funds in the future. California Medical Assistance Program C-85 \u25a0 Caseload Estimate Reasonable. We find that the budget’s estimate for the California Medical Assistance Program (Medi-Cal) caseload is reasonable, but there are significant risks to this estimate that could Findings and Recommendations C – 303 Legislative Analyst’s Office Analysis Page result in the projection being overestimated or underestimated. Accordingly, we will monitor caseload trends and recommend appropriate adjustments at the time of the May Revision. C-88 \u25a0 Savings From Provider Rate Reductions in Doubt. There is a significant risk whether the state would achieve the level of savings anticipated from a provider rate reduction enacted last year and from a proposed further rate reduction because of ongoing litigation over rate issues. As it considers the Governor’s proposal for deeper rate cuts, we recommend that the Legislature examine alternative approaches that would strike a balance between concerns over how such reductions would affect access to care and quality of care for Medi-Cal beneficiaries and the need to address the state’s serious fiscal problems. C-92 \u25a0 Reject Staff to Process Authorizations Requests. Reduce Item 4260- 001-0001 by $1 Million. Recommend that the Legislature reject the Governor’s request for 36 additional positions to process treatment authorization requests (TARs). We propose instead to give the Department of Health Services (DHS) the authority it needs to better manage its workload by adopting the proposed statutory language and to improve the TAR process to better ensure that it controls costs and that decisions on TARs are made more consistently. The DHS should also be directed to implement the Service Utilization Review Guidance and Evaluation system for pharmacy claims by the end of 2004-05. C-94 \u25a0 Proposals to Reform Medi-Cal Should Be Pursued. Reduce Item 4260-001-0001 by $100,000. Recommend the Legislature direct DHS to present more detailed information about the reform plan at budget hearings so that it will be in a better position to assess the policy implications and savings that would actually be achieved by the administration’s plan. We also propose to modify the request for staffing and funding to develop the proposal and recommend changes in managed care enrollment procedures that would help further reduce Medi-Cal Program costs. C-100 \u25a0 Additional Opportunities for Reform Worth Considering. In addition to the concepts proposed by the Governor for reforming the Medi-Cal Program, the Legislature should consider other opportuni- ties to improve the program and achieve savings. These include providing coordinated care to the aged and disabled, combining Medi-Cal and Healthy Families coverage, improving the eligibility determination process, studying the impact of Medicare legislation, and advocating for federal changes in the Medicaid Program. C – 304 Health and Social Services 2004-05 Analysis Analysis Page C-103 \u25a0 Failure of County Organized Health Systems (COHS) Would Increase State Costs. Because COHS plans are a critical component of the success of the Medi-Cal program, we recommend that the Legislature initially reject the administration’s proposal to budget for the phase-out of the Health Plan of San Mateo (HPSM) and direct the DHS to explore alternatives that would permit it to remain in operation. We also recommend that the Legislature also consider a series of options for state actions to help mitigate the financial problems affecting HPSM and other COHS plans. C-111 \u25a0 Overall Effectiveness of Antifraud Efforts Could Improve. Reduce Item 4260-001-0001 by $2,354,000. Recommend that the Legislature take a systematic and coordinated long-term approach to addressing the fraud problem. Based on these principles we recommend: (1) denial of the Governor’s proposal to increase staffing for audits of hospitals; (2) that DHS report at budget hearings regarding how encounter data could be used to prevent managed care fraud; and (3) increased legislative oversight of DHS antifraud efforts through additional reporting requirements. C-125 \u25a0 Additional Oversight Needed for Data Systems Contract. Recommend the adoption of supplemental report language directing DHS to develop and submit a corrective action plan to the Department of Finance’s, Office of State Audits and Evaluations (OSAE) and the Legislature, and submit reports to OSAE and the Legislature every six months, beginning July 1, 2004, regarding its progress towards implementation of the audit recommendations. In addition, we recommend that the Legislature request the Bureau of State Audits to conduct a follow-up audit by July 2005 to assess DHS’ progress towards improving the management of its contract with Electronic Data Systems. C-128 \u25a0 Los Angeles County Monitoring Contract Terminated. Recom- mend that the Legislature direct DHS to report at budget hearings on the findings of the final monitoring reports of the Los Angeles County Medicaid Demonstration Project prepared by the contractor. The Legislature should also direct DHS to provide more detailed information on the specific monitoring activities it will carry out during the remainder of the project to help ensure that the goals of the restructuring effort are met. Department of Health Services C-135 \u25a0 Transfer of Eligibility Work to Counties Would Be More Expensive. Recommend that the Legislature not adopt the Governor’s proposal to shift eligibility determinations for the Breast Findings and Recommendations C – 305 Legislative Analyst’s Office Analysis Page and Cervical Cancer Treatment Program to the counties because it would be more costly than adding Department of Health Services staff for the same purpose. C-140 \u25a0 Major Uncertainties in Child Health and Disability Prevention (CHDP) Gateway Budget Proposal. Withhold recommendation on the CHDP budget proposal, and the related budget adjustments to the Medi-Cal and Healthy Families programs, until more information is available about the impact on caseload and costs of the CHDP gateway at the time of the May Revision. C-142 \u25a0 Reports on Information System Project Not Submitted. Delete Item 4260-011-0001. Recommend denial of proposed $5 million General Fund loan for the Genetic Disease Branch Screening Information System unless required reports are submitted and the Department of Health Services is able to demonstrate its ability to manage the project. Managed Risk Medical Insurance Board (MRMIB) C-147 \u25a0 Enrollment Cap Proposal Raises Policy Concerns. The Governor’s budget proposal to cap Healthy Families Program enrollment, while feasible and effective in addressing the state’s fiscal problems, raises a number of policy concerns. Recommend against this approach because other alternatives are available to the Legislature to hold down the cost of the Healthy Families Program. C-152 \u25a0 Choice of Two-Tier Benefit System Worth Considering. A two-tier benefit system represents a reasonable alternative for reducing Healthy Families Program costs to help address the state’s fiscal problems. Withhold recommendation on this funding request for resources until the administration has fully developed the proposal and provided updated cost and savings estimates to the Legislature. C-153 \u25a0 Alternatives for Reducing Healthy Families Program Costs. The budget plan proposes several measures to contain the costs of the Healthy Families Program. Recommend that the Legislature also consider alternative approaches including program consolidation with the AIM, changes in premium levels, trimming benefits, or shifting coverage of children in families with higher incomes to county coverage. C-158 \u25a0 Federal Approval of County Health Initiative Matching (CHIM) Fund Still Pending. The implementation of the CHIM Fund is contingent upon federal approval. Withhold recommendation at this time on the Governor’s budget proposal to continue the fund at its C – 306 Health and Social Services 2004-05 Analysis Analysis Page current funding level because a decision by federal authorities on the state’s request may be known by this May. C-161 \u25a0 Shift New Access for Infants and Mothers (AIM) Mothers to Healthy Families Program. Recommend that the Legislature take steps to shift all new AIM-eligible mothers to the Healthy Families Program possibly as soon as the budget year. The Legislature also has the option of shifting this group of enrollees to Medi-Cal coverage. Our analysis indicates that either approach would maximize the state’s use of available federal funds and result in significant state savings. C-164 \u25a0 Eliminate Perinatal Insurance Fund Reserve. Reduce Item 4280- 111-0232 by $998,000. Recommend repealing the statutory requirement that MRMIB maintain a reserve in the Perinatal Insurance Fund for the AIM program to achieve state savings of about $1 million in Proposition 99 funds. Department of Developmental Services C-176 \u25a0 Regional Center Caseload Estimate. Withhold recommendation on the Governor’s caseload estimate for regional centers (RCs) at this time. Because of the relatively high degree of uncertainty over the caseload projection, it is possible that the revised 2004-05 budget proposal may understate the amount of state funding required for the program. C-177 \u25a0 Title XX Funding Shift Appears Viable Now. We concur in the proposal to shift federal Social Services Block Grant funding to achieve General Fund savings but note that the success of this action depends on a successful effort to collect client income data. C-177 \u25a0 Evaluating the Governor’s 2004-05 Budget Proposals. The Governor’s proposals for RC cost containment appear to have merit, but a lack of detail about how the proposals would be implemented and what they would save means the Legislature is not in a position to fully assess their policy and operational implications. The Legislature should request that the administration present its completed proposals at budget hearings and not wait until the May Revision. C-183 \u25a0 An Agenda for Further Reform. The Legislature could broaden the discussion of the Governor’s proposals for reform of RC services to consider the improvement of audit functions, clarification of some provisions of the Lanterman Act, modification of the nursing home rate structure, and reductions in certain contracted activities. Findings and Recommendations C – 307 Legislative Analyst’s Office Analysis Page C-188 \u25a0 Developmental Centers (DCs) May Require Additional Funding. Three factors that we have identified make it possible that as much as about $80 million in additional funding may be required to fund DC operations in the current year and in the budget year. These relate to (1) the Agnews DC closure plan, (2) the possible decertification of Lanterman DC, and (3) the possibility that savings from a proposal to contract out food preparation at the DCs may not be realized. Department of Mental Health C-194 \u25a0 Activation of Coalinga Hospital Could Be Delayed. Reduce Item 4440-011-0001 by $20,143,000. The Governor’s budget requests $27.7 million to continue the activation of the Coalinga State Hospital. However, our analysis indicates that the state hospital system has sufficient capacity and could postpone the activation to reduce costs in the budget year. Recommend that the Legislature delay the activation until March 2006 in order to achieve one-time state savings of up to $20.1 million. C-198 \u25a0 Capping Enrollment and Shifting Sexually Violent Predators (SVPs) Could Make Better Use of Beds. Recommend that the Legislature approve the Governor’s proposal to limit the population of certain forensic patients in state hospitals. Recommend that legislative policy committees consider statutory changes that would provide the Department of Mental Health (DMH) more authority to prioritize hospital beds for patients who are willing and ready to receive treatment. Concur with administration’s proposal to shift some individuals who have been referred for commitment as SVPs out of the state hospitals to prioritize the use of beds for patients amenable to treatment. C-202 \u25a0 Additional Funding for SVP Evaluations Not Justified. Reduce Item 4440-001-0001 by $1 Million. An administration proposal to change state law to reduce the number of evaluations of SVPs in order to save $2 million in the budget year is an important policy matter for the Legislature to decide. A request for a $1.1 million augmentation based on a projected increase in evaluation caseloads should be rejected because it is not supported by recent caseload trends. C-205 \u25a0 Budget Includes Beds Missing From CDC Budget. The Governor’s budget plan includes a $2 million increase in reimbursement authority for the Department of Mental Health for a California Department of Correction (CDC) proposal to purchase hospital beds. General Fund resources have not been included in CDC’s 2004-05 budget request. Recommend deletion of increased reimbursement expenditure authority until resources are added to the spending plan for CDC. C – 308 Health and Social Services 2004-05 Analysis Analysis Page C-206 \u25a0 EPSDT Costs Still Soaring, but Some Progress in Sight. Our analysis indicates that, while the program is still growing significantly, recent efforts to slow down the growth in EPSDT expenditures appear to be succeeding. Recommend approval of further efforts to contain program costs by adjusting rate limits, auditing program expenditures, and developing a request for a federal waiver to tighten the definition of what services must be provided by the state. Department of Child Support Services C-214 \u25a0 Governor’s Budget Proposes Keeping County Share of Child Support Collections. Governor’s budget proposes keeping counties’ 2.5 percent share of assistance collections, thus creating a further disincentive for counties to invest in collecting child support payments for families. Recommend allowing those counties that meet state and federal performance measures to keep their share of the assistance collections. C-215 \u25a0 Withhold Recommendation on Child Support Collections. Withhold recommendation on estimated child support collections pending the release of the Governor’s May Revision due to the fact that they may be overstated based upon the Department of Child Support Service’s (DCSS’s) new method of projecting collections. C-217 \u25a0 Option to Transfer Project. Recommend administration report on potential problems and anticipated savings from transferring the California Child Support Automation System from the Franchise Tax Board to the DCSS. CalWORKs Caseload and Grants C-221 \u25a0 Caseload Decline Ends. The California Work Opportunity and Responsibility to Kids (CalWORKs) caseload has declined significantly since 1994-95. However, recent caseload trend data suggest that, absent any policy changes, caseload would increase about 1 percent in the budget year. The Governor’s proposed policy changes would result in a caseload reduction of about 1.3 percent from what it otherwise would have been, which would more than offset this baseline 1 percent increase. C-222 \u25a0 Budget Suspends Statutory Cost-of-Living Adjustments (COLAs) and Reduces Grant Payments. The Governor’s budget proposes to (1) reduce grant payments by 5 percent and (2) suspend both the October 2003 and July 2004 COLAs. Compared to current law, these proposals result in estimated state savings of $135 million in 2003-04 and $408 million in 2004-05. Findings and Recommendations C – 309 Legislative Analyst’s Office Analysis Page Expanding TANF Transfers Results In General Fund Savings C-225 \u25a0 State Spending Budgeted at Temporary Assistance for Needy Families (TANF) Maintenance-of-Effort (MOE) Floor. The Governor’s budget proposes to spend the minimum amount of General Fund monies needed to meet the MOE spending requirement for the CalWORKs program in 2004-05 and maintains a $160 million TANF reserve. Any net augmentation to the Governor’s spending plan would result in General Fund costs, or would deplete the TANF reserve amount. Any net reduction would generally result in TANF savings, not General Fund savings. C-226 \u25a0 TANF Transfers. The budget achieves General Fund savings by increasing TANF transfers to the Title XX Social Services Block Grant by $41 million in the current year and $120 million in the budget year, which would be used to offset General Fund costs in In-Home Supportive Services, Child Welfare Services, the Department of Developmental Services, and Foster Care. Significant CalWORKs Reforms C-230 \u25a0 Framework for Evaluating the Governor’s Proposals. In order to assist the Legislature in evaluating the Governor’s CalWORKs proposals, we summarize the Governor’s approach to reform and offer a framework for assessing specific aspects of the proposal. C-234 \u25a0 Proposal Requires Job Search While CalWORKs Application Is Pending. Recommend that the Legislature ensure county program- matic and fiscal flexibility by making the policy to require job search while the CalWORKs application is pending, a county option. C-235 \u25a0 Proposal Requires Aided Adults to Complete a Welfare-to-Work Plan Within 60 Days of Aid. Recommend that the Legislature consider modifying the Governor’s proposal to require aided adults who are not already meeting program requirements to complete and sign a welfare-to-work plan within 60 days of the receipt of aid, in order to give counties more flexibility in meeting this potentially beneficial requirement. C-236 \u25a0 Proposal Requires 20 Hours of Core Work Activities. Recommend that the Legislature retain as much county flexibility as possible with respect to the Governor’s proposal to require clients to participate in at least 20 hours of core work activities within 60 days of the receipt of aid. C – 310 Health and Social Services 2004-05 Analysis Analysis Page C-240 \u25a0 Proposal Would Reduce Grant for Sanctioned Cases. Recommend that the Legislature weigh the benefits of higher participation against any potential negative impact of a grant reduction on children as a result of the administration’s proposed policy to reduce child-only grants by 25 percent after one month in sanction status. C-242 \u25a0 Proposal Would Reduce Grant for Safety Net Cases with a Nonworking Adult. Recommend that the Legislature weigh the savings from the Governor’s proposal to reduce grants by 25 percent for safety net cases in which the adult is not working, against the negative impact that the grant reduction may have on families and children. Federal Welfare Reauthorization C-243 \u25a0 Update on Federal Welfare Reauthorization As of February 2004, Congress has not completed action on federal welfare reauthoriza- tion. We describe the major features of the currently pending House and Senate versions of welfare reform and update our fiscal estimates of these measures. CalWORKs Automation C-253 \u25a0 Statewide Automated Welfare System C-IV Project. Withhold recommendation on proposed increase pending additional informa- tion from the administration. Adoptions Programs C-255 \u25a0 Adoption Assistance Program (AAP) Reforms. Reduce Item 5180- 101-0001 by $2 Million. Adopt a series of AAP reforms that would tie AAP benefits to the actual needs of the child and would result in General Fund savings of $2 million in 2004-05 and $12 million in 2005-06. In-Home Supportive Services (IHSS) C-267 \u25a0 Governor Proposes to Restrict Eligibility and Reduce Provider Wages. The Governor’s budget reflects the mid-year proposal to eliminate the residual (state-only) program and presents new proposals to limit state support for provider wages to the minimum wage, and reduce services for recipients living with able-bodied relatives. Together these proposals result in net General Fund savings of $492 million (35 percent) compared to the requirements of current law. Findings and Recommendations C – 311 Legislative Analyst’s Office Analysis Page C-270 \u25a0 Comments on the Governor’s IHSS Proposal. The Governor’s proposal to eliminate the residual program, limit state participation in provider wages, and reduce services to recipients with relatives results in substantial budgetary savings and a potential hardship for low-income Californians who receive IHSS. Recommend that the Legislature consider each aspect of the proposal on a case-by-case basis, assessing both its impact on recipients and the estimated savings. Supplemental Security Income\/State Supplementary Program C-276 \u25a0 Budget Proposes COLA Suspensions. By suspending the January 2005 state cost-of-living adjustment (COLA) and not passing through the January 2005 federal COLA, the budget achieves combined savings of $147 million compared to current law. Food Stamps Program C-280 \u25a0 Revenue Loss Exceeds Administrative Savings From Governor’s Food Stamp Proposals. Increase Item 5180-001-0001 by $3.5 Million in 2004-05 and Increase General Fund Revenue by $4.5 Million in 2004-05. Recommend (1) rejecting the Governor’s proposal to delete recent food stamps expansions and (2) recognizing the General Fund revenue associated with the expansions. Child Welfare Services C-282 \u25a0 Budget for Improving Children’s Programs Should Reflect Legislative Priorities. Reduce Item 5180-151-0001 by $558,000. Reduce Item 5180-151-0803 by $3,850,000. Reduce Item 5180-151- 0890 by $14,343,000. Recommend eliminating the $19 million for the continuation of the Child Welfare Services (CWS) Redesign planning process. The funds will not be used to provide additional or new services for children and families. C-288 \u25a0 Child Welfare Services\/Case Management System (CWS\/CMS) Funding. The budget understates the General Fund costs for CWS\/ CMS by $43 million for the current and budget years combined. C-290 \u25a0 CWS\/CMS Revised Proposal. Recommend the administration report (1) on actions it can take to reduce the ongoing costs of the CWS\/CMS system and (2) on its analysis of the costs and benefits of the alternatives to support the system. Recommend the administra- C – 312 Health and Social Services 2004-05 Analysis Analysis Page tion provide a revised budget proposal that reflects the current federal funding ratio. Foster Care C-292 \u25a0 Proposed Foster Care Reforms Lack Necessary Details. The administration assumes savings in the amount of $72 million ($20 million General Fund) from unspecified foster care reforms. Given the magnitude of the reduction and complexity surrounding any reforms, we believe that savings in 2004-05 will be significantly less than has been budgeted. To assist the Legislature in developing foster care reforms, we present a series of options. C-295 \u25a0 Governor’s Budget Understates Savings Associated With Rosales v. Thompson Court Decision. Reduce Item 5180-101-0001 by $5,517,000, and Increase Items 5180-141-0001 by $100,000 and 5180- 151-0001 by $50,000. Recommend increasing the administrative funding for the Foster Care Program and the Adoptions Assistance Program (AAP) by $150,000 to fund required county evaluations of the state-only children under the new Title IV-E eligibility standards. The Governor’s budget overlooks the impact of the Rosales decision on the funding for foster care and AAP children who are currently funded by the state-only programs. By applying the new eligibility rules to this population, the state will save approximately $5.3 million. Community Care Licensing C-298 \u25a0 Legislature Should Increase Oversight of Community Care Licensing (CCL) through the Creation of a Special Fund. Reduce Item 5180-001-0001 by $21,875,776 and Increase New Special Fund Item Under 5180 by Like Amount. Recommend the enactment of legislation to establish a fund for the CCL fees and make the funds available upon appropriation by the Legislature. ”

” [image: http:\/\/www.lao.ca.gov\/lao_images\/analysis_icons\/pandi_logo.jpg] Legislative Analyst’s Office The 2003-04 Budget Bill: Perspectives and Issues [bookmark: _Toc33239620]=Social Services The administration proposes to realign to counties $3.5 billion in state social services program responsibilities. This represents about 44 percent of 2002-03 General Fund spending within the Department of Social Services (DSS). Given the large number of social services programs\u2014and program components\u2014proposed for realignment, Figure 5 (see next page) provides a more detailed look at the information summarized in Figure 4. As shown in Figure 5, the social services programs proposed for realignment fall into six categories: (1) children’s programs, (2) CalWORKs, (3) Food Stamps administration, (4) In-Home Supportive Services (IHSS), (5) noncitizen benefit programs, and (6) Adult Protective Services (APS). With the exception of CalWORKs, the realignment plan shifts 100 percent of the nonfederal costs of these programs to counties. For CalWORKs, the plan shifts 50 percent of the cost for administration and welfare-to-work services. In general, the administration excludes the major social services automation projects from realignment. [bookmark: OLE_LINK5] Figure 5 Programs Meriting Consideration for Realignment Social Services (In Millions) Programs Fund Shift Recommendation Consider Remove Administration Recommendations Children’s Programs\u2014100% Child Welfare Services $596 X Foster Care grants 460 X Adoptions Assistance 217 X Foster Care administration 34 X Kin-GAP 19 X Child abuse prevention, intervention, and treatment 13 X CalWORKs 50% county share of CalWORKs employment services $423 X 50% county share of CalWORKs administration 123 X Food Stamp Administration\u2014100% $268 50% see belowa In-Home Supportive Services (IHSS)\u2014100% $1,171 50% see belowa Noncitizen Benefit Programs\u2014100% Cash Assistance Program for immigrants $95 X California Food Assistance Program 15 X Adult Protective Services\u2014100% 61 X Changes Suggested by LAO IHSS\u201450% county share of cost $275 Adoptions\u2014100% 41 X Food stamp administration\u201450% county share of costs 134 X 25 percent county share of CalWORKs grants 750 X 25 percent county share of automation projects 42 X Total of Programs Recommended For Consideration $3,316 a The LAO recommends realigning 50 percent, rather than 100 percent, of these costs. See the Changes Suggested by LAO section of this table for the proposed shift. Figure 5 shows the proposed funding shift for each social services program, our views as to whether the program should be considered for realignment, and three additional programs (totaling about $830 million) that we suggest the Legislature consider for realignment. [bookmark: _Toc33239621]Realign Full System of Children’s Programs The administration proposes to realign all children’s social services programs, with one exception. Specifically, the plan realigns child welfare services, foster care, and the adoptions assistance program (provides cash benefits), but excludes the adoptions program (provides services). Given the close linkages between the children’s social services programs, we recommend that the Legislature incorporate the adoptions program into any decision it makes regarding the other programs. In general, we think realigning the full array of children’s programs to counties makes sense. Counties would have control and responsibility for the entire interactive system of child welfare and foster care. Specifically, counties would be responsible for deciding when to remove children from their homes (child welfare services), caring for children who are separated from their families (Foster Care), and determining the best long-range plan for foster children (adoption, reunification, emancipation, or permanent placement with a relative under the Kinship Guardian Assistance Program). Giving counties control and responsibility for this full system of care encourages counties to manage each element of the program effectively and efficiently. Counties Would Need Increased Program Control As discussed throughout this analysis, in order for realignment to improve program outcomes, counties need sufficient program authority to allow them to administer programs in a way that responds to local needs and conditions. In the case of children’s programs, giving counties this authority would require the state to eliminate as many nonfederal requirements as possible, such as the state’s requirement for monthly social worker visits (the federal standards is semiannual visits). Need to Address Federal Children and Family Services Reviews. California recently failed a federal performance review for children’s services and must improve performance through a performance improvement plan, or face a reduction in federal funding. Accordingly, we recommend the realignment plan address how the state and counties would share the cost of the performance improvement plan, and how any loss in future federal funding would be allocated. [bookmark: _Toc33239622]CalWORKs: Some Costs Appropriate to Realign CalWORKs is a county administered entitlement program for which the state must meet strict federal participation requirements or face significant penalties. In addition, to prevent migration effects, the state has an interest in making sure grant levels are uniform and that recipients have access to necessary services before reaching their five-year time limits. For these reasons, we think that the state should be responsible for most CalWORKS program costs. However, we recognize that county actions do influence this program’s long-term costs, and therefore we think there is merit to the administration’s proposal to give counties a share of the program’s costs for administration and employment services. In addition, we suggest that the Legislature consider giving the counties a share of the grant costs. We discuss these suggestions separately. Employment Services and Administration Merit Inclusion in Realignment Plan. In general, we concur with the administration’s proposal for a 50 percent county share of costs for administration and employment services. Although counties are responsible for developing welfare-to-work plans and providing the necessary training, child care, and case management services in support of those plans, counties pay no marginal cost for CalWORKs employment services or administrative costs. (Counties pay only a fixed cost based on their expenditures in 1996-97.) Without a marginal share of cost for employment services and administration, counties have limited incentive to control costs for these critical inputs, including the labor cost of county employees administering the CalWORKS program. Add a Share of CalWORKs Grants to Realignment. While economic factors beyond a county’s control drive the number of families eligible for CalWORKS in any community, local actions also influence the size of a county’s CalWORKs caseload. Specifically, counties are responsible for providing welfare-to-work services that enable recipients to make the transition from cash aid to self-sufficiency. Thus, through the delivery of employment services, counties have some control over program exits. Increasing a county’s share of grant costs\u2014it is currently 2.5 percent\u2014would give counties greater incentives to successfully move recipients toward self-sufficiency. Given the degree of control counties have over CalWORKs cash assistance costs, we recommend that the Legislature consider a partial share of cost for grants, perhaps in the range of 25 percent to 35 percent. A 25 percent share would be equivalent to about $750 million. [bookmark: _Toc33239623]Food Stamps Administration\u2014Sharing Costs Makes Sense Currently, counties administer the Food Stamp program, in conformity with federal Food Stamps eligibility rules, but pay no marginal share of costs for this program. The administration proposes to shift to counties 100 percent of the cost of Food Stamps administration. In our view, a shift of 100 percent of the cost of administering this income assistance program would be inappropriate, given the limited county control over these costs. Instead, we recommend the Legislature consider realigning a share of the cost of Food Stamps administration as a reflection of the degree of control counties have over these costs, particularly employee wages. To avoid any potential for cost shifting among social services programs, we suggest that the county share for Food Stamps administration match the share of cost for CalWORKs administration and services. (In some counties, the same workers perform the eligibility function for both programs.) The Governor has proposed a 50 percent share for CalWORKs administration. We believe any share of cost for Food Stamp administration\u2014in the range of about 25 percent to 50 percent\u2014would work, so long as this share of costs is consistent with the share of administrative costs for related programs. [bookmark: _Toc33239624]Immigrant Programs Are Inappropriate to Realign The Cash Assistance Program for Immigrants (CAPI) and California Food Assistance Program (CFAP) provide cash or food coupon benefits to federally ineligible legal immigrants. As shown in Figure 1, the Governor proposes to give counties full discretion in operating these programs, including the option of eliminating these benefits. As these programs are cash (or cash equivalent) programs, the state has an interest in maintaining uniformity in benefit levels. Variation in benefit levels could lead to migration, or potentially a \”race to the bottom,\” whereby one county’s reduction in benefits spurs others to reduce benefits in order to avoid becoming a benefit \”magnet.\” Given the state’s interest in uniform benefits, we believe that CAPI and CFAP should remain state responsibilities. [bookmark: _Toc33239625]In-Home Supportive Services: Partial Realignment Makes Sense The IHSS program provides various services to eligible aged blind, and disabled persons who are unable to remain safely in their own homes without such assistance. The IHSS program has two components: the Personal Care Services Program (PCSP), which is federally funded through Medicaid, and the Residual program, which is funded entirely with state and county funds. The nonfederal costs of the program are shared 35 percent county and 65 percent state. The federal PCSP is an entitlement program, with eligibility governed by federal rules that generally provide that low-income aged or disabled individuals are eligible for services. However, such individuals are not eligible for PCSP if they choose a responsible relative provider or need supervisory care. Such persons are served in the state-only Residual program, which is also an entitlement pursuant to state law. Federal and state rules govern the types of services provided, but counties make specific determinations concerning the degree of impairment and hours of service provided. Counties also negotiate the rates paid to service providers. The IHSS program has been one of the fastest growing social services programs\u2014since 1998-99 its General Fund costs have more than doubled to over $1 billion. Because counties make decisions that significantly affect costs of the IHSS program\u2014assigning hours of service based on their assessment of impairment and negotiating provider payment rates\u2014realigning more program costs to counties has merit. However, we believe a 100 percent program shift to counties does not match counties’ level of control over IHSS costs since they do not establish eligibility rules. Accordingly, we believe the Legislature should consider an increased county share, perhaps 50 percent (compared to 35 percent under current law). The Legislature should also consider giving counties more control over IHSS, especially in the Residual program, which is governed by state rather than federal law. Interaction With Long-Term Care. The IHSS and long-term care programs are integrally linked. The IHSS program assists people in remaining in their homes; long-term care assists people unable to live independently. Earlier in this piece, we argued that the Governor’s realignment plan for long-term care as proposed is unworkable. We offered suggestions for modifying the Governor’s proposal to phase in a realignment plan for increased county responsibility for an integrated long-term care system. If long-term care is ultimately realigned to counties, then the Legislature should enact commensurate increases in county responsibilities under IHSS. [bookmark: _Toc33239626]Adult Protective Services Makes Sense to Realign Created by Chapter 946, Statutes of 1998 (SB 2199, Lockyer), the APS program provides assistance to elderly and dependent adults who are functionally impaired, unable to meet their own needs, and who are victims of abuse, neglect, or exploitation. Like CAPI and CFAP, the Governor proposes that counties have complete flexibility in determining the level of service in this program, including the option of eliminating these services. In recent years, as the Legislature reduced funding for this program, it amended the APS statute to free the counties from certain mandatory activities. The Governor’s proposal moves further in this direction by making the program optional. Because we think it is reasonable to allow community standards and priorities to influence the management and funding of this program, we believe it merits legislative consideration for realignment to counties. [bookmark: _Toc33239627]Automation Projects: Align State and County Interests Currently the state is responsible for developing and maintaining several large welfare automation projects operated by the 58 counties. These systems include the Statewide Automated Welfare System, the Child Welfare Services\/Case Management System, and the Case Management Information and Payrolling System. Although counties share in the maintenance and operations of such systems, their share of development costs is very small (about 5 percent of nonfederal costs). Counties play a significant role in the development of these systems as the state project managers treat the counties as \”clients.\” Further, counties benefit from these systems because increased automation capacity increases their ability to serve clients while reducing labor costs. Under the current system, counties have financial incentives to \”ask for more\” during the development phase because their development cost share is low, and they will benefit from any increased automation functionality that is developed. Because the state has a large interest in overseeing statewide implementation and federal compliance, we believe that the state should continue to support the majority of automation costs. Nevertheless, increasing the county share of development costs would better align state and county goals in automation development. We suggest raising county costs to about 25 percent. For 2003-04, this would shift approximately $42 million in automation costs to the counties. [bookmark: _Toc33239628]Child Care [bookmark: _Toc33239629]Program Improvements Possible through Realignment California’s subsidized child care system is administered primarily through SDE and DSS. The 2002-03 Budget Act allocates about $3.1 billion\u2014$1.7 billion from the General Fund and $1.4 in billion federal funds\u2014for over 15 different child care and development programs. About half of this funding is for programs restricted to current and former CalWORKs recipients. The remaining funding is for programs open to all California residents, based on income eligibility and space availability. The administration’s realignment plan shifts to counties responsibility for\u2014and significant authority over\u2014most child care programs administered by SDE. In addition to the $8.2 billion in new revenues that would be available to counties for child care and other programs, the proposed budget includes $863 million in federal funds for child care subject to enactment of the realignment proposal. Currently, the state’s centralized child care system creates significant difficulties for families and local child care providers: \u00b7 Difficult for Families to Access Services. The state’s child care programs generally use separate eligibility criteria, require different points of entry, and maintain separate waiting lists. The uncoordinated manner in which these programs are administered impedes families’ access to the system. \u00b7 Provider Rules Are Unduly Complex. Local child care providers that receive funding under more than one child care program often must negotiate separate contracts for each program and comply with separate rules regarding allowable expenditures, attendance accounting, eligibility, and reimbursement rates. \u00b7 Similar Families Treated Differently. The state’s child care programs treat families with similar incomes differently, depending on whether they have received assistance through the CalWORKs program. In general, families that previously have been on CalWORKs continue to receive services, while other working poor families are placed on waiting lists. In view of the above, we believe the administration’s proposal to realign child care programs to counties merits legislative consideration. Realignment would give counties the flexibility to use child care funds as part of an integrated strategy to serve the needs of their communities’ working poor. Counties could reduce the administrative complexity of the system by setting countywide rules relating to eligibility, family fees, and reimbursement rates. (Please see the \”Child Care and Development\” section in the \”Education\” chapter of the Analysis for further discussion regarding the child care realignment proposal.) [bookmark: _Toc33239630]Criminal Justice The administration’s plan proposes changes to only one criminal justice program\u2014trial court security. As shown in Figure 4, we recommend the Legislature reject the administration’s trial court proposal, but consider for realignment several programs relating to juvenile and adult corrections. [bookmark: _Toc33239631]Court Security Fund Swap Is Not Realignment Under the administration’s realignment plan, 6.54 percent of the revenues raised by the new sales tax is deposited into the Trial Court Trust Fund for court security purposes. State General Fund support for court security is then reduced by a commensurate amount. Our review indicates that the administration’s plan does not realign any governmental duties or improve the delivery of services; it simply moves the costs of a state funded program from the General Fund to a new revenue source. For this reason, we recommend the Legislature exclude this program from the list of programs considered for realignment. While the administration’s plan proposes to give courts needed increased flexibility in the management of security costs, the Legislature could provide this increased flexibility through a separate statute. [bookmark: _Toc33239632]Realign Adult and Juvenile Offender Programs Currently, the state is responsible for the incarceration and treatment of thousands of adult and juvenile offenders who, within a few years or months, will be released from state facilities. Upon their release, most juvenile and adult offenders return to their home communities. Thus, local governments have a significant interest in the future behavior of these individuals. Counties also administer many of the programs these individuals need to reduce their likelihood of recidivism\u2014drug and alcohol treatment programs, mental health services, indigent health, and some employment services. We believe that realignment of program and funding responsibility for certain components of the criminal justice system merits consideration by the Legislature because of the program linkages discussed above. In addition, such an approach would provide counties with a strong incentive to intervene early with criminal offenders and develop alternative methods of incarceration and services to minimize an individual’s risk of reoffending. The programs we believe worth consideration for realignment are juvenile justice, adult parole, and return-to-custody. Juvenile Offenders. Counties currently are responsible for more than 95 percent of all juvenile offender cases, primarily through their probation departments. The state’s Department of the Youth Authority provides incarceration, rehabilitation services, and community supervision for juvenile offenders who have committed crimes that are more serious in nature or have repeatedly failed to respond to local juvenile justice programs. Current law requires counties to pay a share of the cost for Youth Authority commitments based on a sliding fee schedule that charges counties a higher fee for less serious offenders and a lower fee for more serious offenders. The county share of cost varies from about 4 percent to 63 percent depending on the classification of the ward being committed to the Youth Authority. Under our proposed realignment, counties would be responsible for treatment of all juvenile offenders at the local level, or for paying the full cost of placing offenders in state facilities. This realignment would clarify the responsibility for juvenile commitments and give counties greater incentives to invest in prevention and treatment programs. Adult Parole. Currently, when a state prison inmate completes his or her sentence, he or she is supervised on parole by state staff in the community for up to three years. The community supervision services provided on parole are very similar to the services provided by county probation departments to probationers. Under our proposed realignment, state parole would be abolished and the community supervision function would be consolidated with county probation departments. Counties would determine the type and intensity of community supervision and how to make the best use of funds. For example, a county may decide to place an offender with a violent history in an intensive supervision program, or an offender with a history of substance abuse in a residential treatment program. Adult Parole\u2014Return-to-Custody. Currently, parolees who violate the conditions of their parole may have their parole administratively revoked and be returned to state prison for up to one year by the Board of Prison Terms. Such violations usually are for offenses that local law enforcement officials consider minor, such as unauthorized absence from parole supervision. Under our proposed realignment, counties would be responsible for offenders who violated the terms of their supervision. If an offender violated a condition of his or her supervision order (for which he or she is not prosecuted), counties would have the option to place the offender in custody, impose other community-based alternative punishments, or return the offender to state prison for up to one year at county expense. Funding the LAO Proposed Realignment. We would propose that the realignment financing plan include $1.6 billion to realign these criminal justice programs to the counties. This reflects the current state costs to administer these programs. Counties would determine how best to make use of these realignment funds. In addition, we recommend dedicating additional discretionary funds of $232 million from the elimination of the COPS and Juvenile Justice grant programs for the development of new community-based programs, and\/or the expansion of existing services to meet the needs of these juvenile and adult offenders. [bookmark: _Toc33239633]Mandates [bookmark: _Toc33239634]Realignment Plan Is Well Suited for Funding Mandates The California Constitution requires the state to reimburse schools and other local agencies if it \”mandates\” a new program or higher level of service. As we have discussed in previous budget analyses, the claiming process associated with mandate reimbursement is slow, burdensome, and fails to give local governments incentives to contain costs. Our review indicates that about 13 of the state’s ongoing mandates (relating to voting procedures, property tax administration and, and mental health mandates, such as the AB 3632 program for children in special education, discussed above) represent county functions of significant statewide importance and could be consolidated and funded through the realignment plan. Such a realignment of mandate funding would provide counties with ongoing resources and eliminate the paperwork associated with mandate claiming. Before including these mandates in state-county realignment, however, we recommend that the Legislature modify the underlying mandate requirement to increase county flexibility and lower compliance costs. The amount of realignment funding provided to counties should reflect these mandate changes. [bookmark: _Toc33239635]Conclusion Given the size and diversity of California, we think realigning some programs from state to county control would provide the needed flexibility and fiscal incentives to improve program performance. For this reason, we think realignment merits consideration by the Legislature\u2014regardless of its decisions regarding taxes or education funding. Our review indicates that $5.1 billion of programs in the administration’s plan and $4 billion of other programs may be good candidates for realignment and merit the Legislature’s consideration. Given the requirements of the California Constitution and voter-approved measures, enacting realignment will require achieving a broad consensus among many parties. Because realignment plans are difficult to modify over time, we recommend the Legislature take a long term view in enacting any program and funding changes. Return to 2003-04 Perspectives and Issues Table of Contents [bookmark: _GoBack] Legislative Analyst’s Office The 2003-04 mm Budget Bill: ~~ Perspectives and Issues ”

” [image: http:\/\/www.lao.ca.gov\/lao_images\/analysis_icons\/Iconc.jpg] Legislative Analyst’s Office Analysis of the 2002-03 Budget Bill [bookmark: _Toc1355592]Department of Social Services CalWORKs Program (5180) In response to federal welfare reform, the Legislature created the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children, the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the one-parent component of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for the two-parent component if it includes a child who is financially needy due to the unemployment of one or both parents. The budget proposes an appropriation of $5.9 billion ($2.2 billion General Fund, $155 million county funds, $30 million from the Employment Training Fund, and $3.6 billion federal funds) to the Department of Social Services (DSS) for the CalWORKs program. In total funds, this is an increase of $392 million, or 7.1 percent. Although the 2002-03 budget for CalWORKs is at the maintenance-of-effort (MOE) floor, General Fund spending is proposed to increase by $136 million (6.8 percent). This increase is primarily due to lower MOE spending in non-CalWORKs programs, which must be replaced by an increase in CalWORKs General Fund spending of the same amount in order to maintain MOE compliance. The increase in CalWORKs MOE spending is partially offset by deferring $25 million in spending for the Department of Labor’s Welfare-to-Work program match requirement. We note that the Governor’s budget assumes that the Temporary Assistance for Needy Families (TANF) block grant will be reauthorized by October 1, 2002, and that California will continue to receive $3.7 billion annually in TANF funding. To the extent the TANF block grant is reauthorized at a lower level, this assumption represents a potential risk to CalWORKs program funding. [bookmark: _Toc1355593]Caseload and Grants [bookmark: _Toc1355594]Caseload Decline Ends The California Work Opportunity and Responsibility to Kids caseload has declined significantly since 1994-95. However, recent caseload data suggest that this trend may be ending. The Governor’s budget projects that the caseload decline will end in the current year, and that caseloads will increase by 2 percent in the budget year. The CalWORKs caseload has declined every year since 1994-95, when caseloads reached their peak. During 2000-01, the average monthly number of CalWORKs cases decreased by approximately 9 percent compared to the prior year. However, the Governor’s budget projects that the caseload decline will end in 2001-02, when caseloads will begin to steadily increase for the first time since 1994-95. Caseloads are projected to continue to increase through the budget year, resulting in a year-over increase of 2 percent. Figure 1 illustrates the projected end of the caseload decline. As shown in Figure 1, actual caseloads for the first part of 2001-02 (July through September, the most recent months for which actuals are available) were lower than the Governor’s projections for these months. However, given the recent economic downturn and its projected impact on caseload growth, we believe the Governor’s year-over caseload estimates are realistic. Because the CalWORKs caseload drives program costs, we will continue to monitor caseload trends and advise the Legislature accordingly. [image: http:\/\/www.lao.ca.gov\/analysis_2002\/health_ss\/health_15_1.gif] [bookmark: _Toc1355595]Budget Suspends Statutory Cost-of-Living Adjustment The Governor’s budget proposes suspending the statutory cost-of-living adjustment. Compared to current law, this results in a savings of $112 million. The Governor’s budget proposes to suspend the statutory cost-of-living adjustment (COLA) effective October 2002. Compared to current law, suspending the COLA results in General Fund\/TANF savings of $112 million. The statutory COLA is based on the change in the California Necessities Index (CNI) from December 2000 to December 2001 (3.74 percent). Figure 2 shows the maximum CalWORKs grant and food stamps benefits for a family of three in the current year, and what the maximum grant and benefits would be in the budget year if the COLA were provided. As the figure shows, grants for a family of three in high-cost counties would have increased by $25 to a total of $704, and grants in low-cost counties would have increased by $24 to a total of $671. Figure 2 CalWORKs Maximum Monthly Grant and Food Stamps Governor’s Budget and Current Law Family of Three 2000-03 Change from Current Law 2001-02 Current Lawa Governor’s Budget Amount Percent High-cost counties CalWORKs grant $679 $704 $679 -$25 -3.7% Food Stampsb 285 274 285 11 3.9 Totals $964 $978 $964 -$14 -1.5% Low-cost counties CalWORKs grant $647 $671 $647 -$24 -3.7% Food Stampsb 299 289 299 10 3.3 Totals $946 $960 $946 -$14 -1.5% a Based on California Necessities Index at 3.74 percent. b Based on maximum food stamps allotments effective October 2001. Maximum allotments are adjusted annually each October by the U.S. Department of Agriculture. As a point of reference, the federal poverty guideline for 2001 (the latest reported figure) for a family of three is $1,219 per month. (We note that the federal poverty guidelines are adjusted annually for inflation.) Under current law, combined maximum grant and food stamps benefits in high-cost counties would be $978 per month (80 percent of the poverty guideline). Under the Governor’s proposal to suspend the COLA, combined benefits in high-cost counties would instead be $964 per month (79 percent of poverty). Combined benefits in low-cost counties would be $960 per month (79 percent of poverty) under current law, versus $946 (78 percent of poverty) as proposed in the Governor’s budget. [bookmark: _Toc1355596]The CalWORKs Time Limit: Implementation Issues The statute establishing the California Work Opportunity and Responsibility to Kids (CalWORKs) program does not resolve two issues related to time limits: (1) how counties should apply exemptions from the CalWORKs five-year time limit and (2) the circumstances under which employment services may continue to be provided after an individual reaches the time limit. We present options on how counties should apply exemptions from the CalWORKs five-year time limit. As regards employment services, we recommend enactment of legislation to provide transportation assistance without a community service requirement for time-limited individuals working at least 20 hours per week. [bookmark: _Toc1355597]Background The federal welfare reform law of 1996, which created the TANF block grant, established a lifetime limit on federal assistance. Specifically, states may not use TANF funds to provide assistance to families in which an adult has received a cumulative total of 60 months of assistance. However, a state may exempt up to 20 percent of its caseload from the federal time limit for reasons of \”hardship,\” as defined by the state. States also have the flexibility to create a separate state program, using state-only funds, to provide assistance to families that have reached the federal time limit. Such families would remain eligible for assistance under the state program. California has availed itself of this option. Such state expenditures for post time-limit families are countable toward the state’s maintenance-of-effort (MOE) requirement. Thus, the federal time limit may be viewed more as a limit on the use of federal funds than a strict requirement that aid be limited to five years. Adult CalWORKs recipients began hitting the federal five-year lifetime limit in December 2001. However, because the CalWORKs program did not start until January 1998, adult recipients will not begin to reach the state five-year lifetime limit until January 2003. The Governor’s budget projects that about 100,000 families will reach their CalWORKs time limit during 2002-03. The CalWORKs Time Limit. Under CalWORKs, adults are generally limited to 60 months of cash assistance. However, the CalWORKs statute provides for both categorical and county discretionary exemptions from the time limit. Conditions under which categorical exemptions shall be granted include age (60 or older), certain caretaking responsibilities, and disabilities. In addition to these categorical exemptions, counties have discretion to extend the time limit for individuals who are unable to find and maintain employment (including individuals who are victims of domestic violence). This determination will be based in part on the individual’s history of participation and cooperation. The department is currently in the process of developing regulatory guidance to the counties for making such a determination. These regulations will also provide guidelines to the counties on (1) when to notify recipients who are close to reaching their time limit, (2) establishing a process by which recipients may claim a time extension, (3) tracking cases that have been granted time extensions, and (4) reviewing such cases for redetermination. Grant Reductions. Once a nonexempt adult reaches the time limit, the grant payment is reduced by the adult portion of the grant. Thus, in the case of a family of three (a parent with two children), the grant payment would be reduced to the maximum aid payment for a family of two. For cases in which the timed-out adult is working, the actual grant payment would depend on net income as determined by the CalWORKs income disregard policy. (Under this policy, some of an individual’s earnings are disregarded for the purpose of determining the grant amount.) Reduced grants may be issued in the form of a voucher, at county option. Figure 3 illustrates the effect of grant reductions for a family of three. Figure 3 Total Family Income Before and After 60-Month Time Limit Before Time Limit After Time Limit Scenario 1: Single mother of two, not working Earned income \u2014 \u2014 Minus income disregard \u2014 \u2014 Net nonexempt income \u2014 \u2014 Maximum aid payment $679 $548 Grant amount 679 548 Total family income $679 $548 Difference -$131 Scenario 2: Single mother of two, working half-time at minimum wage Earned income $585 $585 Minus income disregard -405 -405 Net nonexempt income $180 $180 Maximum aid payment $679 $548 Less nonexempt income (from above) -180 -180 Grant amount $499 $368 Plus earned income (from above) 585 585 Total family income $1,084 $953 Difference -$131 Post Time-Limit Services. Working recipients who have reached their 60-month time limit are eligible to receive child care for up to 24 months after leaving cash assistance. For all other employment services, counties have the option to provide services to individuals who have reached their time limit, but whose families remain eligible for assistance. Similar to the employment services available to recipients before they reach the time limit, these county-optional services may include case management; mental health, substance abuse or domestic violence treatment and counseling; transportation; education and training; and other services needed to maintain employment. [bookmark: _Toc1355598]Unresolved Policy Issues While the CalWORKs statute clearly establishes a lifetime limit on cash assistance, it provides less clear direction on two important policy issues. These are (1) how counties should apply exemptions from the time limit and (2) the circumstances under which services may be provided after an individual reaches the time limit. Below we discuss these unresolved policy issues. [bookmark: _Toc1355599]Issue 1: How Should Counties Apply Exemptions From the Time Limit? State law states its intent that California not exceed the 20 percent federal exemption limit. Accordingly, if California exceeds that limit, counties that have granted time extensions to more than 20 percent of their caseload would be responsible for the costs associated with the additional cases. However, the statute also states that counties shall not be penalized \”for circumstances beyond their control\” (for example, high local unemployment rates). Thus, the state may reduce or waive the county share of costs if a county is determined to have good cause for exceeding its 20 percent limit. The department is currently in the process of establishing guidelines for this good cause review. Administration’s Funding Policy Eliminates County Fiscal Risk. In both the current and the budget years, the Governor’s budget uses state-only funds for cases that have reached their federal time limit. In other words, the state will not claim any federal funds under the 20 percent federal exemption provision. As noted above, counties face a fiscal risk for exceeding a 20 percent exemption limit only if the state exceeds the federal 20 percent limit. Since there is no state risk of exceeding the federal limit when time-limited cases are shifted to the state-only program, the administration’s funding policy essentially eliminates the fiscal risk to counties of exceeding the 20 percent exemption limit. Elimination of this fiscal risk means that counties essentially have no guidance (and therefore no limit) on the number of exemptions they can grant. As described earlier, this funding policy is possible (with no additional General Fund costs above the MOE floor) because such state-only spending is countable towards California’s MOE spending requirement. Policy Options. We have identified three approaches to address the issue of how time limit exemptions should be applied. These approaches are (1) the current practice of effectively permitting unlimited exemptions, (2) reestablishing a numerical guideline for the number of exemptions that counties may grant, and (3) statutorily limiting county discretion in granting exemptions. \u00b7 Current Practice. If the Legislature simply wants to avoid a federal penalty for exceeding the 20 percent \u00b7 exemption limit, then current law, in combination with the administration’s funding policy, will achieve that goal. The administration’s policy of using state-only funds for time-limited cases is consistent with that goal since it ensures that California does not exceed the federal limit. \u00b7 Reestablish a Guideline. If, conversely, the Legislature wants to provide counties and the department a guideline on the absolute percentage of the caseload that should be exempted at any one time, then clarifying legislation is necessary. Clarifying legislation could be enacted to explicitly hold counties responsible for the costs associated with granting exemptions to more than a specified percent of their caseloads, regardless of whether the state exceeds the 20 percent federal limit. The good cause review provisions could remain intact. \u00b7 Limit County Discretion. We note that the amount of the federal 20 percent exemption limit is arbitrary. Accordingly, it may not reflect either the categorical exemptions that the Legislature has already established, or additional exemption policies the Legislature may wish to establish given a variety of factors, including local economic conditions. At the same time, giving counties the discretion to grant exemptions to an unlimited number of cases may significantly weaken the effect of the CalWORKs time limit policy. Therefore, rather than either setting a numerical exemption rate guideline or having none at all, a third approach would involve prescribing more specific conditions under which exemptions could be granted. Specifically, the Legislature could limit county discretion in determining whether an individual is unable to maintain employment. For example, counties might be allowed to grant exemptions only if the local unemployment rate is above a specified level, and only to individuals who have either shown a specified number of attempts to find employment and\/or who have been sanctioned no more than twice. Conclusion. Although all three approaches have merit, we are concerned that current practice of allowing unlimited exemptions may weaken the time limit policy. Accordingly, we would recommend that the Legislature either reestablish a guideline or statutorily limit county discretion. [bookmark: _Toc1355600]Issue 2: Post Time-Limit Services State law is unclear about the conditions under which a working adult who has reached the time limit can continue to receive employment services. Specifically, certain code sections conflict as to (1) whether time-limited recipients who are working must participate in community service activities in order to receive employment services, and (2) how long such recipients may receive these services. Further, current law does not specify an hourly requirement for community service activities. Analyst’s Recommendation. We recommend that clarifying legislation be enacted to remove this ambiguity regarding employment services for working, time-limited adults whose families continue to receive assistance. Given that the goal of employment services is to help individuals find and retain employment, we believe that a community service requirement for individuals who are not working and wish to receive services has a sound policy basis. However, for individuals who are working, a community service requirement may disrupt their employment effort. We therefore recommend that former recipients working at least 20 hours per week be provided transportation assistance without any community service requirement. Such assistance could be capped at a certain amount per month, and, similar to the availability of child care services, could be available for up to 24 months after leaving assistance. Because transportation is a critical work support service, providing such assistance to working, time-limited adults would likely result in lower grant costs in the short term, since working families receive a lower grant amount than nonworking families. It could also achieve long-term savings to the extent that enabling parents to remain employed and increase their earning potential results in more families eventually leaving cash assistance altogether. For all other employment services, we further recommend giving counties the option to explicitly waive the community service requirement for individuals working at least 20 hours a week. We believe that counties are in the best position to judge whether families making a good faith effort to work and who demonstrate a need for additional employment services would benefit from a community service assignment. We also believe that counties are best able to judge whether such a benefit outweighs the costs associated with providing a community service assignment. [bookmark: _Toc1355601]MOE Spending Requirement [bookmark: _Toc1355602]Achieving General Fund Savings While Meeting MOE Requirement The Governor’s budget proposes the minimum amount of General Fund monies required by federal law for the California Work Opportunity and Responsibility to Kids (CalWORKs) program in 2002-03. Any net reduction in CalWORKs expenditures would generally result in federal block grant savings, but not General Fund savings. However, we identify two methods by which a CalWORKs reduction could result in General Fund savings, while meeting the maintenance-of-effort requirement. Maintenance-of-Effort (MOE) Requirement. To receive the federal TANF block grant, states must meet a MOE requirement that state spending on assistance for needy families be at least 75 percent of the federal fiscal year (FFY) 1994 level, which is $2.7 billion for California. (The requirement increases to 80 percent if the state fails to comply with federal work participation requirements.) Although the MOE requirement is primarily met with state and county spending in CalWORKs and other programs administered by DSS, state spending in other departments totaling $364 million is also used to satisfy the requirement. Proposed Budget Is at MOE Floor. For 2002-03, the Governor’s budget for CalWORKs is at the MOE floor. The budget also proposes to spend all but $40 million of available federal TANF funds in 2002-03, including both the projected carryover of unexpended funds ($253 million) from 2001-02 and $189 million in reclaimed county performance incentives (discussed later in this Analysis). The $40 million will be held in a reserve for unanticipated future program needs. We note that any net augmentation to the CalWORKs program above the $40 million reserve amount would result in additional General Fund costs above the MOE requirement. Conversely, because the budget proposes to spend the minimum amount of General Fund monies required by federal law, any net program reductions would generally result in TANF savings, but not General Fund savings. However, below we identify two methods by which CalWORKs savings could result in General Fund savings. These include (1) recognizing additional non-CalWORKs MOE-countable expenditures and (2) transferring freed-up TANF funds into the Social Services Block Grant (SSBG). Method 1: Recognize Other MOE-Countable Expenditures. As noted above, the Governor’s budget assumes that $364 million in spending in other departments will be used to satisfy the MOE spending requirement in 2002-03. If additional non-CalWORKs MOE-countable expenditures were identified, the required level of CalWORKs MOE spending would decrease by a like amount. Thus, General Fund spending in CalWORKs could be reduced while still maintaining MOE compliance. Achieving General Fund savings in this way would require either (1) a program reduction in CalWORKs or (2) drawing on the TANF reserve in order to keep the program whole. Later in our analysis of this program, we recommend that certain current state spending for (1) supplemental cash payments to disabled adults and children, (2) nonemergency health services to legal immigrants, and (3) subsidized child care for certain families be counted toward the MOE requirement. Recognizing these payments (which we estimate to be in the range of $30 million to $100 million) as MOE-countable expenditures would permit a General Fund reduction in CalWORKs of a like amount. To the extent that TANF funds are available to replace any General Fund reduction, these General Fund savings could be achieved without a program reduction. Method 2: Transfer Freed-Up TANF Funds Into the Social Services Block Grant (SSBG). The federal TANF block grant provisions allow California to transfer up to $373 million in TANF funds to the SSBG, also known as Title XX funds, under the condition that the transferred funds are spent on children or their families with incomes under 200 percent of poverty. Once transferred, the funds may be used to support any programs that meet the SSBG goals. These include achieving economic self-sufficiency, preventing abuse or neglect, enabling families to stay together, and preventing inappropriate institutional care. For 2002-03, the Governor’s budget proposes to expend the full amount of available SSBG funding to offset General Fund costs in programs that meet the SSBG goals. We estimate that an additional $125 million in current General Fund spending, mostly on developmental services, could be replaced with TANF funds transferred to the SSBG. Later in the Child Welfare Services section of this Analysis, we recommend transferring freed-up TANF funds into the SSBG for the purpose of reducing General Fund expenditures for developmental services. [bookmark: _Toc1355603]Count Additional Spending Toward MOE Requirement We recommend that the department count toward the California Work Opportunity and Responsibility to Kids maintenance-of-effort requirement General Fund expenditures for (1) supplemental cash payments to disabled adults and children, (2) nonemergency health services for certain immigrants, and (3) subsidized child care for certain families. We estimate such countable expenditures to be in the range of $30 million to $100 million. Counting such expenditures would increase legislative flexibility in allocating General Fund monies for CalWORKs. Countable MOE Funds. Pursuant to federal welfare reform, California may count toward meeting its MOE requirement all state spending on families eligible for CalWORKs, even if they are not in the CalWORKs program. To be countable, such spending must be consistent with the broad purposes of federal welfare reform. These include providing assistance to needy families so that children may be cared for in their own homes and families can become self-sufficient. Countable expenditures must also satisfy a \”new spending\” test, whereby only the amount by which they have grown since federal fiscal year (FFY) 1995 is counted. State Supplementary Program (SSP). The SSP supplements federal Supplemental Security Income payments for low-income aged, blind, and disabled individuals. For 2002-03, the Governor’s budget proposes $3 billion from the General Fund for SSP payments. Some of these payments enable children to be cared for at home, and therefore are consistent with the intent of the federal welfare reform law. After applying the new spending test described above, we believe that between $30 million and $50 million in SSP spending could be counted toward the MOE requirement in 2002-03. This includes payments to disabled children and payments to disabled adults with children. Nonemergency Health Services for Federally Ineligible Immigrants. California currently uses state-only funds to provide nonemergency health services to certain legal immigrants who, pursuant to federal welfare reform, were made ineligible for federally reimbursable nonemergency services. Providing preventive health services for families with children keeps parents and children healthy, thereby assisting the parents in keeping regular work hours. Expenditures for such services are therefore consistent with the intent of federal welfare reform. Because they began after 1995, these expenditures also meet the MOE new spending test. We believe that at least $3 million in state spending on these health services could be counted toward the MOE requirement in 2002-03. Subsidized Child Care. Currently, the budget recognizes $322 million in expenditures within the State Department of Education (SDE) for subsidized child care toward the MOE spending requirement. This amount only reflects expenditures for families who are current or former CalWORKs recipients. However, as noted earlier in our analysis of this program, spending for families that are eligible but not necessarily receiving assistance is also countable toward the MOE requirement. We believe a significant portion of SDE’s child care expenditures (potentially in the tens of millions of dollars) in the general subsidized child care system are for such eligible families, and therefore would be countable toward the MOE requirement. Counting such expenditures may require amending the state TANF plan’s definition of needy families for purposes of providing child care. Statutory Change and State Plan Amendment Are Necessary. In order to count the identified SSP, health, and child care expenditures toward the MOE requirement, statutory changes recognizing such expenditures as counting toward the MOE requirement are likely to be necessary. Similarly, the state TANF plan may also need to be amended to recognize such expenditures. We note that neither a statutory change nor a state plan amendment would impact eligibility rules for CalWORKs assistance. Analyst’s Recommendation. We are working with the Department of Social Services to refine the estimate of countable MOE spending. Once this amount is determined, we would recommend that the CalWORKs budget reflect all countable SSP, nonemergency health, and subsidized child care expenditures toward the MOE requirement in 2002-03, and that the department amend the state TANF plan accordingly. We recommend that the Legislature adopt the necessary statutory changes to recognize these expenditures as MOE-eligible. Recognizing additional MOE-countable spending creates options and policy trade-offs for the Legislature, which we discuss below. One option is to count General Fund expenditures in CalWORKs above the MOE requirement toward California’s remaining match requirement for the federal Welfare-to-Work block grant. We note that the remaining obligation–$69 million–must be spent by the end of 2003-04. Alternatively, if the Legislature wants to maintain CalWORKs spending at (or as close as possible to) the MOE floor, the Legislature could simply reduce General Fund spending in CalWORKs. This would be possible either by replacing General Fund monies with available TANF funds from the reserve, or, to the extent TANF funds are unavailable, through a program reduction. We note that the maximum General Fund savings that could be achieved without a program reduction would be $40 million (the proposed TANF reserve). [bookmark: _Toc1355604]Other Budget and Policy Issues [bookmark: _Toc1355605]Budget Proposes Redirecting County Performance Incentives The Governor’s budget proposes to redirect $189 million in unspent county performance incentives in 2001-02 and 2002-03. We comment on the advantages and disadvantages of this proposal. Background. Prior to 2000-01, the CalWORKs statute provided that savings resulting from (1) exits due to employment, (2) increased earnings, and (3) diverting potential recipients from aid with one-time payments, would be paid to the counties as performance incentives. The 2000-01 budget trailer bill for social services–Chapter 108, Statutes of 2000 (AB 2876, Aroner)–changed the treatment of performance incentives in several important ways. Among these changes, it: \u00b7 Prohibited counties from earning new incentives beginning in 2000-01 until the estimated prior obligation owed to the counties had been paid by the state. \u00b7 Made future performance incentive payments subject to annual budget act appropriations, rather than being treated as an \”entitlement.\” Performance Incentives Expenditures. By the end of 1999-00, the last year for which an appropriation for new performance incentives was made, counties had earned approximately $1.2 billion in performance incentives, and had been paid $1.1 billion. The 2001-02 Budget Act appropriated an additional $20 million to the counties, as payment towards the prior-year obligation for previously earned incentives ($97 million). However, as of October 2001, counties had spent only $161 million of their paid incentive funds, leaving $931 million in unspent funds. The department estimates that by the end of 2001-02, approximately $600 million in performance incentive funds will remain unspent. Budget Proposal. In order to reduce CalWORKs funding pressures in 2002-03, the Governor proposes to redirect $189 million in unspent performance incentives to fund CalWORKs grants, basic services, and administration. Specifically, the Governor proposes budget trailer bill language to redirect the $20 million appropriation in 2001-02. In addition, the Governor proposes to (1) reclaim the estimated $600 million in unspent performance incentives in 2002-03, (2) reappropriate $431 million of the reclaimed amount to the counties as performance incentive funds, and (3) redirect the \”recaptured\” $169 million for grants, basic services, and administration. If the Legislature approves the redirections, the state’s unpaid obligation to the counties for prior-year performance incentive earnings will be $266 million ($169 million plus the full prior-year obligation of $97 million). Policy Considerations. The amount of unspent performance incentives to be reappropriated to the counties in the budget year, versus the size of the state’s out-year obligation to repay the counties for previously earned performance incentives, is a policy decision for the Legislature. Specifically, the Legislature could retain more than the proposed $169 million redirection of unspent funds. These funds could be used, for example, to provide the statutory COLA (described earlier in our analysis of this program), augment the TANF reserve for future program needs, or to reduce General Fund expenditures through one of the methods described earlier in our analysis of the MOE requirement. The disadvantages of retaining additional incentive funds are that it (1) increases the obligation to the counties in the out-years and (2) reduces the level of services that counties are able to provide with these funds. We note that some counties believe their employment services allocations are insufficient to provide necessary services, and rely on performance incentive funds to provide such services. [bookmark: _Toc1355606]Budget Expands County Block Grant But Proposed \”Holdback\” Is Disruptive The Governor proposes three significant changes to the California Work Opportunity and Responsibility to Kids budgeting system. These changes include (1) funding county administrative and employment services costs at their current-year levels, (2) substantially expanding the county block grant, and (3) retaining up to 5 percent of the county allocations to pay for potential cost increases for assistance payments. We recommend that the Legislature (1) build on the Governor’s county block grant proposal by including additional Temporary Assistance for Needy Families (TANF) allocations in this block grant but (2) reject the proposed 5 percent \”hold-back\” and instead establish a larger TANF reserve to pay for the potential program cost increases. The CalWORKs Budget System. Funding for CalWORKs employment services, child care, and program administration are provided to the counties in a block grant known as the \”single allocation.\” Counties have the discretion to move these block grant funds among programs in order to address actual need at the local level. Beginning in 2000-01, the budgeting system for the employment services component of the single allocation was changed from a statewide model to a county-driven system based on projected county costs, similar to the system used to budget the administrative cost component of the single allocation. Under this system, known as the proposed county administrative budget (PCAB) process, the department reviews the counties’ PCAB requests for consistency with state law and workload needs and adjusts the county funding requests accordingly. Budget Proposal. The budget proposes three significant changes to the CalWORKs budgeting system. These changes include (1) suspending the PCAB process, (2) replacing the single allocation with an expanded block grant known as a \”county program grant,\” and (3) retaining up to 5 percent of the county allocations to cover potential cost increases for assistance payments. \u00b7 PCAB Suspension. Due to funding pressures in the CalWORKs program, the budget proposes to suspend the PCAB process for 2002-03. (This suspension also applies to funding for county administrative costs for Medi-Cal, Foster Care, and Food Stamps.) Specifically, the budget proposes to fund county administrative and employment services costs at their current-year funding levels, adjusted for caseload changes. Current funding levels will not be adjusted for inflation. Analyst’s Comments. Given the state’s fiscal situation, suspending PCAB for CalWORKs and the administration of other health and social services programs appears prudent. It is difficult to estimate the savings to the CalWORKs program of suspending PCAB in the budget year. We note that in 2001-02, the budget for administration and employment services was frozen at the 2000-01 level, due to funding pressures. As a result, in the current year the counties’ single allocations were approximately $250 million lower than what the counties had requested. Assuming the counties’ funding requests for 2002-03 would have been at least equal to their 2001-02 requests, suspending PCAB in the budget year would result in savings to the CalWORKs program of about $250 million (the exact amount depends on what the department would have approved in the absence of funding pressures). We note that from the perspective of the counties, such program savings mean that the budget for core services and administration is underfunded. \u00b7 County Block Grant. The Governor proposes budget and budget trailer bill language to replace the county single allocation with a new county block grant, known as the \”county program grant.\” In addition to the single allocation funding for services, administration, and child care, the county block grant will include $109 million in funding currently earmarked for mental \u00b7 health and substance abuse treatment and $201 million in funding currently earmarked for probation camps and juvenile treatment facilities. Rolling these separate allocations into a county block grant will increase county flexibility to move funds across program purposes as needed. It is our understanding that the department will introduce trailer bill language to prevent counties from using this increased funding flexibility to supplant existing county expenditures for probation and juvenile treatment services. Analyst’s Recommendation. We believe that counties are in the best position to weigh the service needs of their CalWORKs caseloads against various competing county priorities, both within and outside of the CalWORKs program. We therefore believe that increasing county flexibility to determine the best use of available TANF funds has a sound policy basis. For this reason, we recommend building on the Governor’s county block grant proposal by including additional proposed TANF funds currently categorically allocated to other agencies. Specifically, the Governor proposes to pass through $44 million in TANF funds to various state agencies and community-based organizations that provide (1) employment and educational services to CalWORKs recipients and (2) teen pregnancy prevention services. These agencies and organizations include the California Community Colleges, the State Department of Education, the Department of Health Services, and local Boys and Girls Clubs. We believe that counties are best able to evaluate the educational and employment needs of their caseloads, and to consider those needs in the context of available funding for other basic services, child care, and program administrative costs. Similarly, we believe that counties are in the best position to evaluate the effectiveness of local pregnancy prevention efforts and to weigh the merits of such efforts with competing TANF funding priorities within the CalWORKs program. Therefore, without prejudice to the merits of the particular services that would be funded with the proposed $44 million pass-through, we recommend that the Legislature include those TANF categorical allocations in the county block grant allocation. Counties would have the flexibility to contract with local colleges, universities, and community-based organizations on an as-needed basis. \u00b7 Holdback of County Allocations. The budget proposes budget bill language to retain up to 5 percent (approximately $95 million) of the county block grant allocations to cover potential cost increases for assistance payments in CalWORKs or the Kinship Guardianship Assistance Payment Program (Kin-GAP)a program that enables dependent children to exit the foster care system and live with a relative guardian. Both CalWORKs and Kin-GAP assistance payments are entitlements, meaning that if grant costs exceed budget authority, funding is automatically provided to pay for the increased costs. Under current law, unanticipated increases in program costs due to caseload growth or changes in federal law would be funded automatically with either TANF or General Fund resources. Under the Governor’s proposal, such program cost increases would instead be funded first from the 5 percent holdback funds, which would otherwise support employment services and program administration. In other words, the Governor proposes to use up to approximately $95 million of county program grant funds to mitigate the potential General Fund impact of unanticipated caseload growth. Analyst’s Recommendation. The primary disadvantage of the Governor’s 5 percent holdback proposal is that the potential $95 million reduction in county block grant funding would result in a lower level of employment services and a lower level of funding for county administrative costs. Additionally, because the actual amount of county funds that will ultimately be redirected for grant payments is unspecified, the Governor’s proposal is disruptive to the counties’ planning process and their ability to budget for employment services and administrative costs. While we recognize the need to limit the risk to the General Fund in the budget year given the General Fund condition, we believe that a less disruptive approach to protecting the General Fund in the event of unanticipated caseload growth would be to establish a larger TANF reserve. This could be accomplished either through an outright program reduction (for example, reducing the level of employment services), or by retaining a portion of the proposed $431 million reappropriation for performance incentives (discussed earlier in our analysis of this program). In our view, these incentive funds are not as necessary for core program services as the basic allocation for employment services. We therefore recommend that the Legislature reject the Governor’s 5 percent \”holdback\” of the county block grant. To the extent the Legislature wishes to augment the TANF reserve for the purpose of protecting the General Fund, we would recommend that the Legislature retain a portion of the proposed reappropriation for performance incentives. [bookmark: _Toc1355607]CalWORKs Needs Long-Term Budget Plan Absent legislative action, funding pressures in the California Work Opportunity and Responsibility to Kids (CalWORKs) program will continue to erode the program’s welfare-to-work component (employment services and administration). Accordingly, the Legislature faces difficult policy choices in determining the appropriate level of CalWORKs funding. We present policy considerations for the Legislature in developing a long-term budget plan for CalWORKs. Background. Since its enactment in 1997, CalWORKs funding has remained essentially stable. The program’s relatively flat funding level is due to a fixed amount of TANF block grant funds and the state’s decision to limit its share of funding to the minimum MOE spending requirement. This funding level was sufficient to support the CalWORKs program in its early years for several reasons. Prior to the current year, the continuous caseload decline, coupled with the relatively slow implementation of the employment services component of the CalWORKs program, resulted in TANF reserves that were sufficient to fully fund the program’s core elementsgrants, basic employment services, and child careas well as to provide the counties with approximately $1 billion in performance incentive funds, which could be spent on \”noncore\” program enhancements. Beginning in 2000-01, however, no new funding has been provided for performance incentives. Further, in 2001-02, the budget for the welfare-to-work component (employment services and administration) was frozen at the 2000-01 level due to funding pressures. These pressures resulted from a combination of a slowing caseload decline, a matured welfare-to-work component, and fewer carryover TANF funds available from prior years. Our February 2001 report on Changing the Employment Services Budget Process provided further evidence of upcoming funding pressures. Specifically, we showed that some counties’ employment services and administrative cost allocations were underfunded. Building on this prior analysis, we find that in 2001-02, 11 counties (representing approximately 50 percent of the statewide caseload) had welfare-to-work allocations that were below a minimum funding standard that we calculated based on 1999-00 allocations to Riverside and San Bernardino Counties. (These are two relatively large counties with programs that have no particularly high-cost components, but are nevertheless successful in engaging the majority of participants who are subject to the CalWORKs work participation requirements.) The cost of bringing all counties up to this standard (without redistributing funding from the higher-funded counties) would be approximately $125 million. Legislature Requests New Budgeting Methodology. Recognizing the likelihood that funding pressures would continue to intensify in future years, in 2001 the Legislature adopted budget trailer bill language directing the department to develop a new budgeting methodology for all components of the CalWORKs program as well as all non-CalWORKs programs funded with TANF funds. This methodology was due to the Legislature by November 15, 2001, and was to be the basis for the 2002-03 budget. Governor’s Budget Does Not Incorporate New Methodology. Although the department met with stakeholders as directed, the department has not submitted a new budgeting methodology to the Legislature, nor is the Governor’s budget based on a new methodology. Instead, the Governor again proposes to use the budget for the welfare-to-work component as the \”balancing entry\” in order to maintain CalWORKs expenditures within available resources. Specifically, the budget proposes to (1) continue to freeze the county allocations for employment services and administration and (2) retain up to 5 percent of these allocations to cover potential cost increases for assistance payments. In addition, the budget \”reclaims\” $169 million in performance incentives from the counties in order to fund core program elements without exceeding the MOE floor. (These issues are discussed earlier in our analysis of this program.) The Governor’s budget summary further indicates that funding pressure in future years will be addressed by reducing the county allocations as necessary. Policy Considerations for the Legislature. As noted above, in certain counties the CalWORKs welfare-to-work component is underfunded in the current year. Because the Governor proposes to freeze budget-year allocations, this underfunding would persist in 2002-03. Funding pressures within CalWORKs are likely to intensify in future years, for several reasons. These include the potential for continued caseload increases as a result of the recession, counties exhausting their performance incentive funds, reductions in the level of TANF carryforward balances, the cost of providing the statutory COLA, and the potential for reduced federal funding pursuant to TANF reauthorization. These pressures will be only partially offset by savings due to some recipients reaching their five-year time limit on cash assistance. We believe the CalWORKs program requires a long-term budget plan to address these fiscal pressures. We have identified several issues for legislative consideration in developing such a plan. These include (1) whether to maintain General Fund spending at the MOE floor, (2) the relative importance of fully funding employment services versus maintaining grant levels, and (3) whether to standardize funding allocations for employment services and administration. \u00b7 Should the Legislature Fund CalWORKs Above the MOE Floor? Since CalWORKs was enacted, the Legislature has taken steps to maintain General Fund spending at the MOE floor. Prior to the current year, this budgeting approach was possible without funding reductions in core program elements. However, as caseloads increase and available resources decrease, maintaining General Fund spending at the MOE floor will require reductions either in the employment services level or in the level of assistance payments. The decision about whether to exceed the minimum state spending requirement therefore involves balancing the benefits of budgetary savings against the impact on CalWORKs families of a program reduction. \u00b7 How Should the Legislature Weigh Funding of Grants Versus Services? The decision about the appropriate funding level for CalWORKs also involves weighing the relative importance of two primary goals of a welfare-to-work program: (1) providing an adequate level of cash assistance to enable needy families to maintain a minimum standard of living and (2) providing an adequate level of employment services to enable recipients to gain the skills needed to work and eventually become self-sufficient. Investing in employment services is especially important given the lifetime limit on cash assistance for adult recipients. However, the costs of this investment must be balanced against the costs of ensuring that needy families are provided with sufficient income maintenance. We note that if the Legislature elected to reduce grants, about 45 percent of any such reduction \u00b7 would be offset by an increase in federal food stamp benefits. Current law–like the Governor’s budget–favors preserving grant payments at the expense of funding employment services. Specifically, grant payments are an entitlement under state law, meaning that if grant costs are greater than budgeted, increased funding is automatically provided. State law also provides for statutory COLAs. Conversely, funding for employment services and county administration is capped by the annual budget appropriation. Thus, absent legislative action to increase funding for employment services and administration (or to redirect funding from grant payments), funding pressures will continue to erode the welfare-to-work component of the CalWORKs program. \u00b7 How Should Funds Be Allocated to Counties? Finally, developing a long-term budget plan requires consideration of how funding for employment services and administration is allocated among counties. As noted above, current funding allocations per aided adult vary widely across the counties. Such variation in allocations raises concerns about equitable access to employment services. In determining whether to implement a more equitable allocation process, the Legislature could consider allocating all funding for employment services and administration on a per-aided adult basis (because adults receive the employment services). Final allocations could be adjusted for high- and low-cost regions and for small counties with high fixed costs. In order to avoid unnecessary disruption, this change could be phased in over two to three years. Alternatively, in recognition that some variation in county allocations is to be expected–given differences in local economic conditions, costs of providing services, and program designs–the Legislature could consider standardizing funding only for the program administration component of the county allocation, and leaving intact the current allocation formula for employment services. For example, after determining an appropriate caseworker-to-recipient ratio, county funding for administration could be based on the number of cases with an adult. Again, adjustments could be made for high- and low-cost regions. Summary. The Legislature faces difficult policy choices in determining the appropriate level of CalWORKs funding. Given the state’s fiscal situation, the Governor’s approach of freezing the budget for employment services and administration may be appropriate in the budget year. However, for future years, we believe that the Legislature should establish its priorities with respect to (1) the level of General Fund support for CalWORKs (whether or not to go above the MOE floor), (2) the relative importance of income maintenance (grant payment levels) versus employment services, and (3) addressing the current inequities in funding allocations for employment services and administration. Given caseload and cost trends, we believe that continuing the practice of spending at the MOE floor is likely to result in further underfunding of the program. [bookmark: _Toc1355608]Eliminate CalWORKs Grant Payments Under $150 We recommend eliminating grant payments for families with incomes (including earnings and benefits) of at least 122 percent of the federal poverty level. Such families currently receive relatively modest grant payments (up to about $150 monthly). Removing these families from cash assistance would preserve their time on aid for future periods during which they may become unemployed, and would result in program savings of approximately $37 million. (Reduce Item 5180-101-0890 by $37 million.) CalWORKs Grant Payments. Under the CalWORKs income disregard policy, a portion of a recipient’s earnings is disregarded for the purpose of calculating the family’s grant payment. This policydesigned to \”make work pay\”means that a working family of three would remain eligible for cash assistance as long as the family’s monthly earnings are below $1,583 (130 percent of the federal poverty level). For example, a family of three with earnings of $1,400 would receive a grant of $91. While families with significant earnings receive relatively modest grant payments, the months in which they receive such payments are still counted toward their 60-month lifetime limit on cash assistance. Interaction of Income Disregard Policy With Time Limits. We believe the earned income disregard policy is an important component of any welfare program that is designed to encourage recipients to make the transition from welfare to work. However, there is an inherent tension between California’s relatively generous disregard policy and the CalWORKs lifetime limit on cash assistance. Specifically, the 60-month time limit may motivate recipients to leave assistance as soon as possible in order to preserve any remaining months on assistance for the future. However, the disregard policy enables working families to continue to receive increasingly modest grant payments until their earnings are well above the federal poverty level. Analyst’s Recommendation. We recommend eliminating grant payments for families with total incomes (including earnings and benefits) of at least 122 percent of the federal poverty level. Under this policy, a family of three could lose up to $150 in cash assistance. This would be partially offset by an increase of about $68 in food stamp benefits, leaving the family’s total income at approximately 116 percent of the federal poverty level. While this policy would reduce a family’s total income somewhat, it would preserve the family’s remaining time on aid for periods in which the recipient might become unemployed or unable to work. We note that currently families who leave cash assistance due to earnings may receive up to 12 months of post-employment services after leaving aid (at county option). We estimate that this policy change would result in grant savings of approximately $19 million. In addition, we estimate that the administrative savings associated with this policy change would be approximately $18 million. Such savings (mostly TANF funds) could be used to augment the TANF reserve for future program needs, increase county block grant allocations (described earlier in our analysis of this program), partially adjust grant payments for inflation (in place of providing the full statutory COLA, also described earlier), or to reduce General Fund expenditures through one of the methods described earlier in our analysis of the MOE requirement. [bookmark: _Toc1355609]Reinstate Senior Parent Deeming We recommend that a senior parent’s income be counted for the purpose of determining financial eligibility of a minor parent’s child for California Work Opportunity and Responsibility to Kids assistance. This would result in program savings of approximately $11 million. (Reduce Item 5180-101-0890 by $11 million.) Current Law. Under the Teen Pregnancy Disincentive policy–enacted by Chapter 307, Statutes of 1995 (AB 908, Brulte)–a minor parent is generally required to live with her parent(s) (referred to as \”senior parents\”) in order to receive cash assistance. (Certain exceptions exist, for example, in cases in which the senior parent’s home is unsafe for the minor parent and\/or her child.) Although the minor parent cannot open her own CalWORKs case, the senior parent may apply for and receive aid on behalf of the grandchild, even if the senior parent’s income would otherwise make the family ineligible for assistance. We note that prior to the implementation of the Teen Pregnancy Disincentive policy, the senior parent’s income was \”deemed\” to the grandchild–meaning that the grandparent’s income was considered to be available for the support of the grandchild, and therefore counted for the purpose of determining eligibility of the grandchild for cash assistance. Policy Considerations. The advantage of current law is that it may encourage teen parents to live with their own parents, in what may be a more appropriate child-rearing environment than if the teen parent lived on her own. (We note that if the teen moved out, she would generally not be entitled to a grant for herself or her child pursuant to Chapter 307.) The disadvantage of guaranteeing an aid payment for the minor parent’s child (current law) is that it permits nonneedy families to receive cash assistance by establishing a \”child-only\” case. Because such cases do not include an adult, the family is not subject to either the CalWORKs work participation requirement or the 60-month lifetime limit on cash assistance. Analyst’s Recommendation. The primary mission of the CalWORKs program is to help needy families with children become self-sufficient through work. Providing income support to nonneedy child-only cases with no participation requirements is not consistent with that mission. We therefore recommend that the Legislature reinstate senior deeming in the case of a minor parent living at home. Reinstating senior deeming would result in about 3,000 nonneedy child-only cases (approximately 2 percent of the child-only caseload) losing monthly cash benefits of about $320. We estimate that this policy change would result in savings of approximately $11 million (mostly TANF funds). Such savings could be used to augment the TANF reserve for future program needs, increase county block grant allocations (described earlier in our analysis of this program), partially adjust grant payments for inflation (in place of providing the full statutory COLA, also described earlier), or to reduce General Fund expenditures through one of the methods described earlier in our analysis of the MOE requirement. [bookmark: _Toc1355610]The CalWORKs Child Care Program As part of systemwide child care reforms, the Governor proposes to eliminate the Stage 3 \”set-aside\” designed to provide former CalWORKs families with child care beyond the two-year guarantee for such services. We review the Governor’s child care reform proposals and their impact on the CalWORKs program. The CalWORKs Child Care System. Under current law, CalWORKs child care is delivered in three stages. Stage 1 is administered by county welfare departments and begins when a participant enters CalWORKs. Participants transition to Stage 2, which is administered by the State Department of Education (SDE), once their situations become stable as determined by the counties. Participants can stay in Stage 2 while they remain on CalWORKs and for up to two years after they leave CalWORKs. Stage 3 refers to the broader subsidized child care system administered by SDE that serves both former CalWORKs recipients and working poor families who have never been on CalWORKs. Because there typically are waiting lists for Stage 3, in 1997 the Legislature created the Stage 3 \”set-aside\” as part of the CalWORKs child care system in order to provide continuing child care for former CalWORKs recipients who are unable to find \”regular\” Stage 3 child care once they \”time-out\” of Stage 2. Budget Proposal. The Governor’s budget proposes $1.3 billion for CalWORKs child care. This is a decrease of $271 million (17 percent) over the current-year appropriation. As discussed below, this decrease is due to savings associated with the Governor’s child care reform proposals. Figure 4 summarizes the proposed spending plan. As the figure shows, the budget includes a reserve of $164.7 million for Stage 1 and Stage 2 child care. This total includes a \”hold back\” of 5 percent of the estimated need for Stages 1 and 2 ($64.7 million). The remaining $100 million is above the estimated need and represents a \”true\” reserve for Stages 1 and 2. Figure 4 CalWORKs Child Care Estimated Children Served and Proposed Budget 2002-03 (Dollars in Millions) Funding Estimated Number of Children Served Total TANF CCDF General Fund a Stage 1 78,500 $472.4 $353.2 \u2014 $119.2 Stage 2 117,000 607.0 351.7 $43.5 211.8b Child care reservec 29,500 164.7 164.7 \u2014 \u2014 Stage 3 set-asided 14,500 80.6 \u2014 47.2 33.4e Totals 239,500 $1,324.7 $869.6 $90.7 $225.5 a General Fund used toward CalWORKs maintenance-of-effort requirement. b Proposition 98 funds including $15 million in the California Community Colleges. c The reserve will be allocated to Stage 1 or Stage 2 depending on actual need. d One-time funds to provide child care to families expected to \”time out\” of Stage 2 between July 1, 2002 and the end of March 2003. e Proposition 98 funds. Governor’s Child Care Reform Proposal. The Governor proposes to reform California’s subsidized child care system (which includes both CalWORKs and non-CalWORKs child care) by modifying current eligibility rules, reimbursement rate limits, and family fees. Specifically, the Governor proposes to reduce income eligibility limits, reduce reimburse ment rates, implement fees for lower-income families, and increase current fees for higher-income families. Impact on CalWORKs Child Care. The department estimates that the proposed reforms will result in savings of approximately $183 million ($50 million in Stage 1 and $133 million in Stage 2). These savings result from a combination of higher family fees, lower reimbursement rates, and some families losing eligibility for CalWORKs child care. Specifically, about 6,000 children would lose eligibility. Additionally, many CalWORKs families will be responsible for a child care copayment for the first time. Families would be required to pay such fees directly to their child care providers. We note that the Governor proposes to reinvest the savings resulting from this proposal, thereby increasing the number of child care slots. Eliminating the Long-Term Guarantee. In addition to these systemwide changes to California’s subsidized child care system, the Governor also proposes to eliminate the Stage 3 set-aside for former CalWORKs recipients who have timed-out of Stage 2. Specifically, the Governor’s budget includes funding for Stage 3 child care through the end of 2002-03 for families who time-out of Stage 2 between July 2002 and March 2003. Most families who will transition from Stage 2 during 2002-03 will thus be guaranteed Stage 3 child care through the end of the budget year. The proposed Stage 3 phase-out therefore results in minimal budget risk associated with former recipients returning to aid due to a lack of child care in 2002-03. However, the Governor’s proposal may represent a budget risk in the out-years to the extent that the broader subsidized child care system is unable to absorb families who will time out of Stage 2 beginning in April 2003 as well as those families who will lose their Stage 3 guarantee at the end of 2002-03. Policy Considerations. The primary advantage of eliminating the Stage 3 set-aside is that it would create more equitable access to subsidized child care. Specifically, ending the child care guarantee for former CalWORKs recipients who have been off aid for at least two years would help ensure that working poor families with similar income levels have an equal chance of receiving subsidized child care regardless of whether they have ever received CalWORKs assistance. The disadvantage of this approach is that former CalWORKs recipients–having received aid in the past–may be more likely to go back on CalWORKs if they lose their child care than would a non-CalWORKs working poor family, even though the incomes of the two families may be very similar. [bookmark: _Toc1355611]No Penalty for Cash Management Violation As directed by the U.S. Department of Health and Human Services, California will return unspent Temporary Assistance to Needy Families funds drawn down in violation of the Cash Management Improvement Act, along with interest earned on the advance draw-down funds, but will incur no penalties. In our Analysis of the 2001-02 Budget Bill, we indicated that California’s practice of paying counties performance incentives when they are earned, rather than when they are used for program purposes, may not be consistent with the Cash Management Improvement Act (CMIA) and U.S. Department of Health and Human Services (DHHS) regulations. In August 2001, the Administration for Children and Families (ACF), DHHS–which administers the TANF program–notified the department that California’s advance draw down of TANF funds for county performance incentives was in violation of both CMIA and DHHS regulations. The ACF directed the department to return the unexpended incentives, including any interest earned on the funds. To avoid any penalties, the department has negotiated the use of an offset process to recoup the unspent incentives, whereby no new TANF funds will be drawn down for assistance payments until the unspent incentives have been \”repaid.\” The ACF has further agreed to accept the actual interest that counties have earned on the awarded incentives, rather than an amount based on an augmented (penalty) interest rate. Counties have been instructed to remit the interest they have earned through the end of 2001-02 by July 31, 2002. [bookmark: _Toc1355612]Withhold Recommendation on Impact of Federal Eligibility Changes We withhold recommendation on the estimated cost of recent federal eligibility changes, pending review of the Governor’s May Revision of the budget. Eligibility for CalWORKs is based on a number of factors, including the value of a household’s assets. State law conforms the CalWORKs asset rules to the federal food stamp rules. As a result of recent federal food stamp changes affecting how vehicles are valued for the purpose of determining eligibility, more households are now eligible for CalWORKs assistance. These eligibility changes only went into effect in June 2001. We believe that by the time of the Governor’s May Revision, when more actual caseload data are available, the impact of these changes should largely be reflected in the basic caseload trend. We therefore withhold recommendation on the estimated cost of the federal changes pending review of the Governor’s May estimates. [bookmark: _Toc1355851]Food Stamps Program This program provides food stamps to low-income persons. With the exception of the state-only food assistance program (discussed below), the cost of the food stamp coupons is borne by the federal government ($1.6 billion). Administrative costs are shared between the federal government (50 percent), the state (35 percent), and the counties (15 percent). [bookmark: _Toc1355852]California Food Assistance Program Federal Restrictions on Benefits for Noncitizens. With respect to noncitizens, current federal law generally limits food stamp benefits to legal noncitizens who immigrated to the U.S. prior to August 1996, and are under the age of 18 or were at least 65 years old as of August 1996. State Program for Noncitizens. In response to these federal restrictions, the California Food Assistance Program (CFAP) was created in 1997 to provide state-only funded food stamp benefits to (1) pre-August 1996 legal immigrants who are ineligible for federal benefits, and (2) a very limited number of post-August 1996 legal immigrants whose sponsors are dead, disabled, or abusive. In 1999 and again in 2000, CFAP eligibility was temporarily expanded to include all post-August 1996 legal immigrants who were otherwise eligible but for the fact they arrived after August 1996. Chapter 111, Statutes of 2001 (AB 429, Aroner), made this expansion permanent. The CFAP purchases food stamp coupons from the federal government and distributes them to eligible recipients. Adult recipients are subject to a specified work requirement. [bookmark: _Toc1355853]Assumed Federal Eligibility Restoration Creates Some Budget Risk The Governor’s budget assumes that federal food stamp eligibility will be restored for all otherwise eligible legal immigrants. This assumption represents a budget risk of up to $35 million General Fund. However, recent federal developments suggest that federal food stamp benefits will be restored for most legal immigrants, thus substantially mitigating the risk to the General Fund. Budget Proposal. The budget assumes that federal food stamp eligibility will be restored for all otherwise eligible legal immigrants, effective July 1, 2002. Essentially, this means that legal immigrants who entered the country after August 1996 would be eligible for federally funded food stamp benefits. The budget therefore proposes no funding for CFAP in 2002-03. We note that the Governor does not propose a statutory change to eliminate CFAP in the absence of such federal action. If federal eligibility were not restored for those immigrants currently eligible for CFAP, approximately 101,000 legal immigrants would receive CFAP benefits in 2002-03. This would represent a 2 percent increase over the estimated 2001-02 caseload. The projected state costs of the CFAP program in 2002-03 would be approximately $106 million absent federal action. This includes $80 million for the benefit coupons and $26 million for administrative costs. General Fund Savings. Although CFAP costs absent federal action are estimated to be $106 million, the restoration of federal food stamp eligibility for the CFAP caseload would result in net General Fund savings of only $35 million. Net savings are less because of (1) the offsetting state costs of administering federal food stamp benefits for the newly-eligible caseload (approximately $10 million), and (2) the need to replace countable CFAP maintenance-of-effort (MOE) spending with California Work Opportunity and Responsibility to Kids (CalWORKs) MOE spending (discussed below). As described in the \”CalWORKs\” section of this Analysis, California must meet a minimum spending requirement in order to receive the federal Temporary Aid for Needy Families block grant. Since the creation of CFAP in 1997, California has counted the portion of CFAP spending for families with children toward this MOE requirement. In 2002-03, absent restoration of federal eligibility, approximately $58 million of the projected CFAP costs would be counted in this way. In order to maintain MOE compliance, the Governor’s budget increases General Fund spending in the CalWORKs program by the same $58 million. For technical reasons, additional county MOE spending of $3 million would be shifted to the General Fund as well. Together with the offsetting food stamp administrative costs, these shifts reduce total General Fund savings to only $35 million. Pending Federal Action. There are two pending federal proposals to restore food stamp eligibility to legal immigrants. We note that both proposals are somewhat more narrow than the Governor’s restoration assumption. Under the Bush administration proposal, benefits would be restored to all otherwise eligible legal immigrants who have lived in the United States for at least five years. At the time this analysis was prepared, this proposal was expected to be incorporated into the President’s February budget proposal for federal fiscal year (FFY) 2003. The farm bill under consideration by the U.S. Senate (S.1731) would also restore federal food stamp benefits, but for an even more narrow group of immigrants. Specifically, eligibility would be restored to immigrants who have worked in the country for at least four years and to recent immigrants who are under 18, blind, or disabled. The Department of Social Services has estimated the net General Fund savings compared to current law associated with both proposals. Assuming the Bush administration’s proposal becomes law effective October 1, 2002 (the start of the new FFY), the resulting net General Fund savings would be approximately $25 million in 2002-03 ($10 million below the savings assumed in the Governor’s budget). Under the U.S. Senate’s version of the farm bill, net savings would be approximately $14 million ($21 million below the savings assumed in the Governor’s budget). This estimate also assumes that restoration would be effective October 1, 2002. Budget Risk. As noted above, the Governor does not propose eliminating CFAP in the absence of federal action to restore eligibility. As a result, because federal proposals to restore benefits are still pending, the Governor’s proposal represents a risk to the General Fund of up to $35 million (the net General Fund savings assumed in the Governor’s budget). We will continue to monitor federal legislative actions and advise the Legislature accordingly. Return to Health and Social Services Table of Contents, 2002-03 Budget Analysis [bookmark: _Toc1355884]Supplemental Security Income\/State Supplementary Program The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $3 billion from the General Fund for the state’s share of SSI\/SSP in 2002-03. This is an increase of $228 million, or 8.1 percent, over estimated current-year expenditures. This increase is due primarily to the full-year cost of grant increases provided in the current year, caseload growth, and an increase in the federal administrative fee. In November 2001, there were 336,478 aged, 21,780 blind, and 739,852 disabled SSI\/SSP recipients. In addition to these federally eligible recipients, the state-only Cash Assistance Program for Immigrants is estimated to provide benefits to about 11,800 legal immigrants in November 2001. [bookmark: _Toc1355885]Budget Proposes to Suspend State Cost-of-Living Adjustment By proposing to suspend the statutory cost-of-living adjustment, the budget achieves General Fund savings of $127 million compared to current law. Background. Under current law, both the federal and state grant payments for SSI\/SSP recipients are adjusted for inflation each January. The cost-of-living adjustments (COLAs) are funded by both the federal and state governments. The state COLA is based on the California Necessities Index (CNI) and is applied to the combined SSI\/SSP grant. The federal COLA (based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W) is applied annually to the SSI portion of the grant. The remaining amount needed to cover the state COLA is funded with state monies. Budget Impact of Governor’s Proposal. The Governor’s budget estimates that the CPI-W will be 1.8 percent and that the CNI will be 3.9 percent. Based on these assumptions, providing the state COLA on January 1, 2003 would result in a six-month General Fund cost of $133 million. Based on more recent actual data, however, the CNI will be 3.7 percent. Using the lower actual CNI, we estimate that suspending the state COLA in the budget year would result in a six-month savings of $127 million, a difference of approximately $6 million. Impact on Recipients. Figure 1 shows SSI\/SSP grants for January 2003 for individuals and couples under both current law and the Governor’s proposal. Although the budget proposes suspension of the state COLA, the budget includes the \”pass through\” of the federal SSI portion of the COLA, resulting in maximum monthly grant increases above the current year of $9 per individual and $15 per couple. Figure 1 SSI\/SSP Maximum Monthly Grants Current Law and Governor’s Proposal January 2002 and 2003 January 2003 Change from Current Law Recipient Category January 2002 Current Law Governor’s Budget Amount Percent Individuals SSI $545 $554 $554 \u2014 \u2014 SSP 205 224 205 -$19 -8.5% Totals $750 $778 $759 -$19 -2.5% Couples SSI $817 $832 $832 \u2014 \u2014 SSP 515 550 515 -$35 -6.4% Totals $1,332 $1,382 $1,347 -$35 -2.5% Although SSI grants increase under the Governor’s budget, the increase in the total grant is less than required by current law. Specifically, under the Governor’s proposal grants would be 8.5 percent less (for individuals) and 6.4 percent less (for couples) than current law. As a point of reference, the federal poverty guideline for 2001 is $759 per month for an individual and $968 per month for a couple. Thus, under the Governor’s proposal, the grant for an individual would be 6 percent above the 2001 poverty guideline and the grant for a couple would be 39 percent above the poverty guideline. (We note that the poverty guidelines are adjusted for inflation annually.) [bookmark: _Toc1355926]In-Home Supportive Services The In-Home Supportive Services (IHSS) program provides various services to eligible aged, blind, and disabled persons who are unable to remain safely in their own homes without such assistance. An individual is eligible for IHSS if he or she lives in his or her own home–or is capable of safely doing so if IHSS is provided–and meets specific criteria related to eligibility for the Supplemental Security Income\/State Supplementary Program (SSI\/SSP). The IHSS program consists of two components: the Personal Care Services Program (PCSP) and the Residual IHSS program. Services provided in the PCSP are federally reimbursable under the Medicaid program. The PCSP limits eligibility to categorically eligible Medi-Cal recipients (California Work Opportunity and Responsibility to Kids [CalWORKs] and SSI\/SSP recipients) who satisfy a \”disabling condition\” requirement. Personal care services include activities such as: (1) assisting with the administration of medications; and (2) providing needed assistance with basic personal hygiene, eating, grooming, and toileting. The following cases are excluded from the PCSP and, therefore, receive services through the Residual (state-only funded) IHSS program: cases with domestic services only, protective supervision tasks, spousal providers, parent providers of minor children, \”income eligibles\” (generally recipients with income above a specified threshold), \”advance pay\” recipients (eligible for payments prior to the provision of services), and recipients covered by third party insurance. The budget proposes $1 billion from the General Fund for the IHSS program, which is an increase of 12 percent over estimated current-year expenditures. This spending growth is primarily attributable to increases in the caseload and the wages paid to providers. [bookmark: _Toc1355927]Maximize Federal Funds Through Eligibility Changes Recipients who (1) hire relative caregivers or (2) pay their providers in advance of receiving service are not eligible for federal funding and must be served in the state-only \”residual\” program. In order to maximize federal funds in the In-Home Supportive Services program without reducing services to recipients, we recommend (1) recipients be required to elect nonrelative caregivers and (2) the advance payment option be eliminated. These changes result in General Fund savings of approximately $35 million. (Reduce Item 5180-111-0001 by $35,000,000.) General Fund Spending Has Nearly Quadrupled. From 1993-94 through 2001-02, IHSS has been the fastest growing social services program in terms of General Fund spending. During this time period, General Fund expenditures increased almost four-fold, rising from $232 million in 1993-94 to an estimated $903 million in 2001-02. This represents an average annual growth rate of about 19 percent. By comparison, General Fund spending in CalWORKs declined during this period and SSI\/SSP spending increased at an average annual rate of 4 percent. For 2002-03, the budget proposes about $1 billion for IHSS, just less than the combined General Fund spending for Foster Care and Child Welfare Services. In-Home Supportive Services is now the third largest social services program, behind only SSI\/SSP ($3 billion) and CalWORKs ($2.2 billion). Figure 1 shows General Fund spending from 1993-94 through 2002-03. Why Has Spending Grown So Rapidly? Total spending growth from 1993-94 through 2001-02 was about $670 million, mostly attributable to caseload growth, increases in the hours of service per client, and higher wages for providers. Specifically, caseload and service hour growth, in combination with inflation, account for about $220 million of the increase. Higher wages for providers account for an additional $335 million of program cost growth. (This $335 million results from both minimum wage increases–about $205 million–and from discretionary wage increases for providers–about $130 million.) We cannot specifically identify the cause of the remaining increase, but some of it is due to the impact of court cases. Controlling Costs By Increasing Federal Eligibility. As described above, the IHSS program is really two programs–the PCSP, which is 50 percent federally funded through the Medicaid program, and the residual program, which is funded exclusively with state and county funds. For 2002-03, about 210,000 recipients (75 percent) are in PCSP and about 75,000 recipients (25 percent) are in the residual program. Drawing down federal Medicaid funds in the PCSP saves about $2,000 per case, per year, compared to the residual program where no such federal funding is available. [image: http:\/\/www.lao.ca.gov\/analysis_2002\/health_ss\/health_20_1.gif] Relative Caregivers and Advance Payment Cases Not Federally Eligible. Under current law, IHSS cases in which recipients elect to have a relative act as their caregiver are not eligible for federal funding and must be served in the state-only residual program. There are about 14,500 such cases in which the recipient’s caregiver is a relative, usually a spouse or parent. Current law allows certain severely disabled impaired recipients to receive payment before IHSS services are rendered. There are about 575 such \”advance payment\” cases, and, like cases with relative caregivers, they are not federally eligible. Analyst’s Recommendation. Requiring all IHSS recipients to elect nonrelative caregivers and eliminating the advance payment option would make about 15,000 IHSS cases eligible for federal funding, resulting in General Fund savings of about $30 million and county savings of about $18 million. Accordingly, we recommend enactment of legislation to require (1) all IHSS recipients to elect nonrelative caregivers and (2) to eliminate the advance payment option. This recommendation results in substantial savings without reducing services to IHSS recipients. It would require, however, that about 14,500 relative caregivers seek other part-time employment in order to maintain their household’s income. [bookmark: _Toc1355928]Governor Proposes to Suspend State Participation in Wage Increase By suspending the In-Home Supportive Services revenue \”trigger\” for state participation in higher wages for certain providers, the Governor’s budget achieves a General Fund cost avoidance of $26.7 million. State Participation in Wage Increases. Chapter 108, Statutes of 2000 (AB 2876, Aroner), authorizes the state to pay 65 percent of the nonfederal cost of a series of wage increases for IHSS providers working in counties that have established \”public authorities.\” The wage increases began with $1.75 per hour in 2000-01, potentially to be followed by additional increases of $1 per year, up to a maximum wage of $11.50 per hour. We note that state participation in wage increases after 2000-01 is contingent upon General Fund revenue growth exceeding a 5 percent threshold. Chapter 108 also authorizes state participation in health benefits worth up to 60 cents per hour worked. 2001-02: Wages Increased Absent Trigger. For 2001-02, revenue growth was below 5 percent. Thus, under the revenue trigger mechanism created by Chapter 108, state participation in a $1 per hour wage increase for public authority workers was not required. Nevertheless, state participation in a $1 wage increase to $8.50 per hour was provided, at a General Fund cost of approximately $23 million. 2002-03: Governor Proposes Suspending Trigger Mechanism. The Governor’s budget estimates that an economic recovery beginning in the spring of 2002 will result in revenue growth (excluding transfers) of about 12 percent between 2001-02 and 2002-03. Because revenue growth exceeds the 5 percent threshold, under current law, state participation in a $1 per hour wage increase would be triggered. Given the state’s difficult fiscal situation, the Governor proposes to suspend the application of this trigger. This results in a General Fund cost avoidance of $26.7 million in 2002-03. We note that the decision to override the trigger in 2001-02 means state participation in IHSS wages is already $1 higher than the level contemplated in Chapter 108. Thus, suspending the wage increase in 2002-03 would put wages at a level equal to what they would have been absent last year’s budget change. [bookmark: _Toc1355959]Child Welfare Services California’s state-supervised, county-administered Child Welfare Services (CWS) Program provides services to abused and neglected children, children in foster care, and their families. The CWS Program provides (1) immediate social worker response to allegations of child abuse and neglect; (2) ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect; and (3) services to children in foster care who have been temporarily or permanently removed from their family because of abuse or neglect. The 2002-03 Governor’s Budget proposes $1.9 billion from all funds and $590 million from the General Fund for CWS. This represents an increase of less than 1 percent from the General Fund over current-year expenditures. [bookmark: _Toc1355960]Maximize Federal Funds by Drawing Down Title IV-E Funds for Case Management Currently the state uses a combination of federal Temporary Assistance for Needy Families (TANF) funds and county funds to provide case management services for children in the child welfare system. We recommend (1) replacing the TANF funds with General Fund monies in order to draw down additional Title IV-E federal funds and (2) using the freed-up TANF funds to offset General Fund costs in the Department of Developmental Services. Together, these actions result in net General Fund savings of $31.6 million. Finally, we recommend that the Department of Social Services report at budget hearings on the potential to draw down more federal Title IV-E funds, thereby resulting in additional General Fund savings in both the current and budget years. (Increase Item 5180-151-0001 by $38,300,000 and reduce Item 4300-101-0001 by $69,900,000). Background. The Emergency Assistance (EA) Program, a component of the CWS Program, provides a variety of services to children who are placed in foster care or are at risk of foster care placement. Case management, one portion of the EA Program, provides funds for case planning and reviews; foster and adoptive parent orientation; and a variety of other services to support children and families in the CWS program. Current Budget Practice. Federal Title IV-E funds are the largest federal funding stream for child welfare and foster care services. The 2002-03 budget, however, does not propose to use Title IV-E funds to support EA case management services in the CWS program. Instead, the budget proposes to continue the existing practice of using a combination of federal Temporary Assistance for Needy Families (TANF) and county funds. Together, the TANF funds ($69.9 million) and the county funds ($12.3 million) total $82.2 million. While TANF funds are received in the form of a fixed block grant, Title IV-E funds are available to match state funds on a dollar-for-dollar basis. Substituting IV-E Funds for TANF Funds. If alternatively the state opted to draw down federal Title IV-E funds, the Department of Social Services (DSS) estimates that approximately 77 percent of California children in the CWS and foster care programs would be eligible for such funding in 2002-03. Thus, 77 percent of EA case management spending, or $63.3 million, would be eligible for 50 percent federal financial participation. The nonfederal costs of this option would be shared 70 percent state and 30 percent county. Accordingly, shifting the EA case management costs from TANF to Title IV-E would result in (1) a draw down of $31.6 million in federal Title IV-E funds, (2) a General Fund cost of $35.4 million, (3) an increase in county costs of $2.9 million (to a total of $15.2 million), and (4) $69.9 million in freed-up TANF funds. Converting the TANF Funds Into General Fund Savings. As described more fully in our analysis of the CalWORKs budget, TANF funds may be transferred into the Title XX Social Services block grant. Once transferred, they then may be used to offset General Fund costs in the community-based programs in the Department of Developmental Services (DDS). Taking the actions described above would free up $69.9 million in TANF funds. These funds could then be used to offset $69.9 million in General Fund costs in DDS. Combining this General Fund savings of $69.9 million in DDS with the $35.4 million General Fund cost in the EA case management program would result in net General Fund savings of $34.5 million, and county costs of $2.9 million. Analyst’s Recommendation. We recommend replacing $69.9 million in TANF spending for case management in the EA Program with $34.5 million from the General Fund. This action would draw down an additional $31.6 million in federal Title IV-E funds and would free up $69.9 million in TANF funds. We further recommend transferring this $69.9 million to the Title XX Social Services block grant and using the transferred funds to offset existing General Fund costs in the community-based programs in DDS. Taken together, these recommendations would result in a net General Fund savings of $34.5 million with no reduction in service or change in program operation. In order to hold counties harmless, we also recommend redirecting $2.9 million of the General Fund savings, back to the counties. Finally, given the potential for additional General Fund savings we recommend that DSS report at budget hearings on the potential to (1) draw down Title IV-E funds in the current year by changing our current claiming practice and (2) use Title IV-E funds to pay for other EA services. [bookmark: _GoBack] Figure 1 CalWORKs Caseload Decline Ends (Cases in Thousands 41,000 \u2014 Actuals 900 \u2014 Governor’s Budget 00 700 600 500 400 1996.97 1997-98 1998-99 1999-00 2000-01 2007-02 2002-03, Figure 1 In-Home Supportive Services General Fund Expenditures 1993-94 Through 2002-03 (in Millions) $1,200 4,000 200 600 400 200 93-94 94.95 95-95 96-97 97-93 98-29 99.00 00-01 01-02 02-03 Esl. Pro ean Att Ome Analysis of the 2002-03 Budget Bill Department of Social Services CalWORKs Program (5180) nd Respoaby Kas (AW rm med Chet Seno 197 AB eto thw cls bes \”io pis 8h 22 tk tin Ica ese mie 7 pene Alger CaO eae ‘Scere rane Ft ans pop Cawonkeptn whem ed anim nC DR Geter nd ‘ring hse mnt MOE emp The mee mCAMORKS otter by ror is mops ete De Wena adn le a at een is ea ane Caseload and Grants ”

” 2001-02 Analysis Legislative Analyst’s Office MAJOR ISSUES Health and Social Services \ufffd Adult Health Coverage Plan Misses Some Opportunities \ufffd The budget proposes to expand the Healthy Families Program to provide health coverage for the parents of enrolled children. We find that the proposal misses some opportunities to further reduce the ranks of the uninsured and to conform and simplify the Healthy Families and Medi- Cal Programs. We recommend that the Legislature consider (1) further expansion of parental coverage and (2) elimination of the Medi-Cal asset test (see page C-134). \ufffd Legislation Needed to Guide HIPAA Implementation \ufffd We recommend legislation be enacted to improve the oversight of state implementation of recent federal legislation\u2014the Health Insurance Portability and Account- ability Act (HIPAA)\u2014which requires significant changes in the state’s health data systems and operations. In addition, we recommend consolidating all appropriations for HIPAA activities into one central funding mechanism (see page C-19). \ufffd State Could Assist with Proposition 36 Implementation \ufffd Because the state has a stake in the potential success of Proposition 36, which sends certain adult drug offenders to drug treatment and community supervision instead of prison or jail, we offer the Legislature a number of options for legislative changes and state budget adjustments that could assist counties with their implementation of the measure (see page C-36). C – 4 Health and Social Services 2001-02 Analysis \ufffd Long-Term Care Services\u2014A Fragmented System \ufffd Our analysis of California’s long-term care programs finds that they comprise a fragmented service system, although current efforts are under way to improve coordination. We recommend modifying budget proposals for pilot projects for new approaches to long-term care to take advantage of available federal grant funding (see page C-50). \ufffd Reduce Children’s Length of Stay in Foster Care \ufffd Research indicates that (1) children stay longer in foster family agency (FFA) homes than in regular foster family homes, and (2) the needs of the children do not explain the longer stay. The higher payments made to FFAs may create a fiscal incentive for these agencies to keep children longer in foster care. We recommend enactment of legislation to conduct a three-year pilot project in which FFA treatment rates would incrementally decrease to a specified level (see page C-200). \ufffd Current-Year CalWORKs Savings Proposal Should Be Considered With 2001-02 Budget \ufffd The Governor’s budget proposes a one-time, current-year reduction in the state’s maintenance-of-effort level for the California Work Opportunity and Responsibility to Kids (CalWORKs) program for a General Fund savings of about $150 million. In order to hold the program’s overall funding level harmless, the budget proposes urgency legislation to backfill this reduction with funds taken from county performance incentive payments. \ufffd This proposal raises several policy issues for the Legislature which we recommend be considered in the 2001-02 budget process (see page C-186). \ufffd Federal Law Could Strengthen Women’s Cancer Programs \ufffd A new federal law allows the state to build on the limited services now available for low-income women who are diagnosed with breast or cervical cancer. We offer several options that could better coordinate cancer screening and treatment programs for women (see page C-121). Legislative Analyst’s Office TABLE OF CONTENTS Health and Social Services Overview …………………………………………………………………….. C-7 Expenditure Proposal and Trends …………………………… C-7 Caseload Trends ……………………………………………………… C-8 Spending by Major Program …………………………………. C-12 Major Budget Changes………………………………………….. C-14 Crosscutting Issues ……………………………………………………. C-19 Health Insurance Portability and Accountability Act (HIPAA) ……………………………… C-19 Implementation of Proposition 36…………………………. C-36 California Spending on Long-Term Care Services…. C-50 New Tobacco Settlement Fund ……………………………… C-69 Child Health and Disability Prevention Program …. C-74 Departmental Issues …………………………………………………. C-85 California Medical Assistance Program (Medi-Cal) (4260) ………………………………………………. C-85 C – 6 Health and Social Services 2001-02 Analysis Public Health ………………………………………………………. C-121 Managed Risk Medical Insurance Board (4280) …… C-133 Department of Developmental Services (4300) ……. C-146 Department of Mental Health (4440) …………………… C-151 Employment Development Department (5100) …… C-163 Department of Child Support Services (5175) ……… C-172 Department of Social Services State Operations (5180) ……………………………………. C-179 Department of Social Services CalWORKs Program ……………………………………….. C-181 Foster Care ………………………………………………………….. C-200 Food Stamps Program…………………………………………. C-207 Supplemental Security Income\/State Supplementary Program …………… C-214 In-Home Supportive Services ……………………………… C-220 Child Welfare Services ………………………………………… C-223 Legislative Analyst’s Office OVERVIEW Health and Social Services General Fund expenditures for health and social services programsare proposed to increase by 6.3 percent in the budget year. Thisincrease is due primarily to a variety of caseload and cost increases and the Governor’s initiatives to expand the Healthy Families Program and other public health programs. The budget also proposes to replace some California Work Opportunity and Responsibility to Kids General Fund spending with federal Temporary Assistance for Needy Families (TANF) funds in the current year, which reduces the TANF reserve in 2001-02. EXPENDITURE PROPOSAL AND TRENDS The budget proposes General Fund expenditures of $21.6 billion for health and social services programs in 2001-02, which is 26 percent of total proposed General Fund expenditures. As shown in Figure 1, the health and social services share of the budget generally has been declin- ing since 1994-95, but would increase slightly compared to the prior year under the Governor’s 2001-02 budget plan. The budget proposal repre- sents an increase of $1.3 billion, or 6.3 percent, over estimated expendi- tures in the current year. Figure 1 (see next page) shows that General Fund expenditures (cur- rent dollars) for health and social services programs are projected to in- crease by $7.7 billion, or 55 percent, from 1994-95 through 2001-02. This represents an average annual increase of 6.5 percent. The figure also shows that General Fund spending (in current dol- lars) has increased each year since 1994-95, except for a slight reduction in 1997-98 due primarily to a decline in California Work Opportunity and Responsibility to Kids (CalWORKs, formerly Aid to Families with Dependent Children [AFDC]) program caseloads. C – 8 Health and Social Services 2001-02 Analysis Figure 1 Health and Welfare Expenditures Current and Constant Dollars Constant 1994-95 Dollars 1994-95 Through 2001-02 All State Funds (In Billions) Total Spending General Fund Spending 5 10 15 20 25 $30 95-96 97-98 99-00 01-02 Special funds General Fund Current Dollars 10 20 30 40% 94-95 01-02 Proposed Percent of General Fund Budget Special funds expenditures are estimated to increase significantly in the budget year, primarily because of the creation of a special new trust fund for health services programs comprised of monies received by the state from the settlement of tobacco litigation. The budget estimates that spending from the new trust fund will amount to $445 million in 2001-02. Combined General Fund and special funds spending is projected to increase by about $10 billion, or almost 60 percent, from 1994-95 through 2001-02. This represents an average annual increase of 6.9 percent. Figure 1 also displays the spending for these programs adjusted for inflation (constant dollars). On this basis, General Fund expenditures are estimated to increase by 28 percent from 1994-95 through 2001-02, an av- erage annual rate of 3.6 percent. Combined General Fund and special funds expenditures are estimated to increase by 31 percent during the same period. This is an average annual increase of 4 percent. CASELOAD TRENDS Figures 2 and 3 illustrate the caseload trends for the largest health and welfare programs. Figure 2 shows Medi-Cal caseload trends over the Overview C – 9 Legislative Analyst’s Office Figure 2 Budget Forecasts Upturn in Medi-Cal Caseloads 1990-91 Through 2001-02 1 2 3 4 5 6 91-92 93-94 95-96 97-98 99-00 01-02 Eligible Persons (In Millions) Families\/Children Refugees\/Undocumented Immigrants Disabled Aged Figure 3 CalWorks Caseloads Declining; SSI\/SSP Caseloads Increasing Slightly 1990-91 Through 2001-02 (In Millions) 0.2 0.4 0.6 0.8 1.0 1.2 91-92 93-94 95-96 97-98 99-00 01-02 Cases CalWORKs SSI\/SSP C – 10 Health and Social Services 2001-02 Analysis last decade, divided into three groups: families and children (primarily recipients of CalWORKs\u2014formerly AFDC), refugees and undocumented persons, and disabled and aged persons (who are primarily recipients of Supplemental Security Income\/State Supplementary Program [SSI\/SSP]). Figure 3 shows the caseloads for CalWORKs and SSI\/SSP. Medi-Cal Caseloads. As shown in Figure 2, the Governor’s budget plan assumes that significant caseload growth will occur during the bud- get year in the Medi-Cal program. Specifically, the overall caseload is anticipated to increase by about 640,000, or 12 percent, during 2001-02 compared to the estimated current-year caseload. This projection of strong growth follows a period of several years in which the overall size of the Medi-Cal caseload experienced relatively small changes from year to year. This projected trend reflects the esti- mated impact of a number of policy changes to the Medi-Cal program approved during the past two years. The changes resulting in the largest projected caseload increases are (1) the expansion of health coverage for two-parent families earning up to 100 percent of the federal poverty level (FPL) and (2) changes in program rules intended to make it more likely that families and children remain eligible for Medi-Cal coverage follow- ing their enrollment in the program. These increases in caseload would be partly offset by a projected de- cline in the number of CalWORKs families who are eligible for Medi-Cal benefits. Following the enactment of welfare reform laws, the number of CalWORKs families and children has declined, along with the number of persons who are on Medi-Cal caseloads due to their receipt of CalWORKs public assistance. While this decrease in the CalWORKs-related caseload would continue to be significant, the Governor’s budget proposal assumes it will not be sufficient to offset the other factors discussed above that are increasing the Medi-Cal caseload. Healthy Families Caseload. The Governor’s budget plan assumes that the caseload for the Healthy Families Program will continue the rapid growth experienced since it began enrolling children in July 1998. The budget provides for the enrollment of 106,000 additional children by the end of 2001-02 as a result of ongoing outreach efforts to increase program participation and several changes in eligibility rules. The Governor’s budget plan also proposes to make parents in families earning up to 200 percent of the FPL eligible for Healthy Families coverage and enroll 174,000 of them in the program by the end of the budget year. Taken to- gether, these proposals would increase Health Families participation by about 62 percent to 735,000 children and parents by the end of the budget year. CalWORKs and SSI\/SSP Caseloads. Figure 3 shows the caseload trend for CalWORKs and SSI\/SSP. While the number of cases in SSI\/SSP is Overview C – 11 Legislative Analyst’s Office greater than in the CalWORKs program, there are more persons in the CalWORKs program\u2014about 1.4 million compared to about 1.1 million for SSI\/SSP. (The SSI\/SSP cases are reported as individual persons, while CalWORKs cases are primarily families.) To the extent that caseloads increased in these two programs, it has been due, in part, to the growth of the eligible target populations. The increase in the rate of growth in the CalWORKs caseloads in 1990-91 and 1991-92 was due to the effect of the recession. During the next two years, the caseload continued to increase, but at a slower rate of growth. This slowdown, according to the Department of Finance, was due partly to: (1) certain population changes, including lower migration from other states; and (2) a lower rate of increase in child-only cases (including citizen children of undocumented and newly legalized persons), which was the fastest growing segment of the caseload until 1993-94. Figure 3 also shows that since 1994-95, CalWORKs caseloads have declined. As discussed in our annual California’s Fiscal Outlook reports, this trend is due to various factors, including the improving economy, lower birth rates for young women, a decline in legal immigration to California, changes in grant levels, behavioral changes in anticipation of federal and state welfare reform, and, since 1999-00, the impact of the CalWORKs program interventions (including additional employment services). We note, however, that contrary to this overall downward trend, the number of child-only cases has been increasing slightly in recent years. This category of the caseload includes children whose parents are un- documented, children with nonneedy relative caretakers, and children whose parents are removed from the assistance unit because of sanctions for nonparticipation in the CalWORKs employment services program. The SSI\/SSP caseload can be divided into two major components\u2014 the aged and the disabled. The aged caseload generally increases in pro- portion to increases in the eligible population\u2014age 65 or older. This com- ponent accounts for about one-third of the total caseload. The larger com- ponent\u2014the disabled caseload\u2014grew significantly faster than the rate of increase in the eligible population group (primarily ages 18 to 64) in the early 1990s. This was due to several factors, including (1) the increasing incidence of AIDS-related disabilities, (2) changes in federal policy that broad- ened the criteria for establishing a disability, (3) a decline in the rate at which recipients leave the program (perhaps due to increases in life expectancy), and (4) expanded state and federal outreach efforts in the program. In recent years, however, the growth of the disabled caseload has slowed. In the mid-to-late 1990s, the total SSI\/SSP caseload leveled off and actually declined in 1997-98, in part, because of federal changes that re- C – 12 Health and Social Services 2001-02 Analysis stricted eligibility. Since March 1998, however, the caseload has been grow- ing moderately, about 2.3 percent each year. SPENDING BY MAJOR PROGRAM Figure 4 shows expenditures for the major health and social services programs in 1999-00 and 2000-01, and as proposed for 2001-02. As shown in the figure, the three major benefit payment programs\u2014Medi-Cal, CalWORKs, and SSI\/SSP\u2014account for a large share of total spending in the health and social services area. As the figure shows, General Fund expenditures on Medi-Cal ben- efits would decline 1.4 percent under the Governor’s budget plan com- pared with projected General Fund spending in the current year. How- ever, this is not an accurate reflection of expenditure growth in this pro- gram. Some General Fund support for the program was replaced with support from the new tobacco settlement fund, and other General Fund support for Medi-Cal was shifted to the Department of Developmental Services (DDS) budget in a purely technical change. If these amounts were added back to the Medi-Cal budget, Medi-Cal General Fund growth would be 6.7 percent. The technical shift of Medi-Cal General Fund support to the DDS budget results in nominal increases in the budget year of about 52 per- cent for regional centers and about 82 percent for developmental centers. But these nominal increases also do not accurately reflect actual program expenditure growth in these DDS programs. If the technical shift had not been made, the General Fund budget would reflect about a 17 percent increase in expenditures for regional centers and about a 62 percent de- crease for developmental centers compared to current-year spending. Developmental center expenditures are proposed to decrease significantly because of (1) a reduction in caseload and (2) significant augmentations that were made to the current-year budget for special repairs and other purposes that were one-time appropriations. The figure indicates that expenditures for the Healthy Families Pro- gram would decline about 14 percent in the budget year. However, this reflects a shift of some program support to the new tobacco settlement fund as well as significant increases in expenditures of federal funds. Thus, as the figure indicates, overall spending on the Healthy Families Pro- gram would increase 83 percent under the Governor’s spending plan. Overview C – 13 Legislative Analyst’s Office Figure 4 Major Health and Social Services Program Budget Summarya 1999-00 Through 2001-02 (Dollars in Millions) Actual 1999-00 Estimated 2000-01 Proposed 2001-02 Change from 2000-01 Amount Percent Medi-Cal General Fund b $8,064.9 $9,457.6 $9,325.0 -$132.6 -1.4% All funds 20,128.8 22,990.3 23,523.4 533.1 2.3 CalWORKs General Fund $1,991.3 $1,935.3 $2,128.0 $192.7 10.0% All funds 5,437.7 5,582.2 5,456.4 -125.8 -2.3 AFDC-Foster Care General Fund $405.8 $387.7 $413.0 $25.3 6.5% All funds 1,387.7 1,458.6 1,550.4 91.8 6.3 SSI\/SSP General Fund $2,501.0 $2,626.0 $2,870.2 $244.2 9.3% All funds 6,494.8 6,827.0 7,293.0 466.0 6.8 In-Home Supportive Services General Fund $596.5 $746.0 $843.3 $97.3 13.0% All funds 1,610.3 1,971.7 2,260.5 288.8 14.6 Regional Centers\/Community Services General Fund b $788.2 $972.6 $1,479.9 $507.3 52.2% All funds c 1,623.0 1,878.2 2,037.7 159.5 8.5 Developmental Centers General Fund b $95.2 $177.4 $322.3 $144.9 81.7% All funds c 555.4 641.7 601.0 -40.7 -6.3 Child Welfare Services General Fund $486.3 $533.0 $565.1 $32.1 6.0% All funds 1,532.9 1,697.8 1,774.5 76.7 4.5 Healthy Families General Fund $76.2 $145.6 $125.2 -$20.4 -14.0% All funds 211.8 400.1 733.1 333.0 83.2 Children and Families First Commissions d General Fund \u2014 \u2014 \u2014 \u2014 \u2014 All funds $784.3 $622.2 $656.7 $34.5 5.5% Child Support Services General Fund \u2014 e $370.7 $455.1 $84.4 22.8% All funds \u2014 e 840.6 998.7 158.1 18.8 a Excludes departmental support. b Beginning in 2001-02, some General Fund spending for Medi-Cal services is displayed in the Department of Developmental Services budget instead of the Department of Health Services budget. c Includes General Fund share of Medicaid reimbursements (costs budgeted in Medi-Cal). d Includes state and county commissions. e Child Support Services were included in the Department of Social Services in 1999-00. C – 14 Health and Social Services 2001-02 Analysis MAJOR BUDGET CHANGES Figures 5 and 6 (see page 16) illustrate the major budget changes pro- posed for health and social services programs in 2001-02. (We include the federal funds for CalWORKs because, as a block grant, they are essen- tially interchangeable with state funds within the program.) Most of the major changes can be grouped into the following categories: 1. The Budget Funds Caseload Growth in SSI\/SSP, Medi-Cal, and the Healthy Families Program, Reflects Savings From Caseload Reductions in CalWORKs and Funds Other Workload Cost Increases. The budget includes a projected caseload reduction of 5.2 percent in the CalWORKs program and increases of 12 percent in the Medi-Cal program, 2.2 per- cent in SSI\/SSP, and 62 percent in the Healthy Families Program. 2. The Budget Proposes to Fund Statutory Cost-of-Living Adjust- ments (COLAs) for CalWORKs and SSI\/SSP as Well as Discretionary COLAs for Foster Care. The budget includes a 4.85 percent COLA for CalWORKs and SSI\/SSP in 2001-02. We note that the budget proposes to fund COLAs for all types of foster care placements\u2014foster family agencies (FFAs), non-FFA foster family homes, and group homes. Current law pro- vides for these COLAs, but makes them subject to the availability of funds. 3. The Budget Proposes to Keep General Fund Spending for CalWORKs in 2001-02 at the Federally Required Maintenance-of-Effort (MOE) Level and Achieves General Fund Savings of $154 Million in 2000-01 Due to a Retroactive One-Time Reduction in the MOE. Califor- nia successfully appealed a federal finding that the state failed to comply with federal work participation requirements in 1997. Based on this suc- cessful appeal, the budget assumes that California’s MOE requirement is reduced by $154 million retroactively on a one-time basis. The budget reflects a General Fund savings of $154 million in the current year by replacing General Fund monies with federal TANF funds, thus reducing the TANF reserve by an identical amount. 4. The Budget Includes Various Significant Changes, Including the Following: The budget provides an additional $272 million during 2001-02 above projected current-year General Fund expenditure levels due to increases in the cost of prescription drugs for Medi-Cal benefi- ciaries. These additional costs would be partly offset by a pro- jected $69 million increase in the rebates the state receives on drugs for Medi-Cal patients. The budget plan provides Medi-Cal funding for a one-time pay- ment of $175 million from the General Fund in the current year Overview C – 15 Legislative Analyst’s Office Figure 5 Health Services Programs Proposed Major Changes for 2001-02 General Fund Medi-Cal Requested: $9.3 billion Decrease: $133 million (-1.4%) \ufffd$272 million due to higher costs for prescription drugs, partly off- set by a $69 million increase in rebates the state receives on drug purchases \ufffd$259 million for the costs of major changes to Medi-Cal eligibility rules, including eliminating quarterly status reports for beneficia- ries and providing 12-month continuous coverage for children \ufffd$117 million for growth in the Early Periodic Screening, Diagno- sis, and Treatment Program which provides mental health ser- vices for children \ufffd$64 million for ongoing hospital rate increases for settlement of the Orthopaedic Hospital v. Belsh\u00e9 lawsuit, following a related one-time payment of $175 million in the current year \ufffd$20 million to provide expanded services to residents of Institu- tions for Mental Diseases \ufffd$10 million to help Medi-Cal beneficiaries pay for new or in- creased insurance premiums to stay enrolled in Medicare HMOs \ufffd $601 million due to a technical change shifting the display of Medi-Cal General Fund expenditures to the budget of the De- partment of Developmental Services \ufffd $170 million due to shift from General Fund to new tobacco settlement trust fund \ufffd $21 million due to an increase in the federal matching rate Healthy Families Requested: $125 million Decrease: $20 million (-14%) \ufffd $20 million General Fund due to shift in some program costs from General Fund to new tobacco settlement trust fund. (Over- all Healthy Families budget [all funds] would increase by $333 million due to additional federal funds and allocation of tobacco settlement funds) C – 16 Health and Social Services 2001-02 Analysis Figure 6 Social Services Programs Proposed Major Changes for 2001-02 General Fund CalWORKs Requested: $2.1 billion Increase: $193 million (+10%) \ufffd $154 million due to the maintenance-of-effort requirement re- turning to $2.7 billion following a one-time reduction in 2000-01 \ufffd $128 million for a 4.85 percent cost-of-living adjustment (COLA) \ufffd $40 million for an increase in state matching fund expenditures for federal Department of Labor Welfare-to-Work funds \ufffd $148 million due to caseload reduction \ufffd $97 million due to no funding for county performance incentives SSI\/SSP Requested: $2.9 billion Increase: $244 million (+9.3%) \ufffd $156 million for a 4.85 percent COLA \ufffd $55 million due to a caseload increase In-Home Supportive Services Requested: $843 million Increase: $97 million (+13%) \ufffd $55 million due to increases in the minimum wage \ufffd $38 million due to a caseload increase to settle the case of Orthopaedic Hospital v. Belsh\u00e9 related to hospi- tal reimbursement rates. In fulfillment of the settlement agree- ment, an additional General Fund expenditure of $64 million is budgeted for 2001-02 for an ongoing hospital rate increase. (The Medi-Cal budget also includes an additional $60 million from the General Fund in the current year for negotiated increases in hos- pital rates unrelated to the court case.) Overview C – 17 Legislative Analyst’s Office About $80 million from the General Fund, the new tobacco settle- ment fund, and other sources is provided for various augmenta- tions to create or to expand various public health programs. Pro- posals include medical screening and treatment programs for prostate and breast cancer, as well as programs to prevent youth from using tobacco and to better track infectious diseases. The budget makes two proposals to reduce CalWORKs county performance incentives. First, in the current year, the budget pro- poses urgency legislation to reduce the incentives by $153 mil- lion compared to the appropriation. In 2001-02, the budget exer- cises the option, created in last year’s social services budget trailer bill, to spend less for performance incentives than the amount sug- gested by the statutory formula. Specifically, the budget proposes no funding in 2001-02 for county performance incentives, resulting in a savings of $244 million compared to the statutory formula. C – 18 Health and Social Services 2001-02 Analysis Legislative Analyst’s Office CROSSCUTTING ISSUES Health and Social Services HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT (HIPAA) THE GOVERNOR’S BUDGET PROVIDES FUNDING FOR COMPLIANCE WITH FEDERAL LAW The 2001-02 Governor’s Budget requests a total of $92 million ($23.6 million General Fund) for statewide planning and implementation of the federal Health Insurance Portability and Accountability Act. This includes $70 million ($20 million General Fund) to be allocated to state departments and agencies that apply for funding. In addition, the budget provides about $22 million ($3.6 million General Fund) and 28 positions in four departments. In the following pages, we summarize the requirements of the act, analyze the potential effects on state and county governments, evaluate the approach taken to date by state agencies to comply with the law, and recommend further legislative actions that would improve the state’s compliance. Background What Is HIPAA? The HIPAA was enacted in 1996 and set many goals for the health care industry. The law’s primary purpose was to protect health insurance coverage for workers and their families when they change C – 20 Health and Social Services 2001-02 Analysis or lose jobs. This new protection will impose additional administrative requirements on the health care industry. However, a section of the law requiring administrative simplification is designed to reduce these bur- dens. The general approach is to accelerate the move from paper-based to electronic transactions through the establishment of national standards and requirements for the transmission, storage, and handling of certain electronic health care data. Many experts believe that HIPAA is the most sweeping government action affecting the health care industry since the introduction of Medi- care. They predict that HIPAA will affect nearly every business process of the health insurance industry and result in significant systems changes. Like efforts to address the Year 2000 (Y2K) technology problem, HIPAA does require changes in information technology (IT) systems, but HIPAA involves much more than IT projects. It will also affect administrative policies and regulations, operational processes, education, and training and these in turn will result in significant costs. Who Must Comply? Both private and public sector organizations that provide health care services and use patient or other health care data must comply with HIPAA. Thus, the list of affected organizations includes not only health care providers, but also employers, insurers, and health plans. Health plans include Medicaid programs, Medicare, and most gov- ernment-funded health care programs. The HIPAA will also affect state de- partments that are not considered to be health-related departments, but de- partments that may indirectly handle health care data such as the California Department of Veterans Affairs or the Public Employees’ Retirement Sys- tem. While HIPAA will affect both private and public organizations, our analysis focuses on the potential effects on state and county government. In California, a number of state departments have recognized the potential impact of HIPAA’s requirements and are participating in state- wide compliance efforts. However, few departments have begun actual implementation work, such as developing a work plan. Some departments that may be affected do not appear to be participating in any compliance efforts. Figure 1 provides an overview of some departments which re- ported progress on HIPAA implementation as of October 2000. At this time, the state does not have a comprehensive list of all the departments that will be affected by HIPAA. One of the departments that will be most significantly affected is the Department of Health Services (DHS). The DHS programs that have al- ready been determined to be affected include Medi-Cal, Primary Care and Family Health, the Cancer Detection Section, the Information Tech- nology Services Division, the Genetic Disease Branch, Children’s Medi- cal Services, and the Cancer Control Branch. Other departments that may Crosscutting Issues C – 21 Legislative Analyst’s Office be affected, but have not yet reported progress on HIPAA, include the Public Employees’ Retirement System, the Department of Rehabilitation, the State Teachers’ Retirement System, the Department of Managed Health Care, and the Managed Risk Medical Insurance Board. Figure 1 Departments Reporting Progress on HIPAA Implementation as of October 2000 (In Thousands) Departments Developed a Work Plan Inventory Assessment Impact Analysis Estimate of Total Cost a Alcohol and Drug Programs In development No No $12,413 Board of Equalization Started Started \u2014 356 Aging \u2014 b \u2014 \u2014 364 Corrections No No No \u2014 Highway Patrol No No No \u2014 Youth Authority No No No \u2014 Developmental Services Yes Yes Yes 5,516 Health Services Yes Yes Yes 100,000 Mental Health Yes Yes Yes 23,936 Motor Vehicles No No No \u2014 Rehabilitation No No No \u2014 Emergency Medical Services Authority No Yes Yes 421 Office of Statewide Health Planning and Development In development Yes Yes 927 Total $143,933 a Cost includes multiyear amounts. b No information provided. In addition to state departments, county health-related programs, including county medical services and county hospital and health sys- tems that serve in the role as health care providers, have compliance ob- ligations. Some of the county program areas known to be affected in- clude mental health, Medi-Cal and Healthy Families eligibility, and Cali- fornia Children’s Services. Benefits of Administrative Simplification. The administrative sim- plification component of HIPAA requires that all organizations that en- gage in the electronic transmission of administrative and financial health care information shall use a single set of electronic standards to submit and receive claims, authorize referrals for medical services, enroll benefi- C – 22 Health and Social Services 2001-02 Analysis ciaries, and receive payments. Some of the benefits that may result from administrative simplification include: Increased Efficiency and Reduced Administrative Costs. The fed- eral Health Care Financing Administration (HCFA) predicts that the health care industry will save about $1 billion during the first five years of HIPAA implementation. Others have estimated that billions of dollars will be saved each year by switching from pa- per claims to uniform electronic claims submission and using uniform billing requirements. We have not conducted our own analysis of the accuracy of these savings projections. Improved Effectiveness of the Health Care Industry. The stan- dardization of information will enable the health care industry to take advantage of technical solutions to improve the overall effectiveness of the health care delivery system. For example, health care providers may be able to improve the management of their medical practices because they will be able to verify patient eligibility for medical services more quickly. Compare and Analyze Data. Currently, due to the pervasive use of local codes used to support special state health care programs, state Medicaid programs cannot compare data. With standard- ized codes, programs could analyze data that may allow them to identify relatively high-cost areas and more accurately evaluate which services and programs are most effective. Better Health Care for Beneficiaries. With the implementation of HIPAA, health care beneficiaries will find it easier for them, and their health records, to move to a new provider or health care plan (this is called portability ). They will potentially benefit from improved continuity of health insurance coverage in groups and individual markets and greater coordination of care. Reduced Fraud and Abuse. Having a single set of unique identifi- cation numbers for specific providers, insurers, and patients should make it easier for authorities to detect medical fraud, waste, and abuse by eliminating situations where providers and individuals have multiple identifiers. These multiple identifiers make it difficult to match and track claims to both providers and individuals, particularly where fraud is intended. What Are the Administrative Simplification Standards? To achieve administrative simplification the federal Department of Health and Hu- man Services (HHS) as directed by the Act is developing standards that involve the following: Crosscutting Issues C – 23 Legislative Analyst’s Office Transaction Standards. The HHS has developed national stan- dards designed to allow the electronic exchange of specific health care transactions. This includes standards for the transmission of claims for payment of medical services, enrollment in health plans, inquiries about patients’ eligibility for services, and other critical health-related business transactions. Code Sets. These codes will standardize certain types of health care information such as diseases, injuries, impairments, and pro- cedures on a national level. Unique Identifiers. The HIPAA requires the adoption of unique identifier codes for health care plans, health care providers, and employers. For example, the identification number being pro- posed for employers is the Employer Identification Number which is issued and maintained by the Internal Revenue Service. Currently, employers may use different identification numbers when they conduct business which slows activities such as health plan enrollments and premium payments, and increases costs. System and Patient Data Security. Under HIPAA, security stan- dards must be adopted that carry out reasonable and appropri- ate administrative procedures and safeguards to ensure the in- tegrity and confidentiality of information. These rules require that certain entities enter into agreements that ensure that when an individual’s information is transferred the information is pro- tected in accordance with HIPAA’s privacy and security rules. Privacy Standards. The privacy standards are intended to pro- tect and enhance the rights of consumers, ensure the integrity of the health care system, and create a national framework for health privacy protection. The rule provides standards for covered in- formation, entities, and disclosures. When Must Organizations Comply? The HHS is planning on issuing rules for implementing HIPAA in stages or waves. Under this approach, HHS will publish the proposed rules, receive and review comments on the rules and then will issue the finalized rules. This will allow HHS to respond to the large number of comments received. For example, more than 17,000 public comments were received on the proposed rules for transaction standards and code sets. The first set of final standards, relating to transactions and code sets, published in August 2000, provide the health care industry until October 16, 2002, or about two years, to comply. The second set of stan- dards released relate to privacy and the expected date of compliance for these rules is February 26, 2003. It is anticipated that the states can expect C – 24 Health and Social Services 2001-02 Analysis at least seven more waves of HIPAA regulations which will be issued during the next two years, with each allowing roughly 24 months for implementa- tion. These seven standards include national provider identifiers, national employer identifiers, security, national health plan identifiers, claims attach- ments, enforcement, and the national individual identifiers. Organizational Challenges Posed by HIPAA Government organizations will encounter many challenges to comply with Health Insurance Portability and Accountability Act standards. This will require organizations to make programmatic changes such as altering business processes, adapting to the loss of local codes that track the health care needs of specific groups, and modifying practices to ensure patient privacy. The HIPAA Will Affect State and County Business Processes. The administrative simplification requirements of HIPAA will have a signifi- cant effect on the health care-related business processes of most state and local agencies because they do not currently conform with the majority of the proposed standards. Specific business processes that will be af- fected include billing and payment for health care services; the exchange of eligibility and enrollment information among health care providers, plans, and insurers; and referral and authorization processes for medical services. In addition, all government rules and regulations related to pri- vacy and security policies, processes, and procedures will need to be changed significantly in order to achieve compliance. The Loss of Local Codes Will Have a Significant Effect. The health coverage provided under state Medicaid programs can vary significantly in scope from coverage offered by other public- and private-sector health plans. Thus, some services provided under Medicaid may not generally be recognized by other health care payers and providers. Most state Med- icaid agencies have created local codes (unique state and local identifiers) for identifying and tracking procedures, drugs, provider types, and cat- egories of service. These codes enable Medicaid agencies to process claims for health care services that they provide to specific local populations of beneficiaries. Nationally, more than 22 categories of codes with additional individual codes have been identified for services including private nurs- ing, mental health, and free immunizations for children. Under HIPAA, a code set is any set of codes used for encoding data, such as medical diagnosis codes or medical procedure codes. The HHS- approved HIPAA code sets cover a range of medical conditions, such as diseases and injuries, or drugs and medical procedures. The HIPAA ad- ministrative simplification standards eliminate the use of local codes and require a switch to the HHS-approved code sets. Crosscutting Issues C – 25 Legislative Analyst’s Office The elimination of local codes has programmatic implications that will affect information services, administrative policies and regulations, provider reimbursement levels, and oversight activities. The more local codes a state uses, the more policy and business decisions that will have to be made to address such issues. Each of the nearly 1,100 local codes that are used to administratively support many special programs in Cali- fornia are written into state regulations and will need to be changed to eliminate the use of these nonstandard codes. Reimbursement levels for services could also be affected by the loss of local codes. In order to comply with HIPAA, the state may have to roll up services to a level that could be more costly to the state and may result in California having to pay higher reimbursement rates. For ex- ample, a local code used to provide a specific type of mental health ser- vice to disabled children under age five may not be recognized by the national code system. Under HIPAA, the local code for those services may have to be rolled up to a code that generally covers mental health ser- vices for all children ages 1 through 18 and the reimbursement level for that code may be greater or less than the reimbursement rate for the local code. Complying With Privacy Requirements. The recently released pri- vacy requirements have the potential to significantly change business practices for both health care providers and insurers. The new privacy rules mandate that entities that collect health care information advise patients of their right to privacy and advise them about how their per- sonal medical information might be used by entities that have access to the information. The rules also establish policies that allow patients to review, copy, and make corrections to their personal health information. Organizations may require extensive training to meet these requirements. The State Will Have to Develop Comprehensive Policies to Satisfy Security Requirements. Every entity that handles health care informa- tion will be required by HIPAA to develop comprehensive policies for the security of that data. This involves nontechnological issues such as employee training, disaster-recovery planning, internal audits, and provider contracting, in addition to the technical security issues such as encryption of data. Major Fiscal Issues The Health Insurance Portability and Accountability Act compliance is expected to have a significant fiscal impact nationwide. Estimates of compliance costs vary widely and the state has made an early estimate that compliance for just departments within the Health and Human Services Agency may cost more than $100 million over many years. C – 26 Health and Social Services 2001-02 Analysis Complying With HIPAA Will Be Expensive. The HIPAA planning and implementation is expected to have a major fiscal impact on the state be- cause of the additional staff and funding necessary to analyze and change current operations, policies, and systems. Estimates of the cost to implement HIPAA vary widely, however. The U.S. Office of Management and Bud- get has estimated HIPAA implementation will cost the entire health care industry (both public and private sectors) approximately $3.8 billion over five years. Others have reported that industry-wide costs could go as high as $43 billion for the same time period. Rough estimates for an organization’s costs range from one and one-half times to twice the cost of Y2K. Several state Medicaid agencies have estimated the cost of comply- ing with HIPAA. Their estimates range from $105 million in Texas (with annual Medicaid expenditures of $6 billion) to $18 million in Florida (with annual Medicaid expenditures of $7.5 billion). By way of comparison, California has annual Medicaid expenditures through the Medi-Cal pro- gram of $24.6 billion in the current fiscal year. The cost of HIPAA will depend on the strategy taken for achieving compliance. For example, many state Medicaid agencies are reporting that they plan to replace their information systems as part of their implementation of HIPAA, thereby significantly increasing costs. Other factors affecting costs are the start-up costs of automation, training and process reengineering, and any costs associated with addressing implementation problems. Finally, we would note that much of the cost of implementing the new standards is likely to involve one-time expenditures. Early Estimates of State Costs. In California, several state depart- ments have begun estimating the cost of implementing HIPAA and have requested funding for the budget year totaling $22 million ($3.6 million General Fund). Other departments that may be impacted by HIPAA ei- ther have not requested funding or may not have estimated the cost of compliance. Representatives of the state Health and Human Services Agency esti- mate that, agency-wide, compliance with HIPAA may cost more than $100 million over many years. This is an early estimate and most likely will change significantly because some departments and program areas have not been thoroughly assessed. Figure 1 (shown earlier) shows the steps that some departments have taken towards complying with HIPAA and preliminary cost estimates. Federal Funding Is Available for Medi-Cal Compliance. Compliance with HIPAA standards is a federal mandate and, as such, HCFA has au- thorized the use of enhanced federal funds at the 90 percent match Crosscutting Issues C – 27 Legislative Analyst’s Office rate. These funds can be used for costs associated with the planning, design, development, and implementation of HIPAA requirements for the California Medicaid Management Information System (CA-MMIS) and related computer systems. The CA-MMIS is the medical and den- tal claims processing system used by DHS for various programs, in- cluding the Medi-Cal Program. Other information systems not related to the CA-MMIS are eligible for claiming the normal federal Medi-Cal match of about 51 percent. The availability of federal funding means that state compliance costs will be much lower than would otherwise be the case. Federal Funds Not Available for Non-Medicaid Programs. While HIPAA is a federal mandate, federal funds are not available for non-Med- icaid-related programs. Costs associated with HIPAA project planning, assessment, and remediation for nonmedical programs (for example, the Department of Motor Vehicles) must be funded by the applicable fund- ing source for the affected program. Similarly, federal funding is not available for counties’ compliance with HIPAA, even though counties may also incur significant costs due to the required conversion of local health service codes to national codes. Because local coding is largely related to the Medi-Cal program, the state will need to make decisions as to whether it will pay for any of the coun- ties’ cost of compliance. If the state decides to pay for some of the cost, this will increase the state’s overall costs for HIPAA compliance. Health care providers that the state contracts with for health care ser- vices must also comply with HIPAA. The state must determine if it will share in the cost of changes required by the 90,000 providers. Risks From Failure to Meet HIPAA Requirements. Failure to comply with HIPAA could result in inefficiencies in the health care delivery sys- tem and have a significant fiscal impact on the state. Specifically, the state’s failure to adopt the national standards would mean that the state could risk service interruptions of its major health programs, such as delays or an inability to process provider claims for payment. The state’s ability to interact with business partners could also be hindered and leave the state unprepared for future transaction standards. Failure to meet HIPAA requirements poses other fiscal risks as well. For example, it could result in the imposition of significant federal mon- etary penalties against the state and potentially even the loss of billions of dollars in federal reimbursements for its health programs. At the time this analysis was prepared, HCFA had proposed noncompliance fines of $25,000 a day, per data element, per transaction. The state might also be subject to costly litigation by not complying with HIPAA standards. C – 28 Health and Social Services 2001-02 Analysis What Is the State Currently Doing? The 2001-02 spending plan provides about $92 million ($23.6 million General Fund) in various budget items for the Health Insurance Portability and Accountability Act (HIPAA) compliance activities. The Department of Health Services has established a HIPAA Project Office to act as a resource to guide and monitor compliance efforts. Other health- related departments have also begun compliance work and a separate budget item has been proposed to provide allocations of funding to other departments for HIPAA-related activities. The 2001-02 Governor’s Budget provides $23.6 million from the Gen- eral Fund and about $69 million from other funds\u2014roughly $92 million in all\u2014for HIPAA compliance activities in the budget year. A number of compliance efforts are already under way. We discuss these activities in more detail below. The DHS Has Leading State Role. As the agency overseeing the Medi- Cal and Healthy Families programs, DHS is the largest purchaser of health care services within the state. For many safety-net providers such as County Organized Health Systems, DHS is the primary source of revenue. As the largest purchaser, DHS could greatly influence the rest of the Califor- nia health care industry’s compliance with HIPAA requirements. The DHS received seven two-year limited-term positions in the 2000-01 Budget Act to form a project work group to review and analyze final regulations, specify the effect on DHS programs, and develop a work plan for HIPAA compliance. In May 2000, DHS established the HIPAA Project Office and began performing initial HIPAA assessments of DHS programs, forming workgroups and participating in national groups fo- cusing on standards, implementation, and legislation. The Governor’s budget requests, for the current fiscal year, to (1) ad- ministratively establish 11 additional positions beyond the seven autho- rized in the 2000-01 Budget Act to conduct rate studies, perform impact assessments, and participate in project planning and (2) increase federal funds by $1.2 million. As shown in Figure 2, for the budget year, the DHS budget requests $2 million from the General Fund for continuation of these 11 positions, four additional positions that would first be estab- lished in 2001-02, and consulting services. The DHS indicates that it may request during spring 2001, additional funding for the budget year based on impact assessments and the release of the final HIPAA rules. So far, the HIPAA Project Office has completed initial assessments in nine program areas and remediation has started on the Medi-Cal and Denti-Cal claims processing systems. The office has also begun to match local codes to national standards. Acting as a lead organization, DHS has Crosscutting Issues C – 29 Legislative Analyst’s Office given presentations and provided training in the past year to state de- partments, county organizations, and managed care groups and plans to present its approach to HIPAA as a model for other departments. How- ever, the Project Office has emphasized that DHS program areas, other departments, and individual providers are responsible for their own HIPAA-related activities. Figure 2 Budget Requests for HIPAA-Related Activities (Dollars in Thousands) 2001-02 Personnel Years General Fund Other Funds Total Funds Department of Health Services 15a $2,000 $17,000 $19,000 Department of Mental Health 9 1,200 1,200 $2,400 Department of Developmental Services 3 425 425 $850 Office of Statewide Health Planning and Development 1 \u2014 80 80 Health Insurance Portability and Accountability Act Fund (Item 9909) \u2014 20,000 50,000 70,000 Totals 28 $23,625 $68,705 $92,330 a Health Services received seven two-year limited-term positions and $585,000 ($260,000 General Fund) in the 2000-01 Budget Act for HIPAA activities. Department of Developmental Services (DDS). The DDS received a 2000-01 appropriation of $205,000 from the General Fund and three lim- ited-term positions for the purpose of determining the impact of HIPAA. The budget for 2001-02 requests $850,000 ($425,000 General Fund and $425,000 in reimbursements) to comply with HIPAA’s transactions and code sets requirements. The DDS is completing an initial analysis of the impact of these requirements on the department’s Cost Recovery System (CRS) and on other IT systems. The CRS processes electronic billings to pri- vate insurance companies and claims to Medicare and Medicaid. The de- partment plans to submit a feasibility study report this spring along with a Department of Finance letter requesting additional funds once these initial assessments are completed. Later this spring, the department plans to ad- dress the impact of HIPAA on the business processes of the department, the developmental centers, the regional centers, and service providers. Department of Mental Health. The Department of Mental Health (DMH) has completed a FSR for compliance with the first wave of HIPAA C – 30 Health and Social Services 2001-02 Analysis regulations. The 2001-02 budget requests $2.4 million ($1.2 million Gen- eral Fund and $1.2 million in reimbursements) and nine positions. The DMH is also establishing a special internal team to manage compliance activities in all four of its divisions and anticipates that the compliance effort will take five and one-half years. Office of Statewide Health Planning and Development (OSHPD). The OSHPD 2001-02 budget requests one permanent full-time program posi- tion to evaluate the new HIPAA provisions and implement measures to comply with the data transaction and privacy standards. It is anticipated that by taking these steps the office will be able to protect the identity of individual patients. The HIPAA Fund. The administration’s 2001-02 budget proposal would establish a HIPAA fund\u2014a separate budget item with a total of $70 million ($20 million General Fund, $10 million special funds, and $40 million nongovernmental cost funds)\u2014to provide allocations to other departments for HIPAA compliance activities. To obtain funding, a de- partment would submit a request to the Department of Finance (DOF) for HIPAA-related activities that the department could not fund with existing resources. The DOF would review the funding request, and, if it agreed, would provide a 30-day notification to the Legislature that it in- tended to make an allocation from the HIPAA fund. If a HIPAA compli- ance activity included changes to an information technology system, de- partments would also need approval from the Department of Informa- tion Technology (DOIT) prior to DOF notifying the Legislature of the al- location of funds. Weaknesses in the Administration’s Approach The state has initiated significant efforts to comply with the Health Insurance Portability and Accountability Act. However, based upon the lessons learned during the state’s Year 2000 compliance efforts, we believe that the administration’s approach has a number of weaknesses that we discuss below. Our analysis indicates that the efforts initiated to date by state agen- cies to comply with the requirements of HIPAA are warranted and gener- ally appropriate. However, based on lessons learned in previous efforts to address the Y2K problem, we believe there are several weaknesses in the state’s current approach to addressing the challenges posed by HIPAA. We discuss several such concerns below. Lack of Lead Agency. When a statewide program implementation effort is necessary, the state has sometimes designated a lead agency that is responsible for overseeing all related activities and ensuring that all Crosscutting Issues C – 31 Legislative Analyst’s Office departments that may be affected are participating in compliance activi- ties. For example, the state’s Y2K efforts were led by DOIT, which moni- tored all Y2K activities and reported to the Governor and Legislature on the state’s overall progress. We believe this organizational strategy espe- cially makes sense in situations when the task is complex and involves many different state agencies. The HIPAA appears to be just such a situation. While DHS has estab- lished the HIPAA Project Office to oversee and coordinate its own internal department efforts, the administration had not designated a lead agency for statewide HIPAA compliance activities at the time this analysis was pre- pared. Unless statewide project oversight responsibility is established, it may be difficult later to hold departments (including nonhealth departments) accountable for their efforts to comply with HIPAA. Absence of a Statewide Plan. Comprehensive planning is another critical element for complex statewide projects. For example, in manag- ing its Y2K efforts, the state developed a statewide Y2K plan which in- cluded the following components: A strategy for addressing the Y2K issue. Y2K remediation activities required for each department. Y2K oversight activities to be provided by DOIT. A common definition that the administration and the Legislature could use to determine when the state remediation activities were complete. At the time that this analysis was prepared, however, the administra- tion had not yet developed a statewide plan for addressing HIPAA com- pliance. Lacking such a statewide plan, HIPAA efforts may not be well- coordinated, consistent, and complete. Lack of HIPAA Impact Assessments. Another important lesson the state learned from Y2K was the need for all departments to assess which IT systems would require Y2K remediation. These assessments formed the basis for department work plans and funding requests. Conducting assessments is an important planning component because it defines the scope of the effort, determines funding needs, and establishes time frames for completion of tasks. At the time that this analysis was prepared, however, few depart- ments within the Health and Human Services Agency (HHSA) had be- gun assessments. Because of this lack of completed assessments, it is likely that departments do not have a full understanding of: The scope of their individual HIPAA compliance efforts. C – 32 Health and Social Services 2001-02 Analysis Their overall funding needs. The time frames needed to complete compliance activities. Difficult to Administer Fund. The state encountered some difficulties in the administration of the Y2K fund. For example, DOIT and DOF some- times took up to six months to review and approve requests for fund allocations. This caused some departments to have to delay starting Y2K remediation tasks and, as a result, these departments later had to devote more resources to compliance activities to make up for the lost time. Another difficulty was the confusion between the role of DOIT and DOF in determining what constituted an appropriate expenditure from the Y2K Fund. On some occasions DOIT and DOF disagreed over what activities should and should not be funded through the Y2K Fund. We are concerned that this same problem could affect the administration of the HIPAA fund, given budget language that again splits the approval au- thority for information technology activities between DOIT and DOF. Weaknesses in Funding Mechanism Oversight. During the nine months leading up to the December 1999 deadline for Y2K compliance, a number of funding notifications received by the Legislature were to back- fill for funds that had already been spent for Y2K efforts without prior legislative authorization. We are concerned that the notification mecha- nism proposed for the HIPAA fund would also result in broad adminis- trative control over monies with limited opportunity for legislative re- view and oversight. In addition, a number of the HIPAA requests propose to establish permanent positions. Establishing permanent positions for a time-lim- ited task will limit the Legislature’s ability to determine if the positions are still needed once HIPAA activities are complete. Fragmented Funding Processes. The budget proposes to fund specific HIPAA-related activities in four separate departmental budget items. In addition, it provides funding for unspecified activities through the HIPAA fund. In effect, the administration is using two processes to fund similar activities. Over time, this approach could become a problem when the Legislature tries to determine the total cost for HIPAA compliance. This problem occurred with Y2K remediation when the administration allo- cated funds to individual departments through the annual budget pro- cess in addition to funding the Y2K fund. The Legislature was not able to determine the state’s total spending on Y2K remediation. Lack of Statutory Framework. The state’s Y2K remediation activi- ties, unlike those for HIPAA, were limited to a single set of activities that were well-defined beforehand, consistent throughout government and private industry, and focused exclusively on IT systems. The HIPAA com- Crosscutting Issues C – 33 Legislative Analyst’s Office pliance activities, on the other hand, are much broader in scope\u2014encom- passing mainly changes in administrative policies and regulation as well as some changes to IT systems. The Governor’s budget plan does not offer a statutory framework for the HIPAA statutory compliance program except for (1) budget bill provisions outlining the process for allocations from the HIPAA fund and (2) a proposed budget trailer bill permitting DHS to adopt unspecified emergency regulations to implement HIPAA. Our analysis indicates that a statutory framework is warranted to guide a statewide project with the formidable size, scope, and complex- ity of HIPAA compliance. As we have noted earlier, many significant policy issues will arise from compliance efforts. Except for budgetary decisions, the administration’s approach in effect largely excludes the Legislature from key policy decisions regarding the use of HIPAA funds and the gov- ernance, oversight, and administration of these activities. Recommendations to Improve Legislative Oversight of HIPAA Activities We recommend that the Legislature approve the funding included in the budget to support state Health Insurance Portability and Accountability Act (HIPAA) compliance activities, but schedule all requested funds in the proposed new budget item (9909) for such activities. We further recommend the enactment of legislation to govern HIPAA compliance activities, limit the term of proposed HIPAA compliance positions, and replace the administration’s proposed budget bill language with language that makes HIPAA allocations subject to state legislative requirements. Fund All Activities Through HIPAA Fund. To adequately track all HIPAA allocations and expenditures beginning in the budget year, we recommend that the Legislature delete all HIPAA proposals from the sepa- rate department budget items and instead schedule these allocations in the HIPAA fund budget item (Item 9909). Allocations of reimbursements would be budgeted for the affected departments. The specific budget re- quests would be revised as follows: The DDS, $425,000 General Fund and $425,000 reimbursements. The DMH, $1.2 million General Fund and $1.2 million reimburse- ments. The DHS, $2 million General Fund, about $17 million reimburse- ments. The OSHPD, $79,600 federal funds. Approve Positions for Two-Year Limited Terms. We also recommend that any positions requested by departments for HIPAA compliance ac- C – 34 Health and Social Services 2001-02 Analysis tivities be approved for two-year limited terms. Specifically, we recom- mend the following: The DMH, nine positions. The DHS, 15 positions. The OSHPD, one position. Enact Legislation to Govern HIPAA Activities. We recommend the enactment of legislation to govern state HIPAA compliance activities that establishes a strong statutory framework appropriate for such a broad and complex statewide project. We recommend that the legislation in- clude specific provisions that: Designate HHSA as the lead agency for state HIPAA compliance activities. We recommend HHSA for this role because the agency has the broad health policy and program expertise needed to di- rect and assist other departments in HIPAA compliance activi- ties. Since non-HHSA departments will also be affected by HIPAA, the legislation should authorize HHSA to direct and monitor HIPAA compliance activities in those other departments. Direct HHSA to develop a statewide HIPAA compliance plan. Require departments to complete HIPAA assessments to deter- mine the impact of HIPAA compliance on department operations. Establish appropriate time frames within which control agencies must complete reviews of departmental fund requests. Establish clear lines of authority over the administration of the HIPAA fund. Specify how funds will then be transferred and allocated from the HIPAA fund. Provide 30-day notification to the Legislature upon allocation from the HIPAA fund. The legislation should be modeled on Chapter 608, Statutes of 2000 (AB 2817, Honda), which established oversight and other procedures for allocation of funding from the state’s Information Technology Innova- tion Fund. Like Chapter 608, the HIPAA legislation would establish cri- teria for project funding, assignment of responsibility for approving pro- posals, guidelines for funding requests, and procedures for notifying the Legislature regarding funding allocations. Reject Proposed Budget Bill Language; Adopt New Budget Bill Lan- guage. We recommend that the Legislature reject proposed budget bill language for Item 9909-001-0001 relating to the allocation of the HIPAA Crosscutting Issues C – 35 Legislative Analyst’s Office fund. We recommend that the Legislature replace this language with bud- get bill language that ensures fund allocations are consistent with the proposed legislation. Specifically, we recommend the following budget bill language: Provision X. The funding provided in this item shall be available for expenditure contingent upon enactment of legislation in the 2001-02 legislative session specifying procedures for allocations from this item. Funding shall be expended consistent with any requirements of that legislation. C – 36 Health and Social Services 2001-02 Analysis IMPLEMENTATION OF PROPOSITION 36 In November, California voters approved Proposition 36, the Substance Abuse and Crime Prevention Act of 2000, a measure that makes significant changes to the state’s criminal justice and drug treatment systems. Implementing Proposition 36 will pose challenges to the state and counties. In this analysis, we summarize the provisions of Proposition 36, its key organizational, implementation, and funding issues, and the steps taken so far by the administration to carry out its provisions. We also offer a number of options for legislative changes and state budget adjustments the Legislature may wish to consider that could assist counties in the successful implementation of the measure. BACKGROUND Proposition 36 changes state law so that certain adult offenders who use or possess illegal drugs would receive drug treatment and supervi- sion in the community rather than be sent to state prison, county jail, or supervised in the community without treatment. The measure also pro- vides state funds ($60 million General Fund in the current fiscal year and then $120 million annually thereafter through 2005-06) to counties to pay for the treatment programs and related costs. In addition to substance abuse treatment, the measure authorizes the use of the funds appropri- ated under Proposition 36 for vocational training, family counseling, lit- eracy training, probation supervision, and court monitoring of offenders subject to the provisions of the measure. Figure 1 summarizes the provi- sions of the new law. Key State and Local Agencies Involved. The key players involved in the implementation of the proposition include several state agencies\u2014 specifically, the Department of Alcohol and Drug Programs (DADP), the Board of Prison Terms, and the California Department of Corrections (CDC). The key local government entities involved include county alco- hol and drug treatment agencies, trial courts, county probation depart- ments, and educational, social, and health services agencies. The specific Crosscutting Issues C – 37 Legislative Analyst’s Office implementation activities in which they are involved in regard to Propo- sition 36 are summarized in Figure 2 (see next page). Figure 1 Major Provisions of Proposition 36 Changes sentencing laws, effective July 1, 2001, to require offenders\ufffd\ufffd convicted of nonviolent drug possession, as defined, to be sentenced to probation and drug treatment instead of prison, jail, or probation without treatment. Excludes some offenders, including those who refuse treat- ment and those found by courts to be unamenable to treatment. Changes parole violation laws, effective July 1, 2001, to require that\ufffd\ufffd parole violators who commit nonviolent drug possession offenses or who violate drug-related conditions of parole complete drug treatment in the community, rather than being returned to state prison. Requires that eligible offenders receive up to one year of drug treat-\ufffd\ufffd ment in the community and up to six months of additional follow-up care. Establishes certain sanctions for offenders found unamenable for\ufffd\ufffd treatment or who violate the conditions of probation or parole. Permits courts (for probationers) and Board of Prison Terms (for parole\ufffd\ufffd violators) to require offenders to participate in training, counseling, literacy, or community service. Requires that treatment programs be licensed or certified by the state\ufffd\ufffd Department of Alcohol and Drug Programs (DADP). Requires offenders to pay for their treatment, if they are reasonably\ufffd\ufffd able to do so. Appropriates state funds for distribution to counties to operate drug\ufffd\ufffd treatment programs and provide related services. Requires DADP to study the effectiveness of the measure and to audit\ufffd\ufffd county expenditures. ISSUES, CHALLENGES, AND OPPORTUNITIES Based upon our analysis of the measure and discussions with many of these key players, we issued a report in December entitled, Implement- ing Proposition 36: Issues, Challenges, and Opportunities. We found that the state and counties will face organizational, implementation, and funding issues, including: C – 38 Health and Social Services 2001-02 Analysis Figure 2 Key Players in Proposition 36 Implementation State Department of Alcohol and Drug Programs Distribute funds to counties. License or certify drug treatment programs. Collect data from counties. Audit county expenditures. Evaluate measure’s effectiveness. Board of Prison Terms (BPT) Set revocation criteria for parole violators directed into treatment. Decide when to modify or intensify treatment program and revoke parole. California Department of Corrections Supervise and monitor parole violators directed into treatment by BPT. Report violations of revocation criteria to BPT. Provide treatment services to probationers and parolees directed into treatment within the county, either directly or through contracts with private providers. Local Trial Courts Set probation revocation criteria for probationers directed into treatment. Monitor probationers directed into treatment, including modifying or intensify- ing treatment programs and revoking probation for those who violate. County Probation Departments Supervise and monitor probationers directed into treatment by the local trial courts. Report violations of drug treatment revocation criteria to courts. Educational, Social, and Health Service Agencies Provide treatment services prescribed by the courts, such as vocational and literacy training and counseling. Developing methods for collaboration to ensure that all key play- ers work closely together to increase the likelihood of successful implementation. Assessing drug treatment capacity within counties, the needs of of- fenders who will be treated under Proposition 36, the gaps in the continuum of drug treatment services, and ways to fill those gaps. Determining the criteria for supervising and monitoring offend- ers who will be in treatment, as well as when to revoke their pro- bation and parole and return them to incarceration. Crosscutting Issues C – 39 Legislative Analyst’s Office Distributing funds provided under Proposition 36 to treat and supervise offenders in the community, as well as identifying other sources of funding. A more detailed discussion of these challenges, and our recommended approach to addressing many of them, can be found in the report. INITIAL IMPLEMENTATION ACTIONS Since the issuance of our report, the administration has taken several significant initial steps to commence the implementation of Proposition 36, which we discuss further below. County Funding Allocations. In keeping with the requirements of Proposition 36, DADP has administratively established a Substance Abuse Treatment Trust Fund into which was transferred a current-year appro- priation of $60 million from the General Fund. Upon the review and ap- proval of the state Office of Administrative Law, DADP then issued emer- gency regulations which establish the formula to be used for the distribu- tion of the initial $60 million. The adopted regulation specifies that DADP may retain a portion of the $60 million for administration of the measure, and the department has set aside $1.2 million from the trust fund for this purpose. The re- mainder of the $60 million is to be allocated to counties under a new dis- tribution formula devised by DADP. Under the DADP formula, half of the funds would be allocated using a standard existing formula for the distribution of alcohol and drug treat- ment funds, one-fourth would be allocated based upon the prevalence of drug arrests in each county, and one-fourth would be allocated based upon the number of individuals receiving drug treatment services in each county as of November 1, 2000 (the start of the month the initiative was enacted). To ensure that small counties have sufficient resources to com- ply with the law, the DADP formula further guarantees each county at least $147,000 from the initial round of funding. The rules also prohibit use of the funds for capital outlay projects. In late December, DADP announced in a letter to counties the specific allocations that would be made available to them almost immediately upon their compliance with the new regulations. Funding Procedures. The DADP regulation requires all counties to request funds to implement the new law. In order to receive funds, a county Board of Supervisors must adopt and submit to DADP by March 1, 2001, a board resolution designating a lead agency responsible for the adminis- C – 40 Health and Social Services 2001-02 Analysis tration of all Proposition 36 funds and stating the county’s agreement to comply with the various provisions of the law and the implementing regu- lations. Each county is further required by the regulations to establish a trust fund for all Proposition 36 funds. In addition, the new DADP rules direct each county to submit to the state a county plan for implementation of Proposition 36, including pro- visions indicating how the county alcohol and drug program office, pro- bation department, and courts will collaborate to carry out the law. A deadline for counties to submit their plan is not specified in the emergency regulation, although DADP officials anticipate that nearly all counties will comply by July 1, 2001, the date when the sentencing provisions of Proposi- tion 36 diverting eligible offenders into treatment will go into effect. Budget Proposal. The 2001-02 Governor’s Budget details the administration’s proposals for using Proposition 36 funds for staffing and other expenditures to implement the measure in both the current fiscal year and the budget year. Under the Governor’s expenditure plan, the $1.2 million allocated for the current year would be used to support an initial complement of 15 staff positions that are being established admin- istratively. The Governor’s budget plan would increase administrative funding to about $2.8 million in 2001-02 and establish through the bud- get process a total of 25.2 staff positions for several organizational units within DADP, including a new Office of Criminal Justice Collaboration that would oversee the development of both Proposition 36 implementa- tion and ongoing drug court programs. The department’s staffing proposal is summarized in Figure 3. The budget request also provides for additional office space, information tech- nology, and supplies for the additional staff, and allocates $600,000 in the budget year for a public university study of the new law as required by Proposition 36. Under the Governor’s budget proposal, the funding for staffing and other expenditures would be appropriated to DADP from the Substance Abuse Treatment Trust Fund. Proposition 36 appropriates $120 million from the General Fund to that trust fund in 2001-02 and in ensuing years through 2005-06. Additional Administration Steps in Progress. At the time this analy- sis was prepared, we were advised that the administration was in the process of taking several additional significant steps to implement Propo- sition 36. These include: Review of the statutory and regulatory authority of DADP to ensure that Proposition 36 treatment providers are licensed or certified, as the measure requires. The department is also consid- Crosscutting Issues C – 41 Legislative Analyst’s Office ering what new requirements, if any, should be established for the credentialing of drug treatment counselors. Figure 3 Staffing Proposed for Implementation of Proposition 36 2001-02 DADP Unit Positions Key Activities Permanent Positions Office of Criminal Justice Collaboration 8.0 Oversee implementation and provide technical assistance to counties. Office of Legal Services 1.0 Research and analyze legal and regulatory issues. Office of Applied Research and Analysis 2.0 Organize and supervise research into effects of Proposition 36. Information Management Services Division 1.0 Identify and implement needed modifications to information systems. Licensing and Certification Branch 7.0 Conduct site reviews of treatment facilities and seek corrective actions. Audit Services Branch 6.2 Conduct audits of counties and treatment pro- viders. Total, new permanent positions 25.2 Temporary Positions Human Resources Branch 1.0 Establishment of new positions and hiring of additional personnel. Total, new temporary positions 1.0 Total, staffing augmentation 26.2 Development of additional regulations for the distribution of funding from the Substance Abuse Treatment Trust Fund to coun- ties in 2001-02 and in subsequent years. As we noted earlier, the formula established in the emergency regulations applies only to funding distributed in the current year. Creation of several panels to assist in the overall implementation of the measure. The DADP was planning to establish advisory panels to provide it with guidance from outside experts on over- all implementation issues as well as specifically on the required evaluation of Proposition 36. Steps were also being taken to fos- ter collaboration among the various state agencies involved in the implementation of the measure. C – 42 Health and Social Services 2001-02 Analysis PROPOSITION 36 BUDGET ISSUES Budget Actions in DADP and CDC We recommend that the Legislature approve the proposed Department of Alcohol and Drug Programs budget to implement Proposition 36. We further recommend in our analysis of the California Department of Corrections’ (CDC) budget (Item 5240) that CDC’s budget be reduced by about $45 million to reflect the drop in the prison inmate population that is likely to occur in the budget year. Accept DADP Budget Proposal. Our analysis indicates the DADP budget proposal is consistent with the proposition’s requirements for strong state oversight of county implementation of the measure. The DADP’s proposed expenditures for the administration of Proposition 36 from the Substance Abuse Treatment Trust Fund appear to be reasonable given the department’s significant new workload and responsibilities. The funding allocated to DADP in 2001-02 would amount to about 2.3 per- cent of the total appropriation from the trust fund in 2001-02. Accord- ingly, we recommend approval of the budget request. Reduce Prison Budget. As we further discuss in our analysis of the CDC, the budget does not take into account the impact of Proposition 36 on the prison and parole populations during the budget year. This is the case even though the diversion of offenders to treatment commences in July 2001. The CDC estimates that, as a result of Proposition 36, 3,770 fewer prison beds will be needed in the budget year and that parole caseloads will decrease by 1,051 offenders. In our analysis of the CDC budget (Item 5240), we propose a $61 mil- lion net reduction in the department’s General Fund expenditures. This amount includes $45 million to reflect the impact of Proposition 36 and $16 million to reflect a continuing decrease in the inmate population not taken into account by recent administration population projections. The Legislature may wish to consider further adjustments to prison spending at the time of the May Revision. At that time, the CDC budget plan will be adjusted to reflect updated population projections which are likely to take into account the effects of Proposition 36. As we discuss later in this analysis, the Legislature may wish to redi- rect part of this $45 million in General Fund savings due to Proposition 36 to enhance efforts to implement the measure or to use these savings to address other legislative priorities. Crosscutting Issues C – 43 Legislative Analyst’s Office Funding Options For Implementing Proposition 36 We recommend that the Legislature consider a number of options for legislative changes and state budget adjustments that could increase the odds of Proposition 36’s success. The list of options involves the California Medical Assistance Program and California Work Opportunity and Responsibility to Kids program, federal funding that is available for worker training, literacy education, and drug treatment programs, private insurance coverage of treatment, low-interest loans for treatment facilities, and the redirection of state General Fund savings from the implementation of the measure. State Has Stake in Proposition 36 Success. A number of counties have predicted that the funding provided to them from the Substance Abuse Treatment Trust Fund will be insufficient to provide the treatment and supervision services necessary under Proposition 36. As we have previ- ously advised the Legislature, we believe it is too early to reach that con- clusion until the treatment needs and methods of supervision of the propo- sition have been determined. However, our December report also acknowledged that additional resources beyond those appropriated by the measure would be needed in order to implement Proposition 36 in a more intensive and compre- hensive way. These implementation issues include providing for the drug- testing of offenders; addressing the mental health, education, training, and other social service needs of offenders diverted to treatment; or ad- dressing the long-standing understaffing of probation departments that existed long before the passage of Proposition 36. The measure specifi- cally states that additional appropriations by the Legislature to the treat- ment trust fund are permitted. The Legislature may wish to consider assisting counties in address- ing these issues in light of the state’s own significant stake in the poten- tial success of Proposition 36. The successful implementation of the propo- sition could both improve public safety and result in significant net sav- ings for the state (and counties) on prison operation and construction costs as well as other health and social services expenditures. Academic research has shown that well-designed and well-run substance abuse treat- ment programs can provide cost-effective treatment of drug addiction that prevents the further involvement of offenders in the criminal justice system. The state could assist the counties by providing some modest addi- tional resources to implement Proposition 36. Such resources could be provided at no net cost to the state General Fund, either by (1) effectively using non-General Fund resources such as available federal funds and private insurance coverage, and (2) redirecting General Fund savings that will accrue to the state as a result of the implementation of the measure. C – 44 Health and Social Services 2001-02 Analysis Accordingly, the Legislature may wish to consider the following op- tions for legislative changes and state budget adjustments that we de- scribe below that would result in more intensive and more comprehen- sive implementation of Proposition 36. As these options are considered, we recommend that the Legislature carefully weigh the potential fiscal and policy benefits to the state from a more successful implementation of Proposition 36 against the overall fiscal condition of the state and its other important spending priorities. Federal Block Grant Funds. Federal law provides California and other states with allocations of Substance Abuse Prevention and Treatment Block Grant funds. The Governor’s budget for DADP proposes to allocate about $223 million of these block grant funds for expenditure during 2001-02. About $15 million would be budgeted for state operations and the re- maining $208 million for local assistance. However, DADP was recently advised by federal authorities that there will be an additional $12 million in block grant funds allocated to Cali- fornia during 2001-02. These additional block grant funds are not reflected in the Governor’s budget and would be available if the Legislature so determined to further efforts to implement Proposition 36. Some or all of these funds could be transferred to the Substance Abuse Treatment Trust Fund created by the proposition. The Legislature also has the option of creating a separate state program providing grants to counties for local Proposition 36 implementation efforts. Providing these funds to counties separately of allocations from the Substance Abuse Treat- ment Trust Fund would permit the block grant funds to be used for drug- testing of Proposition 36 offenders, given that the proposition bars use of money from the trust fund for this purpose. Another alternative would be to increase the amount of block grant funds budgeted for DADP local assistance, allowing the counties to determine whether they wished to use their share of the grants to augment Proposition 36 programs or for some other purpose. Eligibility for California Work Opportunity and Responsibility to Kids (CalWORKs) Services. The federal welfare reform legislation gen- erally provides that offenders with a recent drug-related felony convic- tion are not eligible for cash assistance or for services, such as drug treat- ment, transportation, child care, or help in obtaining employment. (Their children remain eligible for welfare assistance.) However, the federal leg- islation does give states the option of adopting statutes permitting cash assistance and services to be provided to some or all of these offenders. So far, California has not exercised its option to do so. According to CDC data, about 18 percent of the offenders sentenced to prison for drug possession felonies are women. Given that many of Crosscutting Issues C – 45 Legislative Analyst’s Office these offenders have low incomes, and that many have custody of their children, it appears likely that several thousand offenders annually di- verted to treatment programs under Proposition 36 could be eligible for CalWORKs services if they did not have a recent drug conviction on their record. (A parole violator diverted to drug treatment under Proposition 36 who did not have a recent conviction for a drug offense\u2014for example, someone initially convicted of burglary and subsequently released to parole\u2014could be eligible for CalWORKs cash assistance and services.) If the Legislature were to change state law so that now-ineligible of- fenders were allowed to receive treatment services under the CalWORKs program, it appears likely that sufficient funding would be available to address their needs. In recent years, tens of millions of dollars of CalWORKs funds allocated to the counties for drug treatment and men- tal health services have gone unspent. Under these circumstances, the Legislature may wish to consider amending the state welfare reform law to allow drug treatment and re- lated services (but not cash assistance) to be provided through CalWORKs for Proposition 36 offenders who would qualify for such services were it not for a recent drug conviction. In our view, providing these treatment services would help reduce the welfare dependency of families of offend- ers whose involvement in crime is often associated with their addiction to illegal drugs. Counties would also be provided additional resources from CalWORKs that might otherwise go unspent to significantly en- hance the treatment programs provided for offenders in compliance with Proposition 36. Counting Welfare Spending as Matching Funds. The option of chang- ing CalWORKs eligibility rules to allow certain Proposition 36 offenders to qualify for services could provide the state with additional fiscal flex- ibility. Pursuant to federal welfare reform legislation, California may count all state spending on families eligible for CalWORKs, even if they are not enrolled in the CalWORKs program, for purposes of meeting mainte- nance-of-effort (MOE) requirements for state matching funds. By count- ing appropriate Proposition 36 expenditures as MOE, the state is free to spend an equivalent amount of General Fund money for any other pur- pose it chooses. We estimate that the state could free up about $11 million General Fund annually for other purposes by counting appropriate Propo- sition 36 expenditures as MOE. We would note that, even if the Legislature does not choose to change CalWORKs eligibility rules for offenders convicted in the courts on new drug charges, the state could count as MOE some of the Proposition 36 expenditures for parole violators who meet CalWORKs eligibility rules. This would be the case even if these offenders are not actually enrolled in the CalWORKs program. C – 46 Health and Social Services 2001-02 Analysis As we discuss further, the Legislature may wish to redirect General Fund money that is no longer required as a state match for the CalWORKs program to further the implementation of Proposition 36 or to address other legislative priorities. Funding Drug Treatment With Medi-Cal Funds. Some of the offend- ers diverted to treatment programs under Proposition 36 could be eli- gible for medical assistance under the Medi-Cal Program. Because sub- stance abuse treatment qualifies as medical service provided under the program, Medi-Cal could, at least theoretically, provide a supplemental source of funding for implementation of Proposition 36. Medi-Cal is jointly funded by the state and federal governments on almost an even dollar- for-dollar matching basis. If the funding allocated to counties under Propo- sition 36 could be counted as the state share of Medi-Cal treatment for eligible offenders, additional federal funds could be obtained for treat- ment services at no further cost to the state. There are legal questions about this approach, however, that would need to be addressed. For example, Medi-Cal reimbursement is limited in California for specified treatment services that are deemed to be medi- cally necessary. Reimbursement might not be available to pay for the treatment of an individual resulting from the legal order of a judge or the state parole board absent a clinical determination that the offender has an addiction problem. However, we believe it is possible to ensure that Medi-Cal only pays for the treatment of Proposition 36 offenders when it is determined through a clinical assessment, perhaps conducted under court order, that the offender meets the test of requiring medically neces- sary treatment. The Legislature may wish to seek a review of such legal issues to determine whether any changes in state law are necessary and feasible to enable counties to leverage their Proposition 36 allocations with federal Medi-Cal funding. Medi-Cal-Funded Mental Health Treatment. Proposition 36 offend- ers who are seriously mentally ill could also be assisted under the Medi-Cal Program because mental health services are an authorized medical ser- vice. Given that more than 70 percent of seriously mentally ill offenders also have a substance abuse problem, it is likely that several thousand Proposition 36 offenders could benefit from mental health services. With some additional state help, counties might be able to make mental health services available for offenders with a dual diagnosis of both drug ad- diction and a serious mental illness. As is the case with drug treatment services, we believe that counties could use their Proposition 36 trust fund allocations as a match for fed- eral Medi-Cal funding if the offender meets the test of requiring medi- cally necessary treatment. However, some of the same legal questions Crosscutting Issues C – 47 Legislative Analyst’s Office about using Medi-Cal for substance abuse treatment would also apply to the provision of mental health services in this way. We also note that Proposition 36 does not specifically authorize the use of trust fund allocations for mental health services. However, a pro- vision permits trust funds to be spent for any miscellaneous costs made necessary by the provisions of this act and therefore could be interpreted to allow funding of mental health services for an offender with a dual diagnosis of drug addiction. The Legislature may wish to consider amend- ing Proposition 36 to clarify that trust fund allocations could be used for mental health services in such cases. Workforce Investment Act Funding. The Legislature may wish to con- sider furthering Proposition 36 programs by using federal funds allocated to the state and county governments under the Workforce Investment Act. Proposition 36 authorizes judges and parole officials to mandate that offenders participate in vocational training and literacy education pro- grams, and the measure allows funds from the Substance Abuse Treat- ment Trust Fund to be used to provide such training. If other sources of funds were available to pay for vocational training and literacy educa- tion, though, more money would remain available for counties’ substance abuse treatment programs and related services. The 2001-02 Governor’s Budget appropriates about $800 million in fund- ing received by the state under the Workforce Investment Act, a recent federal law that targets funds to assist adults facing serious barriers to employment. Up to 15 percent of the allocation is reserved for statewide activities, with the balance of funding allocated to counties. The Governor’s proposed budget identifies few specific statewide projects, and proposes to leave most allocation decisions to the California Workforce Investment Board. The Legislature, or the board, may wish to consider setting aside part of the state’s allocation for Proposition 36 offenders, or encouraging coun- ties to take similar actions with their Workforce Investment Act alloca- tions. Our analysis indicates that some offenders subject to Proposition 36 may have other significant problems beside their drug addiction, such as a lack of job skills, that increase their risk of future involvement with the criminal justice system. These offenders may be less likely to commit pro- bation or parole violations or commit new crimes if they received voca- tional training that made them employable using the federal funds avail- able under the Workforce Investment Act. The federal law permits these funds to be used to provide job training and job preparation assistance for adults, as well as for literacy education provided in coordination with employment assistance services. C – 48 Health and Social Services 2001-02 Analysis Private Health Insurance Coverage. Proposition 36 provides that any offender who is reasonably able to do so may be required to contribute to the cost of his or her placement in a drug treatment program. Not all offenders convicted of the nonviolent drug possession crimes subject to the provisions of Proposition 36 will be indigent, and our analysis indi- cates that many will face at least a nominal charge for the cost of their services. Moreover, some individuals subject to the drug treatment pro- visions of Proposition 36 may have health insurance that could provide substantial reimbursements of the cost of substance abuse treatment pro- vided under the measure. If third-party private reimbursement was available to pay for treat- ment services in such cases, more public money would remain available to counties to enhance their substance abuse treatment programs and to support other activities to implement Proposition 36 effectively. How- ever, we are advised that, in such cases, some health insurers may decline to pay for such services on the grounds that they were the result of a criminal conviction rather than medical necessity. The Legislature may wish to ask Legislative Counsel whether there are any legal impediments to ensuring that third-party reimbursement is available to counties to help pay for treatment provided under Proposition 36. As in the case of Medi-Cal, we believe third-party payment for such services may reason- ably be required when a clinical assessment has determined that they are medically necessary. Capital Outlay Needs of Treatment Facilities. The DADP has pre- dicted that Proposition 36 could result in the need for a significant expan- sion of residential facilities and nonresidential programs to serve offend- ers diverted to treatment under its provisions. We are advised by drug treatment providers that they will need new or expanded facilities for residential or outpatient treatment programs to serve Proposition 36 of- fenders in addition to their existing drug treatment patients. However, the DADP’s emergency regulations prohibit the use of any of the first allocation of money from the trust fund for major capital outlay projects. We believe the state could assist counties and drug treatment provid- ers with their capital outlay needs through the existing loan program operated by the California Health Facilities Financing Authority. The au- thority has frequently provided 3 percent interest-rate loans for up to 15 years to drug treatment programs as well as other types of health pro- gram providers. We are advised that the authority may have up to $18 mil- lion available during the budget year for such loans. The Legislature may wish to request the authority to (1) assess whether it has sufficient fund- ing available to meet the anticipated needs of providers participating in the implementation of Proposition 36 and (2) report at the time of budget hearings as to whether it has sufficient resources to meet the needs both Crosscutting Issues C – 49 Legislative Analyst’s Office of drug treatment providers and other types of medical providers seek- ing financing assistance. Redirection of State Savings. Earlier in this report, we indicated that the Legislature has the option of redirecting anticipated state savings on prison operating costs due to Proposition 36 to further efforts to imple- ment the measure. Any General Fund resources made available by count- ing Proposition 36 expenditures as a match to the CalWORKs program could also be used for such purposes. For example, the Legislature could use these additional General Fund resources to provide counties with the funding needed to pay for drug- testing of Proposition 36 offenders. While the proposition prohibits the use of the Substance Abuse Treatment Trust Fund to support drug test- ing, the measure does not prohibit drug testing for offenders paid for from other funding sources such as we have identified. The Legislature may also wish to consider providing additional funding for court moni- toring or probation supervision of Proposition 36 offenders. CONCLUSION In considering the alternatives we have offered in this analysis, the Legislature should bear in mind that some of these options represent courses of action that do not work in combination with each other. For example, to the extent that Medi-Cal funding is used to provide substance abuse treatment services for Proposition 36 offenders, those expenditures may not also be counted as state MOE for the CalWORKs program. Other options may complement each other. That is the case, for ex- ample, with the alternatives on counting MOE and the option for making certain Proposition 36 offenders eligible for CalWORKs services. Finally, as we stated earlier, we recommend that the Legislature care- fully weigh the potential fiscal and policy benefits to the state from the successful implementation of Proposition 36 against the overall fiscal con- dition of the state and its other important spending priorities in making such funding decisions. C – 50 Health and Social Services 2001-02 Analysis CALIFORNIA SPENDING ON LONG-TERM CARE SERVICES SUMMARY OF SPENDING AND CASELOADS A number of diverse programs make up California’s system of long- term care, and a variety of consumers use long-term care services. Our review of long-term care spending and caseloads shows that about half of the state’s long-term care expenditures are for institutional care, while most long-term care consumers receive their care from home- and community-based services. Generally, long-term care spending is increasing, while caseloads are either remaining constant or growing at a much smaller rate than spending. In our review, we also note that California’s long-term care programs comprise a fragmented service system, but that efforts are under way to improve coordination. Background Assembly Bill 452 (Mazzoni). Assembly Bill 452, the Mazzoni Long-Term Care Act of 2000 (Chapter 895, Statutes of 1999), directed the Legislative Analyst’s Office to provide in our 2001-02 Analysis of the Buget Bill a sum- mary of spending on California’s long-term care programs and, to the extent feasible, estimates of the population served by each program. In accordance with Chapter 895, in this section we provide an inventory of the state’s long- term care services. We examine what is meant by long-term care, how much is spent on long-term care services, and how many clients are served by the various programs. We also report on recent patterns of growth in California’s long-term care system. Later in this Analysis, we also provide a summary of the Governor’s 2001-02 proposals to strengthen long-term care. State’s Efforts to Improve Long-Term Care. Both the Governor and the Legislature have demonstrated an interest in improving the quality and availability of long-term care services in California. The Governor’s Aging With Dignity Initiative and the Legislature’s subsequent budget actions in 2000 provided for enhancements in the state’s long-term care Crosscutting Issues C – 51 Legislative Analyst’s Office services. The Legislature also passed additional long-term care measures which were subsequently approved by the Governor. For example, in addition to mandating this report, Chapter 895 established a state Long- Term Care Council through the year 2006. Comprised of directors from selected departments within the California Health and Human Services Agency (HHSA), the council is charged with the task of developing strat- egies for long-term care. As an initial effort to coordinate long-term care services, the council submitted state long-term care budget proposals for the 2001-02 Governor’s Budget. Efforts to improve long-term care in California have focused prima- rily upon expanding long-term care services that prevent or delay insti- tutional care, maximize a person’s independence, and offer consumer choice. Changes in long-term care services that have occurred have re- sulted not only from state policy initiatives, but also from federal incen- tives. In particular, the federal government provides matching funds for qualifying state programs that offer home- and community-based care as an alternative to institutional care. In addition, a recent U.S. Supreme Court decision, L.C. & E.W. vs. Olmstead, is likely to shape continued state ef- forts to improve long-term care. The June 1999 court ruling means that states must provide alternatives to institutions for persons with disabili- ties who could transition to a community setting, notwithstanding avail- able resources and consumer preference. Characteristics of Long-Term Care Long-Term Care Encompasses a Wide Array of Services. In general, California law defines long-term care as a coordinated continuum of ser- vices that: Addresses the individual’s health, social, and personal needs. Maximizes the individual’s ability to function independently outside of an institution. Long-term care services assist the individual in accomplishing rou- tine daily activities, depending on an individual’s level of need. For ex- ample, a long-term care service may provide a disabled person with assistive technology that allows that person to accomplish routine activi- ties independently. In another case, an individual may receive assistance in the home with meal preparation; housework or shopping; or with eat- ing, bathing, and dressing. Generally, long-term care does not include medical care. Health in- surance, including Medicare, provides for acute medical care, but gener- ally does not cover nonmedical support services needed to perform daily routine activities. Supportive services, therefore, are made available by C – 52 Health and Social Services 2001-02 Analysis other providers and payers of long-term care such as Medicaid; family caregivers (spouses, adult children, and relatives); and private long-term care insurance. Some long-term care services, notably skilled nursing fa- cilities, adult day health care, and the Program for All-Inclusive Care for the Elderly (PACE) nevertheless do provide some medical care, which is incorporated into the service provider’s rates for overall long-term care. Long-Term Care Services Used by Diverse Group. Long-term care ser- vices are provided not only to the elderly (65 years and older), but also to younger persons with developmental disabilities, mental disabilities, or physical disabilities. Many elderly and disabled persons receiving long- term care are linked to the long-term care system as a result of being eli- gible for Medi-Cal or the Supplemental Security Income\/State Supple- mentary Program (SSI\/SSP). Persons with developmental disabilities generally have a mental or physical impairment, which begins before their eighteenth birthday and is expected to continue indefinitely, and is due to mental retardation, ce- rebral palsy, epilepsy, autism, or a condition closely related to mental re- tardation. They receive their services in state-operated developmental centers or in the community through nonprofit regional centers. Individu- als with mental disabilities include mentally ill persons, who generally receive care in state and county mental health programs, and persons with traumatic brain injuries. Persons with physical disabilities may re- ceive services supported by the Department of Rehabilitation that maxi- mize their ability to function independently, such as those offered by in- dependent living centers. Delivery of Long-Term Care Services Where Long-Term Care Is Provided. Figure 1 (pages 53 through 55) provides a summary of state-funded long-term care programs. Programs are listed according to the setting\u2014institutions, the community, or the home\u2014in which the program is provided. Major programs within each setting have been identified along with the department that administers or provides funding for the program, the total amount of spending in 2000-01, the types of services provided, and the types of clients served. Long-term care services are provided in a variety of settings and liv- ing arrangements. Institutional care includes skilled nursing facilities and intermediate care facilities, both of which are licensed health facilities. Community-based services include nonmedical residential care, adult day health care, transportation, and nutrition. The in-home category, including such programs as In-Home Supportive Services (IHSS), provides personal care services in the home and case management aimed at coordinating a variety of services that allow a person to remain in his\/her own home. Crosscutting Issues C – 53 Legislative Analyst’s Office Fi gu re 1 Su m m ar y of L on g- Te rm C ar e Pr og ra m s 20 00 -0 1 (In M illi on s) Pr og ra m De pa rtm en t To ta l Co st Se rv ic e Cl ie nt s In st itu tio na l C ar e Nu rs in g Fa cil itie s\u2014 Fe e- fo r S er vic e M ed i-C al \/H ea lth S er vic es $2 ,6 34 Pr iva te , l ice ns ed s kil le d nu rs in g fa cil itie s. M ed i-C al eli gib le eld er ly, d isa ble d, o r n ee dy . Nu rs in g Fa cil itie s\/ In te rm ed ia te C ar e Fa cil itie s\u2014 M an ag ed C ar e M ed i-C al \/H ea lth S er vic es 23 6 Lo ng -te rm c ar e pr ov id ed b y Co un ty O rg an ize d He al th S ys te m s, u su al ly in a n in st itu tio na l s et tin g. M ed i-C al eli gib le eld er ly, d isa ble d, o r n ee dy . De ve lo pm en ta l C en te rs De ve lo pm en ta l S er vic es 65 6 St at e in st itu tio ns . De ve lo pm en ta lly d isa bl ed . St at e Ho sp ita ls- La nt er m an -P et ris -S ho rt M en ta l H ea lth 11 0 St at e in st itu tio ns . M en ta l h ea lth p at ie nt s. St at e Ho sp ita ls- Fo re ns ic M en ta l H ea lth 40 7 St at e in st itu tio ns . M en ta l h ea lth p at ie nt s. In te rm ed ia te C ar e Fa cil itie s- De ve lo pm en ta lly D isa bl ed M ed i-C al \/ De ve lo pm en ta l S er vic es 32 6 Pr iva te , l ice ns ed h ea lth fa cil itie s. De ve lo pm en ta lly d isa bl ed . Ve te ra ns ‘ H om es -N ur sin g Fa cil itie s an d In te rm ed ia te C ar e Fa cil itie s Ve te ra ns A ffa irs 60 St at e in st itu tio ns , w ith lic en se d sk ille d nu rs in g an d in te rm ed ia te c ar e fa cil itie s. El de rly o r d isa bl ed v et er an s. Ve te ra ns ‘ H om es -R es id en tia l Ve te ra ns A ffa irs 20 St at e in st itu tio ns , w ith re sid en tia l a nd d o- m ici lia ry c ar e. El de rly o r d isa bl ed v et er an s. Co m m un ity -B as ed C ar e Re gi on al C en te rs \/N on re sid en tia l De ve lo pm en ta l S er vic es $1 ,1 20 Se rv ice s pr ov id ed to c lie nt s re sid in g in ow n ho m e or h om e of a re la tiv e. De ve lo pm en ta lly d isa bl ed . Co nt in ue d C – 54 Health and Social Services 2001-02 Analysis Pr og ra m De pa rtm en t To ta l Co st Se rv ic e Cl ie nt s R eg io na l C en te rs \/R es id en tia l D ev el op m en ta l S er vi ce s $7 08 Se rv ic es p ro vi de d to c lie nt s re si di ng in co m m un ity c ar e fa ci lit ie s. D ev el op m en ta lly d is ab le d. SS I\/S SP N on m ed ic al O ut -o f-H om e So ci al S er vi ce s 45 6 C as h gr an t f or re si de nt ia l c ar e (g en er al ly , gr an ts u se d fo r R es id en tia l C ar e Fa ci lit ie s) . El de rly o r d is ab le d, a s el ig ib le a cc or di ng to in co m e an d as se ts . Ad ul t D ay H ea lth C ar e M ed i-C al \/A gi ng 12 3 Li ce ns ed fa ci lit ie s of fe rin g he al th , th er ap eu tic , a nd s oc ia l s er vi ce s. El de rly , d is ab le d ad ul ts . N ut rit io n Ag in g 68 C on gr eg at e or h om e- de liv er ed n ut rit io na l m ea ls . El de rly . Pr og ra m o f A ll- In cl us iv e C ar e fo r t he El de rly H ea lth S er vi ce s 66 Fu ll ra ng e of c ar e, in cl ud in g ad ul t d ay he al th , c as e m an ag em en t, pe rs on al c ar e, pr ov id ed o n a ca pi ta te d ba si s. El de rly . Su pp or tiv e Se rv ic es Ag in g 36 Pr og ra m s au th or iz ed b y th e O ld er Am er ic an s Ac t, in cl ud in g ca se m an ag e- m en t a nd tr an sp or ta tio n. El de rly . C on di tio na l R el ea se P ro gr am M en ta l H ea lth 17 As se ss m en t, tre at m en t, an d su pe rv is io n. Ju di ci al ly c om m itt ed . In de pe nd en t L iv in g C en te rs R eh ab ilit at io n 13 G ra nt s pr ov id ed to c en te rs , w hi ch p ro vi de a fu ll ra ng e of s er vi ce s. D is ab le d. C ar eg iv er R es ou rc e C en te rs M en ta l H ea lth 12 N on pr of it re so ur ce c en te rs . C ar eg iv er s of b ra in -im pa ire d ad ul ts . O m bu ds m an Ag in g 6 St at e pr og ra m th at a dv oc at es fo r r ig ht s of re si de nt s in 2 4- ho ur lo ng -te rm c ar e fa ci lit ie s. El de rly . Al zh ei m er ‘s D ay C ar e R es ou rc e C en te rs Ag in g 5 D ay c ar e. Pe rs on s w ith A lz he im er ‘s d is ea se o r o th er de m en tia a nd th ei r c ar eg iv er s. Al zh ei m er ‘s D is ea se R es ea rc h C en te rs H ea lth S er vi ce s 4 D ia gn os tic a nd tr ea tm en t s er vi ce s. Pe rs on s w ith A lz he im er ‘s d is ea se o r o th er de m en tia . Co nt in ue d Crosscutting Issues C – 55 Legislative Analyst’s Office Pr og ra m De pa rtm en t To ta l Co st Se rv ic e Cl ie nt s Se ni or C om pa ni on P ro gr am Ag in g $2 C om pa ni on sh ip a nd tr an sp or ta tio n se rv ic es . El de rly . R es pi te C ar e Ag in g 1 Te m po ra ry o r p er io di c se rv ic es to re lie ve pr im ar y an d un pa id c ar eg iv er s. El de rly o r d is ab le d, a nd th ei r c ar eg iv er s. In -H om e Ca re In -H om e Su pp or tiv e Se rv ic es So ci al S er vi ce s $1 ,9 72 Pr iva te a nd p ub lic s er vic es , c oo rd in at ed b y th e co un ty w el fa re d ep ar tm en ts , t o al lo w el ig ib le p er so ns to re m ai n in th ei r h om es . Lo w in co m e el de rly , b lin d, o r d is ab le d. M ul tip ur po se S en io r S er vi ce s Pr og ra m Ag in g 39 C as e m an ag em en t p ro gr am p ro vi de d un – de r a fe de ra l w ai ve r t o pr ev en t o r d el ay pr em at ur e in st itu tio na l p la ce m en t. M ed i-C al e lig ib le e ld er ly c er tif ia bl e fo r sk ille d nu rs in g ca re . Li nk ag es Ag in g 9 C as e m an ag em en t p ro gr am to p re ve nt o r de la y pr em at ur e in st itu tio na l p la ce m en t (s er vi ce s pr ov id ed re ga rd le ss o f M ed i-C al el ig ib ilit y) . El de rly o r d is ab le d. C – 56 Health and Social Services 2001-02 Analysis Multiple State Departments Provide Long-Term Care. Within Cali- fornia, the Departments of Aging (CDA), Health Services (DHS), Social Services (DSS), Developmental Services, Mental Health (DMH), Rehabilita- tion, and Veterans Affairs directly administer programs and services that provide long-term care. In some cases, for example, mentally disabled and developmentally disabled clients, the department provides funding to county- operated entities or nonprofit organizations for long-term care services. Many of the long-term care services in California are funded by Medi- Cal\u2014the state’s Medicaid program\u2014which is the jointly funded state-fed- eral health insurance program for eligible low-income and needy persons. Specifically, Medi-Cal pays for nursing home beds on a fee-for-service basis for authorized individuals. Medi-Cal also funds an in-home personal care services program as a state optional benefit, which is administered by DSS as part of the IHSS program. Medi-Cal additionally funds home- and com- munity-based services to targeted individuals\u2014those who might otherwise require institutional care. These services are provided under federal home- and community-based services waivers which allow payment for services not otherwise authorized by Medi-Cal. For example, the Multipurpose Se- nior Services Program (MSSP) provides case management to frail elderly persons so that they may continue to live in their own homes. Other long-term care programs administered by the CDA and local Area Agencies on Aging receive federal funds under the Older Americans Act. The state provides nutrition services, as well as other home- and commu- nity-based social service programs, with these federal funds. The state’s framework for delivering long-term care services largely reflects the state’s central role as an administrative entity for federal funds. The federal government requires a single state agency to be re- sponsible for federal Medicaid funds. In California, that agency is DHS, which receives all federal Medicaid funding and disburses these funds to other departments that administer the programs providing long- term care services. Notwithstanding DHS’ designation as the single state agency for federal funding, the General Fund portion of Medic- aid funding is channeled through DHS only in some cases. In other cases, it is allocated directly to the department administering a par- ticular program. Long-Term Care Expenditures and Caseloads Key Trends Evident in Data. Figure 2 (see pages 58 and 59) summa- rizes the total spending, caseloads, and cost per case for the major long- term care services provided in the state. The data demonstrate some important points regarding California’s system of long-term care: Crosscutting Issues C – 57 Legislative Analyst’s Office Public Spending on Long-Term Care Is Largely Concentrated on Nursing Facilities and the IHSS Program. About $2.6 billion will be spent during 2000-01 on nursing facilities (on a fee-for-service basis) and another $2 billion on IHSS. The State Spends Almost as Much for Institutional Care as for Home- and Community-Based Care Combined. California will spend $4.5 billion (all funds) for all institutional long-term care and $4.7 billion (all funds) for home- and community-based long- term care in 2000-01. More Persons Use Home- and Community-Based Services Than Reside in Institutions. About 250,000 individuals rely upon the IHSS program for assistance. Although spending on nursing fa- cilities is higher than spending on IHSS, only 65,000 individuals reside in nursing homes (fee-for-service). Institutions Are the Most Costly Setting for Long-Term Care on a Per-Case Basis. Because institutional care generally involves higher levels of care and supervision, it costs the most\u2014on aver- age $50,000 per case annually. In comparison, the annual cost of providing in-home care averages no more than $8,000 per case. Although a meaningful average for community-based care can- not be computed, the average costs of the individual programs also remain well below the cost of institutional care. The General Fund Accounts for More Than Half of Long-Term Care Spending. The major long-term care programs, including nursing facilities, services for the developmentally disabled, and IHSS, are funded by Medi-Cal. The state receives matching fed- eral dollars for most of the services provided under these pro- grams. The federal government, therefore, shares a significant portion of state long-term care costs. On balance, however, the General Fund is the primary source of long-term care services, accounting for more than half of the total. Long-Term Care Spending Is Increasing Growth in Spending Over Three Years. As Figure 3 shows (see page 59), spending on state-funded long-term care services grew from nearly $7 bil- lion in 1998-99 to $7.7 billion in 1999-00, and is estimated to reach $9.1 billion in 2000-01. During this period, the General Fund portion of these costs was $3.7 billion in 1998-99, $4.2 billion in 1999-00, and will be an estimated $5 bil- lion in 2000-01. C – 58 Health and Social Services 2001-02 Analysis Figure 2 State-Funded Long-Term Care Services Funding and Caseloads 2000-01 (Funding In Millions) Funding Cost Per CaseProgram Department a State Federal Local Total Amount Caseloads b Institutional Care Nursing Facilities\u2014 Fee-for-Service Medi-Cal\/DHS $1,308 $1,326 \u2014 $2,634 65,050 $40,487 Nursing Facilities\/ ICFs\u2014Managed Care Medi-Cal\/DHS 117 119 \u2014 236 8,704 27,130 Developmental Centers Medi-Cal\/DDS 417 240 \u2014 656 3,844 170,751 State Hospitals-LPS DMH 9 4 $97 110 857 128,636 State Hospitals-Forensic DMH 407 \u2014 \u2014 407 2,717 149,835 ICF-DDs Medi-Cal\/DDS 160 166 \u2014 326 7,075 46,062 Veterans’ Homes-SNF&ICF DVA 45 15 \u2014 60 460 131,087 Veterans’ Homes-Residential DVA 15 5 \u2014 20 965 20,478 Institution Totals $2,479 $1,873 $97 $4,450 89,672 $49,620 Community-Based Care Regional Centers\/ Nonresidential DDS $806 $314 \u2014 $1,120 133,092 $8,415 Regional Centers\/Residential DDS 510 198 \u2014 708 22,803 31,061 SSI\/SSP Nonmedical Out-of-Home DSS 238 218 \u2014 456 63,850 7,141 Adult Day Health Care Medi-Cal\/CDA 60 63 \u2014 123 18,930 6,492 Nutrition CDA 9 59 \u2014 68 224,698 305 Program of All-Inclusive Care For the Elderly c Medi-Cal\/DHS 33 33 \u2014 66 3,711 17,785 Supportive Services CDA 5 31 \u2014 36 d 908,836 40 Conditional Release Program DMH 17 \u2014 \u2014 17 749 23,028 Independent Living Centers DR 6 7 \u2014 13 33,736 $371 Caregiver Resource Centers DMH 12 \u2014 \u2014 12 13,583 902 Ombudsman CDA 4 2 \u2014 6 180,451 32 Alzheimer’s Day Care Resource Center CDA 4 \u2014 \u2014 5 2,639 1,768 Alzheimer’s Disease Research Centers DHS 4 \u2014 \u2014 4 2,000 2,000 Senior Companion Program CDA 2 \u2014 \u2014 2 425 4,388 Respite Care CDA 1 \u2014 \u2014 1 1,068 604 Community Totalse $1,710 $926 \u2014 $2,637 1,610,571 N\/A f Crosscutting Issues C – 59 Legislative Analyst’s Office Funding Cost Per CaseProgram Department a State Federal Local Total Amount Caseloads b In-Home Care IHSS Medi-Cal\/DSS $746 $807 $418 $1,972 248,999 $7,919 MSSP Medi-Cal\/CDA 22 17 \u2014 39 13,847 2,800 Linkages CDA 9 \u2014 \u2014 9 5,643 1,547 In-Home Totalse $777 $825 $418 $2,019 268,489 N\/A f Grand Totals $4,966 $3,624 $515 $9,106 N\/A f N\/A f Percentage of Totals 55% 40% 6% 100% g N\/A f N\/A f a Department of Health Services (DHS), Department of Developmental Services (DDS), Department of Mental Health (DMH), Department of Veteran Affairs (DVA), Department of Social Services (DSS), California Department of Aging (CDA), and Depart- ment of Rehabilitation (DR). b Some caseload data represent an annual estimate based on an average monthly caseload, and therefore does not represent the number of persons served on an annual basis. c Includes Senior Care Action Network. d In addition to total spending shown for supportive services, $14 million (General Fund) was appropriated for long-term care innovation grants in FY 2000-01. e Caseload summation does not provide an unduplicated count of total users. Many individuals use more than one service. f Caseload summation does not provide an unduplicated count of total users. g Percentages may not total due to rounding. Figure 3 Long-Term Care Spending Has Increased (In Billions) Local Federal State 2 4 6 8 $10 98-99 99-00 00-01 C – 60 Health and Social Services 2001-02 Analysis An increase of $1.3 billion in General Fund spending from 1998-99 through 2000-01 may be attributed in part to the expansion of services not covered by Medi-Cal and, therefore, not eligible for federal funding support. Also, there has been a reduction in federal funding for two pro- grams. Specifically, two developmental centers lost federal funding due to noncompliance with federal requirements, and the General Fund com- pensated for that loss. Efforts are under way that would allow restoration of federal funding by 2001-02. Increases in spending occurred across all three settings for long-term care. However, the rates of increase and, therefore, the relative shares that each of these settings are of total expenditures, have changed some- what over time. For example, the data indicate that the share of total spend- ing for institutional care has decreased slightly from 1998-99 through 2000-01, from 51 percent to 49 percent. The share of total spending for in- home care, on the other hand, has increased slightly from 21 percent to 22 percent during the same period. Factors Contributing to Growth. We have identified two major fac- tors contributing to growth in long-term care spending: The Costs of Providing Services Are Increasing. In particular, IHSS spending grew at a significant rate, largely due to wage increases approved for home-care workers in 2000-01. In addition, institu- tional care costs are being driven upward by rising costs for health care and are reflected in a state increase in the rates paid to nursing facilities, intermediate care facilities, and adult day health care cen- ters beginning in August 2000. The increase in the rates includes a wage increase to be passed through to certain employees of nursing facilities and intermediate care facilities. The State Is Expanding Community-Based Long-Term Care Pro- grams. For example, the state increased the number of PACE pro- grams in 1998 after the federal government permanently autho- rized the PACE model of care as a federally funded Medicare and Medicaid benefit. The PACE is an innovative managed care pro- gram where one rate covers a full range of both acute- and long- term care services as an alternative to institutional care. Another example is the expansion of adult day health care to for-profit ser- vices, authorized by Chapter 1121, Statutes of 1994 (SB 1492, Mello). The Linkages program and the MSSP, both case manage- ment programs intended to prevent premature institutional place- ment, also have been expanded in recent years. Caseloads Not Main Cost Factor. Notably, caseloads are not signifi- cantly driving up costs for the largest long-term care programs. For ex- ample, growth in caseloads over fiscal years 1998-99, 1999-00, and 2000-01 Crosscutting Issues C – 61 Legislative Analyst’s Office has remained fairly flat for the services with the highest spending levels, specifically for nursing facilities and developmental centers. Expenditures for nursing facilities, on a fee-for-service basis, grew an average of 13 per- cent each year and expenditures for developmental centers grew an aver- age of 15 percent each year, while caseloads show zero growth. Also, caseloads for regional centers for the developmentally disabled and caseloads for the IHSS program grew at significantly lower rates than the corresponding growth in expenditures for these programs. Caseloads for regional centers generally grew by 6 percent per year, while overall ex- penditures for this program grew by 15 percent. Likewise, caseloads for the IHSS program grew an average of 7 percent each year, while costs rose by 19 percent. Coordination of Long-Term Care Services Long-Term Care Services Are Fragmented. The state’s continuum of long-term care consists of multiple programs administered by multiple entities. Administration of long-term care services in California remains fragmented with no real system of long-term care in place. With the exception of the regional centers, which coordinate care for persons with developmental disabilities, little formal coordination of services available to eligible individuals occurs. Nevertheless, informal coordination some- times does take place at the local level. An adult day health care center, for example, might assist an individual in accessing other services, such as IHSS and transportation services. Current Efforts to Coordinate Services. The Long-Term Care Coun- cil, chaired by the HHSA, was recently established as an interagency work- ing group to seek efficiencies in long-term care programs and to recom- mend viable options for individuals with long-term care needs. In addi- tion, DHS has a Long-Term Care Integration Pilot Project to develop and test a seamless service delivery system at the local level. LONG-TERM CARE BUDGET ISSUES Summary of the Governor’s 2001-02 Proposals The 2001-02 Governor’s Budget proposes more than $10 million ($8 million General Fund) for various programs to expand home- and community-based long-term care services. The proposals build upon the Governor’s Aging With Dignity Initiative, recently enacted legislation, and the efforts of the California Long-Term Care Council that was established last year. We raise no issues with most of the proposals at this time. C – 62 Health and Social Services 2001-02 Analysis The 2001-02 Governor’s Budget proposes approximately $10 million ($8 million General Fund) to establish new and expand existing home- and community-based long-term care services. The administration pro- posals are explained below and summarized in Figure 4. Figure 4 Governor’s Long-Term Care Proposals 2001-02 (In Millions) General Fund Other Funds Total New Programs Pilot Projects to Expand Community Long-Term Care Options $0.5 $0.5 $1.0 Assisted Living Waiver 0.5 0.5 1.0 Nursing Home Quality of Care 1.0 0.9 1.9 Institutions for Mental Diseases Transition Pilot Project 1.0 \u2014 1.0 Elder Abuse Awareness Campaign 2.0 \u2014 2.0 Continued Programs Linkages $1.5 \u2014 $1.5 Adult Day Health Care 0.5 $0.5 1.0 Senior Wellness Education Campaign 1.0 \u2014 1.0 Totals $8.0 $2.4 $10.4 Pilot Projects to Expand Community Options for Long-Term Care: $1 million ($500,000 General Fund) for a contractor to de- velop and evaluate a pilot project that would seek community placement for certain disabled Medi-Cal eligible persons resid- ing in nursing homes. The pilot would include the development of an assessment tool for community placement and would run for three years at three sites. This proposal, which would be imple- mented by DHS, was developed in conjunction with the Long- Term Care Council. Assisted Living Waiver: $1 million ($508,000 General Fund) to contract out the development of a federal demonstration waiver that would allow Medi-Cal eligible persons to receive care in resi- dential care facilities or supportive housing. This proposal would implement Chapter 557, Statutes of 2000 (AB 499, Aroner), and could offer an alternative to nursing home care for some individuals. Crosscutting Issues C – 63 Legislative Analyst’s Office Nursing Home Quality of Care: $1.9 million ($1 million General Fund) to create a Centralized Complaint Intake Unit within the Li- censing and Certification Division of DHS in order to implement a standard procedure for handling complaints, in accordance with Chapter 451, Statutes of 2000 (AB 1731, Shelley). The unit would input and track complaints from residents and staff in long-term health facilities and would ensure a response to serious complaints within 24 hours. The budget would establish 22.5 permanent new positions and also includes funding to study the current method of reimbursing long-term care through the Medi-Cal Program. Institutions for Mental Diseases (IMDs) Transition Pilot Project: $1 million from the General Fund annually for three years to seek community placement for individuals in IMDs. The IMDs are in- stitutions providing long-term nursing and psychiatric care that are operated and funded by the counties under state-local realign- ment. During the first year, $750,000 would be distributed to coun- ties to assess which IMDs residents could be placed in a home- or community-based setting. This proposal would be implemented by DMH and also was developed in conjunction with the Long- Term Care Council. Elder Abuse Public Awareness Campaign: $2 million from the General Fund for the Attorney General, in conjunction with other state and private organizations, to establish a statewide campaign to raise public awareness about elder and dependent adult abuse, as required by Chapter 559, Statutes of 2000 (AB 1819, Shelley). The Governor proposes to spend a total of $6 million over three years on this campaign. Linkages Expansion: $1.5 million from the General Fund to add up to 900 new client slots and to increase staffing for case man- agement and support of seniors living at home who do not qualify for similar services available to Medi-Cal beneficiaries. Autho- rized by the Older Californians’ Act in 1989, the Linkages pro- gram is administered by the CDA. Currently, it serves more than 5,000 clients at 36 different sites. The proposal would increase the client slots at each of the sites by 25. Adult Day Health Care: $982,000 ($484,000 General Fund) to in- crease CDA oversight of the recently expanded adult day health care program. The proposal would establish 8.5 new positions (3.5 of which are two-year limited term) and convert 2 limited- term positions to permanent status in order to handle an increased workload resulting from growth in the number of adult day health care centers. C – 64 Health and Social Services 2001-02 Analysis Senior Wellness Education Campaign: $1 million from the Gen- eral Fund to make permanent the Senior Wellness Education Cam- paign, which is an Aging With Dignity Initiative funded as a one- time cost in 2000-01. The campaign targets seniors, their families, caregivers, and community organizations for the purpose of en- couraging healthier lifestyles that might prevent the need for full-time, long-term care. Evaluating the Governor’s Long-Term Care Proposals Projects Move in Right Direction. Our analysis indicates that the Governor’s budget proposals generally have merit and are consistent with the administration’s and the Legislature’s efforts to strengthen the long- term care system through the adoption last year of the Aging With Dig- nity Initiative and the establishment of the Long-Term Care Council. Several of the projects also are consistent with the mandates of the Olmstead decision, which found that the unjustified institutionalization of people with disabilities constitutes discrimination under the Ameri- cans with Disabilities Act. The court’s decision therefore compels states to review available alternatives to institutional care for individuals with disabilities. Two of the Governor’s budget proposals seek to identify in- dividuals currently receiving institutional care (in nursing facilities and in county-operated IMDs) for placement in a community setting. A third proposal would advance compliance with the Olmstead ruling by seeking to develop an assisted living Medi-Cal waiver program that also might offer an alternative to institutional care for some individuals. At this time, we have no issues with the Governor’s proposals to implement an assisted living waiver, expand the Linkages program, con- duct elder abuse public awareness and senior wellness education cam- paigns, and expand oversight of adult day health care centers. We discuss our proposed modifications of the other budget proposals below. State May Be Eligible for Federal Grants to Fund New Projects We recommend that funding for the Institutions for Mental Diseases transition pilot project be reduced by $333,000 from the General Fund, with a corresponding increase in federal funds by $333,000, due to the availability of federal grant funds for such projects. We also recommend approval of the funding requested for pilot projects to expand community options for long-term care, but propose that the federal funding appropriation be increased by $833,000 because of the availability of federal grant funding for expansion of such projects. Finally, we recommend that the state Health and Human Services Agency report at Crosscutting Issues C – 65 Legislative Analyst’s Office the time of budget hearings on state activities to apply for these federal grants. (Reduce Item 4440-101-0001 by $333,000, increase Item 4440-101- 0890 by $333,000, and increase Item 4260-001-0890 by $833,000.) New Federal Grant Programs. The Health Care Financing Adminis- tration (HCFA), the agency that administers the federal Medicaid pro- gram, recently announced two grant programs providing collectively more than $65 million to states for projects that would allow persons with dis- abilities and chronic illnesses to live in the most integrated setting appro- priate to their needs. Two of the long-term care projects proposed in the 2001-02 Governor’s Budget appear to be eligible for these new federal grants. Grants to Transition Disabled Persons From Institutions. The first federal grant program would assist states in the transition of disabled persons from nursing facilities to community-based settings. The HCFA plans to award up to $15 million in grants nationally by September 2001, with each individual grant ranging from $300,000 to $1 million for a pe- riod of three years. One of the Governor’s proposals, the IMDs transition pilot project, appears to be eligible for funding from the new federal grant program. Just as the federal grant program proposes, the Governor’s pilot project aims at providing a transition for disabled persons from an institution to the community. The Governor’s proposal for a three-year pilot also matches the proposed three-year term of the federal grants. Shifting the cost of the pilot program from the state to federal grant funds could result in a savings to the state General Fund of up to $333,000 annually for three years. Grants for Expanding Community Options. The second federal grant program announced by HCFA would award $50 million to states over three years, with individual state grants ranging from $250,000 to $2.5 mil- lion for the project period. These so-called real choice systems change grants are to support state programs that generally create improvements in community living for people with disabilities. Our analysis indicates that this second federal grant program could assist the Governor’s budget proposal for pilot projects to expand com- munity options for long-term care. Federal grant funds probably could not be used in place of the proposed General Fund appropriation during 2001-02. That is because the initial state funding would be used to de- velop an assessment tool to identify persons currently residing in nurs- ing homes who could be placed in the community, not for actually testing any new programs to support successful community placement. How- ever, we believe that these federal grant funds could be used as an exten- sion of the pilot projects to begin expanding these community options. If a grant application were successful, the state could receive up to $833,000 C – 66 Health and Social Services 2001-02 Analysis during 2001-02, and again in the two subsequent years, to follow through on the Governor’s pilot projects. Analyst Recommendations. For these reasons, we recommend a $333,000 reduction from the General Fund and a corresponding increase in federal funds for the IMDs transition pilot project. We further recom- mend that the Legislature adopt budget bill language authorizing DMH to submit a Section 27.00 letter for additional General Fund resources if the state is unsuccessful in a federal grant application. These actions would give DMH federal spending authority if the state is awarded grant fund- ing but would also ensure the availability of General Fund support in the event that federal funding is not provided. We further recommend that $833,000 in additional federal spending authority be provided to DHS in the event it is successful in obtaining federal grant funding to expand the pilot projects to expand community op- tions for long-term care. Finally, we recommend that HHSA report during budget hearings on efforts to apply for federal grants for these projects. Staffing Level of New Nursing Home Complaint Unit Not Justified We withhold recommendation on $1.4 million ($500,000 General Fund) and 22.5 positions requested for a new Department of Health Services unit that would process all complaints filed against long-term care health facilities. The department has not explained why the funding and staffing for district offices now handling the intake of these complaints cannot be redirected to help support the new centralized complaint unit. We recommend that the department report at budget hearings regarding the funding and positions currently used in district offices for complaint intake activities. If the Legislature approves the department’s request for the additional 22.5 positions, we recommend that 10 of the requested new permanent positions be established instead as two-year limited term positions until the ongoing workload of this new unit can be determined. Governor’s Proposal. The Governor’s budget proposes to create a Centralized Complaint Intake Unit within the Licensing and Certifica- tion Division of DHS. The unit would receive and track complaints against nursing homes, and ensure proper action is taken. This proposal would facilitate a standard complaint intake procedure that is required by Chap- ter 451. It would add 22.5 permanent positions to staff the unit at a cost of $1.4 million ($500,000 General Fund) in 2001-02. The Governor’s budget also includes $500,000 from the General Fund within the Medi-Cal bud- get to study the current method of reimbursing long-term care through the Medi-Cal Program. Crosscutting Issues C – 67 Legislative Analyst’s Office Proposal Creates 22.5 Headquarters’ Positions. The 22.5 new perma- nent positions include the following: 1 health facility evaluator manager, 1 health facility evaluator specialist, 2 supervisors, 2 evaluators, 12 program technicians, 2 office technicians, and 2.5 nurses. The number of positions is based upon a projected workload of processing 13,000 complaints annually. Currently, all complaints are received and investigated by DHS Li- censing and Certification district offices. Complaints are tracked in a state- wide computerized system, to which headquarters has access. Under the proposed centralized complaint intake proposal, the centralized unit would receive all complaints and then assign the complaints to the appropri- ate district office for inspection or investigation. The district offices, there- fore, would retain the primary role in investigating complaints and updat- ing data systems for any action taken on investigated complaints. No District Resources Redirected. The budget proposal argues that a lack of staff resources has contributed to past failures to track and to re- spond promptly to complaints. However, district staff did process about 13,000 oral and written complaints in 1999-00. The district staff performed job duties that will be transferred to the proposed new staff at headquar- ters. The Governor proposes no redirection of these district resources to fund the new centralized complaint intake unit, and has provided an in- sufficient explanation for keeping staffing and funding for district offices that will see a workload decrease as a result of the creation of the new centralized complaint unit. The DHS has asserted that redirection of ex- isting staff resources would compromise other critical functions but has not demonstrated how merely shifting the location of the DHS staff in- volved in complaint intake activities could create a problem. Recent Enforcement Efforts Could Result in Fewer Complaints. Ac- cording to DHS data, the number of complaints received by Licensing and Certification district offices between 1997-98 and 1999-00 increased by 9 percent to about 13,000. Although the number of complaints has risen, recent enforcement efforts could result in a future decline in the number of complaints received, especially if enforcement efforts are effective. These recent enforcement efforts include increased penalties to nursing facili- ties for health and safety violations, increased unannounced site inspec- tions, and the addition of Licensing and Certification district office staff to conduct investigations of complaints. Within two years, the effect of these new enforcement efforts on workload will be known and the Legislature can determine how many permanent positions are needed to accomplish the goals required by statute. If the number of complaints drop as a result of these activities, some of the 22.5 new DHS positions proposed in the budget may no longer be needed. C – 68 Health and Social Services 2001-02 Analysis Analyst Recommendation. We have no concerns about the proposed $500,000 Medi-Cal reimbursement study. We withhold recommendation on the $1.4 million requested in the budget for the new centralized com- plaint unit. While we agree that a higher level of service might result from the creation of the new unit, the department has not justified the level of additional new resources requested given that existing staff in district offices are currently handling this workload. For this reason, we recommend that DHS report to the Legislature regarding the funding and positions currently used for complaint intake in district offices. If the Legislature approves the department’s request for an additional 22.5 new positions, we recommend that 10 of the positions be established as two-year limited-term positions until the ongoing workload of this unit can be determined. These positions are 1 health facility evaluator specialist, 1 su- pervisor, 1 evaluator, 6 program technicians, and 1 office technician. Crosscutting Issues C – 69 Legislative Analyst’s Office NEW TOBACCO SETTLEMENT FUND Tobacco Settlement Funds Earmarked for Health Programs The Governor’s budget proposes to establish a new fund\u2014the Tobacco Settlement Fund\u2014to be used for specific health programs. In the following pages, we summarize the initiative and discuss our findings and related recommendations. Background. In November 1998, California and other states reached a settlement agreement on lawsuits brought by the states against the major tobacco companies. It was originally estimated that California would re- ceive about $25 billion over 25 years, with $12.5 billion going to the coun- ties and $12.5 billion to the state. Since that time, however, the estimated amount the state and counties would receive has decreased due to a provi- sion in the settlement agreement that reduces payments in accordance with a decline in tobacco sales. The state’s share is now projected to be approxi- mately $10.6 billion, or about $2 billion less than its original estimated share of the settlement agreement (the counties’ share has been reduced by a like amount). Figure 1 (see next page) shows the amounts the state is estimated to receive each year for the entire term of the agreement. The basis of the state’s settlement agreement was that the state in- curred additional expenses for treating tobacco-related illnesses in the Medi-Cal Program and other health programs, and thus, had limited funds with which to expand health coverage to the uninsured. Accordingly, there has been significant public and legislative interest in dedicating those funds to smoking cessation programs and proposals to expand access to health care for the uninsured. Several bills have been introduced in the Legislature seeking to accomplish this funding dedication goal, includ- ing SB 673 (Escutia), although none were enacted. The Governor’s Budget Proposal. The budget assumes total tobacco settlement revenues of $468 million in fiscal year 2001-02. Under the Governor’s plan, all of this revenue would be deposited in a newly estab- lished Tobacco Settlement Fund (TSF), and earmarked for specific health care initiatives. Of the total amount, $295 million would be allocated to the Department of Health Services budget and $150 million would be C – 70 Health and Social Services 2001-02 Analysis allocated to the Managed Risk Medical Insurance Board. The remainder would be used to establish a 5 percent reserve for the new fund. Figure 1 Estimated Annual Tobacco Settlement Payments to the State (In Millions) Year 1998a $153 1999 \u2014 2000 409 2001 373 2002 445 2003 446 2004 through 2007b 386 2008 through 2017b 369 2018 through 2025b 441 Total $10,568 a Actual. b Each year. Figure 2 shows the specific programs for which the money is budgeted. Tobacco Settlement Fund Not A Reliable Long-Term Funding Stream Our analysis indicates that most of the funding in the Tobacco Settlement Fund (TSF) would be used for existing, ongoing programs now supported by the General Fund. Only about 24 percent of the TSF would be allocated for new health care initiatives. The fund is not a viable long- term source of support for the proposed mix of programs since its revenues are likely to decline over time. For this reason, we recommend amending the proposed budget trailer bill to establish a 10 percent reserve for the fund, instead of the proposed 5 percent reserve. Fund Includes Mostly Base Expenditures. During the past two years, legislation has been enacted to reduce the number of uninsured children and adults by expanding eligibility in the Medi-Cal and Healthy Families Programs. In 1999, Medi-Cal was expanded to cover working poor adults with income up to 100 percent of the federal poverty level (FPL) (referred to as 1931 [b] expansion in Figure 2). In addition, Healthy Families was Crosscutting Issues C – 71 Legislative Analyst’s Office Figure 2 Allocation of Tobacco Settlement Fund Revenues (In Millions) Departments\/Programs Department of Health Services (DHS) Medi-Cal 1931(b) expansion $123 Aged, blind, and disabled persons with income below 133 percent FPL a 47 Child Health and Disability Prevention Program Replacement of Proposition 99 funding $65 Public Health Breast Cancer Treatment Program $20 Prostate Cancer Screening and Treatment Program 20 Youth Smoking Prevention Program 20 Subtotal, DHS $295 Managed Risk Medical Insurance Board (MRMIB) Healthy Families Program Children with family income between 201 percent to 250 percent FPL a $74 Parents health care expansion 76 Subtotal, MRMIB $150 Total $445 a Federal poverty level. expanded to include children with incomes between 201 percent and 250 percent of the FPL, as well as legal immigrant children. Last year, Medi-Cal was again expanded to provide no-cost coverage to low-income aged, blind, and disabled persons with incomes up to 133 percent of the FPL. The state support for these expansions came from the General Fund. The 2001-02 Governor’s Budget would in effect shift the costs of these prior-year expensions to the TSF. Of the $445 million of proposed expen- ditures from the fund, approximately $339 million, or 76 percent, repre- sents expenditures for existing ongoing programs that would be shifted from the General Fund to the TSF. Of that amount, more than $100 mil- lion would cover projected caseload growth in the Medi-Cal, Healthy Families, and Child Health and Disability Prevention programs. The re- maining $106 million, or about 24 percent of the total funds allocated, is for new health proposals, including $76 million to expand Healthy Families to C – 72 Health and Social Services 2001-02 Analysis parents, $20 million for new smoking prevention programs, and $10 million to expand the Prostate Cancer Screening and Treatment program. Tobacco Settlement Not a Stable Source of Revenue. If the downward trend in smoking continues, tobacco settlement revenues are likely to continue to decline. During the past twelve years, the state has spent more than $781 million, an average of about $65 million a year, on antitobacco and smoking prevention programs. In addition, new state laws prohib- ited smoking in public places and increased taxes on tobacco products. These changes appear to have reduced the prevalence of smoking during this period. The 2001-02 budget proposes to allocate $106 million (mostly Proposition 99 funds) to continue antitobacco and smoking prevention programs, including $20 million in new spending from the TSF. If these programs and other measures continue to be effective in reducing smok- ing, tobacco settlement payments to the state could go even lower be- cause its payments are linked to the volume of tobacco sales. New Fund Not Viable in the Long Term. We believe that the Governor’s plan to fund the specified programs on an ongoing basis from the TSF is not viable in the long term. As we discussed above, the tobacco settle- ment is likely to be a declining revenue stream. Yet, under the Governor’s proposal, the fund would be heavily committed to programs with grow- ing caseloads. Our analysis indicates that the combination of declining revenue and growing caseload makes the fund unreliable as the sole source of funding for these programs in the long term. If the Governor’s caseload projections are correct, this problem could surface as soon as 2002-03. We note that the budget plan assumes all of the expansions would reach full implementation by the end of the bud- get year. If this actually were to occur, the fund would likely be overex- tended by 2002-03 as budgets for Medi-Cal and Healthy Families would be adjusted to account for inflation in health care costs. At this point, the Legislature and Governor would need to find alternative funding sources for the additional costs. Given the magnitude of the programs included within the fund, it is possible that the 5 percent reserve would be inad- equate to cover future cost adjustments. As we discuss below, we believe the Healthy Families Program is actually overbudgeted in 2001-02. However, that would only delay the inevitable point at which expenditures for these programs will expand beyond the ability of the fund to support them. Budget-Year Funds Available for Limited-Term Spending. Our enroll- ment projection for Healthy Families indicates that this program is not likely to reach full enrollment in 2001-02. We estimate there will be TSF savings of $33 million from the Healthy Families Program. (See our analy- sis of the Healthy Families Program for a more detailed discussion of Crosscutting Issues C – 73 Legislative Analyst’s Office these caseload issues.) We would caution the Legislature against allocat- ing these savings for other purposes, however. This is because the funds will likely be needed in fiscal year 2002-03 to support the continued phase- in of the Healthy Families expansions. Analyst’s Recommendation. For these reasons, we recommend amending the proposed budget trailer bill to establish a 10 percent re- serve for the fund, instead of the proposed 5 percent reserve. This would ensure that needed funding is available when the caseload programs are fully phased in. It would also protect the noncaseload programs from reductions in the event there is a sudden surge in enrollment or lower- than-anticipated tobacco settlement revenues. In addition, the Legislature may wish to consider whether certain programs should be shifted back to the General Fund. As we indicated above, the TSF is heavily dedicated to caseload programs, thus, placing the fund at risk of not remaining viable in the long term. An alternative approach is to replace one of the caseload programs, such as the Medi-Cal 1931 (b) expansion, for example, with a noncaseload program, such as one of the proposed Proposition 99-funded smoking cessation programs. This would relieve some of the fiscal pressure on the fund. It also would allow the noncaseload driven programs, such as the tobacco prevention programs to remain in the fund with less risk of being cut in the future because of caseload growth in the Medi-Cal and Healthy Families Programs. C – 74 Health and Social Services 2001-02 Analysis CHILD HEALTH AND DISABILITY PREVENTION PROGRAM PROGRAM FAILS AS GATEWAY TO AFFORDABLE HEALTH CARE Background Purpose of the Program. The state Child Health and Disability Pre- vention (CHDP) program was established by Chapter 1069, Statutes of 1973 (AB 2068, Brown), to provide preventive health, vision, and dental screens to children and adolescents in low-income families who do not qualify for Medi-Cal. It is modeled after the federal Medicaid benefit called Early and Periodic Screening, Diagnosis, and Treatment services. The CHDP program currently reimburses public and private providers for completing health screens and immunizations for children and youth under 19 years of age with family incomes at or below 200 percent of the federal poverty level (FPL). The program is jointly administered by the state Department of Health Services (DHS) and county health depart- ments. An estimated 1.9 million screens will be provided in 2001-02. The Changing Healthcare Landscape. When CHDP was established in 1973, the availability of subsidized health care for children was very limited. The CHDP program, though limited to coverage of preven- tive health screens and medically necessary follow-up treatment, filled a fundamental gap in the availability of care for low-income children. Today the landscape of affordable health care is very different. The Healthy Families Program has been implemented and now provides comprehensive health insurance coverage similar to Medi-Cal for chil- dren in families with income up to 250 percent of the FPL. As a result of the income eligibility expansions in Medi-Cal and Healthy Fami- lies, there are now overlapping income eligibility standards for these three programs. Crosscutting Issues C – 75 Legislative Analyst’s Office Children using CHDP are now either (1) eligible to enroll for full Medi- Cal benefits, (2) eligible to enroll in Healthy Families, or (3) undocumented immigrants and, therefore, ineligible for either of these two programs. (Undocumented immigrants qualify for no-cost Medi-Cal, but only for emergency care, including labor and delivery services.) This evolution in the health care environment resulted in the state establishing a new role for CHDP\u2014as a gateway facilitating children’s enrollment in the Healthy Families Program. Figure 1 summarizes the eligibility criteria for CHDP, as well as those for the Healthy Families and Medi-Cal Pro- grams. The figure illustrates the overlap in income eligibility that exists among the three programs. Figure 1 Income Eligibility Criteria for CHDP, Medi-Cal, and Healthy Families Age Family Income (As Percent of Federal Poverty Level) CHDP 0-18 years of age At or below 200 percent Medi-Cal (Poverty Group)a 0-11 months of age At or below 200 percent 1-5 years of age At or below 133 percent 6-18 years of age At or below 100 percent Healthy Families 0-11 months of age Between 200 percent and 250 percent 1-5 years of age Between 133 percent and 250 percent 6-18 years of age Between 100 percent and 250 percent a Children who meet eligibility criteria for enrollment in no-cost Medi-Cal. The Governor’s Budget. The proposed 2001-02 budget includes a to- tal of $126 million for CHDP, an increase of $11 million, or 9.5 percent, above estimated current-year expenditures. Of that amount, $65 million would be allocated from tobacco settlement funds, $49 million from the General Fund, and the remaining $12 million from various federal and special funds. The increase is driven by a number of factors, including the addition of a new vaccine to protect children against meningitis and ear infections, the full-year cost of previously enacted rate increases, and projected growth of 108,000 in the number of screens. C – 76 Health and Social Services 2001-02 Analysis The LAO Findings Based on our analysis, few children are entering the Healthy Families Program through the Child Health and Disability Prevention (CHDP) program. This has resulted in missed opportunities to provide comprehensive health coverage for low-income children, as well as a missed opportunity to use available federal funds to help support the cost of providing the care. This situation appears to be the result of a number of factors, including a lack of coordination between the two programs, failure to coordinate county administered Healthy Families outreach activities with local CHDP programs, and outdated data systems for client tracking and claims auditing. Few Children Enter Healthy Families Through CHDP Gateway. As a gateway program, CHDP services provided to children who enrolled in Healthy Families within a 90-day period are to be reimbursed by the Healthy Families Program. This retroactive payment allows the state to maximize federal funds and save state General Fund monies for the CHDP program. When the gateway concept was adopted, DHS assumed that 50 percent of Healthy Families enrollees would enter the program shortly after using CHDP services. However, CHDP clients are not enrolling in Healthy Families at the anticipated rate. The best available indicator of the number of children enrolling in Healthy Families through CHDP is the level of reimbursement to CHDP for services provided to children who ultimately enroll in Healthy Fami- lies. In 1999-00, the most recent year for which data are available, only 4.5 percent of the new enrollees in Healthy Families had reimbursed CHDP claims. This represents a slight increase over 1998-99, when claims were reimbursed for only 3.4 percent of new Healthy Families enrollees. Due to a recent change in the retroactive claiming period\u2014from 30 days to 90 days\u2014we estimate that CHDP will be reimbursed for 9.6 percent of Healthy Families’ enrollees in 2000-01. However, this is still a relatively small number of CHDP clients. Figure 2 shows initial expectations for CHDP reimbursements compared to actual reimbursements. These figures probably underestimate somewhat the number of CHDP children enrolling in the Healthy Families Program. This is because they only reflect the number of children who were admitted into the program within the retroactive claiming period. However, the Managed Risk Medical Insur- ance Board (MRMIB)\u2014the state department that administers the Healthy Families Program\u2014has indicated that the 90-day retroactive claim period would capture approximately 90 percent of Healthy Families’ new enrollees. Lack of Effective Gateway Results in Missed Opportunities for Chil- dren and the State. There are several reasons why it is advantageous for CHDP clients who qualify for Medi-Cal or Heathy Families to be enrolled in the other two programs. First, Medi-Cal and Healthy Families offer Crosscutting Issues C – 77 Legislative Analyst’s Office free or low-cost comprehensive health coverage. Although all three pro- grams provide coverage for preventive health screens and immunizations, Medi-Cal and Healthy Families provide a full range of medical benefits, as well as dental and vision care. Figure 2 Few CHDP Clients Enrolling in Healthy Families Reimbursed CHDP Claims as a Percentage of Healthly Families’ New Enrollees 10 20 30 40 50 60% 98-99 99-00 00-01a DHS Projection Actual a 2000-01 is an LAO estimate based on first quarter trends. Second, Medi-Cal and Healthy Families provide a medical home by allowing the families to choose a health plan and regular doctor, as well as around-the-clock access to care. By contrast, in some counties, CHDP services are only available for a few hours on certain days of the week. Anecdotal evidence also indicates that CHDP clients needing fol- low-up care often wait months to be treated. This is especially the case for follow-up dental care. Third, the federal government shares in the cost of the Medi-Cal and Healthy Families Programs, contributing approximately 50 percent and 67 percent, respectively. As mentioned previously, the state CHDP pro- gram is funded largely by the General Fund and tobacco settlement funds. Therefore, shifting children from the CHDP program to the other pro- grams would produce immediate state savings. There would also be sav- ings for counties which would otherwise have to spend county General Fund monies to supplement their Proposition 99 funds for CHDP follow- up treatment. C – 78 Health and Social Services 2001-02 Analysis The DHS Has Not Developed a System of Coordination. Given data showing that large numbers of Healthy Families clients are not entering the program from CHDP, we examined the state and local efforts to in- corporate CHDP into the Healthy Families Program. On the plus side, we found that DHS has distributed policy letters to CHDP health care providers encouraging them to promote enrollment in the Healthy Families Program. The DHS staff have also verbally encouraged promotion of enrollment at statewide meetings with local program officials. However, DHS has not in- corporated Healthy Families enrollment activities into CHDP program pro- cedures. For example, it has not required CHDP providers to facilitate enroll- ment in Healthy Families. Nor has DHS given local CHDP programs addi- tional resources to take on new activities that would be necessary in order to effectively integrate the two programs. Additionally, DHS and MRMIB have not established any standard operating procedures for the provision of Healthy Families information or materials to local CHDP programs. Overall, the absence of a statewide system to enroll CHDP clients in the Healthy Families and Medi-Cal Programs results in a lack of coordi- nation at the local level. For example, we found that some county health departments receiving Medi-Cal\/Healthy Families Outreach contracts\u2014 funds awarded to community-based organizations, school districts, and local governments\u2014to provide outreach and education about Healthy Families and Medi-Cal for children failed to coordinate their outreach activities with CHDP staff. The CHDP Information System Not Compatible With Medi-Cal and Healthy Families. The existing CHDP computer information system is not compatible with the Medi-Cal and Healthy Families information sys- tems. The systems do not share common identifiers, such as client names, social security numbers, or other account numbers that permit records of CHDP clients to be linked to Medi-Cal or Healthy Families participants. This is because CHDP records track claims while the Medi-Cal and Healthy Families systems track individual members. These differences limit the efficiency of CHDP as a gateway program. For example, the absence of a common identifier limits the state’s ability to maximize federal funding and save General Fund monies by retroac- tively reimbursing CHDP when children enroll in Healthy Families. Ac- cording to DHS, they are able to match clients for purposes of retroactive reimbursement only 70 percent to 80 percent of the time. Moreover, since the state has no way of knowing if a child is enrolled in both Healthy Families and CHDP, the state is at risk of making dupli- cate payments for the same services. Under the current system, a child who is enrolled in Healthy Families could be seen by a CHDP provider. If the CHPD provider has no knowledge of the child’s Healthy Families Crosscutting Issues C – 79 Legislative Analyst’s Office status, the provider could submit a claim and be reimbursed for those services under the CHDP program. The extent of such double billing and its cost to the state are unknown. There is evidence, however, that such double billing is occurring. We com- pared our estimates of the number of uninsured children with family in- comes below 200 percent of the FPL (the group eligible for CHDP) against DHS’s estimates of children who utilize CHDP. The comparison shows that there are more children using CHDP than there are eligible uninsured chil- dren. This strongly suggests that children with health coverage (predomi- nantly Healthy Families and Medi-Cal) are in fact utilizing CHDP services. Recommendations for Improving the CHDP Gateway Our analysis suggests that the gateway concept is a sound one and that an effective Child Health and Disability Prevention (CHDP) gateway could move the state closer to its goal of providing Healthy Families and Medi- Cal coverage to every eligible child. In this section we recommend a number of actions the Legislature can take to make CHDP an effective gateway. Figure 3 summarizes our recommendations which are discussed in detail below. Figure 3 CHDP as a Model Gateway LAO Recommendations Health Care Providers. Enact legislation establishing new requirements for health care providers to encourage families to apply for Healthy Families or Medi-Cal. Local CHDP Staff. Encourage counties to use local CHDP staff to assist clients in applying for Healthy Families and Medi-Cal, and streamline the application process with a new on-line computer program. Centralized Determination System. Reconsider legislation to process all Medi-Cal family and child applications through a centralized and simplified, state-level eligibility determination system. Information System Link. Adopt supplemental report language directing DHS to analyze the feasibility of linking the CHDP information system with the Medi-Cal and Healthy Families information systems. Family Income Level. Make additional children eligible for CHDP services by increasing the maximum allowable family income to 250 percent of the federal poverty level once the gateway model has been implemented. C – 80 Health and Social Services 2001-02 Analysis Encourage CHDP Clients to Apply for Medi-Cal and Healthy Fami- lies. We recommend the enactment of legislation establishing new require- ments for health care providers to encourage families to apply for Medi- Cal or Healthy Families. We believe such legislation could convert the CHDP program into a true point of entry for the Healthy Families and Medi-Cal Programs. Under this proposal, in order for a provider to receive a reimburse- ment from CHDP for a health screen, the client for whom reimbursement is sought must have applied for Medi-Cal or Healthy Families. The pro- vider would record on each CHDP claim the proof that the client’s family has applied for Medi-Cal or for Healthy Families coverage. The family would be assisted in completing the application. In theory, linking payments for CHDP screens to requirements that families apply for Medi-Cal and Healthy Families could prompt some families not to utilize CHDP. Some families might believe that complet- ing the application is too much effort. Others, namely immigrant fami- lies\u2014both documented and undocumented\u2014might fear that applying for a government-sponsored program will jeopardize their residence in the U.S. or will deem them a liability to their U.S. sponsor. In order to ensure continued access to CHDP health care services, we recommend that local CHDP offices or the Healthy Families community outreach contractor ensure that each provider has an up-to-date list of certified application assistants available in the area to assist each family. The larger CHDP providers, such as community clinics, might find it ben- eficial to have certified application assistants on site to expedite applica- tion completion and submission. (We note that many clinics already pro- vide this assistance.) Community-based organizations that provide certi- fied application assistance could further collaborate with providers to station application assistants in providers’ offices. We further recommend the enactment of legislation directing DHS and MRMIB to implement a coordinated education campaign to assure CHDP families that submitting their applications to Medi-Cal and Healthy Families will not result in any action against them by the Immigration and Naturalization Service. New Data System Could Improve Gateway. If the CHDP program is to become an effective gateway to enrollment in the Healthy Families and Medi-Cal Programs, the state’s information system must be able to distinguish CHDP clients from Healthy Families and Medi-Cal clients for client-tracking purposes\u2014both to ensure the accuracy of payments and to measure enrollment outcomes. Therefore, we recommend that DHS explore ways to improve its data system. Crosscutting Issues C – 81 Legislative Analyst’s Office Specifically, we recommend the adoption of supplemental report lan- guage to the 2001-02 Budget Act directing DHS to (1) analyze the limitations of the current CHDP data system in regard to its capacity to accurately com- pare client data among the CHDP, Medi-Cal, and Healthy Families Programs; (2) explore the feasibility of linking CHDP client data with Medi-Cal and Healthy Families Program data in order to accurately audit medical claims and track individuals across programs; and (3) examine technological alter- natives for linking these data. These actions would prepare DHS for the pro- curement of an improved CHDP information system. Single Point of Entry Needed for All Applications. Currently, there are two processes in place to determine eligibility for Medi-Cal. Under one method called the single point of entry, the joint Medi-Cal\/Healthy Families application is processed by Electronic Data Systems (EDS) un- der contract with the state. The EDS, as the fiscal intermediary for the Medi-Cal and Healthy Families Programs, is also responsible for making payments to providers. Under the other method, applications are pro- cessed by eligibility workers in county welfare offices. The 2000-01 Budget Bill passed by the Legislature provided funding to allow all applications to be processed through a single point of entry. However, the Governor vetoed that appropriation. We recommend that the Legislature and Governor reconsider establishing a single point of entry for all applications. This approach would facilitate the implemen- tation of changes we have recommended by (1) enhancing state oversight of enrollment in Healthy Families and Med-Cal and (2) creating a cen- tralized database with which to compare CHDP claims. Aligning Income Eligibility. Once CHDP has become a true gateway program for comprehensive health coverage, we recommend that the Legis- lature enact legislation to align income eligibility in CHDP and Healthy Fami- lies. Under current program requirements, children are eligible for CHDP services if their family income is no greater than 200 percent of the FPL. At the time that CHDP was proposed as a gateway program, Healthy Families’ income eligibility was also limited to 200 percent of the FPL. Policymakers have generally found that keeping income eligibility standards the same across similar programs facilitates a seamless deliv- ery system by minimizing exclusion from eligibility and simplifying the application process. Given the prior decision of the Legislature to increase Healthy Families’ income eligibility to 250 percent of the FPL, it should eventually consider increasing CHDP’s income eligibility to the same level. By aligning eligibility standards, CHDP could encourage enrollment in Healthy Families for all children who are eligible for Healthy Families, not just for those whose family income is at or below 200 percent of the FPL. C – 82 Health and Social Services 2001-02 Analysis Expanding income eligibility for CHDP would result in an increase in the program’s caseload of one-time clients. However, most children who would become eligible for CHDP under this expansion would also be eligible for enrollment in the Healthy Families Program. Even their single CHDP screen then would be retroactively reimbursed by the Healthy Families Program. Therefore, we recommend that the Legisla- ture enact legislation increasing the income eligibility standard for CHDP to the same level as the Healthy Families Program after the gateway model has been fully implemented. Conclusion The CHDP program was established at a time when low-income chil- dren had few options for affordable health care. Expansions in the Medi- Cal Program and the enactment of the Healthy Families Program have created an opportunity to transform CHDP from a limited safety net program for children into a true point of entry to comprehensive health coverage. However, in order to accomplish this, the state must take steps to open the gateway. We believe our recommendations move the state in this direction by (1) establishing new requirements for health care providers to encourage families to enroll in Healthy Families and Medi-Cal, (2) encouraging coun- ties to help families apply for health coverage and streamlining the appli- cation process with a new on-line computer program, (3) centralizing and simplifying the application process for public health coverage, (4) pre- paring to improve CHDP’s data system, and (5) raising CHDP’s income eligibility level to match the income limits of Healthy Families. Our analysis suggests that the costs of making these improvements would be offset by savings to the state in the CHDP program, as CHDP clients enrolled in Healthy Families and Medi-Cal and as duplicate medi- cal payments were eliminated. Shifting the CHDP caseload to Medi-Cal would increase state costs for that program, but the enrollment of more CHDP clients in Healthy Families would not result in any significant additional state costs because the state has already budgeted for Healthy Families coverage for these children. Figure 4 summarizes the benefits of our recommended approach. We believe that reforming the CHDP program and its data system will im- prove the health of low-income children by extending more comprehen- sive free or low-cost health coverage to additional children under the Medi-Cal and Healthy Families Programs. Crosscutting Issues C – 83 Legislative Analyst’s Office Figure 4 Benefits of the LAO Gateway Approach Promotes comprehensive health coverage for low-income children by enroll- ing CHDP clients in programs that offer a greater scope of services, including vision, dental, and prescription coverage, as well as visits to the doctor when the child is sick. Reduces number of uninsured children in California whose lack of coverage has been associated with greater utilization of emergency room visits and higher costs for hospitals, and local-state governments. Simplifies and improves for families receiving CHDP services the process of applying for Medi-Cal and Healthy Families coverage. Curbs General Fund costs in the CHDP program, potentially in the tens of millions of dollars annually, by transferring the cost of health care to the Healthy Families and Medi-Cal programs for which the federal government bears a signifi- cant share of the costs. Reduces county costs for providing follow-up treatment for conditions diag- nosed in CHDP screens, as CHDP clients enroll in Healthy Families and Medi- Cal and shift treatment costs to these programs. C – 84 Health and Social Services 2001-02 Analysis Legislative Analyst’s Office DEPARTMENTAL ISSUES Health and Social Services CALIFORNIA MEDICAL ASSISTANCE PROGRAM (MEDI-CAL) (4260) In California, the federal Medicaid Program is administered by the state as the California Medical Assistance Program (Medi-Cal). This pro- gram provides health care services to welfare recipients and other quali- fied low-income persons (primarily families with children and the aged, blind, or disabled). Expenditures for medical benefits are shared about equally by the General Fund and by federal funds. The Medi-Cal budget also includes additional federal funds for (1) disproportionate share hospital (DSH) payments, which provide additional funds to hospitals that serve a disproportionate number of Medi-Cal or other low-income patients, and (2) matching funds for state and local funds in other related programs. At the state level, the Department of Health Services (DHS) adminis- ters the Medi-Cal Program. Other state agencies, including the California Medical Assistance Commission (CMAC), the Department of Social Ser- vices, the Department of Mental Health, the Department of Developmen- tal Services (DDS), the California Department of Aging, and the Depart- ment of Alcohol and Drug Programs receive Medi-Cal funding from DHS for eligible services that they provide to Medi-Cal beneficiaries. At the local level, county welfare departments determine the eligibility of appli- cants for Medi-Cal and are reimbursed by DHS for the cost of those ac- C – 86 Health and Social Services 2001-02 Analysis tivities. The federal Health Care Financing Administration (HCFA) over- sees the program to ensure compliance with federal law. Proposed Spending. The budget for DHS proposes Medi-Cal expen- ditures totaling $25.4 billion from all funds for state operations and local assistance in 2001-02. The General Fund portion of this spending ($9.4 bil- lion) decreases by $129.6 million, or 1.4 percent, compared with estimated General Fund spending in the current year. However, this is not an accu- rate reflection of expenditure growth in this program. About $170 million of General Fund expenditures were replaced with Tobacco Settlement funds for specified Medi-Cal expansions and about $601 million in the Medi-Cal General Fund was shifted to the DDS budget in a purely tech- nical change. If these amounts were added back to the Medi-Cal budget, the Medi-Cal General Fund would total $10.1 billion, an increase of $641.4 million or 6.7 percent. The remaining expenditures for the program are mostly federal funds ($14.4 billion). The spending total for the Medi-Cal budget includes an estimated $2 billion (federal funds and local matching funds) for payments to DSH hospitals, and about $3.1 billion budgeted elsewhere for programs oper- ated by other departments, counties, and the University of California. MEDI-CAL BENEFITS AND ELIGIBILITY What Benefits Does Medi-Cal Provide? Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nursing care, doctor visits, laboratory tests and x-rays, family planning, and regu- lar examinations for children under the age of 21. California also has cho- sen to offer 32 optional services, such as outpatient drugs and adult den- tal care, for which the federal government provides matching funds. Cer- tain Medi-Cal services\u2014such as hospitalization in many circumstances\u2014 require prior authorization from DHS as medically necessary in order to qualify for payment. How Medi-Cal Works Currently, more than half (61 percent) of the Medi-Cal caseload con- sists of participants in the state’s two major welfare programs, which in- clude Medi-Cal coverage in their package of benefits. These programs are (1) the California Work Opportunity and Responsibility to Kids (CalWORKs) program, which provides assistance to families with chil- dren and replaces the former Aid to Families with Dependent Children program, and (2) the Supplemental Security Income\/State Supplemen- California Medical Assistance Program C – 87 Legislative Analyst’s Office tary Program (SSI\/SSP), which assists elderly, blind, or disabled persons. Counties administer the CalWORKs program through county welfare offices which determine eligibility for CalWORKs benefits and Medi-Cal coverage concurrently. Counties also determine Medi-Cal eligibility for per- sons who are not eligible for (or do not wish) welfare benefits. The federal Social Security Administration determines eligibility for SSI\/SSP, and the state automatically adds SSI\/SSP beneficiaries to the Medi-Cal rolls. Generally, persons who have been determined eligible for Medi-Cal benefits (Medi-Cal eligibles ) receive a Medi-Cal card, which they use to obtain services from providers who agree to accept Medi-Cal patients. Medi-Cal provides health care through two basic types of arrangements\u2014 fee-for-service and managed care. Fee-for-Service. This is the traditional arrangement for health care in which providers are paid for each examination, procedure, or other ser- vice that they furnish. Beneficiaries generally may obtain services from any provider who has agreed to accept Medi-Cal payments. The Medi- Cal Program employs a variety of utilization control techniques (such as requiring prior authorization for some services) designed to avoid costs for medically unnecessary or duplicative services. Managed Care. Prepaid health plans generally provide managed care. The plans receive monthly capitation payments from the Medi-Cal Pro- gram for each enrollee in return for providing all of the covered care needed by those enrollees. These plans are similar to health plans offered by many public and private employers. Currently, slightly less than half (2.6 million of the total of 5.2 million Medi-Cal eligibles) are enrolled in managed care organizations. Beneficiaries in managed care choose a plan and then must use providers in that plan for most services. Since pay- ments to the plan do not vary with the amount of service provided, there is much less need for utilization control by the state. Instead, plans must be monitored to ensure that they provide adequate care to enrollees. Who Is Eligible for Medi-Cal? Almost all Medi-Cal eligibles fall into two broad groups of people. They either are aged, blind, or disabled or they are in families with chil- dren. More than half of Medi-Cal eligibles are welfare recipients. Figure 1 (see next page) shows for each of the major Medi-Cal eligibility catego- ries, the maximum income limit (not including earned and unearned in- come disregards or exemptions) in order to be eligible for health benefits and the estimated caseload and total benefit costs for 2000-01. The figure also indicates for each category, whether an asset limit applies and whether eligible persons with incomes over the limit can participate on a spend down basis. If spend down is allowed, then Medi-Cal will pay the C – 88 Health and Social Services 2001-02 Analysis Figure 1 Major Medi-Cal Eligibility Categories 2000-01 Maximum Monthly Income Or Granta Asset Limit Imposed? Spend Downb Allowed? Enrollees (Thousands) Annual Benefit Costs (Millions)c Aged, Blind, or Disabled Persons Welfare (SSI\/SSP) $1,265 U \u2014 1,182 $8,281 Medically needy 934d U U 140 905 Medically needy\u2014 long term care Special limits U U 69 2,807 Families, Children, and Pregnant Women Families Welfare (CalWORKs) $969e U \u2014 1,768 $2,571 Section 1931(b)-onlyf 1,421 U \u2014 1,394 2,037 Medically needy 1,141 U U \u2014g \u2014g Children and Pregnant Women Children 200 percent of poverty\u2014infants $2,842 \u2014 \u2014 49 \u2014h 133 percent of poverty\u2014 ages 1 through 5 1,890 \u2014 \u2014 103 $87 100 percent poverty\u2014 ages 6 through 18 1,421 \u2014 \u2014 83 67 Medically indigent\u2014 ages 0 through 21 1,141 U U 149 325 Pregnant women 200 percent of poverty\u2014 pregnancy service $2,842 \u2014 \u2014 123 $554 Medically indigent\u2014all services 1,141 U U 6 82 Emergency-Only Undocumented immigrants who qualify in any eligibility group are limited to emergency services (including labor and delivery and long-term care). 143i $433 a Amounts are for countable income or grant only for a four-person family and do not include income disregards. b Indicates whether persons with higher incomes may receive benefits on a share-of-cost basis. c Combined state and federal costs. d Effective January 1, 2001, this category is expanded and would include couples with an income limit equivalent to $1,247. e Income limit to apply for CalWORKs. After becoming eligible, the income limit increases to $1,760 (family of four) with the maximum earned income disregard. f Includes Transitional Medi-Cal, which extends coverage for families who leave CalWORKS or 1931(b)-only for up to 12 months. g Enrollment and costs included in amounts for Section 1931(b) family coverage. h Costs included in amount for 200 percent of poverty pregnant women group. i About 244,400 additional undocumented immigrants are included in other categories at a cost of $1.1 billion. California Medical Assistance Program C – 89 Legislative Analyst’s Office portion of any qualifying medical expenses that exceed the person’s share of cost, which is the amount by which that person’s income exceeds the applicable Medi-Cal income limit. Aged, Blind, or Disabled Persons. About 1.4 million low-income per- sons who are (1) at least 65 years old or (2) disabled or blind persons of any age receive Medi-Cal coverage\u2014about 27 percent of the total Medi- Cal caseload. Overall, the disabled make up more than half (61 percent) of this portion of the Medi-Cal caseload. Most of the aged, blind, or dis- abled persons on Medi-Cal (85 percent) are recipients of SSI\/SSP benefits and receive Medi-Cal coverage automatically. The other aged, blind, or disabled eligibles are in the medically needy category. They also have low incomes, but do not qualify for, or choose not to participate in SSI\/SSP. For example, aged low-income non- citizens generally may not apply for SSI\/SSP (although they may con- tinue on SSI\/SSP if they already were in the program as of August 22, 1996). As another example, about 19 percent of the medically needy per- sons in this category have incomes above the Medi-Cal limit and partici- pate on a share-of-cost basis. Beginning January 1, 2001, as a result of no- cost Medi-Cal expansion, fewer persons will participate on a share-of- cost basis. The number of Medi-Cal eligibles in long-term care is small\u2014only 68,500 people, or 1.3 percent of the total caseload. Because long-term care is very expensive, benefit costs for this group total $2.8 billion, or 16 per- cent of total Medi-Cal benefit costs. Almost 60 percent of the aged or disabled Medi-Cal eligibles also have health coverage under the federal Medicare Program. Medi-Cal gener- ally pays the Medicare premiums, deductibles, and any co-payments for these dual beneficiaries, and Medi-Cal pays for services not covered by Medicare, such as drugs and long-term care. Medi-Cal also provides some limited assistance to a small number of Medicare eligibles who have in- comes somewhat higher than the medically needy standard. Families with Children. Medi-Cal provides coverage to families with children in three eligibility categories. The first two categories were cre- ated by Section 1931(b) of the Social Security Act, which required states to grant Medicaid eligibility to anyone who would have been eligible for cash-assistance under the welfare requirements in place on July 16, 1996. One of these categories consists of CalWORKs welfare recipients who automatically receive Medi-Cal. The second category\u2014referred to as the 1931(b)-only group\u2014consists of families who are eligible for CalWORKs, but who choose only to receive Medi-Cal services. The income limit for families in this second category is 100 percent of the federal poverty level (FPL). However, once enrolled in Section 1931(b) coverage, families may C – 90 Health and Social Services 2001-02 Analysis work and remain on Medi-Cal at higher income levels (up to about 155 percent of the FPL indefinitely, or a higher amount for up to two years). A third eligibility category referred to as the medically needy, con- sists of families who do not qualify for CalWORKs, but nevertheless have relatively low incomes. These families have incomes up to 80 percent of the FPL, have less than $3,300 in assets, and meet additional requirements. Families whose incomes are above the medically needy limits, but who meet all of the other medically needy qualifications, may receive Medi- Cal benefits on a share-of-cost basis. About 34 percent of all Medi-Cal eligibles are CalWORKs welfare re- cipients. Although CalWORKs recipients constitute the largest single group of Medi-Cal eligibles by far, they account for only 14 percent of total Medi-Cal benefit costs. This is because almost all CalWORKs recipi- ents are children or able-bodied working-age adults, who generally are relatively healthy. Similarly, 1931(b)-only and medically needy families who are Medi-Cal eligible account for 27 percent of all Medi-Cal eligibles and only 11 percent of total benefit costs. Women and Children. Medi-Cal includes a number of additional eli- gibility categories for pregnant women and for children. Medi-Cal covers all health care services for poor pregnant women in the medically indi- gent category, which has the same income and asset limits and spend- down provisions as apply to medically needy families. However, preg- nancy-related care is covered with no share of cost and no limit on assets for women with family incomes up to 200 percent of the FPL (an annual income of $34,100 for a family of four). The medically indigent category also covers children and young adults under age 21. Several special categories provide coverage without a share of cost or an asset limit to children in families with higher incomes\u2014 200 percent of the FPL for infants, 133 percent of the FPL for children ages 1 through 5, and 100 percent of the FPL for children ages 6 through 18. Pregnant women and the FPL-group children also may use a simplified mail-in application to apply for Medi-Cal or Healthy Families Program coverage (for children above the Medi-Cal income limits). Medi-Cal also provides family planning services for women or men with income up to 200 percent of FPL who do not qualify for regular Medi-Cal. Emergency-Only Medi-Cal. Noncitizens who are undocumented im- migrants, or are otherwise not qualified immigrants under federal law, may apply for Medi-Cal coverage in any of the regular categories. How- ever, benefits are restricted to emergency care (including labor and deliv- ery). Medi-Cal also provides prenatal care and long-term care to undocu- mented immigrants. These services, as well as nonemergency services California Medical Assistance Program C – 91 Legislative Analyst’s Office for recent legal immigrants, do not qualify for federal funds and are sup- ported entirely by the General Fund. Most Medi-Cal Spending Is For the Elderly or Disabled The average cost per eligible for the aged and disabled Medi-Cal caseload (including long-term care) is much higher than the average cost per eligible for families and children on Medi-Cal. As a result, almost two-thirds of Medi-Cal spending is for the elderly and disabled, although they account for only about one-fourth of the total Medi-Cal caseload, as shown in Figure 2. Figure 2 Medi-Cal Most of Caseload Is Families\/Children Most Spending Is For Elderly\/Disabled 2000-01 10 20 30 40 50 60 70 80% Elderly\/Disableda Families\/Children a Includes long-term care. Percent of Spending Percent of Caseload MEDI-CAL EXPENDITURES Rapid Spending Growth in the Current Year Figure 3 (see next page) presents a summary of Medi-Cal General Fund expenditures in the DHS budget for the past, current, and budget years. The budget e1stimates that for the current year the General Fund share of Medi-Cal local assistance costs will increase by $1.4 billion (17 per- C – 92 Health and Social Services 2001-02 Analysis cent), compared with 1999-00. The bulk of this increase is for benefit costs, which will total an estimated $9 billion in 2000-01. Other local assistance costs will also increase in the current year compared with 1999-00. For example, county administration costs will go up about $23 million (5.5 per- cent) and costs related to claims processing by the fiscal intermediary will increase by $9.4 million or about 15 percent. The General Fund cost for hospital construction debt service will increase by $9.1 million (20 per- cent) during 2000-01. Figure 3 Medi-Cal General Fund Budget Summarya Department of Health Services 1999-00 Through 2001-02 (Dollars in Millions) Actual 1999-00 Estimated 2000-01 Proposed 2001-02 Change From 2000-01 Amount Percent Support (state operations) $70.4 $80.4 $86.3 $5.9 7.3% Local Assistance Benefits $7,593.0 $8,953.7 $8,782.8 -$170.9b -1.9%b County administration (eligibility) 410.7 433.3 469.7 36.4 8.4 Fiscal intermediaries (claims processing) 61.2 70.5 72.5 2.0 2.9 Hospital construction debt service 45.9 55.0 51.4 -3.6 -6.5 Subtotals, local assistance ($8,110.8) ($9,512.6) ($9,376.5) (-$136.1) (-1.4%) Totals $8,181.2 $9,593.0 $9,462.8 $-130.2b -1.4%b Caseload (thousands of beneficiaries) 5,106 5,210 5,850 640 12.3% a Excludes General Fund Medi-Cal spending budgeted in other departments. b The replacement of Medi-Cal General Funds with $170 million of Tobacco Settlement funds and shifting $601 million to the Department of Developmental Services’ budget causes the budget to decrease. If this had not been done, the total budget would have increased by $641 million or 6.7 percent. Most of the $1.4 billion increase in benefit costs results from increases in the cost and utilization of health care goods and services (including provider rate increases)\u2014about $871 million. In addition, the settlement of a ten-year-old lawsuit over Medi-Cal hospital reimbursement rates will increase expenditures by $175 million. Caseload growth adds about California Medical Assistance Program C – 93 Legislative Analyst’s Office $82 million of General Fund cost. A change in the way the state pays for Medicare claims accounts for $54 million, changes in the state-federal cost- sharing ratio increases state costs by $52 million, and other factors ac- count for the remainder of the cost increase (about $127 million). 2000-01 Provider Rate Increases. About $596 million of the General Fund spending increase for benefits in the current year is for provider rate increases. Various rate increases for physicians, dentists, in-home nursing, and other medical provider services will total $230 million, most of which is to increase physician services rates by about 17 percent, in- cluding a 40 percent increase for physician services provided in emer- gency rooms. Increases for long-term care facilities such as nursing homes and intermediate-care facilities total $204 million including a 5 percent wage pass-through. Rate increases approved by DHS or CMAC for Medi- Cal managed care plans account for $103 million of the increase. In addi- tion, hospitals have negotiated rate increases with CMAC resulting in a $60 million increase for inpatient costs. Pharmacy and Certain Other Costs Growing Rapidly. The budget estimates that the General Fund cost of payments to pharmacy providers (for drugs and various types of medical supplies) will result in a net in- crease of $138 million in the current year. In addition, General Fund costs for adult day health services will increase by an estimated $39 million, compared with 1999-00. Both of these categories include some groups of providers that DHS has targeted for fraud prevention efforts. Settlement of Hospital Payment Suit Results in Payout. Pending fed- eral approval, the state has settled the Orthopaedic Hospital v. Belshe’ litiga- tion and other related lawsuits over the amount Medi-Cal pays for hospi- tal outpatient services. As part of the settlement, Medi-Cal will pay hos- pitals a lump sum of $350 million ($175 million General Fund) in the cur- rent year. We discuss this litigation further later in this analysis. Caseload Increase Reflects Eligibility Expansions and Simplification. The budget estimates that caseload in the current year will increase by more than 100,000 eligibles or 2 percent. The increase is primarily related to two factors. The first factor is the continued expansion of Section 1931(b) eligibility to cover both the children and parents in families with income at or below 100 percent of the FPL. While the expansion has increased total Medi-Cal caseload by approximately 75,000, the phase-in of new eligibles has been slower than originally estimated. Further caseload in- creases resulting from this change are expected to continue in 2001-02. The second factor increasing caseload is two statutes enacted this year simplifying the eligibility process. Legislation provided 12-month con- tinuing eligibility for Medi-Cal children and eliminated the quarterly sta- tus reporting requirements for families eligible for Medi-Cal. These C – 94 Health and Social Services 2001-02 Analysis changes are projected to increase the monthly average caseload by about 26,000 in the current year, with significant additional caseload increases anticipated in the budget year. $204 Million General Fund Deficiency in 2000-01 The 2000-01 Budget Act anticipated some of the ongoing Medi-Cal cost increase and provided funding for legislatively approved rate in- creases and caseload increases caused by the expansion of Section 1931(b) family eligibility and simplified eligibility processes. However, the Governor’s budget proposes a net increase in Medi-Cal spending of $204 million above the budget act. This is primarily because of the settle- ment of the hospital rate lawsuit. The major components of the additional spending are discussed below. Settlement of Hospital Litigation\u2014$175 Million. Most of the current- year deficiency results from the settlement reached in lawsuits pertain- ing to Medi-Cal payment rates for hospital outpatient services. Hospitals have been in litigation with the state over reimbursement rates since 1990 in the case known as Orthopaedic Hospital v. Belshe’. The DHS had set rates based on what it deemed necessary to encourage enough hospitals to participate in the Medi-Cal Program. However, the courts interpreted fed- eral law to require reimbursement based upon a determination of rea- sonable costs. The DHS expects to pay a lump sum payment of $175 mil- lion from the General Fund in the current year. In 2001-02 it will increase hospital outpatient rates by approximately 30 percent and then for each of the following three years by 3.3 percent annually. Inpatient Costs and Managed Care Rate Increases\u2014$95.6 Million. The budget act underestimated the rate increases that hospitals would negotiate with CMAC by $60 million. Also, managed care costs increase by $36 mil- lion because additional funding is provided to ensure the same level of pro- vider rate increases in managed care as were provided in fee-for-service. Los Angeles County Outpatient Services\u2014$30 Million. Under the terms of the extension of its Medicaid Demonstration Project, Los Ange- les County outpatient sites and their private partner contract clinics will receive Federally Qualified Health Center (FQHC)-like cost based reim- bursement for outpatient services provided to Medi-Cal patients. These rates will be paid pending their application and approval of FQHC sta- tus. State General Fund costs are expected to be $30 million in both the current year and 2001-02. Continuous Eligibility For Children\u2014$5.6 Million. Effective Janu- ary 1, 2001 legislation provides 12 month continuing eligibility for all Medi-Cal eligible children. This was not reflected in the 2000-01 budget California Medical Assistance Program C – 95 Legislative Analyst’s Office plan because the legislation was enacted at the end of the legislative ses- sion. Medicare HMO Premiums\u2014$5 Million. Effective January 1, 2001 Medi-Cal will pay the monthly premiums for Medi-Cal eligibles enrolled in Medicare health maintenance organizations (HMOs). By paying these premiums the Medi-Cal Program expects to avoid General Fund costs of up to $14 million in the current year and $28 million in 2001-02 that otherwise would have occurred if persons affected by the new premiums dropped their Medicare HMO coverage and Medi-Cal had to pay their drug costs. Budget-Year Expenditure Growth Significant The Governor’s budget estimates that total General Fund spending for Medi-Cal local assistance will be $9.4 billion in 2001-02, a decrease of $136 million, or 1.4 percent from the estimated spending in the current year. This amount does not reflect true expenditure growth in the Medi- Cal Program. This is because the decrease results from the replacement of approximately $170 million of General Fund expenditures for specified Medi-Cal expansions with new Tobacco Settlement funds, as well as the shift of $601 million in Medi-Cal General Fund monies to the DDS bud- get in a purely technical change. Barring these changes, Medi-Cal Gen- eral Fund spending for local assistance would total $10.1 billion, an in- crease of $638 million or 6.8 percent. The budget estimates that the Medi- Cal caseload will increase by 640,000 (about 12 percent) in 2001-02 to a total of almost 5.9 million average monthly eligibles\u2014roughly 17 percent of the state’s population. Most of the added spending in 2001-02 is for benefit costs. Because of the switch to tobacco settlement funding and the DDS funding shift, it appears that major benefits spending decreased by $199 million when it has actually increased by $606 million. Figure 4 (see next page) shows the major components of the change in benefit costs, which we discuss below. Increased Costs and Utilization of Services\u2014$258.8 Million Cost. Based on the budget’s projections, General Fund costs for Medi-Cal ben- efits appear to decrease by 1.9 percent in 2001-02. However, disregarding funding shifts, benefits spending actually increases by 6.7 percent, largely due to higher prescription drug costs, caseload expansions, and hospital rate increases. The department attributes most of the increase to spending on drugs. This includes price and utilization increases of $272 million for exist- ing drugs and for new drugs added to the Medi-Cal formulary and rebates of about $69 million obtained through the drug-rebate program. Medi-Cal buy-in payments for Medicare premiums also are increas- ing. Medi-Cal pays Medicare premiums for Medi-Cal enrollees who also C – 96 Health and Social Services 2001-02 Analysis are eligible for Medicare (dual eligibles) in order to obtain 100 percent federal funding for those services covered by Medicare. The budget esti- mates that the General Fund cost of these buy-in payments will increase by $51 million in 2001-02. The budget also projects a $5 million increase in the monthly premium that the Medi-Cal Program pays to HMOs that have enrolled beneficiaries eligible for both the Medi-Cal and Medicare programs (dual eligibles). Figure 4 Medi-Cal Benefits Major General Fund Spending Changes Governor’s Budget 2001-02 (In Millions) Price and Utilization of Services $258.8 Increased pharmacy costs 271.7 Increased cost for Medicare premiums 50.7 Payment of a monthly premium to HMOs that enroll beneficiaries eligible for both Medi-Cal and Medicare 5.0 Savings from drug rebate program -68.6 Caseload $258.8 Full-year impact of providing 12-month continuing eligibility to children 129.1 Elimination of the quarterly status report 68.4 Continued expansion of 1931(b) eligibility to 100 percent of poverty 37.8a Expanded eligibility for aged, blind, and disabled 23.5a Pass-Through Funding for Other Departments -$601.0 Shift Medi-Cal costs for DDS Regional Center consumers -346.0 Shift Medi-Cal costs for developmental center consumers -255.0 Changes in Financing, Payments, and Recoveries -$115.3 Reduce Orthopaedic Hospital settlement payment amount -110.8 Other -4.5 Total -$198.7 a Approximately $170 million of expenditures for specified caseload expansions are being shifted to a new Tobacco Settlement Fund. Caseload Increases\u2014$258.8 Million Cost. The largest caseload-related cost increases are due to the full-year effect of simplification of the com- plex Medi-Cal eligibility process that took effect January 2001. The bud- get includes $129.1 million from the General Fund to provide continuous California Medical Assistance Program C – 97 Legislative Analyst’s Office eligibility to children 19 years of age and younger if federal financial par- ticipation is available. This is expected to result in a caseload increase of about 390,000 eligibles in 2001-02. Eliminating quarterly status reporting requirements for parents and providing continuous Medi-Cal eligibility for persons leaving the CalWORKs program are expected to enable 218,000 adults to retain coverage at a cost of $68.4 million from the General Fund. The phase-in of the program to expand 1931(b) eligibility to cover both children and parents in families with income at or below 100 per- cent of the FPL has been slower than anticipated. As a result, the $37.8 mil- lion General Fund cost of this change has been shifted to 2001-02 to cover the anticipated cost of nearly 161,000 additional enrollees. These costs will be funded by the new Tobacco Settlement Fund under the Governor’s spending plan. Legislation enacted in 2000 expanded Medi-Cal benefits for aged, blind, and disabled persons. Effective January 2001, Medi-Cal benefits are being provided without a share of cost to all aged, blind, and disabled persons with current income equivalent to 133 percent of the FPL and below. The $23.5 million increase in the budget year is due to the full- year cost of this change. In 2001-02, this caseload expansion of about 37,000 would also be funded by the new Tobacco Settlement Fund. Pass-Through Funding for Other Departments\/Programs\u2014$601 Mil- lion Decrease. Previously, Medi-Cal costs for services provided by DDS to Medi-Cal beneficiaries were budgeted in the DHS General Fund item and transferred to DDS as a reimbursement. According to the Governor’s Budget Summary, these costs will be budgeted directly in the DDS budget beginning in 2001-02 to eliminate any unnecessary fund transfers between the two state agencies. The Governor’s budget proposes that $346 mil- lion for the General Fund portion of Medi-Cal costs for regional center consumers and $255 million of Medi-Cal General Fund costs for the de- velopmental centers be budgeted directly in the DDS budget. Changes in Financing, Payments, and Recoveries\u2014$115 Million De- crease. The bulk of the spending decrease in this category involves the one-time payment in the current fiscal year of $175 million for the settle- ment reached in the Orthopaedic Hospital v. Belshe’ litigation and other re- lated lawsuits pertaining to Medi-Cal payments for hospital outpatient services. According to the terms of the settlement, following the lump- sum $175 million payment in 2000-01, DHS expects to increase hospital outpatient rates by approximately 30 percent in 2001-02, at a cost of $64.2 million General Fund. Because funding for the one-time payment will not be carried over into the 20001-02 budget for Medi-Cal there is effectively a cost reduction of $110.8 million from the General Fund in the budget year. C – 98 Health and Social Services 2001-02 Analysis MEDI-CAL COST AND CASELOAD TRENDS Figure 5 illustrates how Medi-Cal caseload and per-eligible costs have changed since 1991-92, along with projections of these for 2000-01 and 2001-02 based on the budget estimates. Figure 5 Medi-Cal Caseload to Increase As Cost Per Eligible Declines 1991-92 Through 2001-02 3 4 5 6 91-92 93-94 95-96 97-98 99-00 01-02 1,500 2,000 2,500 3,000 $3,500 Eligibles (In Millions) Cost Per EligibleEligibles Cost per Eligiblea a Excludes pass-through funding for programs outside of the Department of Health Services. Budget Forecasts Growing Caseloads, But Costs Drop Slightly The budget projects that in the current year the number of eligibles and the cost of benefits per eligible will grow. In the budget year, how- ever, caseloads are projected to continue to grow while the cost per eli- gible will decline. Caseload. The number of persons enrolled in Medi-Cal grew rapidly in the early 1990s\u2014caseload growth in 1992-93 was almost 8 percent over the prior year. Between 1991-92 and 1995-96, the Medi-Cal average monthly caseload grew from 4.6 million eligibles to 5.5 million. The rapid growth resulted from the ongoing effects of Medicaid eligibility expan- sions enacted in the late 1980s and from increased welfare caseloads as- sociated with the severe recession that California experienced at that time. California Medical Assistance Program C – 99 Legislative Analyst’s Office In the mid-1990s, the Medi-Cal caseload leveled off, and then dropped by almost 300,000 eligibles (5.4 percent) in 1997-98. Again, the change in the Medi-Cal caseload roughly paralleled changes in the CalWORKs wel- fare caseload. That caseload began a sharp drop at that time in response to the turnaround in the state’s economy and greater emphasis on mov- ing families from welfare to work in the wake of enactment of state and federal welfare reform legislation. Another factor contributing to declin- ing welfare and Medi-Cal caseloads probably was reluctance among im- migrant Californians to make use of public benefits because of concerns about whether such use might adversely affect their ability to naturalize or to sponsor the immigration of family members in the future. From 1997-98 through 1999-00, the Medi-Cal caseload was relatively flat while the CalWORKs caseload continued to decline. The Medi-Cal caseload has not declined primarily because of the backlog of eligibility determinations for former CalWORKs recipients that resulted from the delay in implementation of Section 1931(b) Medi-Cal eligibility by DHS and the counties. In the current year and 2001-02, the budget estimates that the Medi-Cal caseload will grow once more, primarily due to a vari- ety of eligibility expansions and simplified eligibility processes. Cost Per Eligible. While the caseload has gone up and down, the cost trend has been almost steadily upward until 2001-02. The average annual growth rate of the estimated cost of benefits per eligible (excluding pass- through funding to other departments and local governments) is 4 per- cent, which is twice the rate of general inflation during this period, as measured by the Gross Domestic Product deflator. The temporary dip in the cost per eligible that occurred in 1994-95 and 1995-96 was partly the result of a change in the caseload mix, rather than an underlying drop in health care costs. This is because the rapid increase in the number of families on welfare (whose health care costs are relatively low) temporarily reduced the proportion of aged and disabled persons (relatively high-cost groups) in the Medi-Cal caseload, and this change in the mix tended to reduce the average cost per eligible. As the CalWORKs welfare caseload subsequently fell, the elderly and disabled share of the Medi-Cal caseload returned to its earlier level of about 26 per- cent, and the cost per eligible resumed its growth in 1996-97. In 1999-00, the estimated cost per eligible increased by 5.7 percent. Based on the Governor’s budget, these costs would increase by al- most 13 percent in the current year, but would depart from the pattern of the prior five years by decreasing 4.6 percent in the budget year. The pro- jected slowing of the growth rate in 2001-02 appears to be the result of an increase in the number of healthy beneficiaries rather than a decrease in health care costs. The simplification of the eligibility process means that C – 100 Health and Social Services 2001-02 Analysis the Medi-Cal Program probably will retain a greater number of children and families on its caseload who do not regularly need health care ser- vices. In the past, these individuals might not have submitted quarterly status reports because they did not need health care services at that time and, as a result, they were dropped from Medi-Cal coverage. These indi- viduals would probably reenroll later when they needed health care ser- vices. With continuous eligibility, these individuals are much less likely to leave the program. Therefore, the Medi-Cal caseload increase will in- clude a larger segment of the population that is healthy, resulting in fewer additional program costs compared to other beneficiaries, such as the aged, blind, and disabled. Overall Caseload Estimate Reasonable; One Component May Be Overestimated We find that the budget’s overall estimate for the Medi-Cal caseload is reasonable, but that the projected increase in the caseload of Medi-Cal nonwelfare families may be overestimated. Accordingly, we will monitor caseload trends and recommend appropriate adjustments at the time of the May Revision. Figure 6 shows the budget’s forecast for the Medi-Cal caseload in the current year and 2001-02. The majority of the projected Medi-Cal caseload growth consists of families and children. The budget estimates that the caseload for this group will increase by 2.8 percent in the current year and about 16 percent in the budget year. Nonwelfare families account for most of the projected increase in Medi-Cal eligible families and children. The budget estimates that the caseload of Medi-Cal eligible nonwelfare families will increase by about 52 percent in the current year, then in- crease again by 49 percent in the budget year. The projected caseload increase is primarily the result of growth in the 1931(b) program, elimination of the quarterly status reporting require- ments for adults, and the implementation of new continuous eligibility rules for children. Nonwelfare Family Growth May Be Overestimated. Our analysis indicates that the projected increase in Medi-Cal eligible nonwelfare fami- lies for the budget year may be overestimated. This is because in the cur- rent year, the caseload increase expected to result from the expansion of the nonwelfare 1931(b) program to 100 percent of FPL (effective March 2000) has been about half of what was anticipated. This is attributed to the complexity of making 1931(b) eligibility determinations. Addition- ally, the overall Medi-Cal caseload for the current year appears to be slightly below the estimate upon which the Governor’s budget plan for California Medical Assistance Program C – 101 Legislative Analyst’s Office 2001-02 is based. If this caseload trend continued, state Medi-Cal costs could be tens of millions of dollars below the level of spending assumed in the 2001-02 Governor’s Budget. Figure 6 Medi-Cal Caseload Governor’s Budget Estimate 1999-00 through 2001-02 (Eligibles in Thousands) 1999-00 2000-01 Change from 1999-00 2001-02 Change From 2000-01 Amount Percent Amount Percent Families\/Children 3,573 3,675 102 2.8% 4,271 596 16.2% CalWORKs a 2,033 1,768 -265 -13.0 1,652 -116 -6.6 Nonwelfare families b 919 1,394 475 51.7 2,071 677 48.6 Pregnant women 176 178 2 1.3 203 25 14.1 Children 446 335 -111 -24.8 345 10 3.0 Aged\/Disabled 1,311 1,357 45 3.5% 1,402 46 3.4% Aged 489 508 18 3.7 525 18 3.5 Disabled 823 849 27 3.3 877 28 3.3 Totals 4,885 5,032 147 3.0% 5,674 642 12.8% a California Work Opportunity and Responsibility to Kids program. b Includes former CalWORKs recipients temporarily continued in the Edwards category. Uncertainties in Estimate. However, it is highly uncertain at this time whether this trend will be sustained. There are a number of factors that could result in higher caseloads as well as factors that could produce lower caseloads. On the upside, a number of significant expansions in Medi- Cal coverage and change in eligibility rules only began to take effect on January 1, 2001. It may be several months before they are fully imple- mented and their true effects on the Medi-Cal caseload are known. There is downside potential for the caseload estimates as well. For example, the lag in eligibility determinations (discussed above) may carry over into the budget year and some counties may continue to encounter delays and difficulties in the Section 1931(b) eligibility process. In this event, the number of adults enrolling in the 1931(b) program would be less than anticipated. Moreover, the projected number of additional per- sons who would remain enrolled in Medi-Cal because they no longer have to submit a quarterly status report could also be less than estimated in the budget. C – 102 Health and Social Services 2001-02 Analysis Overall Projections Appear Reasonable. Our review found that other caseload estimates appear reasonable. The overall children’s monthly caseload component of the nonwelfare families category is expected to increase by about 17,000 in the current year, and nearly 370,000 in the budget year. This growth is consistent with the new rules providing these children with continuous eligibility. Caseloads for the aged and disabled are expected to grow by about 45,000 in both the current year and in the budget year. This budget forecast also appears reasonable, given the re- cent expansions of eligibility for this group and recent caseload trends. In summary, while we believe that some caseload savings in the budget year are possible, we do not recommend a specific budget adjustment at this time. That is because it is not yet clear whether the delays associated with 1931(b) determinations will continue. Accordingly, we will continue to monitor the Medi-Cal caseload trends and recommend appropriate ad- justments at the time of the May Revision. Potential Risks to Accuracy of Caseload Projections and Cost Esti- mates. The accuracy of the department’s caseload projections and cost estimates are dependent upon a number of other more general factors not discussed above. Among the factors that could cause the Medi-Cal program’s caseload and cost to vary from the projections are: Federal actions such as a minimum wage rate increase or the en- actment of laws expanding Medi-Cal eligibility. Further changes in state laws and regulations adopted by the Legislature and the Governor or through the initiative process. For example, pursuant to legislation, regulations setting new minimum nurse-to-patient staffing ratios are likely to be imple- mented this year that could affect hospital and managed care rates. Changes in the economy and general inflation could affect the number of people eligible for Medi-Cal. Economic changes could also result in further provider rate increases which would cause an increase in Medi-Cal expenditures. Significant changes in any of these areas could easily result in a caseload growth higher or lower that the one contained in DHS’s Medi-Cal estimate. SETTING MEDI-CAL PHYSICIAN RATES\u2014 A MORE RATIONAL APPROACH Background For 2001-02, the Medi-Cal Program will spend an estimated $1 bil- lion ($500 million General Fund) for physician services in the tradi- California Medical Assistance Program C – 103 Legislative Analyst’s Office tional fee-for-service portion of the program in which providers are paid for each examination, procedure, or other service that they fur- nish. In addition, a significant portion of the estimated $4.2 billion ($2 billion General Fund) in premiums that Medi-Cal provides to health plans for beneficiaries in managed care indirectly pays for physician services. About half of the persons eligible for Medi-Cal are enrolled in man- aged care organizations while the remainder receive services under the fee-for-service portion of the program. Although we believe a review is warranted of the managed care plan rate system, this analysis focuses primarily upon the mechanism for establishing physician rates for fee- for-service Medi-Cal services. The Current Rate-Setting System Our analysis indicates that the rates paid to physicians for services provided under the Medi-Cal Program are relatively low compared to the rates paid by the federal Medicare program and other health care purchasers. Despite state and federal requirements, the Department of Health Services has not conducted annual rate reviews or made periodic adjustments to Medi-Cal rates to ensure reasonable access to health care services. Rate adjustments have generally been adopted in the budget process on an ad hoc basis, usually in response to complaints about limited access to specific services and to provider requests for rate increases. Thus, there is not a rational underlying basis for the state’s complex system of setting Medi-Cal rates. In comparison, Medicare uses a comprehensive, annually updated, rate-setting system that is available for use by other government programs and the public generally. Our key findings, which we discuss below, are summarized in Figure 7 (see next page). Studies Show Medi-Cal Rates Are Low. Studies show that the rates that Medi-Cal pays for physician services are relatively low compared to rates paid by other major purchasers of health care. For example, a May 1999 study conducted by Pricewaterhouse Coopers LLP for the Medi-Cal Policy Institute found that Medi-Cal physician rates for some common procedures were substantially less than those paid by the fed- eral Medicare program, which provides health care benefits for the eld- erly and some disabled persons, or by private health plans. Medi-Cal rates for certain medical services were often less than half the rates paid by other health care purchasers. A national study of physician rates in state Medicaid programs by The Urban Institute found that these states, on average, paid physicians at rates equal to about 64 percent of Medicare rates. However, the study C – 104 Health and Social Services 2001-02 Analysis found that California’s Medi-Cal rates were comparatively lower, amount- ing to an average of 47 percent of the Medicare rates in 1998. Figure 7 Current Physician Rate-Setting System Key Findings Medi-Cal rates are low compared to Medicare and other health care purchasers. The Medi-Cal Program has not met state and federal requirements for setting rates, ensuring reasonable access to health care. Research indicates physician rates can affect access to care and health care quality. Medi-Cal physician rates are not based upon an assessment of relative access of Medi-Cal beneficiaries to quality health care or any measure of the actual costs of providing medical services. Medicare has a rational, comprehensive rate-setting system that adjusts physician rates annually. Medi-Cal physician rates now average about 60 percent of Medicare rates. Budget Problems Held Down Rates. These low rates resulted in part from the state’s budget problems during the recession of the early 1990s. Most Medi-Cal physician rates were frozen and some rates were actually reduced to hold down state costs. As the state economy and state budget situation improved, rates were increased in the 1998-99 and 1999-00 state budgets for specific services, such as primary care and emergency room services. But no general increase affecting Medi-Cal physician rates across the board had been implemented since 1985-86 until the enactment of the 2000-01 Budget Act. As shown in Figure 8, the 2000-01 budget provided about $133 mil- lion from the General Fund (plus matching federal funds) for (1) targeted rate increases and (2) a general physician rate increase (identified as other physician services in Figure 8). The recent rate increases, however, do not put into place any ongoing process for evaluating physician rates or for periodically adjusting them when appropriate. Requirements for Regular Rate Reviews Have Not Been Met. State law establishes the following two general criteria for Medi-Cal physician rates: (1) rates must be sufficient to provide Medi-Cal recipients with rea- sonable access to medical care services and especially to primary and maternity care services; and (2) rates must apply statewide, except that higher rates may be paid if necessary to provide access to care in spe- California Medical Assistance Program C – 105 Legislative Analyst’s Office cific areas. The state provision for reasonable access to care is consis- tent with the requirement of federal Medicaid law that rates be suffi- cient to enlist enough providers so that care and services are available to Medicaid participants to at least the same extent that they are avail- able to the general population in the geographic area. State law also requires the Department of Health Services (DHS) to annually review and periodically revise Medi-Cal physician and dental rates to en- sure the reasonable access of Medi-Cal beneficiaries to physician and dental services. Figure 8 Physician Rate Increases for Medi-Cal and Related Health Programs\u2014General Fund 2000-01 (Dollars in Millions) Amount Percent Increase Child Health and Disability Prevention Program\u2014 health screening exams $19.2 20.0% California Children’s Services 9.2 20.0 Emergency-room and on-call physicians 10.5 40.0 Neonatal intensive care 5.4 30.0 Comprehensive perinatal services 2.6 11.0 Other physician services 84.9 15.6 Total $132.9 Despite these statutory provisions, DHS has not performed the re- quired annual rate reviews or proposed revisions to physician rates for many years. The rate increase included in the 2000-01 budget was not based upon any objective analysis of the adequacy of physician rates. The Legislature approved a bill in 1999 (AB 461, Hertzberg) to re- quire DHS to conduct a rate review by April 1, 2000, including a com- parison of Medi-Cal physician rates with those of Medicaid programs in five comparable states. The Governor vetoed this legislation, stat- ing that DHS lacked the administrative resources to conduct such a rate review. Studies Show Relationship Between Rates and Health Care. A recent national analysis of Medicaid physician rates by The Urban Institute con- cluded that physician fee levels affect both access and outcomes for Med- C – 106 Health and Social Services 2001-02 Analysis icaid patients. One study cited by The Urban Institute report found that higher rates were associated with a small, but significant, decline in the infant mortality rate. Another study found that children enrolled in Medicaid programs that paid relatively higher physician fees were more likely to obtain care at a doctor’s office. The findings of this national study are consistent with a recent sur- vey of Medi-Cal beneficiaries. Specifically, in a recent survey of Medi-Cal beneficiaries, the Medi-Cal Policy Institute reported that 80 percent of program participants believe that they are receiving high-quality medi- cal services. However, 56 percent reported difficulty finding doctors who would provide them treatment, and 78 percent said it is very important that more doctors participate in the program. No Rational Basis for Rate System. There are three basic steps in the methodology for calculating most Medi-Cal physician rates. First, physician procedures are classified according to a coding structure. Sec- ond, each procedure is assigned a relative unit value. Third, the pay- ment amount is determined by multiplying the relative unit value by a dollar conversion factor. (We explain this process in more detail in our February 2001 report entitled, A More Rational Approach to Setting Medi- Cal Physician Rates.) The structure of Medi-Cal rates is complex with thousands of pos- sible combinations of procedure codes, relative unit values, conversion factors, and other rate modifications. Nevertheless, DHS has no regular process in place for the periodic evaluation of the adequacy of physician rates or for periodically adjusting them. Physician rates are no longer tied to a 1969 relative unit value system developed by the California Medical Association. Thus, the rate adjustments approved in recent years in the budget process have generally been adopted on an ad hoc basis, usually in response to complaints about limited access to specific services and to provider requests for rate increases. The rate increases included in the 2000-01 budget, for example, were based upon general legislative concerns about the adequacy of rates and overall budget priorities; they were not based on any spe- cific objective measures of the adequacy of those rates in ensuring pa- tient access to care or quality of care. While DHS has used additional funding received through the budget to adjust Medi-Cal physician rates to reduce some of the disparities with Medicare, large differences still exist for some medical procedures. The lack of a rational system for physician rate setting has significant potential ramifications for the provision of health care for Medi-Cal ben- eficiaries and the administration of the program: (1) the state will not ensure reasonable access to quality health care services; (2) physician ser- California Medical Assistance Program C – 107 Legislative Analyst’s Office vices will be used less efficiently, with overpayments for some medical procedures and underpayments for others, providing an incentive for the overuse of some services and the under use of others; (3) some medical providers may not be fairly compensated for certain medical procedures; and (4) the Medi-Cal rate system will remain complex and difficult to administer for DHS and participating physicians. Medicare Is a Useful Benchmark. Our analysis indicates that Medi- care provides the state with a useful benchmark for rate setting, for sev- eral reasons. Similar to the Medi-Cal Program, Medicare uses a three-step rate-setting process involving a coding structure, relative unit values, and a dollar conversion factor. The key differences in Medicare which we be- lieve make it a useful benchmark are that (1) the relative values and con- version factor the Medicare rate system assigns to medical procedures are updated regularly, and (2) Medicare rates fairly accurately reflect the current costs of providing physician services. Medicare has the most com- prehensive, annually updated, rate system in the nation, and it is pub- licly available for use by anyone, including other public agencies such as the Medi-Cal Program. Many purchasers of health care, including both private health plans and about 19 state Medicaid programs, use the relative value-based rate system developed by Medicare when adjust- ing physician rates. Using Medicare rates as the basis for Medi-Cal rate setting would allow DHS to avoid the expensive and unnecessary process of develop- ing its own separate physician rate structure. This approach also should not be difficult for health care providers to accept, given that four out of five California physicians participate in Medicare. Medi-Cal Rates Now 60 Percent of Medicare. The 2000-01 budget in- cluded about $85 million from the General Fund (plus an equivalent amount of federal matching funds) for a general increase in physician rates averaging 15.6 percent. Because the intent of the budget action was to reduce disparities with Medicare, larger rate increases were provided for some procedures than for others. State payments to managed care health plans will also be increased proportionally to allow those plans to provide higher compensation for physicians. Based upon data provided by DHS, we estimate that the overall level of Medi-Cal physician payments has increased to roughly 60 percent of the Medicare rates allowed for nonhospital settings as a result of the re- cent physician rate increases. We estimate that Medi-Cal physician pay- ments averaged about 50 percent of the Medicare rates before the recent rate increases were implemented. C – 108 Health and Social Services 2001-02 Analysis Reforming the Way Physician Rates Are Set We recommend that the Legislature establish a more rational process for establishing Medi-Cal rates and for periodically reviewing and adjusting those rates. In the short term, if the Legislature wishes to continue to narrow the significant gap between Medi-Cal physician rates and the rates paid under other health programs, Medicare rates should be used as a benchmark. In order to provide a long-term solution, the Legislature should direct the Department of Health Services to perform a comprehensive analysis of access to physician services and the quality of care provided to Medi-Cal beneficiaries, and offer proposals commencing in 2002-03 for periodic future adjustments to physician rates based upon that analysis. Figure 9 summarizes our recommendations. Interim Approach\u2014Base Medi-Cal Rates Upon the Medicare Pro- gram. Due to the lack of objective data at this time about health care ac- cess or quality of care for Medi-Cal beneficiaries, we have no basis for recommending any further change now in Medi-Cal physician rates. How- ever, as we have noted in this analysis, Medi-Cal rates in many cases are well below the rates paid by other health care purchasers, including Medicare. Accordingly, we recommend that any rate adjustments the Legisla- ture does choose to provide in the interim for the Medi-Cal Program in the state budget process be made in a way that further narrows the program’s differences with Medicare rates. We also propose that DHS report each year to the Legislature regarding how Medi-Cal and Medi- care rates compare, and the cost of keeping Medi-Cal rates in alignment with Medicare and other major purchasers of health care. We further recommend that any specific rate increases generally be limited to 80 percent of the Medicare level. This is due to the way Medi- care and Medi-Cal provide coverage to persons eligible for both programs. The Medi-Cal Program pays the Medicare premiums and deductibles and any required copayments for medical services on behalf of these persons. Participating physicians generally agree to accept the Medicare rates for services to Medicare beneficiaries. However, the Medicare payment is only 80 percent of the Medicare rate\u2014with copayments by beneficiaries mak- ing up the remaining 20 percent of the payment due to the physician. Federal law allows state Medicaid programs to limit the amount they pay for Medicare copayments on behalf of dual eligibles, and California has chosen to exercise this option under state law. If the Medicare pay- ment is greater than the Medi-Cal rate, then Medi-Cal pays nothing, and the provider receives only the Medicare payment. If the Medi-Cal rate is greater than the Medicare payment, then Medi-Cal pays the difference between the higher Medi-Cal rate and the lower Medicare payment. California Medical Assistance Program C – 109 Legislative Analyst’s Office Figure 9 LAO Recommendations for Setting Medi-Cal Physician Rates Establish a More Rational Process Interim Rate Adjustments. We have no basis at this time for recommending Medi-Cal physician rate increases. If the Legislature wishes to increase rates, we recommend that those rate increases be made in a way that narrows the gap but does not exceed 80 percent of Medicare rates. Reporting of Rate Comparisons. We recommend that the Department of Health Services (DHS) report each year to the Legislature regarding how Medi-Cal rates compare to Medicare rates and the cost of keeping those rates in alignment with Medicare and other major purchasers of health care. Future Rate Adjustments. We recommend that DHS perform a comprehen- sive analysis of access to physician services and quality of care provided to Medi-Cal beneficiaries and the actual cost of providing medical services. Thereafter, DHS should base future rate adjustments upon that analysis. All rates would thereafter be reviewed at least once every five years. For most procedures and services, the Medi-Cal rate is less than the Medicare payment amount. As a result, the state avoids substantial medi- cal costs. We estimate that if Medi-Cal rates were generally increased to the maximum recommended level of 80 percent of Medicare rates, the an- nual General Fund cost would be roughly $237 million. If the interim 80 percent limit we propose were exceeded so that Medi-Cal and Medi- care physician rates were equal, we estimate that annual General Fund costs would increase much more\u2014about $540 million\u2014for the reasons we have discussed above. Long Term\u2014Base Rates on Comprehensive Review. We recommend the enactment of legislation directing DHS to perform a comprehensive analysis of the access to physician services and quality of care provided to Medi-Cal beneficiaries. The DHS would recommend periodic adjust- ments to physician rates based upon the results of that analysis. The Leg- islature would then determine whether to appropriate funding for such rate adjustments. This analysis would involve regular measurement and evaluation of both patient access to health care and the quality of that care. While the department now contracts for such reviews for Medi-Cal managed care plans, it does not comprehensively or regularly do so for fee-for-service Medi-Cal services. C – 110 Health and Social Services 2001-02 Analysis The long-term fiscal impact of the proposed new rate-setting mecha- nism is uncertain and would largely depend upon the extent to which the Legislature appropriated funding for any periodic rate increases recom- mended by DHS. The Benefits of the LAO Approach We believe that our proposal to establish a rational process for setting Medi-Cal rates, and for periodically reviewing and adjusting those rates, offers some significant potential benefits. For example, it would ensure that the Medi-Cal Program remains in compliance with state and federal statutory requirements for the payment of rates sufficient to ensure the participation of medical providers and regular review and adjustment of physician rates. Our approach is likely in the long term to foster reason- able access to health care for Medi-Cal beneficiaries and a better quality of care. This is because our proposal would ensure that rates are reviewed and adjusted with these factors in mind. Physician services are likely to be used more efficiently under our proposal since rates would be more in line with current costs, thus avoiding overuse of some medical proce- dures and under use of others. Medi-Cal rates would keep pace with changes in medical practices and technology. Our proposal would also simplify administration of the Medi-Cal Pro- gram by doing away with an extremely complex rate structure. For ex- ample, the 20 different dollar conversion factors used to determine payments for physician services would be consolidated into one such factor, and many special modifications of rates would no longer have to be calculated. OTHER ISSUES Los Angeles County Section 1115 Medicaid Demonstration Project We recommend approval of $30 million from the General Fund requested for the extension of a Medicaid demonstration project providing state and federal funds to enable Los Angeles County to reduce its inpatient, and expand its outpatient, health care system. In order to strengthen the Legislature’s oversight of this project, we recommend the adoption of supplemental report language requiring that the state Department of Health Services report on the county’s progress toward restructuring the local health system and its assessment of county plans to address significant health program budget shortfalls projected to begin in 2003-04. California Medical Assistance Program C – 111 Legislative Analyst’s Office We further recommend that the 2001-02 budget request for funding to monitor the demonstration project be reduced by $6.8 million (about $3.4 million General Fund and $3.4 million federal funds), because the monitoring contract is unlikely to be awarded until 2002-03. In addition, the Legislature may wish to consider using available federal funds instead of the General Fund to pay for workforce training related to the demonstration project, thereby saving about $27 million from the General Fund over a five-year period. (Reduce Item 4260-101-0001 by $3.4 million and Item 4260-101-0890 by $3.4 million.) Background. At the start of the 1995-96 fiscal year, Los Angeles County faced a $655 million budget deficit in health services operations and the potential collapse of its medical safety net programs. State, federal, and county officials collaborated to develop a five-year plan to address the crisis by financially stabilizing the county health system, and, over time, moving it away from expensive hospital services toward community-based primary care and preventive services. In April 1996, HCFA approved the plan as a Medicaid demonstration project that was to end during 1999-00. Since that time, Los Angeles County has made some progress toward achieving the project’s goals, including increasing ambulatory (commu- nity based) sites throughout the county from 45 to 156 and decreasing emergency room visits by 27 percent. However, the fundamental restruc- turing goals of reducing inpatient care and expanding outpatient care were not achieved by the end of the project’s term. Access to community- based care was to have been increased by 900,000 additional visits, but it was increased by 600,000 visits, and other goals for reducing operating costs were not achieved. As a result, the county requested an extension of the program to provide it additional time and funding to institute re- forms and restructure its health system. On June 27, 2000, HCFA approved a five-year extension to the dem- onstration project (for 2000-01 through 2004-05). The extension provides $900 million in federal funds that would be phased out over the five-year extension of the project. The total amount of supplemental funding avail- able to Los Angeles County as a result of the demonstration project is $1.5 billion, including federal ($900 million), state ($150 million), and county ($400 million) funds. Provisions of the Project Extension. The project’s extension is con- tingent upon the state and county meeting a number of specific require- ments that include: Further Increasing Access Through Outpatient Services. To ad- vance the restructuring process, the county has committed to con- tinuing expansion of outpatient services. For example, the county must provide a minimum of three million outpatient visits annu- C – 112 Health and Social Services 2001-02 Analysis ally in public and private clinics. As part of this effort, the state must ensure that participating clinics are reimbursed at adequate rates. The county will also expand speciality care services and enhance the mix of services that are available to the uninsured. Improve Screening and Enrollment Processes. The state and the county must take steps to eliminate or reduce barriers to Medi- Cal and Healthy Families enrollment and must specifically en- sure that the total number of Medi-Cal eligibles in the county is increased. Some of these steps include ensuring timely process- ing of applications and providing enrollment materials in lan- guages other than English. Also, through a pilot project, the county must simplify the annual redetermination process by allowing the beneficiary to complete a form and sign to self-declare the information needed for redetermination. County Workforce Training. The state and county must develop a plan and commit funds for workforce training and restructur- ing activities in the county’s health care system to enable county health care workers to be better prepared for new responsibilities. State Monitoring Plan. The state must submit a detailed moni- toring plan that includes specific requirements and measurable milestones of county progress towards reform of health care opera- tions. The plan also enables the state to issue sanctions that could amount to tens of millions of dollars if these goals are not met. State Administrative and Reporting Requirements. The state must perform various administrative activities related to the demon- stration project and submit quarterly and annual progress reports to HCFA. Commitment of State and County Funds. Unlike the initial waiver, which did not require a significant state General Fund contribution, the extension agreement requires the state to provide $30 million annually from the General Fund for five years beginning in the current fiscal year. This funding is in addition to the normal reimbursements the state pro- vides the county through programs such as Medi-Cal. The funding would be used to provide cost-based reimbursement for services provided at eligible county-affiliated clinics. In addition to these state funds, the county has committed $300 mil- lion of tobacco litigation settlement funds and an additional $100 million of the county General Fund during the extension period for demonstra- tion-related services. State Investment Has Risks. The terms and conditions under which HCFA approved an extension to the demonstration project outline spe- California Medical Assistance Program C – 113 Legislative Analyst’s Office cific goals that Los County must achieve. Given that many of these goals were not fully achieved in the first five years of the project, there is uncer- tainty about whether they will be met in the next five years. The extension requirement that the state contribute $150 million during this five-year pe- riod gives it a vested interest in the county’s success in meeting these goals and establishing a more cost-effective and efficient health care system. However, the county’s own fiscal estimates show that, even with the state and federal financial help provided for the demonstration project, the county DHS will face a budget shortfall beginning in the third year (2003-04) of the extension. The shortfall is projected to continue through the end of the project and beyond. The shortfall is projected to amount to $333 million in 2003-04 and grow to $534 by 2005-06, the year after the extension expires. The threat of continued deficits in 2005-06 and subse- quent years, and the projected decline in federal funds, leaves the state at risk of being called upon to provide hundreds of millions of dollars annually for Los Angeles County health services beyond the extension period. The county has not yet determined how it will address these short- falls. Currently, it is considering options, including consolidations and reductions of health operations, to eliminate shortfalls during the five- year demonstration project period. To plan for the shortfall expected af- ter the five-year period, beginning in 2005-06, the county DHS will sub- mit a report to the county Board of Supervisors in December 2002 that provides options for changes in facilities and services in line with require- ments to balance the budget. Monitoring Funding Apparently Not Yet Needed. In addition to the $30 million General Fund augmentation in both 2000-01 and 2001-02, the Governor’s budget requests $7.7 million ($3.8 million from the General Fund) and nine positions to fulfill the monitoring and auditing responsi- bilities mandated in the terms and conditions of the waiver extension. Of this amount, $6.8 million (about $3.4 million from the General Fund and an equal amount of federal funds) would be used to hire a contractor that would conduct the overall program monitoring activities. The timetable for hiring the contractor involves recruiting, hiring, and training staff to develop a request for proposal; soliciting and reviewing bids; interviewing applicants; and hiring the contractor. The DHS’ own timetable provides for the interviewing and hiring of the contractor to occur at the earliest between May 1, 2002 and June 30, 2002. Yet, we are advised that the contractor hiring process has already fallen behind sched- ule. Given this situation, we believe it is very unlikely that the monitor- ing contract will be awarded during 2001-02. Workforce Investment Act Funding. One of the major components of the project is the development of a Workforce Development Program C – 114 Health and Social Services 2001-02 Analysis (WDP) to meet the needs of workers involved in health care delivery sys- tem restructuring areas. The WDP is a jointly developed program through the County of Los Angeles DHS and Service Employees International Union designed to: Implement training programs that address critical labor shortages by training county employees to promote into needed occupations. Support restructuring by upgrading worker skills through inno- vative training programs. Under the terms of the extension agreement, the WDP is to be sup- ported by the state and county at a 2-to-1 ratio, with a combined contri- bution of $40 million during the extension period (fiscal year 2000-01 through 2004-05). The state’s share of this funding is estimated to be about $27 million over five years. The Governor’s budget would provide the state’s share from the Gen- eral Fund. Our analysis indicates, however, that the workforce retraining activities required under the Medicaid demonstration project appear to be eligible for funding under the federal Workforce Investment Act (WIA). The 2001-02 Governor’s Budget appropriates about $800 million in federal funds received by the state under WIA. Of this amount, there are funds which are targeted to adults\u2014including those facing dislocation from their current jobs\u2014to assist them with their retraining and other needs. Up to 15 percent of the allocation is reserved for statewide activities, with the balance of funding allocated to counties. The Governor’s proposed bud- get identifies few specific statewide projects and proposes to leave most allocation decisions to the California Workforce Investment Board. Notably, the state-federal-county agreement to extend the Los Ange- les County demonstration project specifically permits the use of non- Medicaid federal funds for the required retraining activity. Substitution of WIA funds for this purpose would result in General Fund savings of $27 million over the life of the five-year demonstration project. Analyst’s Recommendation. We recommend that the budget’s request for $30 million General Fund annually for the Los Angeles County dem- onstration project be approved. Under the terms of the project extension, the contribution of state funds enables the county to obtain a significant amount of federal funds\u2014$900 million over five years. Without this fund- ing, the county cannot restructure its health operations and stabilize its costs and would risk a large-scale disruption of its health system. Fur- ther, if the demonstration project were halted as a result of a state deci- sion to withhold its financial contribution, the county’s reliance on ex- pensive inpatient care would continue and the planned shift to outpa- tient setting would probably suffer a setback. In addition, the demonstra- California Medical Assistance Program C – 115 Legislative Analyst’s Office tion project does have some mechanisms in place to help assure that the county meets the project’s goals, such as a monitoring plan and the state’s ability to impose financial sanctions upon the county if the monitoring plan’s requirements are not met. However, there are significant risks for the state associated with the commitment of state General Fund support. This requires that the ad- ministration and the Legislature provide strong oversight of the demon- stration project over its five-year life. Accordingly, we recommend the adoption of the following supple- mental report language: It is the intent of the Legislature that the State Department of Health Services (DHS) prepare a detailed written assessment of the progress of Los Angeles County toward meeting the goals outlined in the terms and conditions of the Medicaid Demonstration Project extension approved by the Health Care Financing Administration and report the assessment to the Chair of the Joint Legislative Budget Committee and the chair of the fiscal committee of both houses of the Legislature by December 1, 2001, and by December 1 of each subsequent year through 2005. It is also the intent of the Legislature that, by January 1, 2003, DHS prepare a detailed written assessment for the Joint Legislative Budget Committee and the fiscal committee of both houses of the Legislature of Los Angeles County’s plans to address the significant budget deficits projected for its health systems, both during the term of the demonstration project and thereafter. We also recommend deletion of the funding for the monitoring con- tractor that, based on our review, will not be needed in the budget year. We further recommend that the Legislature consider using available fed- eral funds, at a state savings over five years of about $27 million, for workforce training related to the demonstration project. Medi-Cal Estimate Should Be Redesigned We recommend the enactment of legislation directing the department to revise the Medi-Cal estimate in order to make it a more useful tool for the Legislature. In addition, we recommend the department report at budget hearings regarding the additional resources it would need to complete the redesign of the estimate. Estimate an Inadequate Tool. The annual Medi-Cal estimate is the basic tool the administration, Legislature, and other parties use to moni- tor Medi-Cal and evaluate proposed changes in this $25.4 billion ($9.4 bil- lion General Fund) program. Yet, the estimate’s approach and format have changed little over the last 20 years, resulting in a tool that is inadequate for the task. In the Analysis of the 1999-00 Budget Bill, we found that the C – 116 Health and Social Services 2001-02 Analysis estimate’s approach was outdated and failed to provide important informa- tion, such as data on caseloads and rates for the managed care plans, and provides almost no information explaining why proposed changes should occur. We proposed several ways to make the estimate a more useful tool for budgeting, monitoring, and evaluating the Medi-Cal Program. The 1999-00 Budget Act provided DHS funding for consultants and three limited-term staff through 2000-01 to assess the Medi-Cal estimate and determine the best approach for replacing the existing information system and identifying specific functional requirements. A feasibility study report (FSR) has been completed and is currently under review by the Department of Information Technology. Following approval of the FSR, DHS intends to revise the estimating process to implement improved tech- nology. Because the redesign process is under way, with development and implementation expected over the next two years, we believe this is an opportune time for the Legislature to direct the department to take additional steps to improve the estimate. Analyst’s Recommendation. We believe that the recommendations we offered for such improvements in our 1999-00 Analysis are still relevant and would assist the Legislature in determining the appropriate budget for the Medi-Cal Program. Accordingly, we recommend the enactment of legis- lation directing DHS to restructure the estimate to: Include a summary presentation of all of the program compo- nents of Medi-Cal, identifying the specific components that are administered by other departments or entities, and showing the sources and amount of funding for each. Provide detail on managed care costs, including an estimate of managed care costs, built up from specific rate assumptions, caseload projections, and cost trends for carved-out services. Provide a comprehensive analysis and spending forecast for DHS Medi-Cal services, including actual spending amounts for the past year and identification of factors responsible for spending trends. Identify General Fund cost trends for each group of Medi-Cal eligibles and services. Include concise, but informative, explanations of the basis and assumptions for each premise in the estimate. Separate out new and continuing policy proposals and provide more substantial documentation than is now available explain- ing the rationale and program details for those policy changes that represent new or significantly modified programs. California Medical Assistance Program C – 117 Legislative Analyst’s Office We recognize that revising the estimate as we propose may require additional DHS resources. Thus, we further recommend that the depart- ment report at the time of budget hearings regarding any funding and staffing required to carry out these changes. Report Needed on Managed Care and Inpatient Rate Increases We recommend that the Department of Finance and the Department of Health Services report at budget hearings regarding (1) their plans for Medi-Cal managed care and hospital inpatient rate increases for 2001-02 and (2) the potential amount of additional funding needed in 2001-02 to provide for any such rate increases. An estimate of the cost of providing anticipated rate increases for nursing homes is expected at the time of the May Revision. Managed Care and Inpatient Rate Increases in the Current Year. A portion of the 2000-01 Medi-Cal deficiency is for rate increases the CMAC negotiated and DHS granted to Medi-Cal managed care plans and hospi- tals. The 2000-01 Budget Act included about $67 million from the General Fund for rate increases for Medi-Cal managed care plans operating in the 12 counties under the two plan model. However, about one-third of the total cost of the rate increases for the current year\u2014an additional $36 mil- lion\u2014was not budgeted and is contributing to the Medi-Cal deficiency in the current year. In addition to not fully funding the cost of managed care rate increases in the current year, the 2000-01 Budget Act did not include any appropria- tions for the rate increases that hospitals negotiate with CMAC. The CMAC negotiated such rate increases in the current fiscal year and the related increase in inpatient costs is contributing $60 million to the current-year deficiency. Potential Budget-Year Costs. The budget request for 2001-02 does not include any additional funding for Medi-Cal managed care or inpa- tient rate increases. Managed care rate increases are typically granted every year and it is likely that further inpatient hospital rate increases will also be granted. Excluding these costs results in under budgeting of the Medi-Cal Program. Furthermore, as discussed in the issues above, and in the 2000-01 Analysis, we believe the deficiency process is not an appropriate funding mechanism for these rate increases. In addition, the 2001-02 budget proposal does not include any funding for anticipated increases in Medi-Cal expendi- tures due to rate increases for nursing homes. The DHS ordinarily provides an estimate of the cost of these rate increases at the time of the May Revision. The combined impact of managed care, inpatient, and nursing home rate increases could exceed $100 million in the budget year. C – 118 Health and Social Services 2001-02 Analysis Analyst’s Recommendation. For these reasons, we recommend that DHS and DOF report at budget hearings on (1) their plans for consider- ing Medi-Cal managed care and hospital inpatient rate increases in 2001-02 and (2) the potential amount needed to provide for these rate increases. An estimate of the cost of providing anticipated rate increases for nurs- ing homes is expected at the time of the May Revision. Other Potential Rate Increases Not Included in the Budget We recommend that the Department of Health Services report at budget hearings regarding (1) the impact of the settlement of the Orthopaedic Hospital v. Belshe’ litigation on provider rates and (2) the potential amount of funding needed if provider rates increase in the budget year as a result of the settlement. Potential Provider Rate Increases in the Budget Year. The recent settlement of the Orthopaedic Hospital v. Belshe’ litigation and other re- lated lawsuits pertaining to Medi-Cal payments for hospital outpa- tient services (discussed earlier) could result in provider rate increases. Work is currently under way to negotiate the final details of the settle- ment, which must then be approved by HCFA. Until this is complete, the impact of the settlement on provider rates and the Medi-Cal bud- get is unknown. Analyst’s Recommendation. We recommend that DHS report at bud- get hearings on the impact of settlement of these lawsuits on provider rates and the 2001-02 Medi-Cal budget. Antifraud Expansion Should Increase Savings The proposed Medi-Cal budget assumes that savings resulting from antifraud activities would be about the same as in the current year. However, a significant recent expansion of staff for antifraud activities should result in increased savings during the budget year, potentially amounting to millions of dollars. Accordingly, we recommend that the Department of Health Services (DHS) provide at budget hearings an updated estimate of expected fraud savings for 2001-02. The DHS report should also include the estimated savings for each type of antifraud activity. We recommend approval of the Governor’s request to permanently establish 16 positions for the Medi-Cal Fraud Prevention Bureau. Antifraud Expansion. During the past two years, DHS has been pro- vided additional resources to combat the problem of Medi-Cal fraud and abuse. Specifically, an additional $2.7 million ($1.3 million General Fund), 41 new positions, and enhanced statutory authority were provided to DHS in 1999-00. The 2000-01 Budget Act added $21 million ($9 million General California Medical Assistance Program C – 119 Legislative Analyst’s Office Fund) and 192 more positions for the Governor’s Medi-Cal Fraud and Fiscal Integrity Initiative. The 2001-02 budget plan would continue the funding and positions added over the past two years. The DHS budget proposal also includes a request to make permanent 16 positions previ- ously authorized for a limited term for the Medi-Cal Fraud Prevention Bureau at a cost of $1.4 million ($697,000 General Fund). Additional Positions, But No Additional Savings Yet. The Governor’s budget estimates that the 2001-02 savings from the expansion of anti- fraud activities will amount to $75 million ($38 million General Fund), the same level of savings that was estimated for 2000-01. This estimate was initially provided during the May Revision of the 2000-01 budget. At that time, the department indicated that $75 million represented the mini- mum level of anticipated savings and further indicated that savings would increase as the additional antifraud staff were hired and trained. However, the 2001-02 budget assumes no increase in antifraud sav- ings over the current year. Thus, the budget does not adjust for the addi- tional savings that DHS indicated would result from having a larger and more experienced staff and expansion of antifraud activity. These addi- tional savings could amount to millions of dollars that could reduce the General Fund amount budgeted for Medi-Cal in 2001-02. The department has indicated that a new estimate of antifraud savings will be prepared for the May Revision. At the time this analysis was prepared, DHS was unable to provide information detailing estimated savings for each type of antifraud activ- ity. The department’s antifraud efforts initially focused on the following four types of providers: suppliers of durable medical equipment, such as walkers, wheelchairs, special beds, or breathing equipment; providers of prosthetic or orthotic services, and items such as artificial limbs or corrective braces; independent (nonchain) pharmacies; and providers of nonemergency medical transportation. With expanded resources, the department also intended to focus antifraud efforts in the areas of clinical labs, physicians, billing services, dental providers (through the Denti-Cal program), home health agencies, and adult day health care programs. In addition, new staff was to focus on medical exemptions claimed for Managed Care enrollees, precheckwrite reviews, and tight- ening the Medi-Cal provider enrollment process. Without detailed in- formation about these antifraud efforts, it will be difficult for the Leg- islature to determine which are cost-effective and warrant continued funding in the future. Analyst’s Recommendation. For these reasons, we recommend that DHS report at budget hearings with an update of expected fraud savings for 2001-02 so that appropriate adjustments can be made to the Medi-Cal C – 120 Health and Social Services 2001-02 Analysis budget. We further recommend that the department report on savings generated in the current year and its projections for the budget year for each type of antifraud activity. Finally, we recommend approval of the Governor’s proposal to permanently establish 16 positions for the Medi- Cal Fraud Prevention Bureau. Public Health C – 121 Legislative Analyst’s Office PUBLIC HEALTH The Department of Health Services (DHS) delivers a broad range of public health programs. Some of these programs complement and sup- port the activities of local health agencies in controlling environmental hazards, preventing and controlling disease, and providing health ser- vices to populations who have special needs. Other programs, such as those that license health facilities, are solely state operated. The Governor’s budget proposes $2.1 billion (all funds) for public health local assistance. This represents an increase of $5.6 million, or 0.3 percent, above estimated current-year expenditures. The budget pro- poses $405 million from the General Fund, which is a 12 percent decrease from current-year expenditures. The main reason for this decrease is the proposed shift of General Fund support from some public health pro- grams to the proposed new Tobacco Settlement Fund (TSF). BREAST AND CERVICAL CANCER PREVENTION AND TREATMENT ACT Federal legislation was enacted in October 2000 that allows California to offer breast and cervical cancer treatment services as an optional benefit to low-income, uninsured persons under the Medicaid program with enhanced federal financial participation. We discuss related services that the state currently provides, the ramifications of this new federal law, and some options available to the state if it elects to implement these changes. Background Approximately 23,000 California women are expected to be diagnosed with breast or cervical cancer, and about 4,700 of these women are ex- pected to die from the two diseases, in 2001. A disproportionate share of these women are from low-income and racial- and ethnic- minority groups. C – 122 Health and Social Services 2001-02 Analysis Many are uninsured and do not currently qualify for any of the state’s com- prehensive health care programs, such as Medi-Cal or Healthy Families. Research has shown that early screening, diagnosis , and follow-up treatment substantially improves the health outcomes and survival rates of persons diagnosed with cancer. The state currently provides breast and cervical cancer screening services to low-income, uninsured and underinsured women who do not qualify for Medi-Cal through three programs that are discussed in greater detail below. National Breast and Cervical Cancer Early Detection Program (NBCCEDP). The NBCCEDP was created by the Breast and Cer- vical Cancer Mortality Prevention Act of 1990. This federal pro- gram provides grants to states for breast and cervical cancer screens for uninsured and underinsured women with incomes up to 200 percent of the federal poverty level (FPL). Most woman served by this program are over 40 years of age. Breast Cancer Early Detection Program (BCEDP). In 1993, Cali- fornia enacted the state version of the NBCCEDP to provide greater access to breast cancer screening services, including mam- mography, for uninsured and underinsured persons over 40 years of age with incomes at or below 200 percent of FPL. In addition to screening services, BCEDP provides services required for a definitive diagnosis, assistance in obtaining follow-up treatment, and outreach and education. This is the largest of the screening programs currently available. The BCEDP is funded by state to- bacco tax revenues. Family Planning Access Care and Treatment Program (Family- PACT). This program provides family planning and reproduc- tive health services, including breast and cervical cancer screens, to women with income up to 200 percent of FPL. It is different from the other programs in that it generally provides screens to a younger group of women\u2014those of child-bearing age. We would note that services required for a definitive diagnosis of breast cancer are not covered. Family-PACT is jointly funded by the state and federal government. From Screening to Treatment. For nearly ten years, the state provided breast and cervical cancer screening services for low-income women who did not qualify for Medi-Cal. However, treatment services for these women were generally not available unless they were referred to nonprofit orga- nizations which would help to pay for their treatment. This situation changed with the enactment of Chapter 660, Statutes of 1999 (AB 1107, Cedillo), a measure which created the Breast Cancer Treatment Program (BCTP). In 2001-02, BCTP is expected to provide treatment services to an Public Health C – 123 Legislative Analyst’s Office estimated 2,100 women. There is currently no state-funded program for low-income, uninsured women that provides the treatment services or- dinarily required for women diagnosed with cervical cancer. According to the Department of Health Services (DHS), there are approximately 920,000 women over age 40 with incomes at or below 200 percent of the FPL. About 270,000, or 29 percent, of these women are expected to receive a screening through the programs discussed above during 2001-02. Based upon the projected incidence of the diseases, we estimate that about 2,000 of these women will be diagnosed with breast or cervical cancer through the existing screening programs. Figure 1 shows the number of women served by the four programs. Figure 1 Low-Income Women Receiving Breast and Cervical Cancer Servicesa 2001-02 Program Estimated Number of Women Receiving: Breast Cancer Screens Cervical Cancer Screens Breast Cancer Treatment National Breast and Cervical Cancer Early Detection 23,000 23,000b \u2014 Breast Cancer Early Detection 207,000 \u2014 \u2014 Family-Pactc \u2014d 40,000 \u2014 Breast Cancer Treatment \u2014 \u2014 2,100 Totals 230,000 63,000 2,100 a Women with income at or below 200 percent of the federal poverty level who are not eligible for Medi-Cal services. b Women who receive both breast cancer and cervical cancer screens. Thus, the total number of women receiving screens from all three screening programs is 270,000. c This represents the estimated number of screens for women over 40 years of age. d Program does provide breast cancer screens. At the time this analysis was prepared, no estimate was available. Gaps in Existing Treatment Services. Although BCTP filled a funda- mental gap in the availability of cancer treatment services for low-income, uninsured women, we note that treatment services under this program are limited. For example, women are eligible to receive services for 18 months, even though their illness may require several years of treat- ment. In addition, certain benefits are not available, such as bone marrow C – 124 Health and Social Services 2001-02 Analysis transplants, hospice care, home health care, and nutrition services. Also, because the program is limited to 18 months, many women who need tamoxifen\u2014a standard drug treatment to control the spread of breast can- cer\u2014-are unable to receive this treatment. This is because tamoxifen has a five-year treatment protocol. We would also note that while women over 40 years of age face the greatest risk of breast and cervical cancer, many younger women can and do get these diseases. Based upon our analysis, many younger low-in- come women are being screened for cervical cancer under Family-PACT. However, as indicated earlier, unless a woman otherwise qualifies for Medi-Cal or Healthy Families coverage, state-funded cervical cancer treat- ment services are generally not available to uninsured, low-income women of any age. New Federal Legislation. The enactment of the Breast and Cervical Cancer Prevention and Treatment Act by Congress in October 2000 gives states the option for the first time to offer Medicaid coverage with federal financial participation to previously ineligible, low-income women who are diagnosed with breast or cervical cancer. The legislation provides en- hanced federal matching funds of two federal dollars for every state dol- lar, instead of the dollar-for-dollar federal-state sharing ratio tradition- ally available to California under Medicaid. Specifically, states have the option of providing full-scope benefits to uninsured women under age 65, with income up to 250 percent of FPL, who have been diagnosed with either breast or cervical cancer. Full-scope benefits means that the benefits available to such women would not be limited to those specifically required to treat breast and cervical cancer. All services for these women would be provided with enhanced federal financial participation. Moreover, these benefits would be available for the entire length of the cancer treatment period. States would also have the option to provide these women presumptive eligibility to ensure that needed treatment begins as early as possible. This means an applicant is given coverage for one month based upon a cursory review of their income eligibility. The new federal law allows women diagnosed under a state screen- ing program (such as Family-PACT and BCEDP) to participate in the Medicaid option, as well as women diagnosed through the NBCCEDP. In addition, states have the option of expanding the provider network by certifying providers who do not currently participate in the existing pro- grams to screen and diagnose women under the federal program. Public Health C – 125 Legislative Analyst’s Office Options for Developing an Expanded Cancer Treatment Program If the Legislature wishes to expand cancer treatment services for women in accordance with the new federal law, it has a number of options for doing so. Below we discuss some of these options, including aligning income eligibility for treatment services with the existing screening programs, offering presumptive eligibility to ensure immediate access to treatment services for women diagnosed with cancer, and covering younger women. Finally, our analysis indicates that the state funds already budgeted for breast cancer treatment appear to be sufficient to implement the new federal Medicaid treatment option. There are potentially significant benefits and costs for the state if it were to implement the new federal option to provide treatment services to women diagnosed with breast and cervical cancer. If the Legislature wishes to implement the new federal law, it has several specific options for structuring such a new state program. We discuss these options below. Aligning Eligibility Rules for Screening and Treatment Programs. In order for cancer screening and treatment programs to operate effectively and efficiently together, their eligibility rules must be similar. Currently, the breast and cervical cancer screening programs in California are avail- able to women with incomes at or below 200 percent of FPL. Under the new federal program, breast and cervical cancer treatment services could be provided to women with income at or below 250 percent of FPL. Although the federal law allows the state to cover women up to 250 percent of FPL, the Legislature may wish to consider aligning Medi-Cal income eligibility un- der the federal option at 200 percent of FPL to create a comprehensive sys- tem of care for at-risk women and women diagnosed with cancer. This approach has several benefits. First, it would create a source of treatment for all women who are currently eligible for the existing screen- ing programs. Second, it would simplify eligibility determination since these women would already have been determined to have qualifying income. Third, it would make presumptive eligibility easier to adminis- ter should the Legislature decide to adopt that option. We discuss this eligibility option below. Offering Presumptive Eligibility. Because of the complexity of eligi- bility rules, Medi-Cal eligibility determinations can take 30 to 60 days. For individuals with certain life-threatening conditions, such a delay in obtaining medical services can make a significant difference in their health. The state currently provides presumptive eligibility for pregnant women, because of the potential health risks to a mother and developing child during pregnancy, thereby giving them immediate access to health care. For similar reasons, the Legislature may wish to consider extending pre- sumptive eligibility to women who are diagnosed with breast and cervi- C – 126 Health and Social Services 2001-02 Analysis cal cancer. The Legislature may wish to require DHS to report at the time of budget hearings regarding the feasibility and cost of extending pre- sumptive eligibility to this population. Defining the Target Population. Under the new federal law, the state has the flexibility to expand treatment services to all low-income women up to age 65, or to limit the benefit to some part of this group\u2014for ex- ample, low-income women between 40 years and 65 years of age. There are several factors the Legislature might wish to consider in determining who to include in expanded coverage. The state screening programs pro- vide a very limited number of cervical cancer screens for low-income, uninsured women over 40 years of age due to limited funding. Thus, the number of such women who could be diagnosed with cervical cancer and referred for treatment is limited. Similarly, fewer women under 40 years of age could be referred for breast cancer treatment since Fam- ily-PACT does not provide the services required for a definitive diagno- sis. In the following pages, we offer some options for addressing prob- lems in the existing screening programs. Fiscal Effect of Implementing the New Law. The proposed state bud- get provides $20 million for BCTP in 2001-02. The Governor’s budget, however, does not take into account approximately $4.7 million in cur- rent-year savings in the program that could be reappropriated for the budget year. Although $20 million was provided for the program in 2000-01, a contract with California Health Collaborative, the non-profit organization retained to administer BCTP, will cost the state $15.3 mil- lion, resulting in a current-year savings to the state of $4.7 million. Thus, about $25 million in state funding potentially is available to draw down nearly $50 million in additional federal funds, providing a total of about $75 million that could be used to offer Medi-Cal coverage to women diagnosed with breast and cervical cancer. Based upon our analysis, this would be more than enough to cover our estimate of the cost of such Medi-Cal coverage in 2001-02. We estimate that the budget-year cost of adopting the new Medicaid option for women over 40 years of age with incomes up to 200 percent of FPL would range from $7 million to $12 million (all funds), with the state General Fund share ranging from $2 million to $4 million. Thus, there could be state savings ranging from $21 million to $23 million in the bud- get year if treatment services were expanded under the federal law. Our estimate does not include the cost of offering presumptive eligibility to women diagnosed with breast and cervical cancer. However, we believe such costs would be minimal. The full-year costs in subsequent years would be greater. Public Health C – 127 Legislative Analyst’s Office The Legislature might wish to require DHS to report at the time of budget hearings on its projection of the cost\u2014in the budget year and upon full implementation\u2014of offering this Medi-Cal coverage to women with income up to 200 percent of FPL. Options for Improving Cancer Screening Services In this section, we discuss some of the problems in the existing cancer screening programs which we believe limit the state’s ability to maximize federal funding under the new Medicaid option. Specifically, we found that the funding for screening services is decreasing, cervical cancer screens for high-risk women are limited, and that the limited number of providers certified for screening and diagnosis in the existing programs can limit access to treatment services. We have identified several options the Legislature may wish to consider to address these concerns. Alternative Funding Could Stabilize BCEDP. Our analysis indicates that state funding from tobacco tax revenues is eroding, with significant consequences for any expansion of treatment services under the new Medicaid option. We explain why this is the case below. The BCEDP was originally funded by a 2-cent per pack tax increase on cigarettes. However, growth in program caseload, combined with a decline in tobacco tax revenue, resulted in a shift of support for the pro- gram to the Proposition 99 Cigarette and Tobacco Products Surtax Fund. Due to a continued decline in smoking, Proposition 99 tobacco tax revenues are also declining and will eventually erode the funding available for BCEDP. If the Medicaid option were adopted, BCEDP would be the primary source of referral of women diagnosed with breast cancer. If fewer low- income persons are able to obtain BCEDP screens as a result of a decline in program funding, fewer would be referred for treatment under the new Medicaid option. If the state intended to maximize its available fed- eral funding for treatment services, an alternative and more stable state funding source would be needed in the long run for BCEDP. Expanding BCEDP to Include Cervical Cancer Screening. Our analy- sis indicates that relatively few low-income women at greater risk for cervical cancer are receiving cervical cancer screens. While more than 230,000 women over 40 are expected to receive breast cancer screens in 2001-02, only 63,000 women over 40 years of age, who constitute the at- risk group, are projected to receive cervical cancer screens. The relatively small number of cervical cancer screens reflects limita- tions of the programs available to do such screening. As we discussed earlier, cervical cancer screens are currently provided in two programs: the NBCCEDP and Family-PACT. Although NBCCEDP primarily serves C – 128 Health and Social Services 2001-02 Analysis women over 40 years of age, the amount of federal funding available for this program means that only a very limited number of women, approxi- mately 23,000, can receive cervical cancer screens. Moreover, only about 40,000, or 7 percent, of the women in Family-PACT, which is limited to women of child-bearing age, are over 40 years old and considered to be at higher risk of having cervical cancer. These program limitations mean that many low-income women at risk of cervical cancer will not have the benefit of early identification and treatment of the disease. One approach to improve access to cervical cancer screens would be to expand BCEDP to include cervical cancer screens. Our analysis indi- cates that this could increase the number of women who receive cervical cancer screens by more than 200,000. This is because BCEDP has approxi- mately 2,200 providers\u2014a relatively large network compared to NBCCEDP’s 150 providers. We would note that the women who are at the greatest risk of having breast cancer also happen to have the greatest risk of cervical cancer. If the screens are provided by the same program, women can receive both screens during the same visit to a doctor’s office. Based upon informa- tion provided by DHS, we estimate the state cost of this option would be about $11 million annually. We note that this would also increase the cost of providing treatment under Medi-Cal, since a greater number of women would be diagnosed with cervical cancer and referred for treatment. The Legislature may wish to direct the DHS to report on the feasibility, costs, and benefits of expanding BCEDP to include cervical cancer. Expanding the Provider Network. Program rules regarding which doctors may make a diagnosis of breast or cervical cancer could limit access to the treatment services that could otherwise be provided under the new federal law. If a woman with qualifying income is screened and diagnosed with breast or cervical cancer by a doctor who has not been certified as a provider under the NBCCEDP, she would not be eligible for treatment services under Medicaid. However, the state has the option under federal law to expand the provider network by certifying providers who do not currently partici- pate in the existing programs to screen and diagnose women under the federal program. Given the fact that BCEDP is projected to serve only about 25 percent of women over 40 years of age with income at or below 200 percent of FPL, the Legislature may wish to require DHS to report on the feasibility, costs, and benefits of certifying additional providers. Conclusion Currently, the state provides some cancer screening services, but only limited treatment services for women diagnosed with cancer. The primary Public Health C – 129 Legislative Analyst’s Office screening program is funded by an unstable revenue stream. Although low- income women over 40 are at high risk for both cervical and breast cancer, the current patchwork of state and federally funded health programs does not provide broad access to cervical cancer screening services. The federal Breast and Cervical Cancer Prevention and Treatment Act provides California an opportunity to provide comprehensive health cov- erage for low-income women diagnosed with cancer. We have outlined some options the Legislature may wish to consider that would address some of the problems with the existing cancer screening programs, and establish a better-coordinated and much-expanded screening and treat- ment system. TOBACCO PREVENTION PROGRAM EXPANSION Background State smoking prevention programs have traditionally been funded by Proposition 99 tobacco tax revenues. Proposition 99, the Tobacco Tax and Health Protection Act of 1988, established a 25-cent tax on cigarettes and other tobacco products. Since the enactment of Proposition 99, the state has spent more than $781 million on tobacco control efforts. Of that amount, 31 percent has been used to support the statewide antitobacco media campaign and 64 percent has been used to support locally admin- istered smoking prevention programs. The remaining 5 percent has gone for state administration and evaluations. However, due to the decline in smoking during this period, and the resulting decline in tobacco tax rev- enues, less money is available now to support these programs. The state’s 1998 settlement of litigation with the major tobacco com- panies will provide an estimated $21 billion over 25 years, with half go- ing to the state and half to the counties. As we indicate in our analysis of the proposed TSF, there has been significant public and legislative inter- est in using these revenues for smoking cessation programs and other health care proposals. The Budget Proposal. The Governor’s budget plan would provide $20 million ($15 million ongoing and $5 million one time) from the TSF for youth smoking prevention programs. The proposal would fund a four- part strategy to reduce smoking prevalence among California teenagers, providing a total of between 23 and 34 competitive grants for (1) local enforcement of tobacco laws, (2) youth advocacy coalitions against to- bacco usage, (3) local activities targeting the 18- to 24-year old popula- tion, and (4) surveillance and special studies. The four components are described in more detail below. Except for the surveillance and special C – 130 Health and Social Services 2001-02 Analysis studies proposal, the budget does not specify how much money would be allocated to each component. Local Enforcement of Tobacco Laws. Under the proposal, some funds would be provided to local law enforcement agencies and nonprofit organizations to enhance enforcement activities, par- ticularly laws aimed at eliminating tobacco sales to minors, and free tobacco product sampling. This is the only proposal that re- quires grantees to provide a match to qualify for the grants. Youth Advocacy Coalitions. Under this proposal, college men- tors are joined with high school students to form coalitions which undertake various activities aimed at reducing smoking in their communities. According to DHS, six counties currently adminis- ter a youth advocacy coalition program using Proposition 99 funds. The budget proposes to provide grants to expand existing programs as well as to increase the number of youth coalitions. The youth advocacy coalitions funded under the Governor’s plan would be modeled after the Contra Costa County youth coalition. Activities Targeting 18- to 24-Year Olds. The proposal would provide grants to local agencies to conduct programs that target this population. Activities will include expanding efforts to (1) protect nonsmokers from exposure to secondhand smoke, and (2) counter the tobacco industry’s presence on college campuses and in entertainment venues frequented by this group, such as movies, music, concerts, and sporting events. Surveillance and Special Studies. The budget proposal includes $2 million to conduct ethnic youth-specific surveillance studies, as well as studies of at-risk youth to better plan their programs around these populations. Surveillance studies allow the depart- ment to identify youth tobacco use trends, and determine if to- bacco control programs are having an impact in reducing tobacco use. This would build on similar activities currently conducted by the department. The proposal would also provide a total of $1 million for technical assistance and consultation related to each of the strategies outlined above. We note that, in addition to the proposed $20 million, the budget includes a separate proposal requesting $1 million for additional youth advocacy coalitions funded by a grant from the American Legacy Foundation. Governor’s Proposal Is Flawed The budget proposal to expand youth smoking prevention efforts is flawed because the effectiveness of the proposed new programs has not Public Health C – 131 Legislative Analyst’s Office been demonstrated. Additionally, the proposed new state programs are not coordinated with local tobacco prevention efforts. We therefore recommend the deletion of $18 million from the Tobacco Settlement Fund. We withhold recommendation on the $2 million requested for surveillance and special studies, due to the lack of fiscal detail on the estimated cost of this component. We recommend approval of the $1 million requested for youth advocacy coalitions funded by the American Legacy Foundation. We further recommend that the Department of Health Services report at the time of budget hearings regarding the potential cost of implementing three of the four proposals as pilot programs. (Reduce Item 4260-111-3020 by $18 million.) Surveillance and Studies Component Has Merit, But No Fiscal De- tail. Based upon our analysis, the surveillance and special studies com- ponent of the Governor’s proposal could serve to enhance smoking pre- vention programs by providing the information needed to allow the de- partment to more effectively target ethnic subgroups and at-risk youth, particularly youth attending continuation school, teen mothers, out-of- school youth, and youth offenders. However, at the time this analysis was prepared, the department could not provide details on the $2 mil- lion cost estimate of this proposal. No Evidence Specific Proposals Will Be Effective. At the time of our analysis, DHS could not provide information documenting that any of the proposed strategies is effective in reducing smoking. In support of these proposals, DHS points to the decline in smoking in California and research indicating that overall tobacco control spending has contributed to the decline in smoking prevalence. We note, however, that while it appears to be well-documented that tobacco control spending is gener- ally cost-effective, this does not mean that all of the programs currently funded by the state are cost-effective. In the case of the youth advocacy coalitions, the budget proposes to expand statewide the model currently used in Contra Costa County. Yet, at the time our analysis was prepared, the department could not provide any data demonstrating its effectiveness. Moreover, the department is not able to provide complete information on the amount of money that is currently spent on this program or the number of participants. Given the administration’s lack of evidence to support its budget re- quest for either statewide expansion of current programs or statewide implementation of new strategies, limited pilot projects to test and evalu- ate these proposals may be a more reasonable approach. State Projects Not Coordinated With Local Efforts. Given that the state’s major source of funding for smoking prevention programs\u2014Propo- sition 99\u2014is declining, it is increasingly important that the state priori- tize public health spending for programs that are well-coordinated with C – 132 Health and Social Services 2001-02 Analysis other local programs with the same purpose. Counties are estimated to receive $10.5 billion in payments over 25 years under the 1998 tobacco settlement agreement. Given the availability of this local funding, one promising approach could be for the state to test new approaches for tobacco prevention in partnership with interested counties. The state’s past experience in the administration of public health pro- grams suggests that creating partnerships with counties for such projects, such as by requiring counties to provide matching funds as a condition of obtaining state grants, could be beneficial. This approach would maxi- mize the use of state funds, provide a greater incentive for counties to use their share of tobacco settlement funds for tobacco prevention programs, and could result in better overall state-county coordination of such activities. We note that the budget includes a separate proposal funded by a grant from the American Legacy Foundation to provide $816,000 in the current year and $1 million in the budget year to further expand the number of youth advocacy coalitions. In effect, this budget proposal duplicates one compo- nent of the Governor’s $20 million smoking prevention package. Analyst Recommendation. Because of these concerns, we recommend that the $20 million requested from the TSF for the proposed tobacco pre- vention programs be reduced by $18 million to eliminate the proposed funding for three of the four new tobacco control programs. In lieu of the Governor’s proposal, we recommend that the Legislature consider pro- viding funding for these three proposals as pilot projects. If the projects demonstrated that the Governor’s proposed new programs have merit, they could be expanded at a later date. Accordingly, we recommend that the DHS report at the time of budget hearings regarding the cost of imple- menting these three proposals as pilot projects. We withhold recommendation on the $2 million proposed for sur- veillance and studies, pending fiscal detail on how DHS estimated the cost of this component. We recommend that the $1 million requested for the American Legacy Foundation proposal be approved and serve as a pilot project to test the effectiveness of youth advocacy coalitions. We further recommend that local matching funds be required for all of the pilots, and that funding be provided for an independent evaluation of their effectiveness. Our proposals would allow the Legislature to target available TSF monies at smoking prevention activities with demonstrated positive re- sults, provide an opportunity for the state to partner with the counties and not-for-profit organizations, and provide an incentive for counties to use their settlement funds for smoking prevention efforts. Managed Risk Medical Insurance Board C – 133 Legislative Analyst’s Office MANAGED RISK MEDICAL INSURANCE BOARD (4280) The Managed Risk Medical Insurance Board (MRMIB) administers sev- eral programs designed to provide health care coverage to adults and chil- dren. The Major Risk Medical Insurance Program provides health insurance to California residents unable to obtain it for themselves or their families because of preexisting medical conditions. The Access for Infants and Moth- ers program provides coverage for women seeking pregnancy-related and neonatal medical care and whose family incomes are between 200 percent and 300 percent of the federal poverty level (FPL). The Healthy Families Program provides health coverage for uninsured children in families with incomes up to 250 percent of the FPL who are not eligible for Medi-Cal. The budget proposes $846 million from all funds for support of MRMIB programs in 2001-02, which is an increase of about $336 million, or 66 percent, over estimated current-year expenditures. This increase is due primarily to the proposed expansion of the Healthy Families Pro- gram to include parents, as well as projected caseload increases. The bud- get proposes General Fund expenditures for MRMIB programs of about $129 million, a decrease of 13 percent from estimated current-year expen- ditures. The decrease in the General Fund share is primarily the result of shifting some MRMIB program costs to the newly established Tobacco Settlement Fund. HEALTHY FAMILIES PROGRAM The Healthy Families Program implements the federal government’s State Children’s Health Insurance Program enacted in 1997. Funding for California generally is on a 2-to-1 federal\/state matching basis. Families pay a relatively low monthly premium and can choose from a selection of managed care plans for their children. Coverage is similar to that offered to state employees and includes dental and vision benefits. The program began enrolling children in July 1998. In 1999, it was expanded to include C – 134 Health and Social Services 2001-02 Analysis children with family income up to 250 percent of the FPL as well as legal immigrant children. The Governor proposes $739 million ($125 million General Fund) in MRMIB’s budget for the Healthy Families Program in 2001-02, which is an increase of about 83 percent over estimated current-year expenditures. After accounting for program expenditures (outreach and related Medi- Cal benefits) in the Department of Health Services (DHS) and related expenditures in other departments, the total budget for the Healthy Fami- lies Program is proposed at $833 million ($163 million General Fund), which is an increase of 75 percent over the current year. The proposed increase is due primarily to the proposed expansion of the Healthy Fami- lies Program to include parents, as well as projected caseload growth. We note that the budget does not include funding for provider rate increases in 2001-02. The rate increases will be negotiated in February and will be included in the May Revision of the budget. The budget projects that enrollment will increase to about 511,000 by the end of the current year and to about 735,000 by the end of the budget year. Expansion of the Healthy Families Program to Parents Background The federal Balanced Budget Act of 1997 (Act) made available approxi- mately $40 billion in federal funds over ten years to states to expand health care coverage for children under the State Children’s Health Insurance Program (SCHIP). California’s share is approximately $4.5 billion. The Act also provided states with an enhanced federal match as a financial incentive to cover children in families with incomes above the previous limits of their Medicaid programs. For California, the enhanced match is about two federal dollars for each state dollar, as compared to approxi- mately a one-to-one match in the Medi-Cal Program. California, along with many other states, has not spent all of the funds that are available. Despite the state’s recent expansion of Healthy Fami- lies to children with family income up to 250 percent of the FPL, a size- able portion of California’s federal allotment would remain unspent over the next five years. Based upon our projections of available federal SCHIP funding and spending trends in the Healthy Families Program through 2004-05, we estimate that the cumulative SCHIP allotments over this pe- riod would exceed the cumulative spending of the existing Healthy Fami- lies Program by approximately $1.5 billion. Recognizing that states needed additional flexibility to expand health insurance coverage and spend their allotted federal funds, the federal Health Care Financing Administration (HCFA) last July issued guide- Managed Risk Medical Insurance Board C – 135 Legislative Analyst’s Office lines for demonstration project waivers. Specifically, HCFA indicated that the Secretary for the U.S. Department of Health and Human Services would consider five-year waivers that would allow states to use a por- tion of their SCHIP allotments for (1) coverage of parents of SCHIP en- rollees and (2) public health initiatives designed to address or supple- ment targeted health needs of children. In addition, subsequent federal legislation allows states to retain a portion of their unspent 1998 and 1999 SCHIP funds for two additional years. Prior to this legislation, any given year’s allotment had to be spent by states within three years. Chapter 946, Statutes of 2000 (AB 1015, Gallegos) subsequently di- rected MRMIB to seek a federal waiver to expand the Healthy Families Program to uninsured parents of children eligible for the program. California’s Proposed SCHIP Waiver Budget Proposal. In December, in accordance with Chapter 946, the Secretary for the California Health and Human Services Agency submit- ted a waiver request to federal authorities to expand Healthy Families coverage to parents. At the time this analysis was prepared, California’s waiver request remained pending with federal authorities. Based on the assumption that the waiver will be approved, the 2001-02 Governor’s Budget includes about $202 million in new funding to support California’s proposed SCHIP demonstration project expanding Healthy Families to parents. Of that sum, $76 million would be allocated from tobacco settlement funds, $116 million from federal funds, $9 million from reimbursements, and about $700,000 from the General Fund. The MRMIB estimates that the demonstration project will expand coverage to 290,000 parents. The budget further assumes that 174,000 adults, or 60 percent of the eligible parents, will enroll during the budget year. Eligibility. Under the proposed waiver, the following parents would be eligible for medical, dental, and vision benefits under the Healthy Fami- lies Program: Parents of Healthy Families eligible children with family income between 100 percent and 200 percent of the FPL. Parents of Medi-Cal eligible children who themselves are ineli- gible or enrolled in share of cost Medi-Cal with incomes be- tween 100 percent and 200 percent of the FPL. Parents with income below 100 percent of the FPL who do not qualify for Medi-Cal because of assets. Although the state elimi- nated the Medi-Cal asset test for children to bring the program into conformance with Healthy Families, the asset test is still in place for adults. C – 136 Health and Social Services 2001-02 Analysis Under the proposal, a mother who is enrolled in Healthy Families and becomes pregnant will be covered for labor and delivery. However, since the woman and her infant could qualify for Medi-Cal, the family will have a choice of enrolling them in that program instead of continu- ing in Healthy Families. Premiums and Copayments. Monthly premiums would vary accord- ing to family income. Families with an income between 100 percent and 150 percent of the FPL would pay $20 per parent in addition to the premi- ums for their children, while those with a family income between 151 per- cent and 200 percent of the FPL would pay $25 per parent. However, con- sistent with the current program, a family could receive a $3 discount per parent by choosing the low-cost Community Provider Plan (CPP). The CPP is comprised of a combination of participating health, dental, and vision plans offering the lowest price in each county. Currently, parents pay between $4 and $9 per month for each child (up to two children for families with income up to 150 percent of the FPL, and up to three chil- dren for families with income above 150 percent of the FPL) depending on family income and the plan selected. Figure 1 shows the proposed premium structure for a family of four. Figure 1 Family Premium Under Proposed Healthy Families Expansion Family of Four With: Income Up to 150 Percent FPLa Income Above 150 Percent of FPLa Community Provider Plan Parents (2) $34 $44 Children (2) 8 12 Total Monthly Premium $42 $56 Noncommunity Provider Plan Parents (2) $40 $50 Children (2) 14 18 Total Monthly Premium $54 $68 a Federal poverty level. The MRMIB has indicated that the copayment maximum for adults would be higher than the copayment limit for children, but at the time of Managed Risk Medical Insurance Board C – 137 Legislative Analyst’s Office this analysis, the specifics of the proposal were not available. Under the existing program, a family cannot be required to pay annual health plan copayments of more than $250 for coverage of their children. The proposed waiver would extend to eligible parents many of the same provisions that exist for children. Figure 2 lists the key features of the proposed waiver. Figure 2 Key Features of the Proposed Healthy Families Expansion Parental Coverage. Provides medical, dental, and vision coverage to\ufffd\ufffd 290,000 adults, including parents of Healthy Families eligible children with income between 100 percent and 200 percent of the federal poverty level (FPL), and parents with income below 100 percent of the FPL who do not qualify for Medi-Cal due to assets. Premiums and Copayments. Parents will be required to share in the\ufffd\ufffd cost of coverage through monthly premiums and copayments. The pre- miums and copayments will be waived for American Indian and Alaskan Native parents. Continuous Eligibility. Once enrolled, parents will remain eligible for\ufffd\ufffd one year. Eligibility will be redetermined after one year. Bridge Program. Parents who are found ineligible for the Healthy Fami-\ufffd\ufffd lies Program at annual redetermination will remain on the program for two months\u2014the time it takes to enroll in Medi-Cal. Minimizing Crowd Out. Parents who have had employer coverage\ufffd\ufffd within the past three months will not be eligible. The waiver seeks to demonstrate that by extending health coverage to parents, the number of low-income children that enroll in the program will increase. In addition, it seeks to demonstrate that covering parents will result in children maintaining health insurance coverage for a longer period of time. C – 138 Health and Social Services 2001-02 Analysis Proposal Misses Opportunities to Improve Health Coverage The proposed expansion of the Healthy Families Program appears to meet federal criteria for approval, but there are some missed opportunities to further reduce the number of uninsured and further conform and simplify the Healthy Families and Medi-Cal Programs. California Appears to Meet Federal Criteria for Waiver. Based upon our review of the proposed waiver and federal requirements, California appears to meet the federal criteria for a demonstration waiver. The HCFA guidelines require states to adopt at least three of five policy options to promote the enrollment and retention of eligible children. California has already adopted three of the five listed. These include elimination of the assets test for children, the simplified mail-in application, and elimination of the Medi-Cal quarterly reports (or 12-month continuous eligibility). The HCFA also requires that any state applying for a waiver demon- strate that sufficient federal funds are available to provide coverage to targeted, low-income children before parents can be covered. Based upon our analysis of projected enrollment and spending in Healthy Families, California will have sufficient federal funds to cover children who are currently eligible for the program as well as the population of adults un- der the proposed waiver. Finally, HCFA requires that proposed waivers are budget neutral. This means that the federal cost of the program operated with a waiver would not exceed the amount of SCHIP funding allotted to the state. As we stated previously, our analysis indicates that there are sufficient fed- eral funds to cover the expansion to parents. State Would Still Lose Federal Funds. Providing health coverage for parents under the Governor’s proposal would allow California to spend an additional $1.6 billion of the state’s federal SCHIP allotment over the five-year waiver period (state fiscal years 2001-02 through 2005-06). How- ever, even with this proposed expansion, it is unlikely that the state will be able to spend all of the projected federal SCHIP allocations. The MRMIB estimates that during the waiver period, the state will return about $1.3 bil- lion to the federal government. Although federal law would allow Cali- fornia to retain a portion of its federal fiscal year 1998 and 1999 alloca- tions for two additional years, the effect of this law is to delay the actual reversion of California’s federal SCHIP funds to a later date. Some Low-Income Parents Still Excluded. The waiver request to ex- pand coverage to parents is predicated on the idea that parental coverage will increase enrollment of Healthy Families eligible children, as well as improve continuity of coverage and the overall health of eligible children. The Healthy Families Program currently covers children up to 250 per- Managed Risk Medical Insurance Board C – 139 Legislative Analyst’s Office cent of the FPL. However, the administration is proposing to cover only parents in families with an income up to 200 percent of the FPL. Thus, this proposal would only benefit a portion of the children eligible to en- roll in the Healthy Families Program. The administration has indicated that the primary reason for not cov- ering parents earning between 201 percent and 250 percent of the FPL is concern about crowd-out or displacement of employer-based cover- age. Our analysis indicates that crowd-out can become more of an issue as income levels increase. We would note that, under the waiver pro- posal, parents who have had employer-based health coverage within 90 days of applying would be ineligible to enroll in Healthy Families. In addition to this 90-day rule, the Healthy Families Program has premiums which may also serve as a barrier to crowd-out. One option available to the Legislature, which we discuss below, is to broaden the premium struc- ture by adding a third premium level. This would allow the Legislature to set the premium for families with incomes between 201 percent and 250 percent of the FPL at a level that would help to minimize crowd-out. Proposal Fails to Move Toward Conformity. There are several rea- sons for conforming health programs. Most importantly, it makes it easier for families to move between them as their circumstances change, and easier to determine eligibility in such instances. Program conformity increases the likelihood that individuals will maintain health coverage. It also ensures that similarly situated individuals are treated equitably across programs. The expansion of Healthy Families to adults creates new opportuni- ties for conforming the Medi-Cal and Healthy Families Programs. How- ever, the administration’s proposal does not take advantage of this chance to further conform the two programs. Consider, for example, the treatment of assets in determining eligi- bility. The asset test is a part of the eligibility determination process in which applicants provide information on their personal assets, such as bank and trust accounts, residential property, and automobiles to screen out individuals who have low monthly earnings but significant assets. Under the proposed expansion, parents seeking to enroll in the Healthy Families Program will not be required to meet an asset test. This is con- sistent with the eligibility determination process for children in Healthy Families as well as children in Medi-Cal. However, adults in the Medi-Cal Program continue to be required to meet an asset test. The budget therefore perpetuates inconsistencies between the two programs. There is also an issue of equity to the extent that Medi-Cal participants with lower incomes and, therefore, more likely to have fewer assets, must face asset limits that do not apply to a group with higher incomes and more assets. Finally, we note that it costs the Medi-Cal Pro- C – 140 Health and Social Services 2001-02 Analysis gram more to administer the asset test than it would cost to provide Medi- Cal coverage to the relatively few individuals who are currently deter- mined ineligible for the program because of it. Families Required to Use Two Programs. Because Medi-Cal eligibil- ity rules vary according to the age of a child, a family may have children in both the Medi-Cal and Healthy Families Programs. For example, a fam- ily with an income of 125 percent of the FPL and two children ages 4 and 6 would enroll the younger child in Medi-Cal and the older child and themselves in Healthy Families. This has many consequences for that fam- ily. The younger child’s application would be processed by the local county welfare office, while the application for the older child would be pro- cessed by a state contractor in Sacramento. The two children might have to be enrolled in different health plans or see different doctors even if they were in the same health plan. These problems could be addressed, but the Governor’s proposal fails to do so. Options for Improving the SCHIP Expansion In order to address some of the missed opportunities we have identified, we offer some options for legislative consideration, including (1) further expansion of parental coverage and (2) elimination of the Medi-Cal asset test. Further Expansion of Parental Coverage. Following the release of the administration’s plan to expand Healthy Families, there has been some legislative interest in further reducing the number of uninsured adults by expanding the Healthy Families Program to cover parents with in- come up to 250 percent of the FPL. In response, MRMIB has estimated that a modification of its proposal to expand coverage to parents with incomes up to 250 percent of the FPL would result in covering an addi- tional 87,000 parents at an increased state cost of $66 million annually upon full implementation. Our analysis indicates that the state will re- ceive sufficient federal funds to cover the federal share of cost of such an expansion through the five-year waiver period. In addition to further reducing the number of uninsured, expanding coverage to all parents of Healthy Families eligible children would sim- plify the eligibility determination process for those children who are al- ready enrolled, as well as simplify promotion of the program. In market- ing the parent expansion, for example, MRMIB could state that all par- ents with children enrolled in Healthy Families qualify, instead of say- ing that if your child is enrolled in Healthy Families, you may qualify for the program. This would significantly reduce confusion or misun- derstanding among parents about whether they qualify. Managed Risk Medical Insurance Board C – 141 Legislative Analyst’s Office This option would also allow California to maximize a greater share of the federal funds allotted to the state. The MRMIB estimates that by covering parents up to 250 percent of the FPL, California would spend approximately $400 million more in available federal funds during the five-year waiver period. Should the Legislature decide to expand Healthy Families coverage to parents in families earning up to 250 percent of the FPL, it may wish to consider creating a broader premium structure\u2014perhaps with three pre- mium levels instead of two. A broader premium structure would enhance the state’s ability to set premiums according to participants’ ability to pay, thereby improving MRMIB’s ability to maximize enrollment in the program. It would also allow the Legislature to set the premiums for fami- lies with incomes between 201 percent and 250 percent of the FPL at a level that would minimize crowd-out. While it seems likely the federal government will continue to offer enhanced federal matching funds for coverage of children, there is no assurance that federal funding for this program will be available after 2007. We note, however, that should the federal government decide not to reauthorize funding for SCHIP, the state could continue coverage of Healthy Families enrollees under the Medi-Cal Program. In this event, income eligibility levels in the Medi-Cal Program would be increased and unique features of the Healthy Families Program, such as premiums and copayments, would need to be eliminated. The alterna- tive would be to seek a waiver under Title XIX of the Social Security Act to allow the state to continue coverage with the existing insurance program features. Under either approach, the state would likely receive the dollar-for- dollar federal matching rate provided under the Medi-Cal Program. Eliminating the Medi-Cal Asset Test Would Further Conformity. During each of the past two years, the Legislature passed budget bills that included a proposal to eliminate the Medi-Cal asset test for adults. However, the Governor has twice vetoed the proposal. The Legislature and Governor may wish to reconsider that decision in light of the new pro- posal to expand health care coverage. Eliminating the Medi-Cal asset test would conform the eligibility criteria for adults in Medi-Cal and Healthy Families, as well as simplify eligibility determination in the Medi-Cal Pro- gram. In an effort to conform Medi-Cal to the Healthy Families Program, the state has eliminated the asset test for children enrolled in Medi-Cal. Under current law, a child might be enrolled in Medi-Cal, but the parent of that child might not qualify for Medi-Cal due to assets. Under the administration’s proposal, the parent would be eligible to enroll in Healthy Families but not Medi-Cal. In such a case, the child and the parent(s) would have to be enrolled in different programs. Eliminating C – 142 Health and Social Services 2001-02 Analysis the Medi-Cal asset test for adults would solve this problem. Elimination of the asset test would also result in a net state savings of approximately $4 million in the Medi-Cal Program. Healthy Families Caseload Overestimated in the Budget Year We recommend reducing the budget’s estimated level of spending for the Healthy Families Program in the budget year by about $75 million ($39 million federal funds, $33 million Tobacco Settlement Funds, and $3 million General Fund) because the budget appears to overestimate projected caseload. (Reduce Item 4280-101-0890 by $39 million, reduce Item 4280-101-3020 by $33 million, and reduce Item 4280-101-0001 by $3 million.) Our analysis indicates that the administration has overestimated Healthy Families caseload by 11 percent and has therefore overbudgeted the program by about $75 million ($39 million federal funds, $33 million Tobacco Settlement Funds, and $3 million General Fund). Our analysis further indicates that the budget plan overestimates the enrollment of parents under the proposed waiver, as well as children with family in- come between 201 percent and 250 percent of the FPL, and legal immi- grant children. Figure 3 compares our enrollment projection to the pro- posed budget. We discuss our findings in greater detail below. Figure 3 Healthy Families Caseload Estimates 2001-02 Governor’s Budget LAO Estimate Difference Parents 173,668 147,173 -26,495 Children 100 percent to 200 percent of the FPLa 352,661 349,926 -2,735 Children 201 percent to 250 percent of the FPLa 175,431 138,015 -37,416 Legal immigrant children 33,054 18,207 -14,847 Totals 734,814 653,321 -81,493 a Federal poverty level. Parent Enrollment Overestimated. The MRMIB estimates that ap- proximately 174,000 parents, about 60 percent of the estimated number Managed Risk Medical Insurance Board C – 143 Legislative Analyst’s Office of parents eligible for coverage, would be enrolled under the proposed expansion by the end of the budget year. Our estimate assumes that only about 147,000, or about 51 percent of the total eligible population, will enroll by then. Our lower estimate is driven by three factors: the level of the premiums, the demographics of the parent population, and the num- ber of parents with employer-sponsored health coverage. Each factor is discussed in more detail below. Level of Premiums May Deter Enrollment. The MRMIB has indi- cated that no survey was done to determine the willingness or ability of families to pay this amount for coverage. Our analysis indicates that, while the premiums proposed for family coverage in the Healthy Families Program are relatively low compared to the cost of family coverage available to many low-income work- ing adults, they still may not be attractive for some groups. We believe this could be the case for families on the low end of the qualifying income range (those with income between 100 percent and 133 percent of the FPL), and individuals who would rate themselves as having excellent to good health and thus, perhaps, be less willing to pay for health coverage. Also, some of the adults who would become eligible for Healthy Families under the proposal are enrolled in Medi-Cal with a share of cost. Under Medi-Cal rules, these adults have the obligation of making a share of cost payment only when they visit the doctor rather than having to pay monthly premiums if they enroll in Healthy Families. Some will likely choose to remain on Medi-Cal with a share of cost, particularly if they consider themselves to be in good health. Demographics of Parent Population. The MRMIB has limited data on the parents of children enrolled in Healthy Families, but de- mographic data on the uninsured as a whole indicate that adults ages 18 to 34 represent a significant portion of the low-income adults who lack health insurance. The rate of uninsurance among this group is significantly higher than the uninsurance rate for other age groups of adults. This is the very age group that is tar- geted for enrollment under the Governor’s proposal. Research suggests, however, that the reason for the high level of uninsurance for this group is a prevailing perception among them that they are in excellent health. We also note that uninsured low- income young females with excellent-to-good health are more likely to seek health coverage only during pregnancy, at which time they would qualify for no-cost Medi-Cal. C – 144 Health and Social Services 2001-02 Analysis Parents With Employer-Based Coverage. In estimating the total number of eligible parents, MRMIB has assumed that 38 percent of adults with incomes between 100 percent and 200 percent of the FPL have employer-sponsored health coverage. This assump- tion is based on 1997 survey data. However, the 1999 Current Population Survey indicates that 45 percent of parents in this in- come range have employer-sponsored health coverage. The MRMIB’s assumption that relatively fewer adults targeted for enrollment in Healthy Families have employer-based coverage would tend to overstate the total number of eligible participants. Given the uncertainty of future employer coverage in this time of rising health care costs, we do not, at this time, recommend an adjustment on this basis to MRMIB’s estimated number of total eligible parents. We would note, however, that a higher-than-an- ticipated level of employer-based coverage could result in lower- than-projected enrollment by adults in the Healthy Families Pro- gram during the budget year. In summary, we believe a number of factors will result in the enroll- ment of 147,000 adults in Healthy Families\u201426,000 fewer than assumed in the Governor’s budget proposal. Children’s Enrollment Overestimated. Our analysis indicates that the budget plan overestimates the enrollment of children with family income between 201 percent and 250 percent of the FPL. The MRMIB estimates that 175,000 children within this income group, or 100 percent of the eli- gible children with family incomes in this range, will enroll in the budget year. The budget further assumes that the average monthly enrollment of this group in Healthy Families will increase by 13 percent in the budget year to 6,640 per month. The MRMIB indicates that the accelerated enrollment rate of children will result from the expansion of the program to parents. There are two reasons why we believe MRMIB has overestimated the enrollment of this group of children. First, we believe that some children in this income range would not be enrolled by their parents because they would prefer not to participate in government programs. In the Medi-Cal Program, for example, many people do not participate in the program even though it is free for them. Second, while we agree that opening enrollment to parents will result in the enrollment of additional children, we believe this impact is overstated in the budget estimate. This is because the proposed expansion would only cover the parents of children with family income be- tween 100 percent and 200 percent of the FPL, and not parents in families with income between 201 percent and 250 percent of the FPL. Our lower estimate assumes an average monthly enrollment of 5,200, based upon actual recent enrollment data that has been adjusted for the Managed Risk Medical Insurance Board C – 145 Legislative Analyst’s Office impact of the expansion. At this rate, we project that approximately 138,000 children, or 79 percent of the total eligible population, will enroll by the end of the budget year. Legal Immigrant Children Enrollment Overestimated. The budget assumes an average monthly enrollment for this group of 1,470 during the budget year. At this rate, approximately 33,000, or 82.6 percent of eli- gible legal immigrant children would enroll in the budget year. Given recent evidence indicating that immigrant families still have concerns regarding citizenship, our budget-year estimate assumes a lower aver- age monthly enrollment of 560 per month. This is based on actual enroll- ment for this group in the current year adjusted upward to account for ongoing outreach and education related growth. Thus, we estimate that approximately 18,000 immigrant children, or 45 percent of eligibles will enroll during the budget year. Analyst’s Recommendation. Based upon these findings, we recom- mend reducing the amount budgeted for Healthy Families by about $75 million ($39 million in federal funds, $33 million in Tobacco Settle- ment Funds, and $3 million General Fund). C – 146 Health and Social Services 2001-02 Analysis DEPARTMENT OF DEVELOPMENTAL SERVICES (4300) A developmental disability is defined as a disability, related to cer- tain mental or neurological impairments, that originates before a person’s eighteenth birthday, constitutes a substantial handicap, and is expected to continue indefinitely. The Lanterman Developmental Disabilities Ser- vices Act of 1969 entitles individuals with developmental disabilities to a variety of services, which are overseen by the Department of Develop- mental Services (DDS). The department contracts with 21 nonprofit re- gional centers (RCs) to coordinate educational, vocational, and residen- tial services for more than 160,000 clients each year. In addition to pro- viding some services directly, such as intake and assessment, individual program planning, and case management, RCs purchase a variety of ser- vices from community-based providers. Individuals with developmental disabilities have a number of resi- dential options. While most live with their parents or other relatives, thou- sands live in their own apartments or in group homes that are designed to meet their medical and behavioral needs. The department also oper- ates five developmental centers (DCs) and two smaller facilities, which provide 24-hour care and supervision to approximately 3,800 individuals. The budget proposes $2.7 billion from all funds for support of DDS programs in 2001-02, which is a 5 percent increase over estimated cur- rent-year expenditures. General Fund expenditures are proposed at $1.8 billion, an increase of $657 million. About $600 million of this increase is attributable to a purely technical shift of Medi-Cal General Fund expenditures from the Department of Health Services (DHS) to DDS. Prior to 2001-02, both Gen- eral Fund and federal Medi-Cal dollars were displayed in the DHS bud- get and shown as reimbursements in the DDS budget. Beginning in Department of Developmental Services C – 147 Legislative Analyst’s Office 2001-02, only the federal match would be shown as a reimbursement in the DDS budget. In addition to the General Fund transfer from DHS, the proposed increase in General Fund in the budget year is partly the result of caseload and cost increases for community-based services, and an enhanced sys- tem for reporting abuse, neglect, and exploitation of persons with devel- opmental disabilities. COMMUNITY SERVICES PROGRAM The Community Services Program provides community-based ser- vices to clients through the RCs. The RCs are responsible for client as- sessment and diagnosis, the development of an individualized program plan, case management, and the coordination and purchase of various services. Services fall into three broad categories: residential, supported living, and day program services. Day program services include early intervention services for infants and young children, daytime activity programs for adults, and in-home respite care. The budget proposes $2 billion from all funds ($1.5 billion from the General Fund) for support of the Community Services Program in 2001-02. The budget proposes a $142 million General Fund increase over the previ- ous year for caseload and utilization growth in RC purchase of services. Early Start Coordination Not Clear We recommend approval of $2.6 million from the General Fund to increase regional center (RC) resources for evaluation and assessment functions under the Early Start program. However, we also recommend that the Legislature adopt supplemental report language directing the Department of Developmental Services to report to the Legislature by December 1, 2002, on RC and local education agency coordination, and RC performance in completing evaluation and assessment within statutory time frames. Background. The Early Start program currently provides services through RCs to children from birth through two years of age. Early Start provides early intervention services to infants who have disabilities, or who are at risk of having disabilities, in order to enhance their develop- ment and to minimize the potential for developmental delays. An ulti- mate goal of the program is to promote educational attainment and qual- ity of life for children with disabilities. The total number of children re- ceiving RC services and eligibility testing has increased from nearly 13,000 C – 148 Health and Social Services 2001-02 Analysis in July 1993 when state participation in the federal program began, to about 19,000 currently, and is expected to reach more than 20,000 during 2001-02. The Early Start program requires evaluation and assessment of chil- dren who are either applying for or receiving services. Evaluation involves the determination by qualified personnel of a child’s present level of de- velopment, in the following five specific areas: cognitive development; physical and motor development, including vision and hearing; commu- nication development; social or emotional development; and adaptive development. Assessment involves identification of a child’s needs and services appropriate to meet those needs. The DDS is the lead state agency for the administration of Early Start, which is operated in partnership with the State Department of Education (SDE). The program receives federal funding through Part C of the Indi- viduals with Disabilities Education Act. In 2000-01, DDS received about $45 million in Part C funds, $20 million of which was transferred to SDE and other agencies. In 2000-01, the state for the first time contributed $1.3 million from the General Fund to pay for the cost of Part C services in excess of the available federal funds. Governor’s Budget Proposal. The Governor’s budget includes about $48 million for the Early Start program ($28 million for RCs and $20 mil- lion for transfer to other agencies). Of that sum, $3.3 million would be used to offset an anticipated shortfall in federal funds. The budget pro- poses an additional $2.6 million from the General Fund to provide suffi- cient funding for qualified professionals to determine child eligibility, conduct assessments for service needs, and prepare for individualized family service plan development. Qualified professionals would include speech, physical, and occupational therapists, as well as audiologists, physicians, psychologists, and nurses. The additional resources would help ensure that the state complies with federal and state requirements to conduct multidisciplinary evaluations and assessments involving the five specific developmental areas within 45 days of receipt of a child’s referral to the RC. In 1999, a federal review found that Early Start was not com- plying with the required time frame for conducting evaluations and as- sessments. It also found that Early Start evaluators did not always conduct multidisciplinary evaluations in all five developmental areas, as required. Coordination With Local Education Agencies (LEAs). Not all of the evaluations and assessments of children served by the RCs are conducted by the RCs themselves. They are sometimes conducted by LEAs, which have overlapping responsibilities to provide evaluations and assessments of these children. The LEAs also provide certain early intervention ser- vices for these children. Because both RCs and LEAs have responsibility for providing these services at the local level, the RCs are required to Department of Developmental Services C – 149 Legislative Analyst’s Office have local interagency agreements with LEAs for the purpose of coordi- nating their efforts. However, the extent to which the RCs and LEAs are actually coordi- nating their intake, evaluation, assessment, and case management ser- vices for eligible children is unclear. Although DDS liaisons review the interagency agreements and provide technical assistance to RCs each year, there is no detailed information available which indicates how good a job RCs and LEAs are doing in coordinating their efforts. Consequently, the Legislature cannot determine whether the program is being appropri- ately coordinated. Analyst’s Recommendation. In order to ensure service delivery to children under three years of age and their families as intended by the proposal, we recommend that the Legislature approve the augmentation requested for Early Start, but also adopt supplemental report language directing the department to report to the Legislature, by December 1, 2002, regarding several key issues. These include the coordination of Early Start activities between RCs and LEAs, and whether multidisciplinary evalua- tions and assessments are being completed for all five specific develop- mental areas within the 45-day period required by law. The December 1, 2002, deadline would allow sufficient time for DDS to determine whether the additional resources provided in the budget for Early Start have im- proved the services provided to participating children. We recommend the adoption of the following language: It is the intent of the Legislature that the Department of Developmental Services (DDS) report to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees of both houses of the Legislature by December 1, 2002, on the coordination of Early Start activities between regional centers (RCs) and local education agencies (LEAs), and the performance of RCs in completing initial evaluations and assessments within 45 days of a child’s referral as required. Specifically, the department shall provide the following information: A summary of RC interagency agreements with LEAs, and an analysis of how effectively evaluation, assessment, and case management functions are being coordinated. A summary of DDS’ efforts to provide technical assistance to RCs to improve the quality of the agreements and the delivery of Early Start services. A determination as to whether, within each RC catchment area, multidisciplinary evaluations and assessments of children are being completed as required by law for all five specific developmental areas within 45 days of referral, and, if this is not the case, the actual time required for the completion of evaluations and assessments. C – 150 Health and Social Services 2001-02 Analysis Identification and description of any proposed models for coordination which would result in more cost-effective and consistent service delivery, and any other recommendations for improved service delivery. DEVELOPMENTAL CENTERS PROGRAM The DCs provide residential care for developmentally disabled per- sons. The budget proposes $601 million from all funds ($322 million from the General Fund) for support of the DCs in 2001-02. Report on DC Restructuring Due We recommend the department report to the Legislature prior to budget hearings regarding (1) the recommendations for restructuring the developmental centers (DCs), (2) the effect these recommendations will have on the existing capital outlay program and assets, (3) the future capital outlay needs resulting from any changes in service delivery, (4) the effect of the recommendations on DC operating costs, and (5) a proposed timeline for implementing any changes. For more detailed information about this recommendation, please see the Department of Developmental Services section of the Capital Outlay chapter of this Analysis. ADMINISTRATIVE ISSUES The DDS Proposal to Comply With Health Insurance Portability and Accountability Act (HIPAA) We recommend that funding requested for activities relating to compliance with the Health Insurance Portability and Accountability Act (HIPAA) be deleted from the department’s budget and instead be funded from a newly established fund for statewide HIPAA compliance activities in order to further legislative oversight. For more detailed information about this recommendation, please see the Crosscutting Issues section of this chapter of the Analysis. Department of Mental Health C – 151 Legislative Analyst’s Office DEPARTMENT OF MENTAL HEALTH (4440) The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department’s primary responsibilities are to (1) administer the Bronzan-McCorquodale and Lanterman-Petris-Short Acts, which provide for the delivery of men- tal health services through a state-county partnership and for involun- tary treatment of the mentally disabled; (2) operate four state hospitals; (3) manage state prison treatment services at the California Medical Facility at Vacaville and, beginning next year, at Salinas Valley State Prison; and (4) ad- minister nine community programs directed at specific populations. The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly com- mitted as sexually violent predators, and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections. The budget proposes $2 billion from all funds for support of DMH programs in 2001-02, which is an increase of almost 12 percent above estimated current-year expenditures. The budget proposes $953 million from the General Fund, which is an increase of $75 million, or 8.6 percent, above estimated current-year expenditures. Reimbursements that would be received by DMH\u2014largely Medi-Cal funding passed through to com- munity mental health programs\u2014would increase $135 million or about 15 percent. The overall increase in DMH expenditures is primarily due to (1) the expansion of the Early and Periodic Screening, Diagnosis, and Treatment program (EPSDT) for children with emotional problems; (2) increases in caseload and provider rate increases for managed care plans providing community mental health treatment; and (3) special repairs, new alarm systems, and projects for Americans with Disabilities Act (ADA) compli- ance at state hospitals. C – 152 Health and Social Services 2001-02 Analysis THE EPSDT PROGRAM COSTS STILL SOARING The costs for providing mental health services under the Early and Periodic Screening, Diagnosis, and Treatment program (EPSDT) for emotionally disturbed children are growing by 28 percent per year. This situation has resulted in a request in the Medi-Cal budget for a $126 million budget increase for the program in 2001-02 (about $61 million General Fund and $64 million federal funds). Despite the projection by the Department of Mental Health that this rapid growth rate will continue for at least several more years, state officials overseeing the program have not assessed whether the services being provided by counties to individual EPSDT clients are appropriate given the relative severity of their mental conditions. We recommend approval of the funding request. However, we further recommend that the Legislature initiate field audits to better understand the reasons why costs are escalating and consider options to help ensure that the program operates in the future with appropriate incentives for providing necessary services and controlling costs. Background The EPSDT program was established as a mandatory Medicaid ser- vice in 1967, and expanded by federal law in 1989. Under EPSDT, states are required to provide a broad range of screening, diagnostic, and medi- cally necessary treatment services to Medi-Cal beneficiaries under age 21, even if the treatment is an optional service under a state’s Medicaid plan. The requirements apply to mental as well as physical health care and are intended to correct or improve conditions that could be more expensive to treat later in life. About 120,000 clients per year received EPSDT services in 1998-99, the most recent year for which complete DMH data were available. In this analysis, we focus exclusively on EPSDT men- tal health services. Budget Proposal. Under the Governor’s 2001-02 budget proposal, total spending on basic EPSDT services would reach $563 million in the bud- get year. Of that sum, counties would contribute about $128 million of their available mental health funding for EPSDT services. The federal government and the state General Fund would, respectively, provide an additional $224 million and $212 million through the Department of Health Services (DHS) Medi-Cal budget to support the program. (State and federal support for EPSDT are displayed as reimbursements within the DMH budget.) In addition to the $563 million provided for basic EPSDT services, the 2001-02 budget proposes a $12 million augmentation (consisting of the reimbursement of about $5.9 million General Fund and $6.2 million Department of Mental Health C – 153 Legislative Analyst’s Office federal funds from the DHS Medi-Cal budget) to provide therapeutic behavioral services under the EPSDT program. This separate budget re- quest is intended to provide for state compliance with a federal court order mandating the provision of these more intensive outpatient ser- vices for certain at-risk youth. Rising EPSDT Costs a Continuing Concern State Costs Could Double in Three Years. In our Analysis of the 1999-00 Budget Bill, we voiced concern about the rapid escalation of costs in basic EPSDT mental health services. We remain concerned due to the contin- ued growth in program costs since that time. If the 2001-02 budget for basic EPSDT services is approved as proposed, annual state expenditures on the program will have increased by almost $200 million within seven years. As indicated in Figure 1, the state’s contribution to the program will have increased 15 times over since 1995-96, when it was providing about $13 million annually to support the program. If this expenditure trend were to continue, state costs for the program could more than double within the next three years to almost $525 million annually. Figure 1 Growth in State and County Contributions to EPSDT 1994-95 Through 2001-02 (In Millions) 50 100 150 200 $250 94-95 96-97 98-99 00-01 State Contribution County Contribution C – 154 Health and Social Services 2001-02 Analysis County support for the program has grown more modestly due pri- marily to a 1995-96 interagency agreement between DMH and DHS that provides state matching funds for most of the nonfederal growth in EPSDT program costs. The counties’ contribution to support of the EPSDT pro- gram\u2014often referred to as the county baseline\u2014is periodically adjusted for inflation and other cost factors. During 2001-02, state costs for EPSDT are projected to increase about $57 million, or 37 percent, compared to estimated current-year expenditures. County expenditures would go up about $4.3 million, or 3.5 percent. The expansion of EPSDT mental health services initially came as the result of the settlement of federal litigation. The DMH has indicated that overall EPSDT costs have risen dramatically since that time because of a number of factors, including (1) growing participation by counties in the program, (2) growing caseloads within those participating counties, (3) in- creases in the services provided for clients, and (4) increased costs for providing those client services due to provider rate increases. Inadequate Fiscal Incentives for Cost Control. The current cost-shar- ing arrangement between the state and counties was initially meant to be a short-term agreement until EPSDT program costs stabilized. We are concerned, as we noted in our 1999-00 Analysis of the Budget Bill, that this cost-sharing arrangement does not provide counties with the fiscal in- centive to use EPSDT funds in the most cost-effective manner, such as by implementing a rigorous utilization review of the services provided. Un- der the present arrangement, the entities primarily responsible for the administration of EPSDT programs\u2014county mental health systems\u2014bear relatively little of the responsibility for increases in program costs. Our concern is based, in part, on DMH data indicating the costs and caseloads of EPSDT programs within individual counties. That data show significant increases in EPSDT costs and clients over time. For example, the average annual payment per EPSDT client increased about 40 per- cent between 1994-95 and 1998-99. During the same period the number of clients almost doubled to about 120,000. The data also show that the cost-per-Medi-Cal eligible for EPSDT tripled over five years. The data also document some significant disparities among counties in their average expenditures for the program even within the same re- gions of the state. For example, the data indicate that one coastal South- ern California county, Santa Barbara, spent an average of $5,200 per EPSDT client in 1998-99, more than three times as much as the $1,700 per client spent in San Diego County. There may be appropriate reasons for these disparities, such as varia- tions in client needs among mental health systems. But these disparities in spending amounts could indicate that some counties might be using Department of Mental Health C – 155 Legislative Analyst’s Office EPSDT resources inappropriately, such as by providing more intensive ser- vices than needed for children with less serious mental health treatment needs. Unfortunately, DMH has not yet gathered data that would allow it to determine whether the services being provided by counties to individual EPSDT clients are appropriate given their mental health treatment needs. As a result, the state does not know whether more intensive and more expensive services than medically necessary are being provided to some EPSDT clients. Without such information, the Legislature cannot deter- mine whether the 28 percent average annual increases in the budget for basic EPSDT services are warranted. State Could Take Steps to Address Rapid Growth in Program Costs Analyst’s Recommendation. Given the legal mandates facing the state for the provision of such services, we recommend that the Legislature approve the 2001-02 budget request for additional funding for basic EPSDT services, as well as the additional request for funding for EPSDT thera- peutic behavioral services. We further recommend that the Legislature initiate field audits of county EPSDT programs to better understand why EPSDT costs have grown so significantly and why these costs vary so widely among counties. For this purpose, the Legislature could direct that either DMH, DHS (as the state agency primarily responsible for the Medi-Cal program), or the Bureau of State Audits review samples of EPDST cases in selected counties to verify that only medically necessary services are being provided to clients in a cost-effective manner. The au- dit findings would be reported to the Legislature. Because of our concern over the continuing escalation in EPSDT pro- gram costs, we further recommend that the Legislature consider options that we believe would help ensure that county mental health systems have appropriate fiscal incentives for management of the $563 million EPSDT program. We discuss these options below. Counties Could Share Cost of Growth. One approach the state could take to address the concern over the rapid escalation of EPSDT costs would be to change the way the state and counties share in the cost of providing these services. As we noted earlier, while counties contribute substantial baseline funding for support of the EPSDT program, they collectively con- tribute a relatively small share of the costs resulting from program growth and thus, have little fiscal incentive to control increases in cost. One rem- edy might be to modify the interagency agreement between DMH and DHS to require that counties pay a larger share of any growth in EPSDT program costs, thereby giving them greater incentive to carefully manage these expenditures. C – 156 Health and Social Services 2001-02 Analysis Requiring the local mental health systems to pay a larger share of the cost of EPSDT program growth does raise the concern that a financial hardship might be imposed upon counties. This concern could be ad- dressed, however, by offsetting the projected increase in county costs for the upcoming fiscal year with an equivalent reduction in the county baseline contribution to the EPSDT program. For example, the state and counties might agree that the counties would pay a 20 percent share of the nonfederal increase in EPSDT program costs during 2001-02\u2014now projected to be about $12 million\u2014with the understanding that the coun- ties would receive an offsetting $12 million reduction in their baseline contribution to the EPSDT program. Our analysis indicates that, under such an approach, counties would have a greater fiscal incentive to manage EPSDT expenditures more ef- fectively. That is because they would be able to shift any net savings achieved in their mental health systems through better management of these costs to other community mental health programs that were a local priority. To return to our prior example, if improved fiscal man- agement meant that counties only needed to spend $8 million of their $12 million allocation for the program on EPSDT services, they would be able to use the remaining $4 million at their discretion for other mental health programs. The overall amount the state would otherwise spend on EPSDT ser- vices would not change substantially during the first year of the new arrangement. The savings to the state from county acceptance of a greater share of the costs of EPSDT growth would be spent to offset a commen- surate reduction in county baseline expenditures. However, in subsequent fiscal years, the state could achieve significant net savings potentially amounting to tens of millions of dollars to the extent that tighter county management of the program slowed the trend of dramatic increases in EPSDT expenditures. One further option for the Legislature would be to test such an arrangement with one or several counties as a pilot project to exam- ine the impact, if any, of such a change on EPSDT program expenditures. Realignment Options. In our analysis of the state-county realignment (in The 2001-02 Budget: Perspectives and Issues), we offer another option for the Legislature to address the rapid growth in the cost of EPSDT men- tal health services. Specifically, we propose that the counties accept addi- tional fiscal responsibility for EPSDT in trade for receiving additional state tax revenues to support community mental health programs. Under this option, county mental health systems would (similar to the proposal outlined earlier) be required to accept a greater share of the cost of growth in the EPSDT program. Rather than adjust county baseline contributions to EPSDT, however, the realignment option would allocate Department of Mental Health C – 157 Legislative Analyst’s Office additional state tax revenues to county mental health programs. These additional tax revenues would be allocated each year automatically by statute and would not be subject to the annual state appropriations pro- cess, much the same way realignment revenues are currently distributed. In order for this approach to work, the additional tax revenues shifted to counties would have to equal or exceed the EPSDT costs that would be shifted to county mental health systems. We believe this option, as well, would provide counties with a fiscal incentive to manage EPSDT expenditures more effectively. This is because any county savings achieved from improved management of the EPSDT program would not reduce a county’s future realignment tax allocation from the state. Thus, any savings could be shifted to other mental health programs that were deemed to be a local priority. Incorporate Into Managed Care Allocations. At some point in the future, when EPSDT expenditures are no longer growing so rapidly, the Legislature may wish to consider incorporating EPSDT funding into the allocations that are now provided separately to counties for mental health managed care programs. This approach would effectively treat EPSDT like other Medi-Cal mental health services that are provided by coun- ties under a managed-care approach in which they are paid by the state at a capitated rate. We believe that such an approach could en- courage counties to more carefully monitor the utilization of EPSDT services. This approach may not be feasible at present, however, be- cause of concerns that the consolidated managed care and EPSDT al- locations would be insufficient to keep pace with the dramatic growth in the EPSDT program. Conclusion In considering the options we have offered in this analysis, the Legis- lature should bear in mind that some of these proposals represent alter- native courses of action that do not work in combination with each other. For example, if counties accepted a greater share of the cost of growth in the EPSDT mental health services as part of a revised realignment effort, the Legislature would probably not pursue the alternative approach of reducing county baseline funding for the program. Other proposals may complement each other. We believe there would be no conflict, for example, between adopting our recommen- dation to initiate field audits of EPSDT programs and making other changes in the state-county partnership for the provision of EPSDT mental health services. C – 158 Health and Social Services 2001-02 Analysis COMMUNITY SERVICES PROGRAM ISSUES Realignment Revisited\u2014An Evaluation of the 1991 Experiment in State-County Relations In 1991, the state enacted a major change in the state and local government relationship, known as realignment, which affected a variety of health and social services programs, including significant changes in the provision of mental health services. Our review of realignment ten years later found that it has largely been a successful experiment in the state-county relationship, with some areas for improvement. We recommend a number of proposed changes to strengthen realignment, including changes that would affect community services for the mentally ill. Please see Part IV of The 2001-02 Budget: Perspectives and Issues, for our discussion of realignment and our recommendations to strengthen this ten-year-old experiment in the operation of health, social services, and mental health programs. Report on Treatment Resources for Out-of-Home Placements Overdue We recommend that the Legislature require the Department of Mental Health to report at budget hearings on the status of its findings regarding the availability of resources to assess and treat children in, or at risk of, out-of-home placement, as required by 1998 state legislation. Background. Chapter 311, Statutes of 1998 (SB 933, Thompson), insti- tuted significant reforms of the foster care system. Among these reforms, it expanded county mental health agencies’ target populations to include children in, or at-risk of, foster care placement to the extent resources were available. It also required that DMH develop an estimate of the ex- tent to which resources were available to provide mental health assess- ment and treatment to children in, or at-risk of, foster care placement. Chapter 311 required that the estimate be developed by June 1, 1999, and include an identification of specific resource gaps in the delivery of men- tal health services to this population. Analyst’s Recommendation. The estimate required by Chapter 311 is necessary to determine the adequacy of existing resources to meet this target population expansion. As a result, we recommend that the Legisla- ture require DMH to report at budget hearings on the status of these esti- mates so that the Legislature can determine the extent to which available resources are adequate to implement the assessment and treatment ob- jectives set forth in Chapter 311. Department of Mental Health C – 159 Legislative Analyst’s Office Institutions for Mental Diseases (IMDs) Project Could Be Funded With Federal Grant We recommend that funding for Institutions for Mental Diseases transition pilot projects be reduced by $333,000 General Fund, with a corresponding increase in federal funds by $333,000, due to the availability of federal grant funds for such projects. Institutions for mental diseases are institutions providing long-term nursing and psychiatric care that are operated and funded primarily by counties under state-local realignment. The DMH budget includes a re- quest for $1 million from the General Fund in 2001-02 and the two subse- quent fiscal years to seek community placement for individuals now in IMDs. We discuss the proposal, as well as our recommendation to seek federal grant funding to help reduce the General Fund cost of the projects, in the Crosscutting Issues section of this chapter of the Analysis. We propose a $333,000 reduction from the General Fund and a correspond- ing increase in federal funds for the projects. STATE HOSPITAL ISSUES Other Funding Available for ADA Projects We recommend the deletion of $7.6 million from the General Fund requested in the budget year for Americans with Disabilities Act (ADA) compliance projects at Metropolitan State Hospital because insufficient information has been provided to the Legislature to justify the funding request and because funding for such ADA projects has already been set aside in the current fiscal year. (Reduce Item 4440-011-0001 by $7.6 million.) Budget Proposal. The budget proposes a one-time General Fund al- location of $20 million in the support budget of DMH for various special repair projects, as well as projects to bring facilities into compliance with the ADA. Of that total proposed funding, about $12.4 million would be provided to address a backlog of special repair projects at each of the four state hospitals, with the remaining $7.6 million spent on projects to bring Metropolitan State Hospital facilities into ADA compliance. The ADA projects include widening doors; installing ramps and handrails; and modifying drinking fountains, showers, and restrooms. Insufficient Information on ADA Request. We do not have any con- cerns at this time with the proposal for $12.4 million for special repair funding. We are concerned, however, that the information provided by DMH in support of the ADA compliance projects is insufficient to justify the $7.6 million budget request. A detailed cost summary for the Metro- C – 160 Health and Social Services 2001-02 Analysis politan State Hospital projects, dated June 15, 2000, indicated that the ADA projects would cost about $6.1 million, or about $1.5 million less than is now requested in the budget. In response to questions about this discrepancy, DMH has provided our office with a revised project estimate indicating that the full cost will be the budgeted amount. However, the revised cost estimate does not provide updated cost information for the specific projects that are pro- posed or indicate how their overall cost has escalated about 25 percent in six months. Without such information, the Legislature cannot determine whether the funding level requested is appropriate. Other Funding Available for ADA Compliance. We are also concerned that the DMH budget request does not appear to take into account the availability in the current year of other state funds for such projects. Item 9906 of the 2000-01 Budget Act provided a total of $60 million, including $20 million from the General Fund, to ensure that state buildings are ac- cessible to the disabled. At the time this analysis was prepared, we were advised that the funding had not been allocated by the Department of Finance (DOF) for any specific projects. Thus, this funding would appear to be available for the ADA compliance efforts at the Metropolitan State Hospital, making any budget-year appropriation to DMH unnecessary. Analyst’s Recommendation. Because of the concerns discussed above, we recommend approval of the $12.4 million requested for special repair projects but deletion of the $7.6 million for ADA compliance efforts at Metropolitan State Hospital. Our recommendation need not delay these projects, and could in fact expedite their completion, by making funding available at an earlier date. If, as the administration indicates, these ADA projects are a high priority for the state, they should be supported from the $20 million General Fund amount already appropriated for such projects in the current year. In ap- plying for these funds to the DOF, DMH should provide justification for the $7.6 million requested, including updated cost information for the specific projects that are proposed and an explanation of how their over- all cost has escalated about 25 percent in six months. Security and Alarm Proposal We withhold recommendation on $7.6 million requested in the support budget to install personal security alarm systems at various institutions because it is not clear how the request is related to various capital outlay requests. The department should report to the Legislature at the time of budget hearings with a complete security plan which identifies the coordination among projects and how each will be implemented. Department of Mental Health C – 161 Legislative Analyst’s Office Budget Proposal. The budget includes a total of about $7.6 million to install and upgrade the personal alarm systems at Atascadero, Metro- politan, and Patton State Hospitals. Personal alarms are devices that a staff member can activate to ensure that other staff provide assistance in dangerous or potentially life-threatening situations to protect themselves, patients, or visitors. An additional $901,000 is also requested under the department’s capital outlay program (Item 4440-301-0001) to in- stall personal alarms at the same three institutions. Thus, the budget includes a total of over $8.5 million to change the personal alarm sys- tems at three hospitals. Coordination of Projects Needed. While it is important to have appropriate security systems at these facilities, DMH has not identi- fied how the separate proposals will be coordinated, or to what extent the proposals address the department’s overall security needs. In or- der for the systems to work properly within each institution, the projects need to be properly planned and coordinated to ensure the resulting security system addresses the institutions’ needs. To accom- plish this, the work should be planned, designed, and installed as a single project at each institution. The fragmented proposals in the bud- get do not give the Legislature the information it needs to assess the separate requests. Analyst’s Recommendation. As we further discuss in the Capital Outlay chapter of this Analysis, we recommend that prior to budget hear- ings DMH provide clarifying information to the Legislature. This infor- mation should include at least the following for each institution: A detailed analysis of the current personal alarm system through- out the institution. A detailed analysis of the current personal alarm security plan for the entire institution. The scope of work for each project. How the projects are related and how the projects address the institution’s personal alarm security needs. How the projects will be coordinated through planning, design, and construction Pending receipt and review of this information, we withhold recom- mendation on the $7.6 million requested under Item 4440-001-0001. C – 162 Health and Social Services 2001-02 Analysis ADMINISTRATIVE ISSUES Health Insurance Portability and Accountability Act (HIPAA) We recommend that $2.4 million ($1.2 million General Fund and $1.2 million in reimbursements) requested to implement federal regulations issued under the Health Insurance Portability and Accountability Act (HIPAA) be deleted from the Department of Mental Health (DMH) budget but funded instead from a special budget item to further legislative oversight of HIPAA compliance activities. We further recommend approval within the DMH budget of the nine staff positions requested to implement the federal regulations. We discuss the HIPAA compliance proposal, as well as our recom- mendation for shifting the funding for this new activity to Item 9909 of the 2001-02 Budget Bill, in the Crosscutting Issues section of this chapter of the Analysis. Employment Development Department C – 163 Legislative Analyst’s Office EMPLOYMENT DEVELOPMENT DEPARTMENT (5100) The Employment Development Department (EDD) is responsible for administering the Employment Services (ES), the Unemployment Insur- ance (UI), and the Disability Insurance (DI) programs. The ES program (1) refers qualified applicants to potential employers; (2) places job-ready applicants in jobs; and (3) helps youths, welfare recipients, and economi- cally disadvantaged persons find jobs or prepare themselves for employ- ment by participating in employment and training programs. In addition, the department collects taxes and pays benefits under the UI and DI programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee con- tributions for DI. It also collects personal income tax withholdings. In addition, it pays UI and DI benefits to eligible claimants. The budget proposes expenditures totaling $6.7 billion from all funds for support of EDD in 2001-02. This is a decrease of $26 million, or 0.4 per- cent, over estimated current-year expenditures. The budget proposes $30.5 million from the General Fund in 2001-02, which is a reduction of $4.7 million (13 percent) compared to 2000-01. Disability Insurance Tax Rate Now Complies With Current Law From January through March 2000, the Disability Insurance (DI) contribution rate was below the level required by current law. Since April of 2000, the DI tax rate has complied with statutory requirements. Despite a low balance of $5 million in December 2000, the Employment Development Department projects that the DI Fund will be able to pay anticipated claims without the need for short-term borrowing from the General Fund. Background. The DI program provides benefits to workers who are unable to work due to non-work-related illness, injury, or pregnancy. The DI program is financed by a payroll tax on workers’ earnings. C – 164 Health and Social Services 2001-02 Analysis Statutory Formula for Setting the DI Contribution. Section 984 of the Unemployment Insurance Code specifies a methodology for the Di- rector of EDD to set worker contribution rates for the DI Program each January. Section 984 also grants the Director discretionary authority to reduce or increase the statutory formula rate by 0.1 percent. The stat- ute also requires the Director to prepare a public statement by October 31 of each year which declares the rate of worker contributions for the suc- ceeding calendar year. Rate Setting Process for 2000. The statutory formula for setting the DI tax rate for calendar year 2000 produced a rate of 0.8 percent, which at the Director’s discretion could be reduced by 0.1 percent to 0.7 percent. However, the rate was left unchanged from the 1999 rate at 0.5 percent until April 2000. Thus, between January and March 2000, the DI rate was below the level required by statute. Effective April 1, 2000, EDD increased the DI rate to 0.7 percent, a level that complied with statutory requirements. Rate Setting Process for 2001. The statutory formula indicates that the worker contribution rate be 1 percent during calendar year 2001. Ex- ercising his discretionary authority to reduce the rate by 0.1 percent, the Director announced a rate of 0.9 percent for calendar year 2001. We note that this rate complies with current law. Fund Condition. Since reaching a peak of $1.8 billion at the end of 1995-96, year-end DI fund balances have declined steadily, reaching $157 million in June 2000. The trend toward lower fund balances largely results from decisions by the current and past EDD directors to use their discretionary authority to reduce the DI contribution rate by 0.1 percent below the formula rate. We note that the period from January through March of 2000, when the rate was below statutorily required levels, fur- ther increased stress on the fund. In December 2000, the fund reached a low of about $5 million. Despite the low balance, EDD projects that the fund will be able to pay anticipated benefit claims without the need for short-term borrowing from the General Fund because contributions into the fund are now exceeding claims. The fund is projected to have a bal- ance of $360 million at the end of June 2001, rising to nearly $900 million at the end of June 2002. Unemployment Insurance Benefits in California The Unemployment Insurance (UI) program provides weekly benefits to unemployed workers who become jobless through no fault of their own. Benefit levels are set by state law and have not been increased since 1992. We review the UI program and estimate the cost of increasing the maximum benefit to a level of wage replacement in 2002 that would be roughly equivalent to that of 1992. Employment Development Department C – 165 Legislative Analyst’s Office Background. The UI program provides weekly, unemployment in- surance payments to workers who lose their jobs through no fault of their own. To be eligible for benefits, a claimant must be able to work, be seeking work, and be willing to accept a suitable job. The UI program is a federal-state program, authorized in federal law but with broad discretion for states to set benefit and employer contribu- tion levels. The program is financed by unemployment tax contributions paid by employers for each covered worker. We note that California law allows a part-time employee to file a UI claim. Statutory Benefit Level. State law establishes benefit levels. Currently, the maximum weekly benefit is capped by state law at $230 per week for 26 weeks. The amount of benefits available is based on the claimant’s earnings in the base period. The base period is a 12 month-long pe- riod. The quarter within the base period in which the highest wages were received generally determines the weekly benefit amount. To qualify for benefits in California, a claimant must have generally earned at least $1,300 in the highest quarter of the base period. Current Benefit Payments. The purpose of UI is to ensure that at least basic necessities, (food, shelter and clothing) can be met while an active search for new employment takes place. In California benefit payments vary depending on the claimant’s base period earnings. According to EDD: About 50 percent of UI claimants receive between $40 and $149 per week in UI benefits. 25 percent of unemployed workers receive between $150 to $229 per week in UI benefits. The remaining 25 percent of unemployed workers receive the maximum wage benefit amount of $230. Benefits Last Increased in 1992. As noted above, state law establishes benefit levels, and benefits were last increased in 1992. This change was the final increment of a three-year phased-in maximum benefit increase mandated by Chapter 1146, Statutes of 1989 (SB 600, Roberti). We note that recent legislation, SB 546 (Solis), would have gradually increased the maximum weekly benefit to $380 by January 2003. The bill was vetoed, in part because it lacked a financing mechanism, and therefore would have adversely impacted the UI Fund. Wage Replacement Over the Life of the Program. As noted above, the maximum benefit was raised to $230 in 1992. At that time, this maximum benefit level represented 39 percent of the average weekly nonagricul- tural wage in California. Figure 1 (see next page) tracks the percent of wages replaced by UI benefits since 1956. We define the term wage re- C – 166 Health and Social Services 2001-02 Analysis placement as the maximum UI benefit at the time divided by the aver- age weekly nonagricultural wage. In other words, that portion of a claimant’s earnings that are substituted by benefits is the wage replace- ment. As of December 2000, the maximum UI benefit of $230 replaced 30 percent of the average weekly nonagricultural wage. As the figure shows, this is an all-time low. Figure 1 Unemployment Insurance Wage Replacement Now at Historic Low 1956 Through 1999 25 30 35 40 45 50 55% 1956 1961 1966 1971 1976 1981 1986 1991 1996 Comparison to Other States. Among the 50 states, California’s aver- age weekly benefits paid are low. Specifically, California’s average weekly benefit amount is a little over $159 versus a national average of about $222. Put another way, California ranks 49th, ahead of only Mississippi, which pays its claimants an average of about $157 per week. Among the ten most populous states, California has the lowest average weekly ben- efit, about $56 less than the next lowest state, Georgia. We note that nearly all California workers are covered by UI. This may not be the case in other states. The maximum UI benefit level is a policy decision for the Legislature. Below we discuss the costs of increasing the maximum benefit level to a level of wage replacement roughly equivalent to 1992, the last time ben- efits were increased. Employment Development Department C – 167 Legislative Analyst’s Office Cost of Restoring UI Benefits to 1992 Wage Replacement Level. Dur- ing calendar year 2000, the UI program paid benefits in the amount of $2.8 billion to about 14.8 million workers. If the Legislature wanted to raise the level of the wage replacement to the 1992 level, the maximum benefit level would need to be raised from $230 to $300. With this in- crease, the maximum weekly benefit would then replace about 39 per- cent of average weekly nonagricultural wages. According to EDD, increasing the maximum weekly benefit amount would raise total benefit payments by $178 million in calendar year 2002, $261 million in 2003, $269 million in 2004, and $275 million in 2005. Financing the Benefit Increase. One way to finance the benefit in- crease would be to raise the taxable wage base. Currently, employers pay unemployment taxes on up to $7,000 in wages paid to each worker. To finance the proposed increase with no adverse impact on the UI Fund, the $7,000 ceiling would have to be raised by $700 to $7,700. This increase in the taxable wage base would raise the average annual cost to the em- ployer by $19 for each employee who reaches the $7,700 taxable wage. Summary. The UI benefit levels are a policy decision for the Legisla- ture. Benefits have not been increased since 1992. Raising benefits in 2002, to a level of wage replacement equivalent to 1992, would raise the aver- age annual cost to employers by $19 per employee. Federal Welfare-to-Work Block Grant Program California received $367.6 million in Welfare-to-Work block grant funds from the Department of Labor. Recent federal legislation extended the deadline for expending Welfare-to-Work funds from July 2002 until July 2004. Background. The Balanced Budget Act of 1997 (Act) authorized the fed- eral Department of Labor (DOL) to provide Welfare-to-Work grants to states and local communities. The Welfare-to-Work program was largely intended to complement the Temporary Assistance for Needy Families (TANF) program by providing additional assistance to hard-to-employ TANF recipients who had specific barriers to employment. States must provide a $1 match for every $2 of Welfare-to-Work grant funds awarded. To date, match- ing funds have been budgeted in the Department of Social Services. Initial Conditions of the DOL Grants. California received $367.6 mil- lion from the Department of Labor in two allocations. The state was re- quired to allocate, by formula, 85 percent of the funds to local Workforce Investment Boards (formerly known as Private Industry Councils [PICs]). The remaining 15 percent was used for state administration and a com- petitive grant program. In 1998, California allocated $161.9 million to lo- cal boards. In 1999, an additional $150.6 million was allocated. Under the C – 168 Health and Social Services 2001-02 Analysis original provisions of the Act, California had three years to expend the federal funds and the necessary state match. California’s Spending Rate. As of September 30, 2000, California spent a total of $91.5 million of the first grant, about 57 percent. Only 7.9 per- cent of the second-year grant has been expended. The expenditure rate varies widely among local areas. Extension of Spending Deadline. The Department of Labor Appro- priations Act (P.L. 106-554) extended the deadline for expending Welfare- to-Work funds. Specifically, the act extends the availability of Welfare-to- Work funding from three to five years from the original start date. This means that the first-year grant’s deadline is now extended to June 2003. Similarly, the second-year deadline is extended to July 2004. The exten- sion period also applies to matching funds. We note that, absent this ex- tension, it appeared likely that California would be unable to expend all of its federal funds. As noted above, the extension also applies to the state match. Please see our CalWORKs analysis for a discussion of the budget for matching funds. Legislature Needs Spending Plan for Discretionary WIA Funds The Governor’s budget provides no details on the proposed expenditure of $43.6 million in Workforce Investment Act discretionary funds. We recommend that the Legislature not appropriate these funds until the administration presents an expenditure plan which is reviewed for consistency with legislative priorities. Background. The federal Workforce Investment Act (WIA) of 1998 replaced the Job Training Partnership Act which provided employment training services to youth and adults. The goal of WIA is to strengthen coordination among various employment, education, and training pro- grams. As required by WIA, the Governor appointed a 63-member Workforce Investment Board in December 2000. The board advises the Governor on the operations of the state’s workforce investment system. We note, however, that board actions are not binding on the Governor. Pursuant to federal law, 85 percent of WIA funds ($629.9 million in federal funds in 2001-02) are allocated to Local Workforce Investment Boards (LWIBs, formerly known as PICs). The remaining 15 percent of WIA funds ($94.5 million) may be used by the state for discretionary pur- poses, such as administration, statewide initiatives, or competitive grants. Current-Year Expenditures. In 2000-01, discretionary WIA funds to- taled $94.5 million. With the exception of $15 million for the Caregiver Employment Development Department C – 169 Legislative Analyst’s Office Training Initiative, the 2000-01 Governor’s Budget included no specific WIA expenditure plan. Instead, the Governor, working with recommendations from the state board, determined how WIA funds were allocated. In 2000-01, $21.7 million was used for administrative costs at EDD and the state board. The remaining $72.8 million was used for various discretionary programs. Figure 2 (see next page) shows estimated WIA expenditures in the cur- rent year, and a proposal by the administration to the state board for expen- ditures in the budget year. As the figure shows, about $16 million is allocated to required WIA activities in both 2000-01 and 2001-02. These required activi- ties include technical assistance for LWIBs and certain programs for youth. We note, however, there is no federally mandated minimum spending thresh- old for these activities and therefore the amount could be modified. Budget-Year Expenditure Plan. Like the current-year allocation, the budget-year WIA discretionary funding is estimated to be $94.5 million. As shown in Figure 2 (see next page), the proposal for 2001-02 allocates similar amounts for administration and statewide program expenditures. The remaining $59.7 million is proposed for unspecified proposals, ini- tiatives, and required activities. In separate analyses, we indicate that the Legislature may wish to consider the option of using part of the WIA funds for (1) efforts to imple- ment Proposition 36 and (2) a Los Angeles County Medicaid demonstra- tion project. The Proposition 36 proposal is discussed under the Cross- cutting Issues section of this chapter, while the Los Angeles County pro- posal is discussed as part of our analysis of the Medi-Cal Program. Analyst’s Recommendation. In order to exercise its oversight and budget review responsibilities, the Legislature needs a complete expen- diture plan for WIA funds. Because the Governor’s budget provides no details on how it will expend $43.6 million, we recommend that the Leg- islature not appropriate these funds until an expenditure plan is presented and reviewed for consistency with legislative priorities. National Emergency Grant Program In order to streamline the process for allocating National Emergency Grant (NEG) funds to local entities, the Governor’s budget includes a provision that exempts federal NEG augmentations from the midyear legislative review process prescribed in Section 28 of the 2001-02 Budget Bill. Although streamlining the authorization process is desirable, we recommend (1) deleting of the proposed budget provision and (2) incorporating estimated NEG expenditures into the regular budget process. This approach streamlines the allocation process while preserving legislative oversight. C – 170 Health and Social Services 2001-02 Analysis Figure 2 Workforce Investment Act (WIA) Discretionary Funds (In Millions) 2000-01 2001-02 Administration Employment Development Department $17.0 $18.3 State board 4.7 4.8 Subtotal ($21.7) ($23.1) State-Level Discretionary Projects Training for local workforce investment staff $3.3 $3.3 Services to dislocated workers 5.7 5.7 California Cooperative Occupational Information System 2.7 2.7 Subtotal ($11.7) ($11.7) Local Discretionary Projects Competitive grants for workforce development services $20.0 \u2014 Caregiver Training Initiative 15.0 \u2014 Governor’s award for veteran’s grants 6.3 \u2014 Interagency contract with Department of Education 2.3 \u2014 Hollywood Entertainment Museum 1.0 \u2014 Subtotal ($44.6) ($43.6a) Required WIA Activities Incentive grants and technical assistance to locals $6.3 \u2014 Assistance to locals for eligible youth 7.0 \u2014 Fiscal and management information system 1.0 \u2014 Eligible Training Provider List (database of providers) 0.8 \u2014 Evaluations of workforce investment activities 1.2 \u2014 One-stop system operating needs 0.2 \u2014 Subtotal ($16.5) ($16.1b) Total WIA Discretionary Funds $94.5 $94.5 a No specific proposal provided for local discretionary projects. b For 2001-02, the spending proposal identifies activities similar to the current year, but does not specify amounts for the various subcomponents. Background. Under the NEG program, states may request federal funds to provide readjustment assistance (for example, retraining) to workers that face dislocation due to unforseen events, such as a flood or a freeze. During the last four fiscal years, annual NEG funding for Cali- Employment Development Department C – 171 Legislative Analyst’s Office fornia has ranged from $17 million to $74 million. After the EDD receives these funds, they are allocated to local entities, usually local Workforce Investment Boards, to provide readjustment assistance to displaced work- ers. Typically, EDD obtains the authority to expend the additional federal funds by submitting a letter to the Legislature pursuant to Section 28 of a given budget act. Streamlining the Process. The Governor’s budget includes a provi- sion in Item 5100-001-0869 that would exempt NEG funds from Section 28 notification to the Legislature. The administration indicates that it is proposing this provision in order to allocate NEG funds to dislo- cated workers more quickly. Although we agree that reducing the time it takes to move emergency funds to dislocated workers is desirable, we believe the Legislature needs to retain oversight over this process. In our view, the reduction in processing time for NEG funds could be achieved by incorporating a request for NEG federal expenditure authority into the Governor’s budget. The amount of proposed expenditure authority could be set at the average of annual NEG expenditures over the past four years, about $45 million. In the event that NEG expenditures ulti- mately exceed $45 million, the EDD could seek additional budget authority through the Section 28 process with a waiver of the standard 30-day re- view period. In fact, all recent NEG federal augmentation proposals have included such a waiver request and the Legislature has concurred with the need for these waivers. Analyst’s Recommendation. We recommend that the Legislature de- lete provision 3 of Item 5100-001-0869. We further recommend that EDD submit a budget change proposal for the 2001-02 budget to provide EDD with the authority to expend up to $45 million in NEG funds. This ap- proach streamlines the process while maintaining legislative oversight. If during 2001-02, EDD obtains NEG funds in excess of $45 million, EDD and the Director of the Department of Finance may request, in their Section 28 letter, a waiver of the 30-day waiting period. C – 172 Health and Social Services 2001-02 Analysis DEPARTMENT OF CHILD SUPPORT SERVICES (5175) The Department of Child Support Services (DCSS), created on Janu- ary 1, 2000, administers California’s child support program by over- seeing 58 county child support offices. The primary purpose of the program is to collect from absent parents, support payments for cus- todial parents and their children. Local child support offices provide services such as locating absent parents; establishing paternity; ob- taining, enforcing, and modifying child support orders; and collecting and distributing payments. The 2001-02 Governor’s Budget proposes expenditures totaling $1.1 billion from all funds for support of DCSS in the budget year. This is an increase of $157 million, or 17 percent, over estimated current-year expenditures. The budget proposes $487 million from the General Fund for 2001-02, which is an increase of $79 million, or 21 percent, compared to 2000-01. Most of this increase is attributable to a higher federal automation penalty and lower fed- eral incentive payments. Total Automation Penalties Could Reach $1 Billion Since 1998, California has been subject to penalties for failing to implement a statewide child support automation system. The penalties, estimated to be $114 million in 2000-01 and $163 million in 2001-02, are levied in the form of a reduced federal share of child support administrative expenditures. The penalties are expected to continue through 2004-05, potentially reaching a total of $1 billion since 1998. The federal government usually pays two-thirds of a state’s total child support administrative expenditures. However, pursuant to the Child Support Performance and Incentive Act of 1998 (Public Law 105-200), California has been subject to federal automation penalties which are lev- ied in the form of a reduced federal share in these administrative costs. Chapter 479, Statutes of 1999 (AB 150, Aroner) provides that the dis- tribution of penalties between the state and counties be determined Department of Child Support Services C – 173 Legislative Analyst’s Office through the annual budget process. Chapter 479 also provides that the state General Fund could be used to backfill for the loss of federal support, or the state also could distribute some share of the penalties to the counties. Total Penalties Could Reach $1 Billion. From 1997-98 through 1999-00, California’s child support program incurred penalties totaling $104 million and the state General Fund backfilled the loss of these fed- eral funds. The penalty is set by federal law at 25 percent and 30 percent of estimated federal expenditures for child support administration for federal fiscal years (FFY) 2000 and 2001, respectively. California faces a $114 million penalty in 2000-01 and an estimated $163 million pen- alty in 2001-02. Thus, California will have incurred penalties of about $380 million through 2001-02. We note that with even modest increases in administrative expen- ditures, child support penalties could approach or exceed $200 mil- lion for each of the years during the three-year period of 2002-03 through 2004-05. When added to the penalties incurred through 2001-02, this means that California could incur penalties totaling al- most $1 billion over this time period. The statewide automation sys- tem is scheduled to meet federal requirements in 2005, at which time the penalties would be discontinued. Counterproductive Nature of the Penalties. In previous analyses, we have shown that the principal goal of the child support program\u2014the collection of support\u2014is strongly related to the amount of fiscal resources committed to the program (that is, administrative expenditures). (For further detail, see our April 1999 report entitled The Child Support Enforce- ment Program From a Fiscal Perspective: How Can Performance Be Improved?) We concluded that administrative effort has a particularly strong rela- tionship to collections\u2014explaining about 70 percent of the variation in collections between counties. In other words, counties that did poorly in making child support collections generally had invested less in adminis- trative effort. Conversely, counties that did well in child support collec- tions had made higher administrative expenditures. We note that until the statewide child support automation system is fully implemented increased administrative spending in the child sup- port program will result in increased penalties. This is because the fed- eral penalty is based on administrative expenditures. Thus, any net di- rect fiscal benefit (that is, increase in collections) to government from in- creased administrative spending is reduced significantly. We note that the collection of child support is essential for families. C – 174 Health and Social Services 2001-02 Analysis Child Support Automation Penalties Overbudgeted We recommend that proposed spending for child support administration be reduced by $7.9 million from the General Fund because historic spending trends indicate the federal penalty will be less than budgeted. (Reduce Item 5175-101-0001 by $7,900,000.) As noted previously, future federal child support automation penal- ties will be levied as a 30 percent reduction in federal funds to support administrative costs of the child support program. The Governor’s bud- get estimates a 2001-02 penalty of $163 million from the General Fund. This estimate assumes a 21 percent increase in total administrative spend- ing in the FFY 2001 (October 2000 through September 2001), based on the actual increase in spending between 1998-99 and 1999-00. We believe this estimate is inflated because it has not been adjusted downward to reflect a number of one-time expenses in 1999-00. In addition, our examination of historic trends in the core administrative functions of the program found that expenditures increased at a lower rate of approximately 14 per- cent. A federal penalty based on this slower rate of growth would be $155 million, resulting in a General Fund savings of approximately $7.9 million. Accordingly, we recommend that the budget be reduced to reflect the lower cost for the federal penalty. Child Support Automation Proposal Lacks Detail The budget proposes $16.5 million ($5.6 million General Fund) for interim child support automation improvements over the next three fiscal years, 2001-02 through 2003-04. Without prejudice to the merits of the proposal, we recommend that the Legislature (1) delete this multiyear funding request and (2) instruct the department to include a specific interim automation proposal for 2001-02 only in the May Revision to the Governor’s budget that is consistent with federal guidelines. (Reduce Item 5175-101-0001 by $5,600,000.) The Governor’s budget for 2001-02 proposes a total of $18.1 million for support of an interim child support automation system. This amount consists of $16.5 million for local assistance and $1.6 million for state op- erations. We discuss the local assistance proposal in this write-up and the state-operations proposal in the following write-up. Background. Pursuant to federal law, the Statewide Automated Child Support System (SACSS) was intended to provide automated child sup- port enforcement tracking and monitoring capability through local child support offices. Following several years of difficulty, the state terminated the SACSS project in late 1997. The cancellation of SACSS resulted in the need for California to implement interim automation systems until a new Department of Child Support Services C – 175 Legislative Analyst’s Office statewide system is functional. The new statewide system\u2014known as the California Child Support Automaton System (CCSAS)\u2014is scheduled to be fully implemented in 2005. Interim Automation Systems. Pursuant to Chapter 479, counties may be required to modify their current child support automation systems or to change to a different system in preparation for the new statewide au- tomation system. The Governor’s budget proposes $16.5 million ($5.6 mil- lion General Fund) to be expended over three years for the costs of con- verting counties from various automation systems to one of the six in- terim systems approved by the federal government. Although interim system improvements may be necessary, we believe that the proposal does not provide the Legislature with sufficient detail regarding budget- year and out-year costs. Therefore, we recommend the deletion of the $16.5 million ($5.7 million General Fund) and the related budget bill provi- sion. We further recommend that DCSS submit at the time of the May Revi- sion a proposal that reflects only estimated budget-year funding require- ments. The revised budget-year proposal should demonstrate consistency with the most recent federal guidance on interim automation efforts. Pre-Statewide Interim Systems Management (PRISM) We recommend that the Legislature approve $1.6 million for the continued support and operation of the Pre-Statewide Interim Systems Management (PRISM) project. We further recommend adoption of budget bill language requiring the Department of Child Support Services to obtain federal approval prior to implementation of PRISM modifications. Background. Chapter 479 required DCSS to assume a more active role in overseeing the maintenance and operation of the interim automation systems of the child support program until the new statewide CCSAS is operational. Prior to the interim systems, counties had been responsible for maintaining, enhancing, and supporting their existing systems with minimal state oversight and involvement. In response to this new require- ment, the state combined all of the individual systems into one project known as the PRISM project. The PRISM project, which will spend almost $1 billion in state and federal funds over a six-year period, currently supports six county-based child support enforcement systems, performs data conversions to one of these six systems, and operates and maintains the state’s interim federal case registry. The state will operate PRISM until 2006 when it will be dis- continued and replaced with the CCSAS system. Chapter 479 also required DCSS to ensure that the automation activi- ties of these interim systems are consistent with the new statewide sys- C – 176 Health and Social Services 2001-02 Analysis tem, and if necessary, seek federal funding and approvals for those ac- tivities. Counties were prohibited from changing or enhancing those in- terim systems without prior approval by DCSS. The DCSS Requested Federal Funds for PRISM Support. In April and August 2000, DCSS submitted requests to the federal Administration of Children and Families (ACF) for additional federal funding to maintain PRISM systems. Specifically, DCSS requested funds to: Operate and enhance the six systems to comply with various mandates. Convert all counties to one of the six systems. Operate the state’s interim case registry system which transmits California child support orders to the Federal Case Registry. The ACF Denies or Defers Decision on Funds for Systems Enhance- ments. In July 2000, ACF either denied federal funds or deferred its deci- sions (pending receipt of additional cost information) relating to a num- ber of the enhancement requests. In response, DCSS reorganized its pri- orities, redirected funds to continue some enhancements, and asked ACF (in August 2000) to reconsider its decision to defer funding on the re- maining requests. In October 2000, the Department of Finance (DOF) notified the Leg- islature that ACF had denied a portion of DCSS’ request, but that DCSS intended to redirect existing resources to fund activities in the current year. The DOF letter, however, indicated that it might request additional funds for the budget year. Federal Government Denies Funding, but DCSS Allows County En- hancements to Proceed. Because of the urgency of the time lines and mo- mentum of the projects involved, DCSS subsequently allowed counties to spend $3.1 million in the current year for various deferred system enhance- ments. In November 2000, ACF ultimately notified DCSS of its denial of $8.9 million in federal funds requested for various adjustments to PRISM in the current year, of which $4.1 million was for the deferred enhancements. Budget Request. The budget reflects an ongoing General Fund in- crease of $3.8 million in the current year and proposes an additional on- going augmentation of $1.6 million in the budget year. Concerns. The sequence of events which occurred with PRISM are similar to those that have occurred with other child support automation activities (see our analysis of the Franchise Tax Board’s California Arrear- age Management Project [CAMP] under Item 1730 of the General Gov- ernment section of this Analysis). In each of these situations, the admin- istration initially sought legislative approval for short-term or interim Department of Child Support Services C – 177 Legislative Analyst’s Office automation systems pending development of a statewide system. Con- current with seeking legislative approval, the administration also sought federal funding approval. Generally, federal funding decisions are made months after enactment of the budget act. In the case of both CAMP and PRISM, the federal government took a more restrictive view of the short- term system and decided to limit its funds only to those activities which directly enhanced the single statewide system. This left the state in a dif- ficult position\u2014either proceed without federal funds or stop the short- term projects. The problem in the case of PRISM is that the state assumed federal approval and decided to proceed by redirecting support from the Gen- eral Fund. When federal funds were denied, the department had a short- fall of $3.8 million. Recommendation. The increases reflected in the Governor’s budget for PRISM in the current year ($3.8 million) and proposed for the budget year ($1.6 million) are consistent with the state’s prior commitment to the federal government and we, therefore, recommend budget-year ap- proval. In order to avoid future situations, however, which create defi- ciencies in the department’s budget, we recommend that the Legislature adopt the following budget bill language: It is the intent of the Legislature that the Department of Child Support Services shall receive federal funding approvals prior to any changes in scope or funding of the Pre-Statewide Interim Systems Management Project. Permanent Positions Are Needed to Support Child Support Automation Activities We recommend that the Legislature reject the budget proposal to provide ongoing oversight of county-based automation activities through the use of consultants and instead authorize 3 personnel years to provide such oversight. (Reduce Item 5175-001-0001 by $11,000 and add three positions.) The budget proposes an augmentation of $224,000 for departmental consulting services to oversee counties’ ongoing child support automa- tion activities. For the past three years, three limited-term positions within the department have provided these activities. The DCSS Required to Provide Ongoing Oversight of County Child Support Automation. Chapter 479 requires each county to enter into an Annual Automation Cooperation Agreement (AACA) with DCSS by December 1 of each year or risk losing its funds. Chapter 479 further al- lows a county to modify its AACA to reflect subsequent changes in law and requires DCSS to issue guidelines and review all AACAs and AACA modifications. C – 178 Health and Social Services 2001-02 Analysis The DCSS Oversight Activities Are Expected to Continue. We antici- pate that DCSS’ planning and oversight of county AACAs and county- based automation efforts will need to continue not only during the pe- riod of the PRISM project but after implementation of the statewide sys- tem as well. The DCSS, for example, will need to review any design en- hancements to internal county systems to ensure compliance with the county’s AACA. The DCSS Should Not Acquire Consulting Services for Ongoing Ac- tivities. We recommend the establishment of permanent positions to undertake the proposed planning and oversight activities. This is because these activities to be performed are ongoing in nature and are less expen- sive when performed by state staff. Therefore, we recommend that the Legislature reduce the proposal by $11,000 and authorize 3 personnel years for ongoing departmental oversight of county automation activities. This would leave $198,000 for personnel services and $15,000 for operating expenses and equipment to support the three positions. Department of Social Services State Operations C – 179 Legislative Analyst’s Office DEPARTMENT OF SOCIAL SERVICES STATE OPERATIONS (5180) The Department of Social Services (DSS) administers four major pro- grams: welfare, social services, community care licensing, and disability evaluation. The department is responsible for (1) supervising county de- livery of social services, (2) determining eligibility for federal and state disability programs, (3) licensing residential facilities, (4) providing adop- tion services, and (5) assisting disaster victims. The budget proposes $433 million from all funds ($97 million from the General Fund) and 4,344 personnel-years of staff for DSS state operations in 2001-02. Proposed General Fund spending represents a decrease of 2 percent compared with estimated General Fund spending in the current year. Department Should Develop eGovernment Plan We recommend that the Legislature deny the Governor’s proposal for a one-time increase of $250,000 for the development of a feasibility study report for the Department of Social Services’ eGovernment services, until the department develops an eGovernment plan. The budget proposes a one-time augmentation of $250,000 ($159,000 from the General Fund and $91,000 from other funds) to acquire consult- ing services for the development of a feasibility study report (FSR) for DSS eGovernment services. The FSR would: Identify DSS business processes that would work well with Internet technology. Recommend Internet development tools. Define the department’s eGovernment technical and infrastruc- ture requirements. C – 180 Health and Social Services 2001-02 Analysis The eGovernment Policies and Guidelines Will Be Issued Soon. It is our understanding that the administration will soon release a number of eGovernment policies which will address departmental planning, tech- nical standards, and infrastructure requirements. The administration has issued an executive order that requires every department to prepare an eGovernment plan and submit it to the Department of Information Tech- nology for review and approval. Departments must have their eGovern- ment plans in place prior to starting eGovernment projects. The DSS Should Develop eGovernment Plan First. In view of the pend- ing eGovernment policy directives from the administration, we believe it is inappropriate for DSS to develop an FSR for an eGovernment project when it has not yet developed an eGovernment plan. Departments should have their eGovernment plans in place before preparing FSRs for indi- vidual eGovernment projects in order to adequately oversee and manage all project activities. For this reason, we recommend that the Legislature deny the augmentation to develop an eGovernment services FSR until the department develops an eGovernment plan. Department of Social Services CalWORKs Program C – 181 Legislative Analyst’s Office DEPARTMENT OF SOCIAL SERVICES CALWORKS PROGRAM In response to federal welfare reform legislation, the Legislature cre- ated the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children, the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the one-parent compo- nent of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A fam- ily is eligible for the two-parent component if it includes a child who is financially needy due to the unemployment of one or both parents. The budget proposes an appropriation of $5.5 billion ($2.1 billion General Fund, $143 million county funds, $15 million from the Employ- ment Training Fund, and $3.2 billion federal funds) to the Department of Social Services (DSS) for the CalWORKs program. In total funds, this is a decrease of $126 million, or 2.3 percent. However, General Fund spend- ing is proposed to increase by $193 million (10 percent). The increase is due to (1) replacing the current-year, one-time General Fund reduction of $154 million (due to a retroactive reduction in the maintenance-of-effort [MOE] requirement) and (2) an increase of $40 million in spending for the Department of Labor Welfare-to-Work match requirement. Caseload Decline Slowing The California Work Opportunity and Responsibility to Kids caseload has declined significantly since 1994-95. However, recent caseload data suggest a deceleration in caseload decline, and the Governor’s budget projects a continued deceleration in the budget year. The CalWORKs caseload has declined every year since 1994-95, when caseloads reached their peak. During 1999-00, the average monthly num- ber of persons in the CalWORKs program decreased by approximately C – 182 Health and Social Services 2001-02 Analysis 13 percent. However, the Governor’s budget projects that the caseload decline will slow to 9 percent in 2000-01. The most recent caseload data (July to September 2000) is consistent with the Governor’s current-year caseload forecast. The budget projects a further deceleration in caseload decline in the budget year, when the average monthly caseload is pro- jected to decrease by only 6 percent. Figure 1 illustrates the recent trend toward slower caseload decline. Figure 1 CalWORKs Caseload Decline Slowing (Persons in Thousands) 1997-98 1998-99 1999-00 2000-01 2001-02 1,300 1,500 1,700 1,900 2,100 2,300 Actual Governor’s Budget Because the CalWORKs caseload drives program costs, we will con- tinue to monitor caseload trends and advise the Legislature accordingly. Budget Underestimates Cost of Providing Statutory Cost-of-Living Adjustment The General Fund cost of providing the statutory cost-of-living adjustment will be $10 million above the amount included in the budget, due to an upward revision in the California Necessities Index. These costs should be reflected in the May Revision of the budget. Pursuant to current law, the Governor’s budget proposes to provide the statutory cost-of-living adjustment (COLA), effective October 2001, Department of Social Services CalWORKs Program C – 183 Legislative Analyst’s Office at a General Fund\/Temporary Assistance for Needy Families (TANF) fund cost of $132 million. The statutory COLA is based on the change in the California Necessities Index (CNI) from December 1999 to De- cember 2000. The Governor’s budget, which is prepared prior to the release of the December CNI figures, estimates that the CNI will be 4.85 percent, based on partial-year data. Our review of the actual full- year data, however, indicates that the CNI will be 5.31 percent. Based on the actual CNI, we estimate that the cost of providing the COLA will be $141 million, an increase of $10 million compared to the Governor’s budget. We recommend that the budget be increased to reflect these costs. Figure 2 shows the maximum CalWORKs grant and food stamps ben- efits for a family of three, effective October 2001, as displayed in the Governor’s budget assuming a 4.85 percent CNI and as adjusted to reflect the actual CNI of 5.31 percent. As the figure shows, based on the actual CNI, grants for a family of three in high-cost counties will increase by $34 to a total of $679, and grants in low-cost counties will increase by $33 to a total of $647. Figure 2 CalWORKs Maximum Monthly Grant and Food Stamps Governor’s Budget and LAO Projection Family of Three 2000-01 and 2001-02 2001-02 LAO Projection Change From 2000-01 2000-01 Governor’s Budgeta LAO Projectiona, b Amount Percent High-cost counties CalWORKs grant $645 $676 $679 $34 5.3% Food Stampsc 251 237 236 -15 -6.0 Totals $896 $913 $915 $19 2.1% Low-cost counties CalWORKs grant $614 $644 $647 $33 5.4% Food Stampsc 265 252 250 -15 -5.7 Totals $879 $896 $897 $18 2.0% a Effective October 2001. b Based on California Necessities Index at 5.31 percent (revised pursuant to final data) rather than Gov- ernor’s budget estimate of 4.85 percent. c Based on maximum food stamps allotments effective October 2000. Maximum allotments are adjusted annually each October by the U.S. Department of Agriculture. C – 184 Health and Social Services 2001-02 Analysis As a point of reference, the federal poverty guideline for 2000 (the latest reported figure) for a family of three is $1,179 per month. (We note that the federal poverty guidelines are adjusted annually for inflation.) When the grant is combined with the maximum food stamps benefit, total resources in high-cost counties will be $915 per month (78 percent of the pov- erty guideline). Combined maximum grant and food stamps benefits in low- cost counties will be $897 per month (76 percent of the poverty guideline). Impact of MOE Requirement The Governor’s budget proposes to expend in 2001-02 all but $85 million of available federal block grant funds and the minimum amount of General Fund monies required by federal law for the California Work Opportunity and Responsibility to Kids (CalWORKs) program. Any net augmentation to the program in excess of the proposed $85 million reserve will result in General Fund costs and any net reductions will result in an additional reserve of federal block grant funds (which would be carried over by the state). The MOE Requirement. To receive the federal TANF block grant, states must meet a MOE requirement that state spending on assistance for needy families be at least 75 percent of the federal fiscal year (FFY) 1994 level, which is $2.7 billion for California. (The requirement increases to 80 per- cent if the state fails to comply with federal work participation require- ments.) Although the MOE requirement is primarily met with state and county spending on CalWORKs and other programs administered by the DSS, we note that $478 million in state spending in other departments is also used to satisfy the requirement. (Below we comment on the Governor’s proposal to reduce General Fund spending by $154 million in the current year due to a retroactive reduction in the MOE.) Proposed Budget Is at MOE Floor. For 2001-02, the Governor’s bud- get for CalWORKs is at the MOE floor. We note that the budget also in- cludes $89 million for the purpose of providing state matching funds for the federal Welfare-to-Work block grant. These funds cannot be counted toward the MOE because they are used to match other federal funds. The Governor’s budget also proposes to spend all but $85 million of available federal TANF funds in 2001-02, including the projected carry- over of unexpended funds ($263 million) from 2000-01. The $85 million will be held in a reserve for unanticipated future program needs. Proposition 36 Could Be New Source of MOE Funds. As noted above, California meets its MOE requirement partially through spending in other departments, which the Governor’s budget assumes to be $478 million in 2001-02. As we indicate in our analysis of Proposition 36, certain ex- penditures of Proposition 36 funds may also be countable towards the Department of Social Services CalWORKs Program C – 185 Legislative Analyst’s Office MOE requirement. (Please see Crosscutting Issues in this chapter.) In that analysis, we also cite the possibility of using Proposition 36 funds to draw down additional federal funds, in which case they could not be used to satisfy the MOE requirement. To the extent that some Proposition 36 expenditures on CalWORKs-eligible families are not used to draw down new federal funds, they could be counted towards the MOE requirement. Budget Proposes Reductions in County Performance Incentives The Governor’s budget contains two proposals to reduce county performance incentives by a total of $397 million in 2000-01 and 2001-02. Specifically, the Governor proposes urgency legislation to reduce the current-year appropriation for county performance incentive funds by $153 million. In addition, the Governor ‘s budget proposes no funding for performance incentives in 2001-02, resulting in a savings of $244 million compared to the amount suggested by current law. Background. The CalWORKs legislation provides that savings result- ing from (1) exits due to employment, (2) increased earnings, and (3) di- verting potential recipients from aid with one-time payments, may be paid to the counties as performance incentives. The 2000-01 budget trailer bill for social services\u2014Chapter 108, Statutes of 2000 (AB 2876, Aroner)\u2014 changed the treatment of performance incentives in several important ways. Among these changes, it: Prohibited counties from earning new incentives in the current year until the estimated prior obligation owed to the counties had been paid by the state (discussed below). Subjected future performance incentive payments to annual budget act appropriations, rather than being treated as an entitlement. The of 2000-01 Budget Act appropriated $250 million to counties for performance incentives. Since this amount was less than the estimated prior-year obligations ($320 million), it was assumed that counties would earn no new performance incentives in the current year, consistent with the provision of Chapter 108. Current-Year Proposal. Although earlier estimates had assumed that prior-year obligations owed to the counties would exceed $250 million, the department’s current estimate of the arrearage is only $97 million. The Governor has proposed urgency legislation to reduce the current- year appropriation for performance incentives to $97 million, resulting in a TANF savings of $153 million. Budget-Year Proposal. The department has estimated that, under the statutory formula for determining performance incentives, counties would earn approximately $244 million in 2001-02. However, the Governor’s C – 186 Health and Social Services 2001-02 Analysis budget exercises the option, created by Chapter 108, to spend less for performance incentives than the amount suggested by the statutory for- mula. Specifically, the budget proposes no funding for county performance incentives, resulting in a savings of $244 million. Expenditure of Performance Incentives. By the end of 1999-00, coun- ties had earned approximately $1.2 billion in performance incentives, and had been paid $1.1 billion. However, as of December 2000, counties had spent only $46 million of these funds. As required by Chapter 108, nearly all the counties have submitted their performance incentive spending plans for the current year, which describe how the expenditure of these funds will be coordinated with existing services for CalWORKs recipients as well as the nonrecipient working poor. The department is still reviewing these plans. Current-Year Proposal Raises Policy Issues. As we have indicated, the Governor proposes to reduce county performance incentive payments in the current year. We note that the Governor proposes to use the result- ing TANF savings ($153 million) to replace essentially an equivalent amount of General Fund monies, which he proposes to free-up in 2000-01 as a result of a federal decision regarding the state’s MOE. The amount appropriated for county performance incentives, as well as the treatment of the state’s MOE, are policy decisions for the Legislature. Below we comment on these two current-year proposals. Proposal for Current-Year MOE Reduction Savings Should Be Incorporated Into 2001-02 Budget Process The Governor proposes urgency legislation in the current year to reduce the appropriation for county performance incentives by approxiamtely $150 million. He further proposes to use the resulting Temporary Assistance for Needy Families (TANF) savings to replace a like amount of General Fund spending during 2000-01. Both of these current year proposals are significant policy decisions for the Legislature. If the Legislature elects to reduce county performance incentives through urgency legislation, as proposed by the Governor, we recommend that the Legislature amend the legislation to prohibit the expenditure of the resulting TANF savings in the current year. This action will effectively move the decision about whether to reduce General Fund spending (resulting from the maintenance-of -effort reduction) into the budget process for 2001-02. The Legislature could then deliberate fully on its priorities with respect to General Fund support for California Work Opportunity and Responsibility to Kids and the level of the TANF reserve for future years. Retroactive Reduction in the MOE Requirement. As described ear- lier, states must meet a MOE requirement in order to receive the federal Department of Social Services CalWORKs Program C – 187 Legislative Analyst’s Office TANF block grant funds. Specifically, state spending on welfare for needy families must be at least 75 percent of the FFY 1994 level, which is $2.7 bil- lion for California. The requirement is 80 percent if the state fails to com- ply with federal work participation requirements. During FFY 1997, Cali- fornia assumed that it would not meet the federal work participation rate, so the state budgeted sufficient General Fund monies to satisfy the higher 80 percent MOE level. In December 1998, the federal Department of Health and Human Services (DHHS) notified California that (1) it had not met the federal work participation requirements and (2) was subject to a penalty. Cali- fornia appealed the penalty, and in August 2000, DHHS notified the state that in fact it had met the federal work participation requirements in FFY 1997 and therefore would not be penalized. Based on this successful ap- peal, California’s MOE requirement is retroactively reduced by about $150 million in FFY 1997. By amending a series of historical federal finan- cial reports, California may reduce its General Fund spending for CalWORKs by the same $150 million, in the current year or future years, while remaining in compliance with the federal MOE requirement. Al- though DSS indicates that amending historical federal financial reports is a common practice, we note that the federal Administration for Chil- dren and Families is reviewing whether such amendments with respect to TANF and MOE spending are appropriate. Governor’s Proposal. The Governor’s budget proposes to score the General Fund savings in the current year. In order to reduce General Fund spending and hold total CalWORKs program spending harmless, the Governor proposes to backfill the General Fund savings with federal TANF funds realized from his proposal to reduce county performance incentives in the current year. He proposes to achieve this reduction in performance incentives through urgency legislation in the current year. This approach fully funds the CalWORKs program in 2000-01. However, it has the effect of reducing the TANF reserve because the TANF savings resulting from the reduced county performance incentives would have otherwise gone to the reserve. Governor’s Proposals Represent Significant Policy Changes for the Current Year. The amount of spending for county performance incentives in the current year is a policy decision for the Legislature. Similarly, the amount of General Fund support for CalWORKs and the level of the TANF reserve are also policy judgments for the Legislature. Because federal TANF funds may be carried over indefinitely, the amount of the TANF reserve is important. In future years, the TANF re- serve could be used to cover potentially higher costs for (1) child care for working and former recipients and (2) higher grants pursuant to the statu- C – 188 Health and Social Services 2001-02 Analysis tory COLA. We also note that the annual TANF block grant is only autho- rized through the end of FFY 2002. Some observers believe that Congress may reduce the block grant after 2002 because the TANF caseload has declined significantly since the block grant was created in 1996. We note that achieving any savings from reducing county perfor- mance incentives cannot wait until the budget year. If current law is not changed during this fiscal year, counties would establish claims to the entire $250 million appropriated. Conversely, there is no urgency with respect to achieving the General Fund savings pertaining to the retroac- tive FFY 1997 MOE adjustment. This could wait until the budget year, or longer. Consequently, we believe the proposal to reduce General Fund support for CalWORKs by decreasing the TANF reserve should be con- sidered during the regular budget process for 2001-02 rather than be rushed through in the current year as the Governor proposes. Analyst’s Recommendation. We recommend that the Legislature take necessary action to ensure that the decision about any General Fund sav- ings resulting from the 1997 MOE reduction is moved into the 2001-02 budget process. Adopting this approach will give the Legislature time to deliberate fully on its priorities with respect to General Fund support for CalWORKs and the level of the TANF reserve for future years. Moving the decision about whether to reduce General Fund spend- ing because of MOE relief into the budget year can be achieved in two different ways. First, if the Legislature rejects the urgency legislation pro- posal, such an action would automatically move the decision into the budget year. If, however, the Legislature approves the urgency legisla- tion proposal, we recommend that such legislation be amended to pro- hibit the expenditure of the resulting TANF savings during the current year. This will effectively move the policy decision about any General Fund savings into the 2001-02 budget process. Advance Drawdown of TANF Funds May Not Comply with Federal Law The U.S. Department of Health and Human Services issued a program instruction clarifying that states may not draw down federal Temporary Assistance for Needy Families (TANF) funds prior to their immediate expenditure. California’s practice of drawing down county performance incentive funds may not be consistent with this instruction. Thus the state may be required to return some TANF funds along with any interest that may have been earned. We recommend that the department provide an estimate at budget hearings on the potential interest liability and report on how it will comply with the federal instruction. Department of Social Services CalWORKs Program C – 189 Legislative Analyst’s Office The Administration for Children and Families, U.S. Department of Health and Human Services (DHHS), which administers the TANF pro- gram, issued a program instruction notice on January 2, 2001, regarding the draw-down of TANF funds in advance of a state’s immediate need to expend the funds. The instruction indicates that TANF funds, which are subject to the Cash Management Improvement Act (CMIA), shall be ad- vanced only when they are immediately required for program purposes. The notice further indicates that states or their grantees (including coun- ties) that have violated the draw-down rules must return the overdrawn TANF funds along with any interest earned on the funds. California’s practice of paying counties performance incentives when they are earned, rather than when they will be used for program pur- poses, may not be consistent with CMIA and DHHS regulations. Accord- ingly, we recommend that DSS report at budget hearings on (1) the esti- mated cost of refunding the interest earned on TANF funds that may have been drawn down prematurely and (2) what steps it will take to comply with the federal instruction. Mental Health and Substance Abuse Spending Below Appropriations The California Work Opportunity and Responsibility to Kids legislation requires that counties provide for the treatment of substance abuse or mental health problems that may prevent a recipient from becoming self-sufficient. The Governor’s budget allocates $109 million to the counties for substance abuse and mental health treatment services in 2001-02, an amount virtually identical to the current-year allocation. Because counties have historically been unable to fully expend their substance abuse and mental health treatment funds, we withhold recommendation on the proposed appropriation for 2001-02 pending receipt of additional data on current-year spending. Background. National evaluation studies, as well as information from California counties and other states, suggest that 20 percent to 30 percent of CalWORKs recipients may have a substance abuse or mental health diagnosis (or, in some cases, a dual diagnosis ). The CalWORKs legisla- tion requires that, to the extent funding is available, counties provide for the treatment of substance abuse or mental health problems that limit a participant’s ability to make the transition from welfare to work or retain long-term employment. The legislation requires county welfare depart- ments to collaborate with county alcohol and drug departments to coor- dinate assessment and treatment. The legislation also stipulates that avail- able mental health services must include assessment, case management, and treatment services. C – 190 Health and Social Services 2001-02 Analysis Each year since 1998-99, the budget has included funding for both substance abuse treatment and mental health services. This funding is counted toward the state MOE requirement. Governor’s Proposal. The Governor proposes an appropriation for 2001-02 of $55 million for substance abuse treatment and $54 million for mental health treatment, for a total of $109 million. The Governor pro- poses an additional $1.7 million from the CalWORKs budget for mental health and substance abuse treatment for Native American health clinics. Prior-Year Spending Below Appropriations. In 1998-99, counties were allocated $85 million for substance abuse and mental health treatment (see Figure 3). However, counties spent only $21 million, or 25 percent of available funds. With the expectation that counties would fully implement their treatment services in 1999-00, $118 million was appropriated for sub- stance abuse and mental health treatment in 1999-00. However, counties spent only $68 million. Specifically, counties claimed only 62 percent of their allo- cation for substance abuse ($38 million out of $61 million) and only 52 per- cent of their mental health allocation ($30 million out of $58 million). Figure 3 County Expenditures of CalWORKs Mental Health and Substance Abuse Treatment Funds (Dollars in Millions) Mental Health Substance Abuse Appropriation Expenditures Appropriation Expenditures Amount Percent Amount Percent 1998-99 $25.0 $11.2 44.9% $59.7 $10.0 16.8% 1999-00a 57.7 29.8 51.7 60.5 37.6 62.1 2000-01b 54.1 4.6 8.6 54.8 7.0 12.7 a Does not include supplemental claims which may accrue through March 2001. b Expenditures through September 2000. Spending in 1999-00 varied widely among counties. In terms of the mental health funding, for example, 23 counties spent more than 90 per- cent of their allocation (with 11 counties spending above their allocation), while 28 spent less than 50 percent of their allocations. In fact, nine coun- ties spent less than 10 percent of available funds. Spending on substance abuse followed a similar pattern. Current-Year Spending Uncertain. The current-year appropriation for substance abuse and mental health services is $109 million ($55 for sub- Department of Social Services CalWORKs Program C – 191 Legislative Analyst’s Office stance abuse and $54 for mental health). Expenditure data from the first quarter indicate that counties have spent only $12 million, or 11 percent of their current-year allocation. Whether this is indicative of a trend in the current year is uncertain. Given the large number of counties that under-spent their allocations in the prior year, it may be that they are continuing to spend below their allocations in the current year, despite technical assistance from the department and efforts to disseminate best practices information. Any unspent funds would ultimately revert and result in an increase in the TANF reserve. On the other hand, first quarter data are typically low relative to later quarters and, therefore, do not provide a reliable estimate of full-year spending. Additionally, current-year spending is 66 percent higher than first quarter spending in the prior year. If counties continue to spend at this higher rate for the rest of the year, they would expend the entire 2000-01 allocation. Proposition 36 Funding Adds to Uncertainty. In November, Califor- nia voters approved Proposition 36, the Substance Abuse and Crime Prevention Act of 2000. The measure provides $60 million (General Fund) in the current year and $120 million annually through 2005-06 to coun- ties to pay for substance abuse treatment for specified adult offenders. The effect of Proposition 36 on CalWORKs spending for mental health and substance abuse treatment is uncertain. On the one hand, to the extent that counties use Proposition 36 fund- ing for eligible CalWORKs recipients, counties may use less of their CalWORKs allocation for substance abuse treatment services. On the other hand, as counties invest their Proposition 36 allocations in new program infrastructure, the additional treatment capacity may enable counties to spend their full CalWORKs substance abuse allocations. This may be the case, for example, in counties that have cited lack of capacity as a barrier to spending their full allocation. Finally, to the extent that counties use the Proposition 36 funds to provide dual diagnosis treatment, the measure may impact counties’ ex- penditures of their CalWORKs mental health allocations as well. (Please see Crosscutting Issues in this chapter for our analysis of Proposition 36.) Withhold Recommendation on Governor’s Proposal. Given the un- certainty of current-year spending for substance abuse and mental health treatment services, we withhold recommendation on the Governor’s pro- posal to appropriate $109 million for these services in 2001-02. We will continue to monitor spending in the current year. Based on additional quarterly data, we will advise the Legislature about potential savings in the current year, as well as options for the budget year. C – 192 Health and Social Services 2001-02 Analysis Child Care Shortfall The Governor’s budget provides only limited funding for child care for former California Work Opportunity and Responsiblity to Kids recipients who have been off aid for two years or longer. The CalWORKs Child Care. The CalWORKs child care program is delivered in three stages. Stage 1 is administered by county welfare de- partments and begins when a participant enters CalWORKs. Participants transition to Stage 2, which is administered by the State Department of Education (SDE), once their situations become stable as determined by the counties. Participants can stay in Stage 2 while they remain on CalWORKs and for up to two years after they leave CalWORKs. Stage 3 refers to the broader subsidized child care system administered by SDE that serves both former CalWORKs recipients and working poor families who have never been on CalWORKs. Because there typically are waiting lists for Stage 3, in 1997 the Legislature created the Stage 3 set-aside in order to provide con- tinuing child care for former CalWORKs recipients who are unable to find regular Stage 3 child care once they time-out of Stage 2. Governor’s Budget. The Governor’s budget for the Stage 3 set-aside only provides funding for former CalWORKs recipients who will time- out of Stage 2 during the one month of July 2001; funding is not provided for those who will time-out during the rest of the budget year. The de- partment has estimated that this results in a funding shortfall of about $61 million. In our analysis of the Department of Education’s child care programs, we recommend using additional federal funds to backfill the shortfall. (Please see the Education chapter of this Analysis.) We note that if this shortfall is not addressed, it may result in former recipients returning to CalWORKs due to a lack of child care. Welfare-to-Work Match Deadline Extended California’s remaining match obligation for the U.S. Department of Labor Welfare-to-Work grants is $89 million. Pursuant to recently enacted federal legislation, California’s deadline for expending its federal grant and the required state matching funds has been extended from July 2002 to July 2004. We recommend that proposed spending for the Welfare-to-Work match be spread equally over the next three state fiscal years to take advantage of the extension. This would result in a General Fund savings of $59 million in 2001-02. (Reduce Item 5180-102-0001 by $59 million.) The U.S. Department of Labor provides states with Welfare-to-Work grants to serve low-income persons with specific barriers to employment. States must provide a $1 match for every $2 of Welfare-to-Work grant funds awarded. Although the Employment Development Department ad- ministers the federal grant, state matching funds are included in the DSS’ Department of Social Services CalWORKs Program C – 193 Legislative Analyst’s Office budget and are appropriated to county welfare departments as part of the CalWORKs program. California has received two Welfare-to-Work grants totaling $367 mil- lion. At the time the Governor’s budget was prepared, it was assumed that the second grant ($177 million) would expire by July 2002. The bud- get, therefore, assumes that California would expend its remaining $89 million state match obligation in the budget year. However, pursu- ant to recently enacted federal legislation, California’s deadline for ex- pending the second grant has been extended to July 2004. Consequently, we recommend that proposed spending for the Wel- fare-to-Work match be spread equally over the next three state fiscal years (about $29.5 million each year). Thus match spending in 2001-02 would be $29.5 million, resulting in a savings of $59.1 million. We believe this approach would not have negative program impacts, as California has had difficulty fully expending its Welfare-to-Work appropriations in prior years. We note that if our recommendation is adopted, the department would need to increase the county allocations for employment services accord- ingly. This is because, as discussed below, the Welfare-to-Work matching funds are used as a partial offset to employment services allocations. Welfare-to-Work Funds Should Be Incorporated Into County Budgeting Process Because counties may use Welfare-to-Work funds to pay for California Work Opportunity and Responsibility to Kids employment services, the budget reduces county funding requests by $142 million, even though in the prior year most counties’ budget requests had already accounted for these funds. To avoid a potential double reduction in employment services funding, we recommend that the May Revision address this issue. Background. Pursuant to Chapter 147, Statutes of 1997 (AB 1111, Aroner), the budget for CalWORKs employment services is based on coun- ties’ expenditure plans. (For a full discussion of the county budgeting process, please see our report, Improving CalWORKs Program Effectiveness by Changing the Employment Services Budget Process.) In addition to their employment services allocation, counties have access to other sources of funds for employment services, including the federal Department of La- bor Welfare-to-Work funds and the required state matching funds. Governor’s Budget. The Governor’s budget recognizes the Welfare- to-Work funds as a funding source available to counties for CalWORKs services, and therefore reduces the counties’ allocation by $142 million ($79 million in federal Welfare-to-Work funds and $63 million in state C – 194 Health and Social Services 2001-02 Analysis matching funds). However, in 2000-01, most counties had already ac- counted for the Welfare-to-Work funds in developing their employment services expenditure plans. We expect counties to do the same in the bud- get process for 2001-02, in which case the $142 million reduction would represent a double reduction. Analyst’s Recommendation. With respect to the Welfare-to-Work funds, we recommend that the budget process be changed as follows. First, counties would specifically identify how they plan to use both the federal Welfare-to-Work funds and the state matching funds to serve their CalWORKs clients. In making this identification, counties would note any barriers or limits on using these funds. All of this information would be incorporated into the counties’ budget requests. During their review process, DSS would then determine if the proposed county use of the federal funds and state matching funds were reasonable and consis- tent with CalWORKs purposes. We believe this approach will result in county allocations that correctly reflect the use of available funds for employment services. Finally, we recommend that the May Revision ad- dress this issue. Over Half of Single-Parent Adults Will Reach Federal Time Limit in 2001-02 The department estimates that by June 2002, nearly 60 percent of single-parent adults in the California Work Opportunity and Responsibility to Kids (CalWORKs) program will reach their federal time limit. Because the CalWORKs program began 13 months after the start date of the Temporary Assistance for Needy Families program, assistance to these families will be funded with state-only funds. If trends continue, approximately 80,000 families could face grant reductions in July 2003. Federal Time Limit. The federal welfare reform legislation of 1996, which created the TANF block grant, established a lifetime limit on fed- eral assistance. Specifically, states may not use TANF funds to provide assistance to families in which an individual has already received a cu- mulative total of 60 months of assistance (beginning December 1996). However, a state may exempt up to 20 percent of its caseload from the federal time limit for hardship. States that use their own funds for fami- lies who have reached the federal time limit may count such expendi- tures towards their MOE requirement. CalWORKs Time Limit. Generally, under CalWORKs legislation, able- bodied parents or caretaker relatives may not receive cash assistance for more than 60 months. However, their children remain eligible, in which case assistance would be provided with state-only funds, countable to- ward the MOE requirement. Pursuant to federal legislation, California Department of Social Services CalWORKs Program C – 195 Legislative Analyst’s Office may exempt up to 20 percent of the caseload from the time limit for hard- ship reasons, as determined by the county (for example, if an adult is determined to be incapable of maintaining employment). Cases Will Be Shifted to State-Only Program. The CalWORKs adults will begin reaching their TANF time limit in December 2001. Because the CalWORKs program began in January 1998, 13 months after the federal TANF start date, adults who will reach their federal 60-month time limit in 2001-02 are eligible to receive CalWORKs for an additional 13 months. Assistance for such cases would be funded with state-only funds. Governor’s Estimates. The Governor’s budget projects that by June 2002, a cumulative total of 139,000 adults, or 59 percent of all single-par- ent adults on the CalWORKs caseload, will have reached their federal 60-month time limit. Assuming that 20 percent of these adults will be exempted from the federal time limit, the department estimates that ap- proximately 92,000, or 39 percent of single-parent adults, will be funded exclusively with state-only funds. State Time Limit Approaching. If the same group of adults who will have reached their federal time limit by June 2002 remain on CalWORKs, about 80,000 families may face a grant reduction in July 2003 (this figure assumes some families will lose eligibility due to the youngest child reach- ing age 18). Legislative Oversight: Cal-Learn Final Report Overdue The department has not submitted a legislatively mandated report on the Cal-Learn program due July 1, 2000. We recommend that the department report at budget hearings on the status of the report and on its findings and recommendations. Established in 1994 as a five-year federal demonstration project, the Cal-Learn program is designed to assist pregnant and parenting teens receiving CalWORKs to graduate from high school or its equivalent. The program provides intensive case management, payments for educational expenses and supportive services such as child care and transportation, as well as bonuses and sanctions based on academic performance. Par- ticipants may earn bonuses when they achieve satisfactory grades and upon graduating, while participants who do not make satisfactory progress are subject to a $100 sanction per report card period. Chapter 902, Statutes of 1998 (AB 2772, Assembly Committee on Human Services), made Cal-Learn a permanent program supported by the General Fund and TANF. Current law requires the department to provide the final Cal-Learn report to the Legislature by July 1, 2000. At the time this analysis was prepared, the department had not submitted the report. We recommend C – 196 Health and Social Services 2001-02 Analysis that the department report at budget hearings on the status of the final report and on its findings and recommendations. Increase County Flexibility to Assist Working Recipients By requiring recipients to enter community service after two years on aid, current law limits county flexibility in delivering services most likely to assist California Work Opportunity and Responsibility to Kids recipients in achieving self-sufficiency. We recommend enactment of legislation to give counties the option to provide employment services for more than two years so long as participants work at least 20 hours per week. We believe this approach will enhance program effectiveness for recipients who are working because counties are in the best position to judge whether employment services or community service offers the best approach for long-term self-sufficiency. Background. The CalWORKs program requires parents to participate in employment or welfare-to-work activities for a specified number of hours per week (single parents must work 32 hours and two-parent fami- lies must work a combined 35 hours). Recipients who are unable to find employment after an initial job search are referred for an assessment of their work skills and any employment barriers. Following assessment, the recipient signs a welfare-to-work plan, which specifies the work ac- tivities and employment services in which the recipient will participate, as well as the supportive services the recipient will be provided (includ- ing case management, child care, or personal counseling). Employment services include vocational education and training; adult basic educa- tion; and mental health, substance abuse, and domestic violence services. The primary purpose of employment services is to enable recipients to obtain employment or to advance in their current job, so that they can leave CalWORKs and become self-sufficient for the long term. The CalWORKs legislation has two separate time limits for adult re- cipients. Generally, adults are limited to 60 months of grant payments and 18 to 24 months of employment services. Once the welfare-to-work plan is signed, the participant’s employment services time limit begins. After a cumulative period of 18 months on aid, or, at county option, 24 months, the participant must meet his or her weekly participation man- date (32 or 35 hours) either through unsubsidized employment, commu- nity service, or a combination of the two. After the 18- or 24-month time limit, employment services may only be offered in very limited circum- stances. For example, education or training may be provided if it is re- quired for the participant’s community service placement. (Months in which a recipient is exempt from participation, or is sanctioned for non- compliance, do not count toward the employment services time limit.) Department of Social Services CalWORKs Program C – 197 Legislative Analyst’s Office The Fair Labor Standards Act (FLSA). The Department of Labor be- lieves that under FLSA, CalWORKs recipients participating in commu- nity service are considered employees and, therefore, must be compen- sated at the minimum wage. This means that a recipient’s monthly hours of required participation in community service may not exceed the amount determined by dividing his\/her grant plus his\/her food stamp benefit by the minimum wage. As a result, smaller families with relatively low monthly grants cannot be required to participate in community service for the full 32 or 35 hours required by CalWORKs. Instead, they have to meet their work requirement with other work activities, such as employment services. Figure 4 shows the maximum number of hours per week that non- working recipients can be required to participate in community service activities. As the figure illustrates, two- and three- person families are unable to meet their participation requirements through community ser- vice activities alone. These families are required to participate in other welfare-to-work activities, including education or job training, to meet the balance of their work requirement. Figure 4 Maximum Hours Per Week of Community Service Region\/Family Size Combined CalWORKs Granta Plus Food Stamp Benefit Maximum Hours Per Week at Minimum Wageb Weekly Hours Left to Fill Participation Mandatec High-Cost Counties 2 persons $740 25 7 3 persons 915 31 1 4 persons 1,079 37 None 5 persons 1,222 42 None Low-Cost Counties 2 persons $725 24 8 3 persons 897 30 2 4 persons 1,058 36 None 5 persons 1,198 41 None a Maximum grant levels effective October 1, 2001. b Minimum wage of $6.75 effective January 1, 2002. c Assumes 32-hour per week participation mandate for single parents. The Role of Community Service. We believe community service is an important component of the CalWORKs participation mandate, as it pro- C – 198 Health and Social Services 2001-02 Analysis vides recipients an opportunity to gain valuable work experience prior to reaching their lifetime limit on cash assistance. This is especially true for recipients with limited or no work experience during their first 18 to 24 months on aid. However, we have identified two concerns with how cur- rent policy affects recipients who are working at least 20 hours when they reach their services time limit. Current Policy Raises Cost-Effectiveness Concerns. Current law pre- cludes counties from permitting working recipients to complete their par- ticipation mandate with education or training once they reach their ser- vices time limit (18 to 24 months). Thus, for example, after reaching the employment services time limit, a participant who was working for 20 hours and taking vocational education classes for the remaining 12 hours of his\/her 32-hour participation mandate would instead be required to participate in community service activities for those 12 hours. Substi- tuting a community service assignment for the employment services may be counter-productive to that participant ultimately reaching self-suffi- ciency. This may be true, for example, in cases where a working recipient is diverted from a successful education or training program to commu- nity service. To the extent this policy results in some CalWORKs recipi- ents staying on assistance longer than they otherwise would, it may re- sult in long-term costs that could be avoided. Additionally, while not providing employment services to such re- cipients results in savings, there are offsetting costs involved in provid- ing community service activities. Indeed, the costs involved in arranging transportation and child care for limited-hour community service activi- ties may outweigh the public benefit associated with those activities. Current Policy Raises Equity Concern. Under current law, some work- ing and nonworking families are treated differently upon reaching their employment services time limit. After participating in community ser- vice for the maximum number of hours allowed by FLSA, certain small nonworking families can receive education or training services. Con- versely, working families cannot receive such services to fulfill their par- ticipation mandate. Instead, they are required to meet their mandate with additional hours of community service. This creates a perverse incentive by rewarding small nonworking families with the opportunity to re- ceive education and training in addition to their community activities, while preventing working families from receiving such services. Analyst’s Recommendation. Given the 60-month lifetime limit on cash assistance, we believe imposing a time limit on employment services may be necessary to move recipients into full-time work and, therefore, closer to self-sufficiency, as quickly as possible. As discussed above, however, the current policy raises several concerns for working recipients. Department of Social Services CalWORKs Program C – 199 Legislative Analyst’s Office For working recipients who reach their employment services time limit, we believe that counties are in the best position to judge what mix- ture of employment, education or training, or community service is most likely to result in long-term self-sufficiency. Current policy, however, limits counties’ flexibility to provide the services they deem most appropriate. We believe it makes more sense to give counties the option to provide employment services so long as a participant is working at least 20 hours a week. By requiring 20 hours of unsubsidized employment, this approach would be consistent with the CalWORKs policy to move recipients into full-time work as quickly as possible. This approach would also mean that participants who go to work full-time after signing their plan, and do not receive any employment services during their first 18 to 24 months on aid, would not be forfeiting their opportunity to meet the balance of their participation mandate with employment services if needed in the future. C – 200 Health and Social Services 2001-02 Analysis FOSTER CARE Foster care is an open-ended entitlement program funded by federal, state, and local governments. Children are eligible for foster care grants if they are living with a foster care provider under a court order or a voluntary agreement between the child’s parent and a county welfare department. The California Department of Social Services (DSS) provides oversight for the county-administered foster care system. County welfare departments make decisions regarding the health and safety of children and have the discretion to place a child in one of the following: (1) a foster family home (FFH), (2) a foster family agency (FFA) home, or (3) a group home. The 2001-02 Governor’s Budget proposes expenditures totaling $1.6 bil- lion from all funds for foster care payments. This is an increase of $92 mil- lion, or 6 percent, over estimated current-year expenditures. The budget pro- poses $413 million from the General Fund for 2001-02, which is an increase of $25 million, or 7 percent, compared to 2000-01. Most of this increase is due to the proposed foster care cost-of-living-adjustment (COLA). The caseload in 2001-02 is estimated to be approximately 78,000, a decrease of 4 percent compared to the current year. Most of this decrease is due to child exits from foster care to the Kinship Guardianship Assistance Program, which is part of the California Work Opportunity and Responsibility to Kids program. FOSTER CARE LENGTH OF STAY Federal and state government policies generally view foster care as a temporary, not long-term, solution when children are removed from an abusive or neglectful home. Generally, the longer a child spends in foster care, the less time he or she spends in a permanent living arrangement. Our review indicates that (1) children stay longer in foster family agencies (FFAs) than other placement arrangements and (2) emotional and\/or behavioral differences of FFA children do not explain the longer stay. We recommend enactment of legislation to pilot test a change in FFA rates intended to provide an incentive to accelerate FFA reunification and adoption efforts. Foster Care C – 201 Legislative Analyst’s Office Permanency for Foster Youth Federal Direction. In recent years, there has been an increased em- phasis by both the state and federal governments to reduce the length of time children spend in foster care. This trend toward reducing the length of stay reflects concern about the dramatic growth in the number of chil- dren in foster care and their need for permanent, stable families. Pursu- ant to the Federal Adoption and Safe Families Act of 1997 (PL 105-89), California is required to file a petition to terminate parental rights on behalf of children who have been in foster care for 15 out of the most recent 22 months. Under this policy, the longer a child is in foster care, the less likely it is that he or she will be reunified with his or her family of origin. The goal of this policy is to ensure that children do not drift into foster care, but rather are moved to a permanent, stable setting. This could be reunification with the family of origin or an adoptive family. Caseload and Costs Grow When Children Remain in Foster Care. The length of time youth spend in foster care affects government by in- creasing (1) the foster care caseload, (2) county workloads, and (3) total costs. From 1989 through 1999, the foster care caseload increased almost 70 percent. A portion of this growth was due to an increasing number of children entering foster care. A majority of the increase, however, was due to children remaining longer in foster care. Increases in the foster care caseload affect local government by in- creasing the administrative and clinical workload of county workers. Workload increases result in costs to all levels of government. Foster care costs are shared by the federal, state, and local governments. Approxi- mately 50 percent of costs are paid by the federal government. The re- maining nonfederal costs are shared 40 percent by the state and 60 per- cent by the counties. The 2001-02 Governor’s Budget proposes expendi- tures totaling $1.6 billion from all funds for foster care payments. Children Remain in FFA Placements Twice as Long as Other Placements Range of Foster Care Placements. Following the investigation of child abuse or neglect, county welfare departments make decisions regarding the health and safety of children and have the discretion to place a child in one of three settings. These are: (1) a FFH (which costs $405 to $569 monthly plus specialized care increments for children needing special support services); (2) a FFA home (which costs $1,467 to $1,730 monthly); or (3) a group home (which costs $1,352 to $5,732 monthly). The FFHs must be located in the residence of the foster parent(s), provide services to no more than six children, and be licensed by DSS. The FFAs, created as an alternative to group homes, are nonprofit organizations that recruit foster C – 202 Health and Social Services 2001-02 Analysis parents, certify them for participation in the program, and provide training and support services. Group homes may vary from small, family-like homes to larger institutional facilities and generally serve children with greater emo- tional or behavioral problems who require a more restrictive environment. In theory, the respective foster care rates were designed to reflect the needs of children. Those placed in FFHs have the fewest needs for ser- vices and support, while children placed in group homes are the most in need of intensive services and supervision. The FFAs, positioned between FFHs and group homes, were created to provide intensive treatment to youth who might have otherwise been placed in a group home. Comparing Length of Stay. Length of stay is a key performance mea- sure of the foster care system. It shows how well the goal of permanence for children has been met. Figure 1 shows the median time in foster care for children who entered the system between 1993 and 1999, by place- ment type. As shown in the figure, those children for whom a FFA home was their primary placement stayed in care for almost two years, or twice as long as youth in nonrelative FFHs. As discussed above, increased time spent in foster care is generally considered undesirable, as children are less likely to be reunified with their family of origin or adopted. Do Youth Characteristics Explain Differences in Foster Care Length of Stay? Longer stays in FFA homes might be justified if research indi- cated that the children in FFAs need more services prior to reunification or adoption than do children in FFHs. However, available research does not demonstrate such differences. In a report recently released by DSS, few differences between FFH and FFA youth populations were identi- fied. County child welfare administrators surveyed in this report gener- ally indicated that (1) behavioral issues, (2) mental health diagnoses, and (3) need for reunification services were similarly important factors in the placement of foster youth in either a FFH or FFA. We note that a legisla- tively mandated study is currently underway to evaluate county place- ment patterns, child outcomes, and oversight of FFHs and FFAs. The FFA Placements Are the Fastest Growing Component of Foster Care From 1989 through 1998, the number of children placed in FFAs in- creased tenfold, from 2 percent to approximately 23 percent of the total foster care population, while the proportion of FFH placements declined slightly. This trend has been accompanied by the longer length of stay for children in FFA placements. Below, we discuss how (1) the growth in FFA placements has been driven largely by a shortage in FFH slots, not children’s need for FFA services; and (2) the FFA rate structure may pro- vide an incentive to keep children in foster care longer. Foster Care C – 203 Legislative Analyst’s Office Figure 1 Comparing Length of Staya in Foster Family Homes And Foster Family Agency Homes 1993 Through 1999 Child Entries 0.5 1.0 1.5 2.0 2.5 Nonrelative Foster Family Home Foster Family Agency Home Years a Based on data from University of California Child Welfare Research Center. What Caused the Growth in FFA Placements? Local child welfare and probation officers have indicated during our field visits that counties frequently use FFA placements for children who, according to the county’s assessment, would be more appropriately placed in a FFH if such facili- ties were available. This finding was recently confirmed by a DSS survey of county child welfare departments, discussed above. In this survey, over 40 counties cited a lack of FFH resources as a primary reason for FFA placement. The FFA Rates May Create Fiscal Incentive to Increase Time in Foster Care. The FFA rate is more than three times the rate paid to FFHs, as shown in Figure 2 (see next page). In theory, the higher rates paid to FFAs reflect (1) their function as alternatives to more expensive group homes and (2) the cost of services and support for children with greater emo- tional or behavioral issues than those children in FFHs. However, as dis- cussed above, available research does not show such differences be- tween children in FFHs and FFAs. We believe that the FFA rate, in- cluding about $900 per child, per month for services and administra- tion, potentially creates a fiscal incentive for FFAs to keep children in foster care longer. C – 204 Health and Social Services 2001-02 Analysis Figure 2 Comparison of Foster Family Home and Foster Family Agency Rates Foster Family Agency Rate Age of Child FFH Rate Paid to Family Treatment and Administration Total Difference From FFH Home Rate 0 to 4 $405 $595 $872 $1,467 $1,062 5 to 8 441 629 895 1,524 1,083 9 to 11 471 657 913 1,570 1,099 12 to 14 521 708 947 1,655 1,134 15 to 18 569 753 977 1,730 1,161 Reducing Children’s Time in FFA Placements As described above, children stay longer in FFAs than other place- ments, and these longer stays do not appear to be related to the needs of the FFA children. Given that FFAs cost more than FFHs, we discuss an approach to decreasing the length of time children spend in FFA homes by changing the FFA payment structure. Adjusting FFA Treatment Rates. One adjustment that would provide incentives for FFAs to accelerate reunification and adoption efforts would be to gradually decrease the amount paid to FFAs for services and ad- ministration. While the rate paid to the FFA foster family would remain the same over time, the portion of the rate paid to the FFA organization for services and administration would decrease the longer a child remained in care. For example, the monthly services and administration compo- nent per child could be reduced by one-quarter (between approximately $220 and $250), incrementally, after each six-month period. Figure 3 shows an example of this incremental reduction in the treatment rate. Under this example, treatment and administrative costs would be funded at the full rate for the first six months a child is in placement. The funding would continue, at a reduced rate, for up to two years while a child remains in care. A similar step down of the treatment and administration component would be applied to all of the age-adjusted rates. (We note that many of the youth in FFAs are either reunified with their family of origin or adopted before two years has passed.) This tapering of the treatment and administration compo- nent of the rates could create an incentive system by encouraging FFAs to move children toward reunification or adoption more quickly. However, a decrease in rates could reduce the number of participating FFAs. Foster Care C – 205 Legislative Analyst’s Office Figure 3 Example of Incremental Foster Family Agency Rate Reduction Child 5 to 8 Years of Age Foster Family Agency Rate Time in Placement Paid to Family Treatment and Administration Total 0-6 months $629 $895 $1,524 7-12 months 629 671 1,300 13-18 months 629 447 1,076 19-24 months 629 223 852 over 24 months 629 \u2014 629 Analyst’s Recommendations. We recommend enactment of legisla- tion to conduct a three-year pilot project whereby FFA treatment rates would incrementally decrease over time. Specifically, the treatment and administration component of the rate would decrease by one-quarter ev- ery six months, reaching zero after two years. The pilot would help iden- tify how changes in the rates impact (1) time spent in FFAs and (2) the supply of foster care slots in up to three California counties. We further recommend that DSS conduct a study to evaluate the results of the pilot. Finally, in order to encourage participation, we recommend providing modest fiscal incentives to pilot counties to offset potential associated administrative costs. Such incentives could be in the form of block grants. The grants could be based on the county share of FFA costs. OTHER ISSUES Office of the Ombudsman for Foster Care The budget proposes to convert four Foster Care Ombudsman positions from temporary to permanent, even though the department has not documented the permanent workload. We recommend retaining these positions as two-year limited term until the department can substantiate the ongoing workload. Pursuant to Chapter 311, Statutes of 1998 (SB 933, McPherson), DSS established the Office of the Ombudsman for Foster Care to assist foster youth in resolving concerns related to their placement, care, or services. The office provides a toll-free phone service that is available 24 hours a C – 206 Health and Social Services 2001-02 Analysis day, seven days a week. In addition, the office (1) conducts investigations, (2) resolves complaints, and (3) provides outreach to foster youth. The 2001-02 Governor’s Budget proposes the conversion of four foster care ombudsman positions from temporary to permanent. However, the proposal fails to document the level of the ongoing workload. (The origi- nal justification for these positions was based on 1995-96 caseload data from the Michigan Children’s Ombudsman Office.) Accordingly, we rec- ommend retaining the positions as limited term until the department substantiates the ongoing workload. Budget Underestimates Foster Care COLA The cost of providing the statutory cost-of-living-adjustment to the foster family homes, foster family agencies, group homes, and related programs will be $2.4 million above the amount included in the budget due to an upward revision in the California Necessities Index. These costs should be reflected in the May Revision of the budget. The budget proposes to provide the statutory COLA to FFHs, FFAs, group homes, and related programs effective July 1, 2001. The COLA is based on the change in the California Necessities Index (CNI) from De- cember 1999 to December 2000. The budget, which is prepared prior to the release of the December CNI figures, estimates that the CNI will be 4.85 percent, based on partial-year data. Based on a CNI of 4.85 percent, the Governor’s budget includes $69.3 million ($18.7 million General Fund) for these foster care COLAs. Our review of the final data, however, indicates that the CNI will be 5.31 percent. Based on an actual CNI of 5.31 percent, we estimate that the cost of providing the foster care COLA will be $77.3 million ($21.1 million General Fund). The administration should address this $2.4 mil- lion General Fund cost in the May Revision of the budget. Food Stamps Program C – 207 Legislative Analyst’s Office FOOD STAMPS PROGRAM The Food Stamps Program provides food stamps to low-income per- sons. With the exception of the state-only food assistance program (discussed below), the cost of the food stamp coupons is borne by the federal govern- ment ($1.4 billion). Administrative costs are shared between the federal gov- ernment (50 percent), the state (35 percent), and the counties (15 percent). CALIFORNIA FOOD ASSISTANCE PROGRAM Federal Restrictions on Benefits for Noncitizens. With respect to non- citizens, current federal law generally limits food stamp benefits to legal noncitizens who immigrated to the U.S. prior to August 1996, and are under the age of 18 or were at least 65 years old as of August 1996. State Program for Noncitizens. Created in 1997, the California Food Assistance Program (CFAP) provides state-only funded food stamp ben- efits to (1) pre-August 1996 legal immigrants who are ineligible for fed- eral benefits (generally individuals age 18 through 64), and (2) a very limited number of post-August 1996 legal immigrants whose sponsors are dead, disabled, or abusive. The CFAP purchases food stamp coupons from the federal government and distributes them to eligible recipients. Adult recipients are subject to a specified work requirement. Chapter 147, Statutes of 1999 (AB 1111, Aroner), expanded eligibility, from October 1999 through September 2000, to legal immigrants who would be eligible for food stamps but for the fact they arrived after Au- gust 1996. Chapter 108, Statutes of 2000 (AB 2876, Aroner), extended the period of eligibility for these immigrants through September 30, 2001. The average monthly caseload for this expanded population is estimated to be 8,000 in the budget year. Budget Proposal. For 2001-02, the average monthly caseload for CFAP is estimated to be 71,000 persons. The budget proposes an appropriation of $37 million from the General Fund for coupon purchases and an addi- tional $15 million for administration in 2001-02. This is a decrease of $8 mil- lion from estimated expenditures in 2000-01, mostly attributable to nearly C – 208 Health and Social Services 2001-02 Analysis all of the post-1996 immigrants on CFAP losing their eligibility effective October 1, 2001, pursuant to current law. We note that $35 million of the proposed expenditures for 2001-02 counts towards meeting the federal maintenance-of-effort (MOE) require- ment for the California Work Opportunity and Responsibility to Kids (CalWORKs) program. We also note that the cost of extending eligibility for the approximately 8,000 post-August 1996 immigrants added tempo- rarily by Chapter 147 would be approximately $5 million in 2001-02 (Oc- tober 2001 through June 2002) and $6 million annually thereafter. RECENT FEDERAL CHANGES CREATE OPTIONS The 2001 Agriculture Appropriations Act and new federal regulations together mandate several changes to the Food Stamp Program, while also providing California significant options to expand food stamp benefits for working families. We recommend that the department report at budget hearings on cost estimates for these changes and potential expansions. Background. The Federal Food Stamp Program is administered by the U.S. Department of Agriculture’s (USDA) Food and Nutrition Ser- vice. Issued as coupons, food stamps are designed to assist low-income households in purchasing the food needed to maintain adequate nutri- tional levels. To receive benefits, households must meet income and re- source eligibility standards. However, CalWORKs recipients are automati- cally eligible for food stamps. Recent Federal Changes. The Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act for federal fiscal year 2001 (PL 106-387), hereafter referred to as the 2001 Agriculture Appropriations Act, provides states with several options to implement new eligibility rules and administrative procedures. Addition- ally, on November 21, 2000, USDA issued new regulations which provide states further options. The new regulations also mandate several eligibil- ity and procedural changes, with various implementation dates. Below we discuss some of the most significant changes and options for Califor- nia. We note that because the federal changes took place after the Governor’s budget was prepared, the budget does not include current- or budget-year costs for any of the changes. The Vehicle Asset Test Eligibility for the Food Stamps Program is based on a number of fac- tors, including the value of a household’s assets. Generally, assets include such things as checking and savings accounts, investments, and vehicles. Food Stamps Program C – 209 Legislative Analyst’s Office When determining eligibility, a household’s assets are added together and counted against a specified resource limit. For most households, the re- source limit is $2,000. The current rules for valuing vehicles as part of a household’s assets are complex. Figure 1 illustrates the three different tests which are used to determine the value of a household’s vehicles. Figure 1 Vehicle Asset Tests\u2014Food Stamps Program Specified Use Exemption\ufffd\ufffd Vehicles used for certain purposes, such as transporting a physically disabled household member or producing income (such as through a delivery service), are exempt from the resource test. Fair Market Value Test\ufffd\ufffd A vehicle’s fair market value in excess of $4,650 is counted toward the resource limit. Equity Test\ufffd\ufffd The amount that a household owes on a vehicle is subtracted from its fair market value to determine the vehicle’s equity value, which then would be counted toward the resource limit. Current Regulation. Currently, a household’s nonexempt vehicles are subject to the following tests. Any vehicle used to go to work, training, or education, plus one vehicle per household, is subject only to the fair mar- ket value test. Any remaining vehicles are subject to a dual test: the fair market value test and the equity test. The higher result of this dual test is then counted toward the resource limit. As a practical matter, households with vehicles subject to the dual test will only be eligible for food stamps if (1) the household has little equity in the vehicles and (2) their fair market value is well under $6,650 (the $4,650 exclusion plus the $2,000 resource limit). New Regulations. The new regulations change the current rules in two important ways, with the result of exempting more vehicles com- pletely and excluding more vehicles from the dual test. First, vehicles that could be sold for no more than $1,500 are exempted altogether from C – 210 Health and Social Services 2001-02 Analysis the resource test. This means, for example, that vehicles in need of significant repairs might be exempt. Second, one vehicle per adult, rather than one per household, is exempted from the equity test and subject only to the fair mar- ket value test. Any remaining vehicles are subject to the dual test. By exempting more vehicles completely and excluding more vehicles from the dual test, the new regulations make it somewhat easier for mul- tiple-vehicle households to receive food stamps. However, the fair mar- ket value for all nonexempt cars must still be well under $6,650 to avoid hitting the $2,000 cumulative resource limit. According to federal regulations, these changes must be implemented by June 1, 2001 for new cases. Current cases will be affected by the changes when they are recertified for food stamp eligibility (usually once every 12 months). We note that recent action by the new federal administration may delay this requirement until August 1, 2001. Fiscal Impact. By making more households eligible for food stamps, the new regulations will result in additional federal food stamp benefits to California families, as well as additional state administrative costs as- sociated with higher food stamp caseloads. The regulations will also re- sult in higher caseloads in both CFAP and the CalWORKs program, since state law conforms the asset rules in these programs to the federal food stamp rules. California will bear the entire CFAP cost increase, while costs to CalWORKs will be paid with available Temporary Assistance for Needy Families (TANF) and state MOE funds. The changes will result in one month of costs in the current year (for June 2001), and full-year costs in the budget year and thereafter. Because there is limited data on the value of recipient households’ vehicles, it is difficult to estimate how many households will be affected by the changes. At the time this analysis was prepared, the department had not prepared specific cost estimates for this change. However, the department has developed an estimate that can serve as an upper bound limit for the purposes of projecting the cost of the new regula- tions. Based on that estimate, total current-year state and county costs associ- ated with the regulatory changes are estimated to be less than $500,000. Bud- get-year costs are estimated to be up to $35 million ($34 million for CalWORKs grants and administration, and $1 million for food stamps administration). The Alternative Vehicle Allowance The 2001 Agriculture Appropriations Act gives states the option of conforming the food stamp vehicle rules to their TANF vehicle rules, even if by doing so this would make more families eligible for food stamps. Under this option, states could make their TANF vehicle rules more gen- Food Stamps Program C – 211 Legislative Analyst’s Office erous than current food stamp rules, and apply the more generous rules to all food stamp recipients, including those not receiving cash assistance. States may implement the alternative vehicle allowance any time after July 1, 2001. We note that over half the states have already adopted TANF rules that are more generous than the food stamp rules. California, by contrast, has linked the CalWORKs rules to the food stamp rules. Options for California. There are three approaches the Legislature could adopt for vehicle allowances. The first approach is to simply retain current CalWORKs and food stamp vehicle rules. As noted below, one advantage of this approach is that it would result in no additional state or county costs. The second approach is to increase the CalWORKs fair market value exclusion for vehicles (currently $4,650). Finally, the third ap- proach is to exempt one or more vehicles entirely from the resource test, regardless of how the vehicle is used. Both the second and third approaches would result in additional state and county costs, as discussed below. There are two primary advantages to both the second and third ap- proaches. First, both would decrease the administrative costs associated with complicated vehicle valuations. Second, both approaches would enable more working poor families with vehicles to receive food stamp benefits and still keep their vehicles to look for a job or get to work. In areas with poor public transportation systems, reliable vehicles often are a critical component in the transition from welfare to work, as they pro- vide recipients greater access to jobs in outlying areas and may make it easier to retain employment. Allowing CalWORKs families to keep or invest in a reliable vehicle may therefore help more recipients become self-sufficient for the long term. We note that when the Food Stamps Act of 1977 established the fair market value test for vehicles, $4,000 was considered to be the value of a modest, reliable vehicle; anything in excess of $4,000, therefore, was to be counted towards the household’s asset limit. Since 1977, the limit has been adjusted just once, to $4,650. Had that figure kept pace with infla- tion, it would be $12,850 today. The primary disadvantage of the second and third approaches is the increased public costs associated with potentially higher CalWORKs and food stamp caseloads. Fiscal Impact. The most significant impact of the second or third ap- proach would be the federal cost of providing additional food stamp ben- efits for California families. The second largest cost would be in the CalWORKs program, and would be paid for with available TANF and state MOE funds. Adopting the second or third approach would also re- sult in additional food stamp administrative costs, as well as increased CFAP costs, since CFAP rules conform to the food stamp rules. To the C – 212 Health and Social Services 2001-02 Analysis extent modifying the vehicle rules simplifies the resource calculation for all three programs, there may be partially offsetting administrative sav- ings associated with such a change. Of the three courses of action discussed above, the third, eliminating one or more vehicles from the asset test, would result in the greatest costs (which would be partially offset by the greatest amount of administra- tive savings). The department has estimated that the costs of exempting one vehicle would be $35 million (including $34 million for CalWORKs, $1 million for food stamps, and unknown but modest costs for CFAP). The second option, raising the fair market value test limit, would result in lower, though unknown costs. The Transitional Benefit Alternative The November 21, 2000 regulations give California the option of con- tinuing food stamp benefits to former CalWORKs recipients for up to three months after they leave cash assistance. Under this option, house- holds would receive the same level of food stamps they received just prior to leaving CalWORKs (or, if the household would lose income as a result of leaving CalWORKs and would therefore qualify for a higher benefit level, the benefits would be frozen at the higher level). Families leaving CalWORKs because of program violations would not be eligible for the transitional benefits. The purpose of the transitional benefit allowance is to provide auto- matic assistance to families during the transition period from welfare to work, thereby increasing income stability and decreasing the likelihood of returning to cash assistance. The transitional benefits would affect three types of households. The first type are households that would remain eligible for food stamps after leaving CalWORKs, but would not apply for them. The second type are households that would otherwise be in- come ineligible for food stamps when they leave CalWORKs. Finally, the third type are households that are already receiving food stamps after leaving CalWORKs. The only impact on these households would be a reduction in their reporting requirements for the transitional period. Based on rough estimates of the percentage of CalWORKs leavers who are income ineligible for food stamps and the percentage of eligible households who do not receive benefits, we estimate that up to 75 percent of those transitioning off CalWORKs would benefit from this option. Fiscal Impact. Adopting the transitional benefit option would result in additional federal food stamp benefits to California families, as well as some administrative costs for both the state and counties. Additionally, to the extent that the transitional benefits would also be offered to transitioning CalWORKs recipients who received CFAP, the state would Food Stamps Program C – 213 Legislative Analyst’s Office incur benefit and administrative costs in CFAP. However, these costs are likely to be small, as the total CFAP-eligible CalWORKs caseload is ap- proximately 2,000. At the time this analysis was prepared, the department had not estimated the state and county costs of providing this option. Analyst’s Recommendation We recommend that the department report at budget hearings on cur- rent- and budget-year cost estimates for the mandated vehicle asset rule changes, and, to the extent possible, more precise cost estimates for the alter- native vehicle allowance and the transitional benefit allowance options. ELECTRONIC BENEFITS TRANSFER Delays May Result in Federal Penalty We recommend that the Department of Social Services report at budget hearings on the potential federal penalties if the state is unable to implement the food stamp Electronic Benefits Transfer system by October 2002. The federal welfare reform legislation enacted in 1996 required all states to implement Electronic Benefits Transfer (EBT) systems for food stamps by October 1, 2002. An EBT system uses debit-card technology and retailer terminals to automate benefit authorizations, delivery, re- demption, and financial settlement. Chapter 329, Statutes of 1998 (AB 2779, Aroner) required that the Health and Human Services Agency Data Cen- ter (HHSDC) provide the project management for the state’s implemen- tation of EBT technology for the Food Stamps and California Work Op- portunity and Responsibility to Kids programs. Procurement Has Taken Longer Than Expected. In October 1999, HHSDC began to procure contract services for the EBT system. The pro- curement was delayed, and the contract is now expected to be awarded in June 2001. Because the contract has not been finalized, HHSDC has not provided any information concerning project development and roll out. We note that based on prior schedules, current known delays suggest the system will not be completed until after the federal deadline. Department of Social Services (DSS) Should Report on Penalty Pro- visions. Since full statewide implementation is now expected some time after the federal deadline, the state may incur a federal penalty. For this reason, we recommend that DSS report at budget hearings on (1) the po- tential amount of the penalty and how it is determined, and (2) the steps DSS is taking to mitigate a potential penalty. C – 214 Health and Social Services 2001-02 Analysis SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $2.9 billion from the General Fund for the state’s share of SSI\/SSP in 2001-02. This is an in- crease of $244 million, or 9.3 percent, over estimated current-year expen- ditures. This increase is due primarily to the full-year cost of grant in- creases provided in the current year, caseload growth, the cost-of-living adjustment (COLA) to be provided in January 2002, and an increase in the federal administrative fee. In December 2000, there were 333,259 aged, 21,762 blind, and 723,958 disabled SSI\/SSP recipients. In addition to these federally eligible recipi- ents, the state-only Cash Assistance Program for Immigrants (CAPI) is estimated to provide benefits to about 12,000 legal immigrants in Decem- ber 2000. Budget Underestimates Cost of Providing Statutory COLA The General Fund cost of providing the statutory Supplemental Security Income\/State Supplementary Program cost-of-living adjustment will be $7.7 million above the budget estimate due to an upward revision in the California Necessities Index. These costs should be reflected in the May Revision of the budget. Background. Pursuant to current law, the Governor’s budget proposes to provide a statutory COLA in January 2002. The state COLA is based on the California Necessities Index (CNI) and is applied to the combined SSI\/SSP grant. It is funded by both the federal and state governments. The federal portion is the federal COLA (based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W) that is applied annually to the SSI portion of the grant. The remaining amount Supplemental Security Income\/State Supplementary Program C – 215 Legislative Analyst’s Office needed to cover the state COLA is funded with state monies. Based on its assumptions concerning both the CNI and CPI-W, the budget includes $156.4 million for providing the statutory COLA for six months, effective January 2002. The CNI Revised. The January 2002 COLA is based on the change in the CNI from December 1999 to December 2000. The Governor’s budget, which is prepared prior to the release of the December CNI figures, estimates that the CNI will be 4.85 percent, based on partial data. Our review of the actual data, however, indicates that the CNI will be 5.31 percent. The CPI Overestimated. The January 2002 federal SSI COLA will be based on the change in the CPI-W from the third quarter (July to Septem- ber) of calendar 2000 to the third quarter of calendar 2001. The Governor’s budget estimates that the change in the CPI-W for this period will be 2.1 percent. Based on our review of the consensus economic forecasts for 2001, we estimate that the CPI-W will be 2.4 percent. This increase in the CPI-W (compared to the Governor’s budget) reduces the state cost of providing the statutory COLA because it effectively increases federal fi- nancial participation toward the cost of the state COLA, which is applied to the entire grant. Cost of Providing COLA Is Underestimated. Taken together, the changes in CNI and CPI-W (in relation to the Governor’s budget) in- crease the General Fund cost of providing the statutory COLA by ap- proximately $7.7 million. The administration should address this issue in the May Revision of the budget. Supplemental Security Income\/ State Supplementary Program Grant Levels Figure 1 (see next page) shows SSI\/SSP grants on January 1, 2002 for both individuals and couples as displayed in the Governor’s budget and adjusted to reflect the actual CNI and our estimate of the CPI-W. As the figure indicates, grants for individuals will increase by $38 to a total of $750 per month, and grants for couples will increase by $67 to a total of $1,332 per month. As a point of reference, we note that the federal pov- erty guideline for 2000 is $696 per month for an individual and $938 per month for a couple. Thus, the grant for an individual would be 7.8 per- cent above the 2000 poverty guideline and the grant for a couple would be 42 percent above the guideline. (We note that the poverty guidelines are adjusted for inflation annually.) C – 216 Health and Social Services 2001-02 Analysis Figure 1 SSI\/SSP Maximum Monthly Grants Governor’s Budget and LAO Projections January 2001 and January 2002 January 2002 LAO Projection Change From 2001 Recipient Category January 2001 Governor’s Budget LAO Projectiona Amount Percent Individuals SSI $530 $541 $543 $13 2.5% SSP 182 206 207 25 13.7 Totals $712 $747 $750 $38 5.3% Couples SSI $796 $812 $815 $19 2.4% SSP 469 514 517 48 10.2 Totals $1,265 $1,326 $1,332 $67 5.3% a Based on actual California Necessities Index increase (5.31 percent) and projected U.S. Consumer Price Index increase (2.4 percent). Certain Legal Immigrants Face Benefit Termination California established the Cash Assistance Program for Immigrants (CAPI) to provide state-only funded Supplemental Security Income\/State Supplementary Program benefits to certain legal immigrants who are federally ineligible for benefits because of their immigration status. The component of this program that provides benefits for post-August 1996 immigrants is scheduled to sunset on October 1, 2001. This will result in approximately 2,700 recent legal immigrants losing their benefits effective October 2001. We review the history of the CAPI and provide policy options for the Legislature. State-Only Program Established In Response to Federal Restrictions. With respect to legal noncitizens, current federal law generally limits SSI\/ SSP benefits to noncitizens who were (1) on aid prior to August 1996 or (2) in the U.S. prior to August 1996 and who subsequently became dis- abled. In response to these federal restrictions, Chapter 329, Statutes of 1998 (AB 2779, Aroner) created CAPI. This program provided state-only funded SSI\/SSP benefits to aged immigrants who lived in the U.S. prior to August 1996 and a very limited number of post-August 1996 immi- grants whose sponsors were dead, disabled, or abusive. As enacted, this program was to sunset on July 1, 2000. Supplemental Security Income\/State Supplementary Program C – 217 Legislative Analyst’s Office Sunset Eliminated for Pre-August 1996 Immigrants; Temporary Pro- gram Created for Post-August 1996 Immigrants. Chapter 147, Statutes of 1999 (AB 1111, Aroner) eliminated the sunset for the then existing CAPI program that almost exclusively served pre-August 1996 immigrants. Chapter 147 also made immigrants arriving in the U.S. after August 1996 eligible for CAPI, however, such immigrants would be subject to a five- year deeming provision. Under this provision a sponsor’s income would be counted when determining an immigrant’s eligibility for a period of five years. This expansion for post-August 1996 immigrants was scheduled to sunset on September 30, 2000. Because of the deeming provision, the tem- porary expansion was assumed to have no cost. Chapter 108, Statutes of 2000 (AB 2876, Aroner) extended through September 2001 the temporary expansion of CAPI for post-August 1996 immigrants. The CAPI Serves More Post-August 1996 Immigrants Than Antici- pated. As noted above, it was believed that the five-year deeming provi- sion would prevent nearly all post-August 1996 immigrants from receiv- ing CAPI benefits. However, actual data from 2000-01 indicates this is not the case. As of October 2000, there were approximately 1,200 post- August 1996 immigrants receiving CAPI. About 60 percent of these im- migrants have no sponsor. With no sponsor to deem, these immigrants are eligible for CAPI. Most of the remaining 40 percent have sponsors whose income is too low to be deemed to the immigrant. The budget projects that by September 2001, there will be approximately 2,700 post- August 1996 immigrants receiving CAPI benefits. Pursuant to current law, these 2,700 legal noncitizens will lose their benefits when the ex- panded program sunsets on October 1, 2001. Proposed Budget. The Governor’s budget divides the CAPI budget into two components: (1) the base program which primarily serves pre- August 1996 immigrants and (2) the expanded program for post-Au- gust 1996 immigrants that sunsets on October 1, 2001. Figure 2 (see next page) shows the projected caseload and costs for the different compo- nents of the CAPI. For the base program, the Governor’s budget esti- mates that General Fund CAPI costs will be $81.3 million in 2000-01 and $92.9 million in 2001-02. Most of this increase is attributable to caseload growth and the January 2002 COLA. For the expanded program, the bud- get estimates costs will be $11.2 million in 2000-01 and $4.7 million in 2001-02. Nearly all of the reduction in costs between the current and budget years is attributable to the sunset of the expanded program on October 1, 2001. Options for the Legislature. The issue of whether to modify the sun- set of the expanded CAPI program is a policy decision for the Legisla- C – 218 Health and Social Services 2001-02 Analysis ture. To assist the Legislature in making this decision, we have estimated the fiscal impact of four different options. Figure 2 Cash Assistance Program for Immigrants Budget Proposal (Dollars in Thousands) Program\/Eligibility Category Sunset Estimated September 2001 Caseload Estimated Costs 2000-01 2001-02 Base Program Pre-August 1996 immigrants No 11,310 $80,886 $92,435 Post-August 1996 immigrants (sponsors are dead, disabled, or abusive) No 60 429 491 Expanded Program Post-August 1996 immigrants (no sponsor or very low income sponsor) October 2001 2,700 $11,162 $4,722 Totals 14,070 $92,477 $97,647 Retain Current Law. The Governor’s budget proposes to follow current law, whereby an estimated 2,700 legal noncitizens would lose their benefits effective October 1, 2001. This will result in a General Fund savings of $6.5 million in 2001-02 compared to the current year. Extend Sunset for Existing Recipients Only. As noted above, the Governor’s budget estimates that approximately 2,700 post-Au- gust 1996 immigrants will be receiving expanded CAPI benefits during September 2001. Extending the sunset for these recipients only would result in additional General Fund costs of approximately $17.3 million in 2001-02 compared to the Governor’s budget. Extend Sunset for Immigrants Who Effectively Have No Spon- sor. The $17.3 million figure noted above covers the cost of con- tinuing benefits to the 2,700 immigrants projected to be receiving benefits during September of 2001. The Department of Social Ser- vices (DSS) estimates that this caseload is growing by approxi- mately 100 per month. If the sunset were lifted for additional immigrants that either have no sponsor or whose sponsor has no income to deem, the General Fund cost would be approximately $20.4 million in 2001-02 compared to the Governor’s budget. This is Supplemental Security Income\/State Supplementary Program C – 219 Legislative Analyst’s Office an increase of $3.1 million in comparison to the second option dis- cussed above which does not assume any additional post-August 1996 immigrants are added to the program after September 2001. Extend the Sunset for All Post-August 1996 Immigrants. Extend- ing the program sunset for all post-August 1996 immigrants has substantial cost implications because the five-year deeming pro- vision would no longer prevent most sponsored post-August 1996 immigrants from becoming eligible for CAPI. The deeming pe- riod begins upon entry to the U.S. For example, a sponsored non- citizen who immigrated in October 1996 would no longer be sub- ject to five-year deeming in October 2001 and thus, would be eli- gible for CAPI. The DSS estimates that extending the program sunset for all post-August 1996 immigrants would result in addi- tional costs of approximately $55.5 million in 2001-02 compared to the Governor’s budget. These costs would escalate rapidly in subsequent years as more immigrants become eligible for CAPI each month. To partially control such costs, the Legislature could make CAPI eligibility contingent upon a recipient attempting to become a naturalized citizen. Once an immigrant becomes a citi- zen they would receive federally funded SSI\/SSP, resulting in significant net state savings. Summary. The sunset of the expanded CAPI will result in approxi- mately 2,700 legal immigrants losing their benefits on October 1, 2001. Above we have identified four options for consideration by the Legisla- ture for addressing this situation. C – 220 Health and Social Services 2001-02 Analysis IN-HOME SUPPORTIVE SERVICES The In-Home Supportive Services (IHSS) program provides various services to eligible aged, blind, and disabled persons who are unable to remain safely in their own homes without such assistance. An individual is eligible for IHSS if he or she lives in his or her own home\u2014or is capable of safely doing so if IHSS is provided\u2014and meets specific criteria related to eligibility for the Supplemental Security Income\/State Supplementary Program (SSI\/SSP). The IHSS program consists of two components: the Personal Care Services Program (PCSP) and the Residual IHSS program. Services pro- vided in the PCSP are federally reimbursable under the Medicaid pro- gram. The PCSP limits eligibility to categorically eligible Medi-Cal re- cipients (California Work Opportunity and Responsibility to Kids and SSI\/SSP recipients) who satisfy a disabling condition requirement. Per- sonal care services include activities such as: (1) assisting with the ad- ministration of medications; and (2) providing needed assistance with basic personal hygiene, eating, grooming, and toileting. The following cases are excluded from the PCSP and, therefore, receive services through the Residual IHSS program: cases with domestic services only, protective supervision tasks, spousal providers, parent providers of minor children, income eligibles (generally, recipients with income above a specified threshold), advance pay recipients (eligible for payments prior to the provision of services), and recipients covered by third party insurance. The budget proposes $843 million from the General Fund for the IHSS program, which is an increase of 13 percent over estimated current-year expenditures. This spending growth is primarily attributable to increases in the caseload and the minimum wage. Wage and Benefit Increases for Certain IHSS Workers Although budget trailer bill legislation\u2014Chapter 108, Statutes of 2000 (AB 2876, Aroner)\u2014authorized increased state participation in specified wage and benefit increases for In-Home Supportive Services providers working in counties that have established public authorities, the actual In-Home Supportive Services C – 221 Legislative Analyst’s Office wage increases provided by counties have been less than budgeted. We summarize the wage increases provided by this legislation and their potential fiscal impact. Background. Chapter 108 authorizes the state to pay 65 percent of the nonfederal cost of a series of wage increases for IHSS providers work- ing in counties that have established public authorities. The wage in- creases began with $1.75 per hour in 2000-01, potentially to be followed by additional increases of $1 per year, up to a maximum wage of $11.50 per hour. We note that state participation in wage increases after 2000-01 is contingent upon General Fund revenue growth exceeding a 5 percent threshold. Chapter 108 also authorizes state participation in health ben- efits worth up to 60 cents per hour worked. Revenue Triggers. Starting in 2001-02, state participation in the $1 hourly wage increases is contingent upon the state achieving General Fund revenue growth (excluding transfers) of 5 percent. For example, if Gen- eral Fund revenues (excluding transfers) in 2001-02 exceed General Fund revenues (excluding transfers) in 2000-01 by 5 percent, state participa- tion in a $1 wage increase is triggered in 2001-02. Similarly, if 5 percent growth is achieved in 2002-03, then participation in another $1 increase is triggered. As noted above, maximum state participation is capped at a wage of $11.50 per hour, plus 60 cents per hour for benefits. The statute also allows for a wage increase if the 5 percent revenue growth takes more than one year to accrue. For example, if revenue growth in 2001-02 was only 3 percent followed by an additional 3 percent growth in 2002-03, state participation in the $1 hourly wage increase would not occur in 2001-02 but would be triggered in 2002-03 (when cumulative revenue growth would exceed the 5 percent threshold). Wage Increases Less Than Budgeted in 2000-01. As noted above, Chap- ter 108 authorized state participation in wage increases of up to $1.75 in the current year (from the $5.75 per hour minimum wage in 2000 to $7.50 per hour). The 2000-01 Budget Act provided sufficient funds for all coun- ties that currently have public authorities to increase wages by $1.75. However, several counties did not increase wages by the full $1.75. This results in General Fund savings of $96 million compared to the amount appropriated for 2000-01. Outlook for 2001-02. For 2001-02, the Governor’s budget makes two important assumptions. First, it assumes that revenue growth will be 3.3 percent, so no further increase in state participation in wages is trig- gered in the budget year. Second, it assumes that some counties will have wages and benefits below the maximums for which the state would oth- erwise participate. If instead, all counties were to participate at the state authorized maximums, General Fund costs would be $41.1 million greater than budgeted. If at the May Revision revenue growth is projected to grow C – 222 Health and Social Services 2001-02 Analysis at least 5 percent and if all counties participated in the higher wage levels that would be triggered by higher revenues, General Fund costs would in- crease by about $70 million beyond the $41.1 million mentioned above. Budget Does Not Reflect Likely Savings The proposed budget does not reflect likely savings from (1) actual costs being lower than budgeted for certain current- and budget-year augmentations and (2) an expansion in Medi-Cal eligibility that should result in reduced costs in the In-Home Supportive Services (IHSS) program. Accordingly, we withhold recommendation on the savings of up to $5 million in the IHSS program. In addition to the wage and benefit increases for IHSS providers working in public authorities, the 2000-01 Budget Act also funded (1) a 3 percent wage increase for nonpublic authority IHSS workers and (2) a 10 percent increase in the contract rates for counties that contract with public and private agencies to administer IHSS. The combined General Fund support for these augmentations is $13.2 million in the current year and $16.9 million in 2001-02. As with the public authority wage increase discussed previously in this chapter, counties have not increased nonpublic authority wages or contract rates as much as was budgeted. Such savings, however, are not reflected in the budget. In addition, the budget does not reflect savings from a recent Medi- Cal policy change. Specifically, effective January 2001, Medi-Cal benefits, without a share of cost, were expanded for aged, blind, and disabled in- dividuals. This change will result in unknown net savings in IHSS. Because better information reflecting actual experience will be avail- able at the time of May Revision, we withhold recommendation on sav- ings of up to $5 million in the IHSS program. Child Welfare Services C – 223 Legislative Analyst’s Office CHILD WELFARE SERVICES California’s state-supervised, county-administered Child Welfare Ser- vices (CWS) program provides services to abused and neglected children, children in foster care, and their families. The CWS program provides (1) immediate social worker response to allegations of child abuse and neglect; (2) ongoing services to children and their families who have been identified as victims, or potential victims of abuse and neglect; and (3) ser- vices to children in foster care who have been temporarily or permanently removed from their family because of abuse or neglect. The 2001-02 Governor’s Budget proposes $1.9 billion ($633 million General Fund) for CWS and $1.6 billion ($413 million General Fund) for Foster Care. These represent increases of 3 percent (1 percent General Fund) and 6 percent (7 percent General Fund), respectively, from the current year. IMPROVING CWS THROUGH STRUCTURED DECISION MAKING Structured Decision Making (SDM) is a series of tools designed to aid child welfare workers in making critical child safety decisions. Research indicates that SDM improves child welfare outcomes, as compared to alternative approaches. Currently 14 California counties are using SDM and 10 additional counties are on the SDM waiting list. We recommend expansion of the program in the budget year and make several other recommendations to improve SDM implementation. (Increase Item 5180-151-0001 by $650,000.) Background Child abuse and neglect continues to be a serious problem in Califor- nia. In 1999, over 600,000 allegations of child abuse and\/or neglect were reported to county child protective services agencies. Approximately 400,000 of these reports were investigated; over 120,000 (30 percent) of those cases investigated were substantiated; and over 33,000 (28 percent) children who were victims of substantiated abuse or neglect were placed in foster care. In addition, a significant proportion of the families who C – 224 Health and Social Services 2001-02 Analysis were the subject of reports and substantiation of abuse or neglect had prior contact with child protective services agencies. What is SDM? California, like many other states, has used risk as- sessment to increase consistency and accuracy of CWS decisions. Struc- tured Decision Making is a series of research-based risk assessment tools designed to aid child welfare workers in making critical child safety deci- sions. This approach has been shown to be more accurate and consistent in classifying children and families according to risk than alternative ap- proaches. Key components of SDM are tools for determining (1) when to investigate abuse\/maltreatment allegations, (2) the degree of child safety at the time of investigation, (3) the risk of future child maltreatment, (4) the targeted services to be provided to families at the highest risk of reabuse, and (5) whether to remove a child to foster care. For example, the questionnaire used at the time of an in-person in- vestigation aids social workers in determining whether a child is in dan- ger of future abuse or neglect, whether a case should be opened, and how frequently services should be provided. As compared to some non-SDM assessments which may rely heavily on subjective criteria, most of these items tend to be objective, although some require the clinical judgement of the worker (see Figure 1). Figure 1 Examples of Family Risk Assessment Questions Item Answers Score (Circle to Indicate Score) Current complaint is for abuse No 0 Yes 1 Number of prior abuse investigations None 0 One 1 Two or more 2 Primary caretaker’s assessment of this incident Not applicable 0 Blames child 1 Justifies maltreatment of child 2 The resulting total score assigns families to risk categories according to the likelihood of future child abuse or neglect. A low score suggests a relatively low risk of reabuse, while a very high score implies a very high risk of further abuse. These classifications ( low, medium, high, and Child Welfare Services C – 225 Legislative Analyst’s Office very high ), assist workers in determining whether a case will be opened and what level of services will be provided to the family. For example, a case opened for a low-risk family may require only one monthly visit from a social worker, whereas a case in which a family is assessed to be at very high risk of future abuse or neglect may require four social worker visits in a month. Because no assessment tool correctly predicts outcomes all the time, each tool allows child welfare workers discretion to reassign risk to a higher classification than the tool may otherwise indicate. Structured Decision Making in California. Since the mid-1980s, the Children’s Research Center (CRC), a division of the National Council on Crime and Delinquency, has developed and implemented SDM in a num- ber of states, including New York, Michigan, Indiana, Georgia, New Mexico, Oklahoma, Wisconsin, Rhode Island, and Alaska. Structured Decision Making was implemented in California in 1999. Prior to imple- mentation, CRC and several California counties analyzed over 2,000 lo- cal child abuse and neglect cases. Based on this analysis, the CRC de- signed California’s assessment tools and then aided counties in imple- menting the program. In 2000-01, a total of 14 counties are using SDM on a voluntary basis: Alameda, Fresno, Humboldt, Kern, Los Angeles, Merced, Monterey, Or- ange, Sacramento, San Bernardino, San Luis Obispo, Santa Clara, Sutter, and Trinity. These counties have been using the SDM tools for an average of approximately one year. In Los Angeles and San Bernardino Counties, only one regional office each is using SDM. After adjusting for these two counties not using the SDM tools countywide, approximately 30 percent of California’s abuse and neglect reports are currently being investigated using the SDM approach. At this time, ten more counties have expressed an inter- est in using SDM: Del Norte, Marin, Placer, Riverside, Santa Barbara, Santa Cruz, Solano, Tulare, Yolo, and Yuba. However, due to a lack of funds for SDM in the current year, these counties have been unable to participate. Research Indicates SDM Improves Outcomes Research From Other States. Evaluations have concluded that SDM has significant value in predicting the likelihood of future abuse or ne- glect and that it improves child welfare outcomes. The most comprehen- sive evaluation of SDM was conducted by CRC in Michigan in 1995. In that study, 11 counties that were voluntarily using SDM were matched with 11 other counties in the state that were using other methods for managing CWS reports and caseloads. After two years, all cases handled in these counties were compared. Statistically significant differences were found in both administrative process outcomes and child\/family safety outcomes between the SDM C – 226 Health and Social Services 2001-02 Analysis counties and the comparison counties. The process findings indicated that services in SDM counties were being appropriately redirected from lower-risk cases to higher-risk cases, effectively shifting resources to the families where the likelihood of future maltreatment was highest. The study also concluded that SDM counties had significantly improved child\/ family outcomes in contrast to the comparison counties. For example, for families who had prior contact with child protective services, the SDM counties had lower rates of (1) reported repeat abuse and neglect, (2) sub- stantiations of abuse and neglect, (3) removal from the home, and (4) in- juries (See Figure 2). Figure 2 Michigan Evaluation Results Show SDM Reduces Adverse Child Welfare Outcomes Child\/Family Outcome Comparison Counties SDM Counties Reduction in Adverse Outcomes Reoccurrence of reports of abuse or neglect 20.4% 14.9% -5.5% Reoccurrence of substantiations of abuse or neglect 11.4 5.2 -6.2 Removal to foster care 5.7 3.4 -2.3 Child injury report 3.6 2.1 -1.9 Although both SDM and non-SDM counties had relatively few nega- tive outcomes, SDM counties had even lower rates of reported repeat abuse and neglect, substantiations, removals to foster care, and child in- juries. Because California has more than four times the number of chil- dren as Michigan, achieving these outcomes could improve the lives of thousands of California children and families. Another evaluation, by CRC in Wisconsin and published in 1998, af- firmed the findings of the Michigan study. In the Wisconsin study, child protective cases in three SDM counties were compared over a two-year period to determine (1) SDM’s effectiveness in classifying families accord- ing to risk and (2) the impact of providing intensive services to high- and very-high risk families. Results showed SDM classifications were effec- tive in helping set agency priorities and that more intensive interven- tions for high- and very-high risk cases improved outcomes significantly, reducing subsequent reporting of abuse. Child Welfare Services C – 227 Legislative Analyst’s Office A third study, conducted in Texas and published in 1997, was initi- ated to address SDM’s (1) value in predicting reabuse or neglect and (2) ease of transfer to a different ethnic\/cultural and geographic setting. This study concluded that many of SDM’s risk assessment items were valu- able in predicting future child maltreatment, could be transferred to a new geographic setting, and effectively applied to different ethnic groups. Structured Decision Making May Reduce Bias in CWS Decisions. Al- though national researchers have concluded that the true rate of child abuse and neglect is equal across racial and ethnic groups, certain groups are sig- nificantly over represented in California’s CWS system. For example, although African American children are only 7 percent of California’s child popula- tion, these children are 35 percent of the children in foster care. In addition, African American infants under one year of age are four to five times more likely to be removed to foster care than infants of other racial groups. While various factors may explain some of these differences, research indicates that some of these disparities may be due to bias at key decision points in child welfare cases. Although SDM and other research-based risk assessment tools were initially criticized as potentially further increasing the representation of children of color in the CWS system, process evaluations indicate that SDM reduces or eliminates this bias. In other words, children and families, regardless of race or ethnicity, are classified according to risk very similarly. Reducing the perception of bias is important because it is likely to (1) improve public confidence in the system and (2) improve confi- dence among the populations affected by the CWS system. California SDM Implementation Challenges While expansion of SDM could improve California’s child welfare outcomes, there are barriers to further expansion as well as implementa- tion issues. We discuss these problems below. The first two issues con- cern barriers to expansion, while the last issue concerns implementation. Budget Does Not Propose Funds For Expansion. Fourteen counties are currently using SDM and another ten counties have expressed inter- est in utilizing the SDM system. However, the 2001-02 Governor’s Budget does not propose expansion of SDM. The budget proposes the same level of funding in 2001-02 as in the current year, which is $324,000 ($81,000 General Fund). This amount reflects the costs for continuing the current contract with CRC for support and technical assistance to counties who have been using SDM. According to the Department of Social Services (DSS), the cost to expand the SDM contract in the budget year to the ten counties on the waiting list would be $1.3 million ($317,000 General Fund; $1 million federal funds). C – 228 Health and Social Services 2001-02 Analysis Current Technology Insufficient for Expansion. The Child Welfare Services\/Case Management System (CWS\/CMS) provides a statewide database, case management tools, and reporting system for the state’s CWS program. While the system is in operation in all 58 counties, changes and additions to the system are both costly and time-consuming. Accord- ing to DSS, the vendor for CWS\/CMS estimated that it would cost $2 mil- lion (all funds) to integrate the SDM tools into that system. Instead of pursuing this option, CRC wrote its own software program, within the cost of the current contract, to provide the SDM assessment tools on work- ers’ computers. While this solution has been effective for many of the counties currently using SDM, this software program has not been sufficient for large counties such as Los Angeles, and creates inefficient and redundant processes in some of the smaller counties. In order to solve these problems, CRC has proposed a technology solution that would allow for statewide expansion of SDM. The CRC estimates that this software program would cost approximately $500,000 ($125,000 General Fund). Structured Decision Making Tool Completion Rates Not Maximized. Because SDM assessments aid in case management and resource alloca- tion, it is important that the assessments are completed and the recom- mended service plans are followed. California is conducting a process evaluation of SDM to determine worker utilization of the SDM tools and family classification patterns. Preliminary results of this process evalua- tion indicate that while the Response Priority tool (used to determine timing of investigations) is completed almost 90 percent of the time by caseworkers, the remaining tools are being completed approximately 70 percent of the time. Although 70 percent shows a solid completion rate, there is room for improvement. More information is needed to determine what barriers may be hindering worker completion of assessment tools. Once barriers have been identified, solutions such as additional training or techni- cal assistance to counties could be used to maximize completion rates in SDM counties. Analyst’s Recommendations for Expanding SDM in California Research from other states indicates that SDM may improve outcomes in child welfare by decreasing repeated reports of abuse or neglect and admissions to foster care. Research also suggests that SDM may reduce bias at key decision points in CWS. Improving the CWS system in these ways could result in both fiscal savings to government and broader ben- efits to families. Below we make several recommendations to expand and improve SDM in California. Child Welfare Services C – 229 Legislative Analyst’s Office Expand SDM to Include Counties on Waiting List. As discussed ear- lier, the budget for the SDM project in 2001-02 is $324,000 ($81,000 Gen- eral Fund) to provide support services in the 14 counties that have been using SDM. Also, ten additional counties have expressed an interest in using SDM: Del Norte, Marin, Placer, Riverside, Santa Barbara, Santa Cruz, Solano, Tulare, Yolo, and Yuba. However, due to a lack of General Fund support, these counties have been unable to implement SDM. According to DSS, expansion of SDM to these counties would cost $1.3 million ($317,000 General Fund) in 2001-02. (These costs include one-time start- up activities that are not incurred by the 14 current counties.) This would pay for technical assistance to the additional counties by a contractor. The DSS also indicates that SDM expansion would require the addition of two state staff positions to support the implementation phase. These positions would cost approximately $165,000 ($83,000 General Fund). We recommend SDM expansion to counties on the waiting list, at a total cost of $1.4 million ($400,000 General Fund). Fund a Technology Solution. As we indicated earlier, one of the barri- ers to the expansion of SDM is the limitations of the current software. New technology must be implemented that (1) addresses Los Angeles County’s expansion to the remaining 85 percent of its caseload (approxi- mately 100,000 investigations annually), (2) reduces process inefficien- cies in smaller counties, and (3) does not require integration into CWS\/ CMS. We therefore recommend funding a technology solution that ad- dresses these needs. We estimate such a solution would cost approxi- mately $500,000 ($125,000 General Fund). Fund an Independent Outcome Evaluation. The only planned evalu- ation of SDM in California is a process evaluation. While this type of evaluation will provide important information about family risk classifi- cation and worker utilization, it will not provide California-specific in- formation on SDM’s impact on child welfare outcomes over time. An in- dependent outcome evaluation is needed because (1) it will show whether California is attaining the results shown in research from other states and (2) it may suggest improvements and modifications for SDM in Califor- nia. For these reasons, we recommend an independent outcome evalua- tion of California’s SDM project at a cost of approximately $500,000 ($125,000 General Fund) in 2001-02. Conclusion Above, we present recommendations for the Legislature that would expand and improve SDM in California. We believe existing research on SDM justifies the expansion to the ten counties on the waiting list. At this C – 230 Health and Social Services 2001-02 Analysis time, we recommend deferring a decision on further expansion of SDM until a California-specific evaluation has been completed. THE CWS\/CMS NEEDS STRATEGIC PLAN We recommend that the Child Welfare Services (CWS) Stakeholders’ Group develop a strategic plan for the Child Welfare Services\/Case Management System (CWS\/CMS) as a part of its review of the CWS system. We further recommend that, after 2001-02, the Legislature deny funding for any CWS\/CMS modifications until the strategic plan is completed. Background. Pursuant to the 2000-01 Budget Act, the CWS Stakehold- ers’ Group was established and funded for up to three years. Coordi- nated by DSS, the group was established to (1) review existing CWS pro- grams, components, and systems; and (2) provide recommendations for improvements. The group is composed of approximately 60 members, including county, state, and federal government professionals; advocates; researchers; legislators; and former recipients of CWS. The CWS Stake- holders’ Group plans to submit the following: (1) initial recommenda- tions regarding immediate CWS improvements to the Director of DSS by June 2001, (2) progress reports on the implementation of action items begin- ning June 2001, and (3) an evaluation plan to measure progress toward ob- jectives by October 2001. Automation System. The CWS\/CMS provides a statewide database, case management tools, and reporting system for the state’s CWS pro- gram. The system is in operation in all 58 counties. The system has the potential to provide (1) more accurate, comprehensive, and timely infor- mation on which to base child welfare decisions; (2) key workload data and statutorily required information to managers; and (3) improved worker access to intercounty information. While the system has now been implemented statewide for several years, the federal government and independent consultants have noted that CWS\/CMS continues to be used inconsistently across the state and that barriers to more effective implementation exist. Because there is no program-level strategic plan for the CWS\/CMS, changes and enhance- ments to the system have been authorized and funded in a fragmented fashion, sometimes without regard for statewide benefit. Recommendation. Given its broad mandate to overhaul the CWS sys- tem, we believe the CWS Stakeholders’ Group is well-positioned to pro- vide direction on the program’s future automation needs. Therefore, we recommend that the CWS Stakeholders’ Group develop a five-year stra- tegic plan for CWS\/CMS. A long-range CWS\/CMS strategic plan would Child Welfare Services C – 231 Legislative Analyst’s Office connect the ongoing efforts of the CWS Stakeholders’ Group to improve the delivery of child welfare services with the potential benefits of CWS\/ CMS. In addition, a strategic plan designed with CWS programmatic ex- pertise would provide a framework in which to evaluate the costs and potential benefits of additional changes to CWS\/CMS. Accordingly, we further recommend that the Legislature, after 2001-02, not approve any funding for CWS\/CMS modifications until the strategic plan is completed. C – 232 Health and Social Services 2001-02 Analysis Legislative Analyst’s Office FINDINGS AND RECOMMENDATIONS Health and Social Services Analysis Page Crosscutting Issues Health Insurance Portability and Accountability Act C-19 \ufffd The Governor’s Budget Provides Funding for Compliance With Federal Law. The 2001-02 Budget Act requests $70 million ($20 million General Fund) through a statewide allocation for statewide planning and implementation for applicant state departments and agencies to comply with the federal Health Insurance Portability and Accountability Act. In addition, the budget provides about $22 million ($3.6 million General Fund) and 28 positions in four departments. We summarize the requirements of the act, evaluate the approach taken to date by state agencies to comply with the law, and recommend to the Legislature further actions that would improve the state’s compliance. Implementation of Proposition 36 C-36 \ufffd Funding Options for Proposition 36. We summarize the provisions of Proposition 36, its key organizational, implementation, and funding issues, and the steps taken so far by the administration to carry out its provisions. We also offer a number of options for legislative changes and state budget adjustments the Legislature C – 234 Health and Social Services 2001-02 Analysis Analysis Page may wish to consider that could assist counties in the successful implementation of the measure. Long-Term Care Services C-50 \ufffd Summary of Spending and Caseloads. More than half of the state’s long-term care expenditures are for institutional care, while most long-term care consumers receive their care from home- and community-based services. Generally, long-term care spending is increasing, while caseloads are either remaining constant or growing at a much smaller rate than spending. C-64 \ufffd State May Be Eligible for Federal Grants to Fund New Projects. Reduce Item 4440-101-0001 by $333,000, Increase Item 4440-101-0890 by $333,000, and Increase Item 4260-001-0890 by $833,000. Recommend reduction of $333,000 General Fund for Institutions for Mental Diseases pilot project, and offsetting increase in federal funding due to the availability of grant funds for such projects. For the same reason, we recommend that federal funds for pilot projects to expand community options for long-term care be increased by $833,000. C-66 \ufffd Staffing Level of New Nursing Home Complaint Unit Not Justified. Withhold recommendation on $1.4 mil- lion ($500,000 General Fund) for a new unit within the Department of Health Services’ Licensing and Certifica- tion program that would receive all complaints against long-term care health facilities. The department has provided insufficient justification for not redirecting district resources to the new unit. Findings and Recommendations C – 235 Legislative Analyst’s Office Analysis Page New Tobacco Settlement Fund C-69 \ufffd New Tobacco Settlement Fund. Recommend establish- ing a 10 percent reserve for the new fund, instead of the proposed 5 percent reserve. Child Health and Disability Prevention Program (CHDP) C-74 \ufffd The CHDP Fails as Gateway. Recommend implement- ing legislation requiring providers to encourage CHDP clients to apply for Medi-Cal and Healthy Families. Recommend the adoption of supplemental report language directing Department of Health Services to examine the feasibility of linking CHDP data to Medi-Cal and Healthy Families data. Recommend legislation requiring all applications to be processed through a single point of entry. Recommend aligning CHDP eligibility with Healthy Families eligibility in order to maximize CHDP’s capacity as a gateway to enrollment. California Medical Assistance Program (Medi-Cal) C-100 \ufffd Caseload Estimate Reasonable, But May Be Overesti- mated. We find that the budget’s estimate for the Medi- Cal caseload is reasonable, but that the projected increase in the caseload of Medi-Cal families may be overestimated. Accordingly, we will monitor caseload trends and recommend appropriate adjustments at the time of the May Revision. C-102 \ufffd A More Rational Approach to Setting Medi-Cal Rates. Despite state and federal requirements, the Department of Health Services (DHS) has not conducted annual rate reviews or made periodic adjustments to Medi-Cal rates to ensure reasonable access to health care services. As a result, rate adjustments have often been made on an ad C – 236 Health and Social Services 2001-02 Analysis Analysis Page hoc basis. Recommend both interim and long-term actions to establish a more rational rate-setting process. C-110 \ufffd Los Angeles County Section 1115 Medicaid Demon- stration Project. (Reduce Item 4260-101-0001 by $3.4 Million and Item 4260-101-0890 by $3.4 Million.) Recommend approval of $30 million General Fund annually requested for the extension of a Los Angeles County Medicaid demonstration project and the adoption of supplemental report language to increase Legislative oversight. Further recommend that the 2001-02 budget request for funding to monitor the demonstration project be reduced by $6.8 million (about $3.4 million General Fund and $3.4 million federal funds). C-115 \ufffd Medi-Cal Estimate Should Be Redesigned. Recom- mend the enactment of legislation directing the department to revise the Medi-Cal estimate in order to make it a more useful tool for the Legislature. In addition, recommend the department report at budget hearings regarding the additional resources it will need to complete the redesign of the estimate. C-117 \ufffd Report Needed on Managed Care and Inpatient Rate Increases. Recommend that the Department of Finance and the DHS report at budget hearings regarding (1) their plans for Medi-Cal managed care and hospital inpatient rate increases for 2001-02 and (2) the potential amount of additional funding needed in 2001-02 to provide for any such rate increases. C-118 \ufffd Other Potential Rate Increases Not Included in the Budget. Recommend that DHS report at budget hearings regarding (1) the impact of the settlement of the Orthopaedic Hospital v. Belshe’ litigation on provider rates and (2) the potential amount of funding needed if Findings and Recommendations C – 237 Legislative Analyst’s Office Analysis Page provider rates increase in the budget year as a result of the settlement. C-118 \ufffd Fraud Savings. Recommend that DHS report an update of expected fraud savings for 2001-02 at budget hearings so that appropriate adjustments can be made to the Medi- Cal budget. Recommend that the department report on savings generated in the current year and its projections for the budget year for each type of antifraud activity. Finally, recommend approval of the Governor’s proposal to permanently establish 16 positions for the Medi-Cal Fraud Prevention Bureau. Public Health C-121 \ufffd Breast and Cervical Cancer Prevention and Treatment Act. Recommend the Legislature consider options for modifying the Medi-Cal program and expanding treatment services to take full advantage of the new federal law, including (1) aligning Medi-Cal eligibility with existing programs, (2) offering presumptive eligibility, (3) using proposed state funds for the Breast Cancer Treatment Program to draw down federal funds, (4) stabilizing funding for the Breast Cancer Early Detection Program (BCEDP), (5) expanding the BCEDP to include cervical cancer screening, and (6) expanding the breast and cervical cancer screening and diagnosis provider network. C-129 \ufffd Smoking Prevention Proposal Is Flawed. Reduce Item 4260-111-3020 by $18 Million. Recommend reduction of $18 million proposed to expand youth smoking prevention efforts because there is no evidence that the specific proposals are effective in reducing smoking. Withhold recommendation on $2 million requested for surveillance and special studies activities. Recommend that the DHS be required to report to the budget C – 238 Health and Social Services 2001-02 Analysis Analysis Page committees on the cost of implementing three of the four proposals as pilot programs. Recommend the approval of $1 million for youth advocacy coalitions funded by a grant from the American Legacy Foundation. Managed Risk Medical Insurance Board C-138 \ufffd Health Insurance Waiver Plan Misses Opportunities. Recommend the Legislature consider options for (1) further expansion of parental coverage, and (2) elimi- nation of the Medi-Cal asset test to take advantage of missed opportunities to improve coverage of the uninsured. C-142 \ufffd Healthy Families Enrollment Overestimated. Reduce Item 4280-101-0890 by $39 Million, Reduce Item 4280- 101-3020 by $33 Million, and Reduce Item 4280-101- 0001 by $3 Million. Recommend the Legislature reduce the level of funding budgeted for Healthy Families Program enrollment. Department of Developmental Services C-147 \ufffd Early Start. Adopt supplemental report language directing the Department of Developmental Services (DDS) to report back to the Legislature by December 1, 2002 regarding regional center (RC) and local education agency coordination, and regarding RC performance in completing evaluations and assessments within statu- tory time frames. Department of Mental Health C-152 \ufffd Early and Periodic Screening, Diagnosis, and Treat- ment Program (EPSDT) Costs Still Growing. Recom- mend approval of request for $126 million ($61 million Findings and Recommendations C – 239 Legislative Analyst’s Office Analysis Page General Fund) to offset growing costs in the EPSDT for emotionally disturbed children but propose that the Legislature consider several options to help control future costs. C-158 \ufffd Overdue Report on Treatment Resources. Recommend that the Department of Mental Health (DMH) comply with requirement that it report its findings regarding the availability of resources to assess and treat children in, or at-risk of, foster care placements. C-159 \ufffd Other Funding Available for Americans with Disabili- ties Act (ADA) Projects. Reduce Item 4440-011-0001 by $7.6 Million. Recommend deletion of funding for ADA compliance projects at Metropolitan State Hospital because insufficient information ha been provided to justify the funding request and because funding for such projects has already been set aside in the current-fiscal year. C-160 \ufffd Complete Security Plan Needed. Withhold recommen- dation on $7.6 million requested in the DMH support budget to install personal security alarms at various state hospitals because it is not clear how the request is related to various capital outlay proposals at the same facilities. Employment Development Department C-163 \ufffd Disability Insurance (DI) Tax Rate Now Complies With Current Law. From January through March 2000, the DI contribution rate was below the level required by current law. Since April of 2000, the DI tax rate has complied with statutory requirements. Despite a low balance of $5 million in December 2000, the Employment Development Department projects that the DI fund will C – 240 Health and Social Services 2001-02 Analysis Analysis Page be able to pay anticipated claims without the need for short-term borrowing from the General Fund. C-164 \ufffd Unemployment Insurance (UI) Benefits in California. The UI program provides weekly benefits to unem- ployed workers who become jobless through no fault of their own. Benefit levels are set by state law and have not been increased since 1992. We review the UI program and estimate the cost of increasing the maximum benefit to a level of wage replacement in 2002 that would be roughly equivalent to that of 1992. C-167 \ufffd Federal Welfare-to-Work Block Grant Program. Cali- fornia received $367.6 million in Welfare-to-Work block grant funds from the Department of Labor. Recent federal legislation extended the deadline for expending Welfare-to-Work funds from July 2002 until July 2004. C-168 \ufffd Legislature Needs Spending Plan for Discretionary Workforce Investment Act (WIA) Funds. Recommend that the Legislature not appropriate $43.6 million in WIA discretionary funds until the administration presents an expenditure plan. C-169 \ufffd National Emergency Grant (NEG) Program. Recom- mend deleting a proposed provision that would exempt NEG funds from Section 28 of the 2001-02 Budget Bill and incorporating estimated NEG expenditures into the regular budget process. This approach will streamline the allocation process while preserving legislative oversight. Department of Child Support Services C-172 \ufffd Total Automation Penalties Could Reach $1 Billion. Since 1998, California has been the subject of penalties for Findings and Recommendations C – 241 Legislative Analyst’s Office Analysis Page failing to implement a statewide child support automation system. The penalties, estimated to be $114 million in 2000-01 and $163 million in 2001-02, are levied in the form of a reduced federal share of child support administrative expenditures and are expected to continue through 2004-05. C-174 \ufffd Child Support Automation Penalties Overbudgeted. Reduce Item 5175-101-0001 by $7,900,000. Recommend that proposed spending for child support administration be reduced by $7.9 million General Fund because historic spending trends indicate the federal penalty will be less than budgeted. C-174 \ufffd Child Support Automation Proposal Lacks Detail. Reduce Item 5175-101-0001 by $5.6 Million. The budget proposes $16.5 million ($5.6 million General Fund) for interim child support automation improvements over the next three fiscal years. Without prejudice to the merits of the proposal, we recommend that the Legislature (1) delete this multiyear funding request and (2) instruct the department to include a specific interim automation proposal for 2001-02 in the May Revision to the Governor’s budget that is consistent with federal guidance. C-175 \ufffd Pre-Statewide Interim System Management Project. Recommend that the Legislature adopt budget bill language directing the Department of Child Support Services to obtain federal approval prior to implement- ing enhancements to county-based systems. C-177 \ufffd Permanent Positions Are Needed to Support Child Support Automation Activities. Reduce Item 5175-001- 0001 by $11,000. Recommend that the Legislature deny the request for consulting services and instead authorize C – 242 Health and Social Services 2001-02 Analysis Analysis Page 3 personnel years to provide ongoing support for child support automation activities. Department of Social Services\u2014State Operations C-179 \ufffd Department Should Develop eGovernment Plan. Recommend that the Legislature deny the Governor’s proposal for a one-time increase of $250,000 for the development of a feasibility study report for the Department of Social Services’ eGovernment services, until the department develops an eGovernment plan. Department of Social Services\u2014CalWORKs Program C-181 \ufffd Caseload Decline Slowing. The California Work Opportunity and Responsibility to Kids (CalWORKs) caseload has declined significantly since 1994-95. However, recent caseload data suggest a deceleration in caseload decline and the Governor’s budget projects a continued deceleration in the budget year. C-182 \ufffd Budget Underestimates Cost of Providing Statutory Cost-of-Living Adjustment (COLA). The General Fund cost of providing the statutory COLA will be $10 million above the amount included in the budget, due to an upward revision in the California Necessities Index. C-184 \ufffd Impact of Maintenance-of-Effort (MOE) Requirement. The Governor’s budget proposes to expend all but $85 million of available federal block grant funds and the minimum amount of General Fund monies required by federal law for the CalWORKs program. Any net augmentation to the program in excess of the proposed $85 million reserve will result in General Fund costs and any net reductions will result in an additional reserve of federal block grant funds. Findings and Recommendations C – 243 Legislative Analyst’s Office Analysis Page C-185 \ufffd Budget Proposes Reductions in County Performance Incentives. The Governor’s budget contains two proposals to reduce county performance incentives by a total of $397 million in 2000-01 and 2001-02. Specifically, the Governor proposes urgency legislation to reduce the current-year appropriation for county performance incentive funds by $153 million. In addition, the Governor’s budget proposes no funding for performance incentives in 2001-02, resulting in a savings of $244 million compared to the amount suggested by current law. C-186 \ufffd Proposal for Current-Year MOE Reduction Savings Should Be Incorporated Into 2001-02 Budget Process. The Governor proposes to replace approximately $150 million in General Fund spending with savings freed-up by urgency legislation that reduces Temporary Assistance for Needy Families (TANF) payments to counties for performance incentives by a like amount. Recommend that the Legislature amend any such urgency legislation to prohibit the expenditure of the resulting TANF savings in the current year. This action will move the expenditure decision on these TANF funds into the budget process for 2001-02 where the Legislature may then deliberate fully on its priorities with respect to General Fund support for CalWORKs and the level of the TANF reserve for future years. C-188 \ufffd Advance Drawdown of TANF Funds May Not Comply With Federal Law. The DHHS issued a program instruction clarifying that states may not draw down federal TANF funds prior to their immediate expendi- ture. California’s practice of drawing down county performance incentive funds may not be consistent with this instruction. Thus, the state may be required to return some TANF funds along with any interest that may have been earned. Recommend that the Department of Social C – 244 Health and Social Services 2001-02 Analysis Analysis Page Services (DSS) provide an estimate at budget hearings on the potential interest liability and report on how it will comply with the federal instruction. C-189 \ufffd Mental Health and Substance Abuse Spending Below Appropriations. Withhold recommendation on the proposed appropriation for 2001-02 pending receipt of additional data on current-year spending, because counties have historically been unable to expend their substance abuse and mental health treatment funds. C-192 \ufffd Child Care Shortfall. The Governor’s budget provides only limited funding for child care for former CalWORKs recipients who have been off aid for two years or longer. C-192 \ufffd Welfare-to-Work Match Deadline Extended. Reduce Item 5180-102-0001 by $59 Million. Recommend reducing proposed spending for the Welfare-to-Work match by $59 million because California’s deadline for expending its federal grant and required state matching funds has been extended to July 2004. C-193 \ufffd Welfare-to-Work Funds Should Be Incorporated Into County Budgeting Process. Because counties may use Welfare-to-Work funds to pay for CalWORKs employ- ment services, the budget reduces county funding requests by $142 million, even though in the prior year most counties’ budget requests had already accounted for these funds. Recommend formally incorporating Welfare-to-Work funds into the county budgeting process to avoid a potential double reduction in employment services funding. Further recommend that the May Revision address this issue. C-194 \ufffd Over Half of Single-Parent Adults Will Reach Federal Time Limit in 2001-02. The department estimates that by June 2002, nearly 60 percent of single-parent adults will Findings and Recommendations C – 245 Legislative Analyst’s Office Analysis Page reach their federal time limit. Assistance to these families will be funded with state-only funds. If trends continue, approximately 80,000 families could face grant reductions by the end of 2002-03. C-195 \ufffd Legislative Oversight: Cal-Learn Final Report Over- due. Recommend the department report at budget hearings on the status of the Cal-Learn report and on its findings and recommendations. C-196 \ufffd Increase County Flexibility to Assist Working Recipients. Recommend enactment of legislation to give counties the option to provide employment services for more than two years so long as participants work at least 20 hours per week. Foster Care C-200 \ufffd Foster Care Length of Stay. Recommend a pilot test of a change in FFA rates intended to accelerate FFA reunification and adoption efforts because we have concluded that (1) children stay longer in FFAs than other placements, (2) emotional and\/or behavioral differences of FFA children do not explain the longer stay, and (3) the FFA rates need to be adjusted. C-205 \ufffd Office of the Ombudsman for Foster Care. The budget proposes to convert four Foster Care Ombudsman positions from temporary to permanent, even though the department has not documented the permanent workload. Recommend retaining these positions as two- year limited term until the department can substantiate the ongoing workload. C-206 \ufffd Budget Underestimates Foster Care Cost-of-Living- Adjustment (COLA). The cost of providing the statutory C – 246 Health and Social Services 2001-02 Analysis Analysis Page COLA to the foster family homes, FFAs, group homes, and related programs will be $2.4 million above the amount included in the budget due to an upward revision in the California Necessities Index. These costs should be reflected in the May Revision of the budget. Food Stamps Program C-208 \ufffd Recent Federal Changes Create Options. Recommend the department submit current- and budget-year cost estimates for mandated vehicle asset rule changes, and, to the extent possible, more precise cost estimates for the alternative vehicle allowance and the transitional benefit allowance options. C-213 \ufffd Electronic Benefits Transfer System (EBT). Recom- mend that the department report at budget hearings on the potential federal penalty if the state is unable to implement the food stamp EBT system by October 2002. Supplemental Security Income\/ State Supplementary Program (SSI\/SSP) C-214 \ufffd Budget Underestimates Cost of Providing Statutory Cost-of-Living Adjustment (COLA). The General Fund cost of providing the statutory SSI\/SSP COLA will be $7.7 million above the budget estimate due to an upward revision in the California Necessities Index. C-216 \ufffd Certain Legal Immigrants Face Benefit Termination. California established the Cash Assistance Program for Immigrants (CAPI) to provide state-only funded SSI\/ SSP benefits to certain legal immigrants who are federally ineligible for benefits because of their immigration status. The component of this program that provides benefits for post-August 1996 immigrants is Findings and Recommendations C – 247 Legislative Analyst’s Office Analysis Page scheduled to sunset on September 30, 2001. This will result in approximately 2,700 recent legal immigrants losing their benefits effective October 2001. We review the history of the CAPI and provide policy options for the Legislature. In-Home Supportive Services C-220 \ufffd Wage and Benefit Increases for Certain In-Home Supportive Services (IHSS) Workers. Although budget trailer bill legislation\u2014Chapter 108, Statutes of 2000 (AB 2876, Aroner)\u2014authorized increased state participation in specified wage and benefit increases for IHSS providers working in counties that have established public authorities, the actual wage increases provided by counties have been less than budgeted. We summarize the wage increases provided by this legislation and their potential fiscal impact. C-222 \ufffd Budget Does Not Reflect Likely Savings. Withhold recommendation on a portion of the budget for IHSS because it does not reflect likely savings of up to $5 million from (1) actual costs being lower than budgeted for certain current- and budget-year augmentations and (2) an expansion in Medi-Cal eligibility that should result in reduced costs in the IHSS program. Child Welfare Services (CWS) C-223 \ufffd Improving CWS Through Structured Decision Making (SDM). Increase Item 5180-151-0001 by $650,000. Structured Decision Making is a series of tools designed to aid child welfare workers in making critical child safety decisions. Research indicates that SDM improves child welfare outcomes, as compared to alternative approaches. Currently 14 California Counties are using C – 248 Health and Social Services 2001-02 Analysis Analysis Page SDM and 10 additional counties are on the SDM waiting list. Recommend increasing proposed Child Welfare Services spending by $615,000 for (1) budget-year expansion of the SDM program ($400,000), (2) software solutions to support SDM expansion ($125,000), and (3) independent outcome evaluation of SDM ($125,000). C-230 \ufffd Child Welfare Services\/Case Management System (CWS\/CMS) Needs Strategic Plan. Recommend that the CWS Stakeholders’ Group develop a strategic plan for CWS\/CMS in their review of the CWS system. ”

” 2000-01 Analysis Legislative Analyst’s Office MAJOR ISSUES Health and Social Services \u00fe Recommend Changes to Aging with Dignity Initiative In his Aging with Dignity Initiative, the Governor proposes $272 million ($140 million General Fund) for various activities designed to improve nursing home care and develop community-based alternatives to nursing homes. Among other things, we recommend that the Legislature (1) consider alternatives to the proposed long-term care tax credit, such as further expansion of Medi-Cal coverage for seniors and the disabled, that would better target the funds; and (2) reject the proposed 5 percent pay increase for staff in distinct part nursing facilities because their rates currently are significantly higher than rates for other nursing homes. (see page C-17.) \u00fe CalWORKs County Performance Incentive System Should Be Changed Under current law, the counties receive state payments, or performance incentives, based on savings resulting primarily from recipients exiting the CalWORKs program due to employment and recipients with increased earnings. The Governor proposes to prohibit counties from earning any new performance incentives until the unmet obligation (about $500 million) has been paid. The administration also indicates that it will propose legislation to eliminate or sharply modify the incentives. We find that so far, the performance incentive system has not been effective. Should the Legislature decide to retain such a system, we recommend that it (1) be funded with C – 4 Health and Social Services 2000-01 Analysis General Fund monies that can be used by the counties for any purpose, rather than only within the CalWORKs program, and (2) tie the amount of incentive payments to improvement in CalWORKs program outcomes, rather than include savings that would have occurred even in the absence of the program. (see page C-148.) \u00fe Wisconsin Child Care System Should Be Tested California has a bifurcated system of subsidized child care. The state is fully funding the estimated need of CalWORKs recipients and former recipients; but is not fully funding the needs of the working poor due to fiscal constraints. We recommend legislation to establish a pilot project to evaluate the costs and programmatic impacts of implementing the Wisconsin child care system in California. By using standardized eligibility criteria for the working poor, irrespective of welfare status, this would result in covering more persons. The additional costs would be offset (possibly entirely) by a schedule of copayments which would be higher than the relatively low copayments charged currently in California. (see page C-32.) \u00fe Filling Vacancies Would Reduce Need for New Staff The budget requests a net increase of 557 positions for the Department of Health Services in 2000-01, raising the total number of authorized positions in the department to 6,198\u2014an increase of almost 10 percent. The requests for new positions come despite the fact that, as of January 2000, the department had over 900 vacant positions\u2014 a vacancy rate of more than 16 percent. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new positions and funding. (see page C-56.) Legislative Analyst’s Office TABLE OF CONTENTS Health and Social Services Overview ………………………………………………………………………. C-7 Expenditure Proposal and Trends ……………………………. C-7 Caseload Trends ………………………………………………………. C-9 Spending by Major Program ………………………………….. C-12 Major Budget Changes …………………………………………… C-12 Crosscutting Issues …………………………………………………….. C-17 Aging with Dignity Initiative…………………………………. C-17 Child Care ……………………………………………………………… C-32 Departmental Issues …………………………………………………… C-41 Emergency Medical Services Authority (4120) ………. C-41 Department of Aging (4170) …………………………………… C-44 Department of Alcohol and Drug Programs (4200) ………………………………………… C-45 California Children and Families Commission (4250) ………………………………. C-53 C – 6 Health and Social Services 2000-01 Analysis Department of Health Services State Operations (4260) ………………………………………. C-56 California Medical Assistance Program (Medi-Cal) ………………………………………………………….. C-62 Public Health …………………………………………………………. C-89 Managed Risk Medical Insurance Board (4280) …… C-109 Department of Developmental Services (4300) ……. C-115 Department of Mental Health (4440) ……………………. C-120 Employment Development Department (5100)……. C-123 Department of Rehabilitation (5160) ……………………. C-126 Department of Child Support Services (5175) ……… C-131 Department of Social Services CalWORKs Program (5180) ……………………………… C-140 Kin-GAP Program………………………………………………… C-164 Foster Care …………………………………………………………… C-166 Food Stamps Program ………………………………………….. C-168 Supplemental Security Income\/ State Supplementary Program …………………………. C-170 Child Welfare Services …………………………………………. C-173 Community Care Licensing …………………………………. C-174 Findings and Recommendations ……………………………… C-177 Legislative Analyst’s Office OVERVIEW Health and Social Services General Fund expenditures for health and social services programsare proposed to increase by 6 percent in the budget year. This increase is due primarily to a variety of workload and cost increases, the Governor’s initiative related to nursing homes and other adult care programs, and a technical change in the way child support collections are reflected in the budget. The budget also proposes to revise the formula for providing county fiscal incentives under the California Work Opportunity and Responsibility to Kids program, which would result in significant state savings. EXPENDITURE PROPOSAL AND TRENDS The budget proposes General Fund expenditures of $18.9 billion for health and social services programs in 2000-01, which is 27 percent of total proposed General Fund expenditures. The health and social ser- vices share of the budget generally has been declining since 1993-94. The budget proposal represents an increase of $1.1 billion, or 6 percent, over estimated expenditures in the current year. Figure 1 (see next page) shows that General Fund expenditures (cur- rent dollars) for health and social services programs are projected to in- crease by $5.6 billion, or 42 percent, from 1993-94 through 2000-01. This represents an average annual increase of 5.2 percent. Figure 1 shows that General Fund spending ( in current dollars) has increased since 1993-94, except for a slight reduction in 1997-98 due pri- marily to a decline in California Work Opportunity and Responsibility to Kids (CalWORKs, formerly Aid to Families with Dependent Children [AFDC]) program caseloads. Spending is estimated to increase by 11 per- cent in 1999-00, primarily due to Medi-Cal eligibility expansion and cost C – 8 Health and Social Services 2000-01 Analysis increases, and caseload and cost increases in various health and social services programs. As noted above, the budget proposes a 6.6 percent increase in 2000-01. Figure 1 Health and Welfare Expenditures Current and Constant Dollars 1993-94 Through 2000-01 All State Funds (In Billions) 5 10 15 20 $25 94-95 96-97 98-99 00-01 Current Dollars Constant 1993-94 Dollars Special Funds Total Spending General Fund General Fund Spending 10 20 30 40% 93-94 00-01 Percent of General Fund Budget Proposed In 1991-92, realignment legislation shifted $2 billion of health and social services program costs from the General Fund to the Local Rev- enue Fund, which is funded through state sales taxes and vehicle license fees. This shift in funding accounted for a significant increase in special funds starting in 1991-92. The budget estimates that realignment revenues will be $2.9 billion in 2000-01. Special funds expenditures are estimated to increase significantly in the current year, primarily because of the effect of Proposition 10 of 1998, which imposes a tax increase on cigarettes and other tobacco products and requires that almost all of the revenues be spent by state and local commissions for early childhood development programs. The budget estimates that spend- ing from the new California Children and Families Trust Fund will amount to $1.1 billion in 1999-00 (which includes revenues carried over from 1998-99) and $729 million in 2000-01. (For a discussion of Proposition 10, please see our report Proposition 10: How Does it Work and What Role Should the Legisla- ture Play in its Implementation?, January 13, 1999.) Overview C – 9 Legislative Analyst’s Office Combined General Fund and special funds spending is projected to increase by 52 percent from 1993-94 through 2000-01. This represents an average annual increase of 5.5 percent. Figure 1 also displays the spending for these programs adjusted for inflation (constant dollars). On this basis, General Fund expenditures are estimated to increase by 21 percent from 1993-94 through 2000-01. Com- bined General Fund and special funds expenditures are estimated to in- crease by 23 percent during the same period. This is an average annual increase of 3 percent. CASELOAD TRENDS Figures 2 and 3 (see next page) illustrate the caseload trends for the larg- est health and welfare programs. Figure 2 shows Medi-Cal caseload trends over the last decade, divided into four groups: families and children (prima- rily recipients of CalWORKs\u2014formerlyAFDC), refugees and undocumented persons, and disabled and elderly persons (who are primarily recipients of Supplemental Security Income\/State Supplementary Program\u2014SSI\/SSP). 1 2 3 4 5 6 90-91 92-93 94-95 96-97 98-99 00-01 Figure 2 Budget Forecasts Upturn in Medi-Cal Caseloads 1989-90 Through 2000-01 Eligible Persons (In Millions) Families\/Children Refugees\/Undocumented Immigrants Disabled Aged C – 10 Health and Social Services 2000-01 Analysis Figure 3 CalWORKs Caseloads Declining; SSI\/SSP Caseloads Increasing Slightly 1989-90 Through 2000-01 (In Millions) 0.2 0.4 0.6 0.8 1.0 1.2 90-91 92-93 94-95 96-97 98-99 00-01 CalWORKs SSI\/SSP Cases Medi-Cal Caseloads. Medi-Cal caseloads increased by 51 percent over the 12 years shown in Figure 2. As the figure shows, the growth generally occurred during the period from 1989-90 through 1994-95. The growth in the number of families and children receiving Medi-Cal during this pe- riod reflects the rapid growth in AFDC caseloads as well as the expan- sion of Medi-Cal to cover additional women and children with incomes too high to qualify for cash aid in the welfare programs. Coverage of refugees and undocumented persons also increased caseloads significantly during this period. Since 1994-95, Medi-Cal caseloads have declined, due primarily to a decline in AFDC\/CalWORKs caseloads. The figure also shows that the caseload leveled off in 1997-98 and 1998-99. While the budget states that the caseload is forecasted to decline by 1 percent in 2000-01, this excludes the effect of an expansion in eligibility enacted in the current year. With this adjustment, the Medi-Cal caseload is estimated to increase by 2.6 percent in the current year and 1.9 percent in the bud- get year. We also note that while the number of CalWORKs families and chil- dren has been declining in recent years, the number of nonwelfare fami- lies (generally lower-income working families) has been increasing and now constitutes the majority of Medi-Cal families and children. Overview C – 11 Legislative Analyst’s Office CalWORKs and SSI\/SSP Caseloads. Figure 3 shows the caseload trend for the CalWORKs and SSI\/SSP programs. While the number of cases in SSI\/SSP is greater than in the CalWORKs program, there are more persons in the CalWORKs program\u2014about 1.5 million compared to about 1 million for SSI\/SSP. (The SSI\/SSP cases are reported as individual per- sons, while CalWORKs cases are primarily families.) To the extent that caseloads have been increasing in these two pro- grams, it has been due, in part, to the growth of the eligible target popu- lations. The increase in the rate of growth in the CalWORKs caseloads in 1990-91 and 1991-92 was also due to the effect of the recession. During the next two years, the caseload continued to increase, but at a slower rate of growth. This slowdown, according to the Department of Finance, was due partly to: (1) certain population changes, including lower mi- gration from other states; and (2) a lower rate of increase in child-only cases (including citizen children of undocumented and newly legalized persons), which was the fastest growing segment of the caseload until 1993-94. Figure 3 also shows that since 1994-95, CalWORKs caseloads have declined. As discussed in our annual California’s Fiscal Outlook reports, this trend is due to various factors, including the improving economy, lower birth rates for young women, a decline in legal immigration to California, reductions in grant levels, behavioral changes in anticipation of federal and state welfare reform, and\u2014for the current and budget years\u2014the impact of the CalWORKs program interventions (including additional employment services). We have noted, however, that contrary to this overall downward trend, the number of child-only cases has been increasing slightly in recent years. This category of the caseload includes children whose parents are undocumented, children with nonneedy rela- tive caretakers, and children whose parents are removed from the assis- tance unit because of sanctions for nonparticipation in the CalWORKs employment services program. The SSI\/SSP caseload can be divided into two major components: the aged and the disabled. The aged caseload generally increases in pro- portion to increases in the eligible population\u2014age 65 or older. This com- ponent accounts for about one-third of the total caseload. The larger com- ponent\u2014the disabled caseload\u2014grew significantly faster than the rate of increase in the eligible population group (primarily ages 18 to 64) in the early 1990s. This was due to several factors, including (1) the increasing incidence of AIDS-related disabilities, (2) changes in federal policy that liberalized the criteria for establishing a disability, (3) a decline in the rate at which recipients leave the program (perhaps due to increases in life C – 12 Health and Social Services 2000-01 Analysis expectancy), and (4) expanded state and federal outreach efforts in the program. In recent years, however, the growth of the disabled caseload has slowed. Total SSI\/SSP caseload growth has also moderated in recent years. This is partly attributable to federal policy changes that (1) eliminated drug or alcohol addiction as a qualifying disability and (2) added restric- tions on the eligibility of disabled children. SPENDING BY MAJOR PROGRAM Figure 4 shows expenditures for the major health and social services programs in 1998-99 and 1999-00, and as proposed for 2000-01. As shown in the figure, the three major benefit payment programs\u2014Medi-Cal, CalWORKs, and SSI\/SSP\u2014account for a large share of total spending in the health and social services area. MAJOR BUDGET CHANGES Figures 5 and 6 (see pages 14 and 15) illustrate the major budget changes proposed for health and social services programs in 2000-01. (We include the federal funds for CalWORKs because, as a block grant, they are essentially interchangeable with state funds within the program.) Most of the major changes can be grouped into the following categories: 1. The Budget Funds Caseload Growth in SSI\/SSP, Medi-Cal, and the Healthy Families Program, Reflects Savings From Caseload Reductions in CalWORKs, and Funds Other Workload Cost Increases. The budget includes a projected caseload reduction of 5.5 percent in the CalWORKs program and increases of 1.9 percent (as adjusted) in the Medi-Cal Pro- gram, 3.1 percent in SSI\/SSP, and 32 percent in the Healthy Families Pro- gram. 2. The Budget Proposes to Fund Statutory Cost-of-Living Adjust- ments (COLAs) for CalWORKs and SSI\/SSP. The budget includes a 3.6 percent COLA for CalWORKs and SSI\/SSP in 2000-01. We also note that it proposes to fund the statutory COLA for foster family agencies (FFAs) but does not fund the COLA for non-FFA foster family homes or group homes. Current law provides for these COLAs, but makes them subject to the availability of funds. Overview C – 13 Legislative Analyst’s Office Figure 4 Major Health and Welfare Programs Budget Summarya 1998-99 Through 2000-01 (Dollars in Millions) Actual 1998-99 Estimated 1999-00 Proposed 2000-01 Change From 1999-00 Amount Percent Medi-Cal General Fund $7,471.3 $8,208.8 $8,749.4 $540.6 6.6% All Funds 18,494.2 20,492.4 21,450.8 958.4 4.7 CalWORKs (Grants and Services) General Fund $2,022.4 $1,994.1 $2,071.7 $77.6 3.9% All Funds 5,347.3 5,380.7 5,567.6 186.9 3.5 AFDC-Foster Care General Fund $377.5 $425.7 $389.5 $-36.2 -8.5% All Funds 1,394.4 1,496.4 1,478.1 -18.3 -1.2 SSI\/SSP General Fund $2,242.2 $2,482.6 $2,619.8 $137.2 5.5% All Funds 6,084.4 6,508.4 6,904.8 396.4 6.1 In-Home Supportive Services General Fund $370.4 $527.4 $538.8 $11.4 2.2% All Funds 1,397.8 1,628.3 1,784.5 156.2 9.6 Regional Centers\/Community Services General Fund $647.5 $809.4 $896.3 $86.9 10.7% All Fundsb 1,400.2 1,617.3 1,763.7 146.4 9.1 Developmental Centers General Fund $34.0 $82.4 $71.4 -$11.0 -13.3% All Fundsb 482.7 561.1 612.7 51.6 9.2 Child Welfare Services General Fund $421.0 $496.9 $457.5 -$39.4 -7.9% All Funds 1,177.0 1,507.0 1,554.1 47.1 3.1 State Hospitals General Fund $311.6 $362.9 $424.4 $61.5 16.9% All Funds 490.2 526.8 573.9 47.1 8.9 Children and Families First Commissionsc General Fund \u2014 \u2014 \u2014 \u2014 \u2014 All Funds $5.5 $1,062.7 $728.9 -$333.8 -31.4% Child Support Services General Fund \u2014d \u2014d $332.3 $332.3 \u2014 All Funds \u2014d \u2014d 874.1 874.1 \u2014 a Excludes departmental support, except for state hospitals. b Includes General Fund share of Medicaid reimbursements (costs budgeted in Medi-Cal). c Includes state and county commissions. d Expenditures included in CalWORKs and other Department of Social Services programs. The CalWORKs grant savings from child support are shown as General Fund revenues in 2000-01. C – 14 Health and Social Services 2000-01 Analysis Figure 5 Health Services Programs Proposed Major Changes for 2000-01 General Fund Medi-Cal Requested: $8.7 million Increase: $541 million (+6.6%) \u00ff $183 million due to higher drug costs and new drugs \u00ff $82 million for full-year costs of expanding eligibility of families to 100 percent of poverty level \u00ff $52 million due to a reduction in the federal matching rate \u00ff $43 million for the state match for county mental health ser- vices under the Early and Periodic Screening, Diagnosis, and Treatment Program \u00ff $33 million for a 5 percent wage increase for nursing home staff (included in Aging with Dignity Initiative) \u00ff $30 million to reduce the state takeout from payments to dis- proportionate share hospitals and, potentially, to increase spec- ified physician rates \ufffd\ufffd\ufffd\ufffd $66 million for full-year savings from the waiver to provide fed- eral funds for family planning Healthy Families Requested: $142 million Increase: $46 million (+48%) \u00ff $46 million for caseload growth and cost increases Public Health Requested: $349 million Decrease: $27 million (-7.1%) \ufffd\ufffd\ufffd\ufffd $20 million by eliminating General Fund support for the County Medical Services Program (which was suspended for one year in 1999-00) \ufffd\ufffd\ufffd\ufffd $20 million by using federal rather than state funds to continue the Community Challenge Grants program Overview C – 15 Legislative Analyst’s Office Figure 6 Social Services Programs Proposed Major Changes for 2000-01 General Fund CalWORKs Requested: $2.1 billion Increase: $78 million (+3.9%) \u00ff $198 million due to a technical change related to the child sup- port enforcement program \u00ff $112 million for a 3.6 percent cost-of-living adjustment (COLA) \ufffd\ufffd\ufffd\ufffd $496 million by revising the formula for county fiscal incentive payments \ufffd\ufffd\ufffd\ufffd $258 million due to caseload reduction SSI\/SSP Requested: $2.6 billion Increase: $137 million (+5.5%) \u00ff $59 million due to a caseload increase \u00ff $55 million for a 3.6 percent COLA Regional Centers Requested: $896 million Increase: $87 million (+11%) \u00ff $129 million for caseload and cost increases Department of Aging Requested: $53 million Increase: $21 million (+64%) \u00ff $20 million for a new grants program for adult care alternatives to nursing homes (included in Aging with Dignity Initiative) Child Support Enforcement Requested: $332 million Increase: $23 million (+7.4%) \u00ff $23 million in local assistance to implement legislative reforms under the supervision of the new Department of Child Support Services C – 16 Health and Social Services 2000-01 Analysis 3. The Budget Includes a General Fund Increase of $198 Million for the CalWORKs Program Due to Proposed Technical Changes Related tothe Child Support Enforcement Program. The budget proposes two changes which have the net effect of increasing CalWORKs costs by $198 million. Specifically, it proposes to (1) transfer the costs of child sup- port incentive payments (including $86 million related to CalWORKs cases) from CalWORKs to the new Department of Child Support Ser- vices and (2) treat the state savings from child support collections for welfare families (about $284 million) as General Fund revenues rather than an offset to CalWORKs and foster care grants. 4. The Budget Proposes to Keep General Fund Spending for CalWORKs at the Federally-Required Maintenance-of-Effort (MOE) Level. The budget uses unexpended federal block grant funds carried over from the current year to help meet federal MOE requirements. 5. The Budget Includes Various Policy Changes, Including the Fol- lowing: $496 million in savings by revising the formula for determining CalWORKs fiscal incentive payments, which are allocated to the counties for performance related to recipients’ earnings and pro- gram exits. The budget includes $252 million toward the payment of prior-year obligations to the counties for fiscal incentives, but proposes no funding for the budget-year obligation. $36 million in General Fund savings by eliminating the January 2001 sunset date for the state Medi-Cal drug rebate program. (In effect, this essentially continues the savings achieved in the cur- rent year.) $20 million in savings by eliminating the General Fund appro- priation for the County Medical Services Program, which under current law is suspended for 1999-00. $140 million proposed from the General Fund for the Governor’s Aging with Dignity Initiative, which has numerous program com- ponents. Our discussion of this proposal appears in the Cross- cutting Issues analysis, which immediately follows this overview. Legislative Analyst’s Office CROSSCUTTING ISSUES Health and Social Services AGING WITH DIGNITY INITIATIVE GOVERNOR’S INITIATIVE INCLUDES A WIDE RANGE OF PROPOSALS In his Aging with Dignity Initiative, the Governor makes numerous proposals to improve nursing home care and develop community-based alternatives to nursing homes. In the following pages, we summarize the initiative and provide our assessment of it. The Governor’s Aging with Dignity Initiative consists of numerous components administered by several departments, at a General Fund cost of $140.4 million (and 221.5 positions) in 2000-01. The purpose of the ini- tiative is to help elderly people remain at home, or with their families, rather than in nursing homes; dramatically increase the availability of innovative community-based alternatives to nursing home care; and en- hance the quality of care in California’s nursing homes. Figure 1 (see next page), and the discussion that follows, describe the proposed com- ponents of the initiative that have fiscal effects. Community Programs The budget includes the following proposals intended to help seniors remain in their homes or in the community in a noninstitutional setting. Long-Term Care Tax Credit. The budget proposes a $500 tax credit for persons (specifically taxpayers) who provide or pay for care at home for seniors or disabled individuals of any age. This credit would result in an C – 18 Health and Social Services 2000-01 Analysis estimated General Fund revenue loss of $47 million in 2000-01. In order for the taxpayer to qualify for the credit, the senior or disabled person would have to meet certain criteria for needing care. Figure 1 Aging with Dignity Initiative 2000-01 (In Millions) General Fund Other Funds Totals Community Programs Caregiver tax credit $47.0 \u2014 $47.0 In-Home Supportive Services wage increases 20.0 $35.7 55.7 Long-term care innovation grants 20.2 \u2014 20.2 Expand no-cost Medi-Cal for aged, blind, and disabled 2.4 2.4 4.8 Senior housing information and support center 1.0 \u2014 1.0 Senior wellness education campaign 1.0 \u2014 1.0 Improving Quality of Care and Enforcement Caregiver recruitment and training \u2014 $50.0 $50.0 Five percent pay increase for nursing home workers $32.5 33.3 65.8 Nursing home quality awards 8.0 2.0 10.0 Increased nursing home inspections 3.0 4.5 7.5 Focused nursing home quality reviews 2.5 1.5 4.0 Rapid response to nursing home complaints 2.2 1.7 3.9 Nursing home fiscal review advisory board 0.5 \u2014 0.5 Totals $140.3 $131.1 $271.4 In-Home Supportive Services (IHSS) Wage Increase. The IHSS pro- gram provides services to aged, blind, and disabled persons who are unable to remain safely in their homes without such assistance. Under the program, counties are authorized to establish Public Authorities to negotiate wages for the providers of services. The budget proposes that the state pay 65 percent of the nonfederal costs of wage increases negoti- ated by IHSS Public Authorities, up to 85 cents above the minimum wage. Under current law, the state pays for 80 percent of the nonfederal costs, up to 50 cents above the minimum wage, for 1999-00 only. The budget proposal would result in a General Fund cost of $48.5 million compared to current law, or $20 million above the cost of extending the 1999-00 pro- vision into 2000-01. The budget assumes that the following counties will Crosscutting Issues C – 19 Legislative Analyst’s Office have Public Authorities in 2000-01: Alameda, Contra Costa, Los Angeles, Monterey, Sacramento, San Francisco, San Mateo, and Santa Clara. Long-Term Care Innovation Grants. The budget proposes a one-time General Fund expenditure of $20.2 million (including three positions) in the Department of Aging to establish a Golden Challenge long-term care innovation grants program. The grants would be used to expand adult care alternatives to nursing homes by funding innovative commu- nity-based programs that could be replicated in other communities. Expand Medi-Cal for the Aged, Blind, and Disabled. The budget pro- poses to provide (beginning January 2001) no-cost Medi-Cal coverage to aged, blind, and disabled persons up to 100 percent of the federal pov- erty level, at a General Fund cost of $2.4 million in 2000-01 and $6 million annually thereafter. Currently, persons in this category who have incomes above about 90 percent of the poverty level must pay a share of cost for Medi-Cal benefits. Senior Housing Information and Support Center. The budget pro- poses $1 million from the General Fund, including eight positions, to es- tablish a Senior Housing Information and Support Center in the Depart- ment of Aging. The center would serve as a clearinghouse and educa- tional resource for seniors and their families for information on housing and home modification. The center would also promote education and training for professionals, such as physical and occupational therapists, who can assist seniors in maintaining independence. Senior Wellness Campaign. The budget proposes $1 million from the General Fund, including two positions, in the Department of Aging to develop and administer a statewide media campaign on community- based and in-home care alternatives to institutional care. Improving Quality of Care and Enforcement The Aging with Dignity Initiative includes the following proposals that address issues of quality of care provided to seniors in their homes and in long-term care facilities and the enforcement of requirements for nursing homes. Caregiver Training, Retention, and Recruitment. The budget includes $50 million ($35 million General Fund and $15 million federal Workforce Investment Act funds) to train, recruit, or retain workers in the caregiver industries, including nursing homes and the IHSS program. Pay Increase for Nursing Home Workers. The budget request for the Medi-Cal Program in the Department of Health Services (DHS) includes $65.8 million ($32.5 million General Fund) to increase rates paid to nurs- C – 20 Health and Social Services 2000-01 Analysis ing homes and other long-term care facilities in order to fund a 5 percent increase in wages and benefits for direct-care staff, effective August 1, 2000. This increase would be in addition to a similar 5 percent increase funded in the current year. These increases are in addition to annual cost- based rate increases for nursing homes and other long-term care facili- ties. The budget also indicates that DHS will review staffing ratios in nursing facilities and make recommendations by December 31, 2000. The current-year budget included funds to increase the number of caregiver hours per resident from an average of 2.9 to 3.2. The budget also requests $465,000 ($232,000 General Fund) for 6 additional DHS auditor positions (limited to 2000-01) in order to ensure that nursing homes actually pass the increases through to their employees as higher wages and benefits. Nursing Home Quality Awards. The DHS budget includes $10 mil- lion ($8 million General Fund) for a new program of awards to nursing homes that provide exceptional care. These funds potentially could be used for staff bonuses or to fund innovative programs at nursing homes. The awards would focus on facilities that have a high proportion of Medi- Cal residents and would range from $20,000 to $50,000 each, for a total of 200 to 500 awards (equivalent to 14 percent to 36 percent of the 1,400 nurs- ing homes in California). Increased Unannounced Inspections and Federal Workload. The bud- get requests a total of $7.4 million ($3 million General Fund) to increase DHS staffing by 70 positions and fund an additional 30 Los Angeles County contract positions for these workload components. A total of 57 positions (including 17 contract positions) would be used to increase the frequency and reduce the predictability of required nursing home inspec- tions. The department indicates that the average inspection frequency has increased from the goal of 12 months to almost 14 months. In some cases, inspections have not met the federal minimum-frequency require- ment of 15 months, and that this pushing up against the federal re- quirement makes it relatively easy for facilities that have not been in- spected for more than a year to anticipate the timing of their next inspec- tion. This request also includes 43 positions (including 13 contract posi- tions) to meet new federal requirements for increased nursing home fa- cility monitoring and enforcement in the Medicaid and Medicare pro- grams. Focused Nursing Home Quality Reviews. The budget requests a total of $4.1 million ($2.5 million General Fund) for 43 new DHS positions (plus an unidentified number of Los Angeles County contract positions) to (1) expand the number of nursing homes (from 34 to 100) that would be subject to focused enforcement reviews, (2) perform more in-depth re- views of license applications, and (3) monitor and improve the quality of nursing-home enforcement activities. Crosscutting Issues C – 21 Legislative Analyst’s Office Ensure A Rapid Response to Complaints. The budget requests a total of $3.9 million ($2.2 million General Fund) for 33 additional DHS posi- tions and 13.5 Los Angeles County contract positions in order to respond in a more timely manner to complaints about nursing home conditions and care. Existing law requires DHS to investigate complaints within ten days of their receipt; and, for complaints alleging immediate jeopardy to residents’ health or safety, the department’s policy is to investigate within two days of receiving a complaint. The department indicates that it was unable to meet these goals for a third of the complaints received in 1998-99. Fiscal Advisory Board. The budget requests $500,000 from the Gen- eral Fund for one position and $400,000 in consultant services to staff and provide expert assistance to a new Fiscal Solvency Review Advisory Board. The nursing home industry recently has experienced a number of bankruptcies. The department is responsible for ensuring continuity of care for nursing home residents in the event of an imminent closure\u2014 either by ensuring transfers to other appropriate facilities or by continu- ing operation through a receivership. The new advisory board would help DHS develop better fiscal solvency standards to protect nursing home residents. LAO FINDINGS AND RECOMMENDATIONS Long-Term Care Tax Credit Unlikely To Be An Efficient or Effective Incentive We find that the proposed $500 long-term care tax credit (1) is unlikely to be a means of effectively targeting a significant subsidy to many taxpayers who currently provide in-home long-term care or to provide a significant incentive for many families or individuals to provide this type of care; (2) has an inherent potential for higher-than-intended costs because its eligibility qualifications will be difficult to enforce; and (3) will have its impact diluted by increasing federal tax liabilities. We recommend that the Legislature consider alternative means of helping seniors and disabled persons to remain in their homes or the community, such as further expansion of Medi-Cal coverage for seniors and the disabled. The Governor’s proposal includes a personal income tax credit of $500 for taxpayers providing or paying for the long-term care of elderly or dis- abled individuals in the taxpayer’s home. The $500 credit would typically be available to taxpayers for each individual residing with them who is certi- fied by a physician as requiring long-term care\u2014defined as a continuous period of at least 6 months. Individuals with long-term care needs must meet C – 22 Health and Social Services 2000-01 Analysis the following criteria for a taxpayer to qualify for the credit: (1) those 6 years and older must be unable to perform without assistance at least three basic activities of daily living; (2) those between the ages of 2 and 6 years must be unable to independently perform two activities such as eating or bathing; and (3) those younger than 2 years must require specific medical equipment or the care of a skilled health-care practitioner. The proposal is modeled after a similar proposal at the federal level for a $3,000 credit. For calendar year 2000, the Franchise Tax Board as- sumes that approximately 120,000 taxpayers would take advantage of the new state credit. The estimated revenue reduction from the credit is $47 million in 2000-01, reaching $52 million by 2004-05. Legislative Considerations. Whether tax credits are an effective and efficient means of accomplishing their objectives depends on their spe- cific provisions and purpose. They can, for example, be a good method of providing tax relief to certain categories of taxpayers or outright subsidies to them, if they are well targeted. However, if their objective is to encour- age certain types of behavioral changes, tax credits generally do not score particularly well as an effective and efficient tool. This is largely because it is hard to ensure that credits go only to those persons whose behavior changes; thus, many taxpayers receiving credits are simply rewarded for doing things they would have done anyway. Thus, in the case of the pro- posed credit, a key question is whether it is primarily intended to subsi- dize the care costs of taxpayers who already provide long-term care in their homes, or, alternatively, to provide an incentive for expansion of home-based long-term care. In either case, the proposal raises a number of concerns: Distribution of Benefits. First, the proposed credit is nonrefund- able, which means that taxpayers can only receive it to the extent they have tax liabilities. Thus, certain taxpayers whom it may be most effective to target will only be able to benefit partially from it, or not at all. This is especially the case for lower-income tax- payers without large tax liabilities to offset. In addition, because there is no means test regarding who can receive the credit, much of it could go to those taxpayers who do not have the great- est financial need. Effects on Behavior. Second, at $500, the credit may simply be too small to significantly increase the amount of home-based long- term care that taxpayers are willing and able to provide. Caring for an elderly or disabled person can be a large financial burden. Even with Medicare, out-of-pocket health care costs\u2014particularly for medication\u2014can be large, and other types of costs can be sig- nificant. For example, home modifications may be necessary, or Crosscutting Issues C – 23 Legislative Analyst’s Office a family member may have to give up a job or limit his or her work hours to provide care. In addition to financial issues, pro- viding in-home care may also involve major changes in living arrangements and habits. It would seem unlikely that the avail- ability of the $500 annual credit would be the determining factor in more than a small fraction of care decisions. Potential for Abuse. Third, the credit has an inherent potential for abuse that could require significant monitoring and enforce- ment efforts. While a doctor’s certification will be required, as- sessing the physical or mental limitations of an individual in- volves a degree of judgment that is likely to get stretched over time by the natural desire of physicians to accommodate patients and their families. Moreover, taxpayers need not demonstrate that they have incurred any cost in order to claim the credit\u2014the credit is simply extra money. This could make it attractive to push the envelope when claiming that an elderly person or child in the home meets the test for qualifying limitations. Federal Interactions Diminish Impact. Fourth, because Califor- nia income taxes are an itemized deduction on federal income tax returns, as much as one-third of the state’s credit paid to cer- tain taxpayers will wind up in the pockets of the federal gov- ernment. Given these concerns, we do not believe that the proposed credit would be an effective or efficient means of providing either (1) signifi- cant assistance to those taxpayers who bear the greatest burden for the care of seniors or disabled persons or (2) an effective incentive for an ex- pansion of home-based care for seniors and the disabled. Consequently, we recommend that the Legislature explore alternative approaches to accomplishing the objectives of the proposed tax credit that would pro- vide both more financial relief to many families and individuals and would help more seniors and disabled persons avoid institutionalization. In the issue that follows, we discuss expanding Medi-Cal coverage for seniors and the disabled, which is one alternative approach that in our view, has a number of advantages over the proposed tax credit. Expanding Medi-Cal Coverage for Seniors and the Disabled We recommend that the Legislature consider expanding Medi-Cal coverage for seniors and the disabled as an alternative to the long-term care tax credit proposed in the budget, because expanding Medi-Cal coverage has the potential for more effectively targeting state assistance to those with the greatest needs and would enable the state to leverage federal funds. C – 24 Health and Social Services 2000-01 Analysis As an alternative to the proposed long-term care tax credit, the Legis- lature may wish to consider expanding Medi-Cal coverage for seniors and the disabled beyond the modest expansion proposed in the budget (discussed above). Expanding Medi-Cal coverage has several advantages that can make this approach a more efficient and effective means of help- ing those who have the greatest needs: Focused on Lower-Income Persons. Medi-Cal is a means-tested program that benefits those with low incomes who most need assistance. Focused on Persons with the Greatest Health Needs and Expenses. High health care costs are one of the primary financial burdens on elderly or disabled persons and their families. Even seniors with Medicare coverage often face out-of-pocket drug costs that can be several hundred dollars per month\u2014far more than the $500 annual credit proposed in the budget. Medi-Cal coverage targets lower-income persons with high out-of-pocket health care costs. Medi-Cal Leverages Federal Funds. The federal government pays slightly more than half of Medi-Cal costs, effectively doubling state funds for expanded Medi-Cal coverage, compared with the shift of state funds to the federal government that would result from the tax credit approach. Existing Medi-Cal Coverage for Seniors and the Disabled. Currently, there are two main avenues through which the low-income elderly or disabled may get Medi-Cal coverage: The Supplemental Security Income\/State Supplementary Program (SSI\/SSP). This is the cash grant program that assists low-income elderly, blind or disabled persons. All SSI\/SSP recipients receive no-cost Medi-Cal coverage. In order to qualify for SSI\/SSP, per- sons generally must have incomes under 104 percent of the fed- eral poverty level (FPL) for singles or 136 percent of the FPL for couples. Somewhat lower income limits apply to recipients who live with their family or another household and receive free room and board. The savings or other assets (homes are exempt) of SSI\/SSP recipients also must be less than $2,000 (individuals) or $3,000 (couples). The Medi-Cal Medically Needy (MN) Program. This program is available to elderly or disabled persons who do not meet the re- quirements for SSI\/SSP (recent immigrants, for example) or do not wish to receive a grant. In order to receive no-cost Medi-Cal, individuals living in their own households must have incomes Crosscutting Issues C – 25 Legislative Analyst’s Office under 90 percent of the FPL (individuals) or 104 percent of the FPL (couples). Asset limits similar to those in SSI\/SSP also apply. The MN program allows participation on a spend-down basis for persons above these limits. This means that Medi-Cal will pay the portion of any qualifying medical expense that exceed the person’s share of cost, which is the amount by which that person’s income or assets exceeds the applicable Medi-Cal lim- its. Because of this spend-down provision, the MN program acts as a type of major medical coverage for persons with higher incomes or greater assets. Benefits from the Budget’s Proposed Coverage Expansion Are Lim- ited. In addition to the proposed long-term care tax credit, the Governor’s budget proposes to expand Medi-Cal coverage for the elderly or disabled in a manner that would eliminate a share-of-cost for individuals who have incomes above the MN income limit, but under the poverty level. The expansion would not affect couples initially because the MN limit for couples currently exceeds the FPL. The budget estimates that about 13,000 individuals initially would be affected by this expansion. All of these per- sons currently are enrolled in the Medi-Cal MN program with a share-of- cost of less than about $100 per month. The Governor’s proposal would assist some poor elderly or disabled persons at a very modest state cost. However, it would provide only lim- ited benefits to a relatively small group of individuals. For example, the Governor’s proposal provides no benefit to couples or those individuals whose Medi-Cal share of cost exceeds about $100. (About 47,000 aged or disabled Medi-Cal beneficiaries have a share of cost between $100 and $500, for example.) Options for Expanding Coverage. The Legislature has a number of options for expanding Medi-Cal coverage for seniors and the disabled beyond the modest expansion proposed in the budget. These options in- clude the following: Raise the Asset Limit. Federal law allows the state to increase the asset limit for Medi-Cal coverage for seniors and the disabled above the SSI\/SSP limit. This would allow persons with low in- comes to participate in Medi-Cal while being able to retain some modest savings. Increase the Income Limit. Federal law provides a number of mechanisms for the state to raise the Medi-Cal income limits for the elderly or disabled. One approach would be to adopt a re- fused grant program. This would allow persons who have in- comes up to the SSI\/SSP limits, but who do not receive a grant, to receive no-cost Medi-Cal coverage. This option would benefit C – 26 Health and Social Services 2000-01 Analysis couples because the SSI\/SSP income limit for couples is above both the MN limit and the poverty level, and couples with in- comes above these levels otherwise would have to pay a share of cost under existing law (if above the MN level) or under the Governor’s proposal (if above the poverty level). Another ap- proach would be to adopt income disregards (or deductions) that would have the effect of increasing the income limits for eli- gibility in either the existing MN program or 100 percent of the FPL program proposed in the budget. Increase the Income Limit for Qualified Medicare Beneficiaries (QMBs). Medi-Cal currently covers Medicare premiums, deductibles, and cost-sharing for qualifying persons with incomes up to 100 percent of the FPL and assets up to twice the SSI\/SSP limit. These recipients are known as QMBs. Persons who qualify as QMBs but do not meet regular Medi-Cal requirements are re- ferred to as QMB-onlys, which includes those individuals with incomes between the MN level and the FPL who would be cov- ered by the Governor’s proposed expansion of no-cost Medi-Cal to 100 percent of the FPL. The state could adopt income disre- gards that effectively raise this income level without raising in- come levels for regular Medi-Cal eligibility. This would provide a significant benefit to low-income Medicare beneficiaries, who must pay $45.50 monthly for Medicare Part B coverage plus deductibles and cost sharing. Costs to Medi-Cal would be lim- ited, however, because QMB-only coverage does not include ben- efits that are not covered by Medicare, such as outpatient drugs. Limited Benefits and Waiver Approaches. The state could also de- sign more targeted approaches in order to address the most press- ing needs of low-income seniors and disabled persons while limit- ing state costs. For example, the state might seek a waiver to expand Medi-Cal income ceilings for a limited set of benefits that would include drug coverage, preventive care, and outpatient management of chronic diseases. This approach would be similar in concept to the expansion of Medi-Cal coverage for family planning services, for which the state has received a federal waiver. We recognize that health care costs for the elderly and disabled can be large and difficult to control. Accordingly, approaches would need to be care- fully crafted to provide specific benefits while remaining within ongoing budget constraints. Nevertheless, the Legislature has a variety of options and considerable flexibility in structuring an expansion of coverage in order to remain within those constraints. Accordingly, we recommend that the Legislature consider expanding Medi-Cal coverage for the elderly and dis- abled as an alternative to the Governor’s tax credit proposal because ex- Crosscutting Issues C – 27 Legislative Analyst’s Office panding Medi-Cal would be a more effective use of state funds to benefit needy seniors and disabled persons and their families. More Information Needed On Department of Aging Proposals We withhold recommend on $22 million proposed from the General Fund for the Innovation Grants, Senior Housing Support Center, and Senior Wellness Campaign programs, pending receipt of additional information from the Department of Aging. With respect to the Innovations Grants proposal, the department indi- cates that program elements such as the size and number of grants, the crite- ria for awarding the grants, and how the grants will be evaluated, will be developed prior to the May revision of the budget, in conjunction with the state’s Long Term Care Council. Without such information, the Legislature will be unable to evaluate the proposal to establish the grants program. We have also asked the department to explore whether federal match- ing funds for the three proposed programs could be obtained by coordi- nating with other departments that administer related programs. For ex- ample, the Departments of Rehabilitation and Health Services adminis- ter programs related to housing or health promotion, which qualify for federal funding. Accordingly, we withhold recommendation on these program com- ponents, pending receipt of this information. More Information Needed on Caregiver Training, Retention, and Recruitment Proposal We withhold recommendation on the proposal to establish a caregiver training, recruitment, and retention program, pending receipt of additional justification. At the time this analysis was prepared, the Department of Social Ser- vices could not provide any details on the type of training, retention, or recruiting activities contemplated in the Governor’s initiative; the num- ber of individuals that would receive the training\/recruitment services; or the cost of providing these services. Consequently, we withhold rec- ommendation on the $50 million proposed for these activities, pending receipt of additional information concerning program costs and the esti- mated caseload. We note that $35 million of the proposed funding is part of the $60 million state match for the federal Welfare-to-Work program (U.S. Department of Labor). These funds must be expended if the state is to receive the federal funds under this program. C – 28 Health and Social Services 2000-01 Analysis Rate Increase for Distinct Part Nursing Facilities Not Justified We recommend a General Fund reduction of $2.6 million in the budget request for a 5 percent pay increase pass-through for nursing home staff in order to delete funding for distinct part nursing facilities, because these facilities currently receive much higher rates than other nursing homes for similar care. (Reduce Item 4260-101-0001 by $2,558,000.) The Medi-Cal Program, administered by DHS, pays for the care of roughly two-thirds of all nursing home residents in California. In addi- tion to stand-alone nursing homes, facilities operated as a distinct part of a hospital also provide long-term care to Medi-Cal patients. These hos- pital-based distinct part nursing facilities (DP-NFs) receive daily Medi- Cal rates that generally are more than twice the rate paid to stand-alone facilities for similar levels of care. The basis of the higher rate for DP-NFs is the higher cost structure that they have (including labor costs) due to their association with a hospital. The higher DP-NF rates provide sub- stantially more funding for staff pay and other costs than do the rates for most nursing homes, which are stand-alone facilities. Accordingly, we do not believe that a need for higher DP-NF rates to adjust staff pay has been justified, and we recommend deletion of $2.6 million (General Fund) re- quested for wage pass-throughs for DP-NFs. More Developed Proposal for Quality Awards Needed We withhold recommendation on $10 million ($8 million General Fund) requested for nursing home quality awards, pending a specific proposal that describes the program in sufficient detail, including the criteria for (1) awarding grants and determining their amount, and (2) the use of the funds by awardees. The budget proposal for quality awards currently is at a conceptual stage, and DHS anticipates that it will present a more specific and de- tailed proposal during the budget process. Accordingly, we withhold rec- ommendation on the request pending receipt of a developed proposal. Nursing Home Enforcement Staff Requests Overbudgeted We recommend a General Fund reduction of $584,000 (and $584,000 in federal funds) and 16 positions because the proposal to increase unannounced inspections is overbudgeted. We withhold recommendation on a total of $11.2 million ($6 million General Fund) and 106 positions requested for improving nursing home regulation and enforcement pending receipt of specific workload information, including how much of that workload could be addressed by filling currently authorized, but vacant, positions. (Reduce Item 4260-001-0001 by $584,000.) Crosscutting Issues C – 29 Legislative Analyst’s Office The DHS licenses nursing homes and administers and enforces the state and federal requirements for these facilities through its Division of Licensing and Certification. As part of the Aging with Dignity Initiative, the budget requests $16 million ($8.2 million General Fund) and 147 new state positions for nursing home inspection and enforcement activities. Unannounced Inspections. The DHS staffing request includes the equivalent of 57 additional positions to increase unannounced nursing home inspections, based on increasing the number of current annual in- spections by 20 percent. However, only a 14 percent increase is needed in order to achieve the stated goal of a 12-month average inspection inter- val. Moreover, the current regular inspection workload should decrease due to the planned increase in the number of nursing homes placed on focused quality review status. Accordingly, to meet the administration’s stated goal, we recommend a reduction of 16 positions for a General Fund savings of $584,000 and an equal amount of matching federal funds. Other Inspection and Enforcement Proposals. While additional staff- ing for nursing home inspections and enforcement activities may be needed, the budget proposals do not provide adequate information to justify the specific resources requested. In particular, the following infor- mation is necessary to evaluate these proposals: Specific Workload Justification Lacking. The request for addi- tional staff to rapidly respond to complaints is based, in part, on the department’s assertion that a larger amount of staff time is needed to handle the average complaint than was anticipated several years ago. However, the proposal does not identify the staffing currently available to address complaints. Moreover, the proposal indicates that DHS believes that increased workload contributed to the late initiation of complaint investigations, but does not identify the extent of that contribution or potential other factors that might delay investigations. The requests for staffing for new federal workload and for increased focused quality re- views do not provide any specific workload justification for the proposed staff increases. Identify Vacant Positions That Can Be Used Instead of New Po- sitions. As we discuss in our analysis of the DHS state opera- tions (support) budget request, the department currently has a very large percentage of unfilled positions, approximately 16 per- cent, versus a normal turnover vacancy rate of about 5 percent. Accordingly, a significant amount of additional workload poten- tially could be addressed by filling currently authorized, but va- cant positions, rather than adding new positions. The department C – 30 Health and Social Services 2000-01 Analysis should identify the extent to which filling vacant positions can address its identified needs. Pending receipt of this information, we withhold recommendation on $11.2 million ($6 million General Fund) and 106 DHS positions re- quested for nursing home enforcement and regulation. Increase In Bed Licensing Fee Would Reduce General Fund Costs We recommend an increase in the per-bed nursing-home licensing fee for 2000-01 in order to adjust fee revenues to the amount needed to fully fund additional enforcement and regulatory staff and quality awards approved in the budget for a potential General Fund savings of up to $10.5 million. License fee revenues from health facilities are deposited in the Gen- eral Fund and offset, in effect, the General Fund costs of inspecting and regulating these facilities (federal funds and penalties also finance the program). Proposed budget bill language (in Item 4260-001-0001) estab- lishes the annual per-bed licensing fee for nursing homes at $189.48 for 2000-01. Pursuant to current law, this rate was calculated by DHS based on the amount of license fee revenues needed to fund current-year spend- ing for the regulatory and enforcement program. This one-year lag in the existing fee-setting mechanism facilitates the fee calculation because it does not require the department to estimate future costs or to adjust fees for budget actions. Since the size of the Licensing and Certification Pro- gram has tended to be relatively stable, fee revenues have approximately offset the total General Fund cost of the program, even with the one-year lag in the fee calculation. The budget, however, requests an increase in General Fund spend- ing for this program of almost $16 million, or 51 percent, in 2000-01, and DHS indicates that the license fee revenues proposed in the budget will not be sufficient to offset this increased General Fund cost. Almost all of the increased spending is a result of the Aging with Dignity proposals discussed above. Increasing nursing home fees by an amount sufficient to fully offset the higher General Fund spending proposed for 2000-01 would eliminate the direct General Fund impact of the increased spending. However, some of these savings would be offset by costs to support an additional in- crease in Medi-Cal nursing home rates. This is because the licensing fees are an allowable cost that is included in the Medi-Cal nursing home rates. Since Medi-Cal pays for about 65 percent of nursing home residents, Medi- Cal payments would cover most of the nursing homes’ costs for the in- creased license fees. Federal matching funds provide slightly more than Crosscutting Issues C – 31 Legislative Analyst’s Office half of Medi-Cal funding, with the remainder paid by the General Fund. As a result, the net cost to the General Fund (via Medi-Cal nursing home rates) of increasing nursing home bed fees is about one-third of the in- creased fee revenue, and the net General Fund savings is about two-thirds of the additional revenue. For example, raising nursing home licensing fees by $16 million (which is the amount of the increase in General Fund spending requested in 2000-01, including the quality awards), would reduce General Fund costs by about $10.5 million on a net basis after allowing for the cost of Medi-Cal nursing home rate increases. Similarly, the net cost to nursing homes for the $16 million of additional fee revenue would be about $5.3 million. In order to minimize the net General Fund costs of increased regula- tory and enforcement efforts for nursing homes, we recommend adjust- ing the fee established in the budget bill to the amount necessary to fully offset direct General Fund costs approved in the budget. This would be consistent with the underlying concept of using fee revenues to offset these costs, with the intent of making fees assessed in the budget year correspond to the program’s costs in the budget year. C – 32 Health and Social Services 2000-01 Analysis CHILD CARE CHILD CARE FOR CALWORKS FAMILIES AND THE WORKING POOR In 2000-01, the budget proposal for child care is $2.6 billion and about half of this amount will be spent on child care for current or former California Work Opportunity and Responsibility to Kids (CalWORKs) recipients with the other half provided to non-CalWORKs working poor families. In contrast to the non-CalWORKs working poor (where waiting lists for child care are common), the budget fully funds the estimated need for child care for both former and current CalWORKs recipients. Compared to California, the Wisconsin child care system (1) provides child care to more families, (2) treats welfare and nonwelfare families more equitably, and (3) requires higher copayments from the participating families. In order to determine the impacts of a Wisconsin-style subsidized child care system on families and on public costs, we recommend enactment of legislation to conduct a pilot test of the Wisconsin system in up to four California counties. Background The State Department of Education (SDE) and the Department of Social Services (DSS) provide state supervision over most of the state’s child care programs. Figure 1 summarizes the various child care programs in California. As the figure shows, California provides full-time child care slots (on an average monthly basis) for approximately 383,000 children and part-time preschool or after school programs for an additional 198,000. Of the full-time slots, about 250,000 (65 percent) are for CalWORKs re- cipients. (For a description of the CalWORKs three-stage delivery system for child care, please see the inset box.) CalWORKs Child Care Is Fully Funded. For 2000-01, the estimated need for child care for current and former recipients is proposed to be Crosscutting Issues C – 33 Legislative Analyst’s Office fully funded. CalWORKs recipients on aid will receive necessary child care to meet their participation mandate (through a combination of work and\/or training for 32 to 35 hours per week). If child care is not available, then the recipient does not have to participate in CalWORKs activities for the required hours, until child care becomes available. After leaving aid, former CalWORKs recipients receive up to two years of Stage 2 child care. Although funding for this child care is capped by Figure 1 California Child Care Programs 2000-01 (Dollars in Millions) Program State Controla Estimated Enrollment Governor’s Budget Full-Time Programs CalWORKs Stage 1 DSS 83,000 $424.2 Stage 2 SDE 115,000 609.6 Community Colleges (Stage 2) CCC 3,000 15.0 Reserve for Stage 1 and 2 DSS & SDE 28,000 150.4 Stage 3 set-aside SDE 20,500 115.7 Subtotals (249,500) ($1,314.9) Non-CalWORKs General child care SDE 70,000 $463.5 Alternative payment programs SDE 35,500 194.3 Stage 3 for working poor SDE 10,000 56.9 Migrant and latch key programs SDE 13,000 140.8 CalSAFE SDE 5,000 37.2 Subtotals (133,500) ($892.7) Totals, Full-Time Programs 383,000 $2,207.6 Part-Time Programs State pre-schoolb SDE 100,500 $253.7 After school programs SDE 97,500 87.8 Totals, Part-Time Programs 198,000 $341.5 Grand Totals\u2014All Programs 581,000 $2,549.1 a Department of Social Services (DSS); State Department of Education (SDE); California Community Colleges (CCC). b Some of these programs are full-time. C – 34 Health and Social Services 2000-01 Analysis CalWORKs Child Care Is Delivered in Three Stages Stage 1. Stage 1 begins when a participant enters the CalWORKs program. In Stage 1, county welfare departments (CWDs) refer families to resource and referral agencies to assist them with finding child care providers. Stage 2. Families transfer to Stage 2 when the county determines that the fami- lies’ situations become stable \u2014that is, they develop a welfare-to-work plan and find a child care arrangement. Stage 2 is administered by the State Department of Education (SDE) through its voucher-based Alternative Payment (AP) programs. Participants can stay in Stage 2 while they are on CalWORKs and for up to two years after the family stops receiving a CalWORKs grant. Although Stage 1 and Stage 2 are administered by different agencies, families do not need to switch child care providers upon moving to Stage 2. Stage 3. Stage 3 refers to the broader subsidized child care system administered by SDE that is open to both former CalWORKs recipients and the non-CalWORKs working poor. Once CalWORKs recipients leave aid, they have two years of eligibility in Stage 2. During this time, they are expected to apply for regular Stage 3 child care. We note, however, that typically there are waiting lists for such child care. Stage 3 Set-Aside. In order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year time limit, the Legisla- ture created the Stage 3 set-aside in 1997. Recipients timing out of Stage 2 are eligible for the Stage 3 set-aside if they have been unable to find regular Stage 3 child care. Assuming funding is available (and the practice has been to fully fund the estimated need), former CalWORKs recipients may receive Stage 3 set-aside child care as long as their income remains below 75 percent of the state median and their children are below age 14. the budget appropriation, current practice suggests that it is highly un- likely that a former CalWORKs Stage 2 family would lose its child care. Specifically, these recipients in Stage 2 would have the highest priority for funds. Consequently, if there were not sufficient funds for the Stage 2 former CalWORKs recipients, the Alternative Payment programs (APs) that administer Stage 2 would either draw on the child care reserve and\/ or transfer aided Stage 2 recipients back to Stage 1, thus freeing-up fund- ing for nonaided Stage 2 child care recipients. Former CalWORKs families who have exceeded their two years of Stage 2 child care will move into either regular Stage 3 child care or Stage 3 set-aside. Regular Stage 3 child care is the broader system of subsidized child care operated by SDE. The Stage 3 set-aside was specifi- cally established for former recipients who have reached their two-year Crosscutting Issues C – 35 Legislative Analyst’s Office time limit. Like Stage 2, funding for Stage 3 set-aside is capped by the appropriation. Nevertheless, the Legislature’s and the administration’s practice has been to fully fund this program on a year-by-year basis. In the current year, the administration has notified the Legislature that it will address a shortfall of about $10 million mostly through a transfer of prior-year savings. For 2000-01, the budget proposes $115 million for the Stage 3 set-aside, an increase of almost $90 million compared to the cur- rent year. Non-CalWORKs Child Care Has Waiting Lists. In contrast to the CalWORKs child care system, child care for the non-CalWORKs working poor is not fully funded. Typically, there are waiting lists for non- CalWORKs subsidized child care because there are significantly more eligible families than available slots. Families with incomes up to 75 per- cent of the state median are eligible for regular SDE child care, but prior- ity is given to families with the lowest income. Most of the available slots go to families with incomes at or below 50 percent of the state median. Although a family may retain its subsidized child care slot as its income rises up to 75 percent of the state median, it is very unusual to initially obtain a subsidized slot with an income above 50 percent of state me- dian. As we mentioned in our Analysis of the 1999-00 Budget Bill, there are no reliable data to predict how many eligible families are not receiving child care. Since many families sign up on a waiting list with more than one child care agency, the waiting lists likely double-count some fami- lies. We note that the budget for SDE proposes $1.5 million for a pilot project to analyze waiting lists and begin to collect data on the unmet demand for subsidized child care. Current Law Treats Similar Families Differently As described above, families on CalWORKs receive child care if they need it. Families that leave CalWORKs are eligible for two years of post- assistance child care, and on a year-by-year basis may continue to receive child care in the Stage 3 set-aside. Conversely, working poor families that have never been on CalWORKs receive subsidized child care only if space is available. The incomes of these families may be quite similar. During 1999-00, a family of three becomes ineligible for a CalWORKs grant when its income reaches $1,477 per month (about 44 percent of state median income). A working poor (never-CalWORKs) family with an identical income would only receive child care if slots are available and preference goes to families with the lowest incomes. In all likelihood, such a family would end up on a waiting list, rather than receive a slot. C – 36 Health and Social Services 2000-01 Analysis The current system ensures that CalWORKs recipients have uninter- rupted child care. The policy rationale for this practice is that former CalWORKs recipients\u2014having received aid in the past\u2014may be more likely to go back on CalWORKs if they lose their child care than would a non-CalWORKs working poor family, even though the incomes of the two respective families may be very similar. We know that some persons who leave CalWORKs later go back on aid, but we are aware of no data to assess the validity of the rationale that former CalWORKs recipients are more likely to return to aid if their child care is terminated than are persons with similar incomes but who have never been on aid. Options for Modifying the California Child Care System The administration expects to complete a comprehensive review of child care policies for CalWORKs recipients and the working poor dur- ing the spring of 2000. The review will cover eligibility standards, family fees, state and federal subsidy levels, and how existing resources may be more efficiently focused to serve more equitably the state’s low-income families. In addition, the SDE will hold hearings on revisions to the fam- ily fee schedule that are proposed by a legislative and staff working group. To assist the administration and the Legislature in considering the future of California’s subsidized child care system, we examine different policy options. Below we discuss (1) options for treating welfare\/former welfare families and nonwelfare families more similarly, and (2) modify- ing eligibility and copayment amounts (sliding scale fees paid by the fami- lies) for both populations so as to treat CalWORKs and the non-CalWORKs working poor more equitably. Increasing or Decreasing Child Care Funding. A decision on whether to increase or decrease spending on child care is a policy choice for the Legislature. If the Legislature elects to increase funding for the non- CalWORKs working poor, this would increase equity between the two populations. Due to data limitations, we cannot estimate the cost of fully funding the child care needs for non-CalWORKs working poor families. In addition, we note that expenditures for CalWORKs child care have been increasing more rapidly than for the working poor. In 2000-01, the budget for the Stage 3 set-aside (exclusively for former CalWORKs re- cipients) is $116 million. Preliminary estimates from the DSS indicate the cost for the Stage 3 set-aside will increase to about $200 million in 2001-02 and $265 million in 2002-03 because more former CalWORKs recipients are expected to reach their two-year post-assistance time limit. Another way to increase equity, of course, would be to reduce funding for child care for former CalWORKs recipients. This would achieve more equity but could lead to more former recipients returning to assistance. Crosscutting Issues C – 37 Legislative Analyst’s Office Modifying the Copayment Structure. An alternative approach to pro- viding child care for more families without increasing state expenditures is to increase copayments (the sliding scale fees paid by families that re- ceive subsidized child care). Currently, families with incomes below 50 percent of state median income have no copayment obligation. Fami- lies at 50 percent of the state median ($1,669 per month for a family of three) pay a monthly fee ($44) which is 2.6 percent of their income. As family income rises, the copayment amounts increase. At 75 percent of the state median (the highest level of income at which a family is eligible for subsidized child care), the monthly copayment is $200, which is about 8 percent of the family’s income. The fees are the same regardless of the cost of child care or the number of children in the family receiving the child care. Because most families receiving subsidized child care have incomes below 50 percent of the state median, total copayments in Cali- fornia are relatively low. In 1998-99, total parent copayments were $12.7 million, which was less than 1 percent of the state budget for subsi- dized child care. Decisions on copayment amounts involve trade-offs between the con- flicting goals of (1) cost-effectiveness to government and (2) not overbur- dening poor families. Higher copayments increase the amount of child care that can be purchased within existing resources (or reduce state costs if the amount of child care purchased statewide remains constant), but also increase the financial burden on low-income families. Varying copayment amounts by the type or cost of child care raises similar issues. Higher copayments for more costly child care arrangements will tend to lead to more cost-effective allocation of resources because parents will have a financial incentive to choose less costly child care options. On the other hand, this may lead parents to select lower quality child care ar- rangements. Modifying Eligibility Rules. Another policy option is to change eligibil- ity rules. Currently families with incomes up to 75 percent of the state me- dian income are eligible for subsidized child care. Because there are no reli- able data indicating the distribution of subsidized child care benefits by fam- ily income, it is difficult to predict the impact of changing financial eligibility rules. If the Legislature were to reduce the maximum income limit for pro- gram eligibility, it would result in savings that could be used to reduce the waiting lists for the families with lower incomes.As with copayments, changes in eligibility present difficult trade-offs between applying resources to the most needy families and serving more families. In the above discussion, we have (1) explained how the existing child care system favors former CalWORKs recipients over the working poor and (2) examined the advantages and disadvantages of different policies with respect to resource allocation, modifying copayments, and chang- C – 38 Health and Social Services 2000-01 Analysis ing financial eligibility rules. Below we describe how the State of Wiscon- sin has addressed these issues in its child care system. The Wisconsin System. In Wisconsin, eligibility for child care is inde- pendent of welfare status. Since the program is fully funded, it serves all eligible families. Effective March 2000, a family’s income must be below 185 percent of the federal poverty guideline ($2,082 for a family of three) to enter the state’s program for subsidized child care. Once enrolled, fami- lies remain eligible as long as their income remains at or below 200 per- cent of the federal poverty guideline. All Wisconsin families make monthly copayments even if they are also receiving a welfare grant. The copayments vary depending on fam- ily income, the type of child care purchased, and the number of children receiving child care. For families on assistance and for families with earned incomes up to 70 percent of the federal poverty guideline, the copayment for one child in licensed care is $17 per month (up to 2.7 percent for a family of three). For a family at 200 percent of the federal poverty level, the monthly copayment for one child in licensed care is $216 per month (about 11.8 percent of the family’s income). Copayments are generally higher for more children and lower if the family elects lower-cost certified child care instead of the higher-cost licensed child care. Regardless of the number of children, the maxi- mum copayment for a family is about 11.8 percent of income. As a point of reference, we note that 200 percent of the federal poverty level is about 70 percent of the California state median income for a family of three and 75 percent of state median income for a family of four. (Eligibility for sub- sidized child care in California, as noted above, is set at 75 percent of the median income for a family of three, although few families above 50 per- cent actually receive services because of funding limitations.) In general, Wisconsin’s copayments are higher than California’s, rang- ing up to 12 percent of family income. Total annual copayments are esti- mated to be about $20 million, which is about 10 percent of the state’s total program budget. Figure 2 compares copayments in California and Wisconsin, at selected income levels. Although there is significant uncertainty, we estimate that a Wiscon- sin-style program in California would cost roughly the same as California’s existing subsidized child care program ($2.6 billion). This is because the cost of providing child care to more persons generally would be offset by additional reimbursements from changes in the copayment structure. Analyst’s Recommendation. With respect to subsidized child care, the Legislature has many options. The current system treats families with simi- lar incomes differently, depending on whether or not they have received public assistance in the CalWORKs program. Although the current system is Crosscutting Issues C – 39 Legislative Analyst’s Office not completely equitable, it does tend to ensure that former CalWORKs re- cipients do not return to aid because of a lack of subsidized child care. Figure 2 Monthly Child Care Copayments Comparison of Wisconsin and California Family of Three\u2014Licensed Child Care (Actual Dollars) Selected Income Levels Monthly Income Wisconsin Copayment for California Copayment for 1 Child 2 Children 1 Child 2 Children Equivalent of CalWORKs grant $626 $17 $30 \u2014 \u2014 Working full-time at California minimum wage 998 39 56 \u2014 \u2014 Federal poverty guideline 1,157 61 91 \u2014 \u2014 50 percent of California median income 1,669 147 182 $44 $44 185 percent of poverty 2,140 199 251 128 128 Compared to California, the Wisconsin system provides proportion- ately more child care to more families and treats welfare and nonwelfare families more equitably. It achieves these objectives by collecting higher copayments from the participating families. We think this is a trade-off worth considering. In deciding whether to adopt the changes contained in the Wisconsin program, the Legislature would want to have some knowledge of the system’s effects on families and on public costs. Accordingly, we recommend enact- ment of legislation to conduct a pilot test of the Wisconsin-style child care program in up to four counties in California. The pilot project would include an evaluation that would assess the impact on public costs and identify the effects on families. We estimate that the evaluation would cost about $1.5 mil- lion over a three-year period. Although we anticipate that child care costs in the pilot counties would be similar to costs under current law, there should be some provision for funding potential additional costs. This could be ac- complished by setting aside funds in a child care reserve that could be used to pay for any child care cost increases in the pilot counties, with authoriza- tion for a deficiency request if necessary. C – 40 Health and Social Services 2000-01 Analysis Legislative Analyst’s Office DEPARTMENTAL ISSUES Health and Social Services EMERGENCY MEDICAL SERVICES AUTHORITY (4120) The Emergency Medical Services Authority (EMSA) coordinates emer- gency medical services statewide. The agency’s primary responsibilities are to (1) develop guidelines for local emergency medical services (EMS) systems, (2) review and approve local EMS plans, (3) coordinate medical and hospital disaster preparedness and response and assist the Office of Emergency Services in the preparation of the medical component of the State Emergency Plan, (4) establish standards for the education, training, and licensing of EMS personnel, (5) license EMS paramedics and con- duct disciplinary investigations as necessary. The budget proposes $13.1 million from all funds for support of EMSA programs in 2000-01, which is a decrease of 2.7 percent from estimated current-year expenditures. The budget proposes $9.1 million from the General Fund, which is a decrease of $135,000, or 1.5 percent, from esti- mated current-year expenditures. Fund Condition in Jeopardy We recommend enactment of legislation to reduce the required reserve of the Emergency Medical Services Personnel Fund from 25 percent to 5 percent of the fund’s expenditures. We further recommend that the Emergency Medical Services Authority provide the budget committees with (1) a 2001-02 fiscal projection of the Emergency Medical Services Personnel Fund condition, and (2) a fiscal plan to bring the fund’s reserve into compliance with current law (25 percent of reserve) and our recommendation above (5 percent). C – 42 Health and Social Services 2000-01 Analysis Background. Fee revenues in the EMS Personnel Fund are derived from paramedics’ license fees. The revenues support EMSA’s Paramedic Program, which includes a Licensure Unit and an Enforcement Unit. The Enforcement Unit investigates complaints made about paramedics’ ac- tions and administers disciplinary action. The costs of disciplinary ac- tion, including legal counsel and representation at hearings, are paid for by the EMS Personnel Fund. Governor’s Proposal. The budget proposes to convert the Enforce- ment Unit’s limited-term Special Investigator into a permanent position to meet the growing number of paramedic complaints brought before EMSA. Funding for this position ($78,000 annually) would continue to be provided by the EMS Personnel Fund. Ease Statute’s Reserve Requirement. The Health and Safety Code (Section 1797.112[c]) requires the EMSA to maintain a reserve balance in the Emergency Medical Services Personnel Fund equal to at least three months of the annual authorized expenditures for the personnel licen- sure program . . . In effect, this amounts to a 25 percent reserve require- ment. We believe that a 25 percent reserve is an unnecessary burden on the EMS Personnel Fund, given that its revenues and expenditures are rela- tively stable. A reserve of that magnitude would be appropriate only if the authority’s expenditures and revenues were volatile. Accordingly, we recommend amending the statute to require a 5 percent reserve. Fund’s Condition At Risk. Based on proposed expenditures of $798,000, a 25 percent reserve would amount to $200,000, while 5 percent would be $40,000. As Figure 1 shows, the budget projects no reserve in 2000-01. Consequently, we recommend that EMSA provide the budget com- mittees with (1) a forecast of the EMS Personnel Fund’s fiscal condition through 2001-02, and (2) a fiscal plan for bringing the fund’s reserve into compliance with both current law (25 percent) and our recommendation (5 percent reserve). Emergency Medical Services Authority C – 43 Legislative Analyst’s Office Figure 1 Emergency Medical Services Personnel Fund Condition 1998-99 Through 2000-01 (In Thousands) 1998-99 1999-00 2000-01 Beginning balance $34 $35 $25 Prior-year adjustments 6 \u2014 \u2014 Balance, adjusted $40 $35 $25 Revenues and transfers Revenues: Other regulatory fees $709 $747 $766 Fingerprint identification card fees 42 13 \u2014 Miscellaneous service to the public 2 \u2014 \u2014 Income from surplus money investments 4 7 7 Totals, revenues and transfers $757 $767 $773 Totals, resources $797 $802 $798 Expenditures Disbursements: Emergency Medical Services Authority $762 $777 $798 Fund balance $35 $25 \u2014 C – 44 Health and Social Services 2000-01 Analysis DEPARTMENT OF AGING (4170) The California Department of Aging (CDA) administers funds allo- cated to California under the federal Older Americans Act. These funds are used to provide services to seniors, including supportive services, nutrition programs, employment services, and preventive health services. In addition, CDA administers a range of programs, supported by state and federal funds, that provide noninstitutional services for older Cali- fornians and functionally impaired adults, including the Multipurpose Senior Services Program, Linkages, Adult Day Health Care, and the Alzheimer’s Day Care Resource Centers. Finally, CDA administers the Foster Grandparent, Senior Companion, Respite Purchase of Services, Respite Registry, and Brown Bag programs. The budget proposes expenditures of $167 million ($59 million Gen- eral Fund) for CDA in 2000-01. This represents a 64 percent increase in General Fund expenditures over the current year, due primarily to a $22 million proposed increase for the Department of Aging’s portion of the Governor’s Aging with Dignity Initiative. Aging With Dignity Initiative The Governor’s Aging with Dignity Initiative includes $20 million for the Golden Challenge Long Term Care Innovation grants program and $1 million each for the Senior Housing Support Center and the Se- nior Wellness Campaign in the Department of Aging. Please see our analy- sis of the Aging with Dignity Initiative in the Crosscutting Issues sec- tion of this chapter. Department of Alcohol and Drug Programs C – 45 Legislative Analyst’s Office DEPARTMENT OF ALCOHOL AND DRUG PROGRAMS (4200) The Department of Alcohol and Drug Programs (DADP) directs and coordinates the state’s efforts to prevent or minimize the effects of alco- hol-related problems, narcotic addiction, and drug abuse. Services include prevention, early intervention, detoxification, and recovery. The treatment system serves approximately 500,000 clients annually. The DADP allo- cates funds to local governments and contract providers and negotiates service contracts. The department also coordinates the California Mentor Initiative, a multidepartmental effort targeting youth at risk of substance abuse, teen pregnancy, educational failure, and criminal activity. The budget proposes $448 million from all funds for support of DADP programs in 2000-01, an increase of less than 1 percent above estimated current-year expenditures. The budget proposes $99 million from the General Fund, which is a decrease of $9 million, or 8 percent, from esti- mated current-year expenditures. The decrease is primarily due to a one- time carryover of $12 million from the prior year to the current year for substance abuse programs. The budget proposes an increase of $2.5 mil- lion in General Fund expenditures in 2000-01 to backfill for a reduction in federal funding for perinatal substance abuse programs. Excess Special Fund Revenues Should Be Used to Reduce Fees We recommend the adoption of budget bill language requiring the department to implement a fee reduction for the Driving-Under-the- Influence program provider licenses, because the program fund’s year- end balance is sufficiently high to support reduced fees. Under the Driving-Under-the-Influence program, individuals con- victed of driving while under the influence of alcohol or other drugs are C – 46 Health and Social Services 2000-01 Analysis required to successfully complete a state-licensed alcohol and drug edu- cation and counseling program. The department issues biennial licenses to approximately 265 providers of these services, serving roughly 135,000 participants. The costs of administering the program\u2014which cover ini- tial licensing and biennial licensing reviews, training, and developing regulations\u2014are supported by the Driving-Under-the-Influence Licens- ing Trust Fund. The fund consists of program provider license fees. Ini- tial licensing fees range from an average of $445 for first-offender pro- grams to $1,219 for multiple-offender programs. In addition, each pro- vider deposits fees of $12 per enrolled participant on a quarterly basis. The budget projects a year-end fund balance of $2 million in 2000-01, as shown in Figure 1. Figure 1 Department of Alcohol and Drug Programs Driving-Under-the-Influence Program Licensing Trust Fund (In Thousands) 1998-99 1999-00 2000-01 Beginning balance $1,991 $1,963 $1,929 Revenues 1,585 1,675 1,810 Expenditures 1,613 1,709 1,735 Year-end balance $1,963 $1,929 $2,004 Current law provides that the department shall set the licensing fees in an amount sufficient to cover projected expenditures, and that any ex- cess fees shall be carried forward and taken into consideration in the es- tablishment of fees for the next fiscal year. Based on revenue and expen- diture trends, we believe that the reserve is sufficiently large to support a fee reduction. Our review indicates that a fee reduction of 15 percent could be sustained over the next five years, while maintaining a projected re- serve of approximately $670,000 at the end of this time period. Accord- ingly, we recommend adoption of budget bill language requiring the de- partment to implement a fee reduction for program provider licenses. Our recommendation could be implemented by adoption of the fol- lowing language in budget bill Item 4200-001-0139: The department shall implement a fee reduction based on the amount of the unencumbered balance, taking into account the need to maintain a prudent reserve. Department of Alcohol and Drug Programs C – 47 Legislative Analyst’s Office Excess Special Fund Revenues Should Be Transferred to General Fund We recommend the adoption of budget bill language to transfer the amount of the year-end balance in excess of $20,000 from the Audit Repayment Trust Fund to the General Fund, because a balance of $20,000 would constitute a prudent reserve and it is appropriate to return these repayment revenues to their original source, the General Fund. (Increase General Fund revenues by $206,000.) The Audit Repayment Trust Fund consists of the recovery of state funds found not to have been spent in accordance with the requirements of state or federal regulations regarding substance abuse services. Rev- enues from the fund are used to support program audits. As Figure 2 shows, the budget projects revenues of $50,000 and ex- penditures of $67,000 in 2000-01, and a year-end balance of $226,000. However, based on past-year trends, we estimate that expenditures will be less than projected in the budget. Consequently, we believe the year- end balance will be higher. Our review of this fund indicates that a bal- ance of $20,000 in 2000-01 would be approximately one-third of projected expenditures, thereby constituting a prudent reserve against unanticipated costs. Accordingly, we recommend any balance in excess of $20,000 be transferred to the General Fund. This would be appropriate because the activity supported by this fund consists of the recovery of state funds. We estimate this would result in increased General Fund revenues of $206,000. Figure 2 Department of Alcohol and Drug Programs Audit Repayment Trust Fund (In Thousands) 1998-99 1999-00 2000-01 Beginning balance $222 $260 $243 Revenues 56 50 50 Expenditures 18 67 67 Year-end balance $260 $243 $226 Our recommendation could be implemented by adoption of the fol- lowing language in budget bill Item 4200-001-0816: For support of the Department of Alcohol and Drug Programs, the amount of the unencumbered balance exceeding $20,000 in the Audit Repayment Trust Fund as of June 30, 2001, shall be transferred to the General Fund. C – 48 Health and Social Services 2000-01 Analysis Department Should Report on Medicaid Rehabilitation Option A statutorily required report on the programmatic and fiscal implications of adopting the Medicaid rehabilitation option under the Medi-Cal Drug Treatment Program is more than six months overdue. We recommend that the department advise the Legislature on the status of the report and its recommendations regarding adoption of the option. The federal Health Care Financing Administration , which adminis- ters the Medicaid program, gives states the option of including drug and alcohol rehabilitative services as a Medicaid benefit. These services may be provided outside of the traditional clinic-based setting, and include preventive care, case management, day care habilitative, residential, and other services. Pursuant to Chapter 389, Statutes of 1998 (SB 2015, Wright), the de- partment is required to submit, by July 1, 1999, a report that identifies the key policy, program, and fiscal issues regarding the adoption of the Med- icaid rehabilitation option. The department indicates it submitted the re- port to the Health and Human Services Agency (HHSA) in October 1999. At the time this analysis was prepared, however, HHSA had not released the report. The department should be prepared at the time of budget hearings to advise the Legislature on the status of the report or, if the report has been submitted by that time, on its findings and recommendations. Statewide Strategic Plan Needed to Address Gap in Substance Abuse Treatment We recommend the adoption of budget bill language requiring the department to submit by December 1, 2000 a statewide strategic plan to address the need for substance abuse treatment. Gap in Substance Abuse Treatment. In our July 1999 report, Substance Abuse Treatment in California, we indicated that research demonstrates that substance abuse treatment is cost-effective to society, primarily due to reduced criminal activity. We also identified a gap between the need for, and the availability of, substance abuse treatment in California. The de- partment has estimated that an additional $330 million would be needed annually to serve everyone who would access publicly funded treatment, if it were available. We also reported a substantial gap in treatment specifically for ado- lescents. Compared to adults, a significantly lower percentage of adoles- cents who need publicly funded treatment receive such services. We iden- tified several barriers to serving adolescents through California’s treat- Department of Alcohol and Drug Programs C – 49 Legislative Analyst’s Office ment system, including a limited number of residential facilities and ser- vice models that are not tailored to address the unique developmental stages of adolescence. Our report recommended that the department develop short- and long-term statewide plans to address the need for more services in gen- eral, and to identify effective treatment models and strategies to more effectively serve adolescents in particular. At the time this analysis was prepared, the department had not sub- mitted such a plan. Recent funding increases for substance abuse treatment targeted to specific populations, such as pregnant and postpartum women and their children, the prison population, parolees, and drug court participants, have not been part of an overall statewide strategy to reduce substance abuse. We believe that a statewide strategic plan would enable the state to prioritize funding needs for substance abuse treatment and may help maximize federal funding. Accordingly, we recommend the adoption of budget bill language requiring the department to submit a statewide strategic substance abuse treatment and prevention plan. Specifically, we recommend that, at a minimum, the plan include: A specific component for adolescents identifying effective treat- ment models and strategies to remove barriers to treatment. A standardized assessment tool specific to adolescents, to be de- veloped in conjunction with representatives from county alcohol and drug departments and service providers. With respect to adolescent treatment, consideration of the expan- sion of the substance abuse treatment benefit under the Healthy Families Program (HFP). Consideration of the expansion of the Medi-Cal Drug Treatment Program benefit. A fiscal estimate of the costs of implementing the plan’s recom- mendations. We discuss each of these components of a statewide plan below. Moving Towards an Adolescent Treatment Program. Chapter 866, Statutes of 1998 (AB 1784, Baca), required the department to collaborate with counties and service providers to establish community-based non- residential and residential programs for adolescents who are involved in, or at risk of involvement in, the criminal justice system. In April 1999, the department allocated nearly $5 million in Adolescent Treatment Program C – 50 Health and Social Services 2000-01 Analysis (ATP) grants to 20 counties. The funding is ongoing and included in the budget for 2000-01. The department indicates that it intends to develop an adolescent treatment system based on the findings from the partici- pating counties on the most appropriate and effective services. We believe that the preliminary findings from the participating coun- ties should be used, to the extent possible, to develop the strategic plan’s adolescent component. It is important to note, however, that it is uncer- tain whether the department will be able to obtain adequate information on the full range and amount of services that are needed to treat adoles- cents. This is primarily for two reasons. First, only $149,000 was allocated for a program-wide evaluation. Second, discussions with some of the par- ticipating counties’ alcohol and drug program directors indicate that some of the grants, which average roughly $250,000, may not be enough to develop a new adolescent treatment system that would include a full con- tinuum of services. Lacking a full array of service options, participating counties may not be able to test the most appropriate treatment services. Given the potential limitations of the ATP findings, the department could rely on best practices information from the American Society of Addiction Medicine and the Center for Substance Abuse Treatment in developing our recommended plan. This information, for example, indi- cates that successful adolescent treatment systems (1) include a full con- tinuum of services, from outpatient to intensive day treatment to resi- dential programs, (2) allow clients to remain in treatment over an extended period of time, and (3) address the cognitive and social-emotional devel- opment of youth. Standardized Assessment Tool Necessary to Ensure Uniform Treat- ment Across Counties. California has no statewide adolescent-specific assessment instrument to determine need level and appropriate treat- ment. This limits the department’s ability to ensure that adolescents re- ceive comparable treatment across counties. The National Institute on Drug Abuse reports that patients who receive services specifically matched to assessed need show statistically significant improvement in all assessed problem areas, such as academic performance and violent and criminal activity. A standardized assessment tool would help ensure that clients receive the most appropriate and cost-effective treatment. A statewide assessment tool would also help in estimating the state- wide need for adolescent treatment. While the department gathers wait- ing list information from the counties, such information is an imprecise measure of need because the availability of different types of services affects waiting lists for those services. For example, because there are so few adolescent residential treatment programs, many counties would not keep waiting lists for this service. Assessment data generated by a stan- Department of Alcohol and Drug Programs C – 51 Legislative Analyst’s Office dard assessment tool, by contrast, would enable the department to esti- mate the need for different types of adolescent treatment. Expansion of the Healthy Families Substance Abuse Treatment Ben- efit. The HFP, administered by the Managed Risk Medical Insurance Board (MRMIB), implements the federal Children’s Health Insurance Program enacted in 1997. Under HFP, substance abuse treatment includes medi- cally necessary inpatient hospital detoxification and 20 outpatient visits per year. In September 1999, MRMIB submitted a statutorily required report to the fiscal and policy committees on the adequacy of substance abuse benefits in HFP. The report indicated that only 53 enrolled adolescents received at least one outpatient visit in the past year. The report cited several reasons for this small number of clients, including inaccurate uti- lization data. The report concluded that there is still insufficient utiliza- tion data available to determine the adequacy of the HFP substance abuse benefits. In our field visits, providers and county administrators indicated that the HFP benefit is inadequate for adolescents with serious substance abuse problems, who require intensive outpatient or residential treatment. County officials we spoke with also suggested that the inadequacy of benefits may have discouraged doctors from making referrals to the health plans’ treatment providers. If this is so, utilization data may not be an accurate measure of the adequacy of the benefits of the program. Finally, we note that national best practices research suggests that a full continuum of services and the option to remain in treatment for longer periods are instrumental for successful treatment. For these reasons, we believe that the department’s plan should include consideration of expanding ben- efits under HFP and cost estimates of different expansion scenarios. We note that funding for HFP is generally on a 2-to-1 federal\/state matching basis. Expansion of the Drug Medi-Cal Benefit. The Medi-Cal Drug Treat- ment Program, or Drug Medi-Cal (D\/MC), targets pregnant and post- partum women and children under age 21. The state match is included in the department’s budget. The program covers four principal benefits: individual and group counseling under the Narcotic Treatment Program; individual and group counseling under outpatient drug-free services; day care habilitative services; and perinatal services, which is the only pro- gram that covers residential services. In 1995-96, in an effort to contain costs, the D\/MC trigger was adopted in the budget act and trailer bill (Chapter 305, Statutes of 1995 [AB 911, Vasconcellos]). The legislation enacted a provision stating that if General Fund expenditures exceed a specified amount, outpatient drug-free services would be eliminated as a C – 52 Health and Social Services 2000-01 Analysis D\/MC benefit. The trigger in the current year is $45 million. In addition, in order to reduce costs, the scope and duration of D\/MC benefits were restricted and the provider reimbursement rates were lowered. In our field visits, state and county officials and treatment providers indicated that these cost containment strategies have resulted in inad- equate benefits under D\/MC. Consequently, many Medi-Cal-eligible cli- ents are treated instead in programs funded entirely by state funds, or not treated at all. In order to maximize federal funds, we believe the de- partment should include in its plan a review of the impact of the trig- ger and should consider strategies to expand D\/MC benefits if cost- effective. The plan should also include fiscal estimates of such strategies. As noted above, the department is required to submit a report on the programmatic and fiscal implications of adopting the Medicaid rehabili- tation option under the Medi-Cal Drug Treatment Program, which would expand the range of services covered under D\/MC. We recommended above that the department advise the Legislature on the status of the re- port. We note that expansion of D\/MC benefits may require loosening the trigger. Since D\/MC is an entitlement, and benefits must be provided statewide, expansion raises concerns about uncontrollable costs. As part of the strategic plan, the department could consider a managed care model as a potential longer-term solution to cost containment. Summary. We recommend the adoption of budget bill language re- quiring the department to submit, by December 1, 2000, a statewide stra- tegic plan to address the need for substance abuse treatment. The plan should include a specific component for adolescent treatment, including a standardized assessment tool. In order to serve more persons and maxi- mize federal funding, the plan should consider expansion of the HFP substance abuse treatment benefits and the D\/MC benefits. California Children and Families Commission C – 53 Legislative Analyst’s Office CALIFORNIA CHILDREN AND FAMILIES COMMISSION (4250) Proposition 10 was enacted by the voters of California in the Novem- ber 1998 election. It funds early childhood development programs from revenues generated by increases in the state excise tax on cigarettes and other tobacco products. These programs are provided either by the state California Children and Families Commission or the local county com- missions. The Governor’s proposal estimates that Proposition 10 revenues will be $733 million in 1999-00 and $719 million in 2000-01, a decrease of 2 per- cent due to a projected decrease in tobacco consumption. According to statute, these funds are deposited into the California Children and Fami- lies Trust Fund, and a small amount is used to (1) offset reductions in certain Proposition 99 programs and Breast Cancer Fund programs due to decreased tobacco consumption and (2) reimburse the State Board of Equalization for its administrative costs. Of the remainder, 80 percent of the funds are allocated to Proposition 10 county commissions and the other 20 percent to the state commission. The California Children and Families Commission must spend their funds on (1) a mass media campaign, (2) educational activities, (3) sup- port for child care providers, (4) research, and (5) administration. In early 2000, the state commission intends to fund initiatives in children’s health care, child care and development, and family literacy. The budget estimates that spending will amount to $1.1 billion in the current year and $729 million in the budget year. Current-year expendi- tures exceed the annual revenues because of a large carry-over from 1998-99, due to the time required for program implementation. We note that these funds are continuously appropriated, and not sub- ject to appropriation by the Legislature. We also note that passage of Propo- C – 54 Health and Social Services 2000-01 Analysis sition 28, included on the March 2000 ballot, would repeal the tax provi- sions of Proposition 10. This would eliminate new funds for programs administered by the state and local commissions. Matching Grant Program Would Encourage Cost-Effective Use of Proposition 10 Funds We recommend enactment of legislation to establish a state-funded voluntary matching grant program for the Proposition 10 county commissions, which would fund (1) early childhood programs that have been shown to be cost-effective and\/or (2) demonstration programs that are potentially cost-effective, based on existing research. Background. Proposition 10 results in a significant increase in fund- ing for programs related to early childhood development. A key issue, therefore, is ensuring that these funds will be spent effectively. Most of the Proposition 10 revenues go to the county commissions. This local con- trol is likely to facilitate responsiveness to local needs, but with up to 58 commissions and the broad discretion that they have in allocating their revenues, it will be a challenge to ensure that the funds will be spent effectively. County strategic plans must describe how program outcomes will be measured and must be consistent with guidelines adopted by the state commission, but specific spending plans do not have to be reviewed or approved at the state level. The Legislature has no direct control over the expenditure of Propo- sition 10 funds, and as such its role is a limited one. Nevertheless, the Legislature does have an opportunity to influence decisions taken by the state and, more importantly, the county commissions. Research on Early Childhood Programs. A variety of early childhood programs\u2014typically small-scale demonstration programs\u2014have been evaluated as being effective according to outcome measures such as school achievement and health status. In a few cases (a home-visiting program in Elmira, New York, for example), the cost-effectiveness of programs has been documented as well. (For further discussion of research on such cost-effective programs, please see our report, Proposition 10: How Does it Work? What Role Should the Legislature Play in Its Implementation?, January 1999.) It also makes sense to evaluate the potential of other early childhood interventions. While relatively few programs have been analyzed on the narrowly defined basis of cost-effectiveness, a large number have been shown to result in positive outcomes. The Office of Juvenile Justice and Delinquency Prevention in the U.S. Department of Justice, for example, has published the results of a review of family strengthening programs, California Children and Families Commission C – 55 Legislative Analyst’s Office which identified 34 noteworthy programs, including nine that focus on families with children under six years of age. Such programs could serve as the basis for initiating pilot projects in California. Matching Grant Program. We recommend enactment of legislation to establish a state-funded voluntary matching grant program for the Proposition 10 county commissions, which would fund (1) early child- hood programs that have been shown to be cost-effective and\/or (2) dem- onstration programs that are potentially cost-effective, based on existing research. (As implied above, demonstration programs are small-scale projects designed to test the effectiveness or cost-effectiveness of the pro- gram or specific aspects of the program.) The primary purpose of this matching grant program would be to create a fiscal incentive to encourage the county commissions to use their funds productively. We believe that a 1:3 state\/local match would pro- vide a sufficient incentive. Thus, a state appropriation of $15 million, for example, would match up to $45 million in local funds. We also suggest that if such a program is adopted, it be administered either by the Department of Social Services (DSS) or by the California Children and Families Commission, with the assistance of an advisory group that includes representatives from other departments. We note that the DSS has some expertise in this area and currently oversees a home- visiting pilot project. This expertise is important because the administra- tive agency will have to make judgments on the potential effectiveness and cost-effectiveness of the local proposals. The Children and Families Commission on the other hand, also has acquired staffing expertise and has responsibility for state oversight of the program. C – 56 Health and Social Services 2000-01 Analysis DEPARTMENT OF HEALTH SERVICES STATE OPERATIONS (4260) The Department of Health Services (DHS) has four major responsi- bilities. First, it provides access to health care for low-income persons through the Medi-Cal Program. Second, it administers a broad range of public health programs in cooperation with local health agencies. Third, it licenses hospitals and certain other health facilities. Fourth, it functions as the state’s central agency for vital statistics. The budget proposes $746 million from all funds ($244 million from the General Fund) and 5,790 personnel-years of staff for DHS state opera- tions in 2000-01. Proposed General Fund spending represents an increase of 13 percent compared with estimated General Fund spending in the current year. This is due primarily to proposed new positions, as dis- cussed below. Vacant Positions Should Be Filled Before Adding New Positions In addition to specific recommendations regarding particular staffing requests, we withhold recommendation generally on all of the department’s proposals to increase staffing (which result in a net increase of 557 positions in 2000-01) because the department’s large number of unfilled existing positions calls into question the need for the requested staffing increases. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new positions and funding, and report the results of this review to the budget committees. Budget Request for New Positions. The budget requests a net increase of 557 authorized positions for DHS in 2000-01, raising the total number of authorized positions in the department to 6,198\u2014an increase of almost Department of Health Services State Operations C – 57 Legislative Analyst’s Office 10 percent. The largest of these staffing requests is proposed for the Medi- Cal Fraud and Fiscal Integrity Initiative (255) and for additional staff to monitor the quality of care at nursing homes that are included in the Governor’s Aging with Dignity Initiative (153). Vacant Positions in Department. All departments have some vacant positions due to normal personnel turnover and hiring delays, but gener- ally these unavoidable vacancies are only about 5 percent of total posi- tions. This is normally reflected in the budgeted salary savings for the department. The requests for the new positions, however, come despite the fact that, as of January 2000, the department had over 900 vacant positions. This represents a current vacancy rate of more than 16 percent. Thus, more than one in every six positions in the department is vacant, on average. The DHS notes that it has had difficulty filling positions for reasons such as tight labor markets, particularly for certain types of health profession- als, and administrative backlogs in the department’s hiring process. Department staff indicate that the vacancy rate is somewhat over- stated. This is because persons hired under its temporary help blanket authority offset some of these vacancies; however, the department cur- rently is unable to quantify this offset. Nevertheless, the department agrees that its vacancy rate is excessive. The department’s high vacancy rate is likely to be causing some of the workload backlogs that the department cites as justification for new additional positions and funding. Accordingly, some of this workload problem could likely be resolved by filling existing positions rather than adding new ones. Therefore, while we address the merits of some individual budget staffing requests later in this analysis and in our analysis of the Aging with Dignity Initiative, we withhold recommendation generally on all of the department’s requests for additional staffing. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new posi- tions and funding, and report the results of this review to the budget committees. Salary Savings Estimate Should Be Realistic We recommend that the Departmentof Health Services prepare, for the budget committees, a realistic hiring plan for its revised staffing needs and a revised salary savings estimate for 2000-01 that is consistent with that plan, in order to avoid budgeting funds that are not likely to be spent. C – 58 Health and Social Services 2000-01 Analysis In addition to requesting a net increase of 557 new positions, the bud- get assumes that DHS will fill most of its current vacant positions and reduce its overall vacancy rate in 2000-01 to 6.6 percent. In order to achieve this, the department would have to hire more than 1,000 people by early summer, in addition to replacing personnel who leave due to normal turn- over. This appears unrealistic, and we believe that the department is likely to have a higher vacancy rate in 2000-01 than the budget assumes. The amount of funding requested for staff wages and benefits is the full cost of wages and benefits for all authorized positions for the full year, less an allowance for salary savings that reflects the anticipated va- cancy rate. For this reason, an unrealistically low estimate of the vacancy rate for DHS in 2000-01 would result in overbudgeting for staffing costs. In addition to evaluating the potential workload that can be addressed by filling existing vacancies, as recommended above, we further recom- mend that DHS prepare, for the budget committees, a realistic hiring plan for its revised staffing needs and a revised salary savings estimate for 2000-01 that is consistent with that plan, in order to avoid budgeting funds that are not likely to be spent. Employer Retirement Contribution Overbudgeted We recommend reducing the amount budgeted for employer retirement contributions to the correct amounts for proposed new positions in 2000-01, for a total savings of $1.1 million ($442,000 General Fund, $158,000 special funds, $501,000 federal funds, and $27,000 reimbursements), subject to adjustment for other budget actions affecting these proposals. Employer Retirement Contribution Rates Reduced. Subsequent to the enactment of the 1999-00 Budget Act\u2014which set employer retirement con- tribution rates to roughly 5 percent of salaries for most types of positions\u2014 Chapter 800, Statutes of 1999 (AB 232, Alquist) reduced these rates to approximately1.5 percent. Budget Letter Number 99-31, issued in Octo- ber 1999, provided departments with instructions for budgeting accord- ingly. Old Rate Budgeted for New Positions. The department applied the 5 percent rate rather than the 1.5 percent rate to the retirement contribu- tion costs in its proposals for additional staff in 2000-01. Consequently, the department’s personal services costs are overbudgeted. Accordingly, we recommend reducing the employer retirement contributions budgeted in the proposals to reflect the correct rate. The department has identified the overbudgeted amounts as $442,000 General Fund, $501,000 federal funds, $158,000 special funds, and $27,000 reimbursements. Therefore, Department of Health Services State Operations C – 59 Legislative Analyst’s Office we recommend reductions to the appropriate items, subject to adjust- ment for other budget actions affecting the department’s proposed new positions. Medi-Cal Fraud and Fiscal Integrity Initiative\u2014 More Information Needed We withhold recommendation on $26.2 million ($10 million General Fund) and 255 positions requested for the Governor’s Medi-Cal Fraud and Fiscal Integrity Initiative, pending further analysis of the proposal and receipt of additional information from the department regarding (1) the potential use of existing vacant positions to address identified workload, and (2) more specific workload justification that relates staffing requests to specific goals and outcomes and recognizes the interactive effects of the components of the Governor’s initiative. The budget requests a total of $26.2 million ($10 million from the General Fund) and 255 positions to expand antifraud activities and im- prove the fiscal integrity of the Medi-Cal Program. This request is in ad- dition to an augmentation of 41 positions and $3.3 million ($1.6 million from the General Fund) that was provided in the current year by the 1999-00 Budget Act and trailer bill legislation. The requested new posi- tions and funding for 2000-01 would be used for the following purposes: Double the staff of the Medi-Cal Fraud Prevention Bureau. Tighten the Medi-Cal provider enrollment process, expand mea- sures to detect and withhold payments for claims that appear fraudulent, and take aggressive enforcement action against pro- viders who commit fraud. Increase field audits of Medi-Cal providers. Expand antifraud activities to Medi-Cal managed care. Increase fraud detection efforts for dental providers. Add staff to investigate clinical laboratories that are suspected of fraudulent practices. Rationalize and update Medi-Cal billing codes for medical equip- ment and supplies and contract for some types of medical equip- ment and supplies and for generic drugs in order to reduce op- portunities for fraud and abuse and obtain competitive prices for Medi-Cal purchases. Vacancies Should Be Addressed. Earlier in this analysis, we discuss the large number of current DHS staff vacancies. Because of this large C – 60 Health and Social Services 2000-01 Analysis number of vacancies, we are generally withholding recommendation on proposals for new positions, including the positions requested in the an- tifraud initiative, pending information from the department on the ex- tent to which filling existing vacant positions can address the workload for which the new positions are being requested. Specific Concerns With the Antifraud Initiative. In addition to the general issue of how the department’s vacancies affect the need for new positions, the antifraud proposal raises a number of specific concerns, including the following: Ongoing Workload Versus Intensive Initial Efforts. As indicated above, 41 positions were added in the current year to augment the department’s antifraud activities. This raises the question of how much antifraud staffing will be needed on an ongoing basis after current intensive efforts weed out a backlog of fraudu- lent providers that has built up over several years. Intensive Enforcement Versus Structural Change. In some cases, changing the way in which the Medi-Cal Program purchases goods and services may be a more effective strategy to minimize fraud and abuse than adding more staff for ongoing intensive auditing and enforcement efforts. In fact, the Governor’s budget offers an example of such an approach. It requests 16.4 positions to develop a contracting program for some types of medical equip- ment and supplies, and nine positions to revise and update cod- ing systems and utilization policies. Contracting will enable DHS to reduce the number of providers of these items, and the con- tracting process will limit participation to legitimate health care businesses and therefore exclude shell businesses that are set up only to commit fraud. Updating and rationalizing billing codes and utilization policies will reduce opportunities for fraud and abuse through manipulation of billing practices. The staffing re- quests in the auditing and enforcement components of the Governor’s antifraud initiative, however, base their workload justification on the current number of providers (or even larger numbers that predate the recent provider reenrollment effort). Workload Justification Often Vague and Not Linked to Specific Outcomes. The department’s budget documents provide exten- sive lists of general tasks and the time required to perform them for various types of requested positions. In many cases, however, these documents present little information to link these workloads with specific outcomes or goals. Consequently, the workload ba- sis for the requested positions often is vague and unclear. For example, the initiative requests 29 positions to make drop-in vis- Department of Health Services State Operations C – 61 Legislative Analyst’s Office its on providers who are not in the four categories already being visited as part of the intensive current-year antifraud effort. The new positions will be used to conduct drop-in visits over a five- year period for up to 7,500 providers in those other categories, including chain pharmacies and emergency ambulance services. No evidence is presented, however, that these other categories have significant numbers of fraudulent providers that would be appropriate targets for a drop-in program. Moreover, as men- tioned above, this component of the request does not recognize any workload reductions that will result because of reductions in the number of providers due to the current reenrollment process and the proposed contracting program. Pending receipt and analysis of additional information from DHS to address the issues raised above, we withhold recommendation on the proposal. C – 62 Health and Social Services 2000-01 Analysis CALIFORNIA MEDICAL ASSISTANCE PROGRAM (MEDI-CAL) In California, the federal Medicaid Program is administered by the state as the California Medical Assistance (Medi-Cal) Program. This program pro- vides health care services to welfare recipients and other qualified low-in- come persons (primarily families with children and the aged, blind, or dis- abled). Expenditures for medical benefits are shared about equally by the General Fund and by federal funds. The Medi-Cal budget also includes ad- ditional federal funding for (1) disproportionate share hospital (DSH) pay- ments, which provide additional funds to hospitals that serve a dispropor- tionate number of Medi-Cal or other low-income patients, and (2) matching funds for state and local funds in other related programs. At the state level, the Department of Health Services (DHS) adminis- ters the Medi-Cal Program. Other state agencies, including the California Medical Assistance Commission (CMAC), the Department of Social Ser- vices (DSS), the Department of Mental Health (DMH), the Department of Developmental Services (DDS), the Department of Aging, and the De- partment of Alcohol and Drug Programs receive Medi-Cal funding from DHS for eligible services that they provide to Medi-Cal beneficiaries. At the local level, county welfare departments determine the eligibility of applicants for Medi-Cal and are reimbursed by DHS for the cost of those activities. The federal Health Care Financing Administration oversees the program to ensure compliance with federal law. Proposed Spending. The budget for DHS proposes Medi-Cal expen- ditures totaling $23.2 billion from all funds for state operations and local assistance in 2000-01. The General Fund portion of this spending ($8.8 bil- lion) increases by $551 million, or 6.7 percent, compared with estimated General Fund spending in the current year. The remaining expenditures for the program are mostly federal funds ($12.8 billion). California Medical Assistance Program C – 63 Legislative Analyst’s Office The spending total for the Medi-Cal budget includes an estimated $3 bil- lion (federal funds and local matching funds) for payments to DSH hospi- tals, and about $1.8 billion of federal funds to match $1.7 billion of state and local funds budgeted elsewhere for programs operated by other departments, counties, and the University of California. Including these other state and local funds, total proposed spending would be about $24.4 billion in 2000-01. MEDI-CAL BENEFITS AND ELIGIBILITY What Benefits Does Medi-Cal Provide? Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nurs- ing care, doctor visits, laboratory tests and x-rays, family planning, and regular examinations for children under the age of 21. California also has chosen to offer 32 optional services, such as outpatient drugs and adult dental care, for which the federal government provides matching funds. Certain Medi-Cal services\u2014such as hospitalization in many circum- stances\u2014require prior authorization from DHS as medically necessary in order to qualify for payment. How Medi-Cal Works Currently, more than half (57 percent) of the Medi-Cal caseload consists of participants in the state’s two major welfare programs, which include Medi- Cal coverage in their package of benefits. These programs are (1) the Califor- nia Work Opportunity and Responsibility to Kids (CalWORKs) program, which provides assistance to families with children and replaces the former Aid to Families with Dependent Children (AFDC) program, and (2) the Supplemental Security Income\/State Supplementary Program (SSI\/SSP), which assists elderly, blind, or disabled persons. Counties administer the CalWORKs program and county welfare offices determine eligibility for CalWORKs benefits and Medi-Cal coverage concurrently. Counties also de- termine Medi-Cal eligibility for persons who are not eligible for (or do not wish) welfare benefits. The federal Social Security Administration determines eligibility for SSI\/SSP, and the state automatically adds SSI\/SSP beneficia- ries to the Medi-Cal rolls. Generally, persons who have been determined eligible for Medi-Cal benefits (Medi-Cal eligibles ) receive a Medi-Cal card, which they use to obtain services from providers who agree to accept Medi-Cal patients. Medi-Cal uses two basic types of arrangements for health care\u2014fee-for- service and managed care. C – 64 Health and Social Services 2000-01 Analysis Fee-for-Service. This is the traditional arrangement for health care in which providers are paid for each examination, procedure, or other ser- vice that they furnish. Beneficiaries generally may obtain services from any provider who has agreed to accept Medi-Cal payments. The Medi- Cal Program employs a variety of utilization control techniques (such as requiring prior authorization for some services) designed to avoid costs for medically unnecessary or duplicative services. Managed Care. Prepaid health plans generally provide managed care. The plans receive monthly capitation payments from the Medi-Cal Pro- gram for each enrollee in return for providing all of the covered care needed by those enrollees. These plans are similar to health plans offered by many public and private employers. Currently, slightly more than half (2.6 million of the total of 5 million Medi-Cal eligibles) are enrolled in managed care organizations. Beneficiaries in managed care choose a plan and then must use providers in that plan for most services. Since pay- ments to the plan do not vary with the amount of service provided, there is much less need for utilization control by the state. Instead, plans must be monitored to ensure that they provide adequate care to enrollees. Who Is Eligible for Medi-Cal? Almost all Medi-Cal eligibles fall into two broad groups of people. They either are aged, blind, or disabled or they are in families with chil- dren. Somewhat more than half of Medi-Cal eligibles are welfare recipi- ents. Figure 1 shows for each of the major Medi-Cal eligibility categories, the maximum income limit in order to be eligible for health benefits and the estimated caseload and total benefit costs for 1999-00. The figure also indicates for each category, whether an asset limit applies and whether eligible persons with incomes over the limit can participate on a spend down basis. If spend down is allowed, then Medi-Cal will pay the por- tion of any qualifying medical expenses that exceed the person’s share of cost, which is the amount by which that person’s income exceeds the applicable Medi-Cal income limit. Aged, Blind, or Disabled Persons. About 1.3 million low-income per- sons who are (1) at least 65 years old or (2) disabled or blind persons of any age receive Medi-Cal coverage. Overall, the disabled make up more than half (61 percent) of this portion of the Medi-Cal caseload. Most of the aged, blind, or disabled persons on Medi-Cal (86 percent) are recipi- ents of SSI\/SSP benefits and receive Medi-Cal coverage automatically. The other aged, blind, or disabled eligibles are in the medically needy category. They also have low incomes, but do not qualify for, or choose not to participate in the SSI\/SSP program. For example, aged low-income noncitizens generally may not apply for SSI\/SSP (although they California Medical Assistance Program C – 65 Legislative Analyst’s Office Figure 1 Who is Eligible for Medi-Cal? Major Eligibility Categories 1999-00 Maximum Monthly Income Or Grant a Asset Limit Imposed? Spend Down b Allowed? Enrollees (Thousands) Annual Benefit Costs (Millions) c Aged, Blind, or Disabled Persons Welfare (SSI\/SSP) $1,249 \ufffd \u2014 1,162 $7,267 Medically needy 954 \ufffd \ufffd 111 742 Medically needy\u2014long term care Special limits \ufffd \ufffd 70 2,430 Families, Children, and Pregnant Women Families Welfare (CalWORKs) $1,032 d \ufffd \u2014 1,773 $2,264 Section 1931(b) family coverage 1,482 e \ufffd \u2014 1,209 1,635 Medically needy 1,190 \ufffd \ufffd \u2014 f \u2014 f Children and Pregnant Women Children 200 percent of poverty\u2014 infants $2,873 \u2014 \u2014 52 \u2014 g 133 percent of poverty\u2014 ages 1 through 5 1,941 \u2014 \u2014 127 $86 100 percent poverty\u2014 ages 6 through 18 1,482 \u2014 \u2014 97 68 Medically indigent\u2014 ages 0 through 21 1,190 \ufffd \ufffd 254 432 Pregnant women 200 percent of poverty\u2014 pregnancy services $2,873 \u2014 \u2014 115 $445 Medically indigent\u2014all services 1,190 \ufffd \ufffd 10 95 Emergency-Only Undocumented immigrants who qualify in any eligibility group are limited to emergency services (including labor and delivery and long-term care). 207 h $494 a Amounts are for aged or disabled couple (including the standard $20 disregard) or for a four-person family with children (includ- ing a $90 work expense disregard). b Indicates whether persons with higher incomes may receive benefits on a share-of-costs basis. c Combined state and federal costs. d Income limit to apply for CalWORKs (including a $90 work expense disregard). After becoming eligible, the income limit in- creases to $1,717 (family of four) with the maximum earned income disregard. e Applicant income limit of 100 percent of poverty, effective March 1, 2000. Increases to $2,124 after enrollment. f Enrollment and costs included in amounts for Section 1931(b) family coverage. g Costs included in amount for 200 percent of poverty pregnant women group. h About 70,000 additional undocumented immigrants are included in other enrollment categories. C – 66 Health and Social Services 2000-01 Analysis may continue on SSI\/SSP if they already were in the program as of Au- gust 22, 1996). As another example, about 17 percent of the medically needy persons in this category have incomes above the Medi-Cal limit and participate on a share-of-cost basis. The number of Medi-Cal eligibles in long-term care is small\u2014only 70,000 people, or 1.4 percent of the total caseload\u2014but because long-term care is very expensive, benefit costs for this group total $2.4 billion, or 15 percent of total Medi-Cal benefit costs. Almost 60 percent of the aged or disabled Medi-Cal eligibles also have health coverage under the federal Medicare Program. Medi-Cal gener- ally pays the Medicare premiums, deductibles, and any co-payments for these dual beneficiaries, and Medi-Cal pays for services not covered by Medicare, such as drugs and long-term care. Medi-Cal also provides some limited assistance to a small number of Medicare eligibles who have incomes somewhat higher than the medically needy standard. Families with Children. About 35 percent of all Medi-Cal eligibles are CalWORKs welfare recipients, who receive Medi-Cal coverage under the state’s Section 1931(b) family coverage category. Section 1931(b) family coverage was created by the 1996 federal welfare reform legislation to re- place the former AFDC-linked Medicaid eligibility category. Although CalWORKs recipients constitute the largest single group of Medi-Cal eli- gibles by far, they account for only 17 percent of total Medi-Cal benefit costs. This is because almost all CalWORKs recipients are children or able-bodied working-age adults, who generally are relatively healthy. Low-income fami- lies who are not in CalWORKs may enroll in Medi-Cal in the Section 1931(b) family coverage category or in the medically needy family category. Medi- Cal covers both the adults and the children in these families. As in CalWORKs, applicants for Medi-Cal family coverage in either the Section 1931(b) or medically needy categories have been restricted to single-parent or unemployed families with very low incomes. Currently (until March 2000), the income limit for families applying for Medi-Cal is about 70 percent of the federal poverty level (FPL) for Section 1931(b) coverage and about 80 percent of the FPL for medically needy coverage. However, once enrolled in Section 1931(b) coverage, families may work and remain on Medi-Cal at higher income levels (up to about 155 percent of the FPL). Families whose incomes are above the Section 1931(b) or medically needy limits, but who meet all of the other medically needy qualifications, may receive Medi-Cal benefits on a share-of-cost basis. Expansion of Section 1931(b) Family Coverage. Effective March 1, 2000, Chapter 146, Statutes of 1999 (AB 1170, Cedillo) expands Section 1931(b) eli- gibility to families with incomes up to 100 percent of the FPL, plus appli- cable income deductions. This expansion has the effect of broadening eligi- California Medical Assistance Program C – 67 Legislative Analyst’s Office bility for parents since children in families with incomes up to 250 percent of the FPL (plus income deductions) currently are eligible for either Medi-Cal child-only coverage or for coverage under the Healthy Families Program administered by the Managed Risk Medical Insurance Board. The expansion also will make working parents in two-parent fami- lies eligible for Medi-Cal if they meet the income and asset limits. At present, only families with single parents or unemployed parents (de- fined as working less than 100 hours per month) qualify for Section 1931(b) or medically needy family coverage (these limitations also apply to CalWORKs applicants and will continue for them). Women and Children. Medi-Cal includes a number of additional eli- gibility categories for pregnant women and for children. Medi-Cal cov- ers all health care services for poor pregnant women in the medically indigent category, which has the same income and asset limits and spend- down provisions as apply to medically needy families. However, preg- nancy-related care is covered with no share of cost and no limit on assets for women with family incomes up to 200 percent of the FPL (an annual income of $34,480 for a family of four, including a $90 monthly work expense disregard). The medically indigent category also covers children and young adults through age 20. Several special categories provide coverage without a share of cost or an asset limit to children in families with higher incomes\u2014 200 percent of poverty for infants, 133 percent of poverty for children ages 1 through 5, and 100 percent of poverty for children ages 6 through 18. Pregnant women and poverty-group children also may use a simplified mail-in application to apply for Medi-Cal or Healthy Families Program coverage (for children above the Medi-Cal income limits). Emergency-Only Medi-Cal. Noncitizens who are undocumented im- migrants, or are otherwise not qualified immigrants under federal law, may apply for Medi-Cal coverage in any of the regular categories. How- ever, benefits are restricted to emergency care (including labor and deliv- ery). Medi-Cal also provides prenatal care and long-term care to undocu- mented immigrants. These services, as well as nonemergency services for recent legal immigrants, do not qualify for federal funds and are sup- ported entirely by the General Fund. Most Medi-Cal Spending Is For the Elderly or Disabled The average cost per eligible for the aged and disabled Medi-Cal caseload (including long-term care) is much higher than the average cost per eligible for families and children on Medi-Cal. As a result, almost two-thirds of Medi-Cal spending is for the elderly and disabled, although C – 68 Health and Social Services 2000-01 Analysis they account for only about one-fourth of the total Medi-Cal caseload, as shown in Figure 2. Figure 2 Medi-Cal Most of Caseload Is Families\/Children Most Spending is for Elderly\/Disabled 1999-00 10 20 30 40 50 60 70 80% Elderly\/Disableda Families\/Children Percent of Spending Percent of Caseload a Includes long-term care. MEDI-CAL EXPENDITURES Rapid Spending Growth in the Current Year Figure 3 presents a summary of Medi-Cal General Fund expenditures in the DHS budget for the past, current, and budget years. The budget estimates that the General Fund share of Medi-Cal local assistance costs will increase by $738 million (9.9 percent) in 1999-00, com- pared with 1998-99. The bulk of this increase is for benefit costs, which will total an estimated $7.7 billion in 1999-00\u2014an increase of $662 mil- lion (9.4 percent). County administration costs increase by an estimated $82.1 million (24 percent). Our analysis of the Medi-Cal estimate indicates that increases in the cost and utilization of health care goods and services (including provider rate increases) account for the largest portion of the increase in benefit costs\u2014about $425 million. Caseload growth adds about $180 million of California Medical Assistance Program C – 69 Legislative Analyst’s Office General Fund cost, and other factors account for the remainder of the cost increase (about $57 million). Figure 3 Medi-Cal General Fund Budget Summarya Department of Health Services 1998-99 Through 2000-01 (Dollars in Millions) Actual 1998-99 Estimated 1999-00 Proposed 2000-01 Change From 1999-00 Amount Percent Support (state operations) $65.8 $69.5 $79.9 $10.4 15.0% Local Assistance Benefits $7,002.2 $7,664.7 $8,169.8 $505.1 6.6% County administration (eligibility) 339.7 421.7 451.0 29.2 6.9 Fiscal intermediaries (claims processing) 69.2 66.4 73.6 7.1 10.7 Hospital construction debt service 60.2 55.9 55.1 -0.9 -1.5 Subtotals, local assistance $7,471.2 $8,208.8 $8,749.4 $540.6 6.6% Totals $7,536.1 $8,278.2 $8,829.3 $551.0 6.7% Caseload (thousands of beneficiaries) 5,061 5,192 5,289 131 2.6% a Excludes General Fund Medi-Cal spending budgeted in other departments. 1999-00 Rate Increases. Roughly $140 million of the General Fund spending increase in the current year is for provider rate increases. Rate increases for nursing homes and other long-term care facilities total $49.3 million, most of which is to increase staffing ratios and raise pay levels for direct-care staff by 5 percent. Various rate increases for physi- cians, in-home nursing, optometrists, pharmacists, and emergency medi- cal transportation total $33 million. In addition, we estimate that rate in- creases approved by DHS or by CMAC for Medi-Cal managed care plans increase General Fund costs by roughly $55 million. Pharmacy and Certain Other Costs Growing Rapidly. The budget estimates that the General Fund cost of payments to pharmacy providers (for drugs and various types of medical supplies) will increase by $205 mil- lion, or 26 percent, in the current year. In addition, General Fund costs for the Other Services category in the Medi-Cal estimate, which includes C – 70 Health and Social Services 2000-01 Analysis durable medical equipment suppliers and adult day health services, will increase by an estimated $46 million (22 percent), compared with 1998-99. Both of these categories include some groups of providers that DHS has targeted for fraud prevention efforts. Caseload Increase Reflects Backlog of Eligibility Determinations. The budget estimates that caseload in the current year will increase by 132,000 eligibles, or 2.6 percent. (The Governor’s Budget Summary states that caseload will grow by much less in the current year and then decline in 2000-01, but this reflects only the base caseload before adding the esti- mated caseload increase from recently-enacted and proposed eligibility expansions.) The 2.6 percent caseload increase is primarily related to two factors. First, the caseload continues to be inflated by continued delays in deter- mining the Medi-Cal eligibility of former CalWORKs welfare recipients. These are individuals who were automatically continued on Medi-Cal since 1998 pending the development of Section 1931(b) eligibility stan- dards by DHS and the implementation of the resulting complex stan- dards by county welfare departments. A backlog of more than 300,000 eligibility determinations built up, which the budget anticipates will not be eliminated until late 2000-01. By then, the budget estimates that half of the backlogged caseload will be dropped from the Medi-Cal rolls due to a lack of response by (or inability to locate) beneficiaries or due to a deter- mination of ineligibility. The second factor increasing the caseload is the expansion of Section 1931(b) eligibility enacted as part of the 1999-00 budget. This expansion will take effect in March 2000, increasing the average caseload for the current year by 83,000. Also, contributing to the growth in caseload costs is a moderate growth in the number of disabled SSI\/SSP recipients. Al- though the size of this caseload increase is modest (about 19,000 eligibles or 2.6 percent), it results in a disproportionate cost increase due to the relatively greater health care needs of this group. Reduction in State DSH Payment Takeout. The 1999-00 budget re- duced by $30 million the portion of county matching funds for DSH hos- pital payments that the state diverts to offset General Fund Medi-Cal costs. This state takeout now has been gradually reduced from $239.8 mil- lion in 1995-96 to a current level of $84.8 million. County Administration. The General Fund share of county adminis- tration costs for eligibility determinations, outreach, and related activi- ties increases by $82.1 million, or 24 percent. The large increase results from rapid growth in the nonwelfare caseload. The county administra- tion costs budgeted in Medi-Cal exclude (with some minor exceptions) eligibility determination costs for welfare recipients because those costs California Medical Assistance Program C – 71 Legislative Analyst’s Office are budgeted elsewhere or not paid by the state. Eligibility determination costs for CalWORKs recipients are included in the DSS’ budget for the CalWORKs program, and the federal government performs SSI\/SSP eli- gibility determinations. The rapid increase in the nonwelfare caseload reflects both ongoing caseload growth and a shift of Medi-Cal eligibles to nonaided categories as the CalWORKs welfare population declines. $569 Million General Fund Deficiency in 1999-00 The 1999-00 Budget Act anticipated some of the ongoing Medi-Cal cost increase and provided funding for legislatively approved rate in- creases, the expansion of Section 1931(b) family eligibility, and the reduc- tion in the DSH takeout. The Governor’s budget caseload estimate, how- ever, is substantially above the budget act estimate, and savings assumed from certain federal actions either did not occur or resulted in less than the budgeted amount of savings. Budget Estimates Caseload Will Increase Rather Than Decline. The 1999-00 Budget Act anticipated that total Medi-Cal caseload would decline by 193,000 eligibles (3.8 percent) in the current year compared with 1998-99. The Governor’s budget now estimates that caseload will increase by 132,000 (2.6 percent)\u2014a difference of 325,000 eligibles from the bud- get act estimate. This additional caseload increases Medi-Cal General Fund costs by roughly $250 million compared with the budget act estimate. In addition to continued delays in eliminating the backlog of eligibil- ity determinations for former CalWORKs recipients, two other factors also contribute to the additional caseload costs. First, the Governor’s bud- get estimates that the number of pregnant women and children enrolled in the poverty-level eligibility groups will be 48,000 above the budget act forecast. Second, the number of aged, blind or disabled Medi-Cal eligibles (including those in long-term care) has increased by about 12,000, com- pared with the budget act estimate. Although this portion of the caseload increase is relatively small, it adds about $55 million of General Fund cost due to the greater health care expenses of these groups. Savings from Federal Assumptions Fall Short. The 1999-00 Budget Act assumed that the federal government would make an upward ad- justment to the Federal Medical Assistance Percentage (FMAP) for Cali- fornia\u2014the federal matching rate for Medi-Cal expenditures\u2014in order to correct for an underestimate of the state’s population in the formula used to calculate the FMAP. The budget assumed a General Fund savings of $210 million in 1999-00 due to this adjustment. The federal govern- ment did not make the adjustment, however, so these savings will not occur. C – 72 Health and Social Services 2000-01 Analysis The budget also assumed federal approval, effective July 1, 1999, of a Medicaid waiver to provide 90 percent federal funding for previously state-funded family planning services for low-income persons not other- wise eligible for Medi-Cal. The waiver was not approved until Decem- ber 1, 1999, and was somewhat less comprehensive than anticipated. As a result, the budget estimates that General Fund spending will be $93.5 million more than the amount provided in the 1999-00 Budget Act. Unbudgeted 1999-00 Managed Care Rate Increases. Most of the cur- rent-year deficiency results from unbudgeted caseload and unrealized federal assumptions, as noted above. However, rate increases granted by the department to Medi-Cal managed care plans in the 12 counties that operate under the two-plan model add an additional $39.7 million of General Fund costs to the deficiency amount. Budget Year The Governor’s budget estimates that total General Fund spending for Medi-Cal local assistance (in the DHS budget) will be $8.7 billion in 2000-01, an increase of $541 million, or 6.6 percent, compared with esti- mated spending in the current year. The budget estimates that the Medi- Cal caseload will increase by 97,000 (1.9 percent) in the budget year to a total of almost 5.3 million average monthly eligibles\u2014about 15 percent of the state’s population. Most of the added spending is for Medi-Cal benefit costs, which are projected to increase by $505 million (6.6 percent) in 2000-01. Figure 4 shows the major components of the increase in ben- efit costs. Increased Cost and Utilization of Services\u2014$264.2 Million. Based on the budget’s projections, General Fund costs for Medi-Cal benefits will increase by about 3.4 percent in 2000-01 due to provider rate increases, cost increases for goods and services, and increased use of services by beneficiaries. The department attributes about two-thirds of this increase to spending on drugs. This includes price and utilization increases for existing drugs and for new drugs added to the Medi-Cal formulary. Medi- Cal buy-in payments for Medicare premiums also are increasing. Medi- Cal pays Medicare premiums for Medi-Cal enrollees who also are eli- gible for Medicare (dual eligibles) in order to obtain 100 percent federal funding for those services covered by Medicare. The budget estimates that the General Fund cost of these buy-in payments will increase by $36.2 million in 2000-01. The budget also projects a 30 percent increase ($9.9 million General Fund) in the use of adult day health care services, which the budget attributes to the effect of state start-up grants and the entry of for-profit providers into this market. California Medical Assistance Program C – 73 Legislative Analyst’s Office Figure 4 Medi-Cal Benefits Major General Fund Spending Changes Governor’s Budget 2000-01 (In Millions) Increased Price and Utilization of Services $264.2 Increased pharmacy costs 180.0 Increased cost for Medicare premiums 36.2 Additional 5 percent long-term care wage pass-through 32.5 Full-year cost of 1999-00 increase in long-term care staffing ratio 17.1 Expanded use of adult day health care 9.9 Expanded family planning services authorized in 1999-00 budget 7.3 Increase in pharmacist dispensing fee (Chapter 190, Statutes of 1999 [SB 651, Burton]) 3.3 Increased savings from antifraud activities -9.9 Other -12.2 Cost of Increased Caseload $137.7 Full-year impact of Section 1931(b) expansion 81.9 Increase in ongoing disabled caseload 68.6 Expanded eligibility for aged, blind, and disabled 4.7 Other -17.3 Pass-Through Funding for Other Departments $95.6 Short-Doyle Mental Health Early and Periodic Screening, Diagnosis and Treatment services $43.1 State mental hospitals and developmental centers $24.8 Regional center and community-based developmental services 27.7 Changes in Financing, Payments, and Recoveries $7.6 One-time recoupment in 1999-00 of past hospital overpayments 54.2 Reduction in federal matching rate 51.6 Reduce state disproportionate share hospital takeout\/ increase physician rates 30.0 Full-year federal funding in 2000-01 for family planning waiver -66.3 One-time cost in 1999-00 for federal disallowance of past charges for institutions for mental diseases -43.9 Other -17.9 Total $505.1 C – 74 Health and Social Services 2000-01 Analysis The budget proposes to continue funding ancillary services to pa- tients in institutions for mental diseases (IMDs) through 2000-01 at a Gen- eral Fund cost of $12.5 million. The 1999-00 budget continued funding for these services on a state-only basis for 1999-00 after the federal gov- ernment determined that they did not qualify for Medicaid funding. Ab- sent this state program, county indigent health care systems would be- come responsible for these services. Several new budget proposals also contribute to the projected General Fund spending changes: Additional 5 Percent Long-Term Care Employee Pass-Through ($32.4 Million Cost). This proposal is part of the Governor’s Ag- ing with Dignity Initiative. It provides an additional increase in Medi-Cal rates for long-term care facilities in order to provide a 5 percent pay and benefit increase for caregivers. (We discuss this proposal in our analysis of the Aging with Dignity Initiative ear- lier in this section.) Modest Savings from Staffing Increases for Fraud Prevention and Enforcement ($9.9 Million Savings Increase). In the current year, DHS received 41 additional positions to enhance its Medi-Cal fraud detection, prevention, and enforcement activities. The Governor’s Medi-Cal Fraud and Fiscal Integrity Initiative in the 2000-01 budget requests an additional 255 positions related to this effort, at a cost of $26.2 million ($10 million General Fund). (We discuss these staffing proposals in our analysis of the department’s state operations budget request.) General Fund sav- ings from reduced Medi-Cal fraud as a result of the 41 positions added in the current year will increase by $3.9 million according to the budget estimate (from $2.3 million in 1999-00 to $6.2 mil- lion in 2000-01). The budget also estimates that General Fund savings from the 255 additional staff requested for 2000-01 will be $6 million, which would grow in future years after the new staff is trained and becomes more experienced. Continuation of State Drug Contracting Program. The budget proposes legislation to make the existing state drug contracting program permanent. Under existing law, the program sunsets on January 1, 2001, which the budget estimates would result in a General Fund cost of $36.3 million in 2000-01 (half the full-year amount) because of the loss of supplemental drug rebates that the state receives under the program. The budget also indicates that the state Secretary for Health and Human Services will con- vene a task force to develop options for better controlling Medi- Cal drug expenditures that may be presented in the May revi- sion to the Governor’s budget. California Medical Assistance Program C – 75 Legislative Analyst’s Office Caseload Increases\u2014$137.7 million. The largest caseload-related cost increase ($81.9 million General Fund) is for the expansion of Section 1931(b) family coverage to applicants in working families with incomes up to the poverty level. The budget estimates that this eligibility expan- sion will add 247,000 average monthly eligibles to the Medi-Cal caseload in 2000-01. Because this expansion begins in March 2000, the cost in the current year is one-third of the full-year cost budgeted in 2000-01. The budget also projects an increase of about 18,500 disabled Medi- Cal eligibles due to ongoing caseload trends. Although this caseload in- crease is modest, the relatively high healthcare costs of this group result in an added General Fund cost of about $69 million. In addition, the bud- get includes the following two eligibility expansions for the aged, blind, or disabled (one of which was previously enacted by the Legislature): Expansion of No-Cost Medi-Cal to 100 Percent of Poverty for Aged, Blind, or Disabled ($2.4 Million Cost). As part of the Governor’s Aging with Dignity Initiative, this proposal would eliminate the share of cost for aged, blind, or disabled single per- sons with incomes between 90 percent and 100 percent of the FPL, effective January 2001. Currently, single persons must spend down their income to 90 percent of the FPL before Medi-Cal will begin to pay for their health care costs (couples currently have no share of cost with incomes up to 104 percent of the FPL). The budget estimates that this change will affect on average of 13,000 individuals, about half of whom currently are counted in the Medi-Cal caseload. (We discuss this proposal in our analysis of the Aging with Dignity Initiative earlier in this section.) Medi-Cal Coverage for the Working Disabled ($4.8 Million Cost). Chapter 820, Statutes of 1999 (AB 155, Migden) allows disabled working persons with incomes up to 250 percent of the FPL to obtain Medi-Cal coverage. In order to participate, individuals are required to pay sliding-scale premiums ranging from $20 to $250 per month. The budget estimates that about 7,000 disabled per- sons will participate, including some current SSI\/SSP recipients who will now be able to work without losing their health cover- age. The budget estimates that the annual General Fund cost of this expansion will grow to about $6.7 million after 2000-01 as participation phases in. Pass-Through Funding Increases for Other Departments\/Programs\u2014 $95.6 Million. The DHS Medi-Cal budget includes increases in General Fund costs for some services provided to Medi-Cal beneficiaries in pro- grams operated or supervised by DMH or DDS. These services include state hospitals and developmental centers operated by DMH and DDS, C – 76 Health and Social Services 2000-01 Analysis respectively; and services to developmentally disabled Medi-Cal benefi- ciaries living in the community who are served by regional centers throughout the state. The budget also includes an increase of $43.1 mil- lion (45 percent) for mental health Early and Periodic Screening, Diagno- sis, and Treatment services to children provided through county mental health programs. (We discussed the rapid rate of spending increase for this program last year in our Analysis of the 1999-00 Budget Bill [please see page C-85 of that Analysis].) Changes to Financing, Payments, and Recoveries\u2014$7.6 Million. The relatively small spending increase in this category results from a number of larger offsetting adjustments. Improving personal income in Califor- nia results in a slight reduction in the FMAP pursuant to the formula for determining the federal matching rate. The FMAP reduction increases the General Fund share of Medi-Cal costs by $51.6 million in 2000-01. In addition, budget-year adjustments delete a one-time gain in 1999-00 from recoveries of past Medi-Cal crossover overpayments to hospitals for services to dual (Medi-Cal\/Medicare) beneficiaries and a one-time 1999-00 cost to repay the federal government for disallowed past IMD charges. Finally, the budget estimates increased General Fund savings of $66.3 mil- lion in 2000-01 because the federal family planning waiver will provide enhanced federal funding for the full year. In addition, the budget proposes a further reduction in the state’s DSH takeout of up to $30 million, with the benefit to be shared among both public and private DSH hospitals. The budget also indicates that as an alternative to reducing the DSH takeout by the full $30 million the takeout reduction could be a lesser amount, with the difference used to increase Medi-Cal rates paid to emergency physicians and on-call spe- cialists. MEDI-CAL COST AND CASELOAD TRENDS Figure 5 illustrates how Medi-Cal caseload and per-eligible costs have changed since 1990-91, along with projections of caseload and costs per eligible for 1999-00 and 2000-01 based on the budget estimates. Budget Forecasts Return to Growing Caseloads and Costs After earlier dips in the growth of costs and caseloads, the budget forecasts that both the cost of benefits per eligible and the number of eligibles will grow steadily through the current year and 2000-01. Caseload. The number of persons enrolled in Medi-Cal grew rapidly in the early 1990’s\u2014caseload growth in 1991-92 was almost 14 percent California Medical Assistance Program C – 77 Legislative Analyst’s Office over the prior year. Between 1990-91 and 1995-96, the Medi-Cal average monthly caseload grew from 4.1 million eligibles to 5.5 million. The rapid growth resulted from the ongoing effects of Medicaid eligibility expan- sions enacted in the late 1980s and from increased welfare caseloads as- sociated with the severe recession that California experienced at that time. Figure 5 Medi-Cal Caseload Varies But Cost Per Eligible Grows 1990-91 Through 2000-01 Eligibles In Millions Eligibles Cost Per Eligiblea 3 4 5 6 90-91 92-93 94-95 96-97 98-99 00-01 2,000 2,500 3,000 $3,500 a Exlcudes pass-through funding for programs outside of the Department of Health Services. In the mid-1990s, the Medi-Cal caseload leveled off, and then dropped by almost 300,000 eligibles (5.4 percent) in 1997-98. Again, the change in the Medi-Cal caseload roughly paralleled changes in the CalWORKs welfare caseload, which also began a sharp drop at that time in response to the turnaround in the state’s economy and greater emphasis on mov- ing families from welfare to work in the wake of enactment of state and federal welfare reform legislation. Another factor contributing to declin- ing welfare and Medi-Cal caseloads probably was reluctance among im- migrant Californians to make use of public benefits because of concerns about whether such use might adversely affect their ability to naturalize or to sponsor the immigration of family members in the future. During 1997-98 and 1998-99, the Medi-Cal caseload has been rela- tively flat while the CalWORKs caseload has continued to decline. The Medi-Cal caseload has not declined primarily because of the backlog of C – 78 Health and Social Services 2000-01 Analysis eligibility determinations for former CalWORKs recipients that resulted from the delay in implementation of Section 1931(b) Medi-Cal eligibility by DHS and the counties. In the current year and 2000-01, the budget estimates that the Medi-Cal caseload will grow once more, primarily be- cause of the expansion of Section 1931(b) family eligibility enacted as part of the 1999-00 budget. Cost Per Eligible. While the caseload has gone up and down, the cost trend has been almost steadily upward. The average annual growth rate of the estimated cost of benefits per eligible (excluding pass-through fund- ing to other departments and local governments) is 4 percent, which is twice the rate of general inflation during this period, as measured by the Gross Domestic Product deflator. The temporary dip in the cost-per-eligible that occurred in 1994-95 and 1995-96 was partly the result of a change in the caseload mix, rather than an underlying drop in health care costs. This is because the rapid increase in the number of families on welfare (whose health care costs are relatively low) temporarily reduced the proportion of aged and disabled persons (relatively high-cost groups) in the Medi-Cal caseload, and this change in the mix tended to reduce the average cost per eligible. As the CalWORKs welfare caseload subsequently fell, the elderly and disabled share of the Medi-Cal caseload returned to its earlier level of about 26 per- cent, and the cost per eligible resumed its growth. In 1998-99, the estimated cost per eligible for DHS Medi-Cal benefits increased by 7.6 percent. Based on the Governor’s budget, theses costs will increase by 5.5 percent in the current year and 4.7 percent in the bud- get year. The apparent slowing of the growth rate in 2000-01, however, results from the failure to include in the estimate funding for likely rate increases for nursing homes and managed care plans. Including an al- lowance for these would increase the 2000-01 growth rate to almost the current-year rate of 5.5 percent. MEDI-CAL CASELOAD AND ELIGIBILITY Majority of Medi-Cal Families and Children Are Not On Welfare In July 1999, as shown in Figure 6, the Medi-Cal Program reached a milestone. For the first time in the program’s history, welfare recipients accounted for less than half of the families (including pregnant women) and children enrolled in Medi-Cal. Medi-Cal began as a program to pro- vide health care to welfare recipients. Most of the elderly and disabled persons in Medi-Cal continue to be welfare (SSI\/SSP) recipients, but the combination of declining family welfare (CalWORKs) caseloads, ex- California Medical Assistance Program C – 79 Legislative Analyst’s Office panded eligibility for families and children who are not on welfare, and stronger outreach efforts has reduced the CalWORKs share of families and children in Medi-Cal to less than half. Figure 6 Most Medi-Cal Families and Children No Longer on Welfare Monthly Eligibles (In Thousands) 1,300 1,800 2,300 2,800 3,300 3,800 Nov 98 Feb 99 May 99 Aug 99 Nov 99 Welfare Families Total Families\/Children Nonwelfare Families\/Children Caseload Estimate Probably Too High But Clouded by Uncertainty We find that the budget’s estimate for the Medi-Cal caseload of families and children is likely to be too high, based on current trends. General Fund caseload savings could total as much as $150 million through 2000-01. However, a number of factors currently add considerable uncertainty to Medi-Cal caseload projections. Accordingly, we will monitor caseload trends and recommend appropriate adjustments at the time of the May revision to the Governor’s budget. Figure 7 (see next page) illustrates the budget’s forecast for the Medi- Cal caseload in the current year and 2000-01. Estimated caseload growth for the aged and disabled is 2.2 percent in the current year and 2.4 per- cent in 2000-01, with most of the growth in the disabled portion of the caseload. The budget forecast for the aged and disabled appears reason- able. It includes the effects of the eligibility expansions for this group (discussed earlier) and is in line with recent caseload trends. C – 80 Health and Social Services 2000-01 Analysis Figure 7 Medi-Cal Caseload Governor’s Budget Estimate 1998-99 through 2000-01 (Eligibles in Thousands) 1998-99 1999-00 Change from 1998-99 2000-01 Change From 1999-00 Amount Percent Amount Percent Families\/Children 3,741 3,844 103 2.8% 3,909 65 1.7% CalWORKsa 2,025 1,773 -252 -12.4 1,686 -87 -4.9 Nonwelfare familiesb 1,127 1,419 292 25.9 1,546 127 8.9 Pregnant women 157 175 18 11.7 182 7 4.1 Children 433 478 45 10.3 495 17 3.6 Aged\/Disabled 1,320 1,348 28 2.2% 1,380 32 2.4% Aged 489 497 8 1.6 506 9 1.9 Disabled 831 851 21 2.5 874 22 2.6 Totals 5,061 5,192 132 2.6% 5,289 97 1.9% a California Work Opportunity and Responsibility to Kids program. b Includes former CalWORKs recipients temporarily continued in the \”Edwards\” category. As Figure 7 shows, the majority of the forecasted Medi-Cal caseload growth consists of families and children. The budget estimates that in- creasing caseloads of nonwelfare families and children will more than offset declining CalWORKs caseload. This will result in a net increase of 103,000 eligibles in the current year compared with 1998-99, and an addi- tional increase of 65,000 in 2000-01. As noted earlier, the forecast includes the effect of the Section 1931(b) eligibility expansion to be implemented on March 1, 2000, which the budget estimates will add 246,000 persons to the Medi-Cal rolls. The estimated average monthly caseload for the full year in 1999-00 increases by only 82,000 because the expansion will be in place for only one-third of the current year. The budget estimates an average monthly ongoing caseload of 3,758,000 family and child eligibles in the current year (excluding the 1931[b] eligibility expansion). Based on our review, we believe that this estimate is likely to be overstated for two reasons. First, the actual caseload for November 1999 was 3,688,000 (70,000 below the estimate for the year). Second, Los Angeles County indicates that it is rapidly clearing its large backlog of former CalWORKs recipients. Based on preliminary results of California Medical Assistance Program C – 81 Legislative Analyst’s Office this process, the ongoing caseload in Los Angeles County could decline by as much as 80,000 by March 2000. Based on the declining statewide caseload trend for families and chil- dren and the potential additional reduction in Los Angeles County, the budget caseload estimate for the current year could be as much as 150,000 too high. If this caseload reduction carries through the budget year as well, then the combined two-year General Fund savings could be on the order of $150 million. While we believe that some caseload savings are likely, we do not recommend a specific adjustment at this time because a number of fac- tors currently add an unusual degree of uncertainty to caseload projec- tions. These factors include (1) the recent shift to a predominantly nonwelfare caseload of families and children, (2) continued delays and difficulties in the implementation of Section 1931(b) eligibility determi- nation by the counties, (3) the actual magnitude and timing of the caseload reductions resulting from the backlog elimination in Los Angeles County and elsewhere, and (4) the actual caseload effect of the scheduled Section 1931(b) eligibility expansion. Accordingly, we will continue to monitor Medi-Cal caseload trends and recommend appropriate adjustments at the time of the May revision to the Governor’s budget. Medi-Cal Deficiency Legislative Notification Not Provided for Medi-Cal Deficiency We find that the Department of Finance (DOF) did not provide the Legislature with notification of the 1999-00 Medi-Cal deficiency as required by Section 27.00 of the 1999-00 Budget Act. In addition, the administration’s proposed Medi-Cal deficiency includes some spending that does not appear to meet the requirements of Section 27.00. We recommend that the DOF report at budget hearings on how it intends to meet the requirements of Section 27.00 with respect to future deficiencies. The Governor’s budget indicates that DHS will incur a deficiency of $562.5 million in the current year, essentially all for the Medi-Cal Pro- gram. In other words, DHS expects to spend $562.5 million more in the current year than the Legislature has appropriated. This spring the DOF will ask the Legislature to provide the additional funding, presumably as part of the annual omnibus deficiency bill. Section 27.00 Requirements. Section 27.00 of the 1999-00 Budget Act (as in each annual budget act) generally requires the Director of DOF to notify the chairperson of the Joint Legislative Budget Committee and the chairper- sons of the fiscal committees in the Assembly and Senate of any deficiency C – 82 Health and Social Services 2000-01 Analysis spending request for more than $500,000 within 15 days of receiving that request from a department or other entity. Section 27.00 also requires the Director to notify the chairpersons if he or she intends to approve the re- quest, and provides a 30-day waiting period to allow for legislative consid- eration or comment prior to approval of the deficiency request. The DOF, however, did not notify the Legislature of either the DHS request for the Medi-Cal deficiency or the administration’s approval of the deficiency. Medi-Cal deficiency spending that results from caseload changes is exempt from the Section 27.00 notification requirement. As discussed ear- lier in this analysis, we estimate that the caseload-related portion of the deficiency is about $250 million. The remainder of the deficiency, about $313 million, is not covered by the caseload exemption. The DOF contends that including the Medi-Cal deficiency in the cur- rent-year spending estimate in the Governor’s budget meets the require- ments of Section 27.00. We disagree. The notification requirements in Section 27.00 are intended to (1) highlight individual deficiencies for legislative re- view and (2) address how they meet the statutory requirements for deficiency spending\u2014namely that the added spending must be both unanticipated and confined to cases of actual necessity. Simply including deficiencies in budget estimates accomplishes neither of these purposes. Most of the proposed Medi-Cal deficiency would meet the tests of Sec- tion 27.00, according to our review, because it is needed to compensate for shortfalls in federal funds over which DHS had no control and which must be backfilled in order to maintain existing Medi-Cal services. Nevertheless, the administration’s expectation that this spending would be consistent with Section 27.00 does not exempt it from the section’s notification requirements. Medi-Cal Deficiency Includes Some Discretionary Spending. How- ever, the Medi-Cal deficiency also includes some spending that does not appear to meet the requirements of Section 27.00\u2014specifically, the cost of managed care rate increases that were not funded in the budget, but were subsequently granted by DHS. These rate increases, which we discuss in more detail in the following issue, are discretionary. Since DHS reviews managed care rates on a regular schedule, these events are hardly unan- ticipated, and the department has not made a case that the specific rate increases granted this year were compelled by necessity. The department made policy choices in deciding on rate increases without legislative re- view. For example, DHS chose to freeze the rates of two plans that would otherwise have received rate reductions under the methodology employed by the department. The lack of timely notification, however, limits the Legislature’s options because health plans have used the administration’s approved rates in their budgeting for the current year and are now re- ceiving these funds. California Medical Assistance Program C – 83 Legislative Analyst’s Office The authority to incur deficiencies represents a substantial legisla- tive delegation of spending discretion to the executive branch. As such, the administration’s use of this authority warrants careful monitoring and oversight by the Legislature. Consequently, we recommend that the DOF report at budget hearings on how it intends to comply with the re- quirements of Section 27.00 for future deficiencies. In the General Gov- ernment section of this analysis, we also identify a number of broader, budget-wide issues concerning the application of Section 27.00, and we withhold recommendation on this provision for 2000-01, pending resolu- tion of those issues. Departments Should Identify Funding Needed for Potential Managed Care Rate Increases We recommend that the Departments of Finance and Health Services report at budget hearings on (1) their plans for considering Medi-Cal managed care rate increases in 2000-01 and (2) the potential amount of additional funding needed in 2000-01 for managed care rate increases. Managed Care Rate Increases in the Current Year. As discussed above, a portion of the 1999-00 Medi-Cal deficiency is for rate increases that DHS has granted to Medi-Cal managed care plans. In October 1999, DOF ap- proved rate increases proposed by DHS for Medi-Cal managed care plans operating in the 12 counties under the two-plan model (primarily those counties with the largest Medi-Cal caseloads). These rate increases aver- age 6.5 percent and were effective October 1, 1999. The General Fund cost for the 1999-00 rate increases in the two-plan counties is $42.3 million. A small portion of this amount represents an allocation of funding appro- priated in the 1999-00 Budget Act for specific provider rate increases (for surgeons, for example). However, most of the cost of the rate increase\u2014 about $39.7 million\u2014was not budgeted and contributes to the large Medi- Cal deficiency in the current year. In addition to the two-plan rate in- creases, other rate increases were granted to the five county-organized health systems and to health plans in the two counties operating under the geographic managed care model (Sacramento and San Diego). How- ever, the amounts of these rate increases are negotiated by CMAC and therefore are confidential. Potential Budget-Year Costs. The budget request for 2000-01 does not include any additional funding for Medi-Cal managed care rate in- creases, although increases typically have been granted every year. Ex- cluding these costs results in an underbudgeting bias in the Medi-Cal Program. Furthermore, as discussed in the issue above, the deficiency process is not an appropriate funding mechanism for these rate increases. Thus, we recommend that DHS and DOF report at budget hearings on C – 84 Health and Social Services 2000-01 Analysis (1) their plans for considering Medi-Cal managed care rate increases in the 2000-01 budget and (2) the potential amount needed to provide for these rate increases. Other Issues Antifraud Efforts Starting to Pay Off We recommend General Fund reductions of $6.8 million in 1999-00 and $19.1 million in 2000-01 because recent payment data indicate that savings from the department’s efforts to prevent Medi-Cal provider fraud are greater than the savings anticipated in the budget. (Reduce Item 4260- 101-0001 by $19,088,000.) Background. The department’s antifraud efforts initially have focused on the following four types of providers of outpatient medical equip- ment, supplies, or services: Suppliers of durable medical equipment (DME), such as walk- ers, wheelchairs, special beds, or breathing equipment. Providers of prosthetic and orthotic (P&O) services and items, such as artificial limbs or corrective braces. Independent (nonchain) pharmacies. Providers of nonemergency medical transportation. Recent rapid increases in the number of providers and claims among these groups, which had no apparent relationship to caseload or program changes, were potential indicators of an upswing in fraudulent activity. The department\u2014along with the State Controller’s Office, the Bureau of Medi-Cal Fraud in the Department of Justice, and the Federal Bureau of Investigation\u2014began to focus intensified investigative and enforcement activities on these provider groups in 1998-99. The 1999-00 Budget Act and budget trailer bill legislation provided DHS with additional antifraud resources\u2014specifically, funding for 41 positions and enhanced statutory authority to fight Medi-Cal provider fraud. In August 1999, DHS implemented a provider review and reenrollment process for all of the providers in the targeted groups. Pro- viders were mailed letters and asked whether they wished to continue to participate in the Medi-Cal Program. Those who responded positively were required to provide additional information and were visited by field staff of the DHS Medi-Cal Fraud Prevention Bureau to check for indica- tors of fraudulent activities. A significant number of providers did not respond or did not seek continued Medi-Cal participation and were re- California Medical Assistance Program C – 85 Legislative Analyst’s Office moved from the Medi-Cal provider rolls, including 31 percent of DME providers and 18 percent of P&O providers. Budget Understates Current-Year Savings. Medi-Cal payment data through November 1999 indicate that these efforts have begun to pay off. Claims by, and payments to, DME and P&O providers have declined sig- nificantly compared with 1998-99. Payments per processing day are down by 9.7 percent and 26 percent for DME and P&O providers, respectively. Based on this recent payment data, we estimate that the reduction in total payments to these two provider groups in 1999-00 will be $18.4 million ($8.9 million General Fund) compared with 1998-99. This estimate of General Fund savings for the current year is $6.8 million more than the Governor’s budget estimate of current-year savings that will result from antifraud efforts for all types of Medi-Cal providers (excluding family planning providers). Projected Budget-Year Savings Also Too Low. The budget estimates that savings in 2000-01 from the positions added in the current year will grow by 270 percent over the current year, as the additional staff are hired and trained and as antifraud activities affect more types of providers. Using this growth factor in conjunction with our estimate of current-year savings, we estimate that savings in 2000-01 due to the ongoing efforts of the positions added in the current year will exceed the budget savings estimate for 2000-01 by $19.1 million (General Fund). Accordingly, we recommend a General Fund reduction of $19.1 million in Medi-Cal ex- penditures for 2000-01. Savings Could Be Much Larger. Savings potentially could be much larger than our estimate because our current-year estimate is conserva- tive. We note, in this respect, that the current-year data so far do not re- flect savings from antifraud efforts related to pharmacies, clinical labora- tories, and medical transportation. Payments to these three types of pro- viders total about $1.5 billion\u2014more than five times greater than pay- ments to DME and P&O providers combined. Thus, as the department’s antifraud activities become more fully implemented and affect these ad- ditional types of providers, savings should increase significantly. Reduce DSH Takeout Or Increase Rates? We withhold recommendation on a proposed General Fund augmentation of $30 million to reduce the state takeout from disproportionate share hospital funding and\/or to increase Medi-Cal provider rates, pending receipt of a specific proposal for the use of the funds. C – 86 Health and Social Services 2000-01 Analysis The budget proposes a General Fund augmentation of $30 million in 2000-01 to reduce the state takeout from intergovernmental transfers used to finance hospital DSH payments. Alternatively, the budget indi- cates that a portion of the funds could be used to increase Medi-Cal rates for emergency room physicians and on-call specialists. Counties that operate hospitals, the University of California, and hospital districts make these intergovernmental transfers to the state un- der formulas in state law. These transfers, which total about $1 billion, provide the state match to draw down federal funds which are paid to both public and private hospitals in California serving a disproportion- ate share of low-income patients. The state takeout, currently $84.8 mil- lion, is the amount of these transfers that the state retains to offset Gen- eral Fund Medi-Cal costs. In effect, the state takeout is an extra fee on top of the usual nonfederal match that the transferring enmities pay in order to receive their federal DSH funds. Reducing the DSH takeout less- ens the amount of intergovernmental transfers that these entities must provide to the state in order to receive their federal DSH allotment. At present, the administrations’s proposal is unclear regarding how much of the proposed $30 million augmentation would be used to re- duce the takeout versus increasing provider rates; nor does the budget specify how the takeout reduction would be allocated or how the poten- tial rate increases would be structured. Accordingly, we withhold recom- mendation on the $30 million augmentation, pending receipt of a specific proposal that addresses these issues. Federal Government Will Pay for Hepatitis A Vaccine We recommend a General Fund reduction of $2.9 million in 1999-00 and $4.6 million in 2000-01 (and an equivalent increase in federal funds) because the state will receive Hepatitis A vaccine for children enrolled in Medi-Cal at no state cost through the federal Vaccines for Children Program. (Reduce Item 4260-101-0001 by $4,588,000.) The budget requests $12.6 million ($7.7 million General Fund) in 2000-01 for Hepatitis A vaccinations for children. In October 1999, the Advisory Committee on Immunization Practices of the federal Centers for Disease Control recommended that children in California receive the Hepatitis A vaccine. The budget request assumes that the state will pur- chase the Hepatitis A vaccine through the Medi-Cal Program at the usual state\/federal cost-sharing ratio. However, Hepatitis A vaccine now is cov- ered by the federal Vaccines for Children Program, which pays for the entire cost of vaccines for children who are enrolled in Medi-Cal or who are uninsured. Only the fee paid to health providers for administering the vaccinations ($7.50 per vaccination) will require state matching funds. California Medical Assistance Program C – 87 Legislative Analyst’s Office About one-fourth of the amount requested in the budget is for the cost of paying providers for vaccine administration. Based on cost factors provided by DHS, we estimate that the General Fund savings, compared with the budget request, will be $4.6 million in 2000-01. Accordingly, we recommend a General Fund reduction of this amount. We also note that federal funding for Hepatitis A vaccines will result in a current-year savings of $2.9 million because this vaccine has been provided through Medi-Cal since January 1, 2000. Panorama View Is Nice, But It’s Not Enough We recommend that the department report during budget hearings regarding when and how it intends to provide certain legislative committees with access to the DataScan component of the Medi-Cal Management Information System\/Decision Support System, as required by existing law. The department currently is implementing the final phase of its new Medi-Cal Management Information System\/Decision Support System (MIS\/DSS). The MIS\/DSS is a comprehensive information system that (1) contains comprehensive detailed data on the use of services, provider payments, and eligibility, and (2) organizes the large amounts of data that it contains into a database with software that provides both standard re- ports and answers to individual inquiries. Potentially, the MIS\/DSS can be an extremely powerful tool in understanding how Medi-Cal is used, determining the effectiveness of different treatment approaches, and de- tecting patterns of fraud or abuse. The total cost of system development exceeds $40 million. The Medi-Cal MIS\/DSS data can be accessed in two ways. One is through Panorama View, which is a management information system that provides access to the data after they have been aggregated and com- piled in certain ways. For example, Panorama View can show how many prescriptions Medi-Cal pays for each month for all beneficiaries state- wide, or for certain subgroups, such as elderly Medi-Cal beneficiaries in Los Angeles County. Another way to access the data is through DataScan. This system can answer much more specific questions, such as how much of a particular drug Medi-Cal purchases. DataScan also has the ability to track courses of care in order to answer questions such as whether the use of a specific drug for a particular condition reduces the need for hospitalization. Existing law requires DHS to provide the fiscal and health policy com- mittees of the Legislature with access to both the management informa- tion system (Panorama View) and the ad hoc reporting system (Data Scan) C – 88 Health and Social Services 2000-01 Analysis with safeguards to protect patient privacy by the conclusion of Phase 3 of the MIS\/DSS. Although the department provided the designated legisla- tive committees with access to Panorama View during fall 1999, it has not yet provided the required access to the more powerful DataScan system even though both Phase 3 and Phase 4 of the project have been com- pleted. The department has not explained why the required access to the DataScan system has not been provided or when it will be provided. Accordingly, we recommend that the department report to the bud- get committees regarding when and how it intends to provide the desig- nated legislative committees with access to the DataScan component of the Medi-Cal MIS\/DSS information system. Public Health C – 89 Legislative Analyst’s Office PUBLIC HEALTH The Department of Health Services (DHS) delivers a broad range of public health programs. Some of these programs complement and sup- port the activities of local health agencies in controlling environmental hazards, preventing and controlling disease, and providing health ser- vices to populations who have special needs. Other programs are solely state-operated programs such as those that license health facilities. The Governor’s budget proposes $2 billion (all funds) for public health local assistance. This represents an increase of $79 million, or 4 percent, over estimated current-year expenditures. The budget proposes $349 mil- lion from the General Fund, which is a 7.1 percent decrease from current- year expenditures. The main reason for this decrease is the proposed sub- stitution of federal funds for General Fund support of the Community Challenge Grant Program. This program funds local community projects designed to reduce teen pregnancy. STATEWIDE IMMUNIZATION INFORMATION SYSTEM Since 1995, the DHS has been planning a statewide immunization information system (SIIS). This is an electronic record-keeping system designed to improve immunization levels, primarily among the state’s 3.2 million infants and children under the age of five. Under DHS’s model, the SIIS would consist of a central repository into which locally-developed registries would input immunization data. Local registries have been developing independently and in advance of the SIIS. While some county registries have received state support and are required to follow certain technical guidelines, other counties are de- veloping registries outside of state oversight. Many counties, moreover, do not have registries in development. Provider participation\u2014the submission of immunization data to the local registries\u2014is not required by state law and, therefore, the degree of such participation is uncertain. In this analysis, we address the issues C – 90 Health and Social Services 2000-01 Analysis raised by the department’s approach and recommend changes that, in our view, would move the state toward the implementation of an effec- tive statewide immunization information system. Why Does the State Need to Improve The Childhood Immunization Rate? Children need immunizations to protect them from dangerous child- hood diseases. If immunization rates drop significantly, these diseases resurface, such as in 1989 when a national measles outbreak and the sub- sequent death of 135 people were traced back to a decline in measles vac- cinations. In California, the measles epidemic resulted in over $31 mil- lion in direct medical and outbreak control costs. Immunizations are cost- effective: the federal Centers for Disease Control and Prevention recently reported that every dollar spent on a vaccination saves between $6 and $16 in direct medical costs, depending on the type of vaccine. Because immunizations can prevent debilitating and life-threatening diseases, the federal government’s goal is to increase childhood immuni- zation rates to 90 percent by the year 2000. In 1997 (the most recent year for which data are available), the national immunization rate for 19- to 35-month-olds was 76 percent. California’s rate was 74 percent. Lack of Information: A Barrier to Immunization. A child can fall be- hind in his or her immunizations for various reasons, such as barriers to access and cultural beliefs. However, much of underimmunization can be explained by a lack of information: providers often overestimate the percentage of their patients who are fully immunized, parents do not know their children’s immunization status, most providers do not remind their patients when an immunization appointment is due or missed, and pro- viders frequently do not have access to a child’s immunization history because of scattered records and lost immunization cards. Missed oppor- tunities to immunize are common and may be increasing due to parental and provider confusion about the growing number of recommended im- munizations and the complexity of vaccination schedules. (The number of vaccinations recommended by the age of two has increased from 3 in the 1950s to between 15 and 19 in 1999.) What Is an Immunization Registry And Why Is It Beneficial? Immunization Registries. Immunization registries are confidential, computerized information systems that contain information about im- munizations of children. Typically, children’s registry records are estab- lished at the time of their birth (often through a linkage with electronic Public Health C – 91 Legislative Analyst’s Office birth records) or at first contact with the health care system. If a registry includes all children in a given geographical area and all providers are reporting immunization information, it can provide a single data source for all community immunization participants, including parents, schools, health care providers, health plans, and public health departments. The value of creating an immunization registry statewide is that a child’s im- munization record can be updated and accessed regardless of the child’s mobility across counties and regions within the state. Benefits of Immunization Registries. The information available from registries provides several benefits. For example, immunization registries: Consolidate a child’s immunization data into one electronic record that any provider can access. Currently, the only central source of a child’s immunization history is a card that parents are re- sponsible for keeping. This is an unreliable tracking system be- cause parents often lose their cards or forget to bring them at the time of a visit to a health care provider. Generally, in such cases a provider must either delay the immunization until the card is retrieved, track down the patient’s records at every other pro- vider site the child has visited, or start the immunization process over again and potentially overimmunize the child. Produce reminders and recalls for immunizations that are due or overdue. Studies have shown that reminder\/recall systems can improve immunization rates substantially. Registries can elec- tronically alert providers when a client is due or overdue for an immunization, which means providers do not have to search their patient files in order to identify these clients for follow-up, and parents are more likely to be reminded of immunization appoint- ments. Facilitate compliance with immunization requirements related to school and day care enrollment and receipt of public assis- tance. Under current law, parents must present certification that their children’s immunizations are up-to-date in order to enroll them in child care centers, licensed family day care homes, and elementary schools. Similarly, California Work Opportunity and Responsibility to Kids program applicants must present this in- formation in order to qualify for grants. An immunization regis- try would expedite this verification process, improve quality as- surance, and eliminate enrollment delays because service pro- viders would be able to access these records on-line. Assist public health administrators in identifying under-immu- nized populations and county- and community-level immuniza- tion coverage rates. C – 92 Health and Social Services 2000-01 Analysis Facilitate the production of performance reports by managed care organizations. Most managed care organizations annually sub- mit Health Plan Employer Data and Information Set (HEDIS) data to the National Committee for Quality Assurance in order to re- main accredited. Childhood immunization coverage rates are one of the measures used in HEDIS. Key Assumptions in Assessing the Benefits of a Registry. The ben- efits of an immunization registry as described above do not happen auto- matically. Rather, they only occur if: Every child’s immunization record is entered into the registry database. Every provider who administers immunizations participates in the registry. As we discuss below, the registry system currently being developed by the state will not ensure that either one of these conditions will be met. What Is the State’s Current Approach to Registry Development? Background. In 1993, the federal government adopted a goal of de- veloping a national electronic immunization tracking system. Although there is no federal requirement to do so, all 50 states have begun develop- ment and implementation of statewide tracking systems. Beginning in 1994, the federal government began allowing state and local governments to include immunization registries as one of the activities for which fed- eral immunization grants could be used. Of the $139 million that California’s state and local governments have received from this grant since 1995-96, $875,000 has been appropriated at the state level for the development of the SIIS. The DHS does not know how much of the local portion of the federal grant has been spent on local registry development. In addition, the Legislature has appropriated a total of $17.5 million from the General Fund since 1995-96 to fund the efforts of selected local health departments that opted to develop local immunization registries. In a recently submitted Feasibility Study Report (FSR), the department proposes to build a central statewide hub to which local immunization registries would voluntarily link. Due to a 1999 executive order to deny approval of any technical project proposal until the year 2000 transition is successfully completed, the department has been unable to advance its FSR through the state’s technical review process. Public Health C – 93 Legislative Analyst’s Office Need to Change the Department’s Procurement Strategy We recommend the adoption of budget bill language requiring the Department of Health Services to submit an Alternative Procurement Business Justification for the statewide immunization system, in which the department’s procurement strategy would be based on desired program outcomes rather than technical specifications. Background. In 1995, the Legislature enacted Chapter 314 (AB 254, Alpert), which authorized local health officers to operate immunization information systems in conjunction with DHS. In addition, the 1995-96 Budget Act included an initial appropriation of General Fund monies to DHS for the development of a state immunization registry, with most of the funds designated for the local level . . . to develop a statewide net- work of local immunization tracking systems. Between 1995-96 and 1999-00, General Fund appropriations for support of local registry devel- opment totaled $17.5 million, or $3.5 million annually. The budget pro- poses to appropriate $3.5 million from the General Fund in 2000-01 for further local registry development. Require DHS to Complete an Alternative Procurement Business Jus- tification (APBJ). We believe that the department’s recently released FSR for a central state hub for the SIIS is too prescriptive. This is because it specifies the technical solutions needed to accomplish the desired busi- ness functions of the registry, rather than allowing potential vendors to submit their proposed solutions. As we have recommended for other state system procurements, the department should not prescribe a technical solution during the procurement process, but instead should specify the objectives of the system. In other words, the department should state what it wants from the project and let the vendor community propose how it is to be accomplished. Such an approach has the advantage of not constrain- ing vendors in proposing solutions, and places the burden of success on the vendor who contractually agrees that its solution could resolve the business problem. Typically in this type of procurement, the department submits an APBJ prior to the FSR. The APBJ includes a description of the problem or op- portunity prompting the request; a presentation of the current business process that is the subject of the proposal; the current cost of any existing system that the procurement would likely address; and the anticipated costs, benefits, and resource requirements that may result from a bid award. Because the current FSR is in its earliest stages of the develop- ment process, shifting to an APBJ procurement should not significantly affect the state’s time line for completion of SIIS. Accordingly, we recommend adoption of budget bill language to re- quire the department to submit an APBJ for the statewide immunization C – 94 Health and Social Services 2000-01 Analysis information system, and that the APBJ (and the FSR to follow) specify the business requirements and objectives of the system rather than the tech- nical solutions. Our recommendation can be implemented by adoption of the fol- lowing budget bill language in Item 4260-111-0001: Of the amount appropriated in this item, $3,500,000 shall not be expended for local registry development until the department submits to the Department of Finance an Alternative Procurement Business Justification for the Statewide Immunization Information System. Encouraging Coordination of Regional Registry Development We recommend the adoption of budget bill language directing the Department of Health Services to require the inclusion of project charters in grant applications from counties that are developing regional registries, in order to facilitate regional cooperation and coordination in these efforts. Half the Counties Have No Registry. Under the state’s current ap- proach, the first step in ensuring that every child’s immunization record is entered into the SIIS is to ensure that every county or region develops a local registry. As of August 1999, 24 local registries were in develop- ment: 15 of the registries, covering 14 counties and 1 city in another county, have received state support; the other 9 registries, covering 15 counties and 2 cities, have begun developing their registries without state sup- port\u2014using only local and private funding. Half of the state’s counties currently are not developing registries. The majority of these counties are small and rural. About 15 percent of the state’s zero-to-five-year-olds reside in these counties. Budget Proposes Funds for Additional Grants for Regional Regis- tries. The department expects to use the proposed $3.5 million General Fund appropriation for 2000-01 to provide regional development grants to groups of counties that do not have immunization registries and that wish to develop regional registries with adjoining counties. These grants would require regional registries to use data elements consistent with the other SIIS-funded registries, so that a uniform set of data can be transmit- ted to a statewide system. Make Regional Collaboration Explicit. In order to ensure that re- gional immunization registries are developed collaboratively, we recom- mend that DHS require grant applications to include project charters. The Legislature recently applied this management tool in its child support automation legislation\u2014Chapter 479, Statutes of 1999 (AB 150, Aroner). A project charter is a project management tool: the document articulates Public Health C – 95 Legislative Analyst’s Office the goals and objectives that an organization or consortium is attempting to accomplish when an automation project is undertaken. These charters outline: The project’s scope and description. A governance structure. An intercounty communications plan. Specifications of the contracting authority, data ownership, and responsibility for maintenance of data. Counties’ roles and responsibilities. A description of how changes will be managed during project development. Exit and entrance rules for entities participating in the consor- tium. A process for conflict resolution. Absent these specifications, we believe the process of developing a regional registry is likely to be delayed by problems that could be pre- vented by working out solutions in advance. Our recommendation can be implemented by adoption of the fol- lowing budget bill language in Item 4260-111-0001: In awarding grants to groups of counties for the purpose of developing regional immunization registries, the department shall require applicants to submit project charters that specify: the project’s scope and description; a governance structure; an intercounty communications plan; specifications of the contracting authority, data ownership, and responsibility for maintenance of data; counties’ roles and responsibilities; a description of how changes will be managed; exit and entrance rules for participants in the consortium; and a process for conflict resolution. Ensuring Statewide Compatibility of All Local Registries We recommend enactment of legislation requiring any local registry that chooses to participate in the statewide immunization system to comply with the state’s guidelines for local registry development. State Lacks Oversight of Some Registries. While the 15 registries that have received state support are contractually required to be equipped with certain functions and follow certain technical guidelines (and the regional grants would require this of new registries), 9 registries that have not received state funding are being developed outside the oversight of C – 96 Health and Social Services 2000-01 Analysis the state. Although the department is optimistic that these registries will be able to communicate with the statewide hub, there is no assurance of this. In Order to Link-Up, Registries Need to Be Compatible. The DHS does not have explicit assurance from the nine registries developing out- side the oversight of the state that they intend to link to the SIIS once it is developed. However, the involvement of some of the registries in a SIIS work group and the benefits of participating in a statewide information system provide some indication that these counties will link their regis- tries to the SIIS. We are concerned, however, that the state is not ensuring that these registries’ data and technical functions will be compatible with the other (state-funded) registries. Such compatibility will be important for the success of a statewide database. Therefore, we recommend the enactment of legislation requiring any local registry that wishes to link to the statewide database to comply with the state’s registry guidelines that state-funded registries already follow. Assuring Provider Participation in A Statewide Immunization Registry We recommend the enactment of legislation requiring all immunization providers to participate in local registries, or in the statewide registry if the county in which the provider is located chooses not to develop a local registry. Providers’ submission of immunization data to registries is the linch- pin of an effective immunization information system. When a provider administers an immunization, that information must be added to the child’s electronic immunization record in the registry so that records re- main up-to-date and to avoid unnecessary immunizations. Participation of Providers\u2014Public and Private. To reiterate, the suc- cess of the SIIS will depend largely on the degree of participation by the providers. In order to ensure that all children’s immunization records are entered and updated in the SIIS, we recommend enactment of legislation to require all immunization providers (public and private) to participate in their respective local registries or in the state registry (the central hub) where counties do not have their own registries. We note that ten states currently require provider participation in their statewide immunization registries. As we cited earlier, there are benefits to providers from an im- munization registry, such as avoiding the manual search for immuniza- tion records, avoiding the administering of unnecessary immunizations, and more efficient delivery of reminder and recall notices when clients are due and overdue for immunizations. Public Health C – 97 Legislative Analyst’s Office Provide a State Match for Registries’ Ongoing Costs We recommend enactment of legislation to provide a state match for local registries’ ongoing costs, effective 2001-02, in order to encourage the continuation of local participation in the statewide immunization system. Raising children’s immunization rates is a statewide goal, and the benefits are generally statewide. As such, it is important that the state take actions to facilitate statewide coverage by the local registries. To help accomplish this, we recommend that the state provide matching funds to participating counties for the ongoing costs of their registries, to take ef- fect in 2001-02, when it is anticipated that all participating counties will be in the operational phase of the project. Estimating the Costs of Local Immunization Registries. In its FSR, the department estimates that its proposed centralized state hub would result in a one-time cost of $3 million and annual ongoing costs of $1.1 mil- lion. This figure does not include the development and ongoing costs of local registries. The cost of building a local immunization registry is not well-docu- mented, partly because of variations among local registries, including population size, technical infrastructure, and vendor contracts. The DHS does not have information on the total cost of any local registry being developed in the state. However, the Robert Wood Johnson Foundation has examined the cost of certain registries (located in various states) that receive foundation support. Depending on various factors\u2014population size, preexisting infrastructure, sophistication of registry functions\u2014de- velopment costs ranged from $2.4 million to $6.9 million over a five-year time period. The average annual operating cost of a registry was $3.91 per child. This per-child figure includes the costs of entering immuniza- tion data into the registry, managerial oversight of the registry, software rentals, telecommunication costs, and overhead costs such as rent and heat. Cost of a State Match. Based on the Robert Wood Johnson Foundation’s estimates, if all of California’s 3.2 million zero-to-five-year- olds had immunization records in local registries, the ongoing operating costs would total $12. million. Since the registries are not likely to cap- ture every child’s record, the cost will probably be less ($10 million is a rough estimate). Thus, it might cost the state about $5 million annually to bear half the cost of maintaining local registries. We note that the current $3.5 million General Fund appropriation for the development of local reg- istries will not be ongoing. In addition, DHS estimates that the SIIS would avoid $3.7 million in annual costs that would otherwise be incurred by the department for activities such as consultations to immunization pro- C – 98 Health and Social Services 2000-01 Analysis viders, patient immunization status determinations in private and public clinics, and immunization record verifications and replacements. There- fore, a state match of $5 million probably would not introduce any addi- tional costs above the current-year budget level. Funding Sources for a Statewide Immunization Registry We recommend the enactment of legislation requiring the department to apply for federal matching funds, under the Medi-Cal and Healthy Families Programs, for the development and operation of the statewide immunization information system. In this section, we identify potential funding sources that may be available to the state for the development and ongoing costs of the SIIS. Medicaid. The federal Health Care Financing Administration is cur- rently providing a federal match to states for the improvement of their Medicaid Management Information Systems. Currently, California re- ceives a 90 percent federal match to build the state’s system (called Man- agement Information System\/Decision Support System) and will receive a 75 percent federal match for ongoing costs of the system. These federal matches could be used to partially finance state-sponsored immuniza- tion registry development and maintenance if the registry system is part of an overall system that can be shown to benefit Medicaid clients. Thus, with 28 percent of California’s zero-to-five-year-olds enrolled in Medi- Cal, the state may be able to obtain federal Medicaid funds for a percent- age of the cost to build and maintain a registry system. Absent the en- hanced Medicaid funding, there is reason to pursue a regular Medicaid match of 50 percent for registry costs (potentially state and local) that can be attributed to the Medi-Cal population. Healthy Families Program. The state also may be able to obtain a federal Title XXI match (on a 2-to-1 federal\/state basis) for the mainte- nance of a statewide immunization registry that benefits Healthy Fami- lies clients. We note however, that currently the state is claiming the maxi- mum amount of federal funds available for administration under the 10 percent limit for administrative costs in the Healthy Families Program. Thus, at this time it would not be possible to obtain additional federal funds under this program for the registry. As Healthy Families enroll- ment increases, however, the program’s administrative costs may fall below this limit and, thereby, free up room to submit claims for the costs of the registry, if allowed by the federal administration. Public Health C – 99 Legislative Analyst’s Office OTHER PUBLIC HEALTH PROGRAMS Proposition 99 Revenues Declining Slightly The budget projects that Proposition 99 revenues will decrease by 1 percent in 1999-00 and 1.7 percent in 2000-01. Despite the overall decline in funding, the budget proposes to meet the demands of caseload-driven programs and augment certain other activities, particularly the statewide media campaign and emergency room physician services for uninsured individuals, by using additional resources from carry-over balances from 1999-00 and the budget’s proposed release of $12 million from litigation reserves. Proposition 99, the Tobacco Tax and Health Protection Act of 1988, established a 25-cent surtax on the sale of cigarette and tobacco products in California. The proposition requires that the revenues from the surtax be distributed to six accounts within the Cigarette and Tobacco Products Surtax Fund (C&T Fund) according to specified percentages, and further provides that expenditures from each account must be used for specific kinds of activities. Declining Revenue Source. While Proposition 99 has been a dimin- ishing revenue source due to the decreasing use of cigarettes, events in 1998-99 caused a greater reduction in these revenues (see Figure 1 on page 100). Specifically: Proposition 10. This measure, enacted by the voters in 1998, in- creases the excise tax on cigarettes by 50 cents per pack. The mea- sure also increases the excise tax on other types of tobacco prod- ucts. The tax increase results in a price increase on cigarettes and other tobacco products, which has the effect of reducing consump- tion (sales), thereby reducing Proposition 99 revenues. Proposi- tion 10 provides that some of its revenues will be used to backfill some of these Proposition 99 revenue losses\u2014specifically in the health education and research accounts\u2014but not for other Propo- sition 99 accounts. We note that Proposition 28 on the March 2000 ballot, if adopted, would repeal the Proposition 10 taxes. Lawsuit Settlement. In response to the recent lawsuit settlement with the states, the major tobacco companies increased the price of cigarettes by 45 cents per pack. C – 100 Health and Social Services 2000-01 Analysis Figure 1 Proposition 99 Revenues Declining 1990-91 Through 2000-01 (Dollars in Millions) Year Revenues Percent Change 1990-91 $539 \u2014 1991-92 518 -3.9% 1992-93 499 -3.7 1993-94 473 -5.2 1994-95 465 -1.7 1995-96 462 -0.6 1996-97 463 0.2 1997-98 450 -2.8 1998-99 405 -10.0 1999-00 (est.) 401 -1.0 2000-01 (est.) 394 -1.7 Partly as a result of these factors, Proposition 99 revenues decreased by 10 percent in 1998-99. The budget, however, projects that the revenues will decrease by only 1 percent in the current year and 1.7 percent in the budget year. Governor’s Proposal. Additional resources are forecasted to be avail- able in the budget year due to the carry over of unexpended balances ($76 million) from 1999-00 and the budget’s proposal to reduce by $12 mil- lion the amount of funds set aside for pending litigation. As reflected in Figure 2, the Governor’s budget proposes to meet the demands of caseload-driven programs (such as the Child Health and Disability Pre- vention Program and the Access for Infants and Mothers Program), and, compared to current-year expenditures, allocate additional resources to the following activities: State administration of Proposition 99 ($1 million). California Cancer Registry ($1 million). Anti-tobacco media campaign ($23 million). California Healthcare for Indigents Program and the Rural Health Services program for emergency room physician services ($25 mil- lion). Public Health C – 101 Legislative Analyst’s Office Figure 2 Proposition 99 Expenditures Cigarette and Tobacco Products Surtax Fund 1998-99 through 2000-01 (Dollars in Thousands) Departments\/Programs Actual 1998-99 Estimated 1999-00 Proposed 2000-01 Percent Change From 1999-00 Department of Health Services Chronic Diseases\/Smoking Prevention Breast Cancer Early Detection \u2014 $11,660 $9,000 -23% Media Campaign $22,370 22,057 45,264 105 Competitive Grants 17,068 28,325 17,690 -38 Committee and Evaluation 3,634 4,420 4,381 -1 Local Lead Agencies 25,065 17,426 17,426 \u2014 Primary Care and Family Health Clinic Grants $14,208 $7,653 $7,653 \u2014 Comprehensive Perinatal Outreach 3,162 1,802 1,802 \u2014 Child Health and Disability Prevention 49,291 55,160 59,882 9% Children’s Hospitals 990 565 565 \u2014 County Health Services Managed Care Counties $2,343 $1,336 $1,336 \u2014 County Medical Services Program Expansion 9,983 5,693 5,693 \u2014 California Healthcare for Indigents 146,387 83,483 105,806 27% Rural Health Services 6,484 2,456 4,935 101 State Administration 5,692 5,086 7,148 41 Managed Risk Medical Insurance Board Major Risk Medical Insurance Program $46,033 $42,764 $40,000 -6% Access for Infants and Mothers 37,499 45,796 39,059 -15 Office of Statewide Health Planning and Development $1,837 $1,047 $1,047 \u2014 University of California $23,871 $97,286 $27,451 -72% Department of Education $35,404 $28,024 $28,038 0.1% Resources programs a $33,477 $31,672 $30,330 -4% State Board of Equalization $1,202 $1,293 $1,357 5% Pro rata charges $1,497 $1,821 $1,118 -39% Totals $493,018 $496,825 $456,981 -8% a Includes transfers to Habitat Conservation Fund and Natural Resources Infrastructure Fund. C – 102 Health and Social Services 2000-01 Analysis Budget Proposes to Permanently Eliminate General Fund Support for County Medical Services Program We recommend adopting trailer bill legislation that suspends the state’s General Fund allocation of $20.2 million for the County Medical Services Program for 2000-01, rather than permanently eliminating the appropriation as proposed by the Governor. Background. The County Medical Services Program (CMSP) was es- tablished in 1983 to provide medical and dental care to low-income medi- cally-indigent adults (MIAs) who are not eligible for the state’s Medi- Cal Program and who reside in small counties (see Figure 3 for partici- pating counties). The CMSP governing board, comprised of ten county officials, is responsible for the administration of pooled funds from 34 counties to provide services to approximately 40,000 CMSP clients at an estimated cost of $198 million in 1998-99. The governing board sets eligi- bility requirements, benefit levels, and provider reimbursement rates, but contracts with DHS to administer a program offering uniform benefits and to provide claims processing functions. Figure 3 Counties Participating in the County Medical Services Program 1999-00 Alpine Mendocino Amador Modoc Butte Mono Calaveras Napa Colusa Nevada Del Norte Plumas El Dorado San Benito Glenn Shasta Humboldt Sierra Imperial Siskiyou Inyo Solano Kings Sonoma Lake Sutter Lassen Tehama Madera Trinity Marin Tuolumne Mariposa Yuba Public Health C – 103 Legislative Analyst’s Office History Behind General Fund Contribution. Prior to 1983, the MIA population was eligible for Medi-Cal coverage. However, in response to the state’s budget problems, this population was transferred from the Medi-Cal Program to the counties, which were made responsible for their health services. Small counties, with populations of 300,000 or less, were permitted to contract with the state for administration of their programs, and this became known as the CMSP. Thirty-four counties initially chose the option. The counties adopted uniform eligibility criteria and benefits similar to the Medi-Cal Program. Initially, the state allocated $23.2 mil- lion to the program for health care services, which was 30 percent less than the estimated amount that would have been spent for services un- der the Medi-Cal Program. Until 1992-93, the state bore the risk for CMSP cost increases above specified revenue amounts. Legislation was enacted in 1992 to cap the General Fund responsibil- ity for CMSP at $20.2 million, which was the estimated amount needed for the program in 1991-92. In 1999-00, the General Fund appropriation for CMSP was eliminated for that fiscal year, keeping intact the statutory $20.2 million General Fund commitment for subsequent fiscal years. The CMSP Fund Sources. Funding for CMSP includes realignment revenues (from the 1991-92 realignment legislation), Proposition 99 rev- enues, county funds, and hospital settlements (audit recoveries for overpay- ments to hospitals). Until 1999-00, the state General Fund was also a fund source. Figure 4 (see next page) displays the program’s 1998-99 revenues. Governor’s Proposal. The Governor’s budget proposes trailer bill legislation to permanently eliminate the state’s General Fund appropria- tion of $20.2 million. The budget indicates that (1) CMSP has substantial fund reserves in its local program account and (2) expansions of health care programs by the state have reduced demand for county-funded health care services. The CMSP Reserve Is Robust. Our review indicates that the CMSP’s fund condition is sufficient to absorb the loss of the $20.2 million General Fund allocation in the budget year and possibly for a few additional years. In 1998-99, the CMSP Account showed a reserve of $141 million. Of this amount, $10.5 million was allocated for legal costs associated with a pend- ing lawsuit. The board’s approved budget for 1999-00 projects the reserve to be reduced to $97 million, partly as a result of the 1999-00 elimination of the General Fund appropriation and because estimated expenditures exceed projected revenues. At the same time, however, historical trends show that budgeted expenditures are consistently overestimated; there- fore the 1999-00 fund reserve could be greater. We project that without the General Fund allocation, the fund will have sufficient resources to C – 104 Health and Social Services 2000-01 Analysis support the program for two years beyond the budget year, although there is some uncertainty in this projection. Figure 4 County Medical Services Program Estimated Revenues 1998-99 (Dollars in Thousands) Source Amount Percentage of Total Realignment $124,382 67% General Fund 20,237 11 Hospital settlements 17,801 10 Proposition 99 9,983 5 County funds 5,459 3 Interest 3,068 2 Third-party payers 3,825 2 Unclaimed warrants 8 \u2014 Totals $184,763a 100% a Revenue totals do not include one-time receipt of $8.5 million from a private foundation. Budget’s Expansion Rationale Misleading. We note that one of the administration’s reasons for proposing to permanently discontinue the $20.2 million General Fund contribution\u2014that program expansions within the Medi-Cal Program, Healthy Families Program, and indigent health care programs will relieve some of the demand for CMSP\u2014is not entirely accurate. For example, the Healthy Families Program serves children, whereas CMSP serves adults; and most of the $24.8 million that the bud- get proposes for augmenting emergency medical care services for unin- sured individuals would be allocated to the California Healthcare for Indigents Program, which serves the 24 larger counties, not the counties that participate in CMSP. Recommendation. Rather than permanently eliminate the General Fund contribution to CMSP, we recommend that the budget discontinue the appropriation for 2000-01 so that the CMSP Account’s reserve can be monitored for unexpected revenue reductions and\/or expenditure in- creases. For example, a downturn in the economy would likely generate an increase in the MIA population, as well as reductions in sales tax rev- enues that contribute to CMSP’s realignment revenues. Public Health C – 105 Legislative Analyst’s Office Budget Does Not Maximize Federal Grant for Drinking Water Loan Fund The budget’s proposal to appropriate $15.4 million from the General Fund for the Safe Drinking Water State Revolving Fund does not maximize receipt of federal funds that are available. Passage of a water bond measure on the March 2000 ballot, however, would replace this General Fund appropriation and could maximize federal funds. We withhold recommendation pending the results of the March election. Background. The department maintains the Safe Drinking Water State Revolving Fund to assist public water systems in financing the costs of their infrastructure improvements to comply with the requirements of the federal Safe Drinking Water Act. Federal funds are received from the U.S. Environmental Protection Agency (EPA), which provides capitaliza- tion grants to states according to a need-based formula. State Match Requirements. Federal law requires that states match 20 percent of the federal funds. States must appropriate the match no later than the end of the following federal fiscal year (FFY). For example, in order for a state to draw down federal funds from FFY 1999 (October 1998 through September 1999), the 20 percent match must be appropri- ated by September 30, 2000, otherwise the state would lose these funds. The state then has until September 30, 2001 to obligate the funds to local water projects. Available Federal Funds. By appropriating $15.1 million from the General Fund in the 1998-99 Budget Act, the state received its first federal grant of $75.7 million from FFY 1997. In 1999-00, the budget act appropri- ated $15.4 million from the General Fund in order to draw down the maximum $77.1 million in federal funds available from FFY 1998. Cur- rently, both the FFY 1999 federal award of $80.8 million and the FFY 2000 federal award of $83.9 million are available for California’s use to the extent that the state provides the matching funds. Budget Proposal. The budget proposes to appropriate $15.4 million from the General Fund in the budget year in order to draw down $77.1 mil- lion in FFY 1999 federal grants. Under this proposal, the state will not receive the balance of the FFY 1999 federal award\u2014$3.7 million. We note that according to the EPA, upgrading the state’s local public water sys- tems to meet current and anticipated federal regulations will cost $18 bil- lion. Thus, it is apparent that local systems could benefit from additional funds. In order for the state to maximize receipt of all of the FFY 1999 federal grant, the state match would need to total $16.2 million, or $750,000 more than what the budget proposes. C – 106 Health and Social Services 2000-01 Analysis Passage of Water Bond Measure Could Resolve State Match Defi- ciency. Proposition 13\u2014the Safe Drinking Water, Clean Water, Watershed Protection, and Flood Protection Act\u2014on the March 2000 ballot provides $1.97 billion in general obligation bonds for various water program pur- poses. Of this amount $70 million is available to use as the 20 percent state match to access the annual federal capitalization grants through state fiscal year 2004-05. If Proposition 13 is adopted by the voters, the water bond funds would be used in lieu of the General Fund appropriation for 2000-01, thereby providing the 20 percent state match of $16.2 million in order to draw down the full FFY 1999 federal grant of $80.8 million. Bond funds could also be used to draw down any portion of the FFY 2000 fed- eral grant of $83.9 million that is also available in the budget year. Consequently, we withhold recommendation, pending the results of the election. Budget Proposes to Extend the Community Challenge Grant Program and Use Federal Funds The budget proposes to extend the Community Challenge Grant Program for one year, using a $20 million federal award allocated to California for reducing its out-of-wedlock birth rates in 1997. The final report of the program evaluation, due January 1, 1999, had not been submitted at the time this analysis was prepared, but should be available prior to budget hearings. Program Description and Budget Proposal. The Community Chal- lenge Grant Program (CCGP) was established in 1996-97 to support local community projects to reduce teen pregnancy. Since 1996-97, the Legisla- ture has appropriated $20 million from the General Fund annually to DHS for competitive grant awards under the CCGP. Under current law, the program sunsets on June 30, 2000. The budget proposes to extend the program for one additional year and to continue funding it at $20 million in 2000-01. The budget proposes to fund the pro- gram in 2000-01 using a federal award received by the state because it reduced its out-of-wedlock birth rates in 1997. Nature of Federal Bonus Award. The 1996 federal welfare reform leg- islation included bonus funds for states that could show they had re- duced their out-of-wedlock birth rates without increasing their abortion rates. In 1997, California’s out-of-wedlock birth rate declined by 5.7 per- cent from the previous year. The federal welfare reform legislation speci- fies that these bonus awards can only be used to carry out the goals of the Temporary Assistance for Needy Families (TANF) block grant. The four TANF goals are to (1) provide assistance to needy families; (2) end wel- Public Health C – 107 Legislative Analyst’s Office fare dependency by promoting job preparation, work, and marriage; (3) prevent and\/or reduce out-of-wedlock pregnancies; and (4) encour- age the formation and maintenance of two-parent families. The federal government will continue to allocate these bonus awards for another three years. Legislature Has Been Awaiting Program Evaluation. The CCGP’s authorizing legislation\u2014Chapter 197, Statutes of 1996 (AB 3483, Fried- man)\u2014required that the department conduct a statewide independent evaluation of the program and submit its findings to the Legislature on or before January 1, 1999. To meet the requirement, the department con- tracted with an independent evaluator, who submitted an interim report to the department in January 1999, essentially describing the implemen- tation of program components. The Legislature was told during last year’s budget hearings that the final evaluation would be completed in Decem- ber 1999. At the time this analysis was prepared, however, the evaluation report was still under review by the administration. The department in- dicates that the evaluation should be submitted to the Legislature prior to the budget hearings. Some Local California Children’s Services Programs Not Complying With Statutory Requirement Current law requires that all California Children’s Services claims be submitted by counties to the state fiscal intermediary for payment no later than January 1, 1999. Ten counties have not yet transferred their claims processing activities to the centralized billing system. We recommend that the department report, at budget hearings, on the reasons for counties’ noncompliance and present a plan for ensuring their cooperation. Program Background. The California Children’s Services (CCS) Pro- gram provides diagnostic and treatment services, medical case manage- ment, and medical and occupational therapy services to children under 21 years of age who have eligible medical conditions, such as severe ge- netic diseases, chronic health problems, or major traumatic injuries. The Medi-Cal Program pays for eligible CCS services for those children who are covered by Medi-Cal. Other costs attributed to the CCS Program are shared equally by the state General Fund and county funds. Addition- ally, for those CCS children who are also enrolled in the Healthy Families Program, federal funds will cover two-thirds of the cost of their CCS ser- vices. The CCS Program is administered jointly by the state and counties. There are 28 dependent counties\u2014counties with populations less than C – 108 Health and Social Services 2000-01 Analysis 200,000\u2014that share CCS case management responsibilities with a state regional office. These counties are responsible for approximately 10 per- cent of the total CCS caseload. There are 30 independent counties\u2014 with populations greater than 200,000\u2014that are solely responsible for case management activities. Statutory Deadline Not Met. Chapter 1210, Statutes of 1994 (AB 2793, B. Friedman) establishes a centralized billing system and requires that all counties submit claims for payment of CCS services to the state fiscal intermediary\u2014currently Electronic Data Systems (EDS)\u2014no later than January 1, 1999. The statute further states that the department shall work with the counties to develop a timeline for the counties to begin submit- ting claims to the state. In addition, if a department review of the system demonstrates that as of January 1, 2000, any county has incurred increased costs as a result of submitting claims to the state fiscal intermediary, that county is exempt from the statute’s requirement. Benefits of Centralizing Claims Processing. The department indicates that the implementation of a centralized billing system (1) improves effi- ciencies and economies of scale in processing CCS claims, (2) ensures a consistent application of state CCS policies for coverage of services and provider reimbursement rates, (3) provides statewide information on CCS expenditures, and (4) processes claims in a timely manner. In addition, the department states that it needs all counties to process their claims through EDS in order for it to fully implement the Children’s Medical Services (CMS) Network Enhancement 47\u2014a comprehensive database that will interface with other state information systems. Through this database, the CCS Program will, for example, be able to systemati- cally identify whether a client has enrolled in the Healthy Families Pro- gram, in which case the state would be eligible for federal matching funds. Ten Counties Still Outstanding. At the time that this analysis was pre- pared, 48 counties\u2014covering 72 percent of the CCS caseload\u2014were submit- ting their CCS claims to EDS for authorization and billing purposes. How- ever, ten counties (Alameda, Fresno, Kern, Napa, Orange, Sacramento, San Francisco, San Joaquin, San Mateo, and Sonoma) had not yet transitioned to the centralized claims processing system. According to the department, six of these counties appear committed to completing this task, as they have provided the department with work plans and prospective implementation dates. Four counties, however, do not have these implementation plans in place. Consequently, we recommend that the department report, at budget hearings, on the reasons for the counties’ noncompliance and present a plan for ensuring their cooperation. Managed Risk Medical Insurance Board C – 109 Legislative Analyst’s Office MANAGED RISK MEDICAL INSURANCE BOARD (4280) The Managed Risk Medical Insurance Board (MRMIB) administers several programs designed to provide health care coverage to adults and children. The Major Risk Medical Insurance Program provides health in- surance to California residents unable to obtain it for themselves or their families because of preexisting medical conditions. The Access for Infants and Mothers program provides coverage for women seeking pregnancy- related and neonatal medical care and whose family incomes are between 200 percent and 300 percent of the federal poverty level. The Healthy Families Program provides health coverage for uninsured children in fami- lies with incomes up to 250 percent of the federal poverty level and not eligible for Medi-Cal. The budget proposes $422 million from all funds for support of MRMIB programs in 2000-01, which is an increase of 32 percent over es- timated current-year expenditures. This is due primarily to an increase of $71 million in federal funds and $42 million from the General Fund for caseload growth in the Healthy Families Program. HEALTHY FAMILIES PROGRAM The Healthy Families Program implements the federal government’s State Children’s Health Insurance Program enacted in 1997. Funding for California generally is on a 2-to-1 federal\/state matching basis. Families pay a relatively low monthly premium and can choose from a selection of managed care plans for their children. Coverage is similar to that offered to state employees and includes dental and vision benefits. The program began enrolling children in July 1998. Current-Year Expansions. The 1999-00 Budget Act expanded eligibility in the Healthy Families Program by (1) increasing the family income limit C – 110 Health and Social Services 2000-01 Analysis from 200 percent to 250 percent of the poverty level, (2) allowing use of the same income deductions used in Medi-Cal in computing family income, (3) permitting enrollment of newborns (for those with family incomes of 200 per- cent to 250 percent of the federal poverty level), rather than excluding them until their first birthday, and (4) establishing a one-year, state-only program to cover children who entered the U.S. after August 22, 1996. The Budget Proposal. The Governor proposes $336 million ($121.3 mil- lion General Fund) in MRMIB’s budget for the Healthy Families Program in 2000-01, which is an increase of about 50 percent over estimated current- year expenditures. After accounting for program expenditures (outreach and related Medi-Cal benefits) in the Department of Health Services (DHS) and related expenditures in other departments, the total budget for the Healthy Families Program is proposed at $425 million ($141.8 million General Fund), which is an increase of 46 percent over the current year. The proposed in- crease is due primarily to an expected 32 percent increase in caseload in the budget year. We note that the budget does not include funding for provider rate increases in 2000-01. The rate increases will be negotiated in February and will be included in the May revision of the budget. The budget projects that enrollment will increase to 279,450 by the end of the current year and 369,518 by the end of the budget year. Budget Underestimates Enrollment in Current Year The budget projects a slow-down in enrollment in the current year in the Healthy Families Program. While there is considerable uncertainty about the actual number of children who are eligible for the program, we estimate that the program’s caseload at year’s end will be 11 percent greater than the budget estimates, with an additional cost of $3.3 million ($1.1 million General Fund) in 1999-00. The administration will update its enrollment projections in the May revision of the budget. Budget Assumes Significant Slow-Down in Base Enrollment. The budget estimates that 279,450 children will enroll in the Healthy Families Program by the end of the current year, and that 250,000 of these will be in families whose incomes are less than 200 percent of the federal poverty level. (This income group is referred to as the base population\u2014chil- dren who qualify under the original income limits of the program.) We believe that the base caseload of the budget’s estimated current-year enrollment is understated. The budget projects that an average of 6,442 new enrollees (in this income group) will enroll each month between November 1999 and June 2000. Actual caseload data, however, show that an average of 15,280 new children enrolled each month during the nine months prior to November 1999. The budget, therefore, assumes a significant slow-down\u2014 a 58 percent drop in the monthly average\u2014in the last half of the current year. Managed Risk Medical Insurance Board C – 111 Legislative Analyst’s Office Larger Caseload Will Cost More. Based on caseload trends to date, we see no reason to expect a 58 percent decline in the average number of new enrollees with incomes below 200 percent of the federal poverty level. There- fore, after adjusting for a slight slow-down in the base enrollment per month (since there is a diminishing percentage of children who are eligible but have not already enrolled) and for the disenrollment of some children who will be found no longer eligible for the program during their annual eligibility rede- termination, we estimate that by the end of 1999-00 enrollment of the base population will total 281,500. This would be a 110 percent increase over the prior year, compared to the 87 percent increase reflected in the Governor’s budget (for the base population only). We estimate that the cost associated with this caseload adjustment will be $3.3 million ($1.1 million General Fund). We note that the administration will provide an updated caseload estimate in the May revision of the budget. No Policy Rationale for Excluding Some Legal Immigrants The budget proposes to extend, for one year, Healthy Families eligibility for legal immigrant children who entered the U.S. after August 22, 1996, but only for those who enrolled in the program in the current year. We see no policy rationale for excluding certain legal immigrants from this one-year extension solely on the basis that they did not enroll in the program in the current year. Therefore, we recommend extending the budget proposal to include all legal immigrant children who entered the U.S. after August 22, 1996, at a General Fund cost of $2.4 million in 2000-01. (Increase Item 4280-101-0001 by $2,365,920.) Background. Under the Healthy Families Program expansions that were implemented in the current year, legal immigrant children who en- tered the U.S. after August 22, 1996 (and who otherwise meet program eligibility requirements) became eligible for the program for a period of one year. The cost of these clients is borne solely by the General Fund because federal law excludes the use of federal funds to cover recent le- gal immigrant children under Title XXI of the Social Security Act (the State Children’s Health Insurance Program). Governor’s Proposal. The budget proposes to provide a second year of eligibility for the recent legal immigrant children who enroll in the pro- gram in the current year. The General Fund cost of extending their cover- age in the budget year is estimated to be $1.9 million. No Policy Rationale for Distinguishing On Basis of Time of Enroll- ment. Under the Governor’s budget proposal, a recent legal immigrant child who does not enroll in the program in the current year would be ineligible to apply for coverage in the budget year, while his or her coun- terpart who enrolled in the program in 1999-00 would be eligible to seek C – 112 Health and Social Services 2000-01 Analysis a second year of coverage. We see no policy rationale for basing eligibil- ity on this distinction. We further note that applying the proposal to all recent legal immigrant children would not be costly in the context of this program\u2014about $2.4 million from the General Fund. Consequently, we recommend that the Legislature adopt the Governor’s proposal but extend it to all recent legal immigrant children, regardless of whether they enrolled in the program in the current year. We estimate that adoption of this recommendation would increase the number of recent legal immigrant enrollees at the end of the budget year by about 5,370 children. Technical Error Overbudgets $3 Million from the General Fund The budget double counts the caseload cost of the legal immigrants in 2000-01. Consequently, we recommend a technical correction to the budget, for a General Fund savings of $3 million. (Reduce Item 4280-101- 0001 by $2,946,470.) Due to a technical error, the budget double counts the caseload cost of the legal immigrant children for which it proposes to provide an addi- tional year of health coverage. Accordingly, we recommend correction of this error, for a savings to the General Fund of $3 million in 2000-01. ACCESS FOR INFANTS AND MOTHERS PROGRAM Since 1992, the Access for Infants and Mothers (AIM) Program has served low- to moderate-income women who are pregnant but without health insurance to cover their pregnancy. The AIM Program covers com- prehensive health care throughout the pregnancy, the delivery, and sixty days of post-pregnancy care for the mother and up to two years of care for the infant. The state contracts with health insurance plans to provide these services. To be eligible for the program, women must be pregnant, have no health coverage for their pregnancy, and have incomes between 200 percent and 300 percent of the federal poverty level. (The Medi-Cal Program provides coverage to pregnant women and their infants in fami- lies with incomes up to 200 percent of the federal poverty level.) Currently, program participants pay a fee of 2 percent of their family income toward the costs of services received by the mother and the in- fant. For example, in 1998, a single pregnant woman without other chil- dren whose annual income was $21,701 would pay a fee of $434. Infants can receive coverage for a second year, for an additional $100, or $50 if the recommended one-year vaccinations are up to date. Managed Risk Medical Insurance Board C – 113 Legislative Analyst’s Office The AIM Program is funded mostly through revenues from the Ciga- rette and Tobacco Products Surtax (C&T) Fund established by Proposi- tion 99. In addition, federal Title XXI funds support about 65 percent of the cost of AIM infants between the ages of birth and one year whose family incomes are between 200 percent and 250 percent; the General Fund pays for the other 35 percent of these infants’ costs. Caseload Overestimated for Current Year We recommend reducing the budget’s estimated level of spending for the Access for Infants and Mothers Program in the current year by $1.3 million, for a corresponding savings to the Perinatal Insurance Fund (Proposition 99), to reflect more realistic caseload changes. Background. The MRMIB will promulgate regulations in February that will incorporate the use of income deductions in computing the fam- ily income of AIM applicants (these are the same income deductions used to assess eligibility in the Medi-Cal and Healthy Families Programs). Applying these income deductions in AIM will eliminate a current over- lap in eligibility for the AIM and Medi-Cal Programs for those women whose income, before applying income deductions, is just above 200 per- cent of the federal poverty level. Budget Proposal. The budget estimates that an average of 420 women will enroll in AIM in each of the first six months of the current year. Addi- tionally, the budget assumes that, once income deductions are imple- mented in February, 25 percent of potential AIM enrollees will be ineli- gible for the program because their adjusted incomes will be less than 200 percent of the federal poverty level. Instead, these women will be eligible for the Medi-Cal Program. Accordingly, the budget estimates that 315 new women will enroll in AIM each month from February through the end of the current year. The budget further estimates that 315 new women will enroll each month in the budget year. Overbudgeting in Current Year. We believe that the budget overesti- mates AIM’s caseload in the current year by 2.8 percent, or 120 new en- rollees, and is therefore overbudgeted by $1.3 million in Proposition 99 funds. Our estimate differs from the budget’s in three ways. First, using actual data and historical trends, we estimate that the monthly enroll- ment of new women in the first half of the current year will average 399 women, rather than the budget’s estimated 420 women. Second, by ap- plying our caseload estimate of the first six months of the current year to the estimated 25 percent reduction in caseload beginning in February (due to the use of income deductions), we reduce the estimated caseload in the second six months of the current year to 299 new enrollees per month, compared to the budget’s 315 women per month. Finally, we increase C – 114 Health and Social Services 2000-01 Analysis this estimated monthly enrollment of 299 women to a monthly average of 306 because the budget does not account for women of moderate in- come (just above 300 percent of poverty) who will become newly eligible for the AIM Program once income deductions are applied. For these reasons, we recommend that the current year budget be reduced by $1.3 million in Proposition 99 funds. Budget-Year Estimate Uncertain. We do not take issue with the budget’s estimated caseload for the budget year, primarily because there is more uncertainty as to how the use of income deductions will affect enrollment in 2000-01. The administration will present updated estimates during the May revision of the budget. Program Underbudgeted for Current Year Due to Unpaid Claims The budget does not account for $2.2 million in unpaid claims that the board must pay in 1999-00. We recommend that the board present, at budget hearings, a fiscal plan for satisfying this obligation without jeopardizing the Perinatal Insurance Fund’s reserve. Background. One of the health plans that provide AIM services has presented the board with $3.2 million in back claims. By contractual agree- ment, MRMIB is required to pay these claims in the current year. Budget Increases Appropriation for Payment of Claims. The budget includes a current-year deficiency request of $4.6 million. While the stated purpose of the deficiency is to accommodate a caseload increase, $2 mil- lion of the deficiency is to (1) pay $1 million of the back claims, and (2) increase the Perinatal Insurance Fund’s (PIF) reserve from $485,000 (or 1 percent of current-year expenditures) to $1.4 million (or 3 percent). Thus, there is still $2.2 million in outstanding payments that MRMIB must make in the current year, but the budget does not include these expenditures. Recommendation. If the Legislature adopts our previous recommen- dation\u2014to reduce expenditures by $1.3 million in the current year\u2014then these funds would be available to pay off 60 percent of the balance of unpaid claims. However, almost $1 million in unpaid claims would re- main unaddressed. Further, any use of the PIF’s balance in the current year would jeopardize the reserve (3 percent of the fund’s expenditures). Therefore, we recommend that the board present, at budget hearings, a fiscal plan for how it will pay the back claims while preserving the PIF’s reserve. Department of Developmental Services C – 115 Legislative Analyst’s Office DEPARTMENT OF DEVELOPMENTAL SERVICES (4300) A developmental disability is defined as a disability, related to cer- tain mental or neurological impairments, that originates before a person’s eighteenth birthday, constitutes a substantial handicap, and is expected to continue indefinitely. The Lanterman Developmental Disabilities Ser- vices Act of 1969 entitles individuals with developmental disabilities to a variety of services, which are overseen by the state Department of Devel- opmental Services (DDS). The department contracts with 21 nonprofit regional centers (RCs) to coordinate educational, vocational, and residen- tial services for approximately 170,000 clients each year. In addition to providing some services directly, such as intake and assessment, indi- vidual program planning, and case management, RCs purchase a variety of services from community-based providers. Individuals with developmental disabilities have a number of resi- dential options. While most live with their parents or other relatives, thou- sands live in their own apartments or in group homes that are designed to meet their medical and behavioral needs. The department also oper- ates five developmental centers (DCs) and one 55-bed facility, which pro- vide 24-hour care and supervision to approximately 4,000 individuals. The budget proposes $2.4 billion from all funds for support of DDS programs in 2000-01, which is a 9 percent increase over estimated cur- rent-year expenditures. The budget proposes $997 million from the Gen- eral Fund, which is $76 million, or 8 percent, above estimated current- year expenditures from this funding source. The increase is primarily due to (1) caseload and cost increases for community-based services, (2) the full-year cost of program augmentations enacted in the current year, and (3) the development of a facility for the developmentally disabled with severe behavioral problems. C – 116 Health and Social Services 2000-01 Analysis COMMUNITY SERVICES PROGRAM The Community Services Program provides community-based ser- vices to clients through the RCs. The RCs are responsible for client as- sessment and diagnosis, the development of an individualized program plan, case management, and the coordination and purchase of various services. Services fall into three broad categories: residential, supported living, and day program services. Day program services include early intervention services for infants and young children, daytime activity programs for adults, and in-home respite care. The budget proposes $1.8 billion from all funds ($896 million from the General Fund) for support of the Community Services Program in 2000-01. Statutorily Required Rate-Setting Methodologies Still Not Established The department is required, by legislation enacted in 1998, to develop performance-based rate-setting methodologies for residential, supported living, and day program services. The methodology for supported living services is overdue, and all three methodologies are still in the early developmental stage. We recommend that the department report, during budget hearings, on the status of the development of these methodologies. We withhold recommendation on the related $1.1 million request for contract services, pending receipt of additional information on the scope and costs of the proposed contracts. Background. The rates for supported living, residential, and day pro- gram services are determined by different rate-setting methodologies. Rates for supported living services are negotiated between each regional center and the service providers, residential rates are determined by the Alternative Residential Model (ARM), and day program rates are deter- mined by the department based on cost statements from providers. There were no increases between fiscal years 1992-93 and 1997-98 for day program rates, and residential rates have not been updated to reflect changes in the costs of running these facilities. As a result, service pro- viders and the Association of Regional Center Agencies expressed con- cerns that inadequate rates resulted in high staff turnover, unqualified staff and, in some cases, a lack of services. In response to these concerns, the Legislature appropriated funds for rate increases ranging up to 13 per- cent in 1998-99. Department of Developmental Services C – 117 Legislative Analyst’s Office New Rate-Setting Methodologies Required. Two pieces of legislation were enacted that required the department to develop performance-based rate-setting methodologies for the residential, supported living, and day program services. Chapter 1043, Statutes of 1998 (SB 1038, Thompson) required such methodologies for residential and supported living ser- vices. The 1998-99 budget trailer bill for health programs\u2014Chapter 310, Statutes of 1998 (AB 2780, Gallegos)\u2014required a methodology for day programs. The supported living services rate methodology was to be es- tablished by January 1, 2000, and the residential methodology is to be developed by January 1, 2001. No due date for the day program rate methodology was specified. The department indicates that all three meth- odologies are still in the early developmental stage. Current-Year Rate Increase Vetoed. Senate Bill 1104 (Chesbro) included a 4 percent rate increase in the current year for direct care staff providing day program services. However, citing the department’s effort to estab- lish a new rate-setting methodology for these services, the Governor ve- toed the bill, indicating that it was premature to provide additional rate increases before the methodology was developed. Performance-Based Rate Systems Are Complex. In 1998, the depart- ment convened a stakeholder advisory group, the Service Delivery Re- form Committee (SDRC), to develop the required rate methodologies. The department envisions the development of the methodologies as a three- to five-year process. This process involves three primary phases: (1) identification of desired client outcomes, (2) development of the per- sonnel and service standards required to obtain the outcomes, and (3) de- velopment of a cost model that is based on the costs of meeting the per- sonnel and service standards and that can be adjusted according to ven- dor size, geographical differences, and economic variables. The depart- ment indicates that because they involve sophisticated analysis, the sec- ond and third phases require the services of a contractor. The department has also indicated that it has sought consensus on the desired outcomes\u2014the basis for the cost models\u2014in order for the department to promulgate the new regulations as quickly as possible once a cost model is developed. We note, however, that reaching consensus among a stakeholder group of over 70 participants has been a lengthy process. As a result of the time and complexity involved in the development of the cost models, the department has been unable to meet the statutory deadline for the rate-setting methodology for supported living services, and the methodologies for day program and residential services remain in the early developmental stage. C – 118 Health and Social Services 2000-01 Analysis The department indicates that consensus on outcomes for residential services has been reached, and that a contract will be signed in February 2000 for the development of a residential cost model. The department proposes to enter into a contract in the budget year for the development of cost models for day program and supported living services. However, at the time this analysis was prepared, consensus on outcomes for day program and supported living services had not been reached. Consequently, we recommend that the department report, during budget hearings, on the status of the development of all three rate-setting methodologies. Budget Proposes $1.1 Million For Contract Services. The department proposes to enter into two contracts in 2000-01. The first, as indicated above, is for the development of cost models for day program services and sup- ported living services. The second contract is for the development of a per- formance accountability data system designed to collect data on client out- comes. However, the scope of the contract is yet to be determined. Conse- quently, the department cannot provide sufficient detail on the scope and costs of this contract. Therefore, pending receipt of additional information, we withhold recommendation on the department’s request for $1.1 million for the contracts and a limited-term contract manager. DEVELOPMENTAL CENTERS PROGRAM The DCs provide residential care for developmentally disabled per- sons. The budget proposes $613 million from all funds ($71 million from the General Fund) for support of the DCs in 2000-01. Costs Of Southern California Facility Uncertain We withhold recommendation on the department’s request for $13.2 million ($9.1 million General Fund, including Medi-Cal reimbursements) for the lease and development of a facility to serve individuals with severe behavioral problems, pending an update on the department’s progress in finding a site. Under an interagency agreement, the department contracts with the Department of Mental Health (DMH) to serve 110 forensic developmentally disabled individuals at Napa State Hospital. These are individuals who are found to (1) be gravely disabled and unwilling or incapable of accepting treatment voluntarily, (2) be a danger to self or others, or (3) have committed a crime but are incompetent to stand trial. The department has committed to move these individuals out of Napa by November 1, 2000, so that the DMH can accommodate its own growing forensic population. Department of Developmental Services C – 119 Legislative Analyst’s Office Because the 110 individuals require a secured facility, they must be moved to Porterville Developmental Center. Before this can happen, how- ever, the individuals with severe behavioral problems at Porterville must be transferred to another facility. The five developmental centers do not have enough vacant beds to accommodate this transfer. The department has leased a 55-bed facility in Northern California for individuals with behavioral problems who come from this region. In order to meet the November 1, 2000 deadline to accommodate the persons from Southern California, the budget proposes funds to lease a facility (or, if necessary, more than one facility) with 80 beds in Southern California, to be occupied by September 1, 2000. In total, the budget requests $5.7 million for 126 new positions and $7.5 million for lease payments, operating expenses, and equipment for the facility. The cost estimate for lease payments is based on the assumption that 125,000 square feet of space will be required. We note that the Northern California facility, which will serve 55 individuals, is approximately 50,000 square feet. On this basis, considerably less than 125,000 square feet would be needed to house 80 persons. The department acknowledges that if it is able to lease a single facility, or even two smaller facilities, the lease pay- ments will be less than projected because the number of square feet would likely fall between 60,000 and 100,000 square feet. The department is currently involved in site selection and, because of the urgency involved, will enter into lease negotiations as soon as pos- sible. Thus, pending further information on the development of the ne- gotiations and revised cost projections, we withhold recommendation on the department’s request. C – 120 Health and Social Services 2000-01 Analysis DEPARTMENT OF MENTAL HEALTH (4440) The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department’s primary responsibilities are to (1) administer the Bronzan-McCorquodale and Lanterman-Petris-Short Acts, which provide for the delivery of men- tal health services through a state-county partnership and for involun- tary treatment of the mentally disabled, (2) operate four state hospitals, (3) manage treatment services at the California Medical Facility at Vacaville (a state prison), and (4) administer nine community programs directed at specific populations. The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly com- mitted as Sexually Violent Predators (SVPs), and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections. The budget proposes $1.7 billion from all funds for support of DMH programs in 2000-01, which is an increase of 1 percent over estimated cur- rent-year expenditures. The budget proposes $758 million from the General Fund, which is an increase of $67 million, or 9.7 percent, above estimated current-year expenditures. The increase is primarily due to (1) increases in the judicially committed and SVP populations in the state hospitals, (2) con- tinuation and expansion of local incentive grants for mentally ill homeless persons, and (3) special repair projects at the four state hospitals. Funding for Americans with Disabilities Act Projects Should Be Requested as Capital Outlay Proposal We recommend a reduction of $5.6 million from the General Fund for support of the state hospitals because proposed Americans with Disabilities Act compliance projects should be considered capital outlay projects, and should be resubmitted as a capital outlay budget change proposal. (Reduce Item 4440-011-0001 by $5,573,000.) Department of Mental Health C – 121 Legislative Analyst’s Office The budget proposes a General Fund increase of $5.6 million to fund projects that will bring three of the four state hospitals into compliance with the Americans with Disabilities Act (ADA). The projects would in- clude widening doors, installing ramps and automatic door openers, and restroom modifications. Section 3.00 of the Budget Act defines capital outlay as including any alteration, renovation, addition, or improvement which changes a structure’s function, layout, capacity, or quality. Such projects are bud- geted as capital outlay items. Routine maintenance and special repairs, by contrast, are intended to keep a facility functional at its designed level of services, and are budgeted as support items. The department indicates that it had previously submitted requests for funding the ADA projects as capital outlay budget change proposals, but that the Department of Finance directed that stand-alone capital outlay projects relating to ADA compliance be submitted as support items. By defi- nition, however, additions or renovations undertaken in order to comply with ADA regulations\u2014such as installing ramps and automatic doors and modifying restrooms\u2014are capital outlay projects, because they upgrade the quality of the existing structure or change its function. In order to be consis- tent with the long-standing definition of capital outlay projects, we recom- mend that the department resubmit its proposal as a capital outlay budget change proposal, and that the proposed $5.6 million General Fund augmen- tation for the support of state hospitals be denied. In this way, the proposal will be evaluated in the context of other capital outlay projects. We also note that the proposal as currently submitted lacks sufficient information for the Legislature to evaluate it as a capital outlay project. For example, the proposal includes $4 million for work at Patton State Hospital. The information submitted in support of the request indicates that work will be undertaken in 42 buildings and will include, but not be limited to, improvements such as ramps, handrails, toilet rooms, and signs. There is no information, however, on either the existing problems in these buildings or what work will be undertaken in each of the buildings. In addition, the budget amount is based on an estimate that was pre- pared in 1994 and simply updated for inflation. Information in support of the proposals for the other state hospitals is similar. In order for the Legislature to determine the need for these projects and the appropriate level of funding, the department needs to provide definitive information on existing conditions, proposed work to correct the specific problems, and the associated costs. C – 122 Health and Social Services 2000-01 Analysis Equipment Request Is Premature We recommend a reduction of $845,000 from the General Fund for support of the state hospitals because the department’s request for equipment for the new administration building at Metropolitan State Hospital should be made with the 2001-02 budget request. (Reduce Item 4440-011-0001 by $845,000.) The department has received approval to replace the receiving and treat- ment tower and the administration building at Metropolitan State Hospital with a new, consolidated clinical and administration facility. The new build- ing is scheduled to be completed in November 2001, and move-in is sched- uled to begin in December 2001 and be completed by February 2002. The budget proposes $845,000 from the General Fund to purchase equipment for the new facility, including a telecommunications system, a medical records filing system, and radiology equipment. This equip- ment would replace equipment in the existing buildings that cannot be transferred to the new building. The lead time for the requested equip- ment\u2014the time between when the order is placed and when the equip- ment is delivered\u2014ranges from three weeks for the telecommunications system to three months for the radiology equipment and other large items. While we believe the proposed equipment list is justified, we also believe that the request is premature, since move-in is not scheduled to begin until December 2001\u2014five months after the budget year. Therefore, we recommend that the request be resubmitted for consideration in the 2001-02 budget. We note that in the event that passage of the 2001-02 Budget Act is delayed, the department can put equipment out to bid with the provision that the contract be awarded subject to appropriation of funds by the Legislature. Upon passage of the budget act, the contracts could be awarded and the orders could be placed. Decision on Mentally Ill Homeless Pilot Projects Should Await Evaluation Review We withhold recommend on the $20 million proposed for the continuation and expansion of pilot projects to assist the homeless mentally ill, pending review of the statutorily required report (due May 1, 2000) on the effectiveness of the three existing projects. We further recommend that, if the Legislature does approve funding to expand the pilot projects to other counties, at least one of the new projects be targeted primarily at providing assistance to parolees. Please see Crosscutting Issues in the Judiciary and Criminal Justice section for our discussion of this issue and our analysis of the Governor’s initiatives to keep the mentally ill out of the criminal justice system. Employment Development Department C – 123 Legislative Analyst’s Office EMPLOYMENT DEVELOPMENT DEPARTMENT (5100) The Employment Development Department (EDD) is responsible for administering the Employment Services (ES), the Unemployment Insur- ance (UI), and the Disability Insurance (DI) Programs. The ES Program (1) refers qualified applicants to potential employers; (2) places job-ready applicants in jobs; and (3) helps youths, welfare recipients, and economi- cally disadvantaged persons find jobs or prepare themselves for employ- ment by participating in employment and training programs. In addition, the department collects taxes and pays benefits under the UI and DI Programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contributions for DI. It also collects personal income tax withholdings. In addition, it pays UI and DI benefits to eligible claimants. The budget proposes expenditures totaling $6.3 billion from all funds for support of the EDD in 2000-01. This is an increase of $25 million, or 0.4 percent, over estimated current-year expenditures. The budget pro- poses $25.5 million from the General Fund in 2000-01, which is a reduc- tion of $1.7 million (6.3 percent) compared to 1999-00. Proposed Disability Insurance Tax Rate Does Not Meet Statutory Requirement Without a rate increase, the Disability Insurance Fund will develop an estimated deficit of $278 million by the end of December 2000. The budget proposes to increase the disability insurance tax rate, but the rate would still be below the level required by current law. The proposed rate will result in a small deficit by the end of December 2000, increasing to a reserve of $304 million by June 2001. Background. The DI Program provides benefits to workers who are unable to work due to nonwork related illness, injury, or pregnancy. The DI program is financed by a payroll tax on workers’ earnings. In 1999, the C – 124 Health and Social Services 2000-01 Analysis rate was 0.5 percent of the first $31,767 in annual wages, resulting in a maximum tax of $159. Chapter 973, Statutes of 1999 (SB 656, Solis) in- creased the maximum benefit payment from $336 per week to $490 per week, effective January 2000. Chapter 973 also resulted in an increase in the wage ceiling (for the tax) from $31,767 to $46,327. The two changes made by Chapter 973 are estimated to be budget neutral. Fund Condition. At the end of 1997-98, the DI Fund had a balance of $1.1 billion. In 1998-99, the DI disbursements of $1.8 billion exceeded rev- enues of $1.3 billion; thus, the fund balance was reduced to about $600 mil- lion. Without an increase in the current tax rate of 0.5 percent, the EDD projects that the DI Fund will have a deficit of $278 million by December 2000. The Governor’s budget proposes to increase the tax rate to 0.63 per- cent in April 2000 and 0.65 in January 2001. Assuming these rate increases go into effect, the Governor’s budget projects that the DI Fund will have a balance of $304 million as of June 2001. We note, however, that even with these rate increases the fund will experience a deficit of $33 million in December 2000. Thus, the fund will need a temporary loan in order to pay anticipated benefit payments. Statutory Formula for Setting the DI Contribution Rate. Section 984 of the Unemployment Insurance Code specifies a methodology for the Direc- tor of EDD to set worker contribution rates for the DI Program each January. Section 984 also grants the Director discretionary authority to reduce or in- crease the statutory formula rate by 0.1 percent. The statute also requires the Director to prepare a public statement by October 31 of each year which declares the rate of worker contributions for the succeeding calendar year. Recent History. During calendar years 1997 and 1998 the DI tax rate was 0.5 percent. In fall 1998, the department determined that the statu- tory formula would result in a rate of 0.6 percent for calendar year 1999. Using his statutory authority to set rates within 0.1 percent of the for- mula rate, the Director retained the rate at 0.5 percent for 1999. Rate for Calendar Year 2000 Conflicts with Current Law. In October 1999, the statutory formula indicated that the tax rate for calendar year 2000 should be 0.8 percent. Thus, the statute requires that the rate be at least 0.7 per- cent (the formula rate of 0.8 percent less the discretionary authority to re- duce by 0.1 percent). The new Director of EDD, however, has not changed the rate (currently 0.5 percent). Instead, the budget proposes an increase to 0.63 percent in April 2000 (and 0.65 percent in January 2001). Therefore, even with the proposed increase, the rate for 2000 would be below the level re- quired by current law. Thus, the budget proposes urgency legislation to set rates at the levels described above. The department estimates that the DI Fund will have a deficit of $33 million as of December 2000. The budget projects a positive balance of $304 million on June 30, 2001. Employment Development Department C – 125 Legislative Analyst’s Office Caregiver Training, Retention, and Recruitment As part of the Governor’s Aging with Dignity Initiative, the budget includes $50 million ($15 million Workforce Investment Act funds, and $35 million Welfare-to-Work state matching funds) to train, recruit, and retain workers in the caregiver industries. For our analysis of this issue, please see our analysis of the Aging with Dignity Initiative in the Cross- cutting Issues section of this chapter. Update on Workforce Investment Act Implementation Background. The federal Workforce Investment Act (WIA) of 1998, which replaced the Job Training Partnership Act, provides employment and training services to youths and adults. The goal of the new legisla- tion is to strengthen coordination among various employment, training, and education programs. The act requires states to submit plans for imple- menting the new program to the Department of Labor by April 2000. Actual implementation of the WIA is scheduled to begin on July 1, 2000. State Board Appointed. The Governor appointed 63 members to the statutorily required California Workforce Investment Board (CWIB) in December 1999. The board includes four members of the Legislature (two from each house) and representatives from business, labor, education, local government, and the job training provider community. The board is responsible for assisting in the development of the required state plan. Draft State Plan Released. On January 28, 2000, the CWIB released the draft State Workforce Investment Act Plan for review and comment. During February 2000, the CWIB will hold five public hearings to receive comments on the plan. As noted above, the plan must be submitted to the Department of Labor by April 1, 2000. Budget Proposal. For 2000-01, the budget proposes an appropriation of $574.5 million in federal WIA funds in EDD’s budget. These funds will be expended on training programs and services for adults, economically disadvantaged youths, and dislocated workers. In addition, the budget proposes $3.6 million in federal WIA funds to support the CWIB. C – 126 Health and Social Services 2000-01 Analysis DEPARTMENT OF REHABILITATION (5160) The Department of Rehabilitation (DR) provides basic vocational re- habilitation and habilitation services to persons with disabilities. The purpose of vocational rehabilitation services is to place disabled individu- als in suitable employment, while habilitation services help individuals who are unable to participate in vocational rehabilitation programs achieve a higher level of functioning. Services are provided in sheltered work- shops under the Work Activity Program (WAP) and to groups or indi- viduals on job sites through the Supported Employment Program (SEP). In addition, the department helps legally blind clients support them- selves as operators of vending stands, snack bars, and cafeterias through- out the state; provides prevocational rehabilitation services to newly blind adults; develops cooperative agreements with school districts, state and community colleges, and county mental health programs to provide ser- vices to mutually served clients; and assists community-based rehabili- tation facilities such as independent living programs, halfway houses, and alcoholic recovery homes. The budget proposes $430 million from all funds for support of DR programs in 2000-01, an increase of 4.1 percent over estimated current- year expenditures. The budget proposes $127 million from the General Fund, which is $8 million, or 6.7 percent, above estimated current-year expenditures from this funding source. Funding for Statutory Rate Increase Will Be Proposed in May The budget does not include funding for the statutory rate increase for the Work Activity Program in 2000-01. However, the budget indicates that the administration will propose a rate increase in May. Preliminary projections by the department indicate that the rate increase would result in a General Fund cost of $7 million in 2000-01. Department of Rehabilitation C – 127 Legislative Analyst’s Office Current law requires the department to adjust rates for WAP provid- ers every two years. The next adjustment is scheduled to take effect July 1, 2000. Because actual service provider cost statements are used to deter- mine the rate increase, the budget indicates that the increase will be pro- posed in May when more information is available. The budget as intro- duced therefore includes no funding for the rate increase. Based on cost statements available through December 1999, the department’s prelimi- nary projection is a 12.4 percent rate increase (covering two years), re- sulting in increased General Fund expenditures of $7 million in the bud- get year. Caseload May Be Underbudgeted, Based on Recent Trends Recent trends in the Work Activity Program and the Supported Employment Program indicate that the budget’s projected caseloads may be too high in some programs and too low in others, resulting in a potential net underfunding of $6.1 million in General Fund expenditures. The administration will revise its projections in May, when more caseload data will be available. The budget proposes expenditures of $135 million in total funds ($104 million General Fund) to support vocational rehabilitation and ha- bilitation services programs for clients with developmental disabilities. This is an increase of $1.3 million, or 1 percent, from the General Fund. Our analysis of the department’s caseload projections indicates that the budget does not account for recent caseload trends. Habilitation Services Program\/Work Activity Program (HSP\/WAP) Projection Too Low. The budget proposal projects an increase of eight HSP\/WAP cases per month during 2000-01, with total cases increasing from 9,165 at the beginning of the fiscal year to 9,209 in June 2001. Based on our analysis of the most recent 12 months of data (December 1998 through November 1999), the actual caseload is increasing by an average of 17 cases monthly, as shown in Figure 1. Applying this trend to the ac- tual caseload of 9,325 in November 1999, we estimate that the caseload will increase to 9,648 by June 2001. We estimate an average monthly caseload of 9,555, which is 368 cases higher than the department’s projec- tion. This caseload adjustment would result in increased General Fund expenditures of $2.1 million in 2000-01. Vocational Rehabilitation\/Work Activity Program (VR\/WAP) Pro- jection Too High. The budget proposal projects an increase of one VR\/ WAP case per month during 2000-01, resulting in a caseload of 2,525 in June 2001. However, our review of the most recent eight months of data shows that the actual caseload is decreasing by an average of 29 cases per C – 128 Health and Social Services 2000-01 Analysis month, as shown in Figure 1. Applying this trend to the actual caseload of 2,104 cases in August 1999, we estimate that the caseload will fall to 1,466 clients in 2000-01, resulting in an average monthly caseload of 1,626, or 894 less than the department’s projection. This caseload adjustment results in a savings of $5.2 million ($1.1 million General Fund) in 2000-01. Figure 1 Department of Rehabilitation Program Caseload Trends (In Millions) Program Recent Caseload Trends 2000-01 Average Monthly Caseload General Fund Impact Difference Monthly Change a Actual November 1999 b Governor’s Budget LAO Difference HSP\/WAP 17 9,325 9,187 9,555 368 $2.1 VR\/WAP -29 2,104 2,520 1,626 -894 -1.1 HSP\/SEP Group 21 3,223 3,081 3,507 426 4.2 VR\/SEP Group 28 957 609 1,335 726 1.5 VR\/SEP Individual -9 938 1,055 790 -265 – 0.6 Net Difference $6.1 a Based on most recent 12 months (December 1998 through November 1999, except for the VR\/WAP and VR\/SEP individual- placement programs, which had data available only through August 1999. For the VR\/WAP program, based on data from the most recent eight months). b Actuals for the VR\/WAP and VR\/SEP individual-placement programs are from August 1999. Supported Employment Program Projections: Group Placement Too Low, Individual Placement Too High. Supported employment program services can be provided for individual clients as well as in group set- tings. Chapter 329, Statutes of 1998 (AB 2779, Aroner), changed the rate- setting methodology for SEP from a rate per client hour to a rate per job coach hour. The change was projected to be cost neutral, but General Fund expenditures in 1998-99 increased unexpectedly. The department identi- fied an unexpected increase in the number of SEP groups as one reason for the increased costs. Chapter 147, Statutes of 1999 (AB 1111, Aroner), extended the 1998-99 rates through 1999-00 with the provision that rates be prorated if neces- sary to ensure that General Fund expenditures for the program not ex- ceed appropriations. In order to contain costs, the budget proposes to extend this provision in the budget year. Department of Rehabilitation C – 129 Legislative Analyst’s Office The budget proposal projects a monthly increase of six HSP\/SEP group-placement clients and a monthly increase of one VR\/SEP group- placement client during 2000-01. Our analysis of the most recent 12 months of data shows that the HSP\/SEP group-placement caseload is increasing by 21 clients per month, and the VR\/SEP group-placement caseload is increasing by 28 clients per month, as shown in Figure 1. Applying these trends to the actual November 1999 caseloads, we estimate that the HSP\/ SEP group-placement caseload will increase to 3,622 clients in June 2001, and that the VR\/SEP group-placement caseload will increase to 1,489 by the end of the fiscal year. Our average monthly caseload projections are 426 and 726 above the department’s projections, respectively. The adjusted caseload projections result in an increase of $5.7 million from the General Fund. The budget proposal projects that the VR\/SEP individual-placement caseload will increase by two clients per month during 2000-01. Our analy- sis indicates that the caseload is decreasing by an average of nine clients per month. Applying these trends to the actual November 1998 caseload, we project a caseload of 740 in June 2001, with an average monthly caseload of 790 in the budget year. This is 265 clients less than the department’s estimate. Our projection would result in a savings of $612,000 from the General Fund. Summary. Based on the most recent caseload trends, we estimate that WAP and SEP caseload projections would, on net, be higher than the amounts assumed in the budget, resulting in a net increase of $5.8 million in General Fund expenditures. We note, however, that additional caseload data will be available at the time of the May revision of the budget. High Vacancy Rates Reduce Accountability We recommend that the department present a staffing plan to the budget committees that either (1) identifies and proposes to eliminate approximately 150 vacant authorized positions from the department’s Field Operations Division in order to reflect actual staffing patterns, or (2) proposes funding to fill the vacant positions. The department’s Field Operations Division administers the VR pro- gram through the department’s 120 field offices. The division has 1,822 authorized positions, most of which are filled by counselors who deliver VR services to clients. Currently the division has approximately 240 vacancies (13 percent of all authorized positions). This vacancy rate is not new; since 1994-95, the division has had vacancy rates as high as 14 percent. We note that all departments have some vacant positions due to normal personnel turn- C – 130 Health and Social Services 2000-01 Analysis over and hiring delays, but generally these vacancies are about 5 percent of total positions and are reflected in the department’s salary savings re- quirement. The DR indicates that it intentionally left positions in the Field Operations Division vacant in order to absorb the cost of the 3 percent salary increase granted January 1, 1995, which was not fully funded in the budget for DR and most other departments. We believe that maintaining such high vacancy rates undermines the Legislature’s ability to effectively oversee the VR program because the department’s staffing appears to be richer than what is actually occur- ring. A more straightforward method of budgeting would be to keep va- cancies at the normal salary savings rate of 5 percent. For this reason, we recommend that the department submit a staffing plan to the budget com- mittees that either (1) identifies and proposes to eliminate approximately 150 of the division’s 240 vacant authorized positions (leaving vacant ap- proximately 90 positions, or 5 percent of all positions), or (2) proposes funding to fill the positions, with appropriate justification. Department of Child Support Services C – 131 Legislative Analyst’s Office DEPARTMENT OF CHILD SUPPORT SERVICES (5175) The primary purpose of California’s child support enforcement pro- gram is the collection of payments from absent parents for custodial par- ents and their children. Child support offices in the state’s 58 counties provide services such as locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting and distributing payments. Federal law requires states to provide these services to all custodial parents receiving Temporary Assistance for Needy Families (TANF, which is the California Work Opportunity and Respon- sibility to Kids [CalWORKs] program in California) and, on request, to non-TANF parents. Child support payments collected on behalf of TANF families have historically been used primarily to offset the federal, state, and county costs of TANF grants. Collections made on behalf of non- TANF parents are distributed directly to these parents. As discussed below, legislation enacted in 1999 transferred state ad- ministration of the program from the Department of Social Services (DSS) to the newly created Department of Child Support Services (DCSS). The budget proposes $969 million from all funds ($359 million General Fund) for the DCSS in 2000-01. This includes $874 million ($332 million General Fund) for local assistance for the operation of the local child support of- fices. The proposal for local assistance represents an increase of $23 mil- lion from the General Fund (about 7 percent) over the current year. The budget proses to transfer the state share of child support collections for CalWORKs families\u2014$284 million\u2014into General Fund revenues in 2000-01. Currently, these collections are budgeted as state savings in the form of offsets to CalWORKs grant expenditures. LEGISLATIVE REFORMS OF 1999 Prior to the legislative reforms in California, the child support program was administered at the local level by the county district attorneys (DAs), C – 132 Health and Social Services 2000-01 Analysis with state oversight by the DSS. In an effort to improve program perfor- mance, the Legislature passed a package of bills in 1999, including Chapters 478 (AB 196 Kuehl), 479 (AB 150, Aroner), and 480 (SB 542, Burton and Schiff). Together, these acts made significant changes to the organization, adminis- tration, and funding of the program (see Figure 1). Generally, these reforms significantly increased state authority and oversight over the program, and changed state administrative responsibility for developing the statewide child support automation system. Included among the changes are the creation of a new state Department of Child Support Services; the transfer of local ad- ministration from the county DAs to separate county child support agen- cies; and the transfer of responsibility for procurement of the automation system from the state Health and Human Services Agency Data Center to the Franchise Tax Board. (Please refer to our analyses of the Health and Human Services Agency Data Center and the Franchise Tax Board in the General Government chapter.) THE BUDGET PROPOSAL FOR THE DEPARTMENT OF CHILD SUPPORT SERVICES The Governor’s budget proposes $95 million from all funds ($26.5 mil- lion General Fund) for state operations to support the Department of Child Support Services in 2000-01. The proposal includes a transfer of $79 mil- lion ($23 million General Fund) and 95 positions from DSS to the newly created DCSS, and $3.5 million (General Fund) for 128 new positions and additional operating expenses. Administration Division Is Overbudgeted We recommend (1) deletion of five proposed new positions from the Administration Division of the new Department of Child Support Services, (2) the conversion of five proposed permanent positions in this division to two-year limited term, and (3) the transfer of four more positions, in addition to the 13.5 transfer positions proposed, from the Department of Social Services to the Department of Child Support Services. This will result in General fund savings of $220,000. (Reduce Item 5175-001-0001 by $125,000 and Item 5180-001-0001 by $95,000.) The Governor’s budget proposed a total of 229 positions for the DCSS (see Figure 2 on page 134). The department is organized into the following units: Executive offices; Program Division; Systems Division; and Adminis- tration Division. While the Program Division includes a significant increase in positions (compared to the staffing levels in DSS), we recommend ap- proval of this component because (1) a significant proportion of the new Department of Child Support Services C – 133 Legislative Analyst’s Office workload is to carry out new tasks required by the legislative reforms, and (2) we believe there is a need to provide more program support in order to improve the performance of the local child support programs. With respect to the proposed staffing level for the Administrative Division, however, we find that the budget (1) proposes more positions than are needed and (2) un- derestimates the number of positions that should be transferred from DSS. Figure 1 Major Provisions of the Child Support Reforms of 1999 Creates New State Department. As of January 2000, state-level administration and oversight of the child support enforcement program was transferred from the Department of Social Services to the new Department of Child Support Services. Shifts Local Administration to New County Agencies . At the local level, ad- ministrative responsibility will be shifted from the county district attorneys to newly-created county agencies. Shifts Responsibility for Determining Program Expenditures to the State . Responsibility for determining program expenditure levels and how funds will be allocated among the local agencies will shift from the counties to the state. Establishes a Program Performance Improvement Process . Local agency failure to comply with plans could lead to state assumption of responsibility. Revises the County Fiscal Incentive Payment System . Establishes new incen- tives for counties, subject to availability of funding. Changes Approach for Automation to a Single-Statewide System . Previ- ously, the approach was county-based. Transfers Responsibility for Procurement of the Automation System to the Franchise Tax Board (FTB). Previously, the Health and Human Services Agency Data Center was responsible for procurement. Requires Performance-Based Procurement for the New Statewide Automa- tion System. The procurement for the single statewide system will be based on the vendor’s ability to meet pre-agreed upon program performance levels. Shifts Responsibility for Interim Automation Systems to the State. The state is responsible for determining changes and enhancements to county-based systems. Establishes a Project Charter for the Statewide Automation System . Project charter will describe the governance structure, roles and responsibilities, and the management for the single-statewide system. Requires State to Assume Responsibility for Automation Penalties . The state, rather than countries, will be responsible for the federal financial penalties for not meeting deadlines for the statewide system. Expands the FTB’s Child Support Delinquency Collection Program . The program will cover a broader range of cases. C – 134 Health and Social Services 2000-01 Analysis F ig u re 2 D ep ar tm en t o f C h ild S u p p o rt S er vi ce s S ys te m s D iv is io n Di re ct or & Ch ie f D ep ut y Ex is tin g: 0 N ew : 4 To ta l: 4 Po lic y Bu re au Ex is tin g: 13 .5 N ew : 10 .5 To ta l: 24 Fi sc al P ol ic y Ex is tin g: 5 N ew : 7 To ta l: 12 Pr og ra m E va lu at io n\/ Te ch . A ss is ta nc e Ex is tin g: 21 N ew : 21 .5 To ta l: 42 .5 Cu st om er S er vi ce \/ Da ta A na ly si s Ex is tin g: 17 .5 N ew : 11 To ta l: 28 .5 Fi sc al M an ag em en t Ex is tin g: 2 N ew : 7 To ta l: 9 Hu m an Re so ur ce s Ex is tin g: 1 N ew : 10 To ta l: 11 St at ew id e Sy st em s\/ Lo ca te \/In te rc ep t Ex is tin g: 24 N ew : 8 To ta l: 32 Ap pl ic at io ns & In fra st ru ct ur e Ex is tin g: 3 N ew : 9 To ta l: 12 Ac co un tin g Ex is tin g: 2 N ew : 9 To ta l: 11 Bu si ne ss O pe ra tio ns Ex is tin g: 2 N ew : 8. 5 To ta l: 10 .5 In fo S ec ur ity & Au di tin g Ex is tin g: 0 N ew : 2 To ta l: 2 Su m m ar y Ex is tin g: 95 N ew : 12 8 Te m p H el p: 6 To ta l: 22 9 Le ga l Ex is tin g: 1 N ew : 5 To ta l: 6 Le gi sl at io n Ex is tin g: 0 N ew : 3 To ta l: 3 Pu bl ic A ffa irs Ex is tin g: 0 N ew : 2 To ta l: 2 Re gi on al A dm in . Ex is tin g: 1 N ew : 6 To ta l: 7 A d m in is tr at io n D iv is io n P ro g ra m D iv is io n – D ep t. D ir. 1 – E xe c. A ss is t. 1 – D ep t. D ir. 1 – E xe c. A ss is t. 1 – D ep t. D ir. 1 – E xe c. A ss is t. 1 P ro po se d S ta ffi ng , 2 00 0- 01 Department of Child Support Services C – 135 Legislative Analyst’s Office More Positions Than Comparable Departments. In order to evaluate the Administrative Division, we compared the staffing proposal with the corresponding administrative positions in other departments of similar size (a total of 100 to 300 positions). Our analysis of administrative units focuses on those components that are similar in function to the DCSS administrative functional areas (administrative division management; fis- cal and accounting units; human resources; and business operations). Figure 3 summarizes this comparison. It shows that the budget pro- poses staffing DCSS with 18 percent of total positions in these adminis- trative units, whereas the comparison departments are staffed at an aver- age of 14 percent for the same units. If held to this administrative average of comparison departments, DCSS should have 32, not the proposed 42, positions in these administrative areas. While we recognize the need for enhanced staffing to start a new department, we believe that providing DCSS with ten more administra- tive positions than comparable departments is excessive. Accordingly, we recommend (1) the deletion of five of the proposed new positions from the division and (2) the conversion of five proposed permanent po- sitions to two-year limited term. We believe that this will be sufficient to meet the workload demands of the Administration Division, including tasks associated with starting up a new department. This component of our recommendation would result in General Fund savings of $125,000. Figure 3 Administrative Division Staffing Department of Child Support Services and Comparable Departments 2000-01 Department Total Positions Administrative Positionsa Percent Aging 142 33 23% Community Services and Development 158 28 18 Real Estate 303 33 11 Fair Housing and Employment 306 11 4 Average of comparison departments 227 26 14% Child Support Services 229 42 18% a Excludes positions not comparable to the Department of Child Support Services. C – 136 Health and Social Services 2000-01 Analysis The DSS Should Transfer More Positions. In addition to transferring program staff from DSS, the Governor’s budget proposes to transfer 13.5 administrative and support positions from DSS to DCSS. The proposed transfer of 13.5 positions consists of positions from the following units in DSS: Administration; Data Analysis; Legal Services; and Information Sys- tems. In order to calculate the proportionate number of positions to reas- sign from DSS, the administration used the ratio of DSS’s Office of Child Support staffing to total departmental staffing in 1990-91. The rationale for using this baseline year was that, while the staffing of the Office of Child Support grew significantly beginning in 1990-91, DSS grew only minimally in relevant administrative units during the same time period. We believe the relevant question is whether the DSS has provided adequate administrative support recently, not ten years ago. The admin- istration has not requested additional administrative positions in DSS due to the increase in child support program staff, and has not demonstrated that departmental activities such as accounting and personnel manage- ment currently are inadequate. Consequently, we believe it would be more reasonable to apply the department’s methodology to current-year staff- ing levels in DSS, rather than 1990-91. We therefore made the same calcu- lation using the 1999-00 staffing levels and determined that a total of 17.5 administrative and support positions, or four more than proposed in the budget, should be transferred. This is generally consistent, moreover, with the fact that the department claimed federal child support matching funds for 18 administrative positions in 1998-99. Accordingly, we recommend a transfer of four additional positions, and a General Fund reduction of $95,000 in the DSS budget. In total, our recommendations would result in combined General Fund savings of $220,000. How Should Local Assistance Be Funded in 2000-01? We recommend (1) a $5 million General Fund augmentation for local assistance in 2000-01, to be allocated to local agencies on the basis of county cost-effectiveness (the ratio of historical increases in collections to increases in costs) and (2) enactment of legislation requiring the department to include cost-effectiveness as a criterion in the allocation of all funds to local agencies. We believe that the augmentation will result in a net long-term savings to the state. (Increase Item 5175-101-0001 by $5 million.) Past Research Suggests Program Underinvestment. In previous analy- ses, we have shown that the principal goal of the program\u2014the collec- tion of child support\u2014is strongly related to the amount of fiscal resources committed to the program (administrative expenditures). It does not nec- essarily follow, however, that increasing program spending (and the re- Department of Child Support Services C – 137 Legislative Analyst’s Office sulting increase in collections) will be cost-effective to government. This will depend, in large part, on how much it costs to achieve the additional collections. In addressing this question, we found that (1) the counties vary significantly in their levels of cost-effectiveness, as measured by the ratio of collections to costs, and (2) it is likely that an increase in expendi- tures in many of the counties would yield not only an increase in collec- tions, but net savings to the state due to the welfare grant reductions that result from collections on behalf of these families. We also found that the funding structure of the prior program\u2014 whereby the counties ultimately determined expenditure levels\u2014tended to result in an underinvestment of resources in the program. This is primarily because (1) in many cases, counties did not benefit fiscally from the program and therefore had no fiscal incentive to increase spending even when such spending would benefit the state, or (2) in other cases, counties probably would benefit but, without having any assurance of such an outcome, did not want to risk an increase in spending. (For more detail on these findings, please see The 1992-93 Perspectives and Issues and our April 1999 report entitled The Child Support Enforcement Program From a Fiscal Perspective: How Can Performance Be Improved?) Reforms Create New Opportunity. Under the new reforms, control over spending will shift to the state, creating an opportunity to allocate resources so as to increase both collections and state savings. To achieve this, additional spending should occur in those counties, or local pro- gram sites, where there is reason to believe that the resulting increase in collections will be sufficient to yield a net savings to the state. We note that this could be accomplished by a reallocation of existing funding re- sources among the counties and\/or a net augmentation to the program. Under the new reforms, control over spending will shift to the state, creating an opportunity to allocate resources so as to increase both collec- tions and state savings. To achieve this, additional spending should oc- cur in those counties, or local program sites, where there is reason to be- lieve that the resulting increase in collections will be sufficient to yield a net savings to the state. We note that such an investment could be accom- plished by a reallocation of existing funding resources among the coun- ties and\/or a net augmentation to the program. Regardless of the source of funds (reallocation or net augmentation), the state is still faced with the question of how best to allocate program funding among the local jurisdictions. One way to allocate the funds is based on the relative cost-effectiveness of counties as measured by their collections to cost ratios. To illustrate the underlying concept, we note the following two hypothetical examples of counties with different, but gen- erally representative, levels of cost-effectiveness in collecting child sup- C – 138 Health and Social Services 2000-01 Analysis port, as indicated by their ratios of marginal collections to marginal costs (that is, the increase in collections that accompany an increase in admin- istrative costs). In Figure 4, County A is a relatively efficient county which collects an additional $3 in child support for every additional $1 spent in adminis- tering the program. County B represents a relatively inefficient county which collects an additional $1 for every $1 expended. The figure shows that after accounting for federal reimbursements, CalWORKs grant sav- ings, and federal incentive payments, a $1 increase in spending in County A would yield a net state savings (12 cents), whereas a $1 increase in spending in County B would result in a net state cost (29 cents). Figure 4 Net State Costs (Savings) From $1 Increase in Spending Under Two Marginal Collections\/Costsa Scenarios Hypothetical County A: Collections\/Cost Ratio = $3\/$1 Cost $1.00 Federal reimbursementb -.50 Federal incentive payment -.15 Welfare savings -.47 Net state costs (savings) -$.12 Hypothetical County B: Collections\/Cost Ratio = $1\/$1 Cost $1.00 Federal reimbursementb -.50 Federal incentive payment -.05 Welfare savings -.16 Net state costs $.29 a Ratio of increase in total collections (net of $50 disregard payments) to increase in total administrative costs. b Assumes reduced federal reimbursement due to automation penalties. Thus, one option would be to reallocate funds from County B to County A. We note, however, that at some point this option could result in significant program disruptions to County B (which, while relatively inefficient, is still providing some programmatic benefits through its ef- forts), depending on the amount of such reallocations. Department of Child Support Services C – 139 Legislative Analyst’s Office A second option would be to augment the program, with the increase limited to those counties that hold the most promise of using the funds cost-effectively (such as County A in our example). In this respect, we note that county cost-effectiveness can be a relatively dynamic phenom- enon. In other words, we would expect it to change over time. Further- more, historical data are only an indication of what might happen in the future, and provide no guarantee. Analyst Recommendations. After reviewing the historical data on marginal collections and costs among the counties, we believe it would be reasonable to pursue both options. Consequently we recommend (1) a $5 million General Fund augmentation for local assistance in 2000-01, to be allocated to local agencies on the basis of county cost-effectiveness (the ratio of historical increases in collections to increases in costs) and (2) legislation requiring the department to include marginal cost-effec- tiveness as a criterion in the allocation of all funds to local agencies. We believe that the augmentation, in particular, will result in a net long-term savings to the state. If our proposed augmentation is adopted, we recommend adoption of the following budget bill language in Item 5175-101-0001: Of the amount appropriated in this item, $5 million shall be allocated to the counties solely on the basis of the counties’ cost-effectiveness, as measured by the ratio of historical increases in collections to increases in costs. C – 140 Health and Social Services 2000-01 Analysis DEPARTMENT OF SOCIAL SERVICES CALWORKS PROGRAM (5180) In response to federal welfare reform legislation, the Legislature cre- ated the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children (AFDC), the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the one- parent component of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for the two-parent component if it includes a child who is financially needy due to the unemployment of one or both parents. The budget proposes an appropriation of $5.6 billion ($2.1 billion Gen- eral Fund, $195 million county funds, $30 million from the Employment Training Fund, and $3.3 billion federal funds) to the Department of So- cial Services for the CalWORKs program. In total funds, this an increase of $186 million, or 3.5 percent. Similarly, General Fund spending is pro- posed to increase by $78 million (3.8 percent). Although the current-year amounts reflect the grant savings from child support collections, the bud- get proposes a technical change to treat child support collections as rev- enues in the budget year. If the budget-year figures for CalWORKs are adjusted, for purposes of comparison, to include the savings from child support collections (net of the costs of child support incentives paid to the counties), then proposed total CalWORKs spending would be $316 million (5.9 percent) less than the current year, and General Fund spending would be $126 million (6.3 percent) below the current year. Department of Social Services CalWORKs Program C – 141 Legislative Analyst’s Office Impact of Maintenance-of-Effort Requirement Because the Governor’s budget proposes to expend all available federal block grant funds and the minimum amount of General Fund monies required by federal law, any net augmentation will result in General Fund costs and any net reductions will result in savings in federal block grant funds (which would be retained by the state). Maintenance-of-Effort (MOE) Requirement. To receive the federal Temporary Assistance for Needy Families (TANF) block grant, states must meet a MOE requirement that state spending on welfare for needy fami- lies be at least 75 percent of the federal fiscal year (FFY) 1994 level, which is $2.7 billion for California. (The requirement increases to 80 percent if the state fails to comply with federal work participation requirements.) Although the MOE requirement is primarily met with state and county spending on CalWORKs and other programs administered by the De- partment of Social Services (DSS), we note that $400 million in state spend- ing in other departments is used to help satisfy the requirement. Proposed Budget Is At the MOE Floor. For 2000-01, the Governor’s bud- get for CalWORKs is at the MOE floor. We note that the budget also includes, $59 million for the purpose of providing state matching funds for the federal Welfare-to-Work block grant funds. These funds cannot be counted toward the MOE because they are used to match federal funds. The Governor’s budget also proposes to spend all available federal TANF funds in 2000-01, including the projected carry-over of unexpended funds ($459 million) from 1999-00. We note that without these carry-over funds, General Fund spending would be significantly above the MOE floor in 2000-01, under the budget’s assumption of fully funding the esti- mated needs for the program. Caseload Projection is Overstated We recommend that proposed spending for California Work Opportunity and Responsibility to Kids grants be reduced by $66 million (federal Temporary Assistance for Needy Families funds) in 1999-00 and $35 million in 2000-01 because the caseload is overstated. (Reduce Item 5180-101-0890 by $34,900,000.) The CalWORKs caseload has been declining rapidly since reaching its peak in 1994-95. During 1998-99, the number of persons in the CalWORKs program decreased by approximately 14 percent. The Governor’s budget projects that the average monthly number of persons in CalWORKs will de- crease by 10 percent in 1999-00 and 6.8 percent in 2000-01. Thus, on a year- over-year basis the budget assumes a continuing caseload decline. How- ever, the budget’s month-by-month estimates show that the caseload is pro- C – 142 Health and Social Services 2000-01 Analysis jected to decrease until October 1999, at which point it increases until April 2000. Beginning in May, the budget assumes that the caseload will once again begin to decline, but not as rapidly as in prior years. Our review of caseload trends does not suggest any reason to project an abrupt end to the caseload decline during the current year. We note that the CalWORKs program was not completely implemented in 1998-99, and that the tendency for recipients to benefit from welfare-to-work ser- vices and subsequently leave assistance is likely to be stronger in 1999-00 when the program is fully implemented. Accordingly, we estimate that caseload decline will continue steadily throughout 1999-00. We recog- nize, however, the possibility that caseloads will level off at some point in the future, once the program is fully implemented. Consequently, in order to be conservative in forecasting budget savings, we project that the caseload will begin to level off in 2000-01. Figure 1 shows the actual caseload through September 1999 (the last month for which data are available) and then compares the Legislative Analyst’s Office (LAO) caseload forecast with the Governor’s budget fore- cast. The LAO forecast projects that the caseload will decline by 12 percent in 1999-00 and 5.8 percent in 2000-01. Compared to the Governor’s budget, the LAO forecast will result in grant savings of $65.8 million (federal TANF funds) Figure 1 CalWORKs Persons Comparison of Forecasts (In Thousands) 1,400 1,600 1,800 2,000 2,200 2,400 Jul 97 Nov 97 Mar 98 Jul 98 Nov 98 Mar 99 Jul 99 Nov 99 Mar 00 Jul 00 Nov 00 Mar 01 Jun 01 Actual LAO Governor’s Budget Department of Social Services CalWORKs Program C – 143 Legislative Analyst’s Office in 1999-00, and $34.9 million in 2000-01. Accordingly, we recommend that the budget be reduced to reflect these savings. Budget Overestimates Cost of Providing Statutory Cost-of-Living Adjustment We recommend that proposed spending for California Work Opportunity and Responsibility to Kids grants be reduced by $20 million (federal Temporary Assistance for Needy Families funds) because the statutory cost-of-living adjustment will be lower than estimated in the budget. (Reduce Item 5180-101-0890 by $20,000,000.) Pursuant to current law, the Governor’s budget proposes to provide the statutory cost-of-living adjustment (COLA), effective October 2000, at a Gen- eral Fund\/TANF fund cost of $112 million. The statutory COLA is based on the change in the California Necessities Index (CNI) from December 1998 to December 1999. The Governor’s budget, which is prepared prior to the re- lease of the December CNI figures, estimates that the CNI will be 3.61 per- cent, based on partial-year data. Our review of the actual full-year data, how- ever, indicates that the CNI will be 2.96 percent. Applying the actual CNI of 2.96 percent reduces the cost of providing the COLA to $92 million, a sav- ings of $20 million compared to the Governor’s budget. We recommend that the budget be reduced to reflect these savings.The CalWORKs Grant Levels Figure 2 (see next page) shows the maximum CalWORKs grant and food stamps benefits for a family of three, effective October 2000, as dis- played in the Governor’s budget assuming a 3.61 percent CNI and as adjusted to reflect the actual CNI of 2.96 percent. As the figure shows, grants for a family of three in high-cost counties will increase by $19 to a total of $645, and grants in low-cost counties will increase by $18 to a total of $614. As a point of reference, the federal poverty guideline for 1999 (the latest reported figure) for a family of three is $1,157 per month. (We note that the federal poverty guidelines are adjusted annually for inflation.) When the grant is combined with maximum food stamps benefit, total resources in high-cost counties will be $890 per month (77 percent of the poverty guideline). Combined maximum grant and food stamps benefits in low-cost counties will be $873 per month (75 percent of the poverty guideline). C – 144 Health and Social Services 2000-01 Analysis Figure 2 CalWORKs Maximum Monthly Grant and Food Stamps Governor’s Budget and LAO Projection Family of Three 1999-00 and 2000-01 2000-01 LAO Projection Change From 1999-00 1999-00 Governor’s Budgeta LAO Projectiona, b Amount Percent Region 1: High-cost counties CalWORKs grant $626 $649 $645 $19 3.0% Food Stampsc 254 243 245 -9 -3.5 Totals $880 $892 $890 $10 1.1% Region 2: Low-cost counties CalWORKs grant $596 $618 $614 $18 3.0% Food Stampsc 267 257 259 -8 -3.0 Totals $863 $875 $873 $10 1.2% a Effective October 2000. b Based on California Necessities Index at 2.96 percent (revised pursuant to final data) rather than Gov- ernor’s budget estimate of 3.61 percent. c Based on maximum food stamps allotments effective October 1999. Maximum allotments are adjusted annually each October by the U.S. Department of Agriculture. Budget Underestimates Savings From Imposition of Sanctions We recommend that proposed spending for California Work Opportunity and Responsibility to Kids (CalWORKs) grants be reduced by $32 million in 1999-00 and $30.1 million in 2000-01 (federal Temporary Assistance for Needy Families funds) because grant savings from the imposition of sanctions on CalWORKs recipients are underestimated. (Reduce Item 5180-101-0890 by $30,095,000.) The CalWORKs program requires able bodied adults to participate in work or work-related activities for a minimum of 32 hours per week. Failure to comply with this requirement results in a sanction, in the form of a grant reduction. In addition, participants are required to have their children im- munized, ensure that their children attend school, and cooperate with child support enforcement. Failure to comply with these requirements results in a penalty (also a grant reduction). Based on data from 1998, the Governor’s budget assumes that an average of 4 percent of all CalWORKs cases will Department of Social Services CalWORKs Program C – 145 Legislative Analyst’s Office have a sanction or penalty imposed upon them during 1999-00 and 2000-01. Consistent with this assumption, the budget estimates savings from penal- ties and sanctions to be $43.3 million in 1999-00 and $40.7 million in 2000-01. The most recent data\u2014from July and August of 1999\u2014indicate that the combined sanction and penalty imposition rate was 7 percent, a substan- tial increase from the 1998 levels used as the basis for the Governor’s budget (largely due to increased participation requirements in CalWORKs). Based on the more recent data, we estimate that savings from sanctions and penalties will be $32 million above the budget estimate in 1999-00 and $30.1 million above the budget projection for 2000-01. Accordingly, we rec- ommend that the budget be reduced to reflect these savings. Count Spending on Health Care Programs for Recent Legal Immigrants Toward MOE Requirement We recommend that the department count toward the California Work Opportunity and Responsibility to Kids (CalWORKs) maintenance-of- effort requirement $49.9 million in General Fund expenditures for health care for legal immigrants. This action permits the replacement of General Fund expenditures for CalWORKs grants with an identical amount of available federal Temporary Assistance for Needy Families funds, thereby resulting in $49.9 million of General Fund savings. (Reduce Item 5180- 101-0001 by $49,900,000 and increase Item 5180-101-0890 by $49,900,000.) Countable MOE Funds. Pursuant to the federal welfare reform legisla- tion, California may count many types of state spending on families eligible for CalWORKs, even if they are not in the CalWORKs program, for pur- poses of meeting the MOE requirement. To be countable, such spending must be consistent with the broad purposes of federal welfare reform\u2014providing assistance to families so that they can become self-sufficient. For health ex- penditures to be countable, they must (1) satisfy a new spending test whereby the countable expenditures are limited to the amount by which they have grown since FFY 1995, (2) not be used as matching funds for any federal health program, and (3) not be part of the federally-supported Med- icaid program. State Health Programs for Recent Immigrants. In the budget year, the Medi-Cal program, administered by the California Department of Health Services, will expend approximately $90 million on nonemergency (and pri- marily preventive) health care for legal immigrants who arrived in the United States after August 1996. This program is not part of the federal Medicaid program, and is therefore supported entirely by the General Fund. In addi- tion, the Managed Risk Medical Insurance Board will expend $4.9 million from the General Fund (also state-only funding) on health care for recently arrived legal immigrant children in the Healthy Families Program. C – 146 Health and Social Services 2000-01 Analysis Providing preventive health services for families with children keeps parents and children healthy and thus assists the parents in keeping regu- lar work hours. Therefore, these health care expenditures are consistent with the purpose of TANF. Because these programs were not created un- til after 1995 and are paid for with General Fund monies that are not used to match federal funds, they meet the federal requirements for counting health expenditures toward the MOE. In order to count all of the health care expenditures described above, toward the CalWORKS MOE, the state TANF plan would need an amend- ment. We note that such an amendment would have no impact on eligi- bility rules for CalWORKs cash assistance and welfare-to-work services. Analyst’s Recommendation. We recommend that the DSS count the $49.9 million budgeted for these health services toward the MOE and amend the state TANF plan accordingly. This action would result in $49.9 million in General Fund savings. This is accomplished through a fund shift as follows: Counting these health care expenditures raises total state spending to $49.9 million above the MOE floor. Thus, General Fund spending on CalWORKs grants may be reduced by $49.9 million while still maintaining compliance with the MOE. To maintain funding for the grants, $49.9 million in federal TANF funds must be shifted, from avail- able reserves, to support the grants. The TANF reserves will be made available by adoption of all, or part of, our technical recommendations (discussed above) with respect to CalWORKs caseloads and costs. Budget Should Reflect Award of High Performance Bonus Funds We recommend a technical adjustment in the federal Temporary Assistance for Needy Families fund balance (reserves) to reflect the December 1999 award of $45.5 million in federal High Performance Bonus funds. The federal welfare reform legislation of 1996 authorized the High Performance Bonus award program. From FFY 1999 through FFY 2003, the U.S. Department of Health and Human Services will award $200 mil- lion annually in High Performance Bonus funds to qualifying states. In 1999, California was one of 27 states that received an award for outstand- ing performance during FFY 1998. As a result, the state was awarded $45.5 million in federal TANF funds in December 1999. Because part of the formula for future awards is based on improvement in job placement and success in the workforce among CalWORKs recipients, it seems likely that continued implementation of the CalWORKs program should result in additional bonus awards. Department of Social Services CalWORKs Program C – 147 Legislative Analyst’s Office Although the Governor’s budget summary recognizes the award, the budget’s TANF fund balance for 1999-00 does not reflect the receipt of these funds. Consequently, we recommend a technical adjustment in the TANF fund condition statement to account for the receipt of these funds. This adjustment will increase the TANF reserve by $45.5 million. We note that the Governor’s budget summary indicates that a plan for expending the 1999 award funds will be developed in spring 2000. Because these are TANF funds, they must be spent on families eligible for TANF. The funds could be held in reserve, expended within CalWORKs, or expended on new initiatives for the non-CalWORKs working poor. Please see The TANF Regulations Increase State Flexibility to Serve the Working Poor at the end of the CalWORKS analysis for a discussion of potential uses for TANF funds. Finally, we also note that the $45 million in High Performance Bonus funds are distinct from the $20 million received by California for being one of the top five states in reducing the ratio of out-of-wedlock births. The Governor’s budget proposes to expend the $20 million awarded for reducing out-of-wedlock births on the Community Challenge Grant Pro- gram, which is administered by the Department of Health Services. Withhold Recommendation on Budget for Employment Services Current law requires that a new methodology for budgeting California Work Opportunity and Responsibility to Kids (CalWORKs) employment services be implemented in 2000-01. Because the new county expenditure plan model for budgeting CalWORKs employment services was not completed in time for inclusion in the Governor’s budget, we withhold recommendation on the budget for CalWORKs employment services ($884 million from the General Fund and Temporary Assistance for Needy Families funds). Chapter 147, Statutes of 1997 (AB 1111, Aroner) requires that beginning in 2000-01 the budget for CalWORKs employment services be based on pro- jected county costs (essentially county CalWORKs services expenditure plans), using a methodology jointly developed by DSS and the County Wel- fare Directors Association. This new budgeting system was not completed in time for inclusion in the January budget but will be used for the May revision of the Governor’s budget. Thus, the January budget for employ- ment services ($884 million General Fund and federal TANF funds) repre- sents a placeholder, pending the completion of the county expenditure plan model. Because the new system may result in substantial changes, we with- hold recommendation on the budget for CalWORKs employment services. C – 148 Health and Social Services 2000-01 Analysis Budget Proposes to Prohibit Counties from Earning Additional Performance Incentives The Governor proposes enactment of legislation prohibiting counties from earning new performance incentive payments until the estimated prior obligation owed to the counties (approximately $500 million) has been paid by the state. Once the obligation has been met, the Governor proposes to either repeal or modify the fiscal incentive system. We concur with the Governor’s proposal to prohibit new incentives until the past obligation to the counties has been satisfied. We recommend either repealing the county performance incentive provision or replacing it with a new system that would (1) be funded with General Fund monies that the counties could use for any purpose and (2) tie the amount of incentive payments to improvements in program outcomes. Background. The CalWORKs legislation requires that savings result- ing from (1) exits due to employment, (2) increased earnings, and (3) di- verting clients from aid with one-time payments, be paid by the state to the counties as performance incentives. Current law also requires that DSS, in consultation with the welfare reform steering committee, deter- mine the method for calculating these savings. Steering Committee Actions. In 1998, the steering committee determined that savings would be calculated as follows. Savings from exits due to em- ployment would be based on the increase in exits compared the average number of exits in the three years prior to welfare reform. Savings attribut- able to the earnings of recipients would be paid in their entirety to the coun- ties. Similarly, all savings from diversion were also to be paid to counties. Growing Obligation to the Counties. By the end of 1998-99 counties had earned approximately $900 million in performance incentives. This amount excludes incentives based on exits due to employment during 1998-99 because the data are not yet available. By the end of 1999-00, we estimate total incentives earned by the counties (including incentives based on exits to employment) will be approximately $1.6 billion. The total of the appropriations (from 1998-99 and 1999-00) for incentive pay- ments is approximately $1.1 billion. Thus, we estimate that the unfunded obligation to the counties will be approximately $500 million by the end of 1999-00. We note that county receipt of fiscal incentives has signifi- cantly lagged the appropriation, and that counties have spent very little of their incentive payments. As of September 1999, they had received a total of $685 million but had spent only $5.3 million. Governor’s Proposal. The Governor proposes to prohibit counties from earning additional performance incentives until the unmet obliga- tion to the counties has been satisfied. For 2000-01, the budget proposes an expenditure of $252 million toward this obligation, which, as noted Department of Social Services CalWORKs Program C – 149 Legislative Analyst’s Office above, is estimated to be $500 million by the end of 1999-00. If $252 mil- lion is paid to the counties in 2000-01, a remaining obligation of about the same amount will be carried forward into 2001-02. The department esti- mates that the counties would earn an additional $500 million in 2000-01, under current law. Thus, the Governor’s proposal to prohibit counties from earning additional incentives results in savings of approximately $500 million in 2000-01. The administration also indicates that it will pro- pose legislation to either eliminate or sharply modify the performance incentive program. Department and Steering Committee Could Modify the Methodol- ogy. As noted above, the method for calculating the performance incen- tives is determined by DSS, in consultation with the welfare reform steer- ing committee. The administration has the authority to convene the steer- ing committee at any time, consult with the committee, and then modify the methodology for calculating the incentives. Legislative Considerations. To assist the Legislature in considering these issues, we begin by examining the rationale for the county performance in- centive program. While the Legislature did not specify the purpose of the program, we can identify several possible rationales. Specifically, performance incentives could have been intended as (1) a reward for county performance, (2) an inducement for counties to make an effort to achieve better program outcomes, and\/or (3) a funding source for the CalWORKs program. Below we discuss each of these potential rationales for the program. Reward System. The incentive payments may have been intended sim- ply to be a reward to the counties. If this is the case, however, it is not clear what distinguishes county implementation of CalWORKs from county ad- ministration of other state programs in areas such as health, welfare, and criminal justice. Counties administer many programs on behalf of the state. For most of these, counties are provided with operating funds but are not provided with incentive bonuses for improved program outcomes. The CalWORKs and child support enforcement programs are the only signifi- cant county-administered state programs that offer incentive payments to the counties and under the recent child support reforms, the incentive pay- ments will be largely replaced by a new funding system. There is, however, no analytical basis for determining whether incentive payments should be provided as a reward. Inducement for Better Program Performance. Another argument for pro- viding incentive payments is that they may act as an incentive for counties to make extra efforts toward improving their programs. As noted above, the counties have spent very little of their incentive payments and are still in the early stages of CalWORKs implementation. Thus, while incentive payments could have some impact in the future, it does not appear that they have had any appreciable effect on county behavior so far. C – 150 Health and Social Services 2000-01 Analysis We also note that, as currently structured, counties can earn substan- tial incentive payments without demonstrating any program improve- ment. About $800 million of the performance incentives owed to the coun- ties as of 1998-99 are due to savings attributable to the earnings of recipi- ents. According to DSS, about two-thirds of these savings would have occurred even if CalWORKs had never been implemented (because many recipients were working before CalWORKs started). We believe that for incentives to serve as an inducement, the conditions under which incen- tives are earned must be limited to situations in which program out- comes actually improve. Finally, we note that given the way fiscal incentives have been bud- geted, the counties must spend the incentive payments within the CalWORKs program. Thus, county government programs outside of CalWORKs receive no direct fiscal benefit from the incentive payments. Program Funding. A third argument for the performance incentives is that they could provide the counties with a source of funding for the CalWORKs program. Under CalWORKs, counties have had two sources of funds for employment services (1) the regular budget allocation to fund estimated program needs and (2) the performance incentives. The regu- lar budget allocation (referred to as the single allocation ) has been based on statewide experience with the Greater Avenues for Independence (GAIN) program\u2014California’s previous welfare-to-work program. Un- der this budgeting system, performance incentives were to be used for county-specific enhancements to the CalWORKs program. We note that this has not been the experience to date. Counties have spent only about 60 percent of their single allocation funds and hardly any of their perfor- mance incentives. Pursuant to Chapter 147, Statutes of 1999 (AB 1111, Aroner) the regu- lar budget allocation for employment services will shift from a system based on the GAIN cost model to one based on county expenditure plans, beginning in 2000-01. The shift to budgeting employment services ac- cording to individual county expenditure plans should reduce the need for county performance incentives as a funding source. This is because the county plans, or budgets, can include any funding proposals the coun- ties deem appropriate. Conclusion. The experience so far with CalWORKs suggests that the county performance incentives have not served as an effective reward, inducement toward better program outcomes, or funding source for pro- gram enhancements. While it is possible that, in the future, incentive pay- ments might have some behavioral effect in inducing better performance, we believe that based on experience to date there is little chance of this as the program is currently structured. Department of Social Services CalWORKs Program C – 151 Legislative Analyst’s Office Analyst’s Recommendation. Based on the amount of prior-year obliga- tions, we concur with the Governor’s proposal to prohibit counties from earning new county performance incentives until the outstanding obliga- tion to the counties is satisfied. With respect to whether the program should be eliminated, we have no analytical basis for determining the cost-effective- ness of fiscal incentives. Should the Legislature choose to retain such a sys- tem, however, we recommend that it (1) be funded with General Fund mon- ies that can be used by the counties for any purpose and (2) tie the amount of incentive payments to improvement in CalWORKs program outcomes. We believe that performance incentives would have a better chance of being effective if paid for with General Fund monies that the counties can use for any purpose. This will increase their value to the counties, therefore making it more likely to induce the counties to make an effort to improve the program. Furthermore, it will require the Legislature and the Governor to weigh the potential benefits of the incentives against the costs, because the incentives would compete with other state priorities for funding. As we have previously recommended, tying performance incentive pay- ments to improvement in outcome measures should increase the chances that these payments will induce counties to make an effort to improve their programs. (For a discussion of this aspect of the issue, please see our analysis of CalWORKs in the Analysis of the 1999-00 Budget Bill.) Finally, we note that repealing the performance incentive system, or replacing it with a new system supported by the General Fund, will free up a significant amount of federal TANF funds, which have been the prin- cipal source of funding for the incentive payments. These TANF funds could be (1) held in a reserve, (2) provided to the counties or other local governments to provide services to TANF-eligible individuals, or (3) used to fund state-level initiatives for the working poor. (Please refer to TANF Regulations Increase State Flexibility to Serve Working Poor later in this chapter for a discussion of the possible uses of TANF funds.) The CalWORKs Community Service Law Needs Clarification The provision of current law permitting counties to divert grants to employers for the purpose of funding wages for community service participants conflicts with other sections of the Welfare and Institutions Code. Because of these conflicts, counties are effectively precluded from providing wage-based community service. We recommend enactment of legislation to clarify these provisions so that counties will have the option of providing wage-based community service jobs for California Work Opportunity and Responsibility to Kids recipients. C – 152 Health and Social Services 2000-01 Analysis Background. Chapter 270, Statutes of 1997 (AB 1542, Ducheny) cre- ated the CalWORKs program. Under CalWORKs, able-bodied adult re- cipients (1) must meet participation mandates, (2) are limited to five years of cash assistance, and (3) must begin community service employment after no more than 24 months on aid, unless they have obtained nonsubsidized employment. With respect to grant diversion, Chap- ter 270 authorizes counties to divert all or part of a recipient’s cash grant to an employer to fund a recipient’s wages. The statute specifically states that such grant diversion can be used to fund wages for community ser- vice participants. (We believe that wage-based community service is a good option for CalWORKs recipients, as explained in our February 1999 report, CalWORKs Community Service: What Does It Mean for California?) Earned Income Disregard. Under CalWORKs, recipients who obtain nonsubsidized employment are entitled to a specific earned income dis- regard. Under this system, the first $225 of earnings, plus 50 percent of each additional dollar of earnings, are disregarded (not counted as in- come) in determining a family’s grant. This structure is designed to en- courage recipients to obtain nonsubsidized employment. Based on our understanding of current law, a CalWORKs commu- nity service participant who is receiving wages that are funded through grant diversion would be entitled to the same $225 and 50 percent earned income disregard that is available to a recipient in a nonsubsidized job. We believe that application of the disregard substantially reduces the incen- tive to find nonsubsidized employment. Accordingly, we previously rec- ommended (in our February 1999 report) that the Legislature eliminate or reduce the earned income disregard for community service partici- pants whose grants are diverted and paid to them in the form of wages. Maximum Aid Payment Statute Effectively Precludes Grant Diver- sion. The DSS concurs that a recipient of a diverted grant is entitled to the earned income disregard. The department also believes that, under cur- rent law, total grant payments cannot exceed the maximum aid payments prescribed in Section 11450 of the Welfare and Institutions Code. There- fore, the department concludes that current law has the effect of preclud- ing counties from diverting most or all of a recipients grant to an em- ployer because such a grant diversion, when combined with the applica- tion of the earned income disregard, would ultimately result in a total grant ($1,052 for a family of three) that would exceed the maximum aid payment ($626). In other words, DSS believes that the statute governing maximum aid payments overrides the provision that applies the disre- gard to wages funded with grant diversion (which is the statutory basis for a wage-based community service program). Department of Social Services CalWORKs Program C – 153 Legislative Analyst’s Office In summary, current law includes two technical obstacles to wage-based community service. First of all, it severely restricts counties’ ability to use grant diversion to fund wage-based community service positions because of the interaction between the code sections pertaining to grant diversion, the earned income disregard, and the maximum aid payments. Secondly, by applying the earned income disregard to community service participants, it makes no distinction between subsidized and nonsubsidized employment, thereby reducing the incentive for participants to obtain nonsubsidized em- ployment, and increasing the costs of the program. Analyst’s Recommendation. We believe that applying the disregard to subsidized employment results in an unintended consequence of Chapter 270. In order for wage-based community service to be a viable option for coun- ties, we recommend enactment of legislation to clarify that the earned in- come disregard does not apply to diverted grants that are used to fund community service wages. As an alternative to eliminating the disregard, the Legislature could also provide a work expense supplement in the amount of $50 in lieu of the current $225 and 50 percent disregard, on the basis that recipients participating in wage-based community service must pay employee Federal Insurance Contributions Act taxes (about $50 per month). These clarifications to current law would allow counties to provide wage-based community service positions, while maintaining the incen- tive for recipients to obtain nonsubsidized jobs. The CalWORKs Child Care Program The Governor’s budget fully funds the estimated need for California Work Opportunity and Responsibility to Kids (CalWORKs) child care, plus a reserve of $81 million. The budget proposal includes an increase of $85 million for the Stage 3 set-aside designed to provide former CalWORKs families with child care beyond the two-year time limit for such services. We summarize the CalWORKs child care program. Background. The CalWORKs child care program is delivered in three stages. Stage 1 is administered by county welfare departments (CWDs) and begins when a participant enters the CalWORKs program. In Stage 1, CWDs refer families to resource and referral agencies to assist them with finding child care providers. The welfare department then pays provid- ers directly for the child care services. Families transfer to Stage 2 when the county determines that the fami- lies’ situations become stable \u2014that is, they develop a welfare-to-work plan and find a child care arrangement that allows them to fulfill the obligations of that plan. Stage 2 is administered by the State Department of Education (SDE) through its voucher-based Alternative Payment (AP) C – 154 Health and Social Services 2000-01 Analysis programs. Participants can stay in Stage 2 while they are on CalWORKs and for up to two years after the family stops receiving a CalWORKs grant. Because it is up to the CWD to determine when a recipient is stable, the time at which families are transferred from Stage 1 to Stage 2 varies significantly among counties. Some counties make the transfer to Stage 2 as soon as possible, while others wait until the family has left CalWORKs. The variance in county practice contributes to the uncertainty in budget- ing child care funds for each stage. Although Stages 1 and 2 are administered by different agencies, fami- lies do not need to switch child care providers upon moving to Stage 2. The real difference in the stages is in who pays the providers\u2014in Stage 2, AP programs, operating under contracts with SDE, do this instead of CWDs. Stage 3 refers to the broader subsidized child care system adminis- tered by SDE that is open to both former CalWORKs families and work- ing poor families who have never been on CalWORKs. Once CalWORKs recipients leave aid, they have two years of eligibility in Stage 2. During this time, they are expected to apply for regular Stage 3 child care (in contrast to the Stage 3 set-aside child care discussed below). We note, however, that typically there are waiting lists for such child care because there are significantly more eligible families than the available child care slots. (Families with incomes up to 75 percent of the state median are eligible for regular SDE child care, but priority is given to families with the lowest income. Most of the available slots go to families with incomes below 50 percent of the state median). In order to provide continuing child care for former CalWORKs re- cipients who reach the end of their two-year Stage 2 time limit, the Legis- lature created the Stage 3 set-aside in 1997. Recipients timing out of Stage 2 are eligible for the Stage 3 set-aside if they have been unable to find regu- lar Stage 3 child care. Assuming funding is available (and legislative and administrative practice to date has been to fully fund the estimated need), former CalWORKs recipients may receive Stage 3 set-aside child care as long as their income remains below 75 percent of the state median and their children are below age 14. Current-Year Spending. For 1999-00, the total appropriation for CalWORKs child care was $1.2 billion, including a reserve of $270.7 mil- lion that can be allocated to Stage 1 or Stage 2 depending on a subsequent determination of actual need. As of January 2000, $128 million of the re- serve had been allocated to Stages 1 and 2. The budget estimates that an additional $98 million will be transferred from the reserve to either Stage 1 or State 2 before the end of 1999-00. Although total spending for 1999-00 is estimated to be about $45 million below the appropriation, spending Department of Social Services CalWORKs Program C – 155 Legislative Analyst’s Office for the Stage 3 set-aside is approximately $10 million greater than esti- mated. The administration has proposed to fund this anticipated $10 mil- lion shortfall mostly with savings from 1998-99. Proposed Budget. For 2000-01, the Governor’s budget proposes $1.3 billion for CalWORKs child care. This is an increase of $117 million (9.8 percent) over the current-year appropriation. Figure 3 summarizes the proposed spending plan. As discussed below, most of the increase is due to higher costs in Stage 3. The budget proposal includes a reserve of $150.4 million. Of this total, $69.4 million is held back from the esti- mated need for Stage 2 child care. The remaining $81 million is above the estimated need and represents a true reserve for Stages 1 and 2. This includes $45.4 million that is anticipated to go unspent from the current- year reserve and is proposed to be transferred to the budget-year reserve. Figure 3 CalWORKs Child Care Estimated Children Served and Proposed Budget 2000-01 (Dollars in Millions) Estimated Number of Children Funding Total TANFa CCDFb General Fund Stage 1 83,000 $424.2 $389.7 \u2014 $34.5c Stage 2 117,000 624.5 442.8 $43.0 138.7d Child care reservee 29,000 150.4 150.4 \u2014 \u2014 Stage 3 set aside 21,000 115.7 \u2014 63.4 52.3f Totals 250,000 $1,314.8 $982.9 106.4 $225.5 a Temporary Assistance for Needy Families. b Child Care Development Fund. c General Fund used toward CalWORKs maintenance-of-effort requirement. d Proposition 98 funds, including $15 million in the California Community Colleges. e Proposition 98 funds. f The reserve will be allocated to Stage 1 or Stage 2 depending on actual need. Stage 3 Set-Aside Costs Are Growing Rapidly. As shown in Figure 3, the estimated cost for the Stage 3 set-aside is $116 million, an increase of almost $90 million compared to the current-year estimate. This increase is because a growing number of former CalWORKs recipients are expected to reach their two-year Stage 2 post-assistance time limit. Preliminary estimates from the Department of Social Services indicate the cost for the Stage 3 set-aside will increase to about $200 million in 2001-02 and about $265 million in 2002-03. C – 156 Health and Social Services 2000-01 Analysis For a discussion of the how child care for CalWORKs families differs from child care for the non-CalWORKs working poor families, please see Child Care for CalWORKs Families and the Working Poor in the Cross- cutting Issues section of this chapter. County Probation Departments Should Report Juvenile Justice Data to Department of Justice We recommend the adoption of budget bill language requiring county probation offices to report data on all juvenile probation referrals, court actions, and final dispositions to the Department of Justice, in order to receive full-funding allocations for county probation facilities. Background. County probation departments receive about $200 mil- lion annually from the state for support of probation camps and ranches that house juvenile offenders and for a wide range of juvenile justice sys- tem services, from basic prevention to various kinds of residential place- ments for juvenile offenders. These services are funded with federal TANF monies. Information on these children and other juveniles involved with the probation system is collected by the Department of Justice (DOJ) and stored in the Juvenile Court and Probation Statistical System (JCPSS). This is a statewide database that collects information from county probation departments on all juvenile probation referrals, court actions, and final dispositions. The database was active through the 1980s, using informa- tion voluntarily provided by all 58 counties, but was eliminated in 1989 due to budget reductions at DOJ. The purpose of the JCPSS is to provide a statewide database of infor- mation about juveniles in the criminal justice system. The database is used for many purposes, including assessing potential impacts of recent and proposed changes in law. Many Counties Not Reporting Data. Chapter 803, Statutes of 1995 (AB 488, Baca) directed DOJ to reestablish a juvenile justice data collec- tion system, and the Department of Information Technology approved a new database design in August 1996. Since that time, DOJ has attempted to collect information from all of the counties. Currently, 15 counties are submitting data and 15 counties are testing to determine whether their reprogrammed databases are effective. Of the remaining counties, 10 in- tend to begin testing software within the next few months, and 18 have taken no action to submit data to DOJ. Statewide Database Participation Is Necessary. In our view, it is im- portant for the state to have complete and accurate data as to how juve- Department of Social Services CalWORKs Program C – 157 Legislative Analyst’s Office niles are treated in the criminal justice system in order to assist policymakers in analyzing the state of the juvenile justice system and in making decisions about proposed legislation. The information is valu- able to the counties as well as the state in assessing trends among coun- ties and impacts of county-based programs. For this reason, we believe that it is vital that all counties submit data to DOJ, in order to ensure that information from the JCPSS reflects the statewide juvenile justice situa- tion. These concerns about the need for better county reporting were raised during 1999-00 budget hearings last spring and the county probation of- ficers committed to begin submitting data to the JCPSS. To date however, only a handful of counties are submitting data. Analyst’s Recommendation. In order to ensure that the state has com- plete data in JCPSS, we recommend that the Legislature adopt budget bill language that would require counties to forfeit a portion of the TANF monies provided to probation if they do not submit data to DOJ by March 2001. We believe that this will give all counties adequate time to develop their reporting mechanisms. We do not believe that this will create a hard- ship on counties since they already collect the requested data for their own use. Based on our discussions with DOJ and counties, the costs to counties to report the data to DOJ should be minimal. The TANF dollars provided to probation departments could cover these minimal costs. Specifically, we recommend the following budget bill language be adopted in Item 5180-101-0001: A county shall receive no more than 50 percent of its respective allocation of funds appropriated under Schedule (a)(5) 16.30.050\u2014County Probation Facilities until the Department of Justice (DOJ) has certified to the Department of Social Services that the county is participating in the Juvenile Court and Probation Statistical System. Counties that fail to receive certification by March 31, 2001 shall forfeit the balance of their allocation. Any funds forfeited pursuant to this provision shall be reallocated to counties that have received DOJ certification. The distribution shall be proportionally based on such counties’ original allocations. The TANF Regulations Increase State Flexibility to Serve the Working Poor The final federal Temporary Assistance for Needy Families (TANF) regulations increase state flexibility to serve working poor families that are not eligible for the California Work Opportunity and Responsibility to Kids program. We summarize the TANF regulations and present some options for program changes permitted by the regulations. C – 158 Health and Social Services 2000-01 Analysis Background: Federal Welfare Reform. The federal welfare reform leg- islation of 1996 replaced the AFDC program with the TANF program. The federal law made numerous changes in the nation’s welfare system, including the following: the individual entitlement to a grant is elimi- nated; federal funding for the program is provided as a block grant; re- cipients are subject to a five-year time limit for receipt of federal funds; and states are subject to various penalties for failing to meet specified objectives, including work participation rates. In order to receive the federal block grant, states must meet a MOE requirement that state spending on welfare for needy families be at least 75 percent of FFY 1994 level, which is $2.7 billion for California (the re- quirement increases to 80 percent if the state fails to comply with federal work participation requirements). State MOE funds can be spent in con- junction with TANF funds or may be expended on separate state-only programs for needy families. Previous Federal Guidance Limited State Flexibility. The U.S. De- partment of Health and Human Services (DHHS) issued its first written guidance for the TANF program in January 1997 and later issued pro- posed regulations in December 1997. Both of these documents had the effect of limiting state flexibility in implementing the TANF program. State flexibility was limited by (1) the way in which DHSS defined the term assistance, and (2) cautions against the creation of state-only programs. These limitations are explained below. Definition of Assistance. The definition of assistance is important because a recipient of TANF assistance is subject to all TANF program requirements, including time limits, work participation requirements, and certain child support rules. In both the initial federal guidance and the proposed regulations, the DHHS defined almost all benefits or services funded with TANF funds as assistance. This broad definition meant that almost any recipient of a benefit funded with TANF funds would be sub- ject to TANF rules, including the federal time limits. Thus, under this regulatory approach receipt of services such as child care, or counseling for victims of domestic violence, would require recipients to meet time limits and other TANF requirements. Limits on State-Only Programs. State TANF programs, such as the CalWORKs program in California, are funded with a combination of TANF federal block grant funds and state MOE funds. (In California, most of the MOE funds are state funds appropriated for the CalWORKs program, but some state funds supporting TANF-eligible families in other programs also qualify.) The federal legislation indicated that if states create sepa- rate state-only programs for needy families (funded only with state MOE funds), TANF requirements such as time limits and work participation Department of Social Services CalWORKs Program C – 159 Legislative Analyst’s Office would not apply to such programs. The DHHS guidance and proposed regulations, however, threw this provision into question by cautioning that states creating separate state-only programs may not be eligible for federal TANF penalty relief. (We note that the dollars at stake were not insiginificant. For example, in FFY 1997, the DHHS used its authority to reduce California’s penalty for noncompliance with federal work partici- pation rates by about $32 million.) Final Regulations Increase Flexibility. In April 1999, the DHHS re- leased its final TANF regulations. These regulations became effective on October 1, 1999. In comparison to the proposed rules, the final regula- tions increased state flexibility in several ways as follows. Narrowing the Definition of Assistance. The term assistance is now defined narrowly. Under the final rules, assistance is generally limited to payments directed at providing for a family’s ongoing basic needs. The definition of assistance specifically excludes (1) nonrecurring short-term benefits designed to respond to crisis situations lasting less than four months, (2) child care, (3) transportation benefits, (4) work subsidies paid to employers, (5) refundable earned income tax credits, and (6) services such as education and training. Thus, a state can provide such nonassistance benefits with TANF or state MOE funds without trigger- ing TANF requirements for the recipients of such benefits. State-Only Programs Permitted. Prior warnings that the creation of state-only programs might result in a state being ineligible for penalty relief have been dropped. The regulations simply require that states re- port program information on state-only programs to DHHS. State Authority to Define Needy. The final regulations affirmed and strengthened state flexibility to define the term needy. Because most TANF spending is limited to needy families or parents, the definition of needy is important. Under the final regulations, states may set multiple definitions of needy and tailor benefits to the populations falling within each respective definition. For example, the state could set one definition of needy for cash assistance and a higher definition of needy to allow for the provision of services, without cash assistance, to working poor families. The final regulations do not establish any income limit on the definition of needy. Options for Using New Flexibility. Below we identify two types of changes that are permitted by the final regulations. The first category consists of program expansions. These options would require additional resources or redirection of resources within the TANF program. Second, we present certain program changes that do not require substantial addi- tional resources. C – 160 Health and Social Services 2000-01 Analysis Generally, the significance of this added flexibility is that it gives the state new options for using federal TANF funds to serve the working poor. Specifically, these funds are now available to support new activities or to replace CalWORKs General Fund support within the Department of Social Services (provided this meets the MOE requirement). Potential Program Expansions. The expansions discussed below would result in program costs. Although counties were unable to expend all of the TANF funds provided for the CalWORKs program in 1998-99, the Governor’s budget projects that these carryover balances will be ex- hausted by the end of 2000-01. Thus, if the Legislature were to use TANF funds for any of the options presented below, new funding eventually would have to be identified either from redirection within the CalWORKs program or from the General Fund in order to continue the expansions. Expand Child Care for the Working Poor. Currently, California provides funds for child care to CalWORKs recipients, former CalWORKs recipients, and working poor families that have never received cash assistance. Child care for CalWORKs recipients and former recipients is funded primarily with TANF funds. Child care for non-CalWORKs recipients is funded primarily with state General Fund monies and federal Child Care Development Funds. The final regulations expand the ability for California to use both TANF and state (MOE) funds for non-CalWORKs recipients. To accomplish this, the state TANF plan would have to be amended to establish a category of needy recipient for purposes of child care that is above the level for cash assistance. Under this option, CalWORKs recipients and the working poor could be treated in a more consistent manner. Enact a Refundable Earned Income Tax Credit. The federal regu- lations allow states to use TANF or state MOE funds to pay for the refundable portion of a state earned income tax credit (EITC), subject to certain restrictions. In this context, refundable por- tion means the portion of any credit that is over and above an individual’s tax liability and is refunded to the taxpayer in the form of a check from the taxing authority. The federal regula- tions provide that TANF and state MOE funds may only be used for the refundable credit that is provided to needy families. States, however, are free to set the definition of needy for a state EITC program at a level higher than for cash assistance. If California were to adopt a refundable state EITC equal to 5 percent of the federal EITC, for example, the revenue loss would be approxi- mately $220 million, of which about $205 million would be the refundable portion eligible for TANF or state MOE funding. Re- search indicates that the federal EITC results in an increase in the Department of Social Services CalWORKs Program C – 161 Legislative Analyst’s Office number of people working and an increase in the hours of work for persons earning less than $750 per month. The research also shows, however, that the EITC discourages work for some work- ers making more than $750 per month. Provide New Services to the Non-CalWORKs Working Poor. Be- cause states may establish different definitions of needy, TANF and state MOE funds may be used for programs designed to help working poor families whose incomes are too high to be eligible for cash assistance. In other words, under the new TANF regula- tions, California could provide services (such as mental health and substance abuse treatment, education, training, and trans- portation benefits) to working poor families ineligible for CalWORKs cash grants. Such services could help prevent these individuals from subsequently going on CalWORKs. Using this flexibility, the State of Ohio has developed a Prevention, Reten- tion and Contingency (PRC) program to provide services to needy families that are ineligible for cash assistance. Services provided in the PRC program include job preparation, training, transpor- tation, and shelter. Potential Program Modifications. In contrast to the program expan- sions discussed above, the program changes presented below do not re- sult in significant costs. Replace Grant Payments for Working Recipients With Work Ex- pense Supplements. Those CalWORKs recipients who obtain em- ployment may remain eligible for the program if their earnings are not too high. In these cases, their grant payments generally are relatively small because a portion of their earned income is disregarded when calculating the size of their grant. For re- cipients earning more than the minimum wage and working close to full time, the amount of their monthly CalWORKs grants can be less than $100. Even though the CalWORKs grant in this situ- ation is modest, the recipients of such grants are subject to the state and federal five-year time limits because they are receiving assistance. Under the new TANF regulations, however, states have the option of providing a work expense supplement in- stead of a grant, which would not be considered assistance. Ac- cordingly, if California elected to provide a work expense supple- ment instead of a modest grant, these working recipients would no longer be subject to the federal five-year time limit (which ap- plies to the use of federal funds). Replacing grants of less than $100 for working recipients with a work expense supplement would have minimal program costs, mostly for administration. C – 162 Health and Social Services 2000-01 Analysis Thus, at relatively little state cost, this policy change would pro- vide certain working recipients additional months of eligibility for federal funding. From the recipient’s perspective, however, it is the state rather than the federal time limit that determines the availability of the grant. The federal time limit only affects how the grant is funded. Thus, adding additional months to an individual’s federal eligi- bility would not, by itself, change the grant policy in California (which requires a grant reduction for families that exceed the state five-year limit). Permit Counties to Expend Performance Incentive Funds on Stage III Child Care. Under current law, most of the savings resulting from CalWORKs recipients leaving the program due to employ- ment, and from increased earnings, are redirected by the state to the counties as performance incentives. For 1998-99, total per- formance incentives paid to counties were $433 million. The coun- ties may spend these incentives for CalWORKs program enhance- ments that are consistent with state and federal law, but they can- not use the incentives to provide child care to recipients who have reached the two-year post-assistance time limit on transitional child care. Families that have reached such time limits may receive publicly subsidized child care to the extent funding is available under the CalWORKs Stage III child care set aside or under the child care programs administered by SDE. For 1999-00, the SDE estimates that the amount needed for child care by CalWORKs recipients who have exhausted their two years of transitional benefits will exceed the $17 million Stage III set-aside budget by $2 million to $4 million. We note that the administration intends to address this shortfall in the current year and the Governor’s budget fully funds the estimated need for Stage III set-aside child care in 2000-01. As discussed above, the new federal regulations permit states to use TANF funds or state MOE funds to provide child care for non-CalWORKs recipients (such as recipients who have been off aid for more than two years). Another way of addressing short- falls in the Stage III set-aside would be to allow counties to use their performance incentive funds on child care for CalWORKs recipients who have exhausted their transitional child care ben- efits. In order to provide counties with this flexibility, the state TANF plan would have to be amended. Department of Social Services CalWORKs Program C – 163 Legislative Analyst’s Office Permit Counties to Use Performance Incentive Funds on Services for the Working Poor. In addition to permitting counties to use their performance incentives on Stage III child care, the state TANF plan could be amended to permit counties to provide services to working poor families ineligible for cash assistance. Conclusion. The final TANF regulations provide the Legislature with significant new flexibility to modify the CalWORKs program. In summary, the state can now use TANF and state MOE funds to provide services to working poor families that are not eligible for CalWORKs cash assistance without triggering TANF requirements such as the federal time limit, work participation requirements, and certain child support rules. C – 164 Health and Social Services 2000-01 Analysis KIN-GAP PROGRAM The Kin-GAP (Kinship Guardianship Assistance Payment) Program, authorized by Chapter 1055, Statutes of 1998 (SB 1901, McPherson) be- came effective January 1, 2000. Under the program, a relative caregiver is eligible for a Kin-GAP grant if he or she assumes legal guardianship of a foster child. To qualify, the child must have been in foster care placement with the relative caregiver for over 12 months. Once enrolled in Kin-GAP, the guardian receives a grant, paid at 100 percent of the basic foster care (foster family home) rate. The program is supported by the state General Fund, federal Temporary Assistance for Needy Families (TANF) block grant funds, and county funds. Enrollment in Kin-GAP Program Not Automatic. Movement to Kin- GAP is not automatic. In order for it to occur, the court must terminate court dependency of the child and the caregiver must assume guardian- ship of the child. Budget Overestimates Kin-GAP Caseload in 2000-01 We recommend a General Fund reduction of $443,000 because the Kinship Guardianship Assistance Payment Program caseload is overestimated. (Reduce Item 5180-101-0001 by $1,841,000, increase Item 5180-141-0001 by $273,000, and reduce Item 5180-151-0001 by $1,125,000.) The Governor’s budget proposes $109 million ($28 million General Fund) for the Kin-GAP Program in 2000-01. In addition, the budget re- flects savings ($24 million General Fund) to the foster care and child wel- fare services programs, associated with termination of juvenile depen- dency for those children placed in the Kin-GAP Program. The budget estimates that the Kin-GAP caseload will begin with 1,629 cases in January 2000 and increase by about 1,630 cases each month in the current year, ending with a caseload of 9,783 in June of 2000. The budget projects that the caseload will more than double (to 19,880 cases) in the one-month interval from June to July of 2000 and remain at this full- implementation level throughout 2000-01. When comparing the aver- Kin-GAP Program C – 165 Legislative Analyst’s Office age monthly caseload in 2000-01 to the average for the six months cov- ered in the current year, the budget projects a 248 percent increase. The department has provided no policy rationale for the immediate doubling of caseload at the beginning of 2000-01. For this reason, in our caseload projection we maintain the administration’s current-year phase- in of 1,630 cases per month, but we assume a continuation of that monthly trend until full implementation (19,880) is reached in January 2001 (See Figure 1). This would result in an increase of 210 percent over the six- month average in 1999-00, reflecting the ramp-up of the program, but less than the increase assumed in the budget. Consequently, we recom- mend that the budget reflect more steady caseload projections, for a net General Fund savings of $443,000 in 2000-01. Figure 1 Budget Overestimates Kin-GAP Caseload January 2000 Through June 2001 (In Thousands) 5 10 15 20 25 Jan Apr Jul Oct Jan Apr Jun LAO Estimate Governor’s Proposal 20012000 C – 166 Health and Social Services 2000-01 Analysis FOSTER CARE Children are eligible for grants under the Aid to Families with De- pendent Children-Foster Care program if they are living with a foster care provider under (1) a court order or (2) a voluntary agreement be- tween the child’s parent and a county welfare or probation department. County welfare departments have the responsibility of placing children in foster homes. Children in the foster care system can be placed in either a foster family home (FFH) or a foster care group home (GH). Both types of foster care provide 24-hour residential care. Foster family homes must be (1) located in the residence of the foster parent(s), (2) provide services to not more than six children, and (3) be either licensed by the Depart- ment of Social Services (DSS) or certified by a foster family agency (FFA). Foster care GHs are licensed by the DSS to provide services to seven or more children. The budget proposes total expenditures of $1.5 billion ($389 million General Fund) in 2000-01 for foster care local assistance. This represents a 1 percent (9 percent General Fund) decrease from the current year. The General Fund reduction is due primarily to (1) a one-time 1999-00 expen- diture for a federal audit requirement and (2) a shift of KinGAP (Kinship Guardianship Assistance Payment) Program cases from foster care to the California Work Opportunity and Responsibility to Kids (CalWORKs) program in 2000-01. Budget Overestimates Cost-of-Living Adjustment for Foster Family Agencies We recommend that proposed spending for the foster care program be reduced by $792,000 from the General Fund because the budget overestimates the statutory cost-of-living-adjustment for the foster family agencies. (Reduce Item 5180-101-0001 by $792,000.) The Governor’s budget proposes to provide the statutory cost-of-liv- ing adjustment (COLA) to FFAs, effective July 1, 2000. The COLA is based on the change in the California Necessities Index (CNI) from December Foster Care C – 167 Legislative Analyst’s Office 1998 to December 1999. The Governor’s budget, which is prepared prior to the release of the December CNI figures, estimates that the CNI will be 3.61 percent, based on partial data, for a total cost of $15.3 million ($4.3 mil- lion General Fund). Our review of the final data, however, indicates that the CNI will be 2.96 percent. Applying the actual CNI of 2.96 percent re- duces the cost of providing the FFA COLA to $12.5 million ($3.5 million General Fund). Accordingly, we recommend that the budget be reduced by $792,000 from the General Fund to reflect these savings. Budget Does Not Provide COLA for All Foster Care Providers We recommend a $12.3 million General Fund augmentation to provide a cost-of-living adjustment (COLA) for the foster family homes and group homes because (1) there is no policy rationale for distinguishing these types of providers from foster family agencies and (2) revenues are sufficient to provide the COLA. (Increase Item 5180-101-0001 by $12,300,000.) The budget proposes a COLA to FFAs in 2000-01, but does not pro- vide a COLA to the other foster care providers\u2014FFHs and GHs. The statu- tory COLA for the FFAs is mandatory. Current law provides the same COLA for FFHs and GHs, but makes them subject to the availability of funds. We recommend providing a COLA to FFH and GH providers because (1) there is no policy rationale for distinguishing these types of providers from FFAs, and (2) revenues are sufficient to provide the COLA. With respect to revenues, we note that we are projecting that General Fund revenues will be significantly higher than estimated in the budget, over the two-year period in 1999-00 and 2000-01. (Please see The 2000-01 Budget: Perspectives and Issues.) The cost of providing the 2000-01 FFH and GH COLA of 2.96 percent is $12.3 million from the General Fund ($40.6 million all funds). We note that this amount includes COLAs for Adoption Assistance, Emergency Assistance, and KinGAP, whose rates are based on FFH rates. C – 168 Health and Social Services 2000-01 Analysis FOOD STAMPS PROGRAM The Food Stamps Program provides food stamps to low-income per- sons. With the exception of the state-only program (discussed below), the cost of the food stamp coupons is borne by the federal government ($1.6 billion). Administrative costs are shared between the federal gov- ernment (43 percent), the state (42 percent), and the counties (15 percent). California Food Assistance Program Federal Restrictions on Benefits for Noncitizens. With respect to non- citizens, current federal law generally limits food stamps benefits to legal noncitizens who immigrated to the U.S. prior to August 1996 and are under age 18 or over the age of 64. State Program for Noncitizens. Created in 1997, the California Food Assistance Program (CFAP) provides state-only funded food stamps ben- efits to (1) pre-August 1996 legal immigrants who are ineligible for fed- eral benefits (generally individuals age 18 through 64), and (2) a very limited number of post-August 1996 legal immigrants whose sponsors are dead, disabled, or abusive. The CFAP purchases food stamp coupons from the federal government and distributes them to eligible recipients. Adult recipients are subject to a specified work requirement. Under prior law, the program was to sunset on June 30, 2000. Chap- ter 147, Statutes of 1999 (1) extended the sunset indefinitely and (2) sig- nificantly expanded eligibility, from October 1999 through September 2000, to legal immigrants who arrived after August 1996. Budget Proposal. For 2000-01, the average monthly caseload for CFAP is estimated to be 85,000 persons. The budget proposes an appropriation of $52 million from the General Fund for coupon purchases and an addi- tional $3 million for administration in 2000-01. This is a decrease of $8 mil- lion from estimated expenditures in 1999-00, mostly attributable to nearly all of the post-1996 immigrants on CFAP losing their eligibility effective October 1, 2000, pursuant to current law. Food Stamps Program C – 169 Legislative Analyst’s Office We note that $39 million of the proposed expenditure for 2000-01 counts towards meeting the federal maintenance-of-effort requirement for the California Work Opportunity and Responsibility to Kids program. We also note that the cost of extending eligibility for the approximately 13,000 post-August 1996 immigrants added temporarily by Chapter 147 would be approximately $6.1 million in 2000-01 (October 2000 through June 2001) and $8.1 million annually thereafter. C – 170 Health and Social Services 2000-01 Analysis SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $2.6 billion from the General Fund for the state’s share of the SSI\/SSP in 2000-01. This is an increase of $137 million, or 5.5 percent, over estimated current-year ex- penditures. This increase is due primarily to the full-year cost of grant increases provided in the current year, caseload growth, the cost-of-liv- ing adjustment (COLA) to be provided in January 2001, and an increase in the federal administrative fee. In December 1999, there were 328,998 aged, 21,813 blind, and 707,051 disabled SSI\/SSP recipients. In addition to these federally eligible recipi- ents, the state-only Cash Assistance Program for Immigrants (CAPI) is estimated to provide benefits to about 8,900 legal immigrants in Decem- ber 1999. Budget Overestimates Cost of Providing Statutory COLA We recommend reducing the General Fund amount budgeted for the state portion of Supplemental Security Income\/State Supplementary Program grants by $6.6 million because the cost of providing the statutory cost-of-living adjustment is overestimated. (Reduce Item 5180-111-0001 by $6,600,000.) Background. Pursuant to current law, the Governor’s budget proposes to provide the statutory COLA in January 2001. The state COLA is based on the California Necessities Index (CNI) and is applied to the combined SSI\/SSP grant. It is funded by both the federal and state governments. The federal portion is the federal COLA (based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W) that is applied annually to the SSI portion of the grant. The remaining amount needed to cover the state COLA is funded with state monies. Based on its Supplemental Security Income\/State Supplementary Program C – 171 Legislative Analyst’s Office assumptions concerning both the CNI and CPI-W, the budget includes $55.1 million for providing the statutory COLA for six months, effective January 2001. The CNI Has Been Revised. The January 2001 COLA is based on the change in the CNI from December 1998 to December 1999. The Governor’s budget, which is prepared prior to the release of the December CNI fig- ures, estimates that the CNI will be 3.61 percent, based on partial data. Our review of the actual data, however, indicates that the CNI will be 2.96 percent. The CPI Is Overestimated. The January 2001 federal SSI COLA will be based on the change in the CPI-W from the third quarter of calendar 1999 to the third quarter of calendar 2000. The Governor’s budget esti- mates that the change in the CPI-W for this period will be 3.2 percent. Based on our review of the consensus economic forecasts for 2000, we estimate that the CPI-W will be 2.5 percent. This reduction in the CPI-W (compared to the Governor’s budget) raises the state cost of providing the statutory COLA because it effectively reduces federal financial par- ticipation toward the cost of the state COLA, which is applied to the en- tire grant. Cost of Providing COLA Is Overestimated. Taken together, the changes in CNI and CPI-W (in relation to the Governor’s budget) reduce the General Fund cost of providing the statutory COLA by approximately $6.6 million. Accordingly, we recommend that the budget be reduced to reflect these savings. Supplemental Security Income\/ State Supplementary Program Grant Levels Figure 1 (see next page) shows SSI\/SSP grants on January 1, 2001 for both individuals and couples as displayed in the Governor’s budget and adjusted to reflect the actual CNI and the Legislative Analyst’s Office estimate of the CPI-W. As the figure indicates, grants for individuals will increase by $20 to a total of $712 per month, and grants for couples will increase by $36 to a total of $1,265. As a point of reference we note that the federal poverty guideline for 1999 is $687 per month for an individual and $922 per month for a couple. Thus, the grant for an individual would be 3.7 percent above the 1999 poverty guideline and the grant for a couple would be 37 percent above the guideline. (We note that the poverty guide- lines are adjusted for inflation annually.) C – 172 Health and Social Services 2000-01 Analysis Figure 1 SSI\/SSP Maximum Monthly Grants Governor’s Budget and LAO Projections January 2000 and January 2001 January 2001 LAO Projection Change From 2000 Recipient Category January 2000 Governor’s Budget LAO Projectiona Amount Percent Individuals SSI $512 $529 $525 $13 2.5% SSP 180 188 187 7 3.9 Totals $692 $717 $712 $20 2.9% Couples SSI $769 $793 $788 $19 2.5% SSP 460 480 477 17 3.7 Totals $1,229 $1,273 $1,265 $36 2.9% a Based on actual California Necessities Index increase (2.96 percent) and projected U.S. Consumer Price Index increase (2.5 percent). Child Welfare Services C – 173 Legislative Analyst’s Office CHILD WELFARE SERVICES The Child Welfare Services (CWS) program provides services to abused and neglected children and children in foster care, and their fami- lies. The CWS program provides: Immediate social worker response to allegations of child abuse and neglect. Ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect. Services to children in foster care who have been temporarily or permanently removed from their families because of abuse or neglect. Child Welfare Services Case Management System For a discussion of this issue, please see our review of the Health and Human Services Agency Data Center in the General Government chapter of this Analysis. C – 174 Health and Social Services 2000-01 Analysis COMMUNITY CARE LICENSING The Community Care Licensing Division (CCLD) develops and en- forces regulations designed to protect the health and safety of individu- als in 24-hour residential care facilities and day care. Licensed facilities include child care; foster family and group homes; adult residential fa- cilities; and residential facilities for the elderly. The Governor’s budget proposes expenditures of $117 million ($46 million General Fund) for the CCLD in 2000-01. This represents a 17 percent increase in General Fund expenditures from the current year. This increase is primarily due to a proposal of $5 million from the General Fund for the Child Care Safety Initiative. Need More Information on Child Care Safety Initiative We withhold recommendation on the Child Care Safety Initiative, pending receipt of additional information supporting the budget proposal. The Governor’s budget proposes a one-time $5 million General Fund augmentation in 2000-01 for the Child Care Safety Initiative. These funds would be used to distribute informational material to 13,000 child care centers and to train 10,000 child care center staff. The materials would include a guide to evaluate the security of facilities. The training would address how to reduce the threat of traumatic events and how to counsel families coping with the stress and trauma associated with violence, earth- quakes, and fires. Of the $5 million proposal, $3.4 million would be used to provide the training while $1.6 million would be used to produce and distribute supporting material. We have requested information from the department on how the costs of the training and materials were estimated. At the time this analysis was prepared, we had not received sufficient information to determine if the proposal is funded appropriately. Consequently, we withhold recom- mendation on the Child Care Safety Initiative, pending receipt of addi- tional information supporting the budget proposal. Community Care Licensing Division C – 175 Legislative Analyst’s Office Positions Exceed Estimated Need We recommend elimination of four community care licensing positions, for a General Fund savings of $230,000, because the positions are not needed according to the department’s formula for determining ongoing workload needs. (Reduce Item 5180-001-0001 by $230,000.) As part of its annual budget for community care licensing, the de- partment uses a caseload-driven formula for determining the number of positions needed to accommodate the ongoing licensing workload. This component of the budget proposal\u2014referred to as the Program Growth budget change proposal\u2014is distinct from the 46 positions (18 new and 28 continuing) being requested to address specific needs identified sepa- rately by the department. The formula for the Program Growth component shows that the num- ber of positions needed by the department is approximately four posi- tions less than the number currently authorized (consisting of 2.7 licens- ing program analysts, 0.4 supervisors, and 1 clerical). The budget, how- ever, does not propose to eliminate these positions. While this is a relatively small number of positions compared to the base of about 490 positions, we believe that it would be appropriate to follow the formula. Accordingly, we recommend elimination of the four positions, which would result in a General Fund savings of $230,000 in 2000-01. C – 176 Health and Social Services 2000-01 Analysis Legislative Analyst’s Office FINDINGS AND RECOMMENDATIONS Health and Social Services Analysis Page Crosscutting Issues Aging with Dignity Initiative C-21 \ufffd Long-Term Care Tax Credit Unlikely to Be An Efficient Or Effective Incentive. The proposed $500 long-term care tax credit (1) is unlikely to be a means of effectively targeting a significant subsidy to many taxpayers who currently provide in-home long-term care or to provide a significant incentive for many families or individuals to provide this type of care; (2) has an inherent potential for higher-than-intended costs because its eligibility qualifications will be difficult to enforce; and (3) will have its impact diluted by increasing federal tax liabilities. We recommend that the Legislature consider alternative means of helping seniors and disabled persons to remain in their homes or the community, such as further expansion of Medi-Cal coverage for seniors and the disabled. C-23 \ufffd Expanding Medi-Cal Coverage for Seniors and the Disabled. Recommend that the Legislature consider expand- ing Medi-Cal coverage for seniors and the disabled as an alternative to the long-term care tax credit proposed in the budget because expanding Medi-Cal coverage has the potential for more effectively targeting state assistance to individuals and families with the greatest needs and would enable the state to leverage federal funds. C-27 \ufffd Need Additional Information on Department of Aging Components. Withhold recommendation on $22 million proposed for three program components, pending receipt of additional information. C – 178 Health and Social Services 2000-01 Analysis Analysis Page C-27 \ufffd Caregiver Training, Retention, and Recruitment. Withhold recommendation on the proposal to establish a caregiver training, recruitment, and retention program, pending receipt of additional justification. C-28 \ufffd Medi-Cal Rate Increase for Distinct Part Nursing Facilities Not Justified. Reduce Item 4260-101-0001 by $2,558,000. Recommend reduction of $2.6 million to delete funding for wage pass-throughs for distinct part nursing facilities because these facilities currently receive much higher rates than other nursing homes for similar care. C-28 \ufffd More Developed Proposal for Quality Awards Needed. Withhold recommendation on $10 million ($8 million General Fund) requested for nursing home quality awards, pending a specific proposal that describes the criteria for (1) awarding grants and determining their amount, and (2) the use of the funds by awardees. C-28 \ufffd Nursing Home Inspection and Enforcement Staff Requests Overbudgeted. Reduce Item 4260-001-0001 by $584,000. Recommend General Fund reduction of $584,000 and 16 positions to eliminate overbudgeting for increased unan- nounced inspections. Withhold recommendation on a total of $11.2 million ($6 million General Fund) and 106 positions requested for improving nursing home regulation and enforcement pending receipt of specific workload informa- tion, including how much of that workload could be addressed by filling currently authorized, but vacant, positions. C-30 \ufffd Increase In Bed Licensing Fee Would Reduce General Fund. Recommend an increase in the per-bed nursing home licensing fee for 2000-01 in order to adjust fee revenues to the amount needed to fully fund additional enforcement and regulatory staff approved in the budget for a potential General Fund savings of up to $10.5 million. Findings and Recommendations C – 179 Legislative Analyst’s Office Analysis Page Child Care C-32 \ufffd Child Care for CalWORKs Families and the Working Poor. Recommend enactment of legislation to conduct a pilot test of the Wisconsin-style child care program in up to four counties in California. Emergency Medical Services Authority C-41 \ufffd Ease Statutory Requirement and Restore Fund Reserve. Recommend legislation to reduce from 25 percent to 5 percent the statutory requirement for the Emergency Medical Services (EMS) Personnel Fund. Further recommend that the Emergency Medical Services Authority provide a fiscal plan for the EMS Personnel Fund. Department of Alcohol and Drug Programs C-45 \ufffd Excess Special Fund Revenues Should Be Used to Reduce Fees. Recommend adoption of budget bill language requiring the department to implement a fee reduction for Driving- Under-the-Influence program provider licenses, because the program fund’s year-end balance is sufficiently high to support reduced fees. C-47 \ufffd Excess Special Fund Revenues Should Be Transferred to Fund. Increase General Fund Revenues by $206,000. Recommend adoption of budget bill language to transfer the amount of the year-end balance in excess of $20,000 from the Audit Repayment Trust Fund to the General Fund, because a balance of $20,000 would constitute a prudent reserve and it is appropriate to return these repayment revenues to their original source, the General Fund. C-48 \ufffd Department Should Report on Medicaid Rehabilitation Option. Recommend that the department advise the Legislature on the status of the statutorily required report on the programmatic and fiscal implications of adopting the Medicaid rehabilitation option under the Medi-Cal Drug Treatment Program (Drug Medi-Cal [D\/MC]) and its recommendations regarding adoption of the option. C – 180 Health and Social Services 2000-01 Analysis Analysis Page C-48 \ufffd Statewide Strategic Plan Needed to Address Gap in Substance Abuse Treatment. Recommend adoption of budget bill language requiring the department to submit by December 1, 2000 a statewide strategic plan to address the need for substance abuse treatment, including an adolescent component and consideration of expanding benefits under the Healthy Families Program and D\/MC. California Children and Families Commission C-54 \ufffd Establish a State-Funded Voluntary Matching Grant Program for the Proposition 10 County Commissions. Recommend legislation to create a state-funded matching grant program which would fund (1) early childhood programs that have been shown to be cost-effective and\/or (2) demonstration programs that are potentially cost-effective, based on existing research. Department of Health Services State Operations C-56 \ufffd Vacant Positions Should Be Filled Before Adding New Positions. In addition to specific recommendations regarding individual staffing requests, we withhold recommendation generally on all of the department’s proposals to increase staffing (which result in a net increase of 557 positions in 2000-01) because the department’s large number of unfilled existing positions calls into question the need for the requested staffing increases. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new positions and funding, and report the results of this review to the budget committees. C-57 \ufffd Salary Savings Estimate Should Be Realistic. Recommend that DHS prepare, for the budget committees, a realistic hiring plan for its revised staffing needs and a revised salary savings estimate for 2000-01 that is consistent with that plan, in order to avoid budgeting funds that are not likely to be spent. Findings and Recommendations C – 181 Legislative Analyst’s Office Analysis Page C-58 \ufffd Employer Retirement Contribution Overbudgeted. Recom- mend reducing the amount budgeted for employer retirement contributions to the correct amounts for proposed new positions in 2000-01, for a total savings of $1.1 million ($442,000 General Fund, $158,000 special funds, $501,000 federal funds, and $27,000 reimbursements), subject to adjustment for other budget actions affecting these proposals. C-59 \ufffd Medi-Cal Fraud and Fiscal Integrity Initiative\u2014More Information Needed. Withhold recommendation on $26.2 mil- lion ($10 million General Fund) and 255 positions requested for the Governor’s Medi-Cal Fraud and Fiscal Integrity Initiative pending further analysis of the proposal and receipt of additional information from the department regarding (1) the potential use of existing vacant positions to address identified workload and (2) more specific workload justifica- tion that relates staffing requests to specific goals and outcomes and recognizes the interactive effects of the components of the Governor’s initiative. Medi-Cal C-79 \ufffd Caseload Estimate Probably Too High But Clouded by Uncertainty. We find that the budget’s estimate for the Medi- Cal caseload of families and children is likely to be too high, based on current trends. General Fund caseload savings could total as much as $150 million through 2000-01. However, a number of factors currently add considerable uncertainty to Medi-Cal caseload projections. Accordingly, we will monitor caseload trends and recommend appropriate adjustments at the time of the May revision to the Governor’s budget. C-81 \ufffd Legislative Notification Not Provided for Medi-Cal Defi- ciency. We find that the Department of Finance (DOF) did not provide the Legislature with notification of the 1999-00 Medi- Cal deficiency as required by Section 27.00 of the 1999-00 Budget Act. C-83 \ufffd Departments Should Identify Funding Needed for Potential Managed Care Rate Increases. Recommend that the DOF and the Department of Health Services report at budget hearing on C – 182 Health and Social Services 2000-01 Analysis Analysis Page (1) their plans for considering Medi-Cal managed care rate increases in 2000-01 and (2) the potential amount of additional funding needed in 2000-01 for those rate increases. C-84 \ufffd Antifraud Efforts Starting to Pay Off. Reduce Item 4260-101- 0001 by $19.1 Million. Recommend General Fund reduction in 2000-01 (and reduction of $6.8 million in 1999-00) because recent payment data indicate that savings from the department’s efforts to prevent Medi-Cal provider fraud are greater than the savings anticipated in the budget. C-85 \ufffd Reduce Disproportionate Share Hospital (DSH) Takeout Or Increase Rates? Withhold recommendation on a proposed General Fund augmentation of $30 million to reduce the state takeout from DSH funding and to increase Medi-Cal provider rates, pending receipt of a specific proposal for the use of the funds. C-86 \ufffd Federal Government Will Pay for Hepatitis A Vaccine. Reduce Item 4260-101-0001 by $4,588,000. Recommend General Fund reduction of $2.9 million in 1999-00 and $4.6 million in 2000-01 because the state will receive Hepatitis A vaccine for children enrolled in Medi-Cal at no cost through the federal Vaccines for Children Program. C-87 \ufffd Panorama View Is Nice, But Not Enough. Recommend that the department report during budget hearings regarding when and how it intends to provide certain legislative committees with access to the DataScan component of the Medi-Cal Management Information System\/Decision Sup- port System, as required by existing law. Public Health C-93 \ufffd Change the Department’s Immunization Information System Procurement Strategy. Recommend budget bill language requiring the department to submit an Alternative Procurement Business Justification for the statewide immuni- zation system, in which the department’s procurement strategy would be based on desired program outcomes rather than technical specifications. Findings and Recommendations C – 183 Legislative Analyst’s Office Analysis Page C-94 \ufffd Encourage Coordination of Regional Registry Development. Recommend budget bill language directing the department to require the inclusion of project charters in grant applications from counties that are developing regional registries, in order to facilitate regional cooperation and coordination in these efforts. C-95 \ufffd Ensure State Oversight of All Local Registries. Recommend legislation requiring any local registry that chooses to participate in the statewide immunization system to comply with the state’s guidelines for local registry development. C-96 \ufffd Assure Provider Participation in a Statewide Immunization Registry. Recommend legislation requiring all immunization providers to participate in local registries, or in the statewide registry if the county in which the provider is located chooses not to develop a local registry. C-97 \ufffd Provide a State Match for Registries’ Ongoing Costs. Recommend legislation to provide a state match for local registries’ ongoing costs, effective 2001-02, in order to encourage the continuation of local participation in the statewide immunization system. C-98 \ufffd Obtain Funding Sources for a Statewide Immunization Registry. Recommend legislation requiring the department to apply for federal matching funds, under the Medi-Cal and Healthy Families Programs, for the development and operation of the statewide immunization information system. C-99 \ufffd Proposition 99 Revenues Declining Slightly. The budget projects that Proposition 99 revenues will decrease by 1 percent in 1999-00 and 1.7 percent in 2000-01. Using additional resources from carry-over balances from 1999-00 and the budget’s proposed release of $12 million from litigation reserves, the budget proposes to meet the demands of caseload-driven programs and augment certain activities, particularly the statewide media campaign and emergency room physician services for uninsured individuals. C – 184 Health and Social Services 2000-01 Analysis Analysis Page C-102 \ufffd Budget Proposes to Permanently Eliminate General Fund Support for County Medical Services Program (CMSP). Recommend adopting trailer bill legislation that suspends the state’s General Fund allocation of $20.2 million for CMSP for 2000-01, rather than permanently eliminating the appropria- tion as proposed by the Governor. C-105 \ufffd Budget Does Not Maximize Federal Grant for Drinking Water Loan Fund. The budget’s proposal to appropriate $15.4 million from the General Fund for the Safe Drinking Water State Revolving Fund does not maximize receipt of federal funds that are available. Passage of a water bond measure on the March 2000 ballot would replace this General Fund appropriation and could maximize federal funds. We withhold recommendation pending the results of the March election. C-106 \ufffd Budget Proposes to Extend Community Challenge Grant Program and Use Federal Funds. The budget proposes to extend the Community Challenge Grant Program for one year, using a $20 million federal award allocated to California for reducing its out-of-wedlock birth rates in 1997. The final report of the program evaluation, due January 1, 1999, had not been submitted at the time of this analysis, but should be available prior to budget hearings. C-107 \ufffd Some Local California Children’s Services (CCS) Programs Not Complying With Statutory Requirement. Current law requires that all CCS claims be submitted to the state fiscal intermediary for payment no later than January 1, 1999. We recommend that the department report, at budget hearings, on the reasons that ten counties are not in compliance, and present a plan for ensuring their cooperation. Managed Risk Medical Insurance Board C-110 \ufffd Budget Underestimates Enrollment in Current Year. We estimate that the program’s caseload at year’s end will be 11 percent greater than the budget estimates, with an additional cost of $3.3 million ($1.1 million General Fund). Findings and Recommendations C – 185 Legislative Analyst’s Office Analysis Page C-111 \ufffd No Policy Rationale for Excluding Some Legal Immigrants. Increase Item 4280-101-0001 by $2,365,920. The budget proposes to extend, for one year, Healthy Families eligibility for legal immigrant children who entered the U.S. after August 22, 1996 and who enrolled in the program in the current year. We see no policy rationale for excluding certain legal immigrants solely on the basis that they did not enroll in the program in the current year. C-112 \ufffd Technical Error Overbudgets $3 million from the General Fund. Reduce Item 4280-101-0001 by $2,946,470. Recommend a technical correction to the budget. C-113 \ufffd Caseload Overestimated for Current Year. Recommend reducing the budget’s estimated level of spending for the Access for Infants and Mothers Program in the current year by $1.3 million, for a corresponding savings to the Perinatal Insurance Fund (Proposition 99), to reflect more realistic caseload changes. C-114 \ufffd Program Underbudgeted for Current Year Due to Unpaid Claims. The budget does not account for $2.2 million in unpaid claims that the board must pay in 1999-00. We recommend that the board present, at budget hearings, a fiscal plan for satisfying this obligation without jeopardizing the Perinatal Insurance Fund ‘s reserve. Department of Developmental Services C-116 \ufffd Statutorily Required Rate-Setting Methodologies Still Not Established. Recommend that the department report on the status of the development of rate-setting methodologies for residential, day program, and supported living services. Withhold recommendation on the department’s related $1.1 million request for contract services, pending receipt of additional information on the scope and costs of the proposed contracts. C-118 \ufffd Costs Of Southern California Facility Uncertain. Withhold recommendation on the department’s request for $13.2 mil- lion ($9.1 million General Fund, including Medi-Cal reim- C – 186 Health and Social Services 2000-01 Analysis Analysis Page bursements) for the lease and development of a facility to serve individuals with severe behavioral problems, pending an update on the department’s progress in finding a site. Department of Mental Health C-120 \ufffd Funding for Americans with Disabilities Act (ADA) Projects Should Be Requested as Capital Outlay Proposal. Reduce Item 4440-011-0001 by $5.6 million. Recommend reduction because proposed ADA compliance projects should be considered capital outlay projects, and should be resubmitted as a capital outlay budget change proposal. C-122 \ufffd Equipment Request Is Premature. Reduce Item 4440-011- 0001 by $845,000. Recommend reduction because the equipment request for the new administration building at Metropolitan State Hospital should be made with the 2001-02 budget request. C-122 \ufffd Decision on Mentally Ill Homeless Pilot Projects Should Await Evaluation Review. Withhold recommendation on $20 million proposed for the continuation and expansion of mentally ill homeless pilot projects, pending review of the statutorily required report due May 1, 2000. Further recommend that, if the Legislature does approve funding to expand the pilot projects to other counties, at least one of the new pilots be targeted primarily to parolees. Employment Development Department C-123 \ufffd Proposed Disability Insurance Tax Rate Does Not Meet Statutory Requirement. Without a rate increase, the Disability Insurance Fund will develop an estimated deficit of $278 million by December 2000. The budget proposes to increase the disability insurance tax rate, but the rate would still be below the level required by current law. Findings and Recommendations C – 187 Legislative Analyst’s Office Analysis Page Department of Rehabilitation C-126 \ufffd Funding for Statutory Rate Increase Will Be Prepared in May. Preliminary estimates project a General Fund cost of $7 million in 2000-01. C-127 \ufffd Caseload Projections May Be Underbudgeted. Recent trends indicate that the Work Activity Program and Supported Employment Program caseloads may result in increased General Fund expenditures of $6.1 million. C-129 \ufffd High Vacancy Rates Reduce Accountability. Recommend the department submit a staffing plan that either (1) identifies and proposes to eliminate 150 of the Field Operations Division’s 240 vacant authorized positions in order to reflect actual staffing patterns, or (2) proposes funding to fill the positions. Department of Child Support Services C-132 \ufffd Administration Division is Overbudgeted. Reduce Item 5175-001-0001 by $125,000 and Item 5180-001-0001 by $95,000. Recommend deletion of five proposed new positions from the Administration Division of Department of Child Support Services (DCSS); conversion of five proposed permanent positions in this division to limited term; and transfer of four positions, in addition to the 13.5 transfer positions proposed, from the Department of Social Services to the DCSS. C-136 \ufffd Local Assistance Allocations Should Be Based On County Cost-Effectiveness. Increase Item 5175-101-0001 by $5 mil- lion. Recommend (1) a $5 million General Fund augmentation for local assistance in 2000-01, to be allocated to local agencies on the basis of county cost-effectiveness (ratio of historical increases in collections to increases in costs) and (2) legislation requiring the department to include marginal cost-effective- ness as a criterion in the allocation of all funds to local agencies. C – 188 Health and Social Services 2000-01 Analysis Analysis Page Department of Social Services CalWORKs Program C-141 \ufffd Impact of Maintenance-of-Effort (MOE) Requirement. Because the Governor’s budget proposes to expend all available federal block grant funds and the minimum amount of General Fund monies required by federal law, any net augmentation will result in General Fund costs and any net reductions will result in savings in federal block grant funds (which would be retained by the state). C-141 \ufffd Caseload Projection is Overstated. Reduce Item 5180-101- 0890 by $34,900,000. Recommend reducing proposed spending for California Work Opportunity and Responsibility to Kids (CalWORKs) grants by $66 million in 1999-00 and $35 million in 2000-01 because the caseload is overstated. C-143 \ufffd Budget Overestimates Cost of Providing Statutory Cost-of- Living Adjustment (COLA). Reduce Item 5180-01-0890 by $20,000,000. Recommend reducing proposed spending for CalWORKs grants by $20 million because the cost of providing the statutory COLA will be lower than estimated in the budget. C-144 \ufffd Budget Underestimates Savings from Imposition of Sanctions. Reduce Item 5180-101-0890 by $30,095,000. Recommend reducing proposed spending for CalWORKs grants by $32 million in 1999-00 and $30.1 million in 2000-01 (federal Temporary Assistance for Needy Families [TANF] funds) because grant savings from the imposition of sanctions on CalWORKs recipients are underestimated. C-145 \ufffd Count Spending on Health Care Programs for Recent Legal Immigrants Toward Maintenance-of-Effort (MOE) Require- ment. Reduce Item 5180-101-0001 by $49,900,000 and increase Item 5180-101-0890 by $49,900,000. Recommend that the Department of Social Services count $49.9 million in General Fund expenditures for health care for recent legal immigrants towards the CalWORKs MOE requirement. This action results in a $49.9 million General Fund savings by replacing General Fund expenditures for CalWORKs grants with an identical amount of federal TANF funds. Findings and Recommendations C – 189 Legislative Analyst’s Office Analysis Page C-146 \ufffd Budget Should Reflect Award of High Performance Bonus Funds. Recommend a technical adjustment in the TANF fund balance to reflect the December 1999 award of $45.5 million in federal High Performance Bonus funds. C-147 \ufffd Withhold Recommendation on Budget for Employment Services. Withhold recommendation on proposed budget for employment services ($884 million General Fund and federal TANF funds) because the new methodology for budgeting employment service was not completed in time for inclusion in the Governor’s budget. C-148 \ufffd Budget Proposes to Prohibit Counties from Earning Additional Performance Incentives. Recommend either repealing the performance incentive provision or replacing it with a new system that would (1) be funded with General Fund monies that the counties could use for any purpose and (2) tie the amount of incentive payments to improvement in the CalWORKs program. C-151 \ufffd The CalWORKs Community Service Law Needs Clarifica- tion. Recommend legislation to clarify conflicting provisions of current law so that counties will have the option of providing wage-based community service jobs for CalWORKs recipients. C-153 \ufffd The CalWORKs Child Care Program. The Governor’s budget fully funds the estimated need for CalWORKs child care, plus a reserve of $81 million. The budget proposal includes an increase of $85 million for the Stage 3 set-aside designed to serve families who have reached their two-year post- assistance time limit. We summarize the CalWORKs child care program. C-156 \ufffd County Probation Departments Should Report Juvenile Justice Data. Recommend adoption of budget bill language requiring county probation offices to report specified data on juveniles to Department of Justice in order to receive funding for county probation facilities. C – 190 Health and Social Services 2000-01 Analysis Analysis Page C-157 \ufffd The TANF Regulations Increase State Felxibility to Service the Working Poor. The final federal TANF regulations increase state flexibility to serve working poor families that are not eligible for the California Work Opportunity and Responsibility to Kids program. We summarize the TANF regulations and present some options for program changes permitted by the regulations. Kinship Guardianship Assistance Payment Program C-164 \ufffd Budget Overestimates Kinship Guardianship Assistance Payment (Kin-GAP) Caseload in 2000-01. Reduce Item 5180- 101-0001 by $1,841,000, increase Item 5180-141-0001 by $273,000, and increase Item 5180-151-0001 by $1,125,000. Recommend a General Fund reduction of $443,000 because the Kin-GAP Program caseload is overestimated. Foster Care C-166 \ufffd Foster Family Agencies (FFAs) Cost-of-Living Adjustment (COLA) Overestimated. Reduce Item 5180-101-0001 by $792,000. Recommend reduction based on more recent data, for a General Fund savings of $792,000. C-167 \ufffd Budget Does Not Provide COLA for All Foster Care Providers. Increase Item 5180-101-0001 by $12,300,000. Recommend a $12.3 million General Fund augmentation to provide a COLA for the foster family homes and group homes because (1) there is no policy rationale for distinguishing these types of providers from FFAs and (2) revenues are sufficient to provide the COLA. Supplemental Security Income\/ State Supplementary Program C-170 \ufffd Budget Overestimates Cost of Providing Statutory Cost- of-Living Adjustment (COLA). Reduce Item 5180-111-0001 by $6,600,000. Recommend reducing General Fund amount for the statutory Supplemental Security Income\/State Findings and Recommendations C – 191 Legislative Analyst’s Office Analysis Page Supplementary Program COLA by $6.6 million because the cost of providing the COLA is overestimated. Community Care Licensing Division C-174 \ufffd Need More Information on Child Care Safety Initiative. Withhold recommendation on the Child Care Safety Initiative, pending receipt of additional information supporting the budget proposal. C-175 \ufffd Positions Exceed Estimated Need. Reduce Item 5180-001- 0001 by $230,000. Recommend elimination of four community care licensing positions, for a General Fund savings of $230,000, because the positions are not needed according to the department’s formula for determining ongoing workload needs. C – 192 Health and Social Services 2000-01 Analysis Analysis Page ”

” 2000-01 Analysis Legislative Analyst’s Office MAJOR ISSUES Health and Social Services \u00fe Recommend Changes to Aging with Dignity Initiative In his Aging with Dignity Initiative, the Governor proposes $272 million ($140 million General Fund) for various activities designed to improve nursing home care and develop community-based alternatives to nursing homes. Among other things, we recommend that the Legislature (1) consider alternatives to the proposed long-term care tax credit, such as further expansion of Medi-Cal coverage for seniors and the disabled, that would better target the funds; and (2) reject the proposed 5 percent pay increase for staff in distinct part nursing facilities because their rates currently are significantly higher than rates for other nursing homes. (see page C-17.) \u00fe CalWORKs County Performance Incentive System Should Be Changed Under current law, the counties receive state payments, or performance incentives, based on savings resulting primarily from recipients exiting the CalWORKs program due to employment and recipients with increased earnings. The Governor proposes to prohibit counties from earning any new performance incentives until the unmet obligation (about $500 million) has been paid. The administration also indicates that it will propose legislation to eliminate or sharply modify the incentives. We find that so far, the performance incentive system has not been effective. Should the Legislature decide to retain such a system, we recommend that it (1) be funded with C – 4 Health and Social Services 2000-01 Analysis General Fund monies that can be used by the counties for any purpose, rather than only within the CalWORKs program, and (2) tie the amount of incentive payments to improvement in CalWORKs program outcomes, rather than include savings that would have occurred even in the absence of the program. (see page C-148.) \u00fe Wisconsin Child Care System Should Be Tested California has a bifurcated system of subsidized child care. The state is fully funding the estimated need of CalWORKs recipients and former recipients; but is not fully funding the needs of the working poor due to fiscal constraints. We recommend legislation to establish a pilot project to evaluate the costs and programmatic impacts of implementing the Wisconsin child care system in California. By using standardized eligibility criteria for the working poor, irrespective of welfare status, this would result in covering more persons. The additional costs would be offset (possibly entirely) by a schedule of copayments which would be higher than the relatively low copayments charged currently in California. (see page C-32.) \u00fe Filling Vacancies Would Reduce Need for New Staff The budget requests a net increase of 557 positions for the Department of Health Services in 2000-01, raising the total number of authorized positions in the department to 6,198\u2014an increase of almost 10 percent. The requests for new positions come despite the fact that, as of January 2000, the department had over 900 vacant positions\u2014 a vacancy rate of more than 16 percent. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new positions and funding. (see page C-56.) Legislative Analyst’s Office TABLE OF CONTENTS Health and Social Services Overview ………………………………………………………………………. C-7 Expenditure Proposal and Trends ……………………………. C-7 Caseload Trends ………………………………………………………. C-9 Spending by Major Program ………………………………….. C-12 Major Budget Changes …………………………………………… C-12 Crosscutting Issues …………………………………………………….. C-17 Aging with Dignity Initiative…………………………………. C-17 Child Care ……………………………………………………………… C-32 Departmental Issues …………………………………………………… C-41 Emergency Medical Services Authority (4120) ………. C-41 Department of Aging (4170) …………………………………… C-44 Department of Alcohol and Drug Programs (4200) ………………………………………… C-45 California Children and Families Commission (4250) ………………………………. C-53 C – 6 Health and Social Services 2000-01 Analysis Department of Health Services State Operations (4260) ………………………………………. C-56 California Medical Assistance Program (Medi-Cal) ………………………………………………………….. C-62 Public Health …………………………………………………………. C-89 Managed Risk Medical Insurance Board (4280) …… C-109 Department of Developmental Services (4300) ……. C-115 Department of Mental Health (4440) ……………………. C-120 Employment Development Department (5100)……. C-123 Department of Rehabilitation (5160) ……………………. C-126 Department of Child Support Services (5175) ……… C-131 Department of Social Services CalWORKs Program (5180) ……………………………… C-140 Kin-GAP Program………………………………………………… C-164 Foster Care …………………………………………………………… C-166 Food Stamps Program ………………………………………….. C-168 Supplemental Security Income\/ State Supplementary Program …………………………. C-170 Child Welfare Services …………………………………………. C-173 Community Care Licensing …………………………………. C-174 Findings and Recommendations ……………………………… C-177 Legislative Analyst’s Office OVERVIEW Health and Social Services General Fund expenditures for health and social services programsare proposed to increase by 6 percent in the budget year. This increase is due primarily to a variety of workload and cost increases, the Governor’s initiative related to nursing homes and other adult care programs, and a technical change in the way child support collections are reflected in the budget. The budget also proposes to revise the formula for providing county fiscal incentives under the California Work Opportunity and Responsibility to Kids program, which would result in significant state savings. EXPENDITURE PROPOSAL AND TRENDS The budget proposes General Fund expenditures of $18.9 billion for health and social services programs in 2000-01, which is 27 percent of total proposed General Fund expenditures. The health and social ser- vices share of the budget generally has been declining since 1993-94. The budget proposal represents an increase of $1.1 billion, or 6 percent, over estimated expenditures in the current year. Figure 1 (see next page) shows that General Fund expenditures (cur- rent dollars) for health and social services programs are projected to in- crease by $5.6 billion, or 42 percent, from 1993-94 through 2000-01. This represents an average annual increase of 5.2 percent. Figure 1 shows that General Fund spending ( in current dollars) has increased since 1993-94, except for a slight reduction in 1997-98 due pri- marily to a decline in California Work Opportunity and Responsibility to Kids (CalWORKs, formerly Aid to Families with Dependent Children [AFDC]) program caseloads. Spending is estimated to increase by 11 per- cent in 1999-00, primarily due to Medi-Cal eligibility expansion and cost C – 8 Health and Social Services 2000-01 Analysis increases, and caseload and cost increases in various health and social services programs. As noted above, the budget proposes a 6.6 percent increase in 2000-01. Figure 1 Health and Welfare Expenditures Current and Constant Dollars 1993-94 Through 2000-01 All State Funds (In Billions) 5 10 15 20 $25 94-95 96-97 98-99 00-01 Current Dollars Constant 1993-94 Dollars Special Funds Total Spending General Fund General Fund Spending 10 20 30 40% 93-94 00-01 Percent of General Fund Budget Proposed In 1991-92, realignment legislation shifted $2 billion of health and social services program costs from the General Fund to the Local Rev- enue Fund, which is funded through state sales taxes and vehicle license fees. This shift in funding accounted for a significant increase in special funds starting in 1991-92. The budget estimates that realignment revenues will be $2.9 billion in 2000-01. Special funds expenditures are estimated to increase significantly in the current year, primarily because of the effect of Proposition 10 of 1998, which imposes a tax increase on cigarettes and other tobacco products and requires that almost all of the revenues be spent by state and local commissions for early childhood development programs. The budget estimates that spend- ing from the new California Children and Families Trust Fund will amount to $1.1 billion in 1999-00 (which includes revenues carried over from 1998-99) and $729 million in 2000-01. (For a discussion of Proposition 10, please see our report Proposition 10: How Does it Work and What Role Should the Legisla- ture Play in its Implementation?, January 13, 1999.) Overview C – 9 Legislative Analyst’s Office Combined General Fund and special funds spending is projected to increase by 52 percent from 1993-94 through 2000-01. This represents an average annual increase of 5.5 percent. Figure 1 also displays the spending for these programs adjusted for inflation (constant dollars). On this basis, General Fund expenditures are estimated to increase by 21 percent from 1993-94 through 2000-01. Com- bined General Fund and special funds expenditures are estimated to in- crease by 23 percent during the same period. This is an average annual increase of 3 percent. CASELOAD TRENDS Figures 2 and 3 (see next page) illustrate the caseload trends for the larg- est health and welfare programs. Figure 2 shows Medi-Cal caseload trends over the last decade, divided into four groups: families and children (prima- rily recipients of CalWORKs\u2014formerlyAFDC), refugees and undocumented persons, and disabled and elderly persons (who are primarily recipients of Supplemental Security Income\/State Supplementary Program\u2014SSI\/SSP). 1 2 3 4 5 6 90-91 92-93 94-95 96-97 98-99 00-01 Figure 2 Budget Forecasts Upturn in Medi-Cal Caseloads 1989-90 Through 2000-01 Eligible Persons (In Millions) Families\/Children Refugees\/Undocumented Immigrants Disabled Aged C – 10 Health and Social Services 2000-01 Analysis Figure 3 CalWORKs Caseloads Declining; SSI\/SSP Caseloads Increasing Slightly 1989-90 Through 2000-01 (In Millions) 0.2 0.4 0.6 0.8 1.0 1.2 90-91 92-93 94-95 96-97 98-99 00-01 CalWORKs SSI\/SSP Cases Medi-Cal Caseloads. Medi-Cal caseloads increased by 51 percent over the 12 years shown in Figure 2. As the figure shows, the growth generally occurred during the period from 1989-90 through 1994-95. The growth in the number of families and children receiving Medi-Cal during this pe- riod reflects the rapid growth in AFDC caseloads as well as the expan- sion of Medi-Cal to cover additional women and children with incomes too high to qualify for cash aid in the welfare programs. Coverage of refugees and undocumented persons also increased caseloads significantly during this period. Since 1994-95, Medi-Cal caseloads have declined, due primarily to a decline in AFDC\/CalWORKs caseloads. The figure also shows that the caseload leveled off in 1997-98 and 1998-99. While the budget states that the caseload is forecasted to decline by 1 percent in 2000-01, this excludes the effect of an expansion in eligibility enacted in the current year. With this adjustment, the Medi-Cal caseload is estimated to increase by 2.6 percent in the current year and 1.9 percent in the bud- get year. We also note that while the number of CalWORKs families and chil- dren has been declining in recent years, the number of nonwelfare fami- lies (generally lower-income working families) has been increasing and now constitutes the majority of Medi-Cal families and children. Overview C – 11 Legislative Analyst’s Office CalWORKs and SSI\/SSP Caseloads. Figure 3 shows the caseload trend for the CalWORKs and SSI\/SSP programs. While the number of cases in SSI\/SSP is greater than in the CalWORKs program, there are more persons in the CalWORKs program\u2014about 1.5 million compared to about 1 million for SSI\/SSP. (The SSI\/SSP cases are reported as individual per- sons, while CalWORKs cases are primarily families.) To the extent that caseloads have been increasing in these two pro- grams, it has been due, in part, to the growth of the eligible target popu- lations. The increase in the rate of growth in the CalWORKs caseloads in 1990-91 and 1991-92 was also due to the effect of the recession. During the next two years, the caseload continued to increase, but at a slower rate of growth. This slowdown, according to the Department of Finance, was due partly to: (1) certain population changes, including lower mi- gration from other states; and (2) a lower rate of increase in child-only cases (including citizen children of undocumented and newly legalized persons), which was the fastest growing segment of the caseload until 1993-94. Figure 3 also shows that since 1994-95, CalWORKs caseloads have declined. As discussed in our annual California’s Fiscal Outlook reports, this trend is due to various factors, including the improving economy, lower birth rates for young women, a decline in legal immigration to California, reductions in grant levels, behavioral changes in anticipation of federal and state welfare reform, and\u2014for the current and budget years\u2014the impact of the CalWORKs program interventions (including additional employment services). We have noted, however, that contrary to this overall downward trend, the number of child-only cases has been increasing slightly in recent years. This category of the caseload includes children whose parents are undocumented, children with nonneedy rela- tive caretakers, and children whose parents are removed from the assis- tance unit because of sanctions for nonparticipation in the CalWORKs employment services program. The SSI\/SSP caseload can be divided into two major components: the aged and the disabled. The aged caseload generally increases in pro- portion to increases in the eligible population\u2014age 65 or older. This com- ponent accounts for about one-third of the total caseload. The larger com- ponent\u2014the disabled caseload\u2014grew significantly faster than the rate of increase in the eligible population group (primarily ages 18 to 64) in the early 1990s. This was due to several factors, including (1) the increasing incidence of AIDS-related disabilities, (2) changes in federal policy that liberalized the criteria for establishing a disability, (3) a decline in the rate at which recipients leave the program (perhaps due to increases in life C – 12 Health and Social Services 2000-01 Analysis expectancy), and (4) expanded state and federal outreach efforts in the program. In recent years, however, the growth of the disabled caseload has slowed. Total SSI\/SSP caseload growth has also moderated in recent years. This is partly attributable to federal policy changes that (1) eliminated drug or alcohol addiction as a qualifying disability and (2) added restric- tions on the eligibility of disabled children. SPENDING BY MAJOR PROGRAM Figure 4 shows expenditures for the major health and social services programs in 1998-99 and 1999-00, and as proposed for 2000-01. As shown in the figure, the three major benefit payment programs\u2014Medi-Cal, CalWORKs, and SSI\/SSP\u2014account for a large share of total spending in the health and social services area. MAJOR BUDGET CHANGES Figures 5 and 6 (see pages 14 and 15) illustrate the major budget changes proposed for health and social services programs in 2000-01. (We include the federal funds for CalWORKs because, as a block grant, they are essentially interchangeable with state funds within the program.) Most of the major changes can be grouped into the following categories: 1. The Budget Funds Caseload Growth in SSI\/SSP, Medi-Cal, and the Healthy Families Program, Reflects Savings From Caseload Reductions in CalWORKs, and Funds Other Workload Cost Increases. The budget includes a projected caseload reduction of 5.5 percent in the CalWORKs program and increases of 1.9 percent (as adjusted) in the Medi-Cal Pro- gram, 3.1 percent in SSI\/SSP, and 32 percent in the Healthy Families Pro- gram. 2. The Budget Proposes to Fund Statutory Cost-of-Living Adjust- ments (COLAs) for CalWORKs and SSI\/SSP. The budget includes a 3.6 percent COLA for CalWORKs and SSI\/SSP in 2000-01. We also note that it proposes to fund the statutory COLA for foster family agencies (FFAs) but does not fund the COLA for non-FFA foster family homes or group homes. Current law provides for these COLAs, but makes them subject to the availability of funds. Overview C – 13 Legislative Analyst’s Office Figure 4 Major Health and Welfare Programs Budget Summarya 1998-99 Through 2000-01 (Dollars in Millions) Actual 1998-99 Estimated 1999-00 Proposed 2000-01 Change From 1999-00 Amount Percent Medi-Cal General Fund $7,471.3 $8,208.8 $8,749.4 $540.6 6.6% All Funds 18,494.2 20,492.4 21,450.8 958.4 4.7 CalWORKs (Grants and Services) General Fund $2,022.4 $1,994.1 $2,071.7 $77.6 3.9% All Funds 5,347.3 5,380.7 5,567.6 186.9 3.5 AFDC-Foster Care General Fund $377.5 $425.7 $389.5 $-36.2 -8.5% All Funds 1,394.4 1,496.4 1,478.1 -18.3 -1.2 SSI\/SSP General Fund $2,242.2 $2,482.6 $2,619.8 $137.2 5.5% All Funds 6,084.4 6,508.4 6,904.8 396.4 6.1 In-Home Supportive Services General Fund $370.4 $527.4 $538.8 $11.4 2.2% All Funds 1,397.8 1,628.3 1,784.5 156.2 9.6 Regional Centers\/Community Services General Fund $647.5 $809.4 $896.3 $86.9 10.7% All Fundsb 1,400.2 1,617.3 1,763.7 146.4 9.1 Developmental Centers General Fund $34.0 $82.4 $71.4 -$11.0 -13.3% All Fundsb 482.7 561.1 612.7 51.6 9.2 Child Welfare Services General Fund $421.0 $496.9 $457.5 -$39.4 -7.9% All Funds 1,177.0 1,507.0 1,554.1 47.1 3.1 State Hospitals General Fund $311.6 $362.9 $424.4 $61.5 16.9% All Funds 490.2 526.8 573.9 47.1 8.9 Children and Families First Commissionsc General Fund \u2014 \u2014 \u2014 \u2014 \u2014 All Funds $5.5 $1,062.7 $728.9 -$333.8 -31.4% Child Support Services General Fund \u2014d \u2014d $332.3 $332.3 \u2014 All Funds \u2014d \u2014d 874.1 874.1 \u2014 a Excludes departmental support, except for state hospitals. b Includes General Fund share of Medicaid reimbursements (costs budgeted in Medi-Cal). c Includes state and county commissions. d Expenditures included in CalWORKs and other Department of Social Services programs. The CalWORKs grant savings from child support are shown as General Fund revenues in 2000-01. C – 14 Health and Social Services 2000-01 Analysis Figure 5 Health Services Programs Proposed Major Changes for 2000-01 General Fund Medi-Cal Requested: $8.7 million Increase: $541 million (+6.6%) \u00ff $183 million due to higher drug costs and new drugs \u00ff $82 million for full-year costs of expanding eligibility of families to 100 percent of poverty level \u00ff $52 million due to a reduction in the federal matching rate \u00ff $43 million for the state match for county mental health ser- vices under the Early and Periodic Screening, Diagnosis, and Treatment Program \u00ff $33 million for a 5 percent wage increase for nursing home staff (included in Aging with Dignity Initiative) \u00ff $30 million to reduce the state takeout from payments to dis- proportionate share hospitals and, potentially, to increase spec- ified physician rates \ufffd\ufffd\ufffd\ufffd $66 million for full-year savings from the waiver to provide fed- eral funds for family planning Healthy Families Requested: $142 million Increase: $46 million (+48%) \u00ff $46 million for caseload growth and cost increases Public Health Requested: $349 million Decrease: $27 million (-7.1%) \ufffd\ufffd\ufffd\ufffd $20 million by eliminating General Fund support for the County Medical Services Program (which was suspended for one year in 1999-00) \ufffd\ufffd\ufffd\ufffd $20 million by using federal rather than state funds to continue the Community Challenge Grants program Overview C – 15 Legislative Analyst’s Office Figure 6 Social Services Programs Proposed Major Changes for 2000-01 General Fund CalWORKs Requested: $2.1 billion Increase: $78 million (+3.9%) \u00ff $198 million due to a technical change related to the child sup- port enforcement program \u00ff $112 million for a 3.6 percent cost-of-living adjustment (COLA) \ufffd\ufffd\ufffd\ufffd $496 million by revising the formula for county fiscal incentive payments \ufffd\ufffd\ufffd\ufffd $258 million due to caseload reduction SSI\/SSP Requested: $2.6 billion Increase: $137 million (+5.5%) \u00ff $59 million due to a caseload increase \u00ff $55 million for a 3.6 percent COLA Regional Centers Requested: $896 million Increase: $87 million (+11%) \u00ff $129 million for caseload and cost increases Department of Aging Requested: $53 million Increase: $21 million (+64%) \u00ff $20 million for a new grants program for adult care alternatives to nursing homes (included in Aging with Dignity Initiative) Child Support Enforcement Requested: $332 million Increase: $23 million (+7.4%) \u00ff $23 million in local assistance to implement legislative reforms under the supervision of the new Department of Child Support Services C – 16 Health and Social Services 2000-01 Analysis 3. The Budget Includes a General Fund Increase of $198 Million for the CalWORKs Program Due to Proposed Technical Changes Related tothe Child Support Enforcement Program. The budget proposes two changes which have the net effect of increasing CalWORKs costs by $198 million. Specifically, it proposes to (1) transfer the costs of child sup- port incentive payments (including $86 million related to CalWORKs cases) from CalWORKs to the new Department of Child Support Ser- vices and (2) treat the state savings from child support collections for welfare families (about $284 million) as General Fund revenues rather than an offset to CalWORKs and foster care grants. 4. The Budget Proposes to Keep General Fund Spending for CalWORKs at the Federally-Required Maintenance-of-Effort (MOE) Level. The budget uses unexpended federal block grant funds carried over from the current year to help meet federal MOE requirements. 5. The Budget Includes Various Policy Changes, Including the Fol- lowing: $496 million in savings by revising the formula for determining CalWORKs fiscal incentive payments, which are allocated to the counties for performance related to recipients’ earnings and pro- gram exits. The budget includes $252 million toward the payment of prior-year obligations to the counties for fiscal incentives, but proposes no funding for the budget-year obligation. $36 million in General Fund savings by eliminating the January 2001 sunset date for the state Medi-Cal drug rebate program. (In effect, this essentially continues the savings achieved in the cur- rent year.) $20 million in savings by eliminating the General Fund appro- priation for the County Medical Services Program, which under current law is suspended for 1999-00. $140 million proposed from the General Fund for the Governor’s Aging with Dignity Initiative, which has numerous program com- ponents. Our discussion of this proposal appears in the Cross- cutting Issues analysis, which immediately follows this overview. Legislative Analyst’s Office CROSSCUTTING ISSUES Health and Social Services AGING WITH DIGNITY INITIATIVE GOVERNOR’S INITIATIVE INCLUDES A WIDE RANGE OF PROPOSALS In his Aging with Dignity Initiative, the Governor makes numerous proposals to improve nursing home care and develop community-based alternatives to nursing homes. In the following pages, we summarize the initiative and provide our assessment of it. The Governor’s Aging with Dignity Initiative consists of numerous components administered by several departments, at a General Fund cost of $140.4 million (and 221.5 positions) in 2000-01. The purpose of the ini- tiative is to help elderly people remain at home, or with their families, rather than in nursing homes; dramatically increase the availability of innovative community-based alternatives to nursing home care; and en- hance the quality of care in California’s nursing homes. Figure 1 (see next page), and the discussion that follows, describe the proposed com- ponents of the initiative that have fiscal effects. Community Programs The budget includes the following proposals intended to help seniors remain in their homes or in the community in a noninstitutional setting. Long-Term Care Tax Credit. The budget proposes a $500 tax credit for persons (specifically taxpayers) who provide or pay for care at home for seniors or disabled individuals of any age. This credit would result in an C – 18 Health and Social Services 2000-01 Analysis estimated General Fund revenue loss of $47 million in 2000-01. In order for the taxpayer to qualify for the credit, the senior or disabled person would have to meet certain criteria for needing care. Figure 1 Aging with Dignity Initiative 2000-01 (In Millions) General Fund Other Funds Totals Community Programs Caregiver tax credit $47.0 \u2014 $47.0 In-Home Supportive Services wage increases 20.0 $35.7 55.7 Long-term care innovation grants 20.2 \u2014 20.2 Expand no-cost Medi-Cal for aged, blind, and disabled 2.4 2.4 4.8 Senior housing information and support center 1.0 \u2014 1.0 Senior wellness education campaign 1.0 \u2014 1.0 Improving Quality of Care and Enforcement Caregiver recruitment and training \u2014 $50.0 $50.0 Five percent pay increase for nursing home workers $32.5 33.3 65.8 Nursing home quality awards 8.0 2.0 10.0 Increased nursing home inspections 3.0 4.5 7.5 Focused nursing home quality reviews 2.5 1.5 4.0 Rapid response to nursing home complaints 2.2 1.7 3.9 Nursing home fiscal review advisory board 0.5 \u2014 0.5 Totals $140.3 $131.1 $271.4 In-Home Supportive Services (IHSS) Wage Increase. The IHSS pro- gram provides services to aged, blind, and disabled persons who are unable to remain safely in their homes without such assistance. Under the program, counties are authorized to establish Public Authorities to negotiate wages for the providers of services. The budget proposes that the state pay 65 percent of the nonfederal costs of wage increases negoti- ated by IHSS Public Authorities, up to 85 cents above the minimum wage. Under current law, the state pays for 80 percent of the nonfederal costs, up to 50 cents above the minimum wage, for 1999-00 only. The budget proposal would result in a General Fund cost of $48.5 million compared to current law, or $20 million above the cost of extending the 1999-00 pro- vision into 2000-01. The budget assumes that the following counties will Crosscutting Issues C – 19 Legislative Analyst’s Office have Public Authorities in 2000-01: Alameda, Contra Costa, Los Angeles, Monterey, Sacramento, San Francisco, San Mateo, and Santa Clara. Long-Term Care Innovation Grants. The budget proposes a one-time General Fund expenditure of $20.2 million (including three positions) in the Department of Aging to establish a Golden Challenge long-term care innovation grants program. The grants would be used to expand adult care alternatives to nursing homes by funding innovative commu- nity-based programs that could be replicated in other communities. Expand Medi-Cal for the Aged, Blind, and Disabled. The budget pro- poses to provide (beginning January 2001) no-cost Medi-Cal coverage to aged, blind, and disabled persons up to 100 percent of the federal pov- erty level, at a General Fund cost of $2.4 million in 2000-01 and $6 million annually thereafter. Currently, persons in this category who have incomes above about 90 percent of the poverty level must pay a share of cost for Medi-Cal benefits. Senior Housing Information and Support Center. The budget pro- poses $1 million from the General Fund, including eight positions, to es- tablish a Senior Housing Information and Support Center in the Depart- ment of Aging. The center would serve as a clearinghouse and educa- tional resource for seniors and their families for information on housing and home modification. The center would also promote education and training for professionals, such as physical and occupational therapists, who can assist seniors in maintaining independence. Senior Wellness Campaign. The budget proposes $1 million from the General Fund, including two positions, in the Department of Aging to develop and administer a statewide media campaign on community- based and in-home care alternatives to institutional care. Improving Quality of Care and Enforcement The Aging with Dignity Initiative includes the following proposals that address issues of quality of care provided to seniors in their homes and in long-term care facilities and the enforcement of requirements for nursing homes. Caregiver Training, Retention, and Recruitment. The budget includes $50 million ($35 million General Fund and $15 million federal Workforce Investment Act funds) to train, recruit, or retain workers in the caregiver industries, including nursing homes and the IHSS program. Pay Increase for Nursing Home Workers. The budget request for the Medi-Cal Program in the Department of Health Services (DHS) includes $65.8 million ($32.5 million General Fund) to increase rates paid to nurs- C – 20 Health and Social Services 2000-01 Analysis ing homes and other long-term care facilities in order to fund a 5 percent increase in wages and benefits for direct-care staff, effective August 1, 2000. This increase would be in addition to a similar 5 percent increase funded in the current year. These increases are in addition to annual cost- based rate increases for nursing homes and other long-term care facili- ties. The budget also indicates that DHS will review staffing ratios in nursing facilities and make recommendations by December 31, 2000. The current-year budget included funds to increase the number of caregiver hours per resident from an average of 2.9 to 3.2. The budget also requests $465,000 ($232,000 General Fund) for 6 additional DHS auditor positions (limited to 2000-01) in order to ensure that nursing homes actually pass the increases through to their employees as higher wages and benefits. Nursing Home Quality Awards. The DHS budget includes $10 mil- lion ($8 million General Fund) for a new program of awards to nursing homes that provide exceptional care. These funds potentially could be used for staff bonuses or to fund innovative programs at nursing homes. The awards would focus on facilities that have a high proportion of Medi- Cal residents and would range from $20,000 to $50,000 each, for a total of 200 to 500 awards (equivalent to 14 percent to 36 percent of the 1,400 nurs- ing homes in California). Increased Unannounced Inspections and Federal Workload. The bud- get requests a total of $7.4 million ($3 million General Fund) to increase DHS staffing by 70 positions and fund an additional 30 Los Angeles County contract positions for these workload components. A total of 57 positions (including 17 contract positions) would be used to increase the frequency and reduce the predictability of required nursing home inspec- tions. The department indicates that the average inspection frequency has increased from the goal of 12 months to almost 14 months. In some cases, inspections have not met the federal minimum-frequency require- ment of 15 months, and that this pushing up against the federal re- quirement makes it relatively easy for facilities that have not been in- spected for more than a year to anticipate the timing of their next inspec- tion. This request also includes 43 positions (including 13 contract posi- tions) to meet new federal requirements for increased nursing home fa- cility monitoring and enforcement in the Medicaid and Medicare pro- grams. Focused Nursing Home Quality Reviews. The budget requests a total of $4.1 million ($2.5 million General Fund) for 43 new DHS positions (plus an unidentified number of Los Angeles County contract positions) to (1) expand the number of nursing homes (from 34 to 100) that would be subject to focused enforcement reviews, (2) perform more in-depth re- views of license applications, and (3) monitor and improve the quality of nursing-home enforcement activities. Crosscutting Issues C – 21 Legislative Analyst’s Office Ensure A Rapid Response to Complaints. The budget requests a total of $3.9 million ($2.2 million General Fund) for 33 additional DHS posi- tions and 13.5 Los Angeles County contract positions in order to respond in a more timely manner to complaints about nursing home conditions and care. Existing law requires DHS to investigate complaints within ten days of their receipt; and, for complaints alleging immediate jeopardy to residents’ health or safety, the department’s policy is to investigate within two days of receiving a complaint. The department indicates that it was unable to meet these goals for a third of the complaints received in 1998-99. Fiscal Advisory Board. The budget requests $500,000 from the Gen- eral Fund for one position and $400,000 in consultant services to staff and provide expert assistance to a new Fiscal Solvency Review Advisory Board. The nursing home industry recently has experienced a number of bankruptcies. The department is responsible for ensuring continuity of care for nursing home residents in the event of an imminent closure\u2014 either by ensuring transfers to other appropriate facilities or by continu- ing operation through a receivership. The new advisory board would help DHS develop better fiscal solvency standards to protect nursing home residents. LAO FINDINGS AND RECOMMENDATIONS Long-Term Care Tax Credit Unlikely To Be An Efficient or Effective Incentive We find that the proposed $500 long-term care tax credit (1) is unlikely to be a means of effectively targeting a significant subsidy to many taxpayers who currently provide in-home long-term care or to provide a significant incentive for many families or individuals to provide this type of care; (2) has an inherent potential for higher-than-intended costs because its eligibility qualifications will be difficult to enforce; and (3) will have its impact diluted by increasing federal tax liabilities. We recommend that the Legislature consider alternative means of helping seniors and disabled persons to remain in their homes or the community, such as further expansion of Medi-Cal coverage for seniors and the disabled. The Governor’s proposal includes a personal income tax credit of $500 for taxpayers providing or paying for the long-term care of elderly or dis- abled individuals in the taxpayer’s home. The $500 credit would typically be available to taxpayers for each individual residing with them who is certi- fied by a physician as requiring long-term care\u2014defined as a continuous period of at least 6 months. Individuals with long-term care needs must meet C – 22 Health and Social Services 2000-01 Analysis the following criteria for a taxpayer to qualify for the credit: (1) those 6 years and older must be unable to perform without assistance at least three basic activities of daily living; (2) those between the ages of 2 and 6 years must be unable to independently perform two activities such as eating or bathing; and (3) those younger than 2 years must require specific medical equipment or the care of a skilled health-care practitioner. The proposal is modeled after a similar proposal at the federal level for a $3,000 credit. For calendar year 2000, the Franchise Tax Board as- sumes that approximately 120,000 taxpayers would take advantage of the new state credit. The estimated revenue reduction from the credit is $47 million in 2000-01, reaching $52 million by 2004-05. Legislative Considerations. Whether tax credits are an effective and efficient means of accomplishing their objectives depends on their spe- cific provisions and purpose. They can, for example, be a good method of providing tax relief to certain categories of taxpayers or outright subsidies to them, if they are well targeted. However, if their objective is to encour- age certain types of behavioral changes, tax credits generally do not score particularly well as an effective and efficient tool. This is largely because it is hard to ensure that credits go only to those persons whose behavior changes; thus, many taxpayers receiving credits are simply rewarded for doing things they would have done anyway. Thus, in the case of the pro- posed credit, a key question is whether it is primarily intended to subsi- dize the care costs of taxpayers who already provide long-term care in their homes, or, alternatively, to provide an incentive for expansion of home-based long-term care. In either case, the proposal raises a number of concerns: Distribution of Benefits. First, the proposed credit is nonrefund- able, which means that taxpayers can only receive it to the extent they have tax liabilities. Thus, certain taxpayers whom it may be most effective to target will only be able to benefit partially from it, or not at all. This is especially the case for lower-income tax- payers without large tax liabilities to offset. In addition, because there is no means test regarding who can receive the credit, much of it could go to those taxpayers who do not have the great- est financial need. Effects on Behavior. Second, at $500, the credit may simply be too small to significantly increase the amount of home-based long- term care that taxpayers are willing and able to provide. Caring for an elderly or disabled person can be a large financial burden. Even with Medicare, out-of-pocket health care costs\u2014particularly for medication\u2014can be large, and other types of costs can be sig- nificant. For example, home modifications may be necessary, or Crosscutting Issues C – 23 Legislative Analyst’s Office a family member may have to give up a job or limit his or her work hours to provide care. In addition to financial issues, pro- viding in-home care may also involve major changes in living arrangements and habits. It would seem unlikely that the avail- ability of the $500 annual credit would be the determining factor in more than a small fraction of care decisions. Potential for Abuse. Third, the credit has an inherent potential for abuse that could require significant monitoring and enforce- ment efforts. While a doctor’s certification will be required, as- sessing the physical or mental limitations of an individual in- volves a degree of judgment that is likely to get stretched over time by the natural desire of physicians to accommodate patients and their families. Moreover, taxpayers need not demonstrate that they have incurred any cost in order to claim the credit\u2014the credit is simply extra money. This could make it attractive to push the envelope when claiming that an elderly person or child in the home meets the test for qualifying limitations. Federal Interactions Diminish Impact. Fourth, because Califor- nia income taxes are an itemized deduction on federal income tax returns, as much as one-third of the state’s credit paid to cer- tain taxpayers will wind up in the pockets of the federal gov- ernment. Given these concerns, we do not believe that the proposed credit would be an effective or efficient means of providing either (1) signifi- cant assistance to those taxpayers who bear the greatest burden for the care of seniors or disabled persons or (2) an effective incentive for an ex- pansion of home-based care for seniors and the disabled. Consequently, we recommend that the Legislature explore alternative approaches to accomplishing the objectives of the proposed tax credit that would pro- vide both more financial relief to many families and individuals and would help more seniors and disabled persons avoid institutionalization. In the issue that follows, we discuss expanding Medi-Cal coverage for seniors and the disabled, which is one alternative approach that in our view, has a number of advantages over the proposed tax credit. Expanding Medi-Cal Coverage for Seniors and the Disabled We recommend that the Legislature consider expanding Medi-Cal coverage for seniors and the disabled as an alternative to the long-term care tax credit proposed in the budget, because expanding Medi-Cal coverage has the potential for more effectively targeting state assistance to those with the greatest needs and would enable the state to leverage federal funds. C – 24 Health and Social Services 2000-01 Analysis As an alternative to the proposed long-term care tax credit, the Legis- lature may wish to consider expanding Medi-Cal coverage for seniors and the disabled beyond the modest expansion proposed in the budget (discussed above). Expanding Medi-Cal coverage has several advantages that can make this approach a more efficient and effective means of help- ing those who have the greatest needs: Focused on Lower-Income Persons. Medi-Cal is a means-tested program that benefits those with low incomes who most need assistance. Focused on Persons with the Greatest Health Needs and Expenses. High health care costs are one of the primary financial burdens on elderly or disabled persons and their families. Even seniors with Medicare coverage often face out-of-pocket drug costs that can be several hundred dollars per month\u2014far more than the $500 annual credit proposed in the budget. Medi-Cal coverage targets lower-income persons with high out-of-pocket health care costs. Medi-Cal Leverages Federal Funds. The federal government pays slightly more than half of Medi-Cal costs, effectively doubling state funds for expanded Medi-Cal coverage, compared with the shift of state funds to the federal government that would result from the tax credit approach. Existing Medi-Cal Coverage for Seniors and the Disabled. Currently, there are two main avenues through which the low-income elderly or disabled may get Medi-Cal coverage: The Supplemental Security Income\/State Supplementary Program (SSI\/SSP). This is the cash grant program that assists low-income elderly, blind or disabled persons. All SSI\/SSP recipients receive no-cost Medi-Cal coverage. In order to qualify for SSI\/SSP, per- sons generally must have incomes under 104 percent of the fed- eral poverty level (FPL) for singles or 136 percent of the FPL for couples. Somewhat lower income limits apply to recipients who live with their family or another household and receive free room and board. The savings or other assets (homes are exempt) of SSI\/SSP recipients also must be less than $2,000 (individuals) or $3,000 (couples). The Medi-Cal Medically Needy (MN) Program. This program is available to elderly or disabled persons who do not meet the re- quirements for SSI\/SSP (recent immigrants, for example) or do not wish to receive a grant. In order to receive no-cost Medi-Cal, individuals living in their own households must have incomes Crosscutting Issues C – 25 Legislative Analyst’s Office under 90 percent of the FPL (individuals) or 104 percent of the FPL (couples). Asset limits similar to those in SSI\/SSP also apply. The MN program allows participation on a spend-down basis for persons above these limits. This means that Medi-Cal will pay the portion of any qualifying medical expense that exceed the person’s share of cost, which is the amount by which that person’s income or assets exceeds the applicable Medi-Cal lim- its. Because of this spend-down provision, the MN program acts as a type of major medical coverage for persons with higher incomes or greater assets. Benefits from the Budget’s Proposed Coverage Expansion Are Lim- ited. In addition to the proposed long-term care tax credit, the Governor’s budget proposes to expand Medi-Cal coverage for the elderly or disabled in a manner that would eliminate a share-of-cost for individuals who have incomes above the MN income limit, but under the poverty level. The expansion would not affect couples initially because the MN limit for couples currently exceeds the FPL. The budget estimates that about 13,000 individuals initially would be affected by this expansion. All of these per- sons currently are enrolled in the Medi-Cal MN program with a share-of- cost of less than about $100 per month. The Governor’s proposal would assist some poor elderly or disabled persons at a very modest state cost. However, it would provide only lim- ited benefits to a relatively small group of individuals. For example, the Governor’s proposal provides no benefit to couples or those individuals whose Medi-Cal share of cost exceeds about $100. (About 47,000 aged or disabled Medi-Cal beneficiaries have a share of cost between $100 and $500, for example.) Options for Expanding Coverage. The Legislature has a number of options for expanding Medi-Cal coverage for seniors and the disabled beyond the modest expansion proposed in the budget. These options in- clude the following: Raise the Asset Limit. Federal law allows the state to increase the asset limit for Medi-Cal coverage for seniors and the disabled above the SSI\/SSP limit. This would allow persons with low in- comes to participate in Medi-Cal while being able to retain some modest savings. Increase the Income Limit. Federal law provides a number of mechanisms for the state to raise the Medi-Cal income limits for the elderly or disabled. One approach would be to adopt a re- fused grant program. This would allow persons who have in- comes up to the SSI\/SSP limits, but who do not receive a grant, to receive no-cost Medi-Cal coverage. This option would benefit C – 26 Health and Social Services 2000-01 Analysis couples because the SSI\/SSP income limit for couples is above both the MN limit and the poverty level, and couples with in- comes above these levels otherwise would have to pay a share of cost under existing law (if above the MN level) or under the Governor’s proposal (if above the poverty level). Another ap- proach would be to adopt income disregards (or deductions) that would have the effect of increasing the income limits for eli- gibility in either the existing MN program or 100 percent of the FPL program proposed in the budget. Increase the Income Limit for Qualified Medicare Beneficiaries (QMBs). Medi-Cal currently covers Medicare premiums, deductibles, and cost-sharing for qualifying persons with incomes up to 100 percent of the FPL and assets up to twice the SSI\/SSP limit. These recipients are known as QMBs. Persons who qualify as QMBs but do not meet regular Medi-Cal requirements are re- ferred to as QMB-onlys, which includes those individuals with incomes between the MN level and the FPL who would be cov- ered by the Governor’s proposed expansion of no-cost Medi-Cal to 100 percent of the FPL. The state could adopt income disre- gards that effectively raise this income level without raising in- come levels for regular Medi-Cal eligibility. This would provide a significant benefit to low-income Medicare beneficiaries, who must pay $45.50 monthly for Medicare Part B coverage plus deductibles and cost sharing. Costs to Medi-Cal would be lim- ited, however, because QMB-only coverage does not include ben- efits that are not covered by Medicare, such as outpatient drugs. Limited Benefits and Waiver Approaches. The state could also de- sign more targeted approaches in order to address the most press- ing needs of low-income seniors and disabled persons while limit- ing state costs. For example, the state might seek a waiver to expand Medi-Cal income ceilings for a limited set of benefits that would include drug coverage, preventive care, and outpatient management of chronic diseases. This approach would be similar in concept to the expansion of Medi-Cal coverage for family planning services, for which the state has received a federal waiver. We recognize that health care costs for the elderly and disabled can be large and difficult to control. Accordingly, approaches would need to be care- fully crafted to provide specific benefits while remaining within ongoing budget constraints. Nevertheless, the Legislature has a variety of options and considerable flexibility in structuring an expansion of coverage in order to remain within those constraints. Accordingly, we recommend that the Legislature consider expanding Medi-Cal coverage for the elderly and dis- abled as an alternative to the Governor’s tax credit proposal because ex- Crosscutting Issues C – 27 Legislative Analyst’s Office panding Medi-Cal would be a more effective use of state funds to benefit needy seniors and disabled persons and their families. More Information Needed On Department of Aging Proposals We withhold recommend on $22 million proposed from the General Fund for the Innovation Grants, Senior Housing Support Center, and Senior Wellness Campaign programs, pending receipt of additional information from the Department of Aging. With respect to the Innovations Grants proposal, the department indi- cates that program elements such as the size and number of grants, the crite- ria for awarding the grants, and how the grants will be evaluated, will be developed prior to the May revision of the budget, in conjunction with the state’s Long Term Care Council. Without such information, the Legislature will be unable to evaluate the proposal to establish the grants program. We have also asked the department to explore whether federal match- ing funds for the three proposed programs could be obtained by coordi- nating with other departments that administer related programs. For ex- ample, the Departments of Rehabilitation and Health Services adminis- ter programs related to housing or health promotion, which qualify for federal funding. Accordingly, we withhold recommendation on these program com- ponents, pending receipt of this information. More Information Needed on Caregiver Training, Retention, and Recruitment Proposal We withhold recommendation on the proposal to establish a caregiver training, recruitment, and retention program, pending receipt of additional justification. At the time this analysis was prepared, the Department of Social Ser- vices could not provide any details on the type of training, retention, or recruiting activities contemplated in the Governor’s initiative; the num- ber of individuals that would receive the training\/recruitment services; or the cost of providing these services. Consequently, we withhold rec- ommendation on the $50 million proposed for these activities, pending receipt of additional information concerning program costs and the esti- mated caseload. We note that $35 million of the proposed funding is part of the $60 million state match for the federal Welfare-to-Work program (U.S. Department of Labor). These funds must be expended if the state is to receive the federal funds under this program. C – 28 Health and Social Services 2000-01 Analysis Rate Increase for Distinct Part Nursing Facilities Not Justified We recommend a General Fund reduction of $2.6 million in the budget request for a 5 percent pay increase pass-through for nursing home staff in order to delete funding for distinct part nursing facilities, because these facilities currently receive much higher rates than other nursing homes for similar care. (Reduce Item 4260-101-0001 by $2,558,000.) The Medi-Cal Program, administered by DHS, pays for the care of roughly two-thirds of all nursing home residents in California. In addi- tion to stand-alone nursing homes, facilities operated as a distinct part of a hospital also provide long-term care to Medi-Cal patients. These hos- pital-based distinct part nursing facilities (DP-NFs) receive daily Medi- Cal rates that generally are more than twice the rate paid to stand-alone facilities for similar levels of care. The basis of the higher rate for DP-NFs is the higher cost structure that they have (including labor costs) due to their association with a hospital. The higher DP-NF rates provide sub- stantially more funding for staff pay and other costs than do the rates for most nursing homes, which are stand-alone facilities. Accordingly, we do not believe that a need for higher DP-NF rates to adjust staff pay has been justified, and we recommend deletion of $2.6 million (General Fund) re- quested for wage pass-throughs for DP-NFs. More Developed Proposal for Quality Awards Needed We withhold recommendation on $10 million ($8 million General Fund) requested for nursing home quality awards, pending a specific proposal that describes the program in sufficient detail, including the criteria for (1) awarding grants and determining their amount, and (2) the use of the funds by awardees. The budget proposal for quality awards currently is at a conceptual stage, and DHS anticipates that it will present a more specific and de- tailed proposal during the budget process. Accordingly, we withhold rec- ommendation on the request pending receipt of a developed proposal. Nursing Home Enforcement Staff Requests Overbudgeted We recommend a General Fund reduction of $584,000 (and $584,000 in federal funds) and 16 positions because the proposal to increase unannounced inspections is overbudgeted. We withhold recommendation on a total of $11.2 million ($6 million General Fund) and 106 positions requested for improving nursing home regulation and enforcement pending receipt of specific workload information, including how much of that workload could be addressed by filling currently authorized, but vacant, positions. (Reduce Item 4260-001-0001 by $584,000.) Crosscutting Issues C – 29 Legislative Analyst’s Office The DHS licenses nursing homes and administers and enforces the state and federal requirements for these facilities through its Division of Licensing and Certification. As part of the Aging with Dignity Initiative, the budget requests $16 million ($8.2 million General Fund) and 147 new state positions for nursing home inspection and enforcement activities. Unannounced Inspections. The DHS staffing request includes the equivalent of 57 additional positions to increase unannounced nursing home inspections, based on increasing the number of current annual in- spections by 20 percent. However, only a 14 percent increase is needed in order to achieve the stated goal of a 12-month average inspection inter- val. Moreover, the current regular inspection workload should decrease due to the planned increase in the number of nursing homes placed on focused quality review status. Accordingly, to meet the administration’s stated goal, we recommend a reduction of 16 positions for a General Fund savings of $584,000 and an equal amount of matching federal funds. Other Inspection and Enforcement Proposals. While additional staff- ing for nursing home inspections and enforcement activities may be needed, the budget proposals do not provide adequate information to justify the specific resources requested. In particular, the following infor- mation is necessary to evaluate these proposals: Specific Workload Justification Lacking. The request for addi- tional staff to rapidly respond to complaints is based, in part, on the department’s assertion that a larger amount of staff time is needed to handle the average complaint than was anticipated several years ago. However, the proposal does not identify the staffing currently available to address complaints. Moreover, the proposal indicates that DHS believes that increased workload contributed to the late initiation of complaint investigations, but does not identify the extent of that contribution or potential other factors that might delay investigations. The requests for staffing for new federal workload and for increased focused quality re- views do not provide any specific workload justification for the proposed staff increases. Identify Vacant Positions That Can Be Used Instead of New Po- sitions. As we discuss in our analysis of the DHS state opera- tions (support) budget request, the department currently has a very large percentage of unfilled positions, approximately 16 per- cent, versus a normal turnover vacancy rate of about 5 percent. Accordingly, a significant amount of additional workload poten- tially could be addressed by filling currently authorized, but va- cant positions, rather than adding new positions. The department C – 30 Health and Social Services 2000-01 Analysis should identify the extent to which filling vacant positions can address its identified needs. Pending receipt of this information, we withhold recommendation on $11.2 million ($6 million General Fund) and 106 DHS positions re- quested for nursing home enforcement and regulation. Increase In Bed Licensing Fee Would Reduce General Fund Costs We recommend an increase in the per-bed nursing-home licensing fee for 2000-01 in order to adjust fee revenues to the amount needed to fully fund additional enforcement and regulatory staff and quality awards approved in the budget for a potential General Fund savings of up to $10.5 million. License fee revenues from health facilities are deposited in the Gen- eral Fund and offset, in effect, the General Fund costs of inspecting and regulating these facilities (federal funds and penalties also finance the program). Proposed budget bill language (in Item 4260-001-0001) estab- lishes the annual per-bed licensing fee for nursing homes at $189.48 for 2000-01. Pursuant to current law, this rate was calculated by DHS based on the amount of license fee revenues needed to fund current-year spend- ing for the regulatory and enforcement program. This one-year lag in the existing fee-setting mechanism facilitates the fee calculation because it does not require the department to estimate future costs or to adjust fees for budget actions. Since the size of the Licensing and Certification Pro- gram has tended to be relatively stable, fee revenues have approximately offset the total General Fund cost of the program, even with the one-year lag in the fee calculation. The budget, however, requests an increase in General Fund spend- ing for this program of almost $16 million, or 51 percent, in 2000-01, and DHS indicates that the license fee revenues proposed in the budget will not be sufficient to offset this increased General Fund cost. Almost all of the increased spending is a result of the Aging with Dignity proposals discussed above. Increasing nursing home fees by an amount sufficient to fully offset the higher General Fund spending proposed for 2000-01 would eliminate the direct General Fund impact of the increased spending. However, some of these savings would be offset by costs to support an additional in- crease in Medi-Cal nursing home rates. This is because the licensing fees are an allowable cost that is included in the Medi-Cal nursing home rates. Since Medi-Cal pays for about 65 percent of nursing home residents, Medi- Cal payments would cover most of the nursing homes’ costs for the in- creased license fees. Federal matching funds provide slightly more than Crosscutting Issues C – 31 Legislative Analyst’s Office half of Medi-Cal funding, with the remainder paid by the General Fund. As a result, the net cost to the General Fund (via Medi-Cal nursing home rates) of increasing nursing home bed fees is about one-third of the in- creased fee revenue, and the net General Fund savings is about two-thirds of the additional revenue. For example, raising nursing home licensing fees by $16 million (which is the amount of the increase in General Fund spending requested in 2000-01, including the quality awards), would reduce General Fund costs by about $10.5 million on a net basis after allowing for the cost of Medi-Cal nursing home rate increases. Similarly, the net cost to nursing homes for the $16 million of additional fee revenue would be about $5.3 million. In order to minimize the net General Fund costs of increased regula- tory and enforcement efforts for nursing homes, we recommend adjust- ing the fee established in the budget bill to the amount necessary to fully offset direct General Fund costs approved in the budget. This would be consistent with the underlying concept of using fee revenues to offset these costs, with the intent of making fees assessed in the budget year correspond to the program’s costs in the budget year. C – 32 Health and Social Services 2000-01 Analysis CHILD CARE CHILD CARE FOR CALWORKS FAMILIES AND THE WORKING POOR In 2000-01, the budget proposal for child care is $2.6 billion and about half of this amount will be spent on child care for current or former California Work Opportunity and Responsibility to Kids (CalWORKs) recipients with the other half provided to non-CalWORKs working poor families. In contrast to the non-CalWORKs working poor (where waiting lists for child care are common), the budget fully funds the estimated need for child care for both former and current CalWORKs recipients. Compared to California, the Wisconsin child care system (1) provides child care to more families, (2) treats welfare and nonwelfare families more equitably, and (3) requires higher copayments from the participating families. In order to determine the impacts of a Wisconsin-style subsidized child care system on families and on public costs, we recommend enactment of legislation to conduct a pilot test of the Wisconsin system in up to four California counties. Background The State Department of Education (SDE) and the Department of Social Services (DSS) provide state supervision over most of the state’s child care programs. Figure 1 summarizes the various child care programs in California. As the figure shows, California provides full-time child care slots (on an average monthly basis) for approximately 383,000 children and part-time preschool or after school programs for an additional 198,000. Of the full-time slots, about 250,000 (65 percent) are for CalWORKs re- cipients. (For a description of the CalWORKs three-stage delivery system for child care, please see the inset box.) CalWORKs Child Care Is Fully Funded. For 2000-01, the estimated need for child care for current and former recipients is proposed to be Crosscutting Issues C – 33 Legislative Analyst’s Office fully funded. CalWORKs recipients on aid will receive necessary child care to meet their participation mandate (through a combination of work and\/or training for 32 to 35 hours per week). If child care is not available, then the recipient does not have to participate in CalWORKs activities for the required hours, until child care becomes available. After leaving aid, former CalWORKs recipients receive up to two years of Stage 2 child care. Although funding for this child care is capped by Figure 1 California Child Care Programs 2000-01 (Dollars in Millions) Program State Controla Estimated Enrollment Governor’s Budget Full-Time Programs CalWORKs Stage 1 DSS 83,000 $424.2 Stage 2 SDE 115,000 609.6 Community Colleges (Stage 2) CCC 3,000 15.0 Reserve for Stage 1 and 2 DSS & SDE 28,000 150.4 Stage 3 set-aside SDE 20,500 115.7 Subtotals (249,500) ($1,314.9) Non-CalWORKs General child care SDE 70,000 $463.5 Alternative payment programs SDE 35,500 194.3 Stage 3 for working poor SDE 10,000 56.9 Migrant and latch key programs SDE 13,000 140.8 CalSAFE SDE 5,000 37.2 Subtotals (133,500) ($892.7) Totals, Full-Time Programs 383,000 $2,207.6 Part-Time Programs State pre-schoolb SDE 100,500 $253.7 After school programs SDE 97,500 87.8 Totals, Part-Time Programs 198,000 $341.5 Grand Totals\u2014All Programs 581,000 $2,549.1 a Department of Social Services (DSS); State Department of Education (SDE); California Community Colleges (CCC). b Some of these programs are full-time. C – 34 Health and Social Services 2000-01 Analysis CalWORKs Child Care Is Delivered in Three Stages Stage 1. Stage 1 begins when a participant enters the CalWORKs program. In Stage 1, county welfare departments (CWDs) refer families to resource and referral agencies to assist them with finding child care providers. Stage 2. Families transfer to Stage 2 when the county determines that the fami- lies’ situations become stable \u2014that is, they develop a welfare-to-work plan and find a child care arrangement. Stage 2 is administered by the State Department of Education (SDE) through its voucher-based Alternative Payment (AP) programs. Participants can stay in Stage 2 while they are on CalWORKs and for up to two years after the family stops receiving a CalWORKs grant. Although Stage 1 and Stage 2 are administered by different agencies, families do not need to switch child care providers upon moving to Stage 2. Stage 3. Stage 3 refers to the broader subsidized child care system administered by SDE that is open to both former CalWORKs recipients and the non-CalWORKs working poor. Once CalWORKs recipients leave aid, they have two years of eligibility in Stage 2. During this time, they are expected to apply for regular Stage 3 child care. We note, however, that typically there are waiting lists for such child care. Stage 3 Set-Aside. In order to provide continuing child care for former CalWORKs recipients who reach the end of their two-year time limit, the Legisla- ture created the Stage 3 set-aside in 1997. Recipients timing out of Stage 2 are eligible for the Stage 3 set-aside if they have been unable to find regular Stage 3 child care. Assuming funding is available (and the practice has been to fully fund the estimated need), former CalWORKs recipients may receive Stage 3 set-aside child care as long as their income remains below 75 percent of the state median and their children are below age 14. the budget appropriation, current practice suggests that it is highly un- likely that a former CalWORKs Stage 2 family would lose its child care. Specifically, these recipients in Stage 2 would have the highest priority for funds. Consequently, if there were not sufficient funds for the Stage 2 former CalWORKs recipients, the Alternative Payment programs (APs) that administer Stage 2 would either draw on the child care reserve and\/ or transfer aided Stage 2 recipients back to Stage 1, thus freeing-up fund- ing for nonaided Stage 2 child care recipients. Former CalWORKs families who have exceeded their two years of Stage 2 child care will move into either regular Stage 3 child care or Stage 3 set-aside. Regular Stage 3 child care is the broader system of subsidized child care operated by SDE. The Stage 3 set-aside was specifi- cally established for former recipients who have reached their two-year Crosscutting Issues C – 35 Legislative Analyst’s Office time limit. Like Stage 2, funding for Stage 3 set-aside is capped by the appropriation. Nevertheless, the Legislature’s and the administration’s practice has been to fully fund this program on a year-by-year basis. In the current year, the administration has notified the Legislature that it will address a shortfall of about $10 million mostly through a transfer of prior-year savings. For 2000-01, the budget proposes $115 million for the Stage 3 set-aside, an increase of almost $90 million compared to the cur- rent year. Non-CalWORKs Child Care Has Waiting Lists. In contrast to the CalWORKs child care system, child care for the non-CalWORKs working poor is not fully funded. Typically, there are waiting lists for non- CalWORKs subsidized child care because there are significantly more eligible families than available slots. Families with incomes up to 75 per- cent of the state median are eligible for regular SDE child care, but prior- ity is given to families with the lowest income. Most of the available slots go to families with incomes at or below 50 percent of the state median. Although a family may retain its subsidized child care slot as its income rises up to 75 percent of the state median, it is very unusual to initially obtain a subsidized slot with an income above 50 percent of state me- dian. As we mentioned in our Analysis of the 1999-00 Budget Bill, there are no reliable data to predict how many eligible families are not receiving child care. Since many families sign up on a waiting list with more than one child care agency, the waiting lists likely double-count some fami- lies. We note that the budget for SDE proposes $1.5 million for a pilot project to analyze waiting lists and begin to collect data on the unmet demand for subsidized child care. Current Law Treats Similar Families Differently As described above, families on CalWORKs receive child care if they need it. Families that leave CalWORKs are eligible for two years of post- assistance child care, and on a year-by-year basis may continue to receive child care in the Stage 3 set-aside. Conversely, working poor families that have never been on CalWORKs receive subsidized child care only if space is available. The incomes of these families may be quite similar. During 1999-00, a family of three becomes ineligible for a CalWORKs grant when its income reaches $1,477 per month (about 44 percent of state median income). A working poor (never-CalWORKs) family with an identical income would only receive child care if slots are available and preference goes to families with the lowest incomes. In all likelihood, such a family would end up on a waiting list, rather than receive a slot. C – 36 Health and Social Services 2000-01 Analysis The current system ensures that CalWORKs recipients have uninter- rupted child care. The policy rationale for this practice is that former CalWORKs recipients\u2014having received aid in the past\u2014may be more likely to go back on CalWORKs if they lose their child care than would a non-CalWORKs working poor family, even though the incomes of the two respective families may be very similar. We know that some persons who leave CalWORKs later go back on aid, but we are aware of no data to assess the validity of the rationale that former CalWORKs recipients are more likely to return to aid if their child care is terminated than are persons with similar incomes but who have never been on aid. Options for Modifying the California Child Care System The administration expects to complete a comprehensive review of child care policies for CalWORKs recipients and the working poor dur- ing the spring of 2000. The review will cover eligibility standards, family fees, state and federal subsidy levels, and how existing resources may be more efficiently focused to serve more equitably the state’s low-income families. In addition, the SDE will hold hearings on revisions to the fam- ily fee schedule that are proposed by a legislative and staff working group. To assist the administration and the Legislature in considering the future of California’s subsidized child care system, we examine different policy options. Below we discuss (1) options for treating welfare\/former welfare families and nonwelfare families more similarly, and (2) modify- ing eligibility and copayment amounts (sliding scale fees paid by the fami- lies) for both populations so as to treat CalWORKs and the non-CalWORKs working poor more equitably. Increasing or Decreasing Child Care Funding. A decision on whether to increase or decrease spending on child care is a policy choice for the Legislature. If the Legislature elects to increase funding for the non- CalWORKs working poor, this would increase equity between the two populations. Due to data limitations, we cannot estimate the cost of fully funding the child care needs for non-CalWORKs working poor families. In addition, we note that expenditures for CalWORKs child care have been increasing more rapidly than for the working poor. In 2000-01, the budget for the Stage 3 set-aside (exclusively for former CalWORKs re- cipients) is $116 million. Preliminary estimates from the DSS indicate the cost for the Stage 3 set-aside will increase to about $200 million in 2001-02 and $265 million in 2002-03 because more former CalWORKs recipients are expected to reach their two-year post-assistance time limit. Another way to increase equity, of course, would be to reduce funding for child care for former CalWORKs recipients. This would achieve more equity but could lead to more former recipients returning to assistance. Crosscutting Issues C – 37 Legislative Analyst’s Office Modifying the Copayment Structure. An alternative approach to pro- viding child care for more families without increasing state expenditures is to increase copayments (the sliding scale fees paid by families that re- ceive subsidized child care). Currently, families with incomes below 50 percent of state median income have no copayment obligation. Fami- lies at 50 percent of the state median ($1,669 per month for a family of three) pay a monthly fee ($44) which is 2.6 percent of their income. As family income rises, the copayment amounts increase. At 75 percent of the state median (the highest level of income at which a family is eligible for subsidized child care), the monthly copayment is $200, which is about 8 percent of the family’s income. The fees are the same regardless of the cost of child care or the number of children in the family receiving the child care. Because most families receiving subsidized child care have incomes below 50 percent of the state median, total copayments in Cali- fornia are relatively low. In 1998-99, total parent copayments were $12.7 million, which was less than 1 percent of the state budget for subsi- dized child care. Decisions on copayment amounts involve trade-offs between the con- flicting goals of (1) cost-effectiveness to government and (2) not overbur- dening poor families. Higher copayments increase the amount of child care that can be purchased within existing resources (or reduce state costs if the amount of child care purchased statewide remains constant), but also increase the financial burden on low-income families. Varying copayment amounts by the type or cost of child care raises similar issues. Higher copayments for more costly child care arrangements will tend to lead to more cost-effective allocation of resources because parents will have a financial incentive to choose less costly child care options. On the other hand, this may lead parents to select lower quality child care ar- rangements. Modifying Eligibility Rules. Another policy option is to change eligibil- ity rules. Currently families with incomes up to 75 percent of the state me- dian income are eligible for subsidized child care. Because there are no reli- able data indicating the distribution of subsidized child care benefits by fam- ily income, it is difficult to predict the impact of changing financial eligibility rules. If the Legislature were to reduce the maximum income limit for pro- gram eligibility, it would result in savings that could be used to reduce the waiting lists for the families with lower incomes.As with copayments, changes in eligibility present difficult trade-offs between applying resources to the most needy families and serving more families. In the above discussion, we have (1) explained how the existing child care system favors former CalWORKs recipients over the working poor and (2) examined the advantages and disadvantages of different policies with respect to resource allocation, modifying copayments, and chang- C – 38 Health and Social Services 2000-01 Analysis ing financial eligibility rules. Below we describe how the State of Wiscon- sin has addressed these issues in its child care system. The Wisconsin System. In Wisconsin, eligibility for child care is inde- pendent of welfare status. Since the program is fully funded, it serves all eligible families. Effective March 2000, a family’s income must be below 185 percent of the federal poverty guideline ($2,082 for a family of three) to enter the state’s program for subsidized child care. Once enrolled, fami- lies remain eligible as long as their income remains at or below 200 per- cent of the federal poverty guideline. All Wisconsin families make monthly copayments even if they are also receiving a welfare grant. The copayments vary depending on fam- ily income, the type of child care purchased, and the number of children receiving child care. For families on assistance and for families with earned incomes up to 70 percent of the federal poverty guideline, the copayment for one child in licensed care is $17 per month (up to 2.7 percent for a family of three). For a family at 200 percent of the federal poverty level, the monthly copayment for one child in licensed care is $216 per month (about 11.8 percent of the family’s income). Copayments are generally higher for more children and lower if the family elects lower-cost certified child care instead of the higher-cost licensed child care. Regardless of the number of children, the maxi- mum copayment for a family is about 11.8 percent of income. As a point of reference, we note that 200 percent of the federal poverty level is about 70 percent of the California state median income for a family of three and 75 percent of state median income for a family of four. (Eligibility for sub- sidized child care in California, as noted above, is set at 75 percent of the median income for a family of three, although few families above 50 per- cent actually receive services because of funding limitations.) In general, Wisconsin’s copayments are higher than California’s, rang- ing up to 12 percent of family income. Total annual copayments are esti- mated to be about $20 million, which is about 10 percent of the state’s total program budget. Figure 2 compares copayments in California and Wisconsin, at selected income levels. Although there is significant uncertainty, we estimate that a Wiscon- sin-style program in California would cost roughly the same as California’s existing subsidized child care program ($2.6 billion). This is because the cost of providing child care to more persons generally would be offset by additional reimbursements from changes in the copayment structure. Analyst’s Recommendation. With respect to subsidized child care, the Legislature has many options. The current system treats families with simi- lar incomes differently, depending on whether or not they have received public assistance in the CalWORKs program. Although the current system is Crosscutting Issues C – 39 Legislative Analyst’s Office not completely equitable, it does tend to ensure that former CalWORKs re- cipients do not return to aid because of a lack of subsidized child care. Figure 2 Monthly Child Care Copayments Comparison of Wisconsin and California Family of Three\u2014Licensed Child Care (Actual Dollars) Selected Income Levels Monthly Income Wisconsin Copayment for California Copayment for 1 Child 2 Children 1 Child 2 Children Equivalent of CalWORKs grant $626 $17 $30 \u2014 \u2014 Working full-time at California minimum wage 998 39 56 \u2014 \u2014 Federal poverty guideline 1,157 61 91 \u2014 \u2014 50 percent of California median income 1,669 147 182 $44 $44 185 percent of poverty 2,140 199 251 128 128 Compared to California, the Wisconsin system provides proportion- ately more child care to more families and treats welfare and nonwelfare families more equitably. It achieves these objectives by collecting higher copayments from the participating families. We think this is a trade-off worth considering. In deciding whether to adopt the changes contained in the Wisconsin program, the Legislature would want to have some knowledge of the system’s effects on families and on public costs. Accordingly, we recommend enact- ment of legislation to conduct a pilot test of the Wisconsin-style child care program in up to four counties in California. The pilot project would include an evaluation that would assess the impact on public costs and identify the effects on families. We estimate that the evaluation would cost about $1.5 mil- lion over a three-year period. Although we anticipate that child care costs in the pilot counties would be similar to costs under current law, there should be some provision for funding potential additional costs. This could be ac- complished by setting aside funds in a child care reserve that could be used to pay for any child care cost increases in the pilot counties, with authoriza- tion for a deficiency request if necessary. C – 40 Health and Social Services 2000-01 Analysis Legislative Analyst’s Office DEPARTMENTAL ISSUES Health and Social Services EMERGENCY MEDICAL SERVICES AUTHORITY (4120) The Emergency Medical Services Authority (EMSA) coordinates emer- gency medical services statewide. The agency’s primary responsibilities are to (1) develop guidelines for local emergency medical services (EMS) systems, (2) review and approve local EMS plans, (3) coordinate medical and hospital disaster preparedness and response and assist the Office of Emergency Services in the preparation of the medical component of the State Emergency Plan, (4) establish standards for the education, training, and licensing of EMS personnel, (5) license EMS paramedics and con- duct disciplinary investigations as necessary. The budget proposes $13.1 million from all funds for support of EMSA programs in 2000-01, which is a decrease of 2.7 percent from estimated current-year expenditures. The budget proposes $9.1 million from the General Fund, which is a decrease of $135,000, or 1.5 percent, from esti- mated current-year expenditures. Fund Condition in Jeopardy We recommend enactment of legislation to reduce the required reserve of the Emergency Medical Services Personnel Fund from 25 percent to 5 percent of the fund’s expenditures. We further recommend that the Emergency Medical Services Authority provide the budget committees with (1) a 2001-02 fiscal projection of the Emergency Medical Services Personnel Fund condition, and (2) a fiscal plan to bring the fund’s reserve into compliance with current law (25 percent of reserve) and our recommendation above (5 percent). C – 42 Health and Social Services 2000-01 Analysis Background. Fee revenues in the EMS Personnel Fund are derived from paramedics’ license fees. The revenues support EMSA’s Paramedic Program, which includes a Licensure Unit and an Enforcement Unit. The Enforcement Unit investigates complaints made about paramedics’ ac- tions and administers disciplinary action. The costs of disciplinary ac- tion, including legal counsel and representation at hearings, are paid for by the EMS Personnel Fund. Governor’s Proposal. The budget proposes to convert the Enforce- ment Unit’s limited-term Special Investigator into a permanent position to meet the growing number of paramedic complaints brought before EMSA. Funding for this position ($78,000 annually) would continue to be provided by the EMS Personnel Fund. Ease Statute’s Reserve Requirement. The Health and Safety Code (Section 1797.112[c]) requires the EMSA to maintain a reserve balance in the Emergency Medical Services Personnel Fund equal to at least three months of the annual authorized expenditures for the personnel licen- sure program . . . In effect, this amounts to a 25 percent reserve require- ment. We believe that a 25 percent reserve is an unnecessary burden on the EMS Personnel Fund, given that its revenues and expenditures are rela- tively stable. A reserve of that magnitude would be appropriate only if the authority’s expenditures and revenues were volatile. Accordingly, we recommend amending the statute to require a 5 percent reserve. Fund’s Condition At Risk. Based on proposed expenditures of $798,000, a 25 percent reserve would amount to $200,000, while 5 percent would be $40,000. As Figure 1 shows, the budget projects no reserve in 2000-01. Consequently, we recommend that EMSA provide the budget com- mittees with (1) a forecast of the EMS Personnel Fund’s fiscal condition through 2001-02, and (2) a fiscal plan for bringing the fund’s reserve into compliance with both current law (25 percent) and our recommendation (5 percent reserve). Emergency Medical Services Authority C – 43 Legislative Analyst’s Office Figure 1 Emergency Medical Services Personnel Fund Condition 1998-99 Through 2000-01 (In Thousands) 1998-99 1999-00 2000-01 Beginning balance $34 $35 $25 Prior-year adjustments 6 \u2014 \u2014 Balance, adjusted $40 $35 $25 Revenues and transfers Revenues: Other regulatory fees $709 $747 $766 Fingerprint identification card fees 42 13 \u2014 Miscellaneous service to the public 2 \u2014 \u2014 Income from surplus money investments 4 7 7 Totals, revenues and transfers $757 $767 $773 Totals, resources $797 $802 $798 Expenditures Disbursements: Emergency Medical Services Authority $762 $777 $798 Fund balance $35 $25 \u2014 C – 44 Health and Social Services 2000-01 Analysis DEPARTMENT OF AGING (4170) The California Department of Aging (CDA) administers funds allo- cated to California under the federal Older Americans Act. These funds are used to provide services to seniors, including supportive services, nutrition programs, employment services, and preventive health services. In addition, CDA administers a range of programs, supported by state and federal funds, that provide noninstitutional services for older Cali- fornians and functionally impaired adults, including the Multipurpose Senior Services Program, Linkages, Adult Day Health Care, and the Alzheimer’s Day Care Resource Centers. Finally, CDA administers the Foster Grandparent, Senior Companion, Respite Purchase of Services, Respite Registry, and Brown Bag programs. The budget proposes expenditures of $167 million ($59 million Gen- eral Fund) for CDA in 2000-01. This represents a 64 percent increase in General Fund expenditures over the current year, due primarily to a $22 million proposed increase for the Department of Aging’s portion of the Governor’s Aging with Dignity Initiative. Aging With Dignity Initiative The Governor’s Aging with Dignity Initiative includes $20 million for the Golden Challenge Long Term Care Innovation grants program and $1 million each for the Senior Housing Support Center and the Se- nior Wellness Campaign in the Department of Aging. Please see our analy- sis of the Aging with Dignity Initiative in the Crosscutting Issues sec- tion of this chapter. Department of Alcohol and Drug Programs C – 45 Legislative Analyst’s Office DEPARTMENT OF ALCOHOL AND DRUG PROGRAMS (4200) The Department of Alcohol and Drug Programs (DADP) directs and coordinates the state’s efforts to prevent or minimize the effects of alco- hol-related problems, narcotic addiction, and drug abuse. Services include prevention, early intervention, detoxification, and recovery. The treatment system serves approximately 500,000 clients annually. The DADP allo- cates funds to local governments and contract providers and negotiates service contracts. The department also coordinates the California Mentor Initiative, a multidepartmental effort targeting youth at risk of substance abuse, teen pregnancy, educational failure, and criminal activity. The budget proposes $448 million from all funds for support of DADP programs in 2000-01, an increase of less than 1 percent above estimated current-year expenditures. The budget proposes $99 million from the General Fund, which is a decrease of $9 million, or 8 percent, from esti- mated current-year expenditures. The decrease is primarily due to a one- time carryover of $12 million from the prior year to the current year for substance abuse programs. The budget proposes an increase of $2.5 mil- lion in General Fund expenditures in 2000-01 to backfill for a reduction in federal funding for perinatal substance abuse programs. Excess Special Fund Revenues Should Be Used to Reduce Fees We recommend the adoption of budget bill language requiring the department to implement a fee reduction for the Driving-Under-the- Influence program provider licenses, because the program fund’s year- end balance is sufficiently high to support reduced fees. Under the Driving-Under-the-Influence program, individuals con- victed of driving while under the influence of alcohol or other drugs are C – 46 Health and Social Services 2000-01 Analysis required to successfully complete a state-licensed alcohol and drug edu- cation and counseling program. The department issues biennial licenses to approximately 265 providers of these services, serving roughly 135,000 participants. The costs of administering the program\u2014which cover ini- tial licensing and biennial licensing reviews, training, and developing regulations\u2014are supported by the Driving-Under-the-Influence Licens- ing Trust Fund. The fund consists of program provider license fees. Ini- tial licensing fees range from an average of $445 for first-offender pro- grams to $1,219 for multiple-offender programs. In addition, each pro- vider deposits fees of $12 per enrolled participant on a quarterly basis. The budget projects a year-end fund balance of $2 million in 2000-01, as shown in Figure 1. Figure 1 Department of Alcohol and Drug Programs Driving-Under-the-Influence Program Licensing Trust Fund (In Thousands) 1998-99 1999-00 2000-01 Beginning balance $1,991 $1,963 $1,929 Revenues 1,585 1,675 1,810 Expenditures 1,613 1,709 1,735 Year-end balance $1,963 $1,929 $2,004 Current law provides that the department shall set the licensing fees in an amount sufficient to cover projected expenditures, and that any ex- cess fees shall be carried forward and taken into consideration in the es- tablishment of fees for the next fiscal year. Based on revenue and expen- diture trends, we believe that the reserve is sufficiently large to support a fee reduction. Our review indicates that a fee reduction of 15 percent could be sustained over the next five years, while maintaining a projected re- serve of approximately $670,000 at the end of this time period. Accord- ingly, we recommend adoption of budget bill language requiring the de- partment to implement a fee reduction for program provider licenses. Our recommendation could be implemented by adoption of the fol- lowing language in budget bill Item 4200-001-0139: The department shall implement a fee reduction based on the amount of the unencumbered balance, taking into account the need to maintain a prudent reserve. Department of Alcohol and Drug Programs C – 47 Legislative Analyst’s Office Excess Special Fund Revenues Should Be Transferred to General Fund We recommend the adoption of budget bill language to transfer the amount of the year-end balance in excess of $20,000 from the Audit Repayment Trust Fund to the General Fund, because a balance of $20,000 would constitute a prudent reserve and it is appropriate to return these repayment revenues to their original source, the General Fund. (Increase General Fund revenues by $206,000.) The Audit Repayment Trust Fund consists of the recovery of state funds found not to have been spent in accordance with the requirements of state or federal regulations regarding substance abuse services. Rev- enues from the fund are used to support program audits. As Figure 2 shows, the budget projects revenues of $50,000 and ex- penditures of $67,000 in 2000-01, and a year-end balance of $226,000. However, based on past-year trends, we estimate that expenditures will be less than projected in the budget. Consequently, we believe the year- end balance will be higher. Our review of this fund indicates that a bal- ance of $20,000 in 2000-01 would be approximately one-third of projected expenditures, thereby constituting a prudent reserve against unanticipated costs. Accordingly, we recommend any balance in excess of $20,000 be transferred to the General Fund. This would be appropriate because the activity supported by this fund consists of the recovery of state funds. We estimate this would result in increased General Fund revenues of $206,000. Figure 2 Department of Alcohol and Drug Programs Audit Repayment Trust Fund (In Thousands) 1998-99 1999-00 2000-01 Beginning balance $222 $260 $243 Revenues 56 50 50 Expenditures 18 67 67 Year-end balance $260 $243 $226 Our recommendation could be implemented by adoption of the fol- lowing language in budget bill Item 4200-001-0816: For support of the Department of Alcohol and Drug Programs, the amount of the unencumbered balance exceeding $20,000 in the Audit Repayment Trust Fund as of June 30, 2001, shall be transferred to the General Fund. C – 48 Health and Social Services 2000-01 Analysis Department Should Report on Medicaid Rehabilitation Option A statutorily required report on the programmatic and fiscal implications of adopting the Medicaid rehabilitation option under the Medi-Cal Drug Treatment Program is more than six months overdue. We recommend that the department advise the Legislature on the status of the report and its recommendations regarding adoption of the option. The federal Health Care Financing Administration , which adminis- ters the Medicaid program, gives states the option of including drug and alcohol rehabilitative services as a Medicaid benefit. These services may be provided outside of the traditional clinic-based setting, and include preventive care, case management, day care habilitative, residential, and other services. Pursuant to Chapter 389, Statutes of 1998 (SB 2015, Wright), the de- partment is required to submit, by July 1, 1999, a report that identifies the key policy, program, and fiscal issues regarding the adoption of the Med- icaid rehabilitation option. The department indicates it submitted the re- port to the Health and Human Services Agency (HHSA) in October 1999. At the time this analysis was prepared, however, HHSA had not released the report. The department should be prepared at the time of budget hearings to advise the Legislature on the status of the report or, if the report has been submitted by that time, on its findings and recommendations. Statewide Strategic Plan Needed to Address Gap in Substance Abuse Treatment We recommend the adoption of budget bill language requiring the department to submit by December 1, 2000 a statewide strategic plan to address the need for substance abuse treatment. Gap in Substance Abuse Treatment. In our July 1999 report, Substance Abuse Treatment in California, we indicated that research demonstrates that substance abuse treatment is cost-effective to society, primarily due to reduced criminal activity. We also identified a gap between the need for, and the availability of, substance abuse treatment in California. The de- partment has estimated that an additional $330 million would be needed annually to serve everyone who would access publicly funded treatment, if it were available. We also reported a substantial gap in treatment specifically for ado- lescents. Compared to adults, a significantly lower percentage of adoles- cents who need publicly funded treatment receive such services. We iden- tified several barriers to serving adolescents through California’s treat- Department of Alcohol and Drug Programs C – 49 Legislative Analyst’s Office ment system, including a limited number of residential facilities and ser- vice models that are not tailored to address the unique developmental stages of adolescence. Our report recommended that the department develop short- and long-term statewide plans to address the need for more services in gen- eral, and to identify effective treatment models and strategies to more effectively serve adolescents in particular. At the time this analysis was prepared, the department had not sub- mitted such a plan. Recent funding increases for substance abuse treatment targeted to specific populations, such as pregnant and postpartum women and their children, the prison population, parolees, and drug court participants, have not been part of an overall statewide strategy to reduce substance abuse. We believe that a statewide strategic plan would enable the state to prioritize funding needs for substance abuse treatment and may help maximize federal funding. Accordingly, we recommend the adoption of budget bill language requiring the department to submit a statewide strategic substance abuse treatment and prevention plan. Specifically, we recommend that, at a minimum, the plan include: A specific component for adolescents identifying effective treat- ment models and strategies to remove barriers to treatment. A standardized assessment tool specific to adolescents, to be de- veloped in conjunction with representatives from county alcohol and drug departments and service providers. With respect to adolescent treatment, consideration of the expan- sion of the substance abuse treatment benefit under the Healthy Families Program (HFP). Consideration of the expansion of the Medi-Cal Drug Treatment Program benefit. A fiscal estimate of the costs of implementing the plan’s recom- mendations. We discuss each of these components of a statewide plan below. Moving Towards an Adolescent Treatment Program. Chapter 866, Statutes of 1998 (AB 1784, Baca), required the department to collaborate with counties and service providers to establish community-based non- residential and residential programs for adolescents who are involved in, or at risk of involvement in, the criminal justice system. In April 1999, the department allocated nearly $5 million in Adolescent Treatment Program C – 50 Health and Social Services 2000-01 Analysis (ATP) grants to 20 counties. The funding is ongoing and included in the budget for 2000-01. The department indicates that it intends to develop an adolescent treatment system based on the findings from the partici- pating counties on the most appropriate and effective services. We believe that the preliminary findings from the participating coun- ties should be used, to the extent possible, to develop the strategic plan’s adolescent component. It is important to note, however, that it is uncer- tain whether the department will be able to obtain adequate information on the full range and amount of services that are needed to treat adoles- cents. This is primarily for two reasons. First, only $149,000 was allocated for a program-wide evaluation. Second, discussions with some of the par- ticipating counties’ alcohol and drug program directors indicate that some of the grants, which average roughly $250,000, may not be enough to develop a new adolescent treatment system that would include a full con- tinuum of services. Lacking a full array of service options, participating counties may not be able to test the most appropriate treatment services. Given the potential limitations of the ATP findings, the department could rely on best practices information from the American Society of Addiction Medicine and the Center for Substance Abuse Treatment in developing our recommended plan. This information, for example, indi- cates that successful adolescent treatment systems (1) include a full con- tinuum of services, from outpatient to intensive day treatment to resi- dential programs, (2) allow clients to remain in treatment over an extended period of time, and (3) address the cognitive and social-emotional devel- opment of youth. Standardized Assessment Tool Necessary to Ensure Uniform Treat- ment Across Counties. California has no statewide adolescent-specific assessment instrument to determine need level and appropriate treat- ment. This limits the department’s ability to ensure that adolescents re- ceive comparable treatment across counties. The National Institute on Drug Abuse reports that patients who receive services specifically matched to assessed need show statistically significant improvement in all assessed problem areas, such as academic performance and violent and criminal activity. A standardized assessment tool would help ensure that clients receive the most appropriate and cost-effective treatment. A statewide assessment tool would also help in estimating the state- wide need for adolescent treatment. While the department gathers wait- ing list information from the counties, such information is an imprecise measure of need because the availability of different types of services affects waiting lists for those services. For example, because there are so few adolescent residential treatment programs, many counties would not keep waiting lists for this service. Assessment data generated by a stan- Department of Alcohol and Drug Programs C – 51 Legislative Analyst’s Office dard assessment tool, by contrast, would enable the department to esti- mate the need for different types of adolescent treatment. Expansion of the Healthy Families Substance Abuse Treatment Ben- efit. The HFP, administered by the Managed Risk Medical Insurance Board (MRMIB), implements the federal Children’s Health Insurance Program enacted in 1997. Under HFP, substance abuse treatment includes medi- cally necessary inpatient hospital detoxification and 20 outpatient visits per year. In September 1999, MRMIB submitted a statutorily required report to the fiscal and policy committees on the adequacy of substance abuse benefits in HFP. The report indicated that only 53 enrolled adolescents received at least one outpatient visit in the past year. The report cited several reasons for this small number of clients, including inaccurate uti- lization data. The report concluded that there is still insufficient utiliza- tion data available to determine the adequacy of the HFP substance abuse benefits. In our field visits, providers and county administrators indicated that the HFP benefit is inadequate for adolescents with serious substance abuse problems, who require intensive outpatient or residential treatment. County officials we spoke with also suggested that the inadequacy of benefits may have discouraged doctors from making referrals to the health plans’ treatment providers. If this is so, utilization data may not be an accurate measure of the adequacy of the benefits of the program. Finally, we note that national best practices research suggests that a full continuum of services and the option to remain in treatment for longer periods are instrumental for successful treatment. For these reasons, we believe that the department’s plan should include consideration of expanding ben- efits under HFP and cost estimates of different expansion scenarios. We note that funding for HFP is generally on a 2-to-1 federal\/state matching basis. Expansion of the Drug Medi-Cal Benefit. The Medi-Cal Drug Treat- ment Program, or Drug Medi-Cal (D\/MC), targets pregnant and post- partum women and children under age 21. The state match is included in the department’s budget. The program covers four principal benefits: individual and group counseling under the Narcotic Treatment Program; individual and group counseling under outpatient drug-free services; day care habilitative services; and perinatal services, which is the only pro- gram that covers residential services. In 1995-96, in an effort to contain costs, the D\/MC trigger was adopted in the budget act and trailer bill (Chapter 305, Statutes of 1995 [AB 911, Vasconcellos]). The legislation enacted a provision stating that if General Fund expenditures exceed a specified amount, outpatient drug-free services would be eliminated as a C – 52 Health and Social Services 2000-01 Analysis D\/MC benefit. The trigger in the current year is $45 million. In addition, in order to reduce costs, the scope and duration of D\/MC benefits were restricted and the provider reimbursement rates were lowered. In our field visits, state and county officials and treatment providers indicated that these cost containment strategies have resulted in inad- equate benefits under D\/MC. Consequently, many Medi-Cal-eligible cli- ents are treated instead in programs funded entirely by state funds, or not treated at all. In order to maximize federal funds, we believe the de- partment should include in its plan a review of the impact of the trig- ger and should consider strategies to expand D\/MC benefits if cost- effective. The plan should also include fiscal estimates of such strategies. As noted above, the department is required to submit a report on the programmatic and fiscal implications of adopting the Medicaid rehabili- tation option under the Medi-Cal Drug Treatment Program, which would expand the range of services covered under D\/MC. We recommended above that the department advise the Legislature on the status of the re- port. We note that expansion of D\/MC benefits may require loosening the trigger. Since D\/MC is an entitlement, and benefits must be provided statewide, expansion raises concerns about uncontrollable costs. As part of the strategic plan, the department could consider a managed care model as a potential longer-term solution to cost containment. Summary. We recommend the adoption of budget bill language re- quiring the department to submit, by December 1, 2000, a statewide stra- tegic plan to address the need for substance abuse treatment. The plan should include a specific component for adolescent treatment, including a standardized assessment tool. In order to serve more persons and maxi- mize federal funding, the plan should consider expansion of the HFP substance abuse treatment benefits and the D\/MC benefits. California Children and Families Commission C – 53 Legislative Analyst’s Office CALIFORNIA CHILDREN AND FAMILIES COMMISSION (4250) Proposition 10 was enacted by the voters of California in the Novem- ber 1998 election. It funds early childhood development programs from revenues generated by increases in the state excise tax on cigarettes and other tobacco products. These programs are provided either by the state California Children and Families Commission or the local county com- missions. The Governor’s proposal estimates that Proposition 10 revenues will be $733 million in 1999-00 and $719 million in 2000-01, a decrease of 2 per- cent due to a projected decrease in tobacco consumption. According to statute, these funds are deposited into the California Children and Fami- lies Trust Fund, and a small amount is used to (1) offset reductions in certain Proposition 99 programs and Breast Cancer Fund programs due to decreased tobacco consumption and (2) reimburse the State Board of Equalization for its administrative costs. Of the remainder, 80 percent of the funds are allocated to Proposition 10 county commissions and the other 20 percent to the state commission. The California Children and Families Commission must spend their funds on (1) a mass media campaign, (2) educational activities, (3) sup- port for child care providers, (4) research, and (5) administration. In early 2000, the state commission intends to fund initiatives in children’s health care, child care and development, and family literacy. The budget estimates that spending will amount to $1.1 billion in the current year and $729 million in the budget year. Current-year expendi- tures exceed the annual revenues because of a large carry-over from 1998-99, due to the time required for program implementation. We note that these funds are continuously appropriated, and not sub- ject to appropriation by the Legislature. We also note that passage of Propo- C – 54 Health and Social Services 2000-01 Analysis sition 28, included on the March 2000 ballot, would repeal the tax provi- sions of Proposition 10. This would eliminate new funds for programs administered by the state and local commissions. Matching Grant Program Would Encourage Cost-Effective Use of Proposition 10 Funds We recommend enactment of legislation to establish a state-funded voluntary matching grant program for the Proposition 10 county commissions, which would fund (1) early childhood programs that have been shown to be cost-effective and\/or (2) demonstration programs that are potentially cost-effective, based on existing research. Background. Proposition 10 results in a significant increase in fund- ing for programs related to early childhood development. A key issue, therefore, is ensuring that these funds will be spent effectively. Most of the Proposition 10 revenues go to the county commissions. This local con- trol is likely to facilitate responsiveness to local needs, but with up to 58 commissions and the broad discretion that they have in allocating their revenues, it will be a challenge to ensure that the funds will be spent effectively. County strategic plans must describe how program outcomes will be measured and must be consistent with guidelines adopted by the state commission, but specific spending plans do not have to be reviewed or approved at the state level. The Legislature has no direct control over the expenditure of Propo- sition 10 funds, and as such its role is a limited one. Nevertheless, the Legislature does have an opportunity to influence decisions taken by the state and, more importantly, the county commissions. Research on Early Childhood Programs. A variety of early childhood programs\u2014typically small-scale demonstration programs\u2014have been evaluated as being effective according to outcome measures such as school achievement and health status. In a few cases (a home-visiting program in Elmira, New York, for example), the cost-effectiveness of programs has been documented as well. (For further discussion of research on such cost-effective programs, please see our report, Proposition 10: How Does it Work? What Role Should the Legislature Play in Its Implementation?, January 1999.) It also makes sense to evaluate the potential of other early childhood interventions. While relatively few programs have been analyzed on the narrowly defined basis of cost-effectiveness, a large number have been shown to result in positive outcomes. The Office of Juvenile Justice and Delinquency Prevention in the U.S. Department of Justice, for example, has published the results of a review of family strengthening programs, California Children and Families Commission C – 55 Legislative Analyst’s Office which identified 34 noteworthy programs, including nine that focus on families with children under six years of age. Such programs could serve as the basis for initiating pilot projects in California. Matching Grant Program. We recommend enactment of legislation to establish a state-funded voluntary matching grant program for the Proposition 10 county commissions, which would fund (1) early child- hood programs that have been shown to be cost-effective and\/or (2) dem- onstration programs that are potentially cost-effective, based on existing research. (As implied above, demonstration programs are small-scale projects designed to test the effectiveness or cost-effectiveness of the pro- gram or specific aspects of the program.) The primary purpose of this matching grant program would be to create a fiscal incentive to encourage the county commissions to use their funds productively. We believe that a 1:3 state\/local match would pro- vide a sufficient incentive. Thus, a state appropriation of $15 million, for example, would match up to $45 million in local funds. We also suggest that if such a program is adopted, it be administered either by the Department of Social Services (DSS) or by the California Children and Families Commission, with the assistance of an advisory group that includes representatives from other departments. We note that the DSS has some expertise in this area and currently oversees a home- visiting pilot project. This expertise is important because the administra- tive agency will have to make judgments on the potential effectiveness and cost-effectiveness of the local proposals. The Children and Families Commission on the other hand, also has acquired staffing expertise and has responsibility for state oversight of the program. C – 56 Health and Social Services 2000-01 Analysis DEPARTMENT OF HEALTH SERVICES STATE OPERATIONS (4260) The Department of Health Services (DHS) has four major responsi- bilities. First, it provides access to health care for low-income persons through the Medi-Cal Program. Second, it administers a broad range of public health programs in cooperation with local health agencies. Third, it licenses hospitals and certain other health facilities. Fourth, it functions as the state’s central agency for vital statistics. The budget proposes $746 million from all funds ($244 million from the General Fund) and 5,790 personnel-years of staff for DHS state opera- tions in 2000-01. Proposed General Fund spending represents an increase of 13 percent compared with estimated General Fund spending in the current year. This is due primarily to proposed new positions, as dis- cussed below. Vacant Positions Should Be Filled Before Adding New Positions In addition to specific recommendations regarding particular staffing requests, we withhold recommendation generally on all of the department’s proposals to increase staffing (which result in a net increase of 557 positions in 2000-01) because the department’s large number of unfilled existing positions calls into question the need for the requested staffing increases. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new positions and funding, and report the results of this review to the budget committees. Budget Request for New Positions. The budget requests a net increase of 557 authorized positions for DHS in 2000-01, raising the total number of authorized positions in the department to 6,198\u2014an increase of almost Department of Health Services State Operations C – 57 Legislative Analyst’s Office 10 percent. The largest of these staffing requests is proposed for the Medi- Cal Fraud and Fiscal Integrity Initiative (255) and for additional staff to monitor the quality of care at nursing homes that are included in the Governor’s Aging with Dignity Initiative (153). Vacant Positions in Department. All departments have some vacant positions due to normal personnel turnover and hiring delays, but gener- ally these unavoidable vacancies are only about 5 percent of total posi- tions. This is normally reflected in the budgeted salary savings for the department. The requests for the new positions, however, come despite the fact that, as of January 2000, the department had over 900 vacant positions. This represents a current vacancy rate of more than 16 percent. Thus, more than one in every six positions in the department is vacant, on average. The DHS notes that it has had difficulty filling positions for reasons such as tight labor markets, particularly for certain types of health profession- als, and administrative backlogs in the department’s hiring process. Department staff indicate that the vacancy rate is somewhat over- stated. This is because persons hired under its temporary help blanket authority offset some of these vacancies; however, the department cur- rently is unable to quantify this offset. Nevertheless, the department agrees that its vacancy rate is excessive. The department’s high vacancy rate is likely to be causing some of the workload backlogs that the department cites as justification for new additional positions and funding. Accordingly, some of this workload problem could likely be resolved by filling existing positions rather than adding new ones. Therefore, while we address the merits of some individual budget staffing requests later in this analysis and in our analysis of the Aging with Dignity Initiative, we withhold recommendation generally on all of the department’s requests for additional staffing. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new posi- tions and funding, and report the results of this review to the budget committees. Salary Savings Estimate Should Be Realistic We recommend that the Departmentof Health Services prepare, for the budget committees, a realistic hiring plan for its revised staffing needs and a revised salary savings estimate for 2000-01 that is consistent with that plan, in order to avoid budgeting funds that are not likely to be spent. C – 58 Health and Social Services 2000-01 Analysis In addition to requesting a net increase of 557 new positions, the bud- get assumes that DHS will fill most of its current vacant positions and reduce its overall vacancy rate in 2000-01 to 6.6 percent. In order to achieve this, the department would have to hire more than 1,000 people by early summer, in addition to replacing personnel who leave due to normal turn- over. This appears unrealistic, and we believe that the department is likely to have a higher vacancy rate in 2000-01 than the budget assumes. The amount of funding requested for staff wages and benefits is the full cost of wages and benefits for all authorized positions for the full year, less an allowance for salary savings that reflects the anticipated va- cancy rate. For this reason, an unrealistically low estimate of the vacancy rate for DHS in 2000-01 would result in overbudgeting for staffing costs. In addition to evaluating the potential workload that can be addressed by filling existing vacancies, as recommended above, we further recom- mend that DHS prepare, for the budget committees, a realistic hiring plan for its revised staffing needs and a revised salary savings estimate for 2000-01 that is consistent with that plan, in order to avoid budgeting funds that are not likely to be spent. Employer Retirement Contribution Overbudgeted We recommend reducing the amount budgeted for employer retirement contributions to the correct amounts for proposed new positions in 2000-01, for a total savings of $1.1 million ($442,000 General Fund, $158,000 special funds, $501,000 federal funds, and $27,000 reimbursements), subject to adjustment for other budget actions affecting these proposals. Employer Retirement Contribution Rates Reduced. Subsequent to the enactment of the 1999-00 Budget Act\u2014which set employer retirement con- tribution rates to roughly 5 percent of salaries for most types of positions\u2014 Chapter 800, Statutes of 1999 (AB 232, Alquist) reduced these rates to approximately1.5 percent. Budget Letter Number 99-31, issued in Octo- ber 1999, provided departments with instructions for budgeting accord- ingly. Old Rate Budgeted for New Positions. The department applied the 5 percent rate rather than the 1.5 percent rate to the retirement contribu- tion costs in its proposals for additional staff in 2000-01. Consequently, the department’s personal services costs are overbudgeted. Accordingly, we recommend reducing the employer retirement contributions budgeted in the proposals to reflect the correct rate. The department has identified the overbudgeted amounts as $442,000 General Fund, $501,000 federal funds, $158,000 special funds, and $27,000 reimbursements. Therefore, Department of Health Services State Operations C – 59 Legislative Analyst’s Office we recommend reductions to the appropriate items, subject to adjust- ment for other budget actions affecting the department’s proposed new positions. Medi-Cal Fraud and Fiscal Integrity Initiative\u2014 More Information Needed We withhold recommendation on $26.2 million ($10 million General Fund) and 255 positions requested for the Governor’s Medi-Cal Fraud and Fiscal Integrity Initiative, pending further analysis of the proposal and receipt of additional information from the department regarding (1) the potential use of existing vacant positions to address identified workload, and (2) more specific workload justification that relates staffing requests to specific goals and outcomes and recognizes the interactive effects of the components of the Governor’s initiative. The budget requests a total of $26.2 million ($10 million from the General Fund) and 255 positions to expand antifraud activities and im- prove the fiscal integrity of the Medi-Cal Program. This request is in ad- dition to an augmentation of 41 positions and $3.3 million ($1.6 million from the General Fund) that was provided in the current year by the 1999-00 Budget Act and trailer bill legislation. The requested new posi- tions and funding for 2000-01 would be used for the following purposes: Double the staff of the Medi-Cal Fraud Prevention Bureau. Tighten the Medi-Cal provider enrollment process, expand mea- sures to detect and withhold payments for claims that appear fraudulent, and take aggressive enforcement action against pro- viders who commit fraud. Increase field audits of Medi-Cal providers. Expand antifraud activities to Medi-Cal managed care. Increase fraud detection efforts for dental providers. Add staff to investigate clinical laboratories that are suspected of fraudulent practices. Rationalize and update Medi-Cal billing codes for medical equip- ment and supplies and contract for some types of medical equip- ment and supplies and for generic drugs in order to reduce op- portunities for fraud and abuse and obtain competitive prices for Medi-Cal purchases. Vacancies Should Be Addressed. Earlier in this analysis, we discuss the large number of current DHS staff vacancies. Because of this large C – 60 Health and Social Services 2000-01 Analysis number of vacancies, we are generally withholding recommendation on proposals for new positions, including the positions requested in the an- tifraud initiative, pending information from the department on the ex- tent to which filling existing vacant positions can address the workload for which the new positions are being requested. Specific Concerns With the Antifraud Initiative. In addition to the general issue of how the department’s vacancies affect the need for new positions, the antifraud proposal raises a number of specific concerns, including the following: Ongoing Workload Versus Intensive Initial Efforts. As indicated above, 41 positions were added in the current year to augment the department’s antifraud activities. This raises the question of how much antifraud staffing will be needed on an ongoing basis after current intensive efforts weed out a backlog of fraudu- lent providers that has built up over several years. Intensive Enforcement Versus Structural Change. In some cases, changing the way in which the Medi-Cal Program purchases goods and services may be a more effective strategy to minimize fraud and abuse than adding more staff for ongoing intensive auditing and enforcement efforts. In fact, the Governor’s budget offers an example of such an approach. It requests 16.4 positions to develop a contracting program for some types of medical equip- ment and supplies, and nine positions to revise and update cod- ing systems and utilization policies. Contracting will enable DHS to reduce the number of providers of these items, and the con- tracting process will limit participation to legitimate health care businesses and therefore exclude shell businesses that are set up only to commit fraud. Updating and rationalizing billing codes and utilization policies will reduce opportunities for fraud and abuse through manipulation of billing practices. The staffing re- quests in the auditing and enforcement components of the Governor’s antifraud initiative, however, base their workload justification on the current number of providers (or even larger numbers that predate the recent provider reenrollment effort). Workload Justification Often Vague and Not Linked to Specific Outcomes. The department’s budget documents provide exten- sive lists of general tasks and the time required to perform them for various types of requested positions. In many cases, however, these documents present little information to link these workloads with specific outcomes or goals. Consequently, the workload ba- sis for the requested positions often is vague and unclear. For example, the initiative requests 29 positions to make drop-in vis- Department of Health Services State Operations C – 61 Legislative Analyst’s Office its on providers who are not in the four categories already being visited as part of the intensive current-year antifraud effort. The new positions will be used to conduct drop-in visits over a five- year period for up to 7,500 providers in those other categories, including chain pharmacies and emergency ambulance services. No evidence is presented, however, that these other categories have significant numbers of fraudulent providers that would be appropriate targets for a drop-in program. Moreover, as men- tioned above, this component of the request does not recognize any workload reductions that will result because of reductions in the number of providers due to the current reenrollment process and the proposed contracting program. Pending receipt and analysis of additional information from DHS to address the issues raised above, we withhold recommendation on the proposal. C – 62 Health and Social Services 2000-01 Analysis CALIFORNIA MEDICAL ASSISTANCE PROGRAM (MEDI-CAL) In California, the federal Medicaid Program is administered by the state as the California Medical Assistance (Medi-Cal) Program. This program pro- vides health care services to welfare recipients and other qualified low-in- come persons (primarily families with children and the aged, blind, or dis- abled). Expenditures for medical benefits are shared about equally by the General Fund and by federal funds. The Medi-Cal budget also includes ad- ditional federal funding for (1) disproportionate share hospital (DSH) pay- ments, which provide additional funds to hospitals that serve a dispropor- tionate number of Medi-Cal or other low-income patients, and (2) matching funds for state and local funds in other related programs. At the state level, the Department of Health Services (DHS) adminis- ters the Medi-Cal Program. Other state agencies, including the California Medical Assistance Commission (CMAC), the Department of Social Ser- vices (DSS), the Department of Mental Health (DMH), the Department of Developmental Services (DDS), the Department of Aging, and the De- partment of Alcohol and Drug Programs receive Medi-Cal funding from DHS for eligible services that they provide to Medi-Cal beneficiaries. At the local level, county welfare departments determine the eligibility of applicants for Medi-Cal and are reimbursed by DHS for the cost of those activities. The federal Health Care Financing Administration oversees the program to ensure compliance with federal law. Proposed Spending. The budget for DHS proposes Medi-Cal expen- ditures totaling $23.2 billion from all funds for state operations and local assistance in 2000-01. The General Fund portion of this spending ($8.8 bil- lion) increases by $551 million, or 6.7 percent, compared with estimated General Fund spending in the current year. The remaining expenditures for the program are mostly federal funds ($12.8 billion). California Medical Assistance Program C – 63 Legislative Analyst’s Office The spending total for the Medi-Cal budget includes an estimated $3 bil- lion (federal funds and local matching funds) for payments to DSH hospi- tals, and about $1.8 billion of federal funds to match $1.7 billion of state and local funds budgeted elsewhere for programs operated by other departments, counties, and the University of California. Including these other state and local funds, total proposed spending would be about $24.4 billion in 2000-01. MEDI-CAL BENEFITS AND ELIGIBILITY What Benefits Does Medi-Cal Provide? Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nurs- ing care, doctor visits, laboratory tests and x-rays, family planning, and regular examinations for children under the age of 21. California also has chosen to offer 32 optional services, such as outpatient drugs and adult dental care, for which the federal government provides matching funds. Certain Medi-Cal services\u2014such as hospitalization in many circum- stances\u2014require prior authorization from DHS as medically necessary in order to qualify for payment. How Medi-Cal Works Currently, more than half (57 percent) of the Medi-Cal caseload consists of participants in the state’s two major welfare programs, which include Medi- Cal coverage in their package of benefits. These programs are (1) the Califor- nia Work Opportunity and Responsibility to Kids (CalWORKs) program, which provides assistance to families with children and replaces the former Aid to Families with Dependent Children (AFDC) program, and (2) the Supplemental Security Income\/State Supplementary Program (SSI\/SSP), which assists elderly, blind, or disabled persons. Counties administer the CalWORKs program and county welfare offices determine eligibility for CalWORKs benefits and Medi-Cal coverage concurrently. Counties also de- termine Medi-Cal eligibility for persons who are not eligible for (or do not wish) welfare benefits. The federal Social Security Administration determines eligibility for SSI\/SSP, and the state automatically adds SSI\/SSP beneficia- ries to the Medi-Cal rolls. Generally, persons who have been determined eligible for Medi-Cal benefits (Medi-Cal eligibles ) receive a Medi-Cal card, which they use to obtain services from providers who agree to accept Medi-Cal patients. Medi-Cal uses two basic types of arrangements for health care\u2014fee-for- service and managed care. C – 64 Health and Social Services 2000-01 Analysis Fee-for-Service. This is the traditional arrangement for health care in which providers are paid for each examination, procedure, or other ser- vice that they furnish. Beneficiaries generally may obtain services from any provider who has agreed to accept Medi-Cal payments. The Medi- Cal Program employs a variety of utilization control techniques (such as requiring prior authorization for some services) designed to avoid costs for medically unnecessary or duplicative services. Managed Care. Prepaid health plans generally provide managed care. The plans receive monthly capitation payments from the Medi-Cal Pro- gram for each enrollee in return for providing all of the covered care needed by those enrollees. These plans are similar to health plans offered by many public and private employers. Currently, slightly more than half (2.6 million of the total of 5 million Medi-Cal eligibles) are enrolled in managed care organizations. Beneficiaries in managed care choose a plan and then must use providers in that plan for most services. Since pay- ments to the plan do not vary with the amount of service provided, there is much less need for utilization control by the state. Instead, plans must be monitored to ensure that they provide adequate care to enrollees. Who Is Eligible for Medi-Cal? Almost all Medi-Cal eligibles fall into two broad groups of people. They either are aged, blind, or disabled or they are in families with chil- dren. Somewhat more than half of Medi-Cal eligibles are welfare recipi- ents. Figure 1 shows for each of the major Medi-Cal eligibility categories, the maximum income limit in order to be eligible for health benefits and the estimated caseload and total benefit costs for 1999-00. The figure also indicates for each category, whether an asset limit applies and whether eligible persons with incomes over the limit can participate on a spend down basis. If spend down is allowed, then Medi-Cal will pay the por- tion of any qualifying medical expenses that exceed the person’s share of cost, which is the amount by which that person’s income exceeds the applicable Medi-Cal income limit. Aged, Blind, or Disabled Persons. About 1.3 million low-income per- sons who are (1) at least 65 years old or (2) disabled or blind persons of any age receive Medi-Cal coverage. Overall, the disabled make up more than half (61 percent) of this portion of the Medi-Cal caseload. Most of the aged, blind, or disabled persons on Medi-Cal (86 percent) are recipi- ents of SSI\/SSP benefits and receive Medi-Cal coverage automatically. The other aged, blind, or disabled eligibles are in the medically needy category. They also have low incomes, but do not qualify for, or choose not to participate in the SSI\/SSP program. For example, aged low-income noncitizens generally may not apply for SSI\/SSP (although they California Medical Assistance Program C – 65 Legislative Analyst’s Office Figure 1 Who is Eligible for Medi-Cal? Major Eligibility Categories 1999-00 Maximum Monthly Income Or Grant a Asset Limit Imposed? Spend Down b Allowed? Enrollees (Thousands) Annual Benefit Costs (Millions) c Aged, Blind, or Disabled Persons Welfare (SSI\/SSP) $1,249 \ufffd \u2014 1,162 $7,267 Medically needy 954 \ufffd \ufffd 111 742 Medically needy\u2014long term care Special limits \ufffd \ufffd 70 2,430 Families, Children, and Pregnant Women Families Welfare (CalWORKs) $1,032 d \ufffd \u2014 1,773 $2,264 Section 1931(b) family coverage 1,482 e \ufffd \u2014 1,209 1,635 Medically needy 1,190 \ufffd \ufffd \u2014 f \u2014 f Children and Pregnant Women Children 200 percent of poverty\u2014 infants $2,873 \u2014 \u2014 52 \u2014 g 133 percent of poverty\u2014 ages 1 through 5 1,941 \u2014 \u2014 127 $86 100 percent poverty\u2014 ages 6 through 18 1,482 \u2014 \u2014 97 68 Medically indigent\u2014 ages 0 through 21 1,190 \ufffd \ufffd 254 432 Pregnant women 200 percent of poverty\u2014 pregnancy services $2,873 \u2014 \u2014 115 $445 Medically indigent\u2014all services 1,190 \ufffd \ufffd 10 95 Emergency-Only Undocumented immigrants who qualify in any eligibility group are limited to emergency services (including labor and delivery and long-term care). 207 h $494 a Amounts are for aged or disabled couple (including the standard $20 disregard) or for a four-person family with children (includ- ing a $90 work expense disregard). b Indicates whether persons with higher incomes may receive benefits on a share-of-costs basis. c Combined state and federal costs. d Income limit to apply for CalWORKs (including a $90 work expense disregard). After becoming eligible, the income limit in- creases to $1,717 (family of four) with the maximum earned income disregard. e Applicant income limit of 100 percent of poverty, effective March 1, 2000. Increases to $2,124 after enrollment. f Enrollment and costs included in amounts for Section 1931(b) family coverage. g Costs included in amount for 200 percent of poverty pregnant women group. h About 70,000 additional undocumented immigrants are included in other enrollment categories. C – 66 Health and Social Services 2000-01 Analysis may continue on SSI\/SSP if they already were in the program as of Au- gust 22, 1996). As another example, about 17 percent of the medically needy persons in this category have incomes above the Medi-Cal limit and participate on a share-of-cost basis. The number of Medi-Cal eligibles in long-term care is small\u2014only 70,000 people, or 1.4 percent of the total caseload\u2014but because long-term care is very expensive, benefit costs for this group total $2.4 billion, or 15 percent of total Medi-Cal benefit costs. Almost 60 percent of the aged or disabled Medi-Cal eligibles also have health coverage under the federal Medicare Program. Medi-Cal gener- ally pays the Medicare premiums, deductibles, and any co-payments for these dual beneficiaries, and Medi-Cal pays for services not covered by Medicare, such as drugs and long-term care. Medi-Cal also provides some limited assistance to a small number of Medicare eligibles who have incomes somewhat higher than the medically needy standard. Families with Children. About 35 percent of all Medi-Cal eligibles are CalWORKs welfare recipients, who receive Medi-Cal coverage under the state’s Section 1931(b) family coverage category. Section 1931(b) family coverage was created by the 1996 federal welfare reform legislation to re- place the former AFDC-linked Medicaid eligibility category. Although CalWORKs recipients constitute the largest single group of Medi-Cal eli- gibles by far, they account for only 17 percent of total Medi-Cal benefit costs. This is because almost all CalWORKs recipients are children or able-bodied working-age adults, who generally are relatively healthy. Low-income fami- lies who are not in CalWORKs may enroll in Medi-Cal in the Section 1931(b) family coverage category or in the medically needy family category. Medi- Cal covers both the adults and the children in these families. As in CalWORKs, applicants for Medi-Cal family coverage in either the Section 1931(b) or medically needy categories have been restricted to single-parent or unemployed families with very low incomes. Currently (until March 2000), the income limit for families applying for Medi-Cal is about 70 percent of the federal poverty level (FPL) for Section 1931(b) coverage and about 80 percent of the FPL for medically needy coverage. However, once enrolled in Section 1931(b) coverage, families may work and remain on Medi-Cal at higher income levels (up to about 155 percent of the FPL). Families whose incomes are above the Section 1931(b) or medically needy limits, but who meet all of the other medically needy qualifications, may receive Medi-Cal benefits on a share-of-cost basis. Expansion of Section 1931(b) Family Coverage. Effective March 1, 2000, Chapter 146, Statutes of 1999 (AB 1170, Cedillo) expands Section 1931(b) eli- gibility to families with incomes up to 100 percent of the FPL, plus appli- cable income deductions. This expansion has the effect of broadening eligi- California Medical Assistance Program C – 67 Legislative Analyst’s Office bility for parents since children in families with incomes up to 250 percent of the FPL (plus income deductions) currently are eligible for either Medi-Cal child-only coverage or for coverage under the Healthy Families Program administered by the Managed Risk Medical Insurance Board. The expansion also will make working parents in two-parent fami- lies eligible for Medi-Cal if they meet the income and asset limits. At present, only families with single parents or unemployed parents (de- fined as working less than 100 hours per month) qualify for Section 1931(b) or medically needy family coverage (these limitations also apply to CalWORKs applicants and will continue for them). Women and Children. Medi-Cal includes a number of additional eli- gibility categories for pregnant women and for children. Medi-Cal cov- ers all health care services for poor pregnant women in the medically indigent category, which has the same income and asset limits and spend- down provisions as apply to medically needy families. However, preg- nancy-related care is covered with no share of cost and no limit on assets for women with family incomes up to 200 percent of the FPL (an annual income of $34,480 for a family of four, including a $90 monthly work expense disregard). The medically indigent category also covers children and young adults through age 20. Several special categories provide coverage without a share of cost or an asset limit to children in families with higher incomes\u2014 200 percent of poverty for infants, 133 percent of poverty for children ages 1 through 5, and 100 percent of poverty for children ages 6 through 18. Pregnant women and poverty-group children also may use a simplified mail-in application to apply for Medi-Cal or Healthy Families Program coverage (for children above the Medi-Cal income limits). Emergency-Only Medi-Cal. Noncitizens who are undocumented im- migrants, or are otherwise not qualified immigrants under federal law, may apply for Medi-Cal coverage in any of the regular categories. How- ever, benefits are restricted to emergency care (including labor and deliv- ery). Medi-Cal also provides prenatal care and long-term care to undocu- mented immigrants. These services, as well as nonemergency services for recent legal immigrants, do not qualify for federal funds and are sup- ported entirely by the General Fund. Most Medi-Cal Spending Is For the Elderly or Disabled The average cost per eligible for the aged and disabled Medi-Cal caseload (including long-term care) is much higher than the average cost per eligible for families and children on Medi-Cal. As a result, almost two-thirds of Medi-Cal spending is for the elderly and disabled, although C – 68 Health and Social Services 2000-01 Analysis they account for only about one-fourth of the total Medi-Cal caseload, as shown in Figure 2. Figure 2 Medi-Cal Most of Caseload Is Families\/Children Most Spending is for Elderly\/Disabled 1999-00 10 20 30 40 50 60 70 80% Elderly\/Disableda Families\/Children Percent of Spending Percent of Caseload a Includes long-term care. MEDI-CAL EXPENDITURES Rapid Spending Growth in the Current Year Figure 3 presents a summary of Medi-Cal General Fund expenditures in the DHS budget for the past, current, and budget years. The budget estimates that the General Fund share of Medi-Cal local assistance costs will increase by $738 million (9.9 percent) in 1999-00, com- pared with 1998-99. The bulk of this increase is for benefit costs, which will total an estimated $7.7 billion in 1999-00\u2014an increase of $662 mil- lion (9.4 percent). County administration costs increase by an estimated $82.1 million (24 percent). Our analysis of the Medi-Cal estimate indicates that increases in the cost and utilization of health care goods and services (including provider rate increases) account for the largest portion of the increase in benefit costs\u2014about $425 million. Caseload growth adds about $180 million of California Medical Assistance Program C – 69 Legislative Analyst’s Office General Fund cost, and other factors account for the remainder of the cost increase (about $57 million). Figure 3 Medi-Cal General Fund Budget Summarya Department of Health Services 1998-99 Through 2000-01 (Dollars in Millions) Actual 1998-99 Estimated 1999-00 Proposed 2000-01 Change From 1999-00 Amount Percent Support (state operations) $65.8 $69.5 $79.9 $10.4 15.0% Local Assistance Benefits $7,002.2 $7,664.7 $8,169.8 $505.1 6.6% County administration (eligibility) 339.7 421.7 451.0 29.2 6.9 Fiscal intermediaries (claims processing) 69.2 66.4 73.6 7.1 10.7 Hospital construction debt service 60.2 55.9 55.1 -0.9 -1.5 Subtotals, local assistance $7,471.2 $8,208.8 $8,749.4 $540.6 6.6% Totals $7,536.1 $8,278.2 $8,829.3 $551.0 6.7% Caseload (thousands of beneficiaries) 5,061 5,192 5,289 131 2.6% a Excludes General Fund Medi-Cal spending budgeted in other departments. 1999-00 Rate Increases. Roughly $140 million of the General Fund spending increase in the current year is for provider rate increases. Rate increases for nursing homes and other long-term care facilities total $49.3 million, most of which is to increase staffing ratios and raise pay levels for direct-care staff by 5 percent. Various rate increases for physi- cians, in-home nursing, optometrists, pharmacists, and emergency medi- cal transportation total $33 million. In addition, we estimate that rate in- creases approved by DHS or by CMAC for Medi-Cal managed care plans increase General Fund costs by roughly $55 million. Pharmacy and Certain Other Costs Growing Rapidly. The budget estimates that the General Fund cost of payments to pharmacy providers (for drugs and various types of medical supplies) will increase by $205 mil- lion, or 26 percent, in the current year. In addition, General Fund costs for the Other Services category in the Medi-Cal estimate, which includes C – 70 Health and Social Services 2000-01 Analysis durable medical equipment suppliers and adult day health services, will increase by an estimated $46 million (22 percent), compared with 1998-99. Both of these categories include some groups of providers that DHS has targeted for fraud prevention efforts. Caseload Increase Reflects Backlog of Eligibility Determinations. The budget estimates that caseload in the current year will increase by 132,000 eligibles, or 2.6 percent. (The Governor’s Budget Summary states that caseload will grow by much less in the current year and then decline in 2000-01, but this reflects only the base caseload before adding the esti- mated caseload increase from recently-enacted and proposed eligibility expansions.) The 2.6 percent caseload increase is primarily related to two factors. First, the caseload continues to be inflated by continued delays in deter- mining the Medi-Cal eligibility of former CalWORKs welfare recipients. These are individuals who were automatically continued on Medi-Cal since 1998 pending the development of Section 1931(b) eligibility stan- dards by DHS and the implementation of the resulting complex stan- dards by county welfare departments. A backlog of more than 300,000 eligibility determinations built up, which the budget anticipates will not be eliminated until late 2000-01. By then, the budget estimates that half of the backlogged caseload will be dropped from the Medi-Cal rolls due to a lack of response by (or inability to locate) beneficiaries or due to a deter- mination of ineligibility. The second factor increasing the caseload is the expansion of Section 1931(b) eligibility enacted as part of the 1999-00 budget. This expansion will take effect in March 2000, increasing the average caseload for the current year by 83,000. Also, contributing to the growth in caseload costs is a moderate growth in the number of disabled SSI\/SSP recipients. Al- though the size of this caseload increase is modest (about 19,000 eligibles or 2.6 percent), it results in a disproportionate cost increase due to the relatively greater health care needs of this group. Reduction in State DSH Payment Takeout. The 1999-00 budget re- duced by $30 million the portion of county matching funds for DSH hos- pital payments that the state diverts to offset General Fund Medi-Cal costs. This state takeout now has been gradually reduced from $239.8 mil- lion in 1995-96 to a current level of $84.8 million. County Administration. The General Fund share of county adminis- tration costs for eligibility determinations, outreach, and related activi- ties increases by $82.1 million, or 24 percent. The large increase results from rapid growth in the nonwelfare caseload. The county administra- tion costs budgeted in Medi-Cal exclude (with some minor exceptions) eligibility determination costs for welfare recipients because those costs California Medical Assistance Program C – 71 Legislative Analyst’s Office are budgeted elsewhere or not paid by the state. Eligibility determination costs for CalWORKs recipients are included in the DSS’ budget for the CalWORKs program, and the federal government performs SSI\/SSP eli- gibility determinations. The rapid increase in the nonwelfare caseload reflects both ongoing caseload growth and a shift of Medi-Cal eligibles to nonaided categories as the CalWORKs welfare population declines. $569 Million General Fund Deficiency in 1999-00 The 1999-00 Budget Act anticipated some of the ongoing Medi-Cal cost increase and provided funding for legislatively approved rate in- creases, the expansion of Section 1931(b) family eligibility, and the reduc- tion in the DSH takeout. The Governor’s budget caseload estimate, how- ever, is substantially above the budget act estimate, and savings assumed from certain federal actions either did not occur or resulted in less than the budgeted amount of savings. Budget Estimates Caseload Will Increase Rather Than Decline. The 1999-00 Budget Act anticipated that total Medi-Cal caseload would decline by 193,000 eligibles (3.8 percent) in the current year compared with 1998-99. The Governor’s budget now estimates that caseload will increase by 132,000 (2.6 percent)\u2014a difference of 325,000 eligibles from the bud- get act estimate. This additional caseload increases Medi-Cal General Fund costs by roughly $250 million compared with the budget act estimate. In addition to continued delays in eliminating the backlog of eligibil- ity determinations for former CalWORKs recipients, two other factors also contribute to the additional caseload costs. First, the Governor’s bud- get estimates that the number of pregnant women and children enrolled in the poverty-level eligibility groups will be 48,000 above the budget act forecast. Second, the number of aged, blind or disabled Medi-Cal eligibles (including those in long-term care) has increased by about 12,000, com- pared with the budget act estimate. Although this portion of the caseload increase is relatively small, it adds about $55 million of General Fund cost due to the greater health care expenses of these groups. Savings from Federal Assumptions Fall Short. The 1999-00 Budget Act assumed that the federal government would make an upward ad- justment to the Federal Medical Assistance Percentage (FMAP) for Cali- fornia\u2014the federal matching rate for Medi-Cal expenditures\u2014in order to correct for an underestimate of the state’s population in the formula used to calculate the FMAP. The budget assumed a General Fund savings of $210 million in 1999-00 due to this adjustment. The federal govern- ment did not make the adjustment, however, so these savings will not occur. C – 72 Health and Social Services 2000-01 Analysis The budget also assumed federal approval, effective July 1, 1999, of a Medicaid waiver to provide 90 percent federal funding for previously state-funded family planning services for low-income persons not other- wise eligible for Medi-Cal. The waiver was not approved until Decem- ber 1, 1999, and was somewhat less comprehensive than anticipated. As a result, the budget estimates that General Fund spending will be $93.5 million more than the amount provided in the 1999-00 Budget Act. Unbudgeted 1999-00 Managed Care Rate Increases. Most of the cur- rent-year deficiency results from unbudgeted caseload and unrealized federal assumptions, as noted above. However, rate increases granted by the department to Medi-Cal managed care plans in the 12 counties that operate under the two-plan model add an additional $39.7 million of General Fund costs to the deficiency amount. Budget Year The Governor’s budget estimates that total General Fund spending for Medi-Cal local assistance (in the DHS budget) will be $8.7 billion in 2000-01, an increase of $541 million, or 6.6 percent, compared with esti- mated spending in the current year. The budget estimates that the Medi- Cal caseload will increase by 97,000 (1.9 percent) in the budget year to a total of almost 5.3 million average monthly eligibles\u2014about 15 percent of the state’s population. Most of the added spending is for Medi-Cal benefit costs, which are projected to increase by $505 million (6.6 percent) in 2000-01. Figure 4 shows the major components of the increase in ben- efit costs. Increased Cost and Utilization of Services\u2014$264.2 Million. Based on the budget’s projections, General Fund costs for Medi-Cal benefits will increase by about 3.4 percent in 2000-01 due to provider rate increases, cost increases for goods and services, and increased use of services by beneficiaries. The department attributes about two-thirds of this increase to spending on drugs. This includes price and utilization increases for existing drugs and for new drugs added to the Medi-Cal formulary. Medi- Cal buy-in payments for Medicare premiums also are increasing. Medi- Cal pays Medicare premiums for Medi-Cal enrollees who also are eli- gible for Medicare (dual eligibles) in order to obtain 100 percent federal funding for those services covered by Medicare. The budget estimates that the General Fund cost of these buy-in payments will increase by $36.2 million in 2000-01. The budget also projects a 30 percent increase ($9.9 million General Fund) in the use of adult day health care services, which the budget attributes to the effect of state start-up grants and the entry of for-profit providers into this market. California Medical Assistance Program C – 73 Legislative Analyst’s Office Figure 4 Medi-Cal Benefits Major General Fund Spending Changes Governor’s Budget 2000-01 (In Millions) Increased Price and Utilization of Services $264.2 Increased pharmacy costs 180.0 Increased cost for Medicare premiums 36.2 Additional 5 percent long-term care wage pass-through 32.5 Full-year cost of 1999-00 increase in long-term care staffing ratio 17.1 Expanded use of adult day health care 9.9 Expanded family planning services authorized in 1999-00 budget 7.3 Increase in pharmacist dispensing fee (Chapter 190, Statutes of 1999 [SB 651, Burton]) 3.3 Increased savings from antifraud activities -9.9 Other -12.2 Cost of Increased Caseload $137.7 Full-year impact of Section 1931(b) expansion 81.9 Increase in ongoing disabled caseload 68.6 Expanded eligibility for aged, blind, and disabled 4.7 Other -17.3 Pass-Through Funding for Other Departments $95.6 Short-Doyle Mental Health Early and Periodic Screening, Diagnosis and Treatment services $43.1 State mental hospitals and developmental centers $24.8 Regional center and community-based developmental services 27.7 Changes in Financing, Payments, and Recoveries $7.6 One-time recoupment in 1999-00 of past hospital overpayments 54.2 Reduction in federal matching rate 51.6 Reduce state disproportionate share hospital takeout\/ increase physician rates 30.0 Full-year federal funding in 2000-01 for family planning waiver -66.3 One-time cost in 1999-00 for federal disallowance of past charges for institutions for mental diseases -43.9 Other -17.9 Total $505.1 C – 74 Health and Social Services 2000-01 Analysis The budget proposes to continue funding ancillary services to pa- tients in institutions for mental diseases (IMDs) through 2000-01 at a Gen- eral Fund cost of $12.5 million. The 1999-00 budget continued funding for these services on a state-only basis for 1999-00 after the federal gov- ernment determined that they did not qualify for Medicaid funding. Ab- sent this state program, county indigent health care systems would be- come responsible for these services. Several new budget proposals also contribute to the projected General Fund spending changes: Additional 5 Percent Long-Term Care Employee Pass-Through ($32.4 Million Cost). This proposal is part of the Governor’s Ag- ing with Dignity Initiative. It provides an additional increase in Medi-Cal rates for long-term care facilities in order to provide a 5 percent pay and benefit increase for caregivers. (We discuss this proposal in our analysis of the Aging with Dignity Initiative ear- lier in this section.) Modest Savings from Staffing Increases for Fraud Prevention and Enforcement ($9.9 Million Savings Increase). In the current year, DHS received 41 additional positions to enhance its Medi-Cal fraud detection, prevention, and enforcement activities. The Governor’s Medi-Cal Fraud and Fiscal Integrity Initiative in the 2000-01 budget requests an additional 255 positions related to this effort, at a cost of $26.2 million ($10 million General Fund). (We discuss these staffing proposals in our analysis of the department’s state operations budget request.) General Fund sav- ings from reduced Medi-Cal fraud as a result of the 41 positions added in the current year will increase by $3.9 million according to the budget estimate (from $2.3 million in 1999-00 to $6.2 mil- lion in 2000-01). The budget also estimates that General Fund savings from the 255 additional staff requested for 2000-01 will be $6 million, which would grow in future years after the new staff is trained and becomes more experienced. Continuation of State Drug Contracting Program. The budget proposes legislation to make the existing state drug contracting program permanent. Under existing law, the program sunsets on January 1, 2001, which the budget estimates would result in a General Fund cost of $36.3 million in 2000-01 (half the full-year amount) because of the loss of supplemental drug rebates that the state receives under the program. The budget also indicates that the state Secretary for Health and Human Services will con- vene a task force to develop options for better controlling Medi- Cal drug expenditures that may be presented in the May revi- sion to the Governor’s budget. California Medical Assistance Program C – 75 Legislative Analyst’s Office Caseload Increases\u2014$137.7 million. The largest caseload-related cost increase ($81.9 million General Fund) is for the expansion of Section 1931(b) family coverage to applicants in working families with incomes up to the poverty level. The budget estimates that this eligibility expan- sion will add 247,000 average monthly eligibles to the Medi-Cal caseload in 2000-01. Because this expansion begins in March 2000, the cost in the current year is one-third of the full-year cost budgeted in 2000-01. The budget also projects an increase of about 18,500 disabled Medi- Cal eligibles due to ongoing caseload trends. Although this caseload in- crease is modest, the relatively high healthcare costs of this group result in an added General Fund cost of about $69 million. In addition, the bud- get includes the following two eligibility expansions for the aged, blind, or disabled (one of which was previously enacted by the Legislature): Expansion of No-Cost Medi-Cal to 100 Percent of Poverty for Aged, Blind, or Disabled ($2.4 Million Cost). As part of the Governor’s Aging with Dignity Initiative, this proposal would eliminate the share of cost for aged, blind, or disabled single per- sons with incomes between 90 percent and 100 percent of the FPL, effective January 2001. Currently, single persons must spend down their income to 90 percent of the FPL before Medi-Cal will begin to pay for their health care costs (couples currently have no share of cost with incomes up to 104 percent of the FPL). The budget estimates that this change will affect on average of 13,000 individuals, about half of whom currently are counted in the Medi-Cal caseload. (We discuss this proposal in our analysis of the Aging with Dignity Initiative earlier in this section.) Medi-Cal Coverage for the Working Disabled ($4.8 Million Cost). Chapter 820, Statutes of 1999 (AB 155, Migden) allows disabled working persons with incomes up to 250 percent of the FPL to obtain Medi-Cal coverage. In order to participate, individuals are required to pay sliding-scale premiums ranging from $20 to $250 per month. The budget estimates that about 7,000 disabled per- sons will participate, including some current SSI\/SSP recipients who will now be able to work without losing their health cover- age. The budget estimates that the annual General Fund cost of this expansion will grow to about $6.7 million after 2000-01 as participation phases in. Pass-Through Funding Increases for Other Departments\/Programs\u2014 $95.6 Million. The DHS Medi-Cal budget includes increases in General Fund costs for some services provided to Medi-Cal beneficiaries in pro- grams operated or supervised by DMH or DDS. These services include state hospitals and developmental centers operated by DMH and DDS, C – 76 Health and Social Services 2000-01 Analysis respectively; and services to developmentally disabled Medi-Cal benefi- ciaries living in the community who are served by regional centers throughout the state. The budget also includes an increase of $43.1 mil- lion (45 percent) for mental health Early and Periodic Screening, Diagno- sis, and Treatment services to children provided through county mental health programs. (We discussed the rapid rate of spending increase for this program last year in our Analysis of the 1999-00 Budget Bill [please see page C-85 of that Analysis].) Changes to Financing, Payments, and Recoveries\u2014$7.6 Million. The relatively small spending increase in this category results from a number of larger offsetting adjustments. Improving personal income in Califor- nia results in a slight reduction in the FMAP pursuant to the formula for determining the federal matching rate. The FMAP reduction increases the General Fund share of Medi-Cal costs by $51.6 million in 2000-01. In addition, budget-year adjustments delete a one-time gain in 1999-00 from recoveries of past Medi-Cal crossover overpayments to hospitals for services to dual (Medi-Cal\/Medicare) beneficiaries and a one-time 1999-00 cost to repay the federal government for disallowed past IMD charges. Finally, the budget estimates increased General Fund savings of $66.3 mil- lion in 2000-01 because the federal family planning waiver will provide enhanced federal funding for the full year. In addition, the budget proposes a further reduction in the state’s DSH takeout of up to $30 million, with the benefit to be shared among both public and private DSH hospitals. The budget also indicates that as an alternative to reducing the DSH takeout by the full $30 million the takeout reduction could be a lesser amount, with the difference used to increase Medi-Cal rates paid to emergency physicians and on-call spe- cialists. MEDI-CAL COST AND CASELOAD TRENDS Figure 5 illustrates how Medi-Cal caseload and per-eligible costs have changed since 1990-91, along with projections of caseload and costs per eligible for 1999-00 and 2000-01 based on the budget estimates. Budget Forecasts Return to Growing Caseloads and Costs After earlier dips in the growth of costs and caseloads, the budget forecasts that both the cost of benefits per eligible and the number of eligibles will grow steadily through the current year and 2000-01. Caseload. The number of persons enrolled in Medi-Cal grew rapidly in the early 1990’s\u2014caseload growth in 1991-92 was almost 14 percent California Medical Assistance Program C – 77 Legislative Analyst’s Office over the prior year. Between 1990-91 and 1995-96, the Medi-Cal average monthly caseload grew from 4.1 million eligibles to 5.5 million. The rapid growth resulted from the ongoing effects of Medicaid eligibility expan- sions enacted in the late 1980s and from increased welfare caseloads as- sociated with the severe recession that California experienced at that time. Figure 5 Medi-Cal Caseload Varies But Cost Per Eligible Grows 1990-91 Through 2000-01 Eligibles In Millions Eligibles Cost Per Eligiblea 3 4 5 6 90-91 92-93 94-95 96-97 98-99 00-01 2,000 2,500 3,000 $3,500 a Exlcudes pass-through funding for programs outside of the Department of Health Services. In the mid-1990s, the Medi-Cal caseload leveled off, and then dropped by almost 300,000 eligibles (5.4 percent) in 1997-98. Again, the change in the Medi-Cal caseload roughly paralleled changes in the CalWORKs welfare caseload, which also began a sharp drop at that time in response to the turnaround in the state’s economy and greater emphasis on mov- ing families from welfare to work in the wake of enactment of state and federal welfare reform legislation. Another factor contributing to declin- ing welfare and Medi-Cal caseloads probably was reluctance among im- migrant Californians to make use of public benefits because of concerns about whether such use might adversely affect their ability to naturalize or to sponsor the immigration of family members in the future. During 1997-98 and 1998-99, the Medi-Cal caseload has been rela- tively flat while the CalWORKs caseload has continued to decline. The Medi-Cal caseload has not declined primarily because of the backlog of C – 78 Health and Social Services 2000-01 Analysis eligibility determinations for former CalWORKs recipients that resulted from the delay in implementation of Section 1931(b) Medi-Cal eligibility by DHS and the counties. In the current year and 2000-01, the budget estimates that the Medi-Cal caseload will grow once more, primarily be- cause of the expansion of Section 1931(b) family eligibility enacted as part of the 1999-00 budget. Cost Per Eligible. While the caseload has gone up and down, the cost trend has been almost steadily upward. The average annual growth rate of the estimated cost of benefits per eligible (excluding pass-through fund- ing to other departments and local governments) is 4 percent, which is twice the rate of general inflation during this period, as measured by the Gross Domestic Product deflator. The temporary dip in the cost-per-eligible that occurred in 1994-95 and 1995-96 was partly the result of a change in the caseload mix, rather than an underlying drop in health care costs. This is because the rapid increase in the number of families on welfare (whose health care costs are relatively low) temporarily reduced the proportion of aged and disabled persons (relatively high-cost groups) in the Medi-Cal caseload, and this change in the mix tended to reduce the average cost per eligible. As the CalWORKs welfare caseload subsequently fell, the elderly and disabled share of the Medi-Cal caseload returned to its earlier level of about 26 per- cent, and the cost per eligible resumed its growth. In 1998-99, the estimated cost per eligible for DHS Medi-Cal benefits increased by 7.6 percent. Based on the Governor’s budget, theses costs will increase by 5.5 percent in the current year and 4.7 percent in the bud- get year. The apparent slowing of the growth rate in 2000-01, however, results from the failure to include in the estimate funding for likely rate increases for nursing homes and managed care plans. Including an al- lowance for these would increase the 2000-01 growth rate to almost the current-year rate of 5.5 percent. MEDI-CAL CASELOAD AND ELIGIBILITY Majority of Medi-Cal Families and Children Are Not On Welfare In July 1999, as shown in Figure 6, the Medi-Cal Program reached a milestone. For the first time in the program’s history, welfare recipients accounted for less than half of the families (including pregnant women) and children enrolled in Medi-Cal. Medi-Cal began as a program to pro- vide health care to welfare recipients. Most of the elderly and disabled persons in Medi-Cal continue to be welfare (SSI\/SSP) recipients, but the combination of declining family welfare (CalWORKs) caseloads, ex- California Medical Assistance Program C – 79 Legislative Analyst’s Office panded eligibility for families and children who are not on welfare, and stronger outreach efforts has reduced the CalWORKs share of families and children in Medi-Cal to less than half. Figure 6 Most Medi-Cal Families and Children No Longer on Welfare Monthly Eligibles (In Thousands) 1,300 1,800 2,300 2,800 3,300 3,800 Nov 98 Feb 99 May 99 Aug 99 Nov 99 Welfare Families Total Families\/Children Nonwelfare Families\/Children Caseload Estimate Probably Too High But Clouded by Uncertainty We find that the budget’s estimate for the Medi-Cal caseload of families and children is likely to be too high, based on current trends. General Fund caseload savings could total as much as $150 million through 2000-01. However, a number of factors currently add considerable uncertainty to Medi-Cal caseload projections. Accordingly, we will monitor caseload trends and recommend appropriate adjustments at the time of the May revision to the Governor’s budget. Figure 7 (see next page) illustrates the budget’s forecast for the Medi- Cal caseload in the current year and 2000-01. Estimated caseload growth for the aged and disabled is 2.2 percent in the current year and 2.4 per- cent in 2000-01, with most of the growth in the disabled portion of the caseload. The budget forecast for the aged and disabled appears reason- able. It includes the effects of the eligibility expansions for this group (discussed earlier) and is in line with recent caseload trends. C – 80 Health and Social Services 2000-01 Analysis Figure 7 Medi-Cal Caseload Governor’s Budget Estimate 1998-99 through 2000-01 (Eligibles in Thousands) 1998-99 1999-00 Change from 1998-99 2000-01 Change From 1999-00 Amount Percent Amount Percent Families\/Children 3,741 3,844 103 2.8% 3,909 65 1.7% CalWORKsa 2,025 1,773 -252 -12.4 1,686 -87 -4.9 Nonwelfare familiesb 1,127 1,419 292 25.9 1,546 127 8.9 Pregnant women 157 175 18 11.7 182 7 4.1 Children 433 478 45 10.3 495 17 3.6 Aged\/Disabled 1,320 1,348 28 2.2% 1,380 32 2.4% Aged 489 497 8 1.6 506 9 1.9 Disabled 831 851 21 2.5 874 22 2.6 Totals 5,061 5,192 132 2.6% 5,289 97 1.9% a California Work Opportunity and Responsibility to Kids program. b Includes former CalWORKs recipients temporarily continued in the \”Edwards\” category. As Figure 7 shows, the majority of the forecasted Medi-Cal caseload growth consists of families and children. The budget estimates that in- creasing caseloads of nonwelfare families and children will more than offset declining CalWORKs caseload. This will result in a net increase of 103,000 eligibles in the current year compared with 1998-99, and an addi- tional increase of 65,000 in 2000-01. As noted earlier, the forecast includes the effect of the Section 1931(b) eligibility expansion to be implemented on March 1, 2000, which the budget estimates will add 246,000 persons to the Medi-Cal rolls. The estimated average monthly caseload for the full year in 1999-00 increases by only 82,000 because the expansion will be in place for only one-third of the current year. The budget estimates an average monthly ongoing caseload of 3,758,000 family and child eligibles in the current year (excluding the 1931[b] eligibility expansion). Based on our review, we believe that this estimate is likely to be overstated for two reasons. First, the actual caseload for November 1999 was 3,688,000 (70,000 below the estimate for the year). Second, Los Angeles County indicates that it is rapidly clearing its large backlog of former CalWORKs recipients. Based on preliminary results of California Medical Assistance Program C – 81 Legislative Analyst’s Office this process, the ongoing caseload in Los Angeles County could decline by as much as 80,000 by March 2000. Based on the declining statewide caseload trend for families and chil- dren and the potential additional reduction in Los Angeles County, the budget caseload estimate for the current year could be as much as 150,000 too high. If this caseload reduction carries through the budget year as well, then the combined two-year General Fund savings could be on the order of $150 million. While we believe that some caseload savings are likely, we do not recommend a specific adjustment at this time because a number of fac- tors currently add an unusual degree of uncertainty to caseload projec- tions. These factors include (1) the recent shift to a predominantly nonwelfare caseload of families and children, (2) continued delays and difficulties in the implementation of Section 1931(b) eligibility determi- nation by the counties, (3) the actual magnitude and timing of the caseload reductions resulting from the backlog elimination in Los Angeles County and elsewhere, and (4) the actual caseload effect of the scheduled Section 1931(b) eligibility expansion. Accordingly, we will continue to monitor Medi-Cal caseload trends and recommend appropriate adjustments at the time of the May revision to the Governor’s budget. Medi-Cal Deficiency Legislative Notification Not Provided for Medi-Cal Deficiency We find that the Department of Finance (DOF) did not provide the Legislature with notification of the 1999-00 Medi-Cal deficiency as required by Section 27.00 of the 1999-00 Budget Act. In addition, the administration’s proposed Medi-Cal deficiency includes some spending that does not appear to meet the requirements of Section 27.00. We recommend that the DOF report at budget hearings on how it intends to meet the requirements of Section 27.00 with respect to future deficiencies. The Governor’s budget indicates that DHS will incur a deficiency of $562.5 million in the current year, essentially all for the Medi-Cal Pro- gram. In other words, DHS expects to spend $562.5 million more in the current year than the Legislature has appropriated. This spring the DOF will ask the Legislature to provide the additional funding, presumably as part of the annual omnibus deficiency bill. Section 27.00 Requirements. Section 27.00 of the 1999-00 Budget Act (as in each annual budget act) generally requires the Director of DOF to notify the chairperson of the Joint Legislative Budget Committee and the chairper- sons of the fiscal committees in the Assembly and Senate of any deficiency C – 82 Health and Social Services 2000-01 Analysis spending request for more than $500,000 within 15 days of receiving that request from a department or other entity. Section 27.00 also requires the Director to notify the chairpersons if he or she intends to approve the re- quest, and provides a 30-day waiting period to allow for legislative consid- eration or comment prior to approval of the deficiency request. The DOF, however, did not notify the Legislature of either the DHS request for the Medi-Cal deficiency or the administration’s approval of the deficiency. Medi-Cal deficiency spending that results from caseload changes is exempt from the Section 27.00 notification requirement. As discussed ear- lier in this analysis, we estimate that the caseload-related portion of the deficiency is about $250 million. The remainder of the deficiency, about $313 million, is not covered by the caseload exemption. The DOF contends that including the Medi-Cal deficiency in the cur- rent-year spending estimate in the Governor’s budget meets the require- ments of Section 27.00. We disagree. The notification requirements in Section 27.00 are intended to (1) highlight individual deficiencies for legislative re- view and (2) address how they meet the statutory requirements for deficiency spending\u2014namely that the added spending must be both unanticipated and confined to cases of actual necessity. Simply including deficiencies in budget estimates accomplishes neither of these purposes. Most of the proposed Medi-Cal deficiency would meet the tests of Sec- tion 27.00, according to our review, because it is needed to compensate for shortfalls in federal funds over which DHS had no control and which must be backfilled in order to maintain existing Medi-Cal services. Nevertheless, the administration’s expectation that this spending would be consistent with Section 27.00 does not exempt it from the section’s notification requirements. Medi-Cal Deficiency Includes Some Discretionary Spending. How- ever, the Medi-Cal deficiency also includes some spending that does not appear to meet the requirements of Section 27.00\u2014specifically, the cost of managed care rate increases that were not funded in the budget, but were subsequently granted by DHS. These rate increases, which we discuss in more detail in the following issue, are discretionary. Since DHS reviews managed care rates on a regular schedule, these events are hardly unan- ticipated, and the department has not made a case that the specific rate increases granted this year were compelled by necessity. The department made policy choices in deciding on rate increases without legislative re- view. For example, DHS chose to freeze the rates of two plans that would otherwise have received rate reductions under the methodology employed by the department. The lack of timely notification, however, limits the Legislature’s options because health plans have used the administration’s approved rates in their budgeting for the current year and are now re- ceiving these funds. California Medical Assistance Program C – 83 Legislative Analyst’s Office The authority to incur deficiencies represents a substantial legisla- tive delegation of spending discretion to the executive branch. As such, the administration’s use of this authority warrants careful monitoring and oversight by the Legislature. Consequently, we recommend that the DOF report at budget hearings on how it intends to comply with the re- quirements of Section 27.00 for future deficiencies. In the General Gov- ernment section of this analysis, we also identify a number of broader, budget-wide issues concerning the application of Section 27.00, and we withhold recommendation on this provision for 2000-01, pending resolu- tion of those issues. Departments Should Identify Funding Needed for Potential Managed Care Rate Increases We recommend that the Departments of Finance and Health Services report at budget hearings on (1) their plans for considering Medi-Cal managed care rate increases in 2000-01 and (2) the potential amount of additional funding needed in 2000-01 for managed care rate increases. Managed Care Rate Increases in the Current Year. As discussed above, a portion of the 1999-00 Medi-Cal deficiency is for rate increases that DHS has granted to Medi-Cal managed care plans. In October 1999, DOF ap- proved rate increases proposed by DHS for Medi-Cal managed care plans operating in the 12 counties under the two-plan model (primarily those counties with the largest Medi-Cal caseloads). These rate increases aver- age 6.5 percent and were effective October 1, 1999. The General Fund cost for the 1999-00 rate increases in the two-plan counties is $42.3 million. A small portion of this amount represents an allocation of funding appro- priated in the 1999-00 Budget Act for specific provider rate increases (for surgeons, for example). However, most of the cost of the rate increase\u2014 about $39.7 million\u2014was not budgeted and contributes to the large Medi- Cal deficiency in the current year. In addition to the two-plan rate in- creases, other rate increases were granted to the five county-organized health systems and to health plans in the two counties operating under the geographic managed care model (Sacramento and San Diego). How- ever, the amounts of these rate increases are negotiated by CMAC and therefore are confidential. Potential Budget-Year Costs. The budget request for 2000-01 does not include any additional funding for Medi-Cal managed care rate in- creases, although increases typically have been granted every year. Ex- cluding these costs results in an underbudgeting bias in the Medi-Cal Program. Furthermore, as discussed in the issue above, the deficiency process is not an appropriate funding mechanism for these rate increases. Thus, we recommend that DHS and DOF report at budget hearings on C – 84 Health and Social Services 2000-01 Analysis (1) their plans for considering Medi-Cal managed care rate increases in the 2000-01 budget and (2) the potential amount needed to provide for these rate increases. Other Issues Antifraud Efforts Starting to Pay Off We recommend General Fund reductions of $6.8 million in 1999-00 and $19.1 million in 2000-01 because recent payment data indicate that savings from the department’s efforts to prevent Medi-Cal provider fraud are greater than the savings anticipated in the budget. (Reduce Item 4260- 101-0001 by $19,088,000.) Background. The department’s antifraud efforts initially have focused on the following four types of providers of outpatient medical equip- ment, supplies, or services: Suppliers of durable medical equipment (DME), such as walk- ers, wheelchairs, special beds, or breathing equipment. Providers of prosthetic and orthotic (P&O) services and items, such as artificial limbs or corrective braces. Independent (nonchain) pharmacies. Providers of nonemergency medical transportation. Recent rapid increases in the number of providers and claims among these groups, which had no apparent relationship to caseload or program changes, were potential indicators of an upswing in fraudulent activity. The department\u2014along with the State Controller’s Office, the Bureau of Medi-Cal Fraud in the Department of Justice, and the Federal Bureau of Investigation\u2014began to focus intensified investigative and enforcement activities on these provider groups in 1998-99. The 1999-00 Budget Act and budget trailer bill legislation provided DHS with additional antifraud resources\u2014specifically, funding for 41 positions and enhanced statutory authority to fight Medi-Cal provider fraud. In August 1999, DHS implemented a provider review and reenrollment process for all of the providers in the targeted groups. Pro- viders were mailed letters and asked whether they wished to continue to participate in the Medi-Cal Program. Those who responded positively were required to provide additional information and were visited by field staff of the DHS Medi-Cal Fraud Prevention Bureau to check for indica- tors of fraudulent activities. A significant number of providers did not respond or did not seek continued Medi-Cal participation and were re- California Medical Assistance Program C – 85 Legislative Analyst’s Office moved from the Medi-Cal provider rolls, including 31 percent of DME providers and 18 percent of P&O providers. Budget Understates Current-Year Savings. Medi-Cal payment data through November 1999 indicate that these efforts have begun to pay off. Claims by, and payments to, DME and P&O providers have declined sig- nificantly compared with 1998-99. Payments per processing day are down by 9.7 percent and 26 percent for DME and P&O providers, respectively. Based on this recent payment data, we estimate that the reduction in total payments to these two provider groups in 1999-00 will be $18.4 million ($8.9 million General Fund) compared with 1998-99. This estimate of General Fund savings for the current year is $6.8 million more than the Governor’s budget estimate of current-year savings that will result from antifraud efforts for all types of Medi-Cal providers (excluding family planning providers). Projected Budget-Year Savings Also Too Low. The budget estimates that savings in 2000-01 from the positions added in the current year will grow by 270 percent over the current year, as the additional staff are hired and trained and as antifraud activities affect more types of providers. Using this growth factor in conjunction with our estimate of current-year savings, we estimate that savings in 2000-01 due to the ongoing efforts of the positions added in the current year will exceed the budget savings estimate for 2000-01 by $19.1 million (General Fund). Accordingly, we recommend a General Fund reduction of $19.1 million in Medi-Cal ex- penditures for 2000-01. Savings Could Be Much Larger. Savings potentially could be much larger than our estimate because our current-year estimate is conserva- tive. We note, in this respect, that the current-year data so far do not re- flect savings from antifraud efforts related to pharmacies, clinical labora- tories, and medical transportation. Payments to these three types of pro- viders total about $1.5 billion\u2014more than five times greater than pay- ments to DME and P&O providers combined. Thus, as the department’s antifraud activities become more fully implemented and affect these ad- ditional types of providers, savings should increase significantly. Reduce DSH Takeout Or Increase Rates? We withhold recommendation on a proposed General Fund augmentation of $30 million to reduce the state takeout from disproportionate share hospital funding and\/or to increase Medi-Cal provider rates, pending receipt of a specific proposal for the use of the funds. C – 86 Health and Social Services 2000-01 Analysis The budget proposes a General Fund augmentation of $30 million in 2000-01 to reduce the state takeout from intergovernmental transfers used to finance hospital DSH payments. Alternatively, the budget indi- cates that a portion of the funds could be used to increase Medi-Cal rates for emergency room physicians and on-call specialists. Counties that operate hospitals, the University of California, and hospital districts make these intergovernmental transfers to the state un- der formulas in state law. These transfers, which total about $1 billion, provide the state match to draw down federal funds which are paid to both public and private hospitals in California serving a disproportion- ate share of low-income patients. The state takeout, currently $84.8 mil- lion, is the amount of these transfers that the state retains to offset Gen- eral Fund Medi-Cal costs. In effect, the state takeout is an extra fee on top of the usual nonfederal match that the transferring enmities pay in order to receive their federal DSH funds. Reducing the DSH takeout less- ens the amount of intergovernmental transfers that these entities must provide to the state in order to receive their federal DSH allotment. At present, the administrations’s proposal is unclear regarding how much of the proposed $30 million augmentation would be used to re- duce the takeout versus increasing provider rates; nor does the budget specify how the takeout reduction would be allocated or how the poten- tial rate increases would be structured. Accordingly, we withhold recom- mendation on the $30 million augmentation, pending receipt of a specific proposal that addresses these issues. Federal Government Will Pay for Hepatitis A Vaccine We recommend a General Fund reduction of $2.9 million in 1999-00 and $4.6 million in 2000-01 (and an equivalent increase in federal funds) because the state will receive Hepatitis A vaccine for children enrolled in Medi-Cal at no state cost through the federal Vaccines for Children Program. (Reduce Item 4260-101-0001 by $4,588,000.) The budget requests $12.6 million ($7.7 million General Fund) in 2000-01 for Hepatitis A vaccinations for children. In October 1999, the Advisory Committee on Immunization Practices of the federal Centers for Disease Control recommended that children in California receive the Hepatitis A vaccine. The budget request assumes that the state will pur- chase the Hepatitis A vaccine through the Medi-Cal Program at the usual state\/federal cost-sharing ratio. However, Hepatitis A vaccine now is cov- ered by the federal Vaccines for Children Program, which pays for the entire cost of vaccines for children who are enrolled in Medi-Cal or who are uninsured. Only the fee paid to health providers for administering the vaccinations ($7.50 per vaccination) will require state matching funds. California Medical Assistance Program C – 87 Legislative Analyst’s Office About one-fourth of the amount requested in the budget is for the cost of paying providers for vaccine administration. Based on cost factors provided by DHS, we estimate that the General Fund savings, compared with the budget request, will be $4.6 million in 2000-01. Accordingly, we recommend a General Fund reduction of this amount. We also note that federal funding for Hepatitis A vaccines will result in a current-year savings of $2.9 million because this vaccine has been provided through Medi-Cal since January 1, 2000. Panorama View Is Nice, But It’s Not Enough We recommend that the department report during budget hearings regarding when and how it intends to provide certain legislative committees with access to the DataScan component of the Medi-Cal Management Information System\/Decision Support System, as required by existing law. The department currently is implementing the final phase of its new Medi-Cal Management Information System\/Decision Support System (MIS\/DSS). The MIS\/DSS is a comprehensive information system that (1) contains comprehensive detailed data on the use of services, provider payments, and eligibility, and (2) organizes the large amounts of data that it contains into a database with software that provides both standard re- ports and answers to individual inquiries. Potentially, the MIS\/DSS can be an extremely powerful tool in understanding how Medi-Cal is used, determining the effectiveness of different treatment approaches, and de- tecting patterns of fraud or abuse. The total cost of system development exceeds $40 million. The Medi-Cal MIS\/DSS data can be accessed in two ways. One is through Panorama View, which is a management information system that provides access to the data after they have been aggregated and com- piled in certain ways. For example, Panorama View can show how many prescriptions Medi-Cal pays for each month for all beneficiaries state- wide, or for certain subgroups, such as elderly Medi-Cal beneficiaries in Los Angeles County. Another way to access the data is through DataScan. This system can answer much more specific questions, such as how much of a particular drug Medi-Cal purchases. DataScan also has the ability to track courses of care in order to answer questions such as whether the use of a specific drug for a particular condition reduces the need for hospitalization. Existing law requires DHS to provide the fiscal and health policy com- mittees of the Legislature with access to both the management informa- tion system (Panorama View) and the ad hoc reporting system (Data Scan) C – 88 Health and Social Services 2000-01 Analysis with safeguards to protect patient privacy by the conclusion of Phase 3 of the MIS\/DSS. Although the department provided the designated legisla- tive committees with access to Panorama View during fall 1999, it has not yet provided the required access to the more powerful DataScan system even though both Phase 3 and Phase 4 of the project have been com- pleted. The department has not explained why the required access to the DataScan system has not been provided or when it will be provided. Accordingly, we recommend that the department report to the bud- get committees regarding when and how it intends to provide the desig- nated legislative committees with access to the DataScan component of the Medi-Cal MIS\/DSS information system. Public Health C – 89 Legislative Analyst’s Office PUBLIC HEALTH The Department of Health Services (DHS) delivers a broad range of public health programs. Some of these programs complement and sup- port the activities of local health agencies in controlling environmental hazards, preventing and controlling disease, and providing health ser- vices to populations who have special needs. Other programs are solely state-operated programs such as those that license health facilities. The Governor’s budget proposes $2 billion (all funds) for public health local assistance. This represents an increase of $79 million, or 4 percent, over estimated current-year expenditures. The budget proposes $349 mil- lion from the General Fund, which is a 7.1 percent decrease from current- year expenditures. The main reason for this decrease is the proposed sub- stitution of federal funds for General Fund support of the Community Challenge Grant Program. This program funds local community projects designed to reduce teen pregnancy. STATEWIDE IMMUNIZATION INFORMATION SYSTEM Since 1995, the DHS has been planning a statewide immunization information system (SIIS). This is an electronic record-keeping system designed to improve immunization levels, primarily among the state’s 3.2 million infants and children under the age of five. Under DHS’s model, the SIIS would consist of a central repository into which locally-developed registries would input immunization data. Local registries have been developing independently and in advance of the SIIS. While some county registries have received state support and are required to follow certain technical guidelines, other counties are de- veloping registries outside of state oversight. Many counties, moreover, do not have registries in development. Provider participation\u2014the submission of immunization data to the local registries\u2014is not required by state law and, therefore, the degree of such participation is uncertain. In this analysis, we address the issues C – 90 Health and Social Services 2000-01 Analysis raised by the department’s approach and recommend changes that, in our view, would move the state toward the implementation of an effec- tive statewide immunization information system. Why Does the State Need to Improve The Childhood Immunization Rate? Children need immunizations to protect them from dangerous child- hood diseases. If immunization rates drop significantly, these diseases resurface, such as in 1989 when a national measles outbreak and the sub- sequent death of 135 people were traced back to a decline in measles vac- cinations. In California, the measles epidemic resulted in over $31 mil- lion in direct medical and outbreak control costs. Immunizations are cost- effective: the federal Centers for Disease Control and Prevention recently reported that every dollar spent on a vaccination saves between $6 and $16 in direct medical costs, depending on the type of vaccine. Because immunizations can prevent debilitating and life-threatening diseases, the federal government’s goal is to increase childhood immuni- zation rates to 90 percent by the year 2000. In 1997 (the most recent year for which data are available), the national immunization rate for 19- to 35-month-olds was 76 percent. California’s rate was 74 percent. Lack of Information: A Barrier to Immunization. A child can fall be- hind in his or her immunizations for various reasons, such as barriers to access and cultural beliefs. However, much of underimmunization can be explained by a lack of information: providers often overestimate the percentage of their patients who are fully immunized, parents do not know their children’s immunization status, most providers do not remind their patients when an immunization appointment is due or missed, and pro- viders frequently do not have access to a child’s immunization history because of scattered records and lost immunization cards. Missed oppor- tunities to immunize are common and may be increasing due to parental and provider confusion about the growing number of recommended im- munizations and the complexity of vaccination schedules. (The number of vaccinations recommended by the age of two has increased from 3 in the 1950s to between 15 and 19 in 1999.) What Is an Immunization Registry And Why Is It Beneficial? Immunization Registries. Immunization registries are confidential, computerized information systems that contain information about im- munizations of children. Typically, children’s registry records are estab- lished at the time of their birth (often through a linkage with electronic Public Health C – 91 Legislative Analyst’s Office birth records) or at first contact with the health care system. If a registry includes all children in a given geographical area and all providers are reporting immunization information, it can provide a single data source for all community immunization participants, including parents, schools, health care providers, health plans, and public health departments. The value of creating an immunization registry statewide is that a child’s im- munization record can be updated and accessed regardless of the child’s mobility across counties and regions within the state. Benefits of Immunization Registries. The information available from registries provides several benefits. For example, immunization registries: Consolidate a child’s immunization data into one electronic record that any provider can access. Currently, the only central source of a child’s immunization history is a card that parents are re- sponsible for keeping. This is an unreliable tracking system be- cause parents often lose their cards or forget to bring them at the time of a visit to a health care provider. Generally, in such cases a provider must either delay the immunization until the card is retrieved, track down the patient’s records at every other pro- vider site the child has visited, or start the immunization process over again and potentially overimmunize the child. Produce reminders and recalls for immunizations that are due or overdue. Studies have shown that reminder\/recall systems can improve immunization rates substantially. Registries can elec- tronically alert providers when a client is due or overdue for an immunization, which means providers do not have to search their patient files in order to identify these clients for follow-up, and parents are more likely to be reminded of immunization appoint- ments. Facilitate compliance with immunization requirements related to school and day care enrollment and receipt of public assis- tance. Under current law, parents must present certification that their children’s immunizations are up-to-date in order to enroll them in child care centers, licensed family day care homes, and elementary schools. Similarly, California Work Opportunity and Responsibility to Kids program applicants must present this in- formation in order to qualify for grants. An immunization regis- try would expedite this verification process, improve quality as- surance, and eliminate enrollment delays because service pro- viders would be able to access these records on-line. Assist public health administrators in identifying under-immu- nized populations and county- and community-level immuniza- tion coverage rates. C – 92 Health and Social Services 2000-01 Analysis Facilitate the production of performance reports by managed care organizations. Most managed care organizations annually sub- mit Health Plan Employer Data and Information Set (HEDIS) data to the National Committee for Quality Assurance in order to re- main accredited. Childhood immunization coverage rates are one of the measures used in HEDIS. Key Assumptions in Assessing the Benefits of a Registry. The ben- efits of an immunization registry as described above do not happen auto- matically. Rather, they only occur if: Every child’s immunization record is entered into the registry database. Every provider who administers immunizations participates in the registry. As we discuss below, the registry system currently being developed by the state will not ensure that either one of these conditions will be met. What Is the State’s Current Approach to Registry Development? Background. In 1993, the federal government adopted a goal of de- veloping a national electronic immunization tracking system. Although there is no federal requirement to do so, all 50 states have begun develop- ment and implementation of statewide tracking systems. Beginning in 1994, the federal government began allowing state and local governments to include immunization registries as one of the activities for which fed- eral immunization grants could be used. Of the $139 million that California’s state and local governments have received from this grant since 1995-96, $875,000 has been appropriated at the state level for the development of the SIIS. The DHS does not know how much of the local portion of the federal grant has been spent on local registry development. In addition, the Legislature has appropriated a total of $17.5 million from the General Fund since 1995-96 to fund the efforts of selected local health departments that opted to develop local immunization registries. In a recently submitted Feasibility Study Report (FSR), the department proposes to build a central statewide hub to which local immunization registries would voluntarily link. Due to a 1999 executive order to deny approval of any technical project proposal until the year 2000 transition is successfully completed, the department has been unable to advance its FSR through the state’s technical review process. Public Health C – 93 Legislative Analyst’s Office Need to Change the Department’s Procurement Strategy We recommend the adoption of budget bill language requiring the Department of Health Services to submit an Alternative Procurement Business Justification for the statewide immunization system, in which the department’s procurement strategy would be based on desired program outcomes rather than technical specifications. Background. In 1995, the Legislature enacted Chapter 314 (AB 254, Alpert), which authorized local health officers to operate immunization information systems in conjunction with DHS. In addition, the 1995-96 Budget Act included an initial appropriation of General Fund monies to DHS for the development of a state immunization registry, with most of the funds designated for the local level . . . to develop a statewide net- work of local immunization tracking systems. Between 1995-96 and 1999-00, General Fund appropriations for support of local registry devel- opment totaled $17.5 million, or $3.5 million annually. The budget pro- poses to appropriate $3.5 million from the General Fund in 2000-01 for further local registry development. Require DHS to Complete an Alternative Procurement Business Jus- tification (APBJ). We believe that the department’s recently released FSR for a central state hub for the SIIS is too prescriptive. This is because it specifies the technical solutions needed to accomplish the desired busi- ness functions of the registry, rather than allowing potential vendors to submit their proposed solutions. As we have recommended for other state system procurements, the department should not prescribe a technical solution during the procurement process, but instead should specify the objectives of the system. In other words, the department should state what it wants from the project and let the vendor community propose how it is to be accomplished. Such an approach has the advantage of not constrain- ing vendors in proposing solutions, and places the burden of success on the vendor who contractually agrees that its solution could resolve the business problem. Typically in this type of procurement, the department submits an APBJ prior to the FSR. The APBJ includes a description of the problem or op- portunity prompting the request; a presentation of the current business process that is the subject of the proposal; the current cost of any existing system that the procurement would likely address; and the anticipated costs, benefits, and resource requirements that may result from a bid award. Because the current FSR is in its earliest stages of the develop- ment process, shifting to an APBJ procurement should not significantly affect the state’s time line for completion of SIIS. Accordingly, we recommend adoption of budget bill language to re- quire the department to submit an APBJ for the statewide immunization C – 94 Health and Social Services 2000-01 Analysis information system, and that the APBJ (and the FSR to follow) specify the business requirements and objectives of the system rather than the tech- nical solutions. Our recommendation can be implemented by adoption of the fol- lowing budget bill language in Item 4260-111-0001: Of the amount appropriated in this item, $3,500,000 shall not be expended for local registry development until the department submits to the Department of Finance an Alternative Procurement Business Justification for the Statewide Immunization Information System. Encouraging Coordination of Regional Registry Development We recommend the adoption of budget bill language directing the Department of Health Services to require the inclusion of project charters in grant applications from counties that are developing regional registries, in order to facilitate regional cooperation and coordination in these efforts. Half the Counties Have No Registry. Under the state’s current ap- proach, the first step in ensuring that every child’s immunization record is entered into the SIIS is to ensure that every county or region develops a local registry. As of August 1999, 24 local registries were in develop- ment: 15 of the registries, covering 14 counties and 1 city in another county, have received state support; the other 9 registries, covering 15 counties and 2 cities, have begun developing their registries without state sup- port\u2014using only local and private funding. Half of the state’s counties currently are not developing registries. The majority of these counties are small and rural. About 15 percent of the state’s zero-to-five-year-olds reside in these counties. Budget Proposes Funds for Additional Grants for Regional Regis- tries. The department expects to use the proposed $3.5 million General Fund appropriation for 2000-01 to provide regional development grants to groups of counties that do not have immunization registries and that wish to develop regional registries with adjoining counties. These grants would require regional registries to use data elements consistent with the other SIIS-funded registries, so that a uniform set of data can be transmit- ted to a statewide system. Make Regional Collaboration Explicit. In order to ensure that re- gional immunization registries are developed collaboratively, we recom- mend that DHS require grant applications to include project charters. The Legislature recently applied this management tool in its child support automation legislation\u2014Chapter 479, Statutes of 1999 (AB 150, Aroner). A project charter is a project management tool: the document articulates Public Health C – 95 Legislative Analyst’s Office the goals and objectives that an organization or consortium is attempting to accomplish when an automation project is undertaken. These charters outline: The project’s scope and description. A governance structure. An intercounty communications plan. Specifications of the contracting authority, data ownership, and responsibility for maintenance of data. Counties’ roles and responsibilities. A description of how changes will be managed during project development. Exit and entrance rules for entities participating in the consor- tium. A process for conflict resolution. Absent these specifications, we believe the process of developing a regional registry is likely to be delayed by problems that could be pre- vented by working out solutions in advance. Our recommendation can be implemented by adoption of the fol- lowing budget bill language in Item 4260-111-0001: In awarding grants to groups of counties for the purpose of developing regional immunization registries, the department shall require applicants to submit project charters that specify: the project’s scope and description; a governance structure; an intercounty communications plan; specifications of the contracting authority, data ownership, and responsibility for maintenance of data; counties’ roles and responsibilities; a description of how changes will be managed; exit and entrance rules for participants in the consortium; and a process for conflict resolution. Ensuring Statewide Compatibility of All Local Registries We recommend enactment of legislation requiring any local registry that chooses to participate in the statewide immunization system to comply with the state’s guidelines for local registry development. State Lacks Oversight of Some Registries. While the 15 registries that have received state support are contractually required to be equipped with certain functions and follow certain technical guidelines (and the regional grants would require this of new registries), 9 registries that have not received state funding are being developed outside the oversight of C – 96 Health and Social Services 2000-01 Analysis the state. Although the department is optimistic that these registries will be able to communicate with the statewide hub, there is no assurance of this. In Order to Link-Up, Registries Need to Be Compatible. The DHS does not have explicit assurance from the nine registries developing out- side the oversight of the state that they intend to link to the SIIS once it is developed. However, the involvement of some of the registries in a SIIS work group and the benefits of participating in a statewide information system provide some indication that these counties will link their regis- tries to the SIIS. We are concerned, however, that the state is not ensuring that these registries’ data and technical functions will be compatible with the other (state-funded) registries. Such compatibility will be important for the success of a statewide database. Therefore, we recommend the enactment of legislation requiring any local registry that wishes to link to the statewide database to comply with the state’s registry guidelines that state-funded registries already follow. Assuring Provider Participation in A Statewide Immunization Registry We recommend the enactment of legislation requiring all immunization providers to participate in local registries, or in the statewide registry if the county in which the provider is located chooses not to develop a local registry. Providers’ submission of immunization data to registries is the linch- pin of an effective immunization information system. When a provider administers an immunization, that information must be added to the child’s electronic immunization record in the registry so that records re- main up-to-date and to avoid unnecessary immunizations. Participation of Providers\u2014Public and Private. To reiterate, the suc- cess of the SIIS will depend largely on the degree of participation by the providers. In order to ensure that all children’s immunization records are entered and updated in the SIIS, we recommend enactment of legislation to require all immunization providers (public and private) to participate in their respective local registries or in the state registry (the central hub) where counties do not have their own registries. We note that ten states currently require provider participation in their statewide immunization registries. As we cited earlier, there are benefits to providers from an im- munization registry, such as avoiding the manual search for immuniza- tion records, avoiding the administering of unnecessary immunizations, and more efficient delivery of reminder and recall notices when clients are due and overdue for immunizations. Public Health C – 97 Legislative Analyst’s Office Provide a State Match for Registries’ Ongoing Costs We recommend enactment of legislation to provide a state match for local registries’ ongoing costs, effective 2001-02, in order to encourage the continuation of local participation in the statewide immunization system. Raising children’s immunization rates is a statewide goal, and the benefits are generally statewide. As such, it is important that the state take actions to facilitate statewide coverage by the local registries. To help accomplish this, we recommend that the state provide matching funds to participating counties for the ongoing costs of their registries, to take ef- fect in 2001-02, when it is anticipated that all participating counties will be in the operational phase of the project. Estimating the Costs of Local Immunization Registries. In its FSR, the department estimates that its proposed centralized state hub would result in a one-time cost of $3 million and annual ongoing costs of $1.1 mil- lion. This figure does not include the development and ongoing costs of local registries. The cost of building a local immunization registry is not well-docu- mented, partly because of variations among local registries, including population size, technical infrastructure, and vendor contracts. The DHS does not have information on the total cost of any local registry being developed in the state. However, the Robert Wood Johnson Foundation has examined the cost of certain registries (located in various states) that receive foundation support. Depending on various factors\u2014population size, preexisting infrastructure, sophistication of registry functions\u2014de- velopment costs ranged from $2.4 million to $6.9 million over a five-year time period. The average annual operating cost of a registry was $3.91 per child. This per-child figure includes the costs of entering immuniza- tion data into the registry, managerial oversight of the registry, software rentals, telecommunication costs, and overhead costs such as rent and heat. Cost of a State Match. Based on the Robert Wood Johnson Foundation’s estimates, if all of California’s 3.2 million zero-to-five-year- olds had immunization records in local registries, the ongoing operating costs would total $12. million. Since the registries are not likely to cap- ture every child’s record, the cost will probably be less ($10 million is a rough estimate). Thus, it might cost the state about $5 million annually to bear half the cost of maintaining local registries. We note that the current $3.5 million General Fund appropriation for the development of local reg- istries will not be ongoing. In addition, DHS estimates that the SIIS would avoid $3.7 million in annual costs that would otherwise be incurred by the department for activities such as consultations to immunization pro- C – 98 Health and Social Services 2000-01 Analysis viders, patient immunization status determinations in private and public clinics, and immunization record verifications and replacements. There- fore, a state match of $5 million probably would not introduce any addi- tional costs above the current-year budget level. Funding Sources for a Statewide Immunization Registry We recommend the enactment of legislation requiring the department to apply for federal matching funds, under the Medi-Cal and Healthy Families Programs, for the development and operation of the statewide immunization information system. In this section, we identify potential funding sources that may be available to the state for the development and ongoing costs of the SIIS. Medicaid. The federal Health Care Financing Administration is cur- rently providing a federal match to states for the improvement of their Medicaid Management Information Systems. Currently, California re- ceives a 90 percent federal match to build the state’s system (called Man- agement Information System\/Decision Support System) and will receive a 75 percent federal match for ongoing costs of the system. These federal matches could be used to partially finance state-sponsored immuniza- tion registry development and maintenance if the registry system is part of an overall system that can be shown to benefit Medicaid clients. Thus, with 28 percent of California’s zero-to-five-year-olds enrolled in Medi- Cal, the state may be able to obtain federal Medicaid funds for a percent- age of the cost to build and maintain a registry system. Absent the en- hanced Medicaid funding, there is reason to pursue a regular Medicaid match of 50 percent for registry costs (potentially state and local) that can be attributed to the Medi-Cal population. Healthy Families Program. The state also may be able to obtain a federal Title XXI match (on a 2-to-1 federal\/state basis) for the mainte- nance of a statewide immunization registry that benefits Healthy Fami- lies clients. We note however, that currently the state is claiming the maxi- mum amount of federal funds available for administration under the 10 percent limit for administrative costs in the Healthy Families Program. Thus, at this time it would not be possible to obtain additional federal funds under this program for the registry. As Healthy Families enroll- ment increases, however, the program’s administrative costs may fall below this limit and, thereby, free up room to submit claims for the costs of the registry, if allowed by the federal administration. Public Health C – 99 Legislative Analyst’s Office OTHER PUBLIC HEALTH PROGRAMS Proposition 99 Revenues Declining Slightly The budget projects that Proposition 99 revenues will decrease by 1 percent in 1999-00 and 1.7 percent in 2000-01. Despite the overall decline in funding, the budget proposes to meet the demands of caseload-driven programs and augment certain other activities, particularly the statewide media campaign and emergency room physician services for uninsured individuals, by using additional resources from carry-over balances from 1999-00 and the budget’s proposed release of $12 million from litigation reserves. Proposition 99, the Tobacco Tax and Health Protection Act of 1988, established a 25-cent surtax on the sale of cigarette and tobacco products in California. The proposition requires that the revenues from the surtax be distributed to six accounts within the Cigarette and Tobacco Products Surtax Fund (C&T Fund) according to specified percentages, and further provides that expenditures from each account must be used for specific kinds of activities. Declining Revenue Source. While Proposition 99 has been a dimin- ishing revenue source due to the decreasing use of cigarettes, events in 1998-99 caused a greater reduction in these revenues (see Figure 1 on page 100). Specifically: Proposition 10. This measure, enacted by the voters in 1998, in- creases the excise tax on cigarettes by 50 cents per pack. The mea- sure also increases the excise tax on other types of tobacco prod- ucts. The tax increase results in a price increase on cigarettes and other tobacco products, which has the effect of reducing consump- tion (sales), thereby reducing Proposition 99 revenues. Proposi- tion 10 provides that some of its revenues will be used to backfill some of these Proposition 99 revenue losses\u2014specifically in the health education and research accounts\u2014but not for other Propo- sition 99 accounts. We note that Proposition 28 on the March 2000 ballot, if adopted, would repeal the Proposition 10 taxes. Lawsuit Settlement. In response to the recent lawsuit settlement with the states, the major tobacco companies increased the price of cigarettes by 45 cents per pack. C – 100 Health and Social Services 2000-01 Analysis Figure 1 Proposition 99 Revenues Declining 1990-91 Through 2000-01 (Dollars in Millions) Year Revenues Percent Change 1990-91 $539 \u2014 1991-92 518 -3.9% 1992-93 499 -3.7 1993-94 473 -5.2 1994-95 465 -1.7 1995-96 462 -0.6 1996-97 463 0.2 1997-98 450 -2.8 1998-99 405 -10.0 1999-00 (est.) 401 -1.0 2000-01 (est.) 394 -1.7 Partly as a result of these factors, Proposition 99 revenues decreased by 10 percent in 1998-99. The budget, however, projects that the revenues will decrease by only 1 percent in the current year and 1.7 percent in the budget year. Governor’s Proposal. Additional resources are forecasted to be avail- able in the budget year due to the carry over of unexpended balances ($76 million) from 1999-00 and the budget’s proposal to reduce by $12 mil- lion the amount of funds set aside for pending litigation. As reflected in Figure 2, the Governor’s budget proposes to meet the demands of caseload-driven programs (such as the Child Health and Disability Pre- vention Program and the Access for Infants and Mothers Program), and, compared to current-year expenditures, allocate additional resources to the following activities: State administration of Proposition 99 ($1 million). California Cancer Registry ($1 million). Anti-tobacco media campaign ($23 million). California Healthcare for Indigents Program and the Rural Health Services program for emergency room physician services ($25 mil- lion). Public Health C – 101 Legislative Analyst’s Office Figure 2 Proposition 99 Expenditures Cigarette and Tobacco Products Surtax Fund 1998-99 through 2000-01 (Dollars in Thousands) Departments\/Programs Actual 1998-99 Estimated 1999-00 Proposed 2000-01 Percent Change From 1999-00 Department of Health Services Chronic Diseases\/Smoking Prevention Breast Cancer Early Detection \u2014 $11,660 $9,000 -23% Media Campaign $22,370 22,057 45,264 105 Competitive Grants 17,068 28,325 17,690 -38 Committee and Evaluation 3,634 4,420 4,381 -1 Local Lead Agencies 25,065 17,426 17,426 \u2014 Primary Care and Family Health Clinic Grants $14,208 $7,653 $7,653 \u2014 Comprehensive Perinatal Outreach 3,162 1,802 1,802 \u2014 Child Health and Disability Prevention 49,291 55,160 59,882 9% Children’s Hospitals 990 565 565 \u2014 County Health Services Managed Care Counties $2,343 $1,336 $1,336 \u2014 County Medical Services Program Expansion 9,983 5,693 5,693 \u2014 California Healthcare for Indigents 146,387 83,483 105,806 27% Rural Health Services 6,484 2,456 4,935 101 State Administration 5,692 5,086 7,148 41 Managed Risk Medical Insurance Board Major Risk Medical Insurance Program $46,033 $42,764 $40,000 -6% Access for Infants and Mothers 37,499 45,796 39,059 -15 Office of Statewide Health Planning and Development $1,837 $1,047 $1,047 \u2014 University of California $23,871 $97,286 $27,451 -72% Department of Education $35,404 $28,024 $28,038 0.1% Resources programs a $33,477 $31,672 $30,330 -4% State Board of Equalization $1,202 $1,293 $1,357 5% Pro rata charges $1,497 $1,821 $1,118 -39% Totals $493,018 $496,825 $456,981 -8% a Includes transfers to Habitat Conservation Fund and Natural Resources Infrastructure Fund. C – 102 Health and Social Services 2000-01 Analysis Budget Proposes to Permanently Eliminate General Fund Support for County Medical Services Program We recommend adopting trailer bill legislation that suspends the state’s General Fund allocation of $20.2 million for the County Medical Services Program for 2000-01, rather than permanently eliminating the appropriation as proposed by the Governor. Background. The County Medical Services Program (CMSP) was es- tablished in 1983 to provide medical and dental care to low-income medi- cally-indigent adults (MIAs) who are not eligible for the state’s Medi- Cal Program and who reside in small counties (see Figure 3 for partici- pating counties). The CMSP governing board, comprised of ten county officials, is responsible for the administration of pooled funds from 34 counties to provide services to approximately 40,000 CMSP clients at an estimated cost of $198 million in 1998-99. The governing board sets eligi- bility requirements, benefit levels, and provider reimbursement rates, but contracts with DHS to administer a program offering uniform benefits and to provide claims processing functions. Figure 3 Counties Participating in the County Medical Services Program 1999-00 Alpine Mendocino Amador Modoc Butte Mono Calaveras Napa Colusa Nevada Del Norte Plumas El Dorado San Benito Glenn Shasta Humboldt Sierra Imperial Siskiyou Inyo Solano Kings Sonoma Lake Sutter Lassen Tehama Madera Trinity Marin Tuolumne Mariposa Yuba Public Health C – 103 Legislative Analyst’s Office History Behind General Fund Contribution. Prior to 1983, the MIA population was eligible for Medi-Cal coverage. However, in response to the state’s budget problems, this population was transferred from the Medi-Cal Program to the counties, which were made responsible for their health services. Small counties, with populations of 300,000 or less, were permitted to contract with the state for administration of their programs, and this became known as the CMSP. Thirty-four counties initially chose the option. The counties adopted uniform eligibility criteria and benefits similar to the Medi-Cal Program. Initially, the state allocated $23.2 mil- lion to the program for health care services, which was 30 percent less than the estimated amount that would have been spent for services un- der the Medi-Cal Program. Until 1992-93, the state bore the risk for CMSP cost increases above specified revenue amounts. Legislation was enacted in 1992 to cap the General Fund responsibil- ity for CMSP at $20.2 million, which was the estimated amount needed for the program in 1991-92. In 1999-00, the General Fund appropriation for CMSP was eliminated for that fiscal year, keeping intact the statutory $20.2 million General Fund commitment for subsequent fiscal years. The CMSP Fund Sources. Funding for CMSP includes realignment revenues (from the 1991-92 realignment legislation), Proposition 99 rev- enues, county funds, and hospital settlements (audit recoveries for overpay- ments to hospitals). Until 1999-00, the state General Fund was also a fund source. Figure 4 (see next page) displays the program’s 1998-99 revenues. Governor’s Proposal. The Governor’s budget proposes trailer bill legislation to permanently eliminate the state’s General Fund appropria- tion of $20.2 million. The budget indicates that (1) CMSP has substantial fund reserves in its local program account and (2) expansions of health care programs by the state have reduced demand for county-funded health care services. The CMSP Reserve Is Robust. Our review indicates that the CMSP’s fund condition is sufficient to absorb the loss of the $20.2 million General Fund allocation in the budget year and possibly for a few additional years. In 1998-99, the CMSP Account showed a reserve of $141 million. Of this amount, $10.5 million was allocated for legal costs associated with a pend- ing lawsuit. The board’s approved budget for 1999-00 projects the reserve to be reduced to $97 million, partly as a result of the 1999-00 elimination of the General Fund appropriation and because estimated expenditures exceed projected revenues. At the same time, however, historical trends show that budgeted expenditures are consistently overestimated; there- fore the 1999-00 fund reserve could be greater. We project that without the General Fund allocation, the fund will have sufficient resources to C – 104 Health and Social Services 2000-01 Analysis support the program for two years beyond the budget year, although there is some uncertainty in this projection. Figure 4 County Medical Services Program Estimated Revenues 1998-99 (Dollars in Thousands) Source Amount Percentage of Total Realignment $124,382 67% General Fund 20,237 11 Hospital settlements 17,801 10 Proposition 99 9,983 5 County funds 5,459 3 Interest 3,068 2 Third-party payers 3,825 2 Unclaimed warrants 8 \u2014 Totals $184,763a 100% a Revenue totals do not include one-time receipt of $8.5 million from a private foundation. Budget’s Expansion Rationale Misleading. We note that one of the administration’s reasons for proposing to permanently discontinue the $20.2 million General Fund contribution\u2014that program expansions within the Medi-Cal Program, Healthy Families Program, and indigent health care programs will relieve some of the demand for CMSP\u2014is not entirely accurate. For example, the Healthy Families Program serves children, whereas CMSP serves adults; and most of the $24.8 million that the bud- get proposes for augmenting emergency medical care services for unin- sured individuals would be allocated to the California Healthcare for Indigents Program, which serves the 24 larger counties, not the counties that participate in CMSP. Recommendation. Rather than permanently eliminate the General Fund contribution to CMSP, we recommend that the budget discontinue the appropriation for 2000-01 so that the CMSP Account’s reserve can be monitored for unexpected revenue reductions and\/or expenditure in- creases. For example, a downturn in the economy would likely generate an increase in the MIA population, as well as reductions in sales tax rev- enues that contribute to CMSP’s realignment revenues. Public Health C – 105 Legislative Analyst’s Office Budget Does Not Maximize Federal Grant for Drinking Water Loan Fund The budget’s proposal to appropriate $15.4 million from the General Fund for the Safe Drinking Water State Revolving Fund does not maximize receipt of federal funds that are available. Passage of a water bond measure on the March 2000 ballot, however, would replace this General Fund appropriation and could maximize federal funds. We withhold recommendation pending the results of the March election. Background. The department maintains the Safe Drinking Water State Revolving Fund to assist public water systems in financing the costs of their infrastructure improvements to comply with the requirements of the federal Safe Drinking Water Act. Federal funds are received from the U.S. Environmental Protection Agency (EPA), which provides capitaliza- tion grants to states according to a need-based formula. State Match Requirements. Federal law requires that states match 20 percent of the federal funds. States must appropriate the match no later than the end of the following federal fiscal year (FFY). For example, in order for a state to draw down federal funds from FFY 1999 (October 1998 through September 1999), the 20 percent match must be appropri- ated by September 30, 2000, otherwise the state would lose these funds. The state then has until September 30, 2001 to obligate the funds to local water projects. Available Federal Funds. By appropriating $15.1 million from the General Fund in the 1998-99 Budget Act, the state received its first federal grant of $75.7 million from FFY 1997. In 1999-00, the budget act appropri- ated $15.4 million from the General Fund in order to draw down the maximum $77.1 million in federal funds available from FFY 1998. Cur- rently, both the FFY 1999 federal award of $80.8 million and the FFY 2000 federal award of $83.9 million are available for California’s use to the extent that the state provides the matching funds. Budget Proposal. The budget proposes to appropriate $15.4 million from the General Fund in the budget year in order to draw down $77.1 mil- lion in FFY 1999 federal grants. Under this proposal, the state will not receive the balance of the FFY 1999 federal award\u2014$3.7 million. We note that according to the EPA, upgrading the state’s local public water sys- tems to meet current and anticipated federal regulations will cost $18 bil- lion. Thus, it is apparent that local systems could benefit from additional funds. In order for the state to maximize receipt of all of the FFY 1999 federal grant, the state match would need to total $16.2 million, or $750,000 more than what the budget proposes. C – 106 Health and Social Services 2000-01 Analysis Passage of Water Bond Measure Could Resolve State Match Defi- ciency. Proposition 13\u2014the Safe Drinking Water, Clean Water, Watershed Protection, and Flood Protection Act\u2014on the March 2000 ballot provides $1.97 billion in general obligation bonds for various water program pur- poses. Of this amount $70 million is available to use as the 20 percent state match to access the annual federal capitalization grants through state fiscal year 2004-05. If Proposition 13 is adopted by the voters, the water bond funds would be used in lieu of the General Fund appropriation for 2000-01, thereby providing the 20 percent state match of $16.2 million in order to draw down the full FFY 1999 federal grant of $80.8 million. Bond funds could also be used to draw down any portion of the FFY 2000 fed- eral grant of $83.9 million that is also available in the budget year. Consequently, we withhold recommendation, pending the results of the election. Budget Proposes to Extend the Community Challenge Grant Program and Use Federal Funds The budget proposes to extend the Community Challenge Grant Program for one year, using a $20 million federal award allocated to California for reducing its out-of-wedlock birth rates in 1997. The final report of the program evaluation, due January 1, 1999, had not been submitted at the time this analysis was prepared, but should be available prior to budget hearings. Program Description and Budget Proposal. The Community Chal- lenge Grant Program (CCGP) was established in 1996-97 to support local community projects to reduce teen pregnancy. Since 1996-97, the Legisla- ture has appropriated $20 million from the General Fund annually to DHS for competitive grant awards under the CCGP. Under current law, the program sunsets on June 30, 2000. The budget proposes to extend the program for one additional year and to continue funding it at $20 million in 2000-01. The budget proposes to fund the pro- gram in 2000-01 using a federal award received by the state because it reduced its out-of-wedlock birth rates in 1997. Nature of Federal Bonus Award. The 1996 federal welfare reform leg- islation included bonus funds for states that could show they had re- duced their out-of-wedlock birth rates without increasing their abortion rates. In 1997, California’s out-of-wedlock birth rate declined by 5.7 per- cent from the previous year. The federal welfare reform legislation speci- fies that these bonus awards can only be used to carry out the goals of the Temporary Assistance for Needy Families (TANF) block grant. The four TANF goals are to (1) provide assistance to needy families; (2) end wel- Public Health C – 107 Legislative Analyst’s Office fare dependency by promoting job preparation, work, and marriage; (3) prevent and\/or reduce out-of-wedlock pregnancies; and (4) encour- age the formation and maintenance of two-parent families. The federal government will continue to allocate these bonus awards for another three years. Legislature Has Been Awaiting Program Evaluation. The CCGP’s authorizing legislation\u2014Chapter 197, Statutes of 1996 (AB 3483, Fried- man)\u2014required that the department conduct a statewide independent evaluation of the program and submit its findings to the Legislature on or before January 1, 1999. To meet the requirement, the department con- tracted with an independent evaluator, who submitted an interim report to the department in January 1999, essentially describing the implemen- tation of program components. The Legislature was told during last year’s budget hearings that the final evaluation would be completed in Decem- ber 1999. At the time this analysis was prepared, however, the evaluation report was still under review by the administration. The department in- dicates that the evaluation should be submitted to the Legislature prior to the budget hearings. Some Local California Children’s Services Programs Not Complying With Statutory Requirement Current law requires that all California Children’s Services claims be submitted by counties to the state fiscal intermediary for payment no later than January 1, 1999. Ten counties have not yet transferred their claims processing activities to the centralized billing system. We recommend that the department report, at budget hearings, on the reasons for counties’ noncompliance and present a plan for ensuring their cooperation. Program Background. The California Children’s Services (CCS) Pro- gram provides diagnostic and treatment services, medical case manage- ment, and medical and occupational therapy services to children under 21 years of age who have eligible medical conditions, such as severe ge- netic diseases, chronic health problems, or major traumatic injuries. The Medi-Cal Program pays for eligible CCS services for those children who are covered by Medi-Cal. Other costs attributed to the CCS Program are shared equally by the state General Fund and county funds. Addition- ally, for those CCS children who are also enrolled in the Healthy Families Program, federal funds will cover two-thirds of the cost of their CCS ser- vices. The CCS Program is administered jointly by the state and counties. There are 28 dependent counties\u2014counties with populations less than C – 108 Health and Social Services 2000-01 Analysis 200,000\u2014that share CCS case management responsibilities with a state regional office. These counties are responsible for approximately 10 per- cent of the total CCS caseload. There are 30 independent counties\u2014 with populations greater than 200,000\u2014that are solely responsible for case management activities. Statutory Deadline Not Met. Chapter 1210, Statutes of 1994 (AB 2793, B. Friedman) establishes a centralized billing system and requires that all counties submit claims for payment of CCS services to the state fiscal intermediary\u2014currently Electronic Data Systems (EDS)\u2014no later than January 1, 1999. The statute further states that the department shall work with the counties to develop a timeline for the counties to begin submit- ting claims to the state. In addition, if a department review of the system demonstrates that as of January 1, 2000, any county has incurred increased costs as a result of submitting claims to the state fiscal intermediary, that county is exempt from the statute’s requirement. Benefits of Centralizing Claims Processing. The department indicates that the implementation of a centralized billing system (1) improves effi- ciencies and economies of scale in processing CCS claims, (2) ensures a consistent application of state CCS policies for coverage of services and provider reimbursement rates, (3) provides statewide information on CCS expenditures, and (4) processes claims in a timely manner. In addition, the department states that it needs all counties to process their claims through EDS in order for it to fully implement the Children’s Medical Services (CMS) Network Enhancement 47\u2014a comprehensive database that will interface with other state information systems. Through this database, the CCS Program will, for example, be able to systemati- cally identify whether a client has enrolled in the Healthy Families Pro- gram, in which case the state would be eligible for federal matching funds. Ten Counties Still Outstanding. At the time that this analysis was pre- pared, 48 counties\u2014covering 72 percent of the CCS caseload\u2014were submit- ting their CCS claims to EDS for authorization and billing purposes. How- ever, ten counties (Alameda, Fresno, Kern, Napa, Orange, Sacramento, San Francisco, San Joaquin, San Mateo, and Sonoma) had not yet transitioned to the centralized claims processing system. According to the department, six of these counties appear committed to completing this task, as they have provided the department with work plans and prospective implementation dates. Four counties, however, do not have these implementation plans in place. Consequently, we recommend that the department report, at budget hearings, on the reasons for the counties’ noncompliance and present a plan for ensuring their cooperation. Managed Risk Medical Insurance Board C – 109 Legislative Analyst’s Office MANAGED RISK MEDICAL INSURANCE BOARD (4280) The Managed Risk Medical Insurance Board (MRMIB) administers several programs designed to provide health care coverage to adults and children. The Major Risk Medical Insurance Program provides health in- surance to California residents unable to obtain it for themselves or their families because of preexisting medical conditions. The Access for Infants and Mothers program provides coverage for women seeking pregnancy- related and neonatal medical care and whose family incomes are between 200 percent and 300 percent of the federal poverty level. The Healthy Families Program provides health coverage for uninsured children in fami- lies with incomes up to 250 percent of the federal poverty level and not eligible for Medi-Cal. The budget proposes $422 million from all funds for support of MRMIB programs in 2000-01, which is an increase of 32 percent over es- timated current-year expenditures. This is due primarily to an increase of $71 million in federal funds and $42 million from the General Fund for caseload growth in the Healthy Families Program. HEALTHY FAMILIES PROGRAM The Healthy Families Program implements the federal government’s State Children’s Health Insurance Program enacted in 1997. Funding for California generally is on a 2-to-1 federal\/state matching basis. Families pay a relatively low monthly premium and can choose from a selection of managed care plans for their children. Coverage is similar to that offered to state employees and includes dental and vision benefits. The program began enrolling children in July 1998. Current-Year Expansions. The 1999-00 Budget Act expanded eligibility in the Healthy Families Program by (1) increasing the family income limit C – 110 Health and Social Services 2000-01 Analysis from 200 percent to 250 percent of the poverty level, (2) allowing use of the same income deductions used in Medi-Cal in computing family income, (3) permitting enrollment of newborns (for those with family incomes of 200 per- cent to 250 percent of the federal poverty level), rather than excluding them until their first birthday, and (4) establishing a one-year, state-only program to cover children who entered the U.S. after August 22, 1996. The Budget Proposal. The Governor proposes $336 million ($121.3 mil- lion General Fund) in MRMIB’s budget for the Healthy Families Program in 2000-01, which is an increase of about 50 percent over estimated current- year expenditures. After accounting for program expenditures (outreach and related Medi-Cal benefits) in the Department of Health Services (DHS) and related expenditures in other departments, the total budget for the Healthy Families Program is proposed at $425 million ($141.8 million General Fund), which is an increase of 46 percent over the current year. The proposed in- crease is due primarily to an expected 32 percent increase in caseload in the budget year. We note that the budget does not include funding for provider rate increases in 2000-01. The rate increases will be negotiated in February and will be included in the May revision of the budget. The budget projects that enrollment will increase to 279,450 by the end of the current year and 369,518 by the end of the budget year. Budget Underestimates Enrollment in Current Year The budget projects a slow-down in enrollment in the current year in the Healthy Families Program. While there is considerable uncertainty about the actual number of children who are eligible for the program, we estimate that the program’s caseload at year’s end will be 11 percent greater than the budget estimates, with an additional cost of $3.3 million ($1.1 million General Fund) in 1999-00. The administration will update its enrollment projections in the May revision of the budget. Budget Assumes Significant Slow-Down in Base Enrollment. The budget estimates that 279,450 children will enroll in the Healthy Families Program by the end of the current year, and that 250,000 of these will be in families whose incomes are less than 200 percent of the federal poverty level. (This income group is referred to as the base population\u2014chil- dren who qualify under the original income limits of the program.) We believe that the base caseload of the budget’s estimated current-year enrollment is understated. The budget projects that an average of 6,442 new enrollees (in this income group) will enroll each month between November 1999 and June 2000. Actual caseload data, however, show that an average of 15,280 new children enrolled each month during the nine months prior to November 1999. The budget, therefore, assumes a significant slow-down\u2014 a 58 percent drop in the monthly average\u2014in the last half of the current year. Managed Risk Medical Insurance Board C – 111 Legislative Analyst’s Office Larger Caseload Will Cost More. Based on caseload trends to date, we see no reason to expect a 58 percent decline in the average number of new enrollees with incomes below 200 percent of the federal poverty level. There- fore, after adjusting for a slight slow-down in the base enrollment per month (since there is a diminishing percentage of children who are eligible but have not already enrolled) and for the disenrollment of some children who will be found no longer eligible for the program during their annual eligibility rede- termination, we estimate that by the end of 1999-00 enrollment of the base population will total 281,500. This would be a 110 percent increase over the prior year, compared to the 87 percent increase reflected in the Governor’s budget (for the base population only). We estimate that the cost associated with this caseload adjustment will be $3.3 million ($1.1 million General Fund). We note that the administration will provide an updated caseload estimate in the May revision of the budget. No Policy Rationale for Excluding Some Legal Immigrants The budget proposes to extend, for one year, Healthy Families eligibility for legal immigrant children who entered the U.S. after August 22, 1996, but only for those who enrolled in the program in the current year. We see no policy rationale for excluding certain legal immigrants from this one-year extension solely on the basis that they did not enroll in the program in the current year. Therefore, we recommend extending the budget proposal to include all legal immigrant children who entered the U.S. after August 22, 1996, at a General Fund cost of $2.4 million in 2000-01. (Increase Item 4280-101-0001 by $2,365,920.) Background. Under the Healthy Families Program expansions that were implemented in the current year, legal immigrant children who en- tered the U.S. after August 22, 1996 (and who otherwise meet program eligibility requirements) became eligible for the program for a period of one year. The cost of these clients is borne solely by the General Fund because federal law excludes the use of federal funds to cover recent le- gal immigrant children under Title XXI of the Social Security Act (the State Children’s Health Insurance Program). Governor’s Proposal. The budget proposes to provide a second year of eligibility for the recent legal immigrant children who enroll in the pro- gram in the current year. The General Fund cost of extending their cover- age in the budget year is estimated to be $1.9 million. No Policy Rationale for Distinguishing On Basis of Time of Enroll- ment. Under the Governor’s budget proposal, a recent legal immigrant child who does not enroll in the program in the current year would be ineligible to apply for coverage in the budget year, while his or her coun- terpart who enrolled in the program in 1999-00 would be eligible to seek C – 112 Health and Social Services 2000-01 Analysis a second year of coverage. We see no policy rationale for basing eligibil- ity on this distinction. We further note that applying the proposal to all recent legal immigrant children would not be costly in the context of this program\u2014about $2.4 million from the General Fund. Consequently, we recommend that the Legislature adopt the Governor’s proposal but extend it to all recent legal immigrant children, regardless of whether they enrolled in the program in the current year. We estimate that adoption of this recommendation would increase the number of recent legal immigrant enrollees at the end of the budget year by about 5,370 children. Technical Error Overbudgets $3 Million from the General Fund The budget double counts the caseload cost of the legal immigrants in 2000-01. Consequently, we recommend a technical correction to the budget, for a General Fund savings of $3 million. (Reduce Item 4280-101- 0001 by $2,946,470.) Due to a technical error, the budget double counts the caseload cost of the legal immigrant children for which it proposes to provide an addi- tional year of health coverage. Accordingly, we recommend correction of this error, for a savings to the General Fund of $3 million in 2000-01. ACCESS FOR INFANTS AND MOTHERS PROGRAM Since 1992, the Access for Infants and Mothers (AIM) Program has served low- to moderate-income women who are pregnant but without health insurance to cover their pregnancy. The AIM Program covers com- prehensive health care throughout the pregnancy, the delivery, and sixty days of post-pregnancy care for the mother and up to two years of care for the infant. The state contracts with health insurance plans to provide these services. To be eligible for the program, women must be pregnant, have no health coverage for their pregnancy, and have incomes between 200 percent and 300 percent of the federal poverty level. (The Medi-Cal Program provides coverage to pregnant women and their infants in fami- lies with incomes up to 200 percent of the federal poverty level.) Currently, program participants pay a fee of 2 percent of their family income toward the costs of services received by the mother and the in- fant. For example, in 1998, a single pregnant woman without other chil- dren whose annual income was $21,701 would pay a fee of $434. Infants can receive coverage for a second year, for an additional $100, or $50 if the recommended one-year vaccinations are up to date. Managed Risk Medical Insurance Board C – 113 Legislative Analyst’s Office The AIM Program is funded mostly through revenues from the Ciga- rette and Tobacco Products Surtax (C&T) Fund established by Proposi- tion 99. In addition, federal Title XXI funds support about 65 percent of the cost of AIM infants between the ages of birth and one year whose family incomes are between 200 percent and 250 percent; the General Fund pays for the other 35 percent of these infants’ costs. Caseload Overestimated for Current Year We recommend reducing the budget’s estimated level of spending for the Access for Infants and Mothers Program in the current year by $1.3 million, for a corresponding savings to the Perinatal Insurance Fund (Proposition 99), to reflect more realistic caseload changes. Background. The MRMIB will promulgate regulations in February that will incorporate the use of income deductions in computing the fam- ily income of AIM applicants (these are the same income deductions used to assess eligibility in the Medi-Cal and Healthy Families Programs). Applying these income deductions in AIM will eliminate a current over- lap in eligibility for the AIM and Medi-Cal Programs for those women whose income, before applying income deductions, is just above 200 per- cent of the federal poverty level. Budget Proposal. The budget estimates that an average of 420 women will enroll in AIM in each of the first six months of the current year. Addi- tionally, the budget assumes that, once income deductions are imple- mented in February, 25 percent of potential AIM enrollees will be ineli- gible for the program because their adjusted incomes will be less than 200 percent of the federal poverty level. Instead, these women will be eligible for the Medi-Cal Program. Accordingly, the budget estimates that 315 new women will enroll in AIM each month from February through the end of the current year. The budget further estimates that 315 new women will enroll each month in the budget year. Overbudgeting in Current Year. We believe that the budget overesti- mates AIM’s caseload in the current year by 2.8 percent, or 120 new en- rollees, and is therefore overbudgeted by $1.3 million in Proposition 99 funds. Our estimate differs from the budget’s in three ways. First, using actual data and historical trends, we estimate that the monthly enroll- ment of new women in the first half of the current year will average 399 women, rather than the budget’s estimated 420 women. Second, by ap- plying our caseload estimate of the first six months of the current year to the estimated 25 percent reduction in caseload beginning in February (due to the use of income deductions), we reduce the estimated caseload in the second six months of the current year to 299 new enrollees per month, compared to the budget’s 315 women per month. Finally, we increase C – 114 Health and Social Services 2000-01 Analysis this estimated monthly enrollment of 299 women to a monthly average of 306 because the budget does not account for women of moderate in- come (just above 300 percent of poverty) who will become newly eligible for the AIM Program once income deductions are applied. For these reasons, we recommend that the current year budget be reduced by $1.3 million in Proposition 99 funds. Budget-Year Estimate Uncertain. We do not take issue with the budget’s estimated caseload for the budget year, primarily because there is more uncertainty as to how the use of income deductions will affect enrollment in 2000-01. The administration will present updated estimates during the May revision of the budget. Program Underbudgeted for Current Year Due to Unpaid Claims The budget does not account for $2.2 million in unpaid claims that the board must pay in 1999-00. We recommend that the board present, at budget hearings, a fiscal plan for satisfying this obligation without jeopardizing the Perinatal Insurance Fund’s reserve. Background. One of the health plans that provide AIM services has presented the board with $3.2 million in back claims. By contractual agree- ment, MRMIB is required to pay these claims in the current year. Budget Increases Appropriation for Payment of Claims. The budget includes a current-year deficiency request of $4.6 million. While the stated purpose of the deficiency is to accommodate a caseload increase, $2 mil- lion of the deficiency is to (1) pay $1 million of the back claims, and (2) increase the Perinatal Insurance Fund’s (PIF) reserve from $485,000 (or 1 percent of current-year expenditures) to $1.4 million (or 3 percent). Thus, there is still $2.2 million in outstanding payments that MRMIB must make in the current year, but the budget does not include these expenditures. Recommendation. If the Legislature adopts our previous recommen- dation\u2014to reduce expenditures by $1.3 million in the current year\u2014then these funds would be available to pay off 60 percent of the balance of unpaid claims. However, almost $1 million in unpaid claims would re- main unaddressed. Further, any use of the PIF’s balance in the current year would jeopardize the reserve (3 percent of the fund’s expenditures). Therefore, we recommend that the board present, at budget hearings, a fiscal plan for how it will pay the back claims while preserving the PIF’s reserve. Department of Developmental Services C – 115 Legislative Analyst’s Office DEPARTMENT OF DEVELOPMENTAL SERVICES (4300) A developmental disability is defined as a disability, related to cer- tain mental or neurological impairments, that originates before a person’s eighteenth birthday, constitutes a substantial handicap, and is expected to continue indefinitely. The Lanterman Developmental Disabilities Ser- vices Act of 1969 entitles individuals with developmental disabilities to a variety of services, which are overseen by the state Department of Devel- opmental Services (DDS). The department contracts with 21 nonprofit regional centers (RCs) to coordinate educational, vocational, and residen- tial services for approximately 170,000 clients each year. In addition to providing some services directly, such as intake and assessment, indi- vidual program planning, and case management, RCs purchase a variety of services from community-based providers. Individuals with developmental disabilities have a number of resi- dential options. While most live with their parents or other relatives, thou- sands live in their own apartments or in group homes that are designed to meet their medical and behavioral needs. The department also oper- ates five developmental centers (DCs) and one 55-bed facility, which pro- vide 24-hour care and supervision to approximately 4,000 individuals. The budget proposes $2.4 billion from all funds for support of DDS programs in 2000-01, which is a 9 percent increase over estimated cur- rent-year expenditures. The budget proposes $997 million from the Gen- eral Fund, which is $76 million, or 8 percent, above estimated current- year expenditures from this funding source. The increase is primarily due to (1) caseload and cost increases for community-based services, (2) the full-year cost of program augmentations enacted in the current year, and (3) the development of a facility for the developmentally disabled with severe behavioral problems. C – 116 Health and Social Services 2000-01 Analysis COMMUNITY SERVICES PROGRAM The Community Services Program provides community-based ser- vices to clients through the RCs. The RCs are responsible for client as- sessment and diagnosis, the development of an individualized program plan, case management, and the coordination and purchase of various services. Services fall into three broad categories: residential, supported living, and day program services. Day program services include early intervention services for infants and young children, daytime activity programs for adults, and in-home respite care. The budget proposes $1.8 billion from all funds ($896 million from the General Fund) for support of the Community Services Program in 2000-01. Statutorily Required Rate-Setting Methodologies Still Not Established The department is required, by legislation enacted in 1998, to develop performance-based rate-setting methodologies for residential, supported living, and day program services. The methodology for supported living services is overdue, and all three methodologies are still in the early developmental stage. We recommend that the department report, during budget hearings, on the status of the development of these methodologies. We withhold recommendation on the related $1.1 million request for contract services, pending receipt of additional information on the scope and costs of the proposed contracts. Background. The rates for supported living, residential, and day pro- gram services are determined by different rate-setting methodologies. Rates for supported living services are negotiated between each regional center and the service providers, residential rates are determined by the Alternative Residential Model (ARM), and day program rates are deter- mined by the department based on cost statements from providers. There were no increases between fiscal years 1992-93 and 1997-98 for day program rates, and residential rates have not been updated to reflect changes in the costs of running these facilities. As a result, service pro- viders and the Association of Regional Center Agencies expressed con- cerns that inadequate rates resulted in high staff turnover, unqualified staff and, in some cases, a lack of services. In response to these concerns, the Legislature appropriated funds for rate increases ranging up to 13 per- cent in 1998-99. Department of Developmental Services C – 117 Legislative Analyst’s Office New Rate-Setting Methodologies Required. Two pieces of legislation were enacted that required the department to develop performance-based rate-setting methodologies for the residential, supported living, and day program services. Chapter 1043, Statutes of 1998 (SB 1038, Thompson) required such methodologies for residential and supported living ser- vices. The 1998-99 budget trailer bill for health programs\u2014Chapter 310, Statutes of 1998 (AB 2780, Gallegos)\u2014required a methodology for day programs. The supported living services rate methodology was to be es- tablished by January 1, 2000, and the residential methodology is to be developed by January 1, 2001. No due date for the day program rate methodology was specified. The department indicates that all three meth- odologies are still in the early developmental stage. Current-Year Rate Increase Vetoed. Senate Bill 1104 (Chesbro) included a 4 percent rate increase in the current year for direct care staff providing day program services. However, citing the department’s effort to estab- lish a new rate-setting methodology for these services, the Governor ve- toed the bill, indicating that it was premature to provide additional rate increases before the methodology was developed. Performance-Based Rate Systems Are Complex. In 1998, the depart- ment convened a stakeholder advisory group, the Service Delivery Re- form Committee (SDRC), to develop the required rate methodologies. The department envisions the development of the methodologies as a three- to five-year process. This process involves three primary phases: (1) identification of desired client outcomes, (2) development of the per- sonnel and service standards required to obtain the outcomes, and (3) de- velopment of a cost model that is based on the costs of meeting the per- sonnel and service standards and that can be adjusted according to ven- dor size, geographical differences, and economic variables. The depart- ment indicates that because they involve sophisticated analysis, the sec- ond and third phases require the services of a contractor. The department has also indicated that it has sought consensus on the desired outcomes\u2014the basis for the cost models\u2014in order for the department to promulgate the new regulations as quickly as possible once a cost model is developed. We note, however, that reaching consensus among a stakeholder group of over 70 participants has been a lengthy process. As a result of the time and complexity involved in the development of the cost models, the department has been unable to meet the statutory deadline for the rate-setting methodology for supported living services, and the methodologies for day program and residential services remain in the early developmental stage. C – 118 Health and Social Services 2000-01 Analysis The department indicates that consensus on outcomes for residential services has been reached, and that a contract will be signed in February 2000 for the development of a residential cost model. The department proposes to enter into a contract in the budget year for the development of cost models for day program and supported living services. However, at the time this analysis was prepared, consensus on outcomes for day program and supported living services had not been reached. Consequently, we recommend that the department report, during budget hearings, on the status of the development of all three rate-setting methodologies. Budget Proposes $1.1 Million For Contract Services. The department proposes to enter into two contracts in 2000-01. The first, as indicated above, is for the development of cost models for day program services and sup- ported living services. The second contract is for the development of a per- formance accountability data system designed to collect data on client out- comes. However, the scope of the contract is yet to be determined. Conse- quently, the department cannot provide sufficient detail on the scope and costs of this contract. Therefore, pending receipt of additional information, we withhold recommendation on the department’s request for $1.1 million for the contracts and a limited-term contract manager. DEVELOPMENTAL CENTERS PROGRAM The DCs provide residential care for developmentally disabled per- sons. The budget proposes $613 million from all funds ($71 million from the General Fund) for support of the DCs in 2000-01. Costs Of Southern California Facility Uncertain We withhold recommendation on the department’s request for $13.2 million ($9.1 million General Fund, including Medi-Cal reimbursements) for the lease and development of a facility to serve individuals with severe behavioral problems, pending an update on the department’s progress in finding a site. Under an interagency agreement, the department contracts with the Department of Mental Health (DMH) to serve 110 forensic developmentally disabled individuals at Napa State Hospital. These are individuals who are found to (1) be gravely disabled and unwilling or incapable of accepting treatment voluntarily, (2) be a danger to self or others, or (3) have committed a crime but are incompetent to stand trial. The department has committed to move these individuals out of Napa by November 1, 2000, so that the DMH can accommodate its own growing forensic population. Department of Developmental Services C – 119 Legislative Analyst’s Office Because the 110 individuals require a secured facility, they must be moved to Porterville Developmental Center. Before this can happen, how- ever, the individuals with severe behavioral problems at Porterville must be transferred to another facility. The five developmental centers do not have enough vacant beds to accommodate this transfer. The department has leased a 55-bed facility in Northern California for individuals with behavioral problems who come from this region. In order to meet the November 1, 2000 deadline to accommodate the persons from Southern California, the budget proposes funds to lease a facility (or, if necessary, more than one facility) with 80 beds in Southern California, to be occupied by September 1, 2000. In total, the budget requests $5.7 million for 126 new positions and $7.5 million for lease payments, operating expenses, and equipment for the facility. The cost estimate for lease payments is based on the assumption that 125,000 square feet of space will be required. We note that the Northern California facility, which will serve 55 individuals, is approximately 50,000 square feet. On this basis, considerably less than 125,000 square feet would be needed to house 80 persons. The department acknowledges that if it is able to lease a single facility, or even two smaller facilities, the lease pay- ments will be less than projected because the number of square feet would likely fall between 60,000 and 100,000 square feet. The department is currently involved in site selection and, because of the urgency involved, will enter into lease negotiations as soon as pos- sible. Thus, pending further information on the development of the ne- gotiations and revised cost projections, we withhold recommendation on the department’s request. C – 120 Health and Social Services 2000-01 Analysis DEPARTMENT OF MENTAL HEALTH (4440) The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department’s primary responsibilities are to (1) administer the Bronzan-McCorquodale and Lanterman-Petris-Short Acts, which provide for the delivery of men- tal health services through a state-county partnership and for involun- tary treatment of the mentally disabled, (2) operate four state hospitals, (3) manage treatment services at the California Medical Facility at Vacaville (a state prison), and (4) administer nine community programs directed at specific populations. The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly com- mitted as Sexually Violent Predators (SVPs), and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections. The budget proposes $1.7 billion from all funds for support of DMH programs in 2000-01, which is an increase of 1 percent over estimated cur- rent-year expenditures. The budget proposes $758 million from the General Fund, which is an increase of $67 million, or 9.7 percent, above estimated current-year expenditures. The increase is primarily due to (1) increases in the judicially committed and SVP populations in the state hospitals, (2) con- tinuation and expansion of local incentive grants for mentally ill homeless persons, and (3) special repair projects at the four state hospitals. Funding for Americans with Disabilities Act Projects Should Be Requested as Capital Outlay Proposal We recommend a reduction of $5.6 million from the General Fund for support of the state hospitals because proposed Americans with Disabilities Act compliance projects should be considered capital outlay projects, and should be resubmitted as a capital outlay budget change proposal. (Reduce Item 4440-011-0001 by $5,573,000.) Department of Mental Health C – 121 Legislative Analyst’s Office The budget proposes a General Fund increase of $5.6 million to fund projects that will bring three of the four state hospitals into compliance with the Americans with Disabilities Act (ADA). The projects would in- clude widening doors, installing ramps and automatic door openers, and restroom modifications. Section 3.00 of the Budget Act defines capital outlay as including any alteration, renovation, addition, or improvement which changes a structure’s function, layout, capacity, or quality. Such projects are bud- geted as capital outlay items. Routine maintenance and special repairs, by contrast, are intended to keep a facility functional at its designed level of services, and are budgeted as support items. The department indicates that it had previously submitted requests for funding the ADA projects as capital outlay budget change proposals, but that the Department of Finance directed that stand-alone capital outlay projects relating to ADA compliance be submitted as support items. By defi- nition, however, additions or renovations undertaken in order to comply with ADA regulations\u2014such as installing ramps and automatic doors and modifying restrooms\u2014are capital outlay projects, because they upgrade the quality of the existing structure or change its function. In order to be consis- tent with the long-standing definition of capital outlay projects, we recom- mend that the department resubmit its proposal as a capital outlay budget change proposal, and that the proposed $5.6 million General Fund augmen- tation for the support of state hospitals be denied. In this way, the proposal will be evaluated in the context of other capital outlay projects. We also note that the proposal as currently submitted lacks sufficient information for the Legislature to evaluate it as a capital outlay project. For example, the proposal includes $4 million for work at Patton State Hospital. The information submitted in support of the request indicates that work will be undertaken in 42 buildings and will include, but not be limited to, improvements such as ramps, handrails, toilet rooms, and signs. There is no information, however, on either the existing problems in these buildings or what work will be undertaken in each of the buildings. In addition, the budget amount is based on an estimate that was pre- pared in 1994 and simply updated for inflation. Information in support of the proposals for the other state hospitals is similar. In order for the Legislature to determine the need for these projects and the appropriate level of funding, the department needs to provide definitive information on existing conditions, proposed work to correct the specific problems, and the associated costs. C – 122 Health and Social Services 2000-01 Analysis Equipment Request Is Premature We recommend a reduction of $845,000 from the General Fund for support of the state hospitals because the department’s request for equipment for the new administration building at Metropolitan State Hospital should be made with the 2001-02 budget request. (Reduce Item 4440-011-0001 by $845,000.) The department has received approval to replace the receiving and treat- ment tower and the administration building at Metropolitan State Hospital with a new, consolidated clinical and administration facility. The new build- ing is scheduled to be completed in November 2001, and move-in is sched- uled to begin in December 2001 and be completed by February 2002. The budget proposes $845,000 from the General Fund to purchase equipment for the new facility, including a telecommunications system, a medical records filing system, and radiology equipment. This equip- ment would replace equipment in the existing buildings that cannot be transferred to the new building. The lead time for the requested equip- ment\u2014the time between when the order is placed and when the equip- ment is delivered\u2014ranges from three weeks for the telecommunications system to three months for the radiology equipment and other large items. While we believe the proposed equipment list is justified, we also believe that the request is premature, since move-in is not scheduled to begin until December 2001\u2014five months after the budget year. Therefore, we recommend that the request be resubmitted for consideration in the 2001-02 budget. We note that in the event that passage of the 2001-02 Budget Act is delayed, the department can put equipment out to bid with the provision that the contract be awarded subject to appropriation of funds by the Legislature. Upon passage of the budget act, the contracts could be awarded and the orders could be placed. Decision on Mentally Ill Homeless Pilot Projects Should Await Evaluation Review We withhold recommend on the $20 million proposed for the continuation and expansion of pilot projects to assist the homeless mentally ill, pending review of the statutorily required report (due May 1, 2000) on the effectiveness of the three existing projects. We further recommend that, if the Legislature does approve funding to expand the pilot projects to other counties, at least one of the new projects be targeted primarily at providing assistance to parolees. Please see Crosscutting Issues in the Judiciary and Criminal Justice section for our discussion of this issue and our analysis of the Governor’s initiatives to keep the mentally ill out of the criminal justice system. Employment Development Department C – 123 Legislative Analyst’s Office EMPLOYMENT DEVELOPMENT DEPARTMENT (5100) The Employment Development Department (EDD) is responsible for administering the Employment Services (ES), the Unemployment Insur- ance (UI), and the Disability Insurance (DI) Programs. The ES Program (1) refers qualified applicants to potential employers; (2) places job-ready applicants in jobs; and (3) helps youths, welfare recipients, and economi- cally disadvantaged persons find jobs or prepare themselves for employ- ment by participating in employment and training programs. In addition, the department collects taxes and pays benefits under the UI and DI Programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contributions for DI. It also collects personal income tax withholdings. In addition, it pays UI and DI benefits to eligible claimants. The budget proposes expenditures totaling $6.3 billion from all funds for support of the EDD in 2000-01. This is an increase of $25 million, or 0.4 percent, over estimated current-year expenditures. The budget pro- poses $25.5 million from the General Fund in 2000-01, which is a reduc- tion of $1.7 million (6.3 percent) compared to 1999-00. Proposed Disability Insurance Tax Rate Does Not Meet Statutory Requirement Without a rate increase, the Disability Insurance Fund will develop an estimated deficit of $278 million by the end of December 2000. The budget proposes to increase the disability insurance tax rate, but the rate would still be below the level required by current law. The proposed rate will result in a small deficit by the end of December 2000, increasing to a reserve of $304 million by June 2001. Background. The DI Program provides benefits to workers who are unable to work due to nonwork related illness, injury, or pregnancy. The DI program is financed by a payroll tax on workers’ earnings. In 1999, the C – 124 Health and Social Services 2000-01 Analysis rate was 0.5 percent of the first $31,767 in annual wages, resulting in a maximum tax of $159. Chapter 973, Statutes of 1999 (SB 656, Solis) in- creased the maximum benefit payment from $336 per week to $490 per week, effective January 2000. Chapter 973 also resulted in an increase in the wage ceiling (for the tax) from $31,767 to $46,327. The two changes made by Chapter 973 are estimated to be budget neutral. Fund Condition. At the end of 1997-98, the DI Fund had a balance of $1.1 billion. In 1998-99, the DI disbursements of $1.8 billion exceeded rev- enues of $1.3 billion; thus, the fund balance was reduced to about $600 mil- lion. Without an increase in the current tax rate of 0.5 percent, the EDD projects that the DI Fund will have a deficit of $278 million by December 2000. The Governor’s budget proposes to increase the tax rate to 0.63 per- cent in April 2000 and 0.65 in January 2001. Assuming these rate increases go into effect, the Governor’s budget projects that the DI Fund will have a balance of $304 million as of June 2001. We note, however, that even with these rate increases the fund will experience a deficit of $33 million in December 2000. Thus, the fund will need a temporary loan in order to pay anticipated benefit payments. Statutory Formula for Setting the DI Contribution Rate. Section 984 of the Unemployment Insurance Code specifies a methodology for the Direc- tor of EDD to set worker contribution rates for the DI Program each January. Section 984 also grants the Director discretionary authority to reduce or in- crease the statutory formula rate by 0.1 percent. The statute also requires the Director to prepare a public statement by October 31 of each year which declares the rate of worker contributions for the succeeding calendar year. Recent History. During calendar years 1997 and 1998 the DI tax rate was 0.5 percent. In fall 1998, the department determined that the statu- tory formula would result in a rate of 0.6 percent for calendar year 1999. Using his statutory authority to set rates within 0.1 percent of the for- mula rate, the Director retained the rate at 0.5 percent for 1999. Rate for Calendar Year 2000 Conflicts with Current Law. In October 1999, the statutory formula indicated that the tax rate for calendar year 2000 should be 0.8 percent. Thus, the statute requires that the rate be at least 0.7 per- cent (the formula rate of 0.8 percent less the discretionary authority to re- duce by 0.1 percent). The new Director of EDD, however, has not changed the rate (currently 0.5 percent). Instead, the budget proposes an increase to 0.63 percent in April 2000 (and 0.65 percent in January 2001). Therefore, even with the proposed increase, the rate for 2000 would be below the level re- quired by current law. Thus, the budget proposes urgency legislation to set rates at the levels described above. The department estimates that the DI Fund will have a deficit of $33 million as of December 2000. The budget projects a positive balance of $304 million on June 30, 2001. Employment Development Department C – 125 Legislative Analyst’s Office Caregiver Training, Retention, and Recruitment As part of the Governor’s Aging with Dignity Initiative, the budget includes $50 million ($15 million Workforce Investment Act funds, and $35 million Welfare-to-Work state matching funds) to train, recruit, and retain workers in the caregiver industries. For our analysis of this issue, please see our analysis of the Aging with Dignity Initiative in the Cross- cutting Issues section of this chapter. Update on Workforce Investment Act Implementation Background. The federal Workforce Investment Act (WIA) of 1998, which replaced the Job Training Partnership Act, provides employment and training services to youths and adults. The goal of the new legisla- tion is to strengthen coordination among various employment, training, and education programs. The act requires states to submit plans for imple- menting the new program to the Department of Labor by April 2000. Actual implementation of the WIA is scheduled to begin on July 1, 2000. State Board Appointed. The Governor appointed 63 members to the statutorily required California Workforce Investment Board (CWIB) in December 1999. The board includes four members of the Legislature (two from each house) and representatives from business, labor, education, local government, and the job training provider community. The board is responsible for assisting in the development of the required state plan. Draft State Plan Released. On January 28, 2000, the CWIB released the draft State Workforce Investment Act Plan for review and comment. During February 2000, the CWIB will hold five public hearings to receive comments on the plan. As noted above, the plan must be submitted to the Department of Labor by April 1, 2000. Budget Proposal. For 2000-01, the budget proposes an appropriation of $574.5 million in federal WIA funds in EDD’s budget. These funds will be expended on training programs and services for adults, economically disadvantaged youths, and dislocated workers. In addition, the budget proposes $3.6 million in federal WIA funds to support the CWIB. C – 126 Health and Social Services 2000-01 Analysis DEPARTMENT OF REHABILITATION (5160) The Department of Rehabilitation (DR) provides basic vocational re- habilitation and habilitation services to persons with disabilities. The purpose of vocational rehabilitation services is to place disabled individu- als in suitable employment, while habilitation services help individuals who are unable to participate in vocational rehabilitation programs achieve a higher level of functioning. Services are provided in sheltered work- shops under the Work Activity Program (WAP) and to groups or indi- viduals on job sites through the Supported Employment Program (SEP). In addition, the department helps legally blind clients support them- selves as operators of vending stands, snack bars, and cafeterias through- out the state; provides prevocational rehabilitation services to newly blind adults; develops cooperative agreements with school districts, state and community colleges, and county mental health programs to provide ser- vices to mutually served clients; and assists community-based rehabili- tation facilities such as independent living programs, halfway houses, and alcoholic recovery homes. The budget proposes $430 million from all funds for support of DR programs in 2000-01, an increase of 4.1 percent over estimated current- year expenditures. The budget proposes $127 million from the General Fund, which is $8 million, or 6.7 percent, above estimated current-year expenditures from this funding source. Funding for Statutory Rate Increase Will Be Proposed in May The budget does not include funding for the statutory rate increase for the Work Activity Program in 2000-01. However, the budget indicates that the administration will propose a rate increase in May. Preliminary projections by the department indicate that the rate increase would result in a General Fund cost of $7 million in 2000-01. Department of Rehabilitation C – 127 Legislative Analyst’s Office Current law requires the department to adjust rates for WAP provid- ers every two years. The next adjustment is scheduled to take effect July 1, 2000. Because actual service provider cost statements are used to deter- mine the rate increase, the budget indicates that the increase will be pro- posed in May when more information is available. The budget as intro- duced therefore includes no funding for the rate increase. Based on cost statements available through December 1999, the department’s prelimi- nary projection is a 12.4 percent rate increase (covering two years), re- sulting in increased General Fund expenditures of $7 million in the bud- get year. Caseload May Be Underbudgeted, Based on Recent Trends Recent trends in the Work Activity Program and the Supported Employment Program indicate that the budget’s projected caseloads may be too high in some programs and too low in others, resulting in a potential net underfunding of $6.1 million in General Fund expenditures. The administration will revise its projections in May, when more caseload data will be available. The budget proposes expenditures of $135 million in total funds ($104 million General Fund) to support vocational rehabilitation and ha- bilitation services programs for clients with developmental disabilities. This is an increase of $1.3 million, or 1 percent, from the General Fund. Our analysis of the department’s caseload projections indicates that the budget does not account for recent caseload trends. Habilitation Services Program\/Work Activity Program (HSP\/WAP) Projection Too Low. The budget proposal projects an increase of eight HSP\/WAP cases per month during 2000-01, with total cases increasing from 9,165 at the beginning of the fiscal year to 9,209 in June 2001. Based on our analysis of the most recent 12 months of data (December 1998 through November 1999), the actual caseload is increasing by an average of 17 cases monthly, as shown in Figure 1. Applying this trend to the ac- tual caseload of 9,325 in November 1999, we estimate that the caseload will increase to 9,648 by June 2001. We estimate an average monthly caseload of 9,555, which is 368 cases higher than the department’s projec- tion. This caseload adjustment would result in increased General Fund expenditures of $2.1 million in 2000-01. Vocational Rehabilitation\/Work Activity Program (VR\/WAP) Pro- jection Too High. The budget proposal projects an increase of one VR\/ WAP case per month during 2000-01, resulting in a caseload of 2,525 in June 2001. However, our review of the most recent eight months of data shows that the actual caseload is decreasing by an average of 29 cases per C – 128 Health and Social Services 2000-01 Analysis month, as shown in Figure 1. Applying this trend to the actual caseload of 2,104 cases in August 1999, we estimate that the caseload will fall to 1,466 clients in 2000-01, resulting in an average monthly caseload of 1,626, or 894 less than the department’s projection. This caseload adjustment results in a savings of $5.2 million ($1.1 million General Fund) in 2000-01. Figure 1 Department of Rehabilitation Program Caseload Trends (In Millions) Program Recent Caseload Trends 2000-01 Average Monthly Caseload General Fund Impact Difference Monthly Change a Actual November 1999 b Governor’s Budget LAO Difference HSP\/WAP 17 9,325 9,187 9,555 368 $2.1 VR\/WAP -29 2,104 2,520 1,626 -894 -1.1 HSP\/SEP Group 21 3,223 3,081 3,507 426 4.2 VR\/SEP Group 28 957 609 1,335 726 1.5 VR\/SEP Individual -9 938 1,055 790 -265 – 0.6 Net Difference $6.1 a Based on most recent 12 months (December 1998 through November 1999, except for the VR\/WAP and VR\/SEP individual- placement programs, which had data available only through August 1999. For the VR\/WAP program, based on data from the most recent eight months). b Actuals for the VR\/WAP and VR\/SEP individual-placement programs are from August 1999. Supported Employment Program Projections: Group Placement Too Low, Individual Placement Too High. Supported employment program services can be provided for individual clients as well as in group set- tings. Chapter 329, Statutes of 1998 (AB 2779, Aroner), changed the rate- setting methodology for SEP from a rate per client hour to a rate per job coach hour. The change was projected to be cost neutral, but General Fund expenditures in 1998-99 increased unexpectedly. The department identi- fied an unexpected increase in the number of SEP groups as one reason for the increased costs. Chapter 147, Statutes of 1999 (AB 1111, Aroner), extended the 1998-99 rates through 1999-00 with the provision that rates be prorated if neces- sary to ensure that General Fund expenditures for the program not ex- ceed appropriations. In order to contain costs, the budget proposes to extend this provision in the budget year. Department of Rehabilitation C – 129 Legislative Analyst’s Office The budget proposal projects a monthly increase of six HSP\/SEP group-placement clients and a monthly increase of one VR\/SEP group- placement client during 2000-01. Our analysis of the most recent 12 months of data shows that the HSP\/SEP group-placement caseload is increasing by 21 clients per month, and the VR\/SEP group-placement caseload is increasing by 28 clients per month, as shown in Figure 1. Applying these trends to the actual November 1999 caseloads, we estimate that the HSP\/ SEP group-placement caseload will increase to 3,622 clients in June 2001, and that the VR\/SEP group-placement caseload will increase to 1,489 by the end of the fiscal year. Our average monthly caseload projections are 426 and 726 above the department’s projections, respectively. The adjusted caseload projections result in an increase of $5.7 million from the General Fund. The budget proposal projects that the VR\/SEP individual-placement caseload will increase by two clients per month during 2000-01. Our analy- sis indicates that the caseload is decreasing by an average of nine clients per month. Applying these trends to the actual November 1998 caseload, we project a caseload of 740 in June 2001, with an average monthly caseload of 790 in the budget year. This is 265 clients less than the department’s estimate. Our projection would result in a savings of $612,000 from the General Fund. Summary. Based on the most recent caseload trends, we estimate that WAP and SEP caseload projections would, on net, be higher than the amounts assumed in the budget, resulting in a net increase of $5.8 million in General Fund expenditures. We note, however, that additional caseload data will be available at the time of the May revision of the budget. High Vacancy Rates Reduce Accountability We recommend that the department present a staffing plan to the budget committees that either (1) identifies and proposes to eliminate approximately 150 vacant authorized positions from the department’s Field Operations Division in order to reflect actual staffing patterns, or (2) proposes funding to fill the vacant positions. The department’s Field Operations Division administers the VR pro- gram through the department’s 120 field offices. The division has 1,822 authorized positions, most of which are filled by counselors who deliver VR services to clients. Currently the division has approximately 240 vacancies (13 percent of all authorized positions). This vacancy rate is not new; since 1994-95, the division has had vacancy rates as high as 14 percent. We note that all departments have some vacant positions due to normal personnel turn- C – 130 Health and Social Services 2000-01 Analysis over and hiring delays, but generally these vacancies are about 5 percent of total positions and are reflected in the department’s salary savings re- quirement. The DR indicates that it intentionally left positions in the Field Operations Division vacant in order to absorb the cost of the 3 percent salary increase granted January 1, 1995, which was not fully funded in the budget for DR and most other departments. We believe that maintaining such high vacancy rates undermines the Legislature’s ability to effectively oversee the VR program because the department’s staffing appears to be richer than what is actually occur- ring. A more straightforward method of budgeting would be to keep va- cancies at the normal salary savings rate of 5 percent. For this reason, we recommend that the department submit a staffing plan to the budget com- mittees that either (1) identifies and proposes to eliminate approximately 150 of the division’s 240 vacant authorized positions (leaving vacant ap- proximately 90 positions, or 5 percent of all positions), or (2) proposes funding to fill the positions, with appropriate justification. Department of Child Support Services C – 131 Legislative Analyst’s Office DEPARTMENT OF CHILD SUPPORT SERVICES (5175) The primary purpose of California’s child support enforcement pro- gram is the collection of payments from absent parents for custodial par- ents and their children. Child support offices in the state’s 58 counties provide services such as locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting and distributing payments. Federal law requires states to provide these services to all custodial parents receiving Temporary Assistance for Needy Families (TANF, which is the California Work Opportunity and Respon- sibility to Kids [CalWORKs] program in California) and, on request, to non-TANF parents. Child support payments collected on behalf of TANF families have historically been used primarily to offset the federal, state, and county costs of TANF grants. Collections made on behalf of non- TANF parents are distributed directly to these parents. As discussed below, legislation enacted in 1999 transferred state ad- ministration of the program from the Department of Social Services (DSS) to the newly created Department of Child Support Services (DCSS). The budget proposes $969 million from all funds ($359 million General Fund) for the DCSS in 2000-01. This includes $874 million ($332 million General Fund) for local assistance for the operation of the local child support of- fices. The proposal for local assistance represents an increase of $23 mil- lion from the General Fund (about 7 percent) over the current year. The budget proses to transfer the state share of child support collections for CalWORKs families\u2014$284 million\u2014into General Fund revenues in 2000-01. Currently, these collections are budgeted as state savings in the form of offsets to CalWORKs grant expenditures. LEGISLATIVE REFORMS OF 1999 Prior to the legislative reforms in California, the child support program was administered at the local level by the county district attorneys (DAs), C – 132 Health and Social Services 2000-01 Analysis with state oversight by the DSS. In an effort to improve program perfor- mance, the Legislature passed a package of bills in 1999, including Chapters 478 (AB 196 Kuehl), 479 (AB 150, Aroner), and 480 (SB 542, Burton and Schiff). Together, these acts made significant changes to the organization, adminis- tration, and funding of the program (see Figure 1). Generally, these reforms significantly increased state authority and oversight over the program, and changed state administrative responsibility for developing the statewide child support automation system. Included among the changes are the creation of a new state Department of Child Support Services; the transfer of local ad- ministration from the county DAs to separate county child support agen- cies; and the transfer of responsibility for procurement of the automation system from the state Health and Human Services Agency Data Center to the Franchise Tax Board. (Please refer to our analyses of the Health and Human Services Agency Data Center and the Franchise Tax Board in the General Government chapter.) THE BUDGET PROPOSAL FOR THE DEPARTMENT OF CHILD SUPPORT SERVICES The Governor’s budget proposes $95 million from all funds ($26.5 mil- lion General Fund) for state operations to support the Department of Child Support Services in 2000-01. The proposal includes a transfer of $79 mil- lion ($23 million General Fund) and 95 positions from DSS to the newly created DCSS, and $3.5 million (General Fund) for 128 new positions and additional operating expenses. Administration Division Is Overbudgeted We recommend (1) deletion of five proposed new positions from the Administration Division of the new Department of Child Support Services, (2) the conversion of five proposed permanent positions in this division to two-year limited term, and (3) the transfer of four more positions, in addition to the 13.5 transfer positions proposed, from the Department of Social Services to the Department of Child Support Services. This will result in General fund savings of $220,000. (Reduce Item 5175-001-0001 by $125,000 and Item 5180-001-0001 by $95,000.) The Governor’s budget proposed a total of 229 positions for the DCSS (see Figure 2 on page 134). The department is organized into the following units: Executive offices; Program Division; Systems Division; and Adminis- tration Division. While the Program Division includes a significant increase in positions (compared to the staffing levels in DSS), we recommend ap- proval of this component because (1) a significant proportion of the new Department of Child Support Services C – 133 Legislative Analyst’s Office workload is to carry out new tasks required by the legislative reforms, and (2) we believe there is a need to provide more program support in order to improve the performance of the local child support programs. With respect to the proposed staffing level for the Administrative Division, however, we find that the budget (1) proposes more positions than are needed and (2) un- derestimates the number of positions that should be transferred from DSS. Figure 1 Major Provisions of the Child Support Reforms of 1999 Creates New State Department. As of January 2000, state-level administration and oversight of the child support enforcement program was transferred from the Department of Social Services to the new Department of Child Support Services. Shifts Local Administration to New County Agencies . At the local level, ad- ministrative responsibility will be shifted from the county district attorneys to newly-created county agencies. Shifts Responsibility for Determining Program Expenditures to the State . Responsibility for determining program expenditure levels and how funds will be allocated among the local agencies will shift from the counties to the state. Establishes a Program Performance Improvement Process . Local agency failure to comply with plans could lead to state assumption of responsibility. Revises the County Fiscal Incentive Payment System . Establishes new incen- tives for counties, subject to availability of funding. Changes Approach for Automation to a Single-Statewide System . Previ- ously, the approach was county-based. Transfers Responsibility for Procurement of the Automation System to the Franchise Tax Board (FTB). Previously, the Health and Human Services Agency Data Center was responsible for procurement. Requires Performance-Based Procurement for the New Statewide Automa- tion System. The procurement for the single statewide system will be based on the vendor’s ability to meet pre-agreed upon program performance levels. Shifts Responsibility for Interim Automation Systems to the State. The state is responsible for determining changes and enhancements to county-based systems. Establishes a Project Charter for the Statewide Automation System . Project charter will describe the governance structure, roles and responsibilities, and the management for the single-statewide system. Requires State to Assume Responsibility for Automation Penalties . The state, rather than countries, will be responsible for the federal financial penalties for not meeting deadlines for the statewide system. Expands the FTB’s Child Support Delinquency Collection Program . The program will cover a broader range of cases. C – 134 Health and Social Services 2000-01 Analysis F ig u re 2 D ep ar tm en t o f C h ild S u p p o rt S er vi ce s S ys te m s D iv is io n Di re ct or & Ch ie f D ep ut y Ex is tin g: 0 N ew : 4 To ta l: 4 Po lic y Bu re au Ex is tin g: 13 .5 N ew : 10 .5 To ta l: 24 Fi sc al P ol ic y Ex is tin g: 5 N ew : 7 To ta l: 12 Pr og ra m E va lu at io n\/ Te ch . A ss is ta nc e Ex is tin g: 21 N ew : 21 .5 To ta l: 42 .5 Cu st om er S er vi ce \/ Da ta A na ly si s Ex is tin g: 17 .5 N ew : 11 To ta l: 28 .5 Fi sc al M an ag em en t Ex is tin g: 2 N ew : 7 To ta l: 9 Hu m an Re so ur ce s Ex is tin g: 1 N ew : 10 To ta l: 11 St at ew id e Sy st em s\/ Lo ca te \/In te rc ep t Ex is tin g: 24 N ew : 8 To ta l: 32 Ap pl ic at io ns & In fra st ru ct ur e Ex is tin g: 3 N ew : 9 To ta l: 12 Ac co un tin g Ex is tin g: 2 N ew : 9 To ta l: 11 Bu si ne ss O pe ra tio ns Ex is tin g: 2 N ew : 8. 5 To ta l: 10 .5 In fo S ec ur ity & Au di tin g Ex is tin g: 0 N ew : 2 To ta l: 2 Su m m ar y Ex is tin g: 95 N ew : 12 8 Te m p H el p: 6 To ta l: 22 9 Le ga l Ex is tin g: 1 N ew : 5 To ta l: 6 Le gi sl at io n Ex is tin g: 0 N ew : 3 To ta l: 3 Pu bl ic A ffa irs Ex is tin g: 0 N ew : 2 To ta l: 2 Re gi on al A dm in . Ex is tin g: 1 N ew : 6 To ta l: 7 A d m in is tr at io n D iv is io n P ro g ra m D iv is io n – D ep t. D ir. 1 – E xe c. A ss is t. 1 – D ep t. D ir. 1 – E xe c. A ss is t. 1 – D ep t. D ir. 1 – E xe c. A ss is t. 1 P ro po se d S ta ffi ng , 2 00 0- 01 Department of Child Support Services C – 135 Legislative Analyst’s Office More Positions Than Comparable Departments. In order to evaluate the Administrative Division, we compared the staffing proposal with the corresponding administrative positions in other departments of similar size (a total of 100 to 300 positions). Our analysis of administrative units focuses on those components that are similar in function to the DCSS administrative functional areas (administrative division management; fis- cal and accounting units; human resources; and business operations). Figure 3 summarizes this comparison. It shows that the budget pro- poses staffing DCSS with 18 percent of total positions in these adminis- trative units, whereas the comparison departments are staffed at an aver- age of 14 percent for the same units. If held to this administrative average of comparison departments, DCSS should have 32, not the proposed 42, positions in these administrative areas. While we recognize the need for enhanced staffing to start a new department, we believe that providing DCSS with ten more administra- tive positions than comparable departments is excessive. Accordingly, we recommend (1) the deletion of five of the proposed new positions from the division and (2) the conversion of five proposed permanent po- sitions to two-year limited term. We believe that this will be sufficient to meet the workload demands of the Administration Division, including tasks associated with starting up a new department. This component of our recommendation would result in General Fund savings of $125,000. Figure 3 Administrative Division Staffing Department of Child Support Services and Comparable Departments 2000-01 Department Total Positions Administrative Positionsa Percent Aging 142 33 23% Community Services and Development 158 28 18 Real Estate 303 33 11 Fair Housing and Employment 306 11 4 Average of comparison departments 227 26 14% Child Support Services 229 42 18% a Excludes positions not comparable to the Department of Child Support Services. C – 136 Health and Social Services 2000-01 Analysis The DSS Should Transfer More Positions. In addition to transferring program staff from DSS, the Governor’s budget proposes to transfer 13.5 administrative and support positions from DSS to DCSS. The proposed transfer of 13.5 positions consists of positions from the following units in DSS: Administration; Data Analysis; Legal Services; and Information Sys- tems. In order to calculate the proportionate number of positions to reas- sign from DSS, the administration used the ratio of DSS’s Office of Child Support staffing to total departmental staffing in 1990-91. The rationale for using this baseline year was that, while the staffing of the Office of Child Support grew significantly beginning in 1990-91, DSS grew only minimally in relevant administrative units during the same time period. We believe the relevant question is whether the DSS has provided adequate administrative support recently, not ten years ago. The admin- istration has not requested additional administrative positions in DSS due to the increase in child support program staff, and has not demonstrated that departmental activities such as accounting and personnel manage- ment currently are inadequate. Consequently, we believe it would be more reasonable to apply the department’s methodology to current-year staff- ing levels in DSS, rather than 1990-91. We therefore made the same calcu- lation using the 1999-00 staffing levels and determined that a total of 17.5 administrative and support positions, or four more than proposed in the budget, should be transferred. This is generally consistent, moreover, with the fact that the department claimed federal child support matching funds for 18 administrative positions in 1998-99. Accordingly, we recommend a transfer of four additional positions, and a General Fund reduction of $95,000 in the DSS budget. In total, our recommendations would result in combined General Fund savings of $220,000. How Should Local Assistance Be Funded in 2000-01? We recommend (1) a $5 million General Fund augmentation for local assistance in 2000-01, to be allocated to local agencies on the basis of county cost-effectiveness (the ratio of historical increases in collections to increases in costs) and (2) enactment of legislation requiring the department to include cost-effectiveness as a criterion in the allocation of all funds to local agencies. We believe that the augmentation will result in a net long-term savings to the state. (Increase Item 5175-101-0001 by $5 million.) Past Research Suggests Program Underinvestment. In previous analy- ses, we have shown that the principal goal of the program\u2014the collec- tion of child support\u2014is strongly related to the amount of fiscal resources committed to the program (administrative expenditures). It does not nec- essarily follow, however, that increasing program spending (and the re- Department of Child Support Services C – 137 Legislative Analyst’s Office sulting increase in collections) will be cost-effective to government. This will depend, in large part, on how much it costs to achieve the additional collections. In addressing this question, we found that (1) the counties vary significantly in their levels of cost-effectiveness, as measured by the ratio of collections to costs, and (2) it is likely that an increase in expendi- tures in many of the counties would yield not only an increase in collec- tions, but net savings to the state due to the welfare grant reductions that result from collections on behalf of these families. We also found that the funding structure of the prior program\u2014 whereby the counties ultimately determined expenditure levels\u2014tended to result in an underinvestment of resources in the program. This is primarily because (1) in many cases, counties did not benefit fiscally from the program and therefore had no fiscal incentive to increase spending even when such spending would benefit the state, or (2) in other cases, counties probably would benefit but, without having any assurance of such an outcome, did not want to risk an increase in spending. (For more detail on these findings, please see The 1992-93 Perspectives and Issues and our April 1999 report entitled The Child Support Enforcement Program From a Fiscal Perspective: How Can Performance Be Improved?) Reforms Create New Opportunity. Under the new reforms, control over spending will shift to the state, creating an opportunity to allocate resources so as to increase both collections and state savings. To achieve this, additional spending should occur in those counties, or local pro- gram sites, where there is reason to believe that the resulting increase in collections will be sufficient to yield a net savings to the state. We note that this could be accomplished by a reallocation of existing funding re- sources among the counties and\/or a net augmentation to the program. Under the new reforms, control over spending will shift to the state, creating an opportunity to allocate resources so as to increase both collec- tions and state savings. To achieve this, additional spending should oc- cur in those counties, or local program sites, where there is reason to be- lieve that the resulting increase in collections will be sufficient to yield a net savings to the state. We note that such an investment could be accom- plished by a reallocation of existing funding resources among the coun- ties and\/or a net augmentation to the program. Regardless of the source of funds (reallocation or net augmentation), the state is still faced with the question of how best to allocate program funding among the local jurisdictions. One way to allocate the funds is based on the relative cost-effectiveness of counties as measured by their collections to cost ratios. To illustrate the underlying concept, we note the following two hypothetical examples of counties with different, but gen- erally representative, levels of cost-effectiveness in collecting child sup- C – 138 Health and Social Services 2000-01 Analysis port, as indicated by their ratios of marginal collections to marginal costs (that is, the increase in collections that accompany an increase in admin- istrative costs). In Figure 4, County A is a relatively efficient county which collects an additional $3 in child support for every additional $1 spent in adminis- tering the program. County B represents a relatively inefficient county which collects an additional $1 for every $1 expended. The figure shows that after accounting for federal reimbursements, CalWORKs grant sav- ings, and federal incentive payments, a $1 increase in spending in County A would yield a net state savings (12 cents), whereas a $1 increase in spending in County B would result in a net state cost (29 cents). Figure 4 Net State Costs (Savings) From $1 Increase in Spending Under Two Marginal Collections\/Costsa Scenarios Hypothetical County A: Collections\/Cost Ratio = $3\/$1 Cost $1.00 Federal reimbursementb -.50 Federal incentive payment -.15 Welfare savings -.47 Net state costs (savings) -$.12 Hypothetical County B: Collections\/Cost Ratio = $1\/$1 Cost $1.00 Federal reimbursementb -.50 Federal incentive payment -.05 Welfare savings -.16 Net state costs $.29 a Ratio of increase in total collections (net of $50 disregard payments) to increase in total administrative costs. b Assumes reduced federal reimbursement due to automation penalties. Thus, one option would be to reallocate funds from County B to County A. We note, however, that at some point this option could result in significant program disruptions to County B (which, while relatively inefficient, is still providing some programmatic benefits through its ef- forts), depending on the amount of such reallocations. Department of Child Support Services C – 139 Legislative Analyst’s Office A second option would be to augment the program, with the increase limited to those counties that hold the most promise of using the funds cost-effectively (such as County A in our example). In this respect, we note that county cost-effectiveness can be a relatively dynamic phenom- enon. In other words, we would expect it to change over time. Further- more, historical data are only an indication of what might happen in the future, and provide no guarantee. Analyst Recommendations. After reviewing the historical data on marginal collections and costs among the counties, we believe it would be reasonable to pursue both options. Consequently we recommend (1) a $5 million General Fund augmentation for local assistance in 2000-01, to be allocated to local agencies on the basis of county cost-effectiveness (the ratio of historical increases in collections to increases in costs) and (2) legislation requiring the department to include marginal cost-effec- tiveness as a criterion in the allocation of all funds to local agencies. We believe that the augmentation, in particular, will result in a net long-term savings to the state. If our proposed augmentation is adopted, we recommend adoption of the following budget bill language in Item 5175-101-0001: Of the amount appropriated in this item, $5 million shall be allocated to the counties solely on the basis of the counties’ cost-effectiveness, as measured by the ratio of historical increases in collections to increases in costs. C – 140 Health and Social Services 2000-01 Analysis DEPARTMENT OF SOCIAL SERVICES CALWORKS PROGRAM (5180) In response to federal welfare reform legislation, the Legislature cre- ated the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children (AFDC), the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the one- parent component of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for the two-parent component if it includes a child who is financially needy due to the unemployment of one or both parents. The budget proposes an appropriation of $5.6 billion ($2.1 billion Gen- eral Fund, $195 million county funds, $30 million from the Employment Training Fund, and $3.3 billion federal funds) to the Department of So- cial Services for the CalWORKs program. In total funds, this an increase of $186 million, or 3.5 percent. Similarly, General Fund spending is pro- posed to increase by $78 million (3.8 percent). Although the current-year amounts reflect the grant savings from child support collections, the bud- get proposes a technical change to treat child support collections as rev- enues in the budget year. If the budget-year figures for CalWORKs are adjusted, for purposes of comparison, to include the savings from child support collections (net of the costs of child support incentives paid to the counties), then proposed total CalWORKs spending would be $316 million (5.9 percent) less than the current year, and General Fund spending would be $126 million (6.3 percent) below the current year. Department of Social Services CalWORKs Program C – 141 Legislative Analyst’s Office Impact of Maintenance-of-Effort Requirement Because the Governor’s budget proposes to expend all available federal block grant funds and the minimum amount of General Fund monies required by federal law, any net augmentation will result in General Fund costs and any net reductions will result in savings in federal block grant funds (which would be retained by the state). Maintenance-of-Effort (MOE) Requirement. To receive the federal Temporary Assistance for Needy Families (TANF) block grant, states must meet a MOE requirement that state spending on welfare for needy fami- lies be at least 75 percent of the federal fiscal year (FFY) 1994 level, which is $2.7 billion for California. (The requirement increases to 80 percent if the state fails to comply with federal work participation requirements.) Although the MOE requirement is primarily met with state and county spending on CalWORKs and other programs administered by the De- partment of Social Services (DSS), we note that $400 million in state spend- ing in other departments is used to help satisfy the requirement. Proposed Budget Is At the MOE Floor. For 2000-01, the Governor’s bud- get for CalWORKs is at the MOE floor. We note that the budget also includes, $59 million for the purpose of providing state matching funds for the federal Welfare-to-Work block grant funds. These funds cannot be counted toward the MOE because they are used to match federal funds. The Governor’s budget also proposes to spend all available federal TANF funds in 2000-01, including the projected carry-over of unexpended funds ($459 million) from 1999-00. We note that without these carry-over funds, General Fund spending would be significantly above the MOE floor in 2000-01, under the budget’s assumption of fully funding the esti- mated needs for the program. Caseload Projection is Overstated We recommend that proposed spending for California Work Opportunity and Responsibility to Kids grants be reduced by $66 million (federal Temporary Assistance for Needy Families funds) in 1999-00 and $35 million in 2000-01 because the caseload is overstated. (Reduce Item 5180-101-0890 by $34,900,000.) The CalWORKs caseload has been declining rapidly since reaching its peak in 1994-95. During 1998-99, the number of persons in the CalWORKs program decreased by approximately 14 percent. The Governor’s budget projects that the average monthly number of persons in CalWORKs will de- crease by 10 percent in 1999-00 and 6.8 percent in 2000-01. Thus, on a year- over-year basis the budget assumes a continuing caseload decline. How- ever, the budget’s month-by-month estimates show that the caseload is pro- C – 142 Health and Social Services 2000-01 Analysis jected to decrease until October 1999, at which point it increases until April 2000. Beginning in May, the budget assumes that the caseload will once again begin to decline, but not as rapidly as in prior years. Our review of caseload trends does not suggest any reason to project an abrupt end to the caseload decline during the current year. We note that the CalWORKs program was not completely implemented in 1998-99, and that the tendency for recipients to benefit from welfare-to-work ser- vices and subsequently leave assistance is likely to be stronger in 1999-00 when the program is fully implemented. Accordingly, we estimate that caseload decline will continue steadily throughout 1999-00. We recog- nize, however, the possibility that caseloads will level off at some point in the future, once the program is fully implemented. Consequently, in order to be conservative in forecasting budget savings, we project that the caseload will begin to level off in 2000-01. Figure 1 shows the actual caseload through September 1999 (the last month for which data are available) and then compares the Legislative Analyst’s Office (LAO) caseload forecast with the Governor’s budget fore- cast. The LAO forecast projects that the caseload will decline by 12 percent in 1999-00 and 5.8 percent in 2000-01. Compared to the Governor’s budget, the LAO forecast will result in grant savings of $65.8 million (federal TANF funds) Figure 1 CalWORKs Persons Comparison of Forecasts (In Thousands) 1,400 1,600 1,800 2,000 2,200 2,400 Jul 97 Nov 97 Mar 98 Jul 98 Nov 98 Mar 99 Jul 99 Nov 99 Mar 00 Jul 00 Nov 00 Mar 01 Jun 01 Actual LAO Governor’s Budget Department of Social Services CalWORKs Program C – 143 Legislative Analyst’s Office in 1999-00, and $34.9 million in 2000-01. Accordingly, we recommend that the budget be reduced to reflect these savings. Budget Overestimates Cost of Providing Statutory Cost-of-Living Adjustment We recommend that proposed spending for California Work Opportunity and Responsibility to Kids grants be reduced by $20 million (federal Temporary Assistance for Needy Families funds) because the statutory cost-of-living adjustment will be lower than estimated in the budget. (Reduce Item 5180-101-0890 by $20,000,000.) Pursuant to current law, the Governor’s budget proposes to provide the statutory cost-of-living adjustment (COLA), effective October 2000, at a Gen- eral Fund\/TANF fund cost of $112 million. The statutory COLA is based on the change in the California Necessities Index (CNI) from December 1998 to December 1999. The Governor’s budget, which is prepared prior to the re- lease of the December CNI figures, estimates that the CNI will be 3.61 per- cent, based on partial-year data. Our review of the actual full-year data, how- ever, indicates that the CNI will be 2.96 percent. Applying the actual CNI of 2.96 percent reduces the cost of providing the COLA to $92 million, a sav- ings of $20 million compared to the Governor’s budget. We recommend that the budget be reduced to reflect these savings.The CalWORKs Grant Levels Figure 2 (see next page) shows the maximum CalWORKs grant and food stamps benefits for a family of three, effective October 2000, as dis- played in the Governor’s budget assuming a 3.61 percent CNI and as adjusted to reflect the actual CNI of 2.96 percent. As the figure shows, grants for a family of three in high-cost counties will increase by $19 to a total of $645, and grants in low-cost counties will increase by $18 to a total of $614. As a point of reference, the federal poverty guideline for 1999 (the latest reported figure) for a family of three is $1,157 per month. (We note that the federal poverty guidelines are adjusted annually for inflation.) When the grant is combined with maximum food stamps benefit, total resources in high-cost counties will be $890 per month (77 percent of the poverty guideline). Combined maximum grant and food stamps benefits in low-cost counties will be $873 per month (75 percent of the poverty guideline). C – 144 Health and Social Services 2000-01 Analysis Figure 2 CalWORKs Maximum Monthly Grant and Food Stamps Governor’s Budget and LAO Projection Family of Three 1999-00 and 2000-01 2000-01 LAO Projection Change From 1999-00 1999-00 Governor’s Budgeta LAO Projectiona, b Amount Percent Region 1: High-cost counties CalWORKs grant $626 $649 $645 $19 3.0% Food Stampsc 254 243 245 -9 -3.5 Totals $880 $892 $890 $10 1.1% Region 2: Low-cost counties CalWORKs grant $596 $618 $614 $18 3.0% Food Stampsc 267 257 259 -8 -3.0 Totals $863 $875 $873 $10 1.2% a Effective October 2000. b Based on California Necessities Index at 2.96 percent (revised pursuant to final data) rather than Gov- ernor’s budget estimate of 3.61 percent. c Based on maximum food stamps allotments effective October 1999. Maximum allotments are adjusted annually each October by the U.S. Department of Agriculture. Budget Underestimates Savings From Imposition of Sanctions We recommend that proposed spending for California Work Opportunity and Responsibility to Kids (CalWORKs) grants be reduced by $32 million in 1999-00 and $30.1 million in 2000-01 (federal Temporary Assistance for Needy Families funds) because grant savings from the imposition of sanctions on CalWORKs recipients are underestimated. (Reduce Item 5180-101-0890 by $30,095,000.) The CalWORKs program requires able bodied adults to participate in work or work-related activities for a minimum of 32 hours per week. Failure to comply with this requirement results in a sanction, in the form of a grant reduction. In addition, participants are required to have their children im- munized, ensure that their children attend school, and cooperate with child support enforcement. Failure to comply with these requirements results in a penalty (also a grant reduction). Based on data from 1998, the Governor’s budget assumes that an average of 4 percent of all CalWORKs cases will Department of Social Services CalWORKs Program C – 145 Legislative Analyst’s Office have a sanction or penalty imposed upon them during 1999-00 and 2000-01. Consistent with this assumption, the budget estimates savings from penal- ties and sanctions to be $43.3 million in 1999-00 and $40.7 million in 2000-01. The most recent data\u2014from July and August of 1999\u2014indicate that the combined sanction and penalty imposition rate was 7 percent, a substan- tial increase from the 1998 levels used as the basis for the Governor’s budget (largely due to increased participation requirements in CalWORKs). Based on the more recent data, we estimate that savings from sanctions and penalties will be $32 million above the budget estimate in 1999-00 and $30.1 million above the budget projection for 2000-01. Accordingly, we rec- ommend that the budget be reduced to reflect these savings. Count Spending on Health Care Programs for Recent Legal Immigrants Toward MOE Requirement We recommend that the department count toward the California Work Opportunity and Responsibility to Kids (CalWORKs) maintenance-of- effort requirement $49.9 million in General Fund expenditures for health care for legal immigrants. This action permits the replacement of General Fund expenditures for CalWORKs grants with an identical amount of available federal Temporary Assistance for Needy Families funds, thereby resulting in $49.9 million of General Fund savings. (Reduce Item 5180- 101-0001 by $49,900,000 and increase Item 5180-101-0890 by $49,900,000.) Countable MOE Funds. Pursuant to the federal welfare reform legisla- tion, California may count many types of state spending on families eligible for CalWORKs, even if they are not in the CalWORKs program, for pur- poses of meeting the MOE requirement. To be countable, such spending must be consistent with the broad purposes of federal welfare reform\u2014providing assistance to families so that they can become self-sufficient. For health ex- penditures to be countable, they must (1) satisfy a new spending test whereby the countable expenditures are limited to the amount by which they have grown since FFY 1995, (2) not be used as matching funds for any federal health program, and (3) not be part of the federally-supported Med- icaid program. State Health Programs for Recent Immigrants. In the budget year, the Medi-Cal program, administered by the California Department of Health Services, will expend approximately $90 million on nonemergency (and pri- marily preventive) health care for legal immigrants who arrived in the United States after August 1996. This program is not part of the federal Medicaid program, and is therefore supported entirely by the General Fund. In addi- tion, the Managed Risk Medical Insurance Board will expend $4.9 million from the General Fund (also state-only funding) on health care for recently arrived legal immigrant children in the Healthy Families Program. C – 146 Health and Social Services 2000-01 Analysis Providing preventive health services for families with children keeps parents and children healthy and thus assists the parents in keeping regu- lar work hours. Therefore, these health care expenditures are consistent with the purpose of TANF. Because these programs were not created un- til after 1995 and are paid for with General Fund monies that are not used to match federal funds, they meet the federal requirements for counting health expenditures toward the MOE. In order to count all of the health care expenditures described above, toward the CalWORKS MOE, the state TANF plan would need an amend- ment. We note that such an amendment would have no impact on eligi- bility rules for CalWORKs cash assistance and welfare-to-work services. Analyst’s Recommendation. We recommend that the DSS count the $49.9 million budgeted for these health services toward the MOE and amend the state TANF plan accordingly. This action would result in $49.9 million in General Fund savings. This is accomplished through a fund shift as follows: Counting these health care expenditures raises total state spending to $49.9 million above the MOE floor. Thus, General Fund spending on CalWORKs grants may be reduced by $49.9 million while still maintaining compliance with the MOE. To maintain funding for the grants, $49.9 million in federal TANF funds must be shifted, from avail- able reserves, to support the grants. The TANF reserves will be made available by adoption of all, or part of, our technical recommendations (discussed above) with respect to CalWORKs caseloads and costs. Budget Should Reflect Award of High Performance Bonus Funds We recommend a technical adjustment in the federal Temporary Assistance for Needy Families fund balance (reserves) to reflect the December 1999 award of $45.5 million in federal High Performance Bonus funds. The federal welfare reform legislation of 1996 authorized the High Performance Bonus award program. From FFY 1999 through FFY 2003, the U.S. Department of Health and Human Services will award $200 mil- lion annually in High Performance Bonus funds to qualifying states. In 1999, California was one of 27 states that received an award for outstand- ing performance during FFY 1998. As a result, the state was awarded $45.5 million in federal TANF funds in December 1999. Because part of the formula for future awards is based on improvement in job placement and success in the workforce among CalWORKs recipients, it seems likely that continued implementation of the CalWORKs program should result in additional bonus awards. Department of Social Services CalWORKs Program C – 147 Legislative Analyst’s Office Although the Governor’s budget summary recognizes the award, the budget’s TANF fund balance for 1999-00 does not reflect the receipt of these funds. Consequently, we recommend a technical adjustment in the TANF fund condition statement to account for the receipt of these funds. This adjustment will increase the TANF reserve by $45.5 million. We note that the Governor’s budget summary indicates that a plan for expending the 1999 award funds will be developed in spring 2000. Because these are TANF funds, they must be spent on families eligible for TANF. The funds could be held in reserve, expended within CalWORKs, or expended on new initiatives for the non-CalWORKs working poor. Please see The TANF Regulations Increase State Flexibility to Serve the Working Poor at the end of the CalWORKS analysis for a discussion of potential uses for TANF funds. Finally, we also note that the $45 million in High Performance Bonus funds are distinct from the $20 million received by California for being one of the top five states in reducing the ratio of out-of-wedlock births. The Governor’s budget proposes to expend the $20 million awarded for reducing out-of-wedlock births on the Community Challenge Grant Pro- gram, which is administered by the Department of Health Services. Withhold Recommendation on Budget for Employment Services Current law requires that a new methodology for budgeting California Work Opportunity and Responsibility to Kids (CalWORKs) employment services be implemented in 2000-01. Because the new county expenditure plan model for budgeting CalWORKs employment services was not completed in time for inclusion in the Governor’s budget, we withhold recommendation on the budget for CalWORKs employment services ($884 million from the General Fund and Temporary Assistance for Needy Families funds). Chapter 147, Statutes of 1997 (AB 1111, Aroner) requires that beginning in 2000-01 the budget for CalWORKs employment services be based on pro- jected county costs (essentially county CalWORKs services expenditure plans), using a methodology jointly developed by DSS and the County Wel- fare Directors Association. This new budgeting system was not completed in time for inclusion in the January budget but will be used for the May revision of the Governor’s budget. Thus, the January budget for employ- ment services ($884 million General Fund and federal TANF funds) repre- sents a placeholder, pending the completion of the county expenditure plan model. Because the new system may result in substantial changes, we with- hold recommendation on the budget for CalWORKs employment services. C – 148 Health and Social Services 2000-01 Analysis Budget Proposes to Prohibit Counties from Earning Additional Performance Incentives The Governor proposes enactment of legislation prohibiting counties from earning new performance incentive payments until the estimated prior obligation owed to the counties (approximately $500 million) has been paid by the state. Once the obligation has been met, the Governor proposes to either repeal or modify the fiscal incentive system. We concur with the Governor’s proposal to prohibit new incentives until the past obligation to the counties has been satisfied. We recommend either repealing the county performance incentive provision or replacing it with a new system that would (1) be funded with General Fund monies that the counties could use for any purpose and (2) tie the amount of incentive payments to improvements in program outcomes. Background. The CalWORKs legislation requires that savings result- ing from (1) exits due to employment, (2) increased earnings, and (3) di- verting clients from aid with one-time payments, be paid by the state to the counties as performance incentives. Current law also requires that DSS, in consultation with the welfare reform steering committee, deter- mine the method for calculating these savings. Steering Committee Actions. In 1998, the steering committee determined that savings would be calculated as follows. Savings from exits due to em- ployment would be based on the increase in exits compared the average number of exits in the three years prior to welfare reform. Savings attribut- able to the earnings of recipients would be paid in their entirety to the coun- ties. Similarly, all savings from diversion were also to be paid to counties. Growing Obligation to the Counties. By the end of 1998-99 counties had earned approximately $900 million in performance incentives. This amount excludes incentives based on exits due to employment during 1998-99 because the data are not yet available. By the end of 1999-00, we estimate total incentives earned by the counties (including incentives based on exits to employment) will be approximately $1.6 billion. The total of the appropriations (from 1998-99 and 1999-00) for incentive pay- ments is approximately $1.1 billion. Thus, we estimate that the unfunded obligation to the counties will be approximately $500 million by the end of 1999-00. We note that county receipt of fiscal incentives has signifi- cantly lagged the appropriation, and that counties have spent very little of their incentive payments. As of September 1999, they had received a total of $685 million but had spent only $5.3 million. Governor’s Proposal. The Governor proposes to prohibit counties from earning additional performance incentives until the unmet obliga- tion to the counties has been satisfied. For 2000-01, the budget proposes an expenditure of $252 million toward this obligation, which, as noted Department of Social Services CalWORKs Program C – 149 Legislative Analyst’s Office above, is estimated to be $500 million by the end of 1999-00. If $252 mil- lion is paid to the counties in 2000-01, a remaining obligation of about the same amount will be carried forward into 2001-02. The department esti- mates that the counties would earn an additional $500 million in 2000-01, under current law. Thus, the Governor’s proposal to prohibit counties from earning additional incentives results in savings of approximately $500 million in 2000-01. The administration also indicates that it will pro- pose legislation to either eliminate or sharply modify the performance incentive program. Department and Steering Committee Could Modify the Methodol- ogy. As noted above, the method for calculating the performance incen- tives is determined by DSS, in consultation with the welfare reform steer- ing committee. The administration has the authority to convene the steer- ing committee at any time, consult with the committee, and then modify the methodology for calculating the incentives. Legislative Considerations. To assist the Legislature in considering these issues, we begin by examining the rationale for the county performance in- centive program. While the Legislature did not specify the purpose of the program, we can identify several possible rationales. Specifically, performance incentives could have been intended as (1) a reward for county performance, (2) an inducement for counties to make an effort to achieve better program outcomes, and\/or (3) a funding source for the CalWORKs program. Below we discuss each of these potential rationales for the program. Reward System. The incentive payments may have been intended sim- ply to be a reward to the counties. If this is the case, however, it is not clear what distinguishes county implementation of CalWORKs from county ad- ministration of other state programs in areas such as health, welfare, and criminal justice. Counties administer many programs on behalf of the state. For most of these, counties are provided with operating funds but are not provided with incentive bonuses for improved program outcomes. The CalWORKs and child support enforcement programs are the only signifi- cant county-administered state programs that offer incentive payments to the counties and under the recent child support reforms, the incentive pay- ments will be largely replaced by a new funding system. There is, however, no analytical basis for determining whether incentive payments should be provided as a reward. Inducement for Better Program Performance. Another argument for pro- viding incentive payments is that they may act as an incentive for counties to make extra efforts toward improving their programs. As noted above, the counties have spent very little of their incentive payments and are still in the early stages of CalWORKs implementation. Thus, while incentive payments could have some impact in the future, it does not appear that they have had any appreciable effect on county behavior so far. C – 150 Health and Social Services 2000-01 Analysis We also note that, as currently structured, counties can earn substan- tial incentive payments without demonstrating any program improve- ment. About $800 million of the performance incentives owed to the coun- ties as of 1998-99 are due to savings attributable to the earnings of recipi- ents. According to DSS, about two-thirds of these savings would have occurred even if CalWORKs had never been implemented (because many recipients were working before CalWORKs started). We believe that for incentives to serve as an inducement, the conditions under which incen- tives are earned must be limited to situations in which program out- comes actually improve. Finally, we note that given the way fiscal incentives have been bud- geted, the counties must spend the incentive payments within the CalWORKs program. Thus, county government programs outside of CalWORKs receive no direct fiscal benefit from the incentive payments. Program Funding. A third argument for the performance incentives is that they could provide the counties with a source of funding for the CalWORKs program. Under CalWORKs, counties have had two sources of funds for employment services (1) the regular budget allocation to fund estimated program needs and (2) the performance incentives. The regu- lar budget allocation (referred to as the single allocation ) has been based on statewide experience with the Greater Avenues for Independence (GAIN) program\u2014California’s previous welfare-to-work program. Un- der this budgeting system, performance incentives were to be used for county-specific enhancements to the CalWORKs program. We note that this has not been the experience to date. Counties have spent only about 60 percent of their single allocation funds and hardly any of their perfor- mance incentives. Pursuant to Chapter 147, Statutes of 1999 (AB 1111, Aroner) the regu- lar budget allocation for employment services will shift from a system based on the GAIN cost model to one based on county expenditure plans, beginning in 2000-01. The shift to budgeting employment services ac- cording to individual county expenditure plans should reduce the need for county performance incentives as a funding source. This is because the county plans, or budgets, can include any funding proposals the coun- ties deem appropriate. Conclusion. The experience so far with CalWORKs suggests that the county performance incentives have not served as an effective reward, inducement toward better program outcomes, or funding source for pro- gram enhancements. While it is possible that, in the future, incentive pay- ments might have some behavioral effect in inducing better performance, we believe that based on experience to date there is little chance of this as the program is currently structured. Department of Social Services CalWORKs Program C – 151 Legislative Analyst’s Office Analyst’s Recommendation. Based on the amount of prior-year obliga- tions, we concur with the Governor’s proposal to prohibit counties from earning new county performance incentives until the outstanding obliga- tion to the counties is satisfied. With respect to whether the program should be eliminated, we have no analytical basis for determining the cost-effective- ness of fiscal incentives. Should the Legislature choose to retain such a sys- tem, however, we recommend that it (1) be funded with General Fund mon- ies that can be used by the counties for any purpose and (2) tie the amount of incentive payments to improvement in CalWORKs program outcomes. We believe that performance incentives would have a better chance of being effective if paid for with General Fund monies that the counties can use for any purpose. This will increase their value to the counties, therefore making it more likely to induce the counties to make an effort to improve the program. Furthermore, it will require the Legislature and the Governor to weigh the potential benefits of the incentives against the costs, because the incentives would compete with other state priorities for funding. As we have previously recommended, tying performance incentive pay- ments to improvement in outcome measures should increase the chances that these payments will induce counties to make an effort to improve their programs. (For a discussion of this aspect of the issue, please see our analysis of CalWORKs in the Analysis of the 1999-00 Budget Bill.) Finally, we note that repealing the performance incentive system, or replacing it with a new system supported by the General Fund, will free up a significant amount of federal TANF funds, which have been the prin- cipal source of funding for the incentive payments. These TANF funds could be (1) held in a reserve, (2) provided to the counties or other local governments to provide services to TANF-eligible individuals, or (3) used to fund state-level initiatives for the working poor. (Please refer to TANF Regulations Increase State Flexibility to Serve Working Poor later in this chapter for a discussion of the possible uses of TANF funds.) The CalWORKs Community Service Law Needs Clarification The provision of current law permitting counties to divert grants to employers for the purpose of funding wages for community service participants conflicts with other sections of the Welfare and Institutions Code. Because of these conflicts, counties are effectively precluded from providing wage-based community service. We recommend enactment of legislation to clarify these provisions so that counties will have the option of providing wage-based community service jobs for California Work Opportunity and Responsibility to Kids recipients. C – 152 Health and Social Services 2000-01 Analysis Background. Chapter 270, Statutes of 1997 (AB 1542, Ducheny) cre- ated the CalWORKs program. Under CalWORKs, able-bodied adult re- cipients (1) must meet participation mandates, (2) are limited to five years of cash assistance, and (3) must begin community service employment after no more than 24 months on aid, unless they have obtained nonsubsidized employment. With respect to grant diversion, Chap- ter 270 authorizes counties to divert all or part of a recipient’s cash grant to an employer to fund a recipient’s wages. The statute specifically states that such grant diversion can be used to fund wages for community ser- vice participants. (We believe that wage-based community service is a good option for CalWORKs recipients, as explained in our February 1999 report, CalWORKs Community Service: What Does It Mean for California?) Earned Income Disregard. Under CalWORKs, recipients who obtain nonsubsidized employment are entitled to a specific earned income dis- regard. Under this system, the first $225 of earnings, plus 50 percent of each additional dollar of earnings, are disregarded (not counted as in- come) in determining a family’s grant. This structure is designed to en- courage recipients to obtain nonsubsidized employment. Based on our understanding of current law, a CalWORKs commu- nity service participant who is receiving wages that are funded through grant diversion would be entitled to the same $225 and 50 percent earned income disregard that is available to a recipient in a nonsubsidized job. We believe that application of the disregard substantially reduces the incen- tive to find nonsubsidized employment. Accordingly, we previously rec- ommended (in our February 1999 report) that the Legislature eliminate or reduce the earned income disregard for community service partici- pants whose grants are diverted and paid to them in the form of wages. Maximum Aid Payment Statute Effectively Precludes Grant Diver- sion. The DSS concurs that a recipient of a diverted grant is entitled to the earned income disregard. The department also believes that, under cur- rent law, total grant payments cannot exceed the maximum aid payments prescribed in Section 11450 of the Welfare and Institutions Code. There- fore, the department concludes that current law has the effect of preclud- ing counties from diverting most or all of a recipients grant to an em- ployer because such a grant diversion, when combined with the applica- tion of the earned income disregard, would ultimately result in a total grant ($1,052 for a family of three) that would exceed the maximum aid payment ($626). In other words, DSS believes that the statute governing maximum aid payments overrides the provision that applies the disre- gard to wages funded with grant diversion (which is the statutory basis for a wage-based community service program). Department of Social Services CalWORKs Program C – 153 Legislative Analyst’s Office In summary, current law includes two technical obstacles to wage-based community service. First of all, it severely restricts counties’ ability to use grant diversion to fund wage-based community service positions because of the interaction between the code sections pertaining to grant diversion, the earned income disregard, and the maximum aid payments. Secondly, by applying the earned income disregard to community service participants, it makes no distinction between subsidized and nonsubsidized employment, thereby reducing the incentive for participants to obtain nonsubsidized em- ployment, and increasing the costs of the program. Analyst’s Recommendation. We believe that applying the disregard to subsidized employment results in an unintended consequence of Chapter 270. In order for wage-based community service to be a viable option for coun- ties, we recommend enactment of legislation to clarify that the earned in- come disregard does not apply to diverted grants that are used to fund community service wages. As an alternative to eliminating the disregard, the Legislature could also provide a work expense supplement in the amount of $50 in lieu of the current $225 and 50 percent disregard, on the basis that recipients participating in wage-based community service must pay employee Federal Insurance Contributions Act taxes (about $50 per month). These clarifications to current law would allow counties to provide wage-based community service positions, while maintaining the incen- tive for recipients to obtain nonsubsidized jobs. The CalWORKs Child Care Program The Governor’s budget fully funds the estimated need for California Work Opportunity and Responsibility to Kids (CalWORKs) child care, plus a reserve of $81 million. The budget proposal includes an increase of $85 million for the Stage 3 set-aside designed to provide former CalWORKs families with child care beyond the two-year time limit for such services. We summarize the CalWORKs child care program. Background. The CalWORKs child care program is delivered in three stages. Stage 1 is administered by county welfare departments (CWDs) and begins when a participant enters the CalWORKs program. In Stage 1, CWDs refer families to resource and referral agencies to assist them with finding child care providers. The welfare department then pays provid- ers directly for the child care services. Families transfer to Stage 2 when the county determines that the fami- lies’ situations become stable \u2014that is, they develop a welfare-to-work plan and find a child care arrangement that allows them to fulfill the obligations of that plan. Stage 2 is administered by the State Department of Education (SDE) through its voucher-based Alternative Payment (AP) C – 154 Health and Social Services 2000-01 Analysis programs. Participants can stay in Stage 2 while they are on CalWORKs and for up to two years after the family stops receiving a CalWORKs grant. Because it is up to the CWD to determine when a recipient is stable, the time at which families are transferred from Stage 1 to Stage 2 varies significantly among counties. Some counties make the transfer to Stage 2 as soon as possible, while others wait until the family has left CalWORKs. The variance in county practice contributes to the uncertainty in budget- ing child care funds for each stage. Although Stages 1 and 2 are administered by different agencies, fami- lies do not need to switch child care providers upon moving to Stage 2. The real difference in the stages is in who pays the providers\u2014in Stage 2, AP programs, operating under contracts with SDE, do this instead of CWDs. Stage 3 refers to the broader subsidized child care system adminis- tered by SDE that is open to both former CalWORKs families and work- ing poor families who have never been on CalWORKs. Once CalWORKs recipients leave aid, they have two years of eligibility in Stage 2. During this time, they are expected to apply for regular Stage 3 child care (in contrast to the Stage 3 set-aside child care discussed below). We note, however, that typically there are waiting lists for such child care because there are significantly more eligible families than the available child care slots. (Families with incomes up to 75 percent of the state median are eligible for regular SDE child care, but priority is given to families with the lowest income. Most of the available slots go to families with incomes below 50 percent of the state median). In order to provide continuing child care for former CalWORKs re- cipients who reach the end of their two-year Stage 2 time limit, the Legis- lature created the Stage 3 set-aside in 1997. Recipients timing out of Stage 2 are eligible for the Stage 3 set-aside if they have been unable to find regu- lar Stage 3 child care. Assuming funding is available (and legislative and administrative practice to date has been to fully fund the estimated need), former CalWORKs recipients may receive Stage 3 set-aside child care as long as their income remains below 75 percent of the state median and their children are below age 14. Current-Year Spending. For 1999-00, the total appropriation for CalWORKs child care was $1.2 billion, including a reserve of $270.7 mil- lion that can be allocated to Stage 1 or Stage 2 depending on a subsequent determination of actual need. As of January 2000, $128 million of the re- serve had been allocated to Stages 1 and 2. The budget estimates that an additional $98 million will be transferred from the reserve to either Stage 1 or State 2 before the end of 1999-00. Although total spending for 1999-00 is estimated to be about $45 million below the appropriation, spending Department of Social Services CalWORKs Program C – 155 Legislative Analyst’s Office for the Stage 3 set-aside is approximately $10 million greater than esti- mated. The administration has proposed to fund this anticipated $10 mil- lion shortfall mostly with savings from 1998-99. Proposed Budget. For 2000-01, the Governor’s budget proposes $1.3 billion for CalWORKs child care. This is an increase of $117 million (9.8 percent) over the current-year appropriation. Figure 3 summarizes the proposed spending plan. As discussed below, most of the increase is due to higher costs in Stage 3. The budget proposal includes a reserve of $150.4 million. Of this total, $69.4 million is held back from the esti- mated need for Stage 2 child care. The remaining $81 million is above the estimated need and represents a true reserve for Stages 1 and 2. This includes $45.4 million that is anticipated to go unspent from the current- year reserve and is proposed to be transferred to the budget-year reserve. Figure 3 CalWORKs Child Care Estimated Children Served and Proposed Budget 2000-01 (Dollars in Millions) Estimated Number of Children Funding Total TANFa CCDFb General Fund Stage 1 83,000 $424.2 $389.7 \u2014 $34.5c Stage 2 117,000 624.5 442.8 $43.0 138.7d Child care reservee 29,000 150.4 150.4 \u2014 \u2014 Stage 3 set aside 21,000 115.7 \u2014 63.4 52.3f Totals 250,000 $1,314.8 $982.9 106.4 $225.5 a Temporary Assistance for Needy Families. b Child Care Development Fund. c General Fund used toward CalWORKs maintenance-of-effort requirement. d Proposition 98 funds, including $15 million in the California Community Colleges. e Proposition 98 funds. f The reserve will be allocated to Stage 1 or Stage 2 depending on actual need. Stage 3 Set-Aside Costs Are Growing Rapidly. As shown in Figure 3, the estimated cost for the Stage 3 set-aside is $116 million, an increase of almost $90 million compared to the current-year estimate. This increase is because a growing number of former CalWORKs recipients are expected to reach their two-year Stage 2 post-assistance time limit. Preliminary estimates from the Department of Social Services indicate the cost for the Stage 3 set-aside will increase to about $200 million in 2001-02 and about $265 million in 2002-03. C – 156 Health and Social Services 2000-01 Analysis For a discussion of the how child care for CalWORKs families differs from child care for the non-CalWORKs working poor families, please see Child Care for CalWORKs Families and the Working Poor in the Cross- cutting Issues section of this chapter. County Probation Departments Should Report Juvenile Justice Data to Department of Justice We recommend the adoption of budget bill language requiring county probation offices to report data on all juvenile probation referrals, court actions, and final dispositions to the Department of Justice, in order to receive full-funding allocations for county probation facilities. Background. County probation departments receive about $200 mil- lion annually from the state for support of probation camps and ranches that house juvenile offenders and for a wide range of juvenile justice sys- tem services, from basic prevention to various kinds of residential place- ments for juvenile offenders. These services are funded with federal TANF monies. Information on these children and other juveniles involved with the probation system is collected by the Department of Justice (DOJ) and stored in the Juvenile Court and Probation Statistical System (JCPSS). This is a statewide database that collects information from county probation departments on all juvenile probation referrals, court actions, and final dispositions. The database was active through the 1980s, using informa- tion voluntarily provided by all 58 counties, but was eliminated in 1989 due to budget reductions at DOJ. The purpose of the JCPSS is to provide a statewide database of infor- mation about juveniles in the criminal justice system. The database is used for many purposes, including assessing potential impacts of recent and proposed changes in law. Many Counties Not Reporting Data. Chapter 803, Statutes of 1995 (AB 488, Baca) directed DOJ to reestablish a juvenile justice data collec- tion system, and the Department of Information Technology approved a new database design in August 1996. Since that time, DOJ has attempted to collect information from all of the counties. Currently, 15 counties are submitting data and 15 counties are testing to determine whether their reprogrammed databases are effective. Of the remaining counties, 10 in- tend to begin testing software within the next few months, and 18 have taken no action to submit data to DOJ. Statewide Database Participation Is Necessary. In our view, it is im- portant for the state to have complete and accurate data as to how juve- Department of Social Services CalWORKs Program C – 157 Legislative Analyst’s Office niles are treated in the criminal justice system in order to assist policymakers in analyzing the state of the juvenile justice system and in making decisions about proposed legislation. The information is valu- able to the counties as well as the state in assessing trends among coun- ties and impacts of county-based programs. For this reason, we believe that it is vital that all counties submit data to DOJ, in order to ensure that information from the JCPSS reflects the statewide juvenile justice situa- tion. These concerns about the need for better county reporting were raised during 1999-00 budget hearings last spring and the county probation of- ficers committed to begin submitting data to the JCPSS. To date however, only a handful of counties are submitting data. Analyst’s Recommendation. In order to ensure that the state has com- plete data in JCPSS, we recommend that the Legislature adopt budget bill language that would require counties to forfeit a portion of the TANF monies provided to probation if they do not submit data to DOJ by March 2001. We believe that this will give all counties adequate time to develop their reporting mechanisms. We do not believe that this will create a hard- ship on counties since they already collect the requested data for their own use. Based on our discussions with DOJ and counties, the costs to counties to report the data to DOJ should be minimal. The TANF dollars provided to probation departments could cover these minimal costs. Specifically, we recommend the following budget bill language be adopted in Item 5180-101-0001: A county shall receive no more than 50 percent of its respective allocation of funds appropriated under Schedule (a)(5) 16.30.050\u2014County Probation Facilities until the Department of Justice (DOJ) has certified to the Department of Social Services that the county is participating in the Juvenile Court and Probation Statistical System. Counties that fail to receive certification by March 31, 2001 shall forfeit the balance of their allocation. Any funds forfeited pursuant to this provision shall be reallocated to counties that have received DOJ certification. The distribution shall be proportionally based on such counties’ original allocations. The TANF Regulations Increase State Flexibility to Serve the Working Poor The final federal Temporary Assistance for Needy Families (TANF) regulations increase state flexibility to serve working poor families that are not eligible for the California Work Opportunity and Responsibility to Kids program. We summarize the TANF regulations and present some options for program changes permitted by the regulations. C – 158 Health and Social Services 2000-01 Analysis Background: Federal Welfare Reform. The federal welfare reform leg- islation of 1996 replaced the AFDC program with the TANF program. The federal law made numerous changes in the nation’s welfare system, including the following: the individual entitlement to a grant is elimi- nated; federal funding for the program is provided as a block grant; re- cipients are subject to a five-year time limit for receipt of federal funds; and states are subject to various penalties for failing to meet specified objectives, including work participation rates. In order to receive the federal block grant, states must meet a MOE requirement that state spending on welfare for needy families be at least 75 percent of FFY 1994 level, which is $2.7 billion for California (the re- quirement increases to 80 percent if the state fails to comply with federal work participation requirements). State MOE funds can be spent in con- junction with TANF funds or may be expended on separate state-only programs for needy families. Previous Federal Guidance Limited State Flexibility. The U.S. De- partment of Health and Human Services (DHHS) issued its first written guidance for the TANF program in January 1997 and later issued pro- posed regulations in December 1997. Both of these documents had the effect of limiting state flexibility in implementing the TANF program. State flexibility was limited by (1) the way in which DHSS defined the term assistance, and (2) cautions against the creation of state-only programs. These limitations are explained below. Definition of Assistance. The definition of assistance is important because a recipient of TANF assistance is subject to all TANF program requirements, including time limits, work participation requirements, and certain child support rules. In both the initial federal guidance and the proposed regulations, the DHHS defined almost all benefits or services funded with TANF funds as assistance. This broad definition meant that almost any recipient of a benefit funded with TANF funds would be sub- ject to TANF rules, including the federal time limits. Thus, under this regulatory approach receipt of services such as child care, or counseling for victims of domestic violence, would require recipients to meet time limits and other TANF requirements. Limits on State-Only Programs. State TANF programs, such as the CalWORKs program in California, are funded with a combination of TANF federal block grant funds and state MOE funds. (In California, most of the MOE funds are state funds appropriated for the CalWORKs program, but some state funds supporting TANF-eligible families in other programs also qualify.) The federal legislation indicated that if states create sepa- rate state-only programs for needy families (funded only with state MOE funds), TANF requirements such as time limits and work participation Department of Social Services CalWORKs Program C – 159 Legislative Analyst’s Office would not apply to such programs. The DHHS guidance and proposed regulations, however, threw this provision into question by cautioning that states creating separate state-only programs may not be eligible for federal TANF penalty relief. (We note that the dollars at stake were not insiginificant. For example, in FFY 1997, the DHHS used its authority to reduce California’s penalty for noncompliance with federal work partici- pation rates by about $32 million.) Final Regulations Increase Flexibility. In April 1999, the DHHS re- leased its final TANF regulations. These regulations became effective on October 1, 1999. In comparison to the proposed rules, the final regula- tions increased state flexibility in several ways as follows. Narrowing the Definition of Assistance. The term assistance is now defined narrowly. Under the final rules, assistance is generally limited to payments directed at providing for a family’s ongoing basic needs. The definition of assistance specifically excludes (1) nonrecurring short-term benefits designed to respond to crisis situations lasting less than four months, (2) child care, (3) transportation benefits, (4) work subsidies paid to employers, (5) refundable earned income tax credits, and (6) services such as education and training. Thus, a state can provide such nonassistance benefits with TANF or state MOE funds without trigger- ing TANF requirements for the recipients of such benefits. State-Only Programs Permitted. Prior warnings that the creation of state-only programs might result in a state being ineligible for penalty relief have been dropped. The regulations simply require that states re- port program information on state-only programs to DHHS. State Authority to Define Needy. The final regulations affirmed and strengthened state flexibility to define the term needy. Because most TANF spending is limited to needy families or parents, the definition of needy is important. Under the final regulations, states may set multiple definitions of needy and tailor benefits to the populations falling within each respective definition. For example, the state could set one definition of needy for cash assistance and a higher definition of needy to allow for the provision of services, without cash assistance, to working poor families. The final regulations do not establish any income limit on the definition of needy. Options for Using New Flexibility. Below we identify two types of changes that are permitted by the final regulations. The first category consists of program expansions. These options would require additional resources or redirection of resources within the TANF program. Second, we present certain program changes that do not require substantial addi- tional resources. C – 160 Health and Social Services 2000-01 Analysis Generally, the significance of this added flexibility is that it gives the state new options for using federal TANF funds to serve the working poor. Specifically, these funds are now available to support new activities or to replace CalWORKs General Fund support within the Department of Social Services (provided this meets the MOE requirement). Potential Program Expansions. The expansions discussed below would result in program costs. Although counties were unable to expend all of the TANF funds provided for the CalWORKs program in 1998-99, the Governor’s budget projects that these carryover balances will be ex- hausted by the end of 2000-01. Thus, if the Legislature were to use TANF funds for any of the options presented below, new funding eventually would have to be identified either from redirection within the CalWORKs program or from the General Fund in order to continue the expansions. Expand Child Care for the Working Poor. Currently, California provides funds for child care to CalWORKs recipients, former CalWORKs recipients, and working poor families that have never received cash assistance. Child care for CalWORKs recipients and former recipients is funded primarily with TANF funds. Child care for non-CalWORKs recipients is funded primarily with state General Fund monies and federal Child Care Development Funds. The final regulations expand the ability for California to use both TANF and state (MOE) funds for non-CalWORKs recipients. To accomplish this, the state TANF plan would have to be amended to establish a category of needy recipient for purposes of child care that is above the level for cash assistance. Under this option, CalWORKs recipients and the working poor could be treated in a more consistent manner. Enact a Refundable Earned Income Tax Credit. The federal regu- lations allow states to use TANF or state MOE funds to pay for the refundable portion of a state earned income tax credit (EITC), subject to certain restrictions. In this context, refundable por- tion means the portion of any credit that is over and above an individual’s tax liability and is refunded to the taxpayer in the form of a check from the taxing authority. The federal regula- tions provide that TANF and state MOE funds may only be used for the refundable credit that is provided to needy families. States, however, are free to set the definition of needy for a state EITC program at a level higher than for cash assistance. If California were to adopt a refundable state EITC equal to 5 percent of the federal EITC, for example, the revenue loss would be approxi- mately $220 million, of which about $205 million would be the refundable portion eligible for TANF or state MOE funding. Re- search indicates that the federal EITC results in an increase in the Department of Social Services CalWORKs Program C – 161 Legislative Analyst’s Office number of people working and an increase in the hours of work for persons earning less than $750 per month. The research also shows, however, that the EITC discourages work for some work- ers making more than $750 per month. Provide New Services to the Non-CalWORKs Working Poor. Be- cause states may establish different definitions of needy, TANF and state MOE funds may be used for programs designed to help working poor families whose incomes are too high to be eligible for cash assistance. In other words, under the new TANF regula- tions, California could provide services (such as mental health and substance abuse treatment, education, training, and trans- portation benefits) to working poor families ineligible for CalWORKs cash grants. Such services could help prevent these individuals from subsequently going on CalWORKs. Using this flexibility, the State of Ohio has developed a Prevention, Reten- tion and Contingency (PRC) program to provide services to needy families that are ineligible for cash assistance. Services provided in the PRC program include job preparation, training, transpor- tation, and shelter. Potential Program Modifications. In contrast to the program expan- sions discussed above, the program changes presented below do not re- sult in significant costs. Replace Grant Payments for Working Recipients With Work Ex- pense Supplements. Those CalWORKs recipients who obtain em- ployment may remain eligible for the program if their earnings are not too high. In these cases, their grant payments generally are relatively small because a portion of their earned income is disregarded when calculating the size of their grant. For re- cipients earning more than the minimum wage and working close to full time, the amount of their monthly CalWORKs grants can be less than $100. Even though the CalWORKs grant in this situ- ation is modest, the recipients of such grants are subject to the state and federal five-year time limits because they are receiving assistance. Under the new TANF regulations, however, states have the option of providing a work expense supplement in- stead of a grant, which would not be considered assistance. Ac- cordingly, if California elected to provide a work expense supple- ment instead of a modest grant, these working recipients would no longer be subject to the federal five-year time limit (which ap- plies to the use of federal funds). Replacing grants of less than $100 for working recipients with a work expense supplement would have minimal program costs, mostly for administration. C – 162 Health and Social Services 2000-01 Analysis Thus, at relatively little state cost, this policy change would pro- vide certain working recipients additional months of eligibility for federal funding. From the recipient’s perspective, however, it is the state rather than the federal time limit that determines the availability of the grant. The federal time limit only affects how the grant is funded. Thus, adding additional months to an individual’s federal eligi- bility would not, by itself, change the grant policy in California (which requires a grant reduction for families that exceed the state five-year limit). Permit Counties to Expend Performance Incentive Funds on Stage III Child Care. Under current law, most of the savings resulting from CalWORKs recipients leaving the program due to employ- ment, and from increased earnings, are redirected by the state to the counties as performance incentives. For 1998-99, total per- formance incentives paid to counties were $433 million. The coun- ties may spend these incentives for CalWORKs program enhance- ments that are consistent with state and federal law, but they can- not use the incentives to provide child care to recipients who have reached the two-year post-assistance time limit on transitional child care. Families that have reached such time limits may receive publicly subsidized child care to the extent funding is available under the CalWORKs Stage III child care set aside or under the child care programs administered by SDE. For 1999-00, the SDE estimates that the amount needed for child care by CalWORKs recipients who have exhausted their two years of transitional benefits will exceed the $17 million Stage III set-aside budget by $2 million to $4 million. We note that the administration intends to address this shortfall in the current year and the Governor’s budget fully funds the estimated need for Stage III set-aside child care in 2000-01. As discussed above, the new federal regulations permit states to use TANF funds or state MOE funds to provide child care for non-CalWORKs recipients (such as recipients who have been off aid for more than two years). Another way of addressing short- falls in the Stage III set-aside would be to allow counties to use their performance incentive funds on child care for CalWORKs recipients who have exhausted their transitional child care ben- efits. In order to provide counties with this flexibility, the state TANF plan would have to be amended. Department of Social Services CalWORKs Program C – 163 Legislative Analyst’s Office Permit Counties to Use Performance Incentive Funds on Services for the Working Poor. In addition to permitting counties to use their performance incentives on Stage III child care, the state TANF plan could be amended to permit counties to provide services to working poor families ineligible for cash assistance. Conclusion. The final TANF regulations provide the Legislature with significant new flexibility to modify the CalWORKs program. In summary, the state can now use TANF and state MOE funds to provide services to working poor families that are not eligible for CalWORKs cash assistance without triggering TANF requirements such as the federal time limit, work participation requirements, and certain child support rules. C – 164 Health and Social Services 2000-01 Analysis KIN-GAP PROGRAM The Kin-GAP (Kinship Guardianship Assistance Payment) Program, authorized by Chapter 1055, Statutes of 1998 (SB 1901, McPherson) be- came effective January 1, 2000. Under the program, a relative caregiver is eligible for a Kin-GAP grant if he or she assumes legal guardianship of a foster child. To qualify, the child must have been in foster care placement with the relative caregiver for over 12 months. Once enrolled in Kin-GAP, the guardian receives a grant, paid at 100 percent of the basic foster care (foster family home) rate. The program is supported by the state General Fund, federal Temporary Assistance for Needy Families (TANF) block grant funds, and county funds. Enrollment in Kin-GAP Program Not Automatic. Movement to Kin- GAP is not automatic. In order for it to occur, the court must terminate court dependency of the child and the caregiver must assume guardian- ship of the child. Budget Overestimates Kin-GAP Caseload in 2000-01 We recommend a General Fund reduction of $443,000 because the Kinship Guardianship Assistance Payment Program caseload is overestimated. (Reduce Item 5180-101-0001 by $1,841,000, increase Item 5180-141-0001 by $273,000, and reduce Item 5180-151-0001 by $1,125,000.) The Governor’s budget proposes $109 million ($28 million General Fund) for the Kin-GAP Program in 2000-01. In addition, the budget re- flects savings ($24 million General Fund) to the foster care and child wel- fare services programs, associated with termination of juvenile depen- dency for those children placed in the Kin-GAP Program. The budget estimates that the Kin-GAP caseload will begin with 1,629 cases in January 2000 and increase by about 1,630 cases each month in the current year, ending with a caseload of 9,783 in June of 2000. The budget projects that the caseload will more than double (to 19,880 cases) in the one-month interval from June to July of 2000 and remain at this full- implementation level throughout 2000-01. When comparing the aver- Kin-GAP Program C – 165 Legislative Analyst’s Office age monthly caseload in 2000-01 to the average for the six months cov- ered in the current year, the budget projects a 248 percent increase. The department has provided no policy rationale for the immediate doubling of caseload at the beginning of 2000-01. For this reason, in our caseload projection we maintain the administration’s current-year phase- in of 1,630 cases per month, but we assume a continuation of that monthly trend until full implementation (19,880) is reached in January 2001 (See Figure 1). This would result in an increase of 210 percent over the six- month average in 1999-00, reflecting the ramp-up of the program, but less than the increase assumed in the budget. Consequently, we recom- mend that the budget reflect more steady caseload projections, for a net General Fund savings of $443,000 in 2000-01. Figure 1 Budget Overestimates Kin-GAP Caseload January 2000 Through June 2001 (In Thousands) 5 10 15 20 25 Jan Apr Jul Oct Jan Apr Jun LAO Estimate Governor’s Proposal 20012000 C – 166 Health and Social Services 2000-01 Analysis FOSTER CARE Children are eligible for grants under the Aid to Families with De- pendent Children-Foster Care program if they are living with a foster care provider under (1) a court order or (2) a voluntary agreement be- tween the child’s parent and a county welfare or probation department. County welfare departments have the responsibility of placing children in foster homes. Children in the foster care system can be placed in either a foster family home (FFH) or a foster care group home (GH). Both types of foster care provide 24-hour residential care. Foster family homes must be (1) located in the residence of the foster parent(s), (2) provide services to not more than six children, and (3) be either licensed by the Depart- ment of Social Services (DSS) or certified by a foster family agency (FFA). Foster care GHs are licensed by the DSS to provide services to seven or more children. The budget proposes total expenditures of $1.5 billion ($389 million General Fund) in 2000-01 for foster care local assistance. This represents a 1 percent (9 percent General Fund) decrease from the current year. The General Fund reduction is due primarily to (1) a one-time 1999-00 expen- diture for a federal audit requirement and (2) a shift of KinGAP (Kinship Guardianship Assistance Payment) Program cases from foster care to the California Work Opportunity and Responsibility to Kids (CalWORKs) program in 2000-01. Budget Overestimates Cost-of-Living Adjustment for Foster Family Agencies We recommend that proposed spending for the foster care program be reduced by $792,000 from the General Fund because the budget overestimates the statutory cost-of-living-adjustment for the foster family agencies. (Reduce Item 5180-101-0001 by $792,000.) The Governor’s budget proposes to provide the statutory cost-of-liv- ing adjustment (COLA) to FFAs, effective July 1, 2000. The COLA is based on the change in the California Necessities Index (CNI) from December Foster Care C – 167 Legislative Analyst’s Office 1998 to December 1999. The Governor’s budget, which is prepared prior to the release of the December CNI figures, estimates that the CNI will be 3.61 percent, based on partial data, for a total cost of $15.3 million ($4.3 mil- lion General Fund). Our review of the final data, however, indicates that the CNI will be 2.96 percent. Applying the actual CNI of 2.96 percent re- duces the cost of providing the FFA COLA to $12.5 million ($3.5 million General Fund). Accordingly, we recommend that the budget be reduced by $792,000 from the General Fund to reflect these savings. Budget Does Not Provide COLA for All Foster Care Providers We recommend a $12.3 million General Fund augmentation to provide a cost-of-living adjustment (COLA) for the foster family homes and group homes because (1) there is no policy rationale for distinguishing these types of providers from foster family agencies and (2) revenues are sufficient to provide the COLA. (Increase Item 5180-101-0001 by $12,300,000.) The budget proposes a COLA to FFAs in 2000-01, but does not pro- vide a COLA to the other foster care providers\u2014FFHs and GHs. The statu- tory COLA for the FFAs is mandatory. Current law provides the same COLA for FFHs and GHs, but makes them subject to the availability of funds. We recommend providing a COLA to FFH and GH providers because (1) there is no policy rationale for distinguishing these types of providers from FFAs, and (2) revenues are sufficient to provide the COLA. With respect to revenues, we note that we are projecting that General Fund revenues will be significantly higher than estimated in the budget, over the two-year period in 1999-00 and 2000-01. (Please see The 2000-01 Budget: Perspectives and Issues.) The cost of providing the 2000-01 FFH and GH COLA of 2.96 percent is $12.3 million from the General Fund ($40.6 million all funds). We note that this amount includes COLAs for Adoption Assistance, Emergency Assistance, and KinGAP, whose rates are based on FFH rates. C – 168 Health and Social Services 2000-01 Analysis FOOD STAMPS PROGRAM The Food Stamps Program provides food stamps to low-income per- sons. With the exception of the state-only program (discussed below), the cost of the food stamp coupons is borne by the federal government ($1.6 billion). Administrative costs are shared between the federal gov- ernment (43 percent), the state (42 percent), and the counties (15 percent). California Food Assistance Program Federal Restrictions on Benefits for Noncitizens. With respect to non- citizens, current federal law generally limits food stamps benefits to legal noncitizens who immigrated to the U.S. prior to August 1996 and are under age 18 or over the age of 64. State Program for Noncitizens. Created in 1997, the California Food Assistance Program (CFAP) provides state-only funded food stamps ben- efits to (1) pre-August 1996 legal immigrants who are ineligible for fed- eral benefits (generally individuals age 18 through 64), and (2) a very limited number of post-August 1996 legal immigrants whose sponsors are dead, disabled, or abusive. The CFAP purchases food stamp coupons from the federal government and distributes them to eligible recipients. Adult recipients are subject to a specified work requirement. Under prior law, the program was to sunset on June 30, 2000. Chap- ter 147, Statutes of 1999 (1) extended the sunset indefinitely and (2) sig- nificantly expanded eligibility, from October 1999 through September 2000, to legal immigrants who arrived after August 1996. Budget Proposal. For 2000-01, the average monthly caseload for CFAP is estimated to be 85,000 persons. The budget proposes an appropriation of $52 million from the General Fund for coupon purchases and an addi- tional $3 million for administration in 2000-01. This is a decrease of $8 mil- lion from estimated expenditures in 1999-00, mostly attributable to nearly all of the post-1996 immigrants on CFAP losing their eligibility effective October 1, 2000, pursuant to current law. Food Stamps Program C – 169 Legislative Analyst’s Office We note that $39 million of the proposed expenditure for 2000-01 counts towards meeting the federal maintenance-of-effort requirement for the California Work Opportunity and Responsibility to Kids program. We also note that the cost of extending eligibility for the approximately 13,000 post-August 1996 immigrants added temporarily by Chapter 147 would be approximately $6.1 million in 2000-01 (October 2000 through June 2001) and $8.1 million annually thereafter. C – 170 Health and Social Services 2000-01 Analysis SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $2.6 billion from the General Fund for the state’s share of the SSI\/SSP in 2000-01. This is an increase of $137 million, or 5.5 percent, over estimated current-year ex- penditures. This increase is due primarily to the full-year cost of grant increases provided in the current year, caseload growth, the cost-of-liv- ing adjustment (COLA) to be provided in January 2001, and an increase in the federal administrative fee. In December 1999, there were 328,998 aged, 21,813 blind, and 707,051 disabled SSI\/SSP recipients. In addition to these federally eligible recipi- ents, the state-only Cash Assistance Program for Immigrants (CAPI) is estimated to provide benefits to about 8,900 legal immigrants in Decem- ber 1999. Budget Overestimates Cost of Providing Statutory COLA We recommend reducing the General Fund amount budgeted for the state portion of Supplemental Security Income\/State Supplementary Program grants by $6.6 million because the cost of providing the statutory cost-of-living adjustment is overestimated. (Reduce Item 5180-111-0001 by $6,600,000.) Background. Pursuant to current law, the Governor’s budget proposes to provide the statutory COLA in January 2001. The state COLA is based on the California Necessities Index (CNI) and is applied to the combined SSI\/SSP grant. It is funded by both the federal and state governments. The federal portion is the federal COLA (based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W) that is applied annually to the SSI portion of the grant. The remaining amount needed to cover the state COLA is funded with state monies. Based on its Supplemental Security Income\/State Supplementary Program C – 171 Legislative Analyst’s Office assumptions concerning both the CNI and CPI-W, the budget includes $55.1 million for providing the statutory COLA for six months, effective January 2001. The CNI Has Been Revised. The January 2001 COLA is based on the change in the CNI from December 1998 to December 1999. The Governor’s budget, which is prepared prior to the release of the December CNI fig- ures, estimates that the CNI will be 3.61 percent, based on partial data. Our review of the actual data, however, indicates that the CNI will be 2.96 percent. The CPI Is Overestimated. The January 2001 federal SSI COLA will be based on the change in the CPI-W from the third quarter of calendar 1999 to the third quarter of calendar 2000. The Governor’s budget esti- mates that the change in the CPI-W for this period will be 3.2 percent. Based on our review of the consensus economic forecasts for 2000, we estimate that the CPI-W will be 2.5 percent. This reduction in the CPI-W (compared to the Governor’s budget) raises the state cost of providing the statutory COLA because it effectively reduces federal financial par- ticipation toward the cost of the state COLA, which is applied to the en- tire grant. Cost of Providing COLA Is Overestimated. Taken together, the changes in CNI and CPI-W (in relation to the Governor’s budget) reduce the General Fund cost of providing the statutory COLA by approximately $6.6 million. Accordingly, we recommend that the budget be reduced to reflect these savings. Supplemental Security Income\/ State Supplementary Program Grant Levels Figure 1 (see next page) shows SSI\/SSP grants on January 1, 2001 for both individuals and couples as displayed in the Governor’s budget and adjusted to reflect the actual CNI and the Legislative Analyst’s Office estimate of the CPI-W. As the figure indicates, grants for individuals will increase by $20 to a total of $712 per month, and grants for couples will increase by $36 to a total of $1,265. As a point of reference we note that the federal poverty guideline for 1999 is $687 per month for an individual and $922 per month for a couple. Thus, the grant for an individual would be 3.7 percent above the 1999 poverty guideline and the grant for a couple would be 37 percent above the guideline. (We note that the poverty guide- lines are adjusted for inflation annually.) C – 172 Health and Social Services 2000-01 Analysis Figure 1 SSI\/SSP Maximum Monthly Grants Governor’s Budget and LAO Projections January 2000 and January 2001 January 2001 LAO Projection Change From 2000 Recipient Category January 2000 Governor’s Budget LAO Projectiona Amount Percent Individuals SSI $512 $529 $525 $13 2.5% SSP 180 188 187 7 3.9 Totals $692 $717 $712 $20 2.9% Couples SSI $769 $793 $788 $19 2.5% SSP 460 480 477 17 3.7 Totals $1,229 $1,273 $1,265 $36 2.9% a Based on actual California Necessities Index increase (2.96 percent) and projected U.S. Consumer Price Index increase (2.5 percent). Child Welfare Services C – 173 Legislative Analyst’s Office CHILD WELFARE SERVICES The Child Welfare Services (CWS) program provides services to abused and neglected children and children in foster care, and their fami- lies. The CWS program provides: Immediate social worker response to allegations of child abuse and neglect. Ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect. Services to children in foster care who have been temporarily or permanently removed from their families because of abuse or neglect. Child Welfare Services Case Management System For a discussion of this issue, please see our review of the Health and Human Services Agency Data Center in the General Government chapter of this Analysis. C – 174 Health and Social Services 2000-01 Analysis COMMUNITY CARE LICENSING The Community Care Licensing Division (CCLD) develops and en- forces regulations designed to protect the health and safety of individu- als in 24-hour residential care facilities and day care. Licensed facilities include child care; foster family and group homes; adult residential fa- cilities; and residential facilities for the elderly. The Governor’s budget proposes expenditures of $117 million ($46 million General Fund) for the CCLD in 2000-01. This represents a 17 percent increase in General Fund expenditures from the current year. This increase is primarily due to a proposal of $5 million from the General Fund for the Child Care Safety Initiative. Need More Information on Child Care Safety Initiative We withhold recommendation on the Child Care Safety Initiative, pending receipt of additional information supporting the budget proposal. The Governor’s budget proposes a one-time $5 million General Fund augmentation in 2000-01 for the Child Care Safety Initiative. These funds would be used to distribute informational material to 13,000 child care centers and to train 10,000 child care center staff. The materials would include a guide to evaluate the security of facilities. The training would address how to reduce the threat of traumatic events and how to counsel families coping with the stress and trauma associated with violence, earth- quakes, and fires. Of the $5 million proposal, $3.4 million would be used to provide the training while $1.6 million would be used to produce and distribute supporting material. We have requested information from the department on how the costs of the training and materials were estimated. At the time this analysis was prepared, we had not received sufficient information to determine if the proposal is funded appropriately. Consequently, we withhold recom- mendation on the Child Care Safety Initiative, pending receipt of addi- tional information supporting the budget proposal. Community Care Licensing Division C – 175 Legislative Analyst’s Office Positions Exceed Estimated Need We recommend elimination of four community care licensing positions, for a General Fund savings of $230,000, because the positions are not needed according to the department’s formula for determining ongoing workload needs. (Reduce Item 5180-001-0001 by $230,000.) As part of its annual budget for community care licensing, the de- partment uses a caseload-driven formula for determining the number of positions needed to accommodate the ongoing licensing workload. This component of the budget proposal\u2014referred to as the Program Growth budget change proposal\u2014is distinct from the 46 positions (18 new and 28 continuing) being requested to address specific needs identified sepa- rately by the department. The formula for the Program Growth component shows that the num- ber of positions needed by the department is approximately four posi- tions less than the number currently authorized (consisting of 2.7 licens- ing program analysts, 0.4 supervisors, and 1 clerical). The budget, how- ever, does not propose to eliminate these positions. While this is a relatively small number of positions compared to the base of about 490 positions, we believe that it would be appropriate to follow the formula. Accordingly, we recommend elimination of the four positions, which would result in a General Fund savings of $230,000 in 2000-01. C – 176 Health and Social Services 2000-01 Analysis Legislative Analyst’s Office FINDINGS AND RECOMMENDATIONS Health and Social Services Analysis Page Crosscutting Issues Aging with Dignity Initiative C-21 \ufffd Long-Term Care Tax Credit Unlikely to Be An Efficient Or Effective Incentive. The proposed $500 long-term care tax credit (1) is unlikely to be a means of effectively targeting a significant subsidy to many taxpayers who currently provide in-home long-term care or to provide a significant incentive for many families or individuals to provide this type of care; (2) has an inherent potential for higher-than-intended costs because its eligibility qualifications will be difficult to enforce; and (3) will have its impact diluted by increasing federal tax liabilities. We recommend that the Legislature consider alternative means of helping seniors and disabled persons to remain in their homes or the community, such as further expansion of Medi-Cal coverage for seniors and the disabled. C-23 \ufffd Expanding Medi-Cal Coverage for Seniors and the Disabled. Recommend that the Legislature consider expand- ing Medi-Cal coverage for seniors and the disabled as an alternative to the long-term care tax credit proposed in the budget because expanding Medi-Cal coverage has the potential for more effectively targeting state assistance to individuals and families with the greatest needs and would enable the state to leverage federal funds. C-27 \ufffd Need Additional Information on Department of Aging Components. Withhold recommendation on $22 million proposed for three program components, pending receipt of additional information. C – 178 Health and Social Services 2000-01 Analysis Analysis Page C-27 \ufffd Caregiver Training, Retention, and Recruitment. Withhold recommendation on the proposal to establish a caregiver training, recruitment, and retention program, pending receipt of additional justification. C-28 \ufffd Medi-Cal Rate Increase for Distinct Part Nursing Facilities Not Justified. Reduce Item 4260-101-0001 by $2,558,000. Recommend reduction of $2.6 million to delete funding for wage pass-throughs for distinct part nursing facilities because these facilities currently receive much higher rates than other nursing homes for similar care. C-28 \ufffd More Developed Proposal for Quality Awards Needed. Withhold recommendation on $10 million ($8 million General Fund) requested for nursing home quality awards, pending a specific proposal that describes the criteria for (1) awarding grants and determining their amount, and (2) the use of the funds by awardees. C-28 \ufffd Nursing Home Inspection and Enforcement Staff Requests Overbudgeted. Reduce Item 4260-001-0001 by $584,000. Recommend General Fund reduction of $584,000 and 16 positions to eliminate overbudgeting for increased unan- nounced inspections. Withhold recommendation on a total of $11.2 million ($6 million General Fund) and 106 positions requested for improving nursing home regulation and enforcement pending receipt of specific workload informa- tion, including how much of that workload could be addressed by filling currently authorized, but vacant, positions. C-30 \ufffd Increase In Bed Licensing Fee Would Reduce General Fund. Recommend an increase in the per-bed nursing home licensing fee for 2000-01 in order to adjust fee revenues to the amount needed to fully fund additional enforcement and regulatory staff approved in the budget for a potential General Fund savings of up to $10.5 million. Findings and Recommendations C – 179 Legislative Analyst’s Office Analysis Page Child Care C-32 \ufffd Child Care for CalWORKs Families and the Working Poor. Recommend enactment of legislation to conduct a pilot test of the Wisconsin-style child care program in up to four counties in California. Emergency Medical Services Authority C-41 \ufffd Ease Statutory Requirement and Restore Fund Reserve. Recommend legislation to reduce from 25 percent to 5 percent the statutory requirement for the Emergency Medical Services (EMS) Personnel Fund. Further recommend that the Emergency Medical Services Authority provide a fiscal plan for the EMS Personnel Fund. Department of Alcohol and Drug Programs C-45 \ufffd Excess Special Fund Revenues Should Be Used to Reduce Fees. Recommend adoption of budget bill language requiring the department to implement a fee reduction for Driving- Under-the-Influence program provider licenses, because the program fund’s year-end balance is sufficiently high to support reduced fees. C-47 \ufffd Excess Special Fund Revenues Should Be Transferred to Fund. Increase General Fund Revenues by $206,000. Recommend adoption of budget bill language to transfer the amount of the year-end balance in excess of $20,000 from the Audit Repayment Trust Fund to the General Fund, because a balance of $20,000 would constitute a prudent reserve and it is appropriate to return these repayment revenues to their original source, the General Fund. C-48 \ufffd Department Should Report on Medicaid Rehabilitation Option. Recommend that the department advise the Legislature on the status of the statutorily required report on the programmatic and fiscal implications of adopting the Medicaid rehabilitation option under the Medi-Cal Drug Treatment Program (Drug Medi-Cal [D\/MC]) and its recommendations regarding adoption of the option. C – 180 Health and Social Services 2000-01 Analysis Analysis Page C-48 \ufffd Statewide Strategic Plan Needed to Address Gap in Substance Abuse Treatment. Recommend adoption of budget bill language requiring the department to submit by December 1, 2000 a statewide strategic plan to address the need for substance abuse treatment, including an adolescent component and consideration of expanding benefits under the Healthy Families Program and D\/MC. California Children and Families Commission C-54 \ufffd Establish a State-Funded Voluntary Matching Grant Program for the Proposition 10 County Commissions. Recommend legislation to create a state-funded matching grant program which would fund (1) early childhood programs that have been shown to be cost-effective and\/or (2) demonstration programs that are potentially cost-effective, based on existing research. Department of Health Services State Operations C-56 \ufffd Vacant Positions Should Be Filled Before Adding New Positions. In addition to specific recommendations regarding individual staffing requests, we withhold recommendation generally on all of the department’s proposals to increase staffing (which result in a net increase of 557 positions in 2000-01) because the department’s large number of unfilled existing positions calls into question the need for the requested staffing increases. We recommend that the department evaluate its staffing vacancies in order to identify workload that can be met by filling existing positions instead of adding new positions and funding, and report the results of this review to the budget committees. C-57 \ufffd Salary Savings Estimate Should Be Realistic. Recommend that DHS prepare, for the budget committees, a realistic hiring plan for its revised staffing needs and a revised salary savings estimate for 2000-01 that is consistent with that plan, in order to avoid budgeting funds that are not likely to be spent. Findings and Recommendations C – 181 Legislative Analyst’s Office Analysis Page C-58 \ufffd Employer Retirement Contribution Overbudgeted. Recom- mend reducing the amount budgeted for employer retirement contributions to the correct amounts for proposed new positions in 2000-01, for a total savings of $1.1 million ($442,000 General Fund, $158,000 special funds, $501,000 federal funds, and $27,000 reimbursements), subject to adjustment for other budget actions affecting these proposals. C-59 \ufffd Medi-Cal Fraud and Fiscal Integrity Initiative\u2014More Information Needed. Withhold recommendation on $26.2 mil- lion ($10 million General Fund) and 255 positions requested for the Governor’s Medi-Cal Fraud and Fiscal Integrity Initiative pending further analysis of the proposal and receipt of additional information from the department regarding (1) the potential use of existing vacant positions to address identified workload and (2) more specific workload justifica- tion that relates staffing requests to specific goals and outcomes and recognizes the interactive effects of the components of the Governor’s initiative. Medi-Cal C-79 \ufffd Caseload Estimate Probably Too High But Clouded by Uncertainty. We find that the budget’s estimate for the Medi- Cal caseload of families and children is likely to be too high, based on current trends. General Fund caseload savings could total as much as $150 million through 2000-01. However, a number of factors currently add considerable uncertainty to Medi-Cal caseload projections. Accordingly, we will monitor caseload trends and recommend appropriate adjustments at the time of the May revision to the Governor’s budget. C-81 \ufffd Legislative Notification Not Provided for Medi-Cal Defi- ciency. We find that the Department of Finance (DOF) did not provide the Legislature with notification of the 1999-00 Medi- Cal deficiency as required by Section 27.00 of the 1999-00 Budget Act. C-83 \ufffd Departments Should Identify Funding Needed for Potential Managed Care Rate Increases. Recommend that the DOF and the Department of Health Services report at budget hearing on C – 182 Health and Social Services 2000-01 Analysis Analysis Page (1) their plans for considering Medi-Cal managed care rate increases in 2000-01 and (2) the potential amount of additional funding needed in 2000-01 for those rate increases. C-84 \ufffd Antifraud Efforts Starting to Pay Off. Reduce Item 4260-101- 0001 by $19.1 Million. Recommend General Fund reduction in 2000-01 (and reduction of $6.8 million in 1999-00) because recent payment data indicate that savings from the department’s efforts to prevent Medi-Cal provider fraud are greater than the savings anticipated in the budget. C-85 \ufffd Reduce Disproportionate Share Hospital (DSH) Takeout Or Increase Rates? Withhold recommendation on a proposed General Fund augmentation of $30 million to reduce the state takeout from DSH funding and to increase Medi-Cal provider rates, pending receipt of a specific proposal for the use of the funds. C-86 \ufffd Federal Government Will Pay for Hepatitis A Vaccine. Reduce Item 4260-101-0001 by $4,588,000. Recommend General Fund reduction of $2.9 million in 1999-00 and $4.6 million in 2000-01 because the state will receive Hepatitis A vaccine for children enrolled in Medi-Cal at no cost through the federal Vaccines for Children Program. C-87 \ufffd Panorama View Is Nice, But Not Enough. Recommend that the department report during budget hearings regarding when and how it intends to provide certain legislative committees with access to the DataScan component of the Medi-Cal Management Information System\/Decision Sup- port System, as required by existing law. Public Health C-93 \ufffd Change the Department’s Immunization Information System Procurement Strategy. Recommend budget bill language requiring the department to submit an Alternative Procurement Business Justification for the statewide immuni- zation system, in which the department’s procurement strategy would be based on desired program outcomes rather than technical specifications. Findings and Recommendations C – 183 Legislative Analyst’s Office Analysis Page C-94 \ufffd Encourage Coordination of Regional Registry Development. Recommend budget bill language directing the department to require the inclusion of project charters in grant applications from counties that are developing regional registries, in order to facilitate regional cooperation and coordination in these efforts. C-95 \ufffd Ensure State Oversight of All Local Registries. Recommend legislation requiring any local registry that chooses to participate in the statewide immunization system to comply with the state’s guidelines for local registry development. C-96 \ufffd Assure Provider Participation in a Statewide Immunization Registry. Recommend legislation requiring all immunization providers to participate in local registries, or in the statewide registry if the county in which the provider is located chooses not to develop a local registry. C-97 \ufffd Provide a State Match for Registries’ Ongoing Costs. Recommend legislation to provide a state match for local registries’ ongoing costs, effective 2001-02, in order to encourage the continuation of local participation in the statewide immunization system. C-98 \ufffd Obtain Funding Sources for a Statewide Immunization Registry. Recommend legislation requiring the department to apply for federal matching funds, under the Medi-Cal and Healthy Families Programs, for the development and operation of the statewide immunization information system. C-99 \ufffd Proposition 99 Revenues Declining Slightly. The budget projects that Proposition 99 revenues will decrease by 1 percent in 1999-00 and 1.7 percent in 2000-01. Using additional resources from carry-over balances from 1999-00 and the budget’s proposed release of $12 million from litigation reserves, the budget proposes to meet the demands of caseload-driven programs and augment certain activities, particularly the statewide media campaign and emergency room physician services for uninsured individuals. C – 184 Health and Social Services 2000-01 Analysis Analysis Page C-102 \ufffd Budget Proposes to Permanently Eliminate General Fund Support for County Medical Services Program (CMSP). Recommend adopting trailer bill legislation that suspends the state’s General Fund allocation of $20.2 million for CMSP for 2000-01, rather than permanently eliminating the appropria- tion as proposed by the Governor. C-105 \ufffd Budget Does Not Maximize Federal Grant for Drinking Water Loan Fund. The budget’s proposal to appropriate $15.4 million from the General Fund for the Safe Drinking Water State Revolving Fund does not maximize receipt of federal funds that are available. Passage of a water bond measure on the March 2000 ballot would replace this General Fund appropriation and could maximize federal funds. We withhold recommendation pending the results of the March election. C-106 \ufffd Budget Proposes to Extend Community Challenge Grant Program and Use Federal Funds. The budget proposes to extend the Community Challenge Grant Program for one year, using a $20 million federal award allocated to California for reducing its out-of-wedlock birth rates in 1997. The final report of the program evaluation, due January 1, 1999, had not been submitted at the time of this analysis, but should be available prior to budget hearings. C-107 \ufffd Some Local California Children’s Services (CCS) Programs Not Complying With Statutory Requirement. Current law requires that all CCS claims be submitted to the state fiscal intermediary for payment no later than January 1, 1999. We recommend that the department report, at budget hearings, on the reasons that ten counties are not in compliance, and present a plan for ensuring their cooperation. Managed Risk Medical Insurance Board C-110 \ufffd Budget Underestimates Enrollment in Current Year. We estimate that the program’s caseload at year’s end will be 11 percent greater than the budget estimates, with an additional cost of $3.3 million ($1.1 million General Fund). Findings and Recommendations C – 185 Legislative Analyst’s Office Analysis Page C-111 \ufffd No Policy Rationale for Excluding Some Legal Immigrants. Increase Item 4280-101-0001 by $2,365,920. The budget proposes to extend, for one year, Healthy Families eligibility for legal immigrant children who entered the U.S. after August 22, 1996 and who enrolled in the program in the current year. We see no policy rationale for excluding certain legal immigrants solely on the basis that they did not enroll in the program in the current year. C-112 \ufffd Technical Error Overbudgets $3 million from the General Fund. Reduce Item 4280-101-0001 by $2,946,470. Recommend a technical correction to the budget. C-113 \ufffd Caseload Overestimated for Current Year. Recommend reducing the budget’s estimated level of spending for the Access for Infants and Mothers Program in the current year by $1.3 million, for a corresponding savings to the Perinatal Insurance Fund (Proposition 99), to reflect more realistic caseload changes. C-114 \ufffd Program Underbudgeted for Current Year Due to Unpaid Claims. The budget does not account for $2.2 million in unpaid claims that the board must pay in 1999-00. We recommend that the board present, at budget hearings, a fiscal plan for satisfying this obligation without jeopardizing the Perinatal Insurance Fund ‘s reserve. Department of Developmental Services C-116 \ufffd Statutorily Required Rate-Setting Methodologies Still Not Established. Recommend that the department report on the status of the development of rate-setting methodologies for residential, day program, and supported living services. Withhold recommendation on the department’s related $1.1 million request for contract services, pending receipt of additional information on the scope and costs of the proposed contracts. C-118 \ufffd Costs Of Southern California Facility Uncertain. Withhold recommendation on the department’s request for $13.2 mil- lion ($9.1 million General Fund, including Medi-Cal reim- C – 186 Health and Social Services 2000-01 Analysis Analysis Page bursements) for the lease and development of a facility to serve individuals with severe behavioral problems, pending an update on the department’s progress in finding a site. Department of Mental Health C-120 \ufffd Funding for Americans with Disabilities Act (ADA) Projects Should Be Requested as Capital Outlay Proposal. Reduce Item 4440-011-0001 by $5.6 million. Recommend reduction because proposed ADA compliance projects should be considered capital outlay projects, and should be resubmitted as a capital outlay budget change proposal. C-122 \ufffd Equipment Request Is Premature. Reduce Item 4440-011- 0001 by $845,000. Recommend reduction because the equipment request for the new administration building at Metropolitan State Hospital should be made with the 2001-02 budget request. C-122 \ufffd Decision on Mentally Ill Homeless Pilot Projects Should Await Evaluation Review. Withhold recommendation on $20 million proposed for the continuation and expansion of mentally ill homeless pilot projects, pending review of the statutorily required report due May 1, 2000. Further recommend that, if the Legislature does approve funding to expand the pilot projects to other counties, at least one of the new pilots be targeted primarily to parolees. Employment Development Department C-123 \ufffd Proposed Disability Insurance Tax Rate Does Not Meet Statutory Requirement. Without a rate increase, the Disability Insurance Fund will develop an estimated deficit of $278 million by December 2000. The budget proposes to increase the disability insurance tax rate, but the rate would still be below the level required by current law. Findings and Recommendations C – 187 Legislative Analyst’s Office Analysis Page Department of Rehabilitation C-126 \ufffd Funding for Statutory Rate Increase Will Be Prepared in May. Preliminary estimates project a General Fund cost of $7 million in 2000-01. C-127 \ufffd Caseload Projections May Be Underbudgeted. Recent trends indicate that the Work Activity Program and Supported Employment Program caseloads may result in increased General Fund expenditures of $6.1 million. C-129 \ufffd High Vacancy Rates Reduce Accountability. Recommend the department submit a staffing plan that either (1) identifies and proposes to eliminate 150 of the Field Operations Division’s 240 vacant authorized positions in order to reflect actual staffing patterns, or (2) proposes funding to fill the positions. Department of Child Support Services C-132 \ufffd Administration Division is Overbudgeted. Reduce Item 5175-001-0001 by $125,000 and Item 5180-001-0001 by $95,000. Recommend deletion of five proposed new positions from the Administration Division of Department of Child Support Services (DCSS); conversion of five proposed permanent positions in this division to limited term; and transfer of four positions, in addition to the 13.5 transfer positions proposed, from the Department of Social Services to the DCSS. C-136 \ufffd Local Assistance Allocations Should Be Based On County Cost-Effectiveness. Increase Item 5175-101-0001 by $5 mil- lion. Recommend (1) a $5 million General Fund augmentation for local assistance in 2000-01, to be allocated to local agencies on the basis of county cost-effectiveness (ratio of historical increases in collections to increases in costs) and (2) legislation requiring the department to include marginal cost-effective- ness as a criterion in the allocation of all funds to local agencies. C – 188 Health and Social Services 2000-01 Analysis Analysis Page Department of Social Services CalWORKs Program C-141 \ufffd Impact of Maintenance-of-Effort (MOE) Requirement. Because the Governor’s budget proposes to expend all available federal block grant funds and the minimum amount of General Fund monies required by federal law, any net augmentation will result in General Fund costs and any net reductions will result in savings in federal block grant funds (which would be retained by the state). C-141 \ufffd Caseload Projection is Overstated. Reduce Item 5180-101- 0890 by $34,900,000. Recommend reducing proposed spending for California Work Opportunity and Responsibility to Kids (CalWORKs) grants by $66 million in 1999-00 and $35 million in 2000-01 because the caseload is overstated. C-143 \ufffd Budget Overestimates Cost of Providing Statutory Cost-of- Living Adjustment (COLA). Reduce Item 5180-01-0890 by $20,000,000. Recommend reducing proposed spending for CalWORKs grants by $20 million because the cost of providing the statutory COLA will be lower than estimated in the budget. C-144 \ufffd Budget Underestimates Savings from Imposition of Sanctions. Reduce Item 5180-101-0890 by $30,095,000. Recommend reducing proposed spending for CalWORKs grants by $32 million in 1999-00 and $30.1 million in 2000-01 (federal Temporary Assistance for Needy Families [TANF] funds) because grant savings from the imposition of sanctions on CalWORKs recipients are underestimated. C-145 \ufffd Count Spending on Health Care Programs for Recent Legal Immigrants Toward Maintenance-of-Effort (MOE) Require- ment. Reduce Item 5180-101-0001 by $49,900,000 and increase Item 5180-101-0890 by $49,900,000. Recommend that the Department of Social Services count $49.9 million in General Fund expenditures for health care for recent legal immigrants towards the CalWORKs MOE requirement. This action results in a $49.9 million General Fund savings by replacing General Fund expenditures for CalWORKs grants with an identical amount of federal TANF funds. Findings and Recommendations C – 189 Legislative Analyst’s Office Analysis Page C-146 \ufffd Budget Should Reflect Award of High Performance Bonus Funds. Recommend a technical adjustment in the TANF fund balance to reflect the December 1999 award of $45.5 million in federal High Performance Bonus funds. C-147 \ufffd Withhold Recommendation on Budget for Employment Services. Withhold recommendation on proposed budget for employment services ($884 million General Fund and federal TANF funds) because the new methodology for budgeting employment service was not completed in time for inclusion in the Governor’s budget. C-148 \ufffd Budget Proposes to Prohibit Counties from Earning Additional Performance Incentives. Recommend either repealing the performance incentive provision or replacing it with a new system that would (1) be funded with General Fund monies that the counties could use for any purpose and (2) tie the amount of incentive payments to improvement in the CalWORKs program. C-151 \ufffd The CalWORKs Community Service Law Needs Clarifica- tion. Recommend legislation to clarify conflicting provisions of current law so that counties will have the option of providing wage-based community service jobs for CalWORKs recipients. C-153 \ufffd The CalWORKs Child Care Program. The Governor’s budget fully funds the estimated need for CalWORKs child care, plus a reserve of $81 million. The budget proposal includes an increase of $85 million for the Stage 3 set-aside designed to serve families who have reached their two-year post- assistance time limit. We summarize the CalWORKs child care program. C-156 \ufffd County Probation Departments Should Report Juvenile Justice Data. Recommend adoption of budget bill language requiring county probation offices to report specified data on juveniles to Department of Justice in order to receive funding for county probation facilities. C – 190 Health and Social Services 2000-01 Analysis Analysis Page C-157 \ufffd The TANF Regulations Increase State Felxibility to Service the Working Poor. The final federal TANF regulations increase state flexibility to serve working poor families that are not eligible for the California Work Opportunity and Responsibility to Kids program. We summarize the TANF regulations and present some options for program changes permitted by the regulations. Kinship Guardianship Assistance Payment Program C-164 \ufffd Budget Overestimates Kinship Guardianship Assistance Payment (Kin-GAP) Caseload in 2000-01. Reduce Item 5180- 101-0001 by $1,841,000, increase Item 5180-141-0001 by $273,000, and increase Item 5180-151-0001 by $1,125,000. Recommend a General Fund reduction of $443,000 because the Kin-GAP Program caseload is overestimated. Foster Care C-166 \ufffd Foster Family Agencies (FFAs) Cost-of-Living Adjustment (COLA) Overestimated. Reduce Item 5180-101-0001 by $792,000. Recommend reduction based on more recent data, for a General Fund savings of $792,000. C-167 \ufffd Budget Does Not Provide COLA for All Foster Care Providers. Increase Item 5180-101-0001 by $12,300,000. Recommend a $12.3 million General Fund augmentation to provide a COLA for the foster family homes and group homes because (1) there is no policy rationale for distinguishing these types of providers from FFAs and (2) revenues are sufficient to provide the COLA. Supplemental Security Income\/ State Supplementary Program C-170 \ufffd Budget Overestimates Cost of Providing Statutory Cost- of-Living Adjustment (COLA). Reduce Item 5180-111-0001 by $6,600,000. Recommend reducing General Fund amount for the statutory Supplemental Security Income\/State Findings and Recommendations C – 191 Legislative Analyst’s Office Analysis Page Supplementary Program COLA by $6.6 million because the cost of providing the COLA is overestimated. Community Care Licensing Division C-174 \ufffd Need More Information on Child Care Safety Initiative. Withhold recommendation on the Child Care Safety Initiative, pending receipt of additional information supporting the budget proposal. C-175 \ufffd Positions Exceed Estimated Need. Reduce Item 5180-001- 0001 by $230,000. Recommend elimination of four community care licensing positions, for a General Fund savings of $230,000, because the positions are not needed according to the department’s formula for determining ongoing workload needs. C – 192 Health and Social Services 2000-01 Analysis Analysis Page ”

” California Work Opportunity and Responsibility to Kids C – 97 Legislative Analyst’s Office DEPARTMENT OF SOCIAL SERVICES CALWORKS PROGRAM 1999-2000 (5180) In response to federal welfare reform legislation, the Legislature created the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children (AFDC), the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the Family Group compo- nent of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for the Unemployed Parent component if it includes a child who is financially needy due to the unemployment of one or both parents. The budget proposes an appropriation of $5.5 billion ($1.8 billion General Fund, $64 million county funds, $30 million from the Employ- ment Training Panel Fund, and $3.5 billion federal funds) to the Depart- ment of Social Services (DSS) for the CalWORKs program. In total funds, this is a decrease of $681 million, or 11 percent. Similarly, General Fund spending is projected to decline by $216 million (11 percent). The budget total for CalWORKs, however, does not include funds transferred to the Department of Education to pay for Stage 2 child care or the child care reserve. When these funds are taken into account, total spending is pro- jected to decline by $218 million, or 3.6 percent, in 1999-00. CURRENT-YEAR UPDATE OF THE CALWORKS PROGRAM Grants. The Legislature rejected the Governor’s proposal to make permanent the previously enacted 4.9 percent grant reduction and delete the statutory cost-of-living adjustment (COLA) in 1998-99. On November 1, 1998 the temporary 4.9 percent grant reduction ended and, C – 98 Health and Social Services 1999-00 Analysis pursuant to Chapter 329, Statutes of 1998 (AB 2779, Aroner), a 2.84 percent COLA was provided. These grant increases resulted in an eight-month General Fund cost of $226 million in 1998-99. Future COLAs Tied to Future Tax Reductions. Chapter 329 provides that future COLAs will be suspended in any year where revenues are insufficient to trigger an additional vehicle license fee reduction, begin- ning in 2000-01. Technical Corrections. Chapter 902, Statutes of 1998 (AB 2772, Aroner) primarily made technical changes to CalWORKs. Significant provisions include (1) clarifying that the 18 to 24 month time limit for employment services prior to community service begins when a client signs a welfare- to-work agreement and (2) modifying the county performance incentives, to permit the method of allocation contained in the 1998-99 Budget Act. We discuss the issue of county performance incentives later in this section of the Analysis. 1999-00 BUDGET ISSUES Impact of Maintenance-of-Effort Requirement Because the Governor’s budget proposes to expend all available fed- eral funds and the minimum amount of General Fund monies required by federal law for the California Work Opportunity and Responsibility to Kids program, any net augmentation will result in General Fund costs and any net reductions will result in federal savings. Maintenance-of-Effort (MOE) Requirement. To receive the annual federal Temporary Assistance for Needy Families (TANF) block grant ($3.7 billion for California), states must meet a MOE requirement that state spending on welfare for needy families be at least 80 percent of the federal fiscal year (FFY) 94 level, which is $2.9 billion for California. The MOE requirement drops to 75 percent if a state meets two specified work participation rates, but California is unlikely to meet both rates in the budget year. Although the MOE requirement is primarily met with state and county spending on CalWORKs and other programs administered by DSS, we note that $395 million in state spending in other departments is used to satisfy the requirement. Proposed Budget Is at the MOE Floor, With Partial Match for Welfare-to-Work Program. For 1999-00, the Governor’s budget for CalWORKs is at the MOE floor, with the exception of $25 million above the MOE for the purpose of providing the state match for the federal California Work Opportunity and Responsibility to Kids C – 99 Legislative Analyst’s Office Welfare-to-Work block grant funds. Because California is to receive $364 million in Welfare-to-Work block grant funds and the federal match rate is 2 to 1, a total of $182 million in state matching funds must be ex- pended by September 30, 2001. When the proposed $25 million match for 1999-00 is added to the $10 million expended for the match in 1998-99, an obligation to expend $147 million in matching funds would remain. The Governor’s budget also proposes to spend all available federal TANF funds in 1999-00, including the projected carry over funds ($409 million) from 1998-99. We note that without these carry over funds, General Fund spending would be significantly above the MOE floor in 1999-00, under the budget’s assumption of fully funding the program. Technical Adjustments Raise MOE Countable Spending. As discussed below, we believe that the budget needs to be increased by $27.5 million in order to fully fund the cost of providing the statutory COLA as pro- posed in the Governor’s budget. In addition, we believe that $4.8 million in General Fund spending on women offenders and parolees should be counted toward meeting the MOE requirement. (These issues are dis- cussed later in our analysis of the program.) Taken together, these two technical changes would raise spending an additional $32.3 million above the MOE requirement, absent other changes to the budget that would free up federal TANF funds for these expenditure increases. Budget Underestimates Cost of Providing the Statutory COLA The General Fund cost of providing the statutory cost-of-living ad- justment will be $27.5 million above the amount included in the budget, due to an upward revision in the California Necessities Index. These costs should be reflected in the May Revision of the budget. Pursuant to current law, the Governor’s budget proposes to provide the statutory COLA in 1999-00, at a General Fund\/TANF cost of $209.4 million. The COLA is based on the change in the California Neces- sities Index (CNI) from December 1997 to December 1998. The Governor’s budget, which is prepared prior to the release of the December CNI fig- ures, estimates that the CNI will be 2.08 percent, based on partial data. Our review of the actual data, however, indicates that the CNI will be 2.36 percent. Applying the actual CNI of 2.36 percent raises the cost of providing the COLA to $236.9 million, or $27.5 million above the amount proposed in the budget. The administration should address this issue in the May Revision of the budget. We note that these additional costs could be funded with federal TANF funds if the Legislature frees up these funds by budget reductions C – 100 Health and Social Services 1999-00 Analysis (such as those we recommend later in this analysis). Alternatively, the General Fund could be used as a funding source. This would bring the budget above the MOE. In that case, these expenditures could count toward meeting the state’s $147 million state match obligation for the federal Welfare-to-Work block grant. The CalWORKs Grant Levels Figure 1 shows the maximum CalWORKs grant and food stamps benefits effective July 1999, as displayed in the Governor’s budget and adjusted to reflect the actual CNI. As the figure shows, grants in high-cost counties will increase by $15 to a total of $626 and grants in low-cost counties will increase by $14 to a total of $596. As a point of reference, we note that the federal poverty guideline for 1998 (the latest reported figure) for a family of three is $1,138 per month. When the grant is combined with the maximum food stamps benefit, total resources in high-cost counties will be $874 per month (77 percent of the poverty guideline). Combined grant and food stamps benefits in low-cost counties will be $857 per month (75 percent of the poverty guideline). We note that the poverty guidelines are adjusted for inflation annually. Figure 1 CalWORKs Maximum Monthly Grant and Food Stamps Governor’s Budget and LAO Projection Family of Three 1998-99 and 1999-00 Recipient Category 1998-99a 1999-00 Change from 1998-99 Governor’s Budget LAO Projectionb Amount Percent Region 1: High-cost counties CalWORKs grant $611 $624 $626 $15 2.5% Food Stamps 254 249 248 -6 -2.4 Totals $865 $873 $874 $9 1.0% Region 2: Low-cost counties CalWORKs Grant $582 $595 $596 $14 2.4% Food Stamps 267 262 261 -6 -2.3 Totals $849 $857 $857 $8 0.9% a Effective November 1998. b Based on California Necessities Index at 2.36 percent (revised pursuant to final data) rather than Gover- nor’s budget estimate of 2.08 percent. California Work Opportunity and Responsibility to Kids C – 101 Legislative Analyst’s Office Count Spending on Programs for Women Offenders And Parolees Toward MOE Requirement We recommend that the department count toward the California Work Opportunity and Responsibility to Kids maintenance-of-effort requirement $4.8 million in General Fund expenditures in the Department of Corrections on programs for women offenders and parolees. Pursuant to the federal welfare reform legislation, California may count all state spending on families eligible for CalWORKs, even if they are not in the CalWORKs program, for purposes of meeting the MOE requirement. To be countable, such spending must be consistent with the broad purposes of federal welfare reform\u2014providing assistance to fami- lies so that they can become self sufficient. The California Department of Corrections (CDC) operates three programs for women offenders and parolees with children. These programs provide services (such as drug treatment, child care, and education) to assist women in reintegrating into society. Because these programs provide services that are consistent with the intent of the federal welfare reform legislation, they can be counted toward meeting the federal MOE requirement. Total spending for these program in 1999-00 is projected to be about $11 million. We note that about 45 percent of the women in the programs are likely to have had a drug-related felony conviction. Because current state law makes drug felons ineligible for CalWORKs, the spending on program services that go to drug felons would not count toward the federal MOE requirement. After reducing total spending by 45 percent to account for women who are likely to have drug-related felony convictions, and reducing the remaining amount by an additional 20 percent to account for other spending (such as health care) that may not meet the federal require- ments, we estimate that at least $4.8 million of spending in the budget year for these programs operated by CDC (and $4.2 million in the current year) would count toward the MOE requirement. The administration, however, has not included these expenditures in its MOE calculations. Consequently, we recommend that the department make this adjustment, which would bring estimated current-year expenditures $4.2 million above the MOE and the budget proposal $4.8 million above the requirement. This action would create options for the Legislature, which we discuss below. We note that these General Fund expenditures above the MOE could be counted toward the state match for the federal Welfare-to-Work block grant. Alternatively, any federal TANF savings identified by the Legisla- ture could be used to replace General Fund monies to bring the budget down to the MOE level. C – 102 Health and Social Services 1999-00 Analysis Budget Underestimates Savings From Maximum Family Grant Policy We recommend that proposed spending for California Work Opportu- nity and Responsibility to Kids grants be reduced by $20.4 million (federal Temporary Assistance for Needy Families funds) to reflect the incremental savings that will occur in 1999-00 due to the continuation of the Maximum Family Grant policy. (Reduce Item 5180-101-0890 by $20,400,000.) Chapter 196, Statutes of 1994 (AB 473, Brulte) enacted the Maximum Family Grant program. This program prohibits increases in any family’s grant due to children conceived while on aid, except in cases of rape, incest, or failure of certain contraceptives, unless there has been a break in aid of at least 24 consecutive months. This policy became effective in December 1996. In May 1998, DSS estimated that this policy would save $22.4 million in 1997-98 and $68.9 million in 1998-99. Previous multiyear estimates for this policy prepared by DSS indicated the annual baseline savings were likely to grow to nearly $200 million after five years of implementation. We note, however, that for 1999-00, the budget does not reflect any in- crease in savings from additional children who will not qualify for a grant because of this policy. We estimate these additional savings to be approx- imately $20.4 million in 1999-00. Accordingly, we recommend that the budget be reduced to reflect these savings. We note that DSS is in the process of reestimating the actual savings attributable to the Maximum Family Grant policy during 1998. Based on the department’s quality control data, a better estimate of actual and projected savings should be available in the May Revision of the budget. If appropriate, we will modify our estimate of the additional savings in 1999-00 based on this information. Budget for Services and Child Care Should Reflect Impact of Nonparticipation Although the budget for grants includes a reduction of 13 percent to account for adults who will be sanctioned for failing to comply with pro- gram participation requirements, the budget for employment services and child care includes no such reduction. We recommend reducing the budget for employment services and child care to account for nonparticipation, for a savings of $150.8 million (federal Temporary Assistance for Needy Families funds). (Reduce Item 5180-101-0890 by $150,775,000.) Based on data from the Greater Avenues for Independence (GAIN) program (which provided employment services to AFDC recipients prior California Work Opportunity and Responsibility to Kids C – 103 Legislative Analyst’s Office to CalWORKs), the budget for CalWORKs grants reflects savings of $95 million to account for sanctions on adults who fail to meet various program participation requirements. Specifically, the budget estimates that during 1999-00 an average of almost 53,000 adults per month (13 percent of all cases with adults) will be sanctioned. The budget for welfare-to-work services and child care, however, has not been adjusted to reflect this nonparticipation. Since adults who are sanctioned will not receive welfare-to-work services, we recommend that the budget for services and child care be reduced to reflect the anticipated savings from nonparticipation. Based on an overall 13 percent nonparticipation rate, we estimate these savings to be $150.8 million in the budget year. Incentive Payments Should Be Related to Improved County Performance Of the $479 million proposed for county performance incentive pay- ments, $287 million (60 percent) is the result of the baseline level of recipient earnings, rather than savings attributable to improved county performance in California Work Opportunity and Responsibility to Kids (CalWORKs). We recommend enactment of legislation to modify the methodology for calculating the incentive payments so that counties retain 50 percent of savings attributable to earnings (rather than the 100 percent included in the budget) because the rest of the savings would have occurred in the absence of CalWORKs. This change will result in budget savings of $193 million (federal Temporary Assistance for Needy Families funds) in 1999-00 . (Reduce Item 5180-101-0890 by $192,573,000.) Background. The CalWORKs legislation requires that savings resulting from (1) exits due to employment, (2) increased earnings, and (3) diverting clients from aid with one-time payments, be paid by the state to the counties as performance incentives. Current law also requires that DSS, in consultation with the welfare reform steering committee, determine the method of calculating these savings. Savings from Exits Due to Employment. For 1998-99, the steering committee recommended that county performance incentive payments attributable to savings from exits due to employment be based on the increase in exits compared to the average number of exits during 1994-95, 1995-96, and 1996-97. By estimating the savings from exits due to employ- ment in comparison to a baseline, the incentive payments for exits are directly related to improved county performance. Savings From Increased Earnings. In contrast to its approach with respect to exits, the steering committee did not incorporate a baseline for C – 104 Health and Social Services 1999-00 Analysis savings due to increased earnings. Specifically, the steering committee recommended that all savings attributable to earnings\u2014regardless of whether they resulted from CalWORKs interventions or would have occurred absent any change in program implementation\u2014be paid as fiscal incentives. We note that prior to implementation of CalWORKs, 17 percent of the caseload had sufficient earnings to result in reduced grants. For 1999-00, the DSS estimates that of the $385 million in savings resulting from increased earnings, $287 million (about 75 percent) would have occurred without CalWORKs. Thus, the steering committee ap- proach provides counties with $287 million in performance incentives that they would earn even if CalWORKs recipients show no improve- ments in earnings from county implementation of the program. Savings From Diversion. The Governor’s budget proposes to provide all net savings that are attributable to diversion as county performance incentives. Specifically, the budget estimates that cases diverted by the counties would have been on aid for an average of six months, and that the average one-time diversion payment would be $1,175. Based on these assumptions, DSS estimates that fiscal incentive payments based on net savings from diversion will be $18.7 million in 1999-00. We note that the diversion payment is a new program component, so any savings should be attributable to CalWORKs. Summary of Incentive Payments. Figure 2 summarizes the sources of the fiscal incentives. As the figure shows, $287 million, or almost 60 percent of the proposed budget for performance incentives, is based on savings that would have occurred in the absence of CalWORKs, rather than from im- proved county performance in implementing the new program. Tying Incentives to Improved County Performance. One approach to bringing incentives in line with performance would be to limit incentive payments based on increased earnings to the $99 million in savings from earnings that are actually attributable to CalWORKs. This approach would reduce fiscal incentives by $287 million, down to a total of $192 million. We note that even though DSS has estimated that only $99 million in statewide savings from earnings can be attributed to CalWORKs, it is administratively difficult to separate baseline savings from CalWORKs savings at the individual county level. This technical estimating problem is one reason why the steering committee did not limit the fiscal incentive payments in this way. To address this problem, we recommend providing counties with 50 percent of all savings attributable to earnings. Under this approach, fiscal incentives would be reduced by $193 million, to a total of $286 million. Al- California Work Opportunity and Responsibility to Kids C – 105 Legislative Analyst’s Office though this approach leaves counties with more in incentives than can be strictly justified on the basis of improved performance, it does not rely on a county-level estimate of the baseline and still provides counties with a signifi- cant fiscal incentive to assist recipients in obtaining employment. At the same time, it will result in savings to the state which, in years when CalWORKs spending is above the MOE level, will accrue to the General Fund, and in other years will be in federal TANF funds that can be used according to the Legislature’s priorities for the CalWORKs program. Figure 2 Governor’s Budget for County Performance Incentive Payments 1999-00 (In Millions) Reason for Incentive Payment Amount Percent Incentives based on improved county performance Exits due to employment $75 15.7% Diversion 19 3.9 Increased earnings attributable to CalWORKs 99 34.4 Subtotal $192 40.2% Incentives unrelated to improved county performance Increased earnings attributable to pre-CalWORKs program (baseline) $287 59.8% Total performance incentive payments $479 100.0% Analyst’s Recommendation. In summary, we recommend enactment of legislation to limit performance incentive payments that are based on earnings to 50 percent of total savings from earnings. Based on this rec- ommendation, the budget for fiscal incentive payments should be re- duced by $192.6 million (federal TANF funds). Options for Using Identified Savings Federal savings could be (1) redirected to other priorities in the Cali- fornia Work Opportunity and Responsibility to Kids program, (2) placed into a reserve for future years, and\/or (3) transferred to the Social Ser- vices Block Grant (Title XX), where the funds could be used to offset General Fund spending in other departments. Among these options, we recommend that the Legislature place at least 50 percent ($166 million) of our identified savings into a reserve for expenditure in future years. C – 106 Health and Social Services 1999-00 Analysis Options for Using Identified Savings. If adopted, the above recom- mendations would result in savings of $332 million. With the exception of the General Fund proposal of $25 million for the Welfare-to-Work match and the other adjustments noted previously ($27.5 million to fund the cost of the COLA and $4.8 million in Department of Corrections spending that should be counted toward the MOE requirement), the proposed budget is at the MOE floor. Thus, if the Legislature makes any budget reductions (beyond the $32.3 million discussed above), the result- ing savings would be in federal funds. Such savings would be retained by the state because they are TANF block grant funds that can be carried over indefinitely. The Legislature has three options with respect to any such federal savings: (1) redirect the savings into other priorities in the CalWORKs program, (2) place the federal savings in a reserve for expenditure in future years, and\/or (3) transfer the federal funds (up to roughly $100 million) into the Social Services Block Grant (SSBG), where the funds could be used to replace General Fund spending in certain other depart- ments. This last option requires some explanation. In accordance with the federal TANF block grant provisions, as amended by the Balanced Budget Act of 1997, California may transfer up to $370 million of federal TANF funds into the SSBG, also known as Title XX funds. Once transferred, the funds become subject to the rules of the SSBG, including the condition that SSBG spending of transferred TANF funds must be for children or their families with incomes under 200 percent of poverty. For 1999-00, the budget proposes to use $176 million in SSBG funds to offset General Fund costs, mostly in the In- Home Supportive Services (IHSS) program and in the community-based programs of the Department of Developmental Services. We estimate that additional SSBG funds (from a TANF transfer) could be used to supplant approximately $100 million in General Fund spending for low-income children and families in these programs. Analyst’s Recommendation. Of the three options for using identified savings, we recommend that the Legislature place at least 50 percent ($166 million) of such savings into a reserve for future years. There are two advantages to this approach. First, we note that in the event of a recession, the state will be responsible for 100 percent of any increased costs for CalWORKs grants or services that would result from an increase in the caseload. Establishing a TANF reserve would help mitigate the fiscal impact of a recession. Second, creating a TANF reserve increases legislative flexibility. If counties need more funds for CalWORKs services, California Work Opportunity and Responsibility to Kids C – 107 Legislative Analyst’s Office they could request them during the budget year and the Legislature could authorize additional funding. Budget Proposes to Use County Carry-Over Balances as a Funding Source In contrast to 1998-99, the Governor’s budget proposes to use $251 million in projected county carry over funds as a source of funding for the estimated need for California Work Opportunity and Responsi- bility to Kids employment services in 1999-00. Background. The 1998-99 Budget Act appropriated funds to the coun- ties in the amount estimated to meet the need for employment services and child care for the CalWORKs program in 1998-99. In addition, $175 million in prior-year unexpended child care funds and $25 million in unexpended county administration funds were reappropriated for use by the counties in 1998-99 even though the estimated need for these services was fully funded. This approach is consistent with the CalWORKs legislation which provides that counties shall retain unex- pended county block grant funds through June of 2000. Budget Proposes to Use Unspent County Funds as Funding Source. For 1999-00, the estimated need for employment services (including county fiscal incentives) is $1,258 million. The Governor’s budget, however, proposes to use $251 million in estimated unexpended county block grant funds from 1998-99 as a funding source in 1990-00. Pursuant to this policy change, the Governor’s budget proposes $1,007 million in new funding for employment services in the budget year. We believe that this is a reasonable policy change. It would treat the state and federal funds in a manner that is similar to how most programs are budgeted. In other words, unspent General Funds revert back to the General Fund. Transfer Extra Child Care Funds to Child Care Reserve In addition to funding the estimated need for child care in 1999-00, the Governor’s budget proposes to allow counties to retain $88 million in unexpended child care funds carried over from 1998-99. To ensure that child care funds are available to recipients who need them and used for their designated purpose, we recommend transferring $88 million from the county block grant allocation to the child care reserve. Inconsistent Approach to Unexpended County Block Grant Funds. As described in the previous issue, the budget proposes to use 1998-99 unex- C – 108 Health and Social Services 1999-00 Analysis pended county employment service funds as a funding source for 1999-00. Thus, the proposed appropriation for employment services has been reduced by the estimated $251 million in unexpended county block grant funds. The budget also estimates there will be $88 million in unex- pended child care funds, but proposes to reappropriate these funds to the counties in addition to providing enough new funding to cover the entire estimated need for child care in 1999-00. Analyst’s Recommendation. The Governor’s budget leaves counties with $88 million more than the estimated need for child care. We note that there is significant uncertainty in estimating the budget for child care because there is limited data upon which to estimate the child care utiliza- tion rate. Accordingly, rather than reducing the proposed budget for child care by $88 million, we recommend transferring $88 million from the county block grant allocation to the child care reserve. In this way, the funds would be restricted to child care, if needed, rather than placed within the county block grant allocation where the funds could be redi- rected to employment services or administration. Thus, our recommenda- tion will ensure that sufficient funding is available for counties that have unanticipated needs for child care, while also providing assurance that these funds will be used for their designated purpose. Penalty for Failure to Meet Federal Work Participation Rate The federal Department of Health and Human Services has indicated that (1) California failed to meet the work participation rate for two- parent families during the final quarter of federal fiscal year 1997 and (2) the state is subject to a penalty of $6,964,000. We review California’s status with respect to federal work participation rates, and estimate the cost of potential future penalties. Background. The federal welfare reform legislation of 1996 penalizes states that fail to have specified percentages of their caseload engaged in work or some other type of work-related education, job training, or job search activity. The required participation rate for the overall CalWORKs caseload is 25 percent in federal fiscal year (FFY) 97, rising to 50 percent by FFY 02. For two-parent CalWORKs families, the participation rate is 75 percent in FFY 97 and FFY 98, increasing to 90 percent in FFY 99. These rates are adjusted downward to reflect the percentage reduction in the caseload since federal welfare reform was enacted in August 1996. The penalty for failing to meet the specified work participation rates is up to 5 percent of the federal block grant, increasing 2 percent for each year of successive failure, to a maximum of 21 percent. California’s block California Work Opportunity and Responsibility to Kids C – 109 Legislative Analyst’s Office grant is $3.7 billion, so a 1 percent penalty is equal to $37 million. A fed- eral penalty results in a reduction in TANF funds and a corresponding increase in a state’s MOE requirement. Department of Health and Human Services (DHSS) Notification. In December 1998, the DHHS notified California that the state had met the participation rate for all families but had failed to meet the higher rate for two-parent families. Specifically, after accounting for the caseload reduc- tion factor, DHHS determined that California needed to have 19.5 percent of the overall caseload, and 68 percent of the two-parent caseload, en- gaged in work or some other work-related activity. For the overall case- load, California achieved a 20.6 percent participation rate (therefore exceeding the penalty threshold). For the two-parent caseload, California achieved a 24.5 percent participation\u2014well below the required rate of 68 percent. Based on this finding, California is subject to a penalty of $6,964,321. We note that, according to DHHS, 16 other states and the District of Columbia failed to meet the participation rate for two-parent families. Determining the Amount of the Penalty. According to federal law, California became subject to the work participation requirement effective July 1, 1997. So, with respect to FFY 1997 (October 1996 through Septem- ber 1997), California was subject to the requirement for just one quarter of the year. The DHHS calculated the penalty by applying the penalty rate of 5 percent to one quarter of the state’s block grant. The DHHS then used its discretionary authority to reduce the penalty based on the degree of noncompliance by multiplying the gross penalty by 17.7 percent (the proportion of two-parent cases in our caseload). State Options. The state has four options in responding to DHHS. The state can (1) accept the penalty, (2) appeal the penalty by claiming Califor- nia had reasonable cause for not meeting the participation rate, (3) enter into a corrective compliance plan, or (4) ask for a penalty reduction based on extraordinary circumstances such as a natural disaster. Cur- rently DSS is reviewing these options and, at the time this analysis was prepared, had made no formal response to DHHS. Impact of Penalty. The potential penalty of approximately $7 million has not been included in the Governor’s budget. We note that if Califor- nia were found to be out of compliance in FFY 1998, the penalty could increase to about $45 million (based on the DHHS methodology) because the maximum penalty increases to 7 percent and the penalty would be based on a full-year of the block grant, rather than just one quarter of FFY 1997. Because any penalties result in a loss in federal TANF funds and a C – 110 Health and Social Services 1999-00 Analysis corresponding increase in the state’s MOE requirement, a penalty repre- sents a potential state cost. Withhold Recommendation on Savings Attributable to Diversion We withhold recommendation on $15 million in projected net savings attributable to counties diverting clients from assistance with one-time diversion payments. Current law allows counties to offer clients one-time diversion payments if the county believes that such payments will enable the client to remain self-sufficient and therefore off welfare. The DSS estimates that this diversion policy will reduce the CalWORKs caseload by approxi- mately 2,700 cases during 1999-00, resulting in net savings of $15 million. In November 1998, we surveyed counties on their diversion programs. Based on the results of our survey, we believe that counties will divert significantly fewer clients than DSS estimates. Because better data reflect- ing actual experience with diversion will be available by the time of the May Revision of the budget, we withhold recommendation on the $15 million in estimated grant savings attributable to diversion. Withhold Recommendation on Budget for CalWORKs Community Service We withhold recommendation on the proposed budget for community service employment pending revised estimates of caseload and costs from the Department of Social Services and the counties. The Governor’s budget for 1999-00 is based on the workfare approach to community service employment, whereby recipients will participate in community service employment in exchange for their grant. The bud- get proposal for recipients who transition into community service after 24 months on aid is about $20 million (the specific amount is not sepa- rately identified in the budget). This estimate assumes that one hour of case management per month, with half of this time dedicated to creating the job slot, is sufficient funding for counties to provide community service positions to all participants. The budget assumes that employers will absorb all supervisory costs. The DSS is currently revising its caseload estimate for community service to reflect the phase-in of recipients into CalWORKs. We also note that the cost for creating job slots in the New Hope Project (a community service employment program based in Milwaukee, Wisconsin) was sig- California Work Opportunity and Responsibility to Kids C – 111 Legislative Analyst’s Office nificantly higher than the amount assumed in the budget. Given the uncertainty in the budget for community service, we withhold recom- mendation pending receipt of updated caseload and unit cost information from DSS and the county welfare departments. Below, we discuss different approaches to budgeting for the incremen- tal costs of the wage-based (the recipient’s grant is converted into wages) approach to community service employment. Options for Budgeting Community Service Employment The Governor’s budget for 1999-00 assumes the workfare approach to community service, with no funding for the incremental cost of the wage- based approach. We present two alternative approaches to budgeting these incremental costs. Under current law, the state pays for all CalWORKs employment service costs above the 1996-97 level. The Legislature, however, has not established a budgeting approach for community service. There are two broad approaches to community service: workfare and wage-based. Under workfare, recipients are required to participate in community service as a condition of receiving their grant. Under wage- based community service, the recipient’s grant is diverted to an em- ployer and paid as wages to the recipient. The decision to provide either wage-based community service or workfare is made by the counties. As noted above however, the 1999-00 Governor’s Budget assumes the workfare approach to community service employment, with the state\/federal block grant funding 100 percent of the associated costs and the counties having no share of costs. On the other hand, the budget provides no state\/federal block grant funds to cover the incremental cost of the wage-based approach to community service for counties that choose this option. As a result, incremental costs would be borne exclusively by the counties. Below, we describe three approaches that the Legislature could follow in budgeting the incremen- tal cost of wage-based community service. Local Funding (Governor’s Budget). The incremental cost of wage- based community service could be viewed as a program en- hancement, which counties could elect to fund with (1) the CalWORKs performance incentive payments that the counties receive from the state, (2) a redirection of resources from within the CalWORKs county block grant allocation, or (3) other local funds such as Welfare-to-Work grants allocated to private industry C – 112 Health and Social Services 1999-00 Analysis councils. We note that the Governor’s budget includes about $500 million in performance incentives in both 1998-99 and 1999-00 that the counties must expend within the CalWORKs program. State Funding: Include the Incremental Cost in County Block Grants. The incremental cost of wage-based community service could be viewed as a base program cost for CalWORKs employ- ment services and incorporated into the funding model for the program. Under this approach, the incremental costs would be budgeted as part of the single allocation of state\/federal block grant funds to counties for employment services. The total amount available would be based on an estimate of the caseload in coun- ties that choose the wage-based option. This would help to ensure that the counties have sufficient funds to pay for wage-based com- munity service, but it would result in General Fund costs of up to $20 million in 1999-00 (if all counties were to choose this ap- proach). Matching Program. Another approach would be a middle ground, whereby the incremental costs are viewed as a program enhance- ment, but one that potentially promises sufficient benefits to war- rant 50 percent state participation. Under this approach, the state would match dollar-for-dollar any investment by the counties in wage-based community service. To control costs, total available matching funds could be budgeted as a separate allocation and capped by the budget act appropriation. Individual county match limits, moreover, could be established whereby the total amount of matching funds a county may draw down is limited to a fixed percentage of its community service caseload. Conclusion. Although all of the approaches to budgeting the incre- mental costs of wage-based community service discussed above have merit, we prefer option two\u2014state\/federal block grant funding of the incremental costs. The wage-based approach is specifically authorized by current law, provides substantial benefits to the recipient in the form of the federal Earned Income Tax Credit (EITC), and may provide a better bridge to nonsubsidized employment and self-sufficiency. Accordingly, we believe it should be considered a base program cost and be fully funded in the budget for any county that elects this option. For a complete discussion of the fiscal and policy issues pertaining to CalWORKs community service employment, please see our report CalWORKs Community Service: What Does it Mean For California? California Work Opportunity and Responsibility to Kids C – 113 Legislative Analyst’s Office Rethinking the Budget for CalWORKs Services and Administration Current law requires the welfare reform steering committee to report to the Legislature on alternative ways of budgeting and allocating funds for California Work Opportunity and Responsibility to Kids services and administration. We review the current budget practices and present different approaches for consideration by the steering committee and the Legislature. Currently, the budget process for CalWORKs services and administra- tion combines past practices with certain new program features. Key features of the CalWORKs budget process are: County Block Grant. Funds for administration, welfare-to-work services, and child care are provided to counties in the form of a block grant, known as the single allocation. The counties may transfer funds within these program components. County Share Fixed at 1996-97 Level. Under prior law, the coun- ties generally paid for 15 percent of the total costs of AFDC and Food Stamps Program administration and services. Under CalWORKs the county share of these costs is fixed at the 1996-97 level. Thus, as the budget for these components increases, the state bears 100 percent of the marginal cost. Budget for County Administration of Welfare and Food Stamps Based on County Plans. As with the former AFDC program, the Department of Social Services reviews individual county plans for program administration and recommends a budget based upon this review. Budget for Employment and Support Services Based on Statewide Model. Although counties are required to submit individualized plans stating how they will implement CalWORKs, the budget for CalWORKs employment services and child care is based on a statewide model. The model uses assumptions based primarily on the former GAIN program. Allocation of Funds Among Counties Based Largely on Historical Budget Allocations Rather Than Caseload. Counties receive em- ployment service and child care funds based largely on the share of funds that they received under the former GAIN program. Although current law directed that some of the increased funding for employment services and child care (over the 1996-97 GAIN amount) be allocated in a manner that helps to equalize funding C – 114 Health and Social Services 1999-00 Analysis among the counties, funding on a per-case basis remains inequita- ble. For 1998-99, the total single allocation for employment ser- vices, child care, and administration was $1.4 billion, or an average of $2,500 per aided adult. Excluding the 20 smallest counties (all of which had allocations substantially above the state average), the remaining 38 counties had allocations per aided adult ranging from $2,000 to $7,000. County Carry Over Authority. The CalWORKs legislation pro- vides that unexpended block grant funds would remain available to each county until July 2000. In 1998-99, counties were provided with new budget authority (that is, excluding the carry over funds) to cover the estimated need for services while retaining an addi- tional $175 million in unexpended funds from the prior year. As discussed previously, the Governor’s budget proposes to use $251 million in estimated unexpended funds from 1998-99 as a source for funding the estimated need in 1999-00. We note how- ever, that the budget bill includes a proposed provision to extend county roll-over authority until 2000-01. Issues for Legislative Consideration. Developing a budget system that addresses the needs of county administrators and CalWORKs recipients, while controlling public costs, is difficult. Below we present alternatives for improving (1) the development of the total budget for employment and services and (2) the method of allocating funds to the counties. Determining the Total Budget for Employment Services and Child Care. To estimate the total budget, the state has three broad op- tions: (1) the current practices, whereby the single statewide model for projecting costs is applied to the statewide caseload, (2) basing the budget on individual county budget plans (the current process for budgeting administrative costs), and (3) a hybrid approach, whereby the statewide model is adjusted to reflect updated county cost estimates as well as new program components and changes developed by the counties. The current model does not reflect county variation in pro- gram implementation. Given that counties have the broad author- ity to design their own CalWORKs programs, basing the budget on individual county plans has some merit. The problem with this approach is that counties have no share of marginal program costs, so there are no built-in incentives for counties to control costs. Any cost control would have to come from the DSS review of the county plans, which is administratively cumbersome. For these reasons, we prefer the hybrid approach, whereby the budget is California Work Opportunity and Responsibility to Kids C – 115 Legislative Analyst’s Office based on a statewide model that could incorporate new cost and program assumptions. This could be facilitated by a work group consisting of county representatives and DSS staff that would annually recommend changes to the existing model. Achieving More Equity in the Allocation of Funds to Counties. As noted above, the single allocation of employment services, admin- istration, and child care per aided adult varies significantly among the counties. Compared to the statewide average allocation per aided adult ($2,500), 12 counties had allocations at least $200 below the state average, and 14 counties (in addition to the 20 smallest counties) had allocations more than $500 above the average. These differences mean that where a recipient resides will affect the level of resources that are available for that recipient for employment services and child care, and presumably their ability to obtain employment. We note that counties have different local economic conditions and face different cost structures. Accord- ingly, it is not unreasonable that the allocation per aided adult vary to some degree. Nevertheless, we believe that except for the 20 smallest counties (which are unlikely to achieve economies of scale) the allocation per aided adult should not vary by more than what would be warranted by local cost differentials and economic conditions. To make county allocations more equitable, the Legislature could follow one of the following basic approaches: it could reduce funding to counties with high allocations and use these savings to increase the allocation to counties with low allocations. This ap- proach is budget neutral, but results in significant reductions for high-allocation counties. Alternatively, the Legislature could in- crease funding for low-allocation counties and hold harmless counties above the average. This approach however, increases state costs and tends to work slowly towards equalization. We suggest consideration of a hybrid strategy\u2014the first approach, with a limit on the annual reduction that any county will incur. Accordingly, we recommend that the welfare reform steering commit- tee consider these issues and options in developing its report to the Legis- lature. C – 116 Health and Social Services 1999-00 Analysis FOSTER CARE Children are eligible for grants under the Aid to Families with De- pendent Children-Foster Care (AFDC-FC) program if they are living with a foster care provider under (1) a court order or (2) a voluntary agreement between the child’s parent and a county welfare or probation department. Children in the foster care system can be placed in either a foster family home (FFH) or a foster care group home (GH). Both types of foster care provide 24-hour residential care. Foster family homes must be located in the residence of the foster parent(s), provide services to no more than six children, and be either licensed by the Department of Social Services (DSS) or certified by a foster family agency. Foster care group homes are licensed by the DSS to provide services to seven or more children. Are Foster Family Agencies Too Successful ? We recommend the adoption of supplemental report language requir- ing the department to (1) collect data to estimate the number of foster children placed in foster family agency homes due to a shortage of nonagency foster family homes and the net costs of these placements compared to the costs if nonagency homes were available, and (2) make recommendations, if appropriate, to reduce the incidence of placing foster children in a higher-cost placement than is warranted by the county’s assessment. County welfare departments have the responsibility of placing chil- dren in foster care homes. The homes fall into three categories: group homes, foster family agency (FFA) homes, and foster family homes. Foster family agencies are nonprofit organizations that recruit foster parents, certify them for participation in the program, and provide train- ing and support services. There are approximately 225 FFAs in the state. As Figure 1 shows, they are reimbursed at a rate that falls between the grants paid to nonagency foster family homes and the average rate for group homes. Foster Care C – 117 Legislative Analyst’s Office Figure 1 Foster Care Grants and Caseloads 1998-99 Type of Placement Caseloada Grant Level Foster family home 79,000 Basic grant: $375 – $528b Specialized care increment: $0 – $1,872c Foster family agency 17,800 $1,362 – $1,607b Group home 6,700 $1,254 – $5,314d a Excludes approximately 4,800 foster children supervised by county probation departments (primarily in group homes) and approximately 4,100 foster children placed in county shelters, medical facilities, specially licensed small family homes, and specialized pilot projects. b Varies with age of child. Amount includes grant to parent and FFA support services. c Varies within and among the counties. d Varies with rate classification levels, which generally reflect levels of service. We note that in comparing these rates, it is important to recognize that most counties provide specialized care increments that supplement the grants to foster family homes in cases where the child needs special support services. Thus, for such children, the cost difference between an FFA and the nonagency home may be much smaller than the differences in the basic rate. (Currently, the department does not have sufficient data to estimate the average amount provided for specialized care increments.) We also note that funding for administrative support is included in the FFA reimbursement rate but is provided to counties separately from the basic cash grant. Foster family agencies were established to serve as alternatives to group home placement. In the course of our review of the foster care program, however, several county administrators indicated that fre- quently they must resort to an FFA placement for children who, accord- ing to the county’s assessment, should be placed in a nonagency home at a lower cost. This occurs because the FFAs compete with the counties in recruiting foster parents, and in some areas the county has a shortage of parents and the FFA has a surplus. The county administrators indicate that by offering support services and the potential for higher payments, the FFAs have attracted a sufficient number of potential parents to the point that county social workers have little choice but to place a child with the FFA even where a county foster family home would be the more appropriate choice. Figure 2 (see next page), while not conclusive, provides some evidence that FFAs have been serving as an alternative to nonagency foster family C – 118 Health and Social Services 1999-00 Analysis homes as well as group homes. It shows that between 1989 and 1998, the growth of FFAs in the state has been accompanied by a decrease in the proportion of both nonagency homes and group homes. Unfortunately, there are no data that directly document the extent to which the counties are placing foster children in FFA homes at a higher cost than is war- ranted by the county assessment. We believe that such a determination is feasible, however, through a survey of the county welfare\/children’s services departments. (We note that such an assessment should take into account the specialized care increments, where applicable.) Consequently, we recommend the adoption of supplemental report language requiring the department to conduct such an analysis. We further recommend that if the analysis documents the problem discussed above, the department make recommendations to address it. In doing so, the department could consider a variety of alternatives. These include increasing the recruitment allowance provided to the counties, establishing FFA rates above and below the existing rates to provide more flexibility in matching services to the assessments, and requiring all potential foster parents to register with the county in order to establish a closer link between the parents and the agency that con- ducts the assessments. Figure 2 Use of Foster Family Agency Homes Increasing Foster Home FFA Home Other 1989 Foster Care Caseload: 62,000 aGroup Home Foster Home FFA Home Other Group Home 1998 Foster Care Caseload: 108,000 a a Excludes children supervised by county probation departments. Foster Care C – 119 Legislative Analyst’s Office We also suggest that the department investigate the option, available to counties under current law, whereby the counties themselves can apply to act as licensed FFAs. This is an action recently taken by San Mateo County. The department should attempt to determine the impact of this policy in order to assess to what degree it has affected the county’s ability to recruit potential foster parents and to make appropriate place- ments of foster children. Our recommendation can be implemented by adoption of the follow- ing supplemental report language in Item 5180-001-0001: The department shall (1) collect data to estimate the number of foster chil- dren placed in foster family agency homes due to a shortage of nonagency foster family homes and the net costs of these placements compared to the costs if nonagency homes were available, and (2) make recommendations, if appropriate, to reduce the incidence of placing foster children in a higher- cost placement than is warranted by the county’s assessment. The depart- ment shall submit its report to the Department of Finance, the Joint Legisla- tive Budget Committee, and the appropriate fiscal and policy committees of the Legislature by March 1, 2000. C – 120 Health and Social Services 1999-00 Analysis FOOD STAMPS PROGRAM The Food Stamps Program provides food stamps to low-income per- sons. With the exception of the recently-enacted state-only program (discussed below), the cost of the food stamp coupons is borne by the federal government ($1.6 billion). Administrative costs are shared be- tween the federal government (41 percent), the state (44 percent), and the counties (15 percent). California Food Assistance Program Federal Restrictions on Benefits For Noncitizens. The federal welfare legislation enacted in 1996 made legal noncitizens (with certain excep- tions for refugees, veterans, and those who had worked for 40 quarters) ineligible for food stamps. Subsequent federal legislation\u2014the Agricul- tural Research, Extension, and Education Reform Act of 1998\u2014restored federal benefits to certain noncitizens. Specifically, effective November 1, 1998, the new legislation restored federal eligibility to noncitizens law- fully residing in the U.S. prior to August 22, 1996 who (1) are under the age of 18 or (2) were at least 65 years of age as of August 1996. Initial State Program for Noncitizens. The Legislature enacted a temporary state-only program to provide food stamp benefits to certain noncitizens, effective September 1997. Specifically, Chapter 287, Statutes of 1997 (AB 1576, Bustamante) created the state-only California Food Assistance Program (CFAP), which provides food stamps to noncitizens under the age of 18 or over the age of 64 who were residing in the United States prior to August 22, 1996. Under CFAP, the state purchases the food stamp coupons from the federal government and distributes them to eligible recipients. This program is to sunset on July 1, 2000. State Program Expanded in 1998. Partially in response to the 1998 federal legislation that essentially restored federal benefits to nearly all of the noncitizens that were covered by CFAP, Chapter 329, Statutes of 1998 (AB 2779, Aroner) expanded the CFAP to cover (1) noncitizens legally residing in the U.S. prior to August 1996 between the ages of 18 and 64 Food Stamps Program C – 121 Legislative Analyst’s Office and (2) certain noncitizens who arrived in the U.S. after August 1996. Adult recipients of this program are subject to a specified work require- ment. Like the original program, the expanded CFAP sunsets in July 2000. 1999-00 Budget. For 1999-00, the average monthly caseload for CFAP is estimated to be about 85,000 persons. The budget proposes an appro- priation of $73.6 million from the General Fund for the cost of coupon purchases and an additional $5.2 million for program administration. The total is a decrease of $13.5 million from estimated expenditures in 1998-99, mostly attributable to a lower caseload due to the full-year effect of federal restoration of benefits for children and the elderly. We note that $53 million of the proposed expenditure for 1999-00 counts towards meeting the federal maintenance-of-effort requirement for the California Work Opportunity and Responsibility to Kids program. C – 122 Health and Social Services 1999-00 Analysis SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $2.4 billion from the General Fund for the state’s share of the SSI\/SSP in 1999-00. This is an increase of $183 million, or 8.1 percent, over estimated current-year ex- penditures. This increase is due primarily to the full-year cost of grant increases provided in the current year, caseload growth, modest state costs for the cost-of-living adjustment (COLA) to be provided in January 2000, and an increase in the federal administrative fee. In November 1998, there were 324,318 aged, 21,671 blind, and 687,655 disabled SSI\/SSP recipients. In addition to these federally eligible recipi- ents, the state-only program for immigrants (described below) is esti- mated to provide benefits to about 2,000 legal immigrants during Novem- ber 1998. Budget Underestimates Cost of Providing Statutory COLA The General Fund cost of providing the statutory Supplemental Secu- rity Income\/State Supplementary Program cost-of-living adjustment will be $12.5 million above the budget estimate due to an upward revi- sion in the California Necessities Index. We also estimate an additional General Fund cost of $19.5 million because the budget overestimates the U.S. Consumer Price Index. These issues should be addressed in the May revision of the budget. Background. Pursuant to current law, the Governor’s budget proposes to provide the statutory COLA to the SSI\/SSP grant in January 2000. The state COLA is based on the California Necessities Index (CNI) and is applied to the combined SSI\/SSP grant. It is funded by both the federal and state governments. The federal portion is the federal COLA (based Supplemental Security Income\/State Supplementary Program C – 123 Legislative Analyst’s Office on the U.S. Consumer Price Index, or the CPI) that is applied annually to the SSI portion of the grant. The remaining amount needed to cover the state COLA is funded with state monies. Based on its assumptions con- cerning both the CNI and CPI, the budget includes $8.4 million for pro- viding the statutory COLA for six months effective January 2000. The CNI Has Been Revised. The January 2000 COLA is based on the change in the CNI from December 1997 to December 1998. The Gover- nor’s budget, which is prepared prior to the release of the December CNI figures, estimates that the CNI will be 2.08 percent, based on partial data. Our review of the actual data, however, indicates that the CNI will be 2.36 percent. The CPI is Overestimated. The Governor’s budget estimates that the CPI will be 2.6 percent for federal fiscal year (FFY) 1999. Based on our review of the consensus economic forecasts for 1999, we estimate that the CPI will be 2.3 percent. This reduction in the CPI raises the state cost of providing the statutory COLA because it effectively reduces federal financial participation toward the cost of the state COLA, which is ap- plied to the entire grant. Cost of Providing COLA Underestimated. Taken together, the higher CNI and lower CPI (in relation to the Governor’s budget) raise the Gen- eral Fund cost of providing the statutory COLA from $8.4 million to about $40.4 million in 1999-00\u2014an increase of $32 million ($12.5 million for the CNI revision and $19.5 million from overestimating the CPI). The administration should address these issues in the May revision of the budget. The SSI\/SSP Grant Levels Figure 1 (see next page) shows SSI\/SSP grants on January 1, 2000 for both individuals and couples as displayed in the Governor’s budget and our projection based on the actual CNI and our estimate of the CPI. Based on our projection, grants for individuals will increase by $16 to a total of $692 per month and grants for couples will increase by $28 to a total of $1,229. As a point of reference we note that the federal poverty guideline for 1998 is $671 per month for an individual and $904 per month for a couple. Thus, the grant for an individual would be 3 percent above the 1998 poverty guideline and the grant for a couple would be 36 percent above the guideline. (We note that the poverty guidelines are adjusted for inflation annually.) C – 124 Health and Social Services 1999-00 Analysis Figure 1 SSI\/SSP Maximum Monthly Grants Governor’s Budget and LAO Projection January 1999 and January 2000 Recipient Category January 1999 January 2000 Change From 1999 Governor’s Budget LAO Projectiona Amount Percent Individuals SSI $500 $513 $512 $12 2.4% SSP 176 177 180 4 2.3 Totals $676 $690 $692 $16 2.3% Couples SSI $751 $770 $768 $17 2.3% SSP 450 456 461 11 2.4 Totals $1,201 $1,226 $1,229 $28 2.3% a Based on actual California Necessities Index increase (2.36 percent) and projected U.S. Consumer Price Index increase (2.3 percent). Cash Assistance Program for Aged, Blind, and Disabled Legal Immigrants Federal welfare reform and related legislation made elderly legal noncitizens in the U.S. prior to August 1996, who are not disabled, ineligi- ble for SSI\/SSP. This legislation also made noncitizens arriving after August 1996 (with certain exceptions) ineligible for SSI\/SSP. Chapter 329, Statutes of 1998 (AB 2779, Aroner) created the Cash Assistance Program for Aged, Blind, and Disabled Legal Immigrants (CAPI). This program provides state-funded benefits at the SSI\/SSP grant levels, less $10 for individuals and $20 for couples, to any legal noncitizen who has been denied federal benefits solely on the basis of their immigration status. With respect to legal noncitizens arriving in the United States after Au- gust 22, 1996, CAPI benefits are restricted to individuals (1) who are sponsored by a U.S. citizen, and (2) the sponsor has died, is disabled, or is abusive to the noncitizen. The state reimburses the counties for all administrative costs incurred in making the CAPI benefit payments to individuals. The program is to sunset in July 2000. The 1999-00 Governor’s Budget proposes an appropriation of $21.3 million from the General Fund for benefit payments and Supplemental Security Income\/State Supplementary Program C – 125 Legislative Analyst’s Office $1.4 million for county administration of the CAPI. The average monthly caseload is projected to be about 2,900 during 1999-00. Alternatives for the Regional 4.9 Percent Grant Reduction Chapter 307, Statutes of 1995 (AB 908, Brulte) requires that Supple- mental Security Income\/State Supplementary Program (SSI\/SSP) grants be reduced by 4.9 percent in the low-cost counties. This reduction has not been implemented because it would have brought SSP grants below the federal maintenance-of-effort level. We estimate, however, that by January 2002 the annual cost-of-living adjustments pursuant to current law will raise SSP grants to a level that will trigger the implementation of the regional 4.9 percent reduction. We present alternatives for the Legislature to consider regarding the regional grant reduction. Background. Chapter 307 requires that grants for both California Work Opportunity and Responsibility to Kids (CalWORKs) and SSI\/SSP be reduced by 4.9 percent in the low-cost counties (specifically, the 41 counties where the lowest quartile rent was below $400 per month in 1990.) This reduction was designed to achieve a regional grant differential between low-cost and high-cost counties. The grant reduction was implemented for the CalWORKs program in January 1997 but has never been implemented for SSI\/SSP because such a reduction would violate the federal maintenance-of-effort (MOE) requirement. Specifically, federal law requires that the state SSP portion of the combined SSI\/SSP grant be maintained at or above its 1983 level. Failure to comply with the MOE requirement would result in the loss of federal Medicaid funding. Because of the federal MOE requirement, the monthly SSP grant for individuals must be at least $156.40. (Although there are different grant levels for couples and other persons in specific circumstances, for illustra- tion purposes this discussion is limited to the grant levels for individu- als.) Implementation of the regional grant reduction\u2014which under state law is fixed at 4.9 percent of the combined SSI\/SSP grant as of June 30, 1995\u2014would reduce the monthly SSP grant for individuals by $30.11. Thus, in order to implement this reduction without violating federal law, SSP grants must first be at least $186.51, or $30.11 above the MOE. As of January 1999, the total maximum SSI\/SSP monthly grant for an individual is $676 ($500 SSI and $176 SSP). Under current state law, a COLA is applied to the SSI\/SSP grant each January. The state COLA is based on the CNI and is applied to the combined SSI\/SSP grant. It is funded by both the federal and state governments: the federal portion is the federal COLA (based on the CPI) that is applied annually to the SSI C – 126 Health and Social Services 1999-00 Analysis portion of the grant. The remaining amount needed to cover the state COLA is funded with state monies and applied to the SSP portion of the grant. Based on current law, and our estimates for the CNI and CPI , we believe that application of the statutory COLA will result in the SSP grant exceeding $186.51 as of January 2002. Thus, at that time, the regional 4.9 percent grant reduction would be triggered because the reduction could be implemented without violating the federal MOE requirement. Figure 2 shows the estimated SSI\/SSP grants for individuals from Janu- ary 1999 through January 2002, based on current law and our forecasts for the CNI and the CPI. As the figure shows, grants will increase in both low- cost and high-cost counties in January 2000 and January 2001, reaching a total of $710 in that year. Then in January 2002, the grant in the low-cost counties will be reduced to $702, which is $30 less than the amount in the high-cost counties. Compared to the preceding year (January 2001), the grant in the low-cost counties goes down by $8 rather than the $22 increase that would occur in the absence of the statutory reduction. Figure 2 Projected Maximum Monthly SSI\/SSP Grants for Individuals Based on Current Law 1999 Through 2002 January 1999 January 2000 January 2001 January 2002 High-cost counties SSI $500 $512 $527 $543 SSP 176 180 183 189 Totals $676 $692 $710 $732 Low-cost counties SSI $500 $512 $527 $543 SSP 176 180 183 159 Totals $676 $692 $710 $702 To provide some perspective on the impact of this grant reduction in the low-cost counties, we compare grants to our projections for the fed- eral poverty guideline. As of January 2002, the grant for an individual in the low-cost counties would be about 96 percent of the federal poverty guideline, the grant for an individual in the high-cost counties would be Supplemental Security Income\/State Supplementary Program C – 127 Legislative Analyst’s Office just above the poverty guideline, and the grants for couples in both re- gions would be about 30 percent above the poverty guideline. Alternatives. Setting the level of the SSI\/SSP grant is a policy decision for the Legislature. Given that the decision to impose a 4.9 percent grant reduction in the low-cost counties was made during a period when the state was facing significant fiscal constraints, however, we anticipate that there will be interest in revisiting the issue prior to implementation of the reduction. To facilitate the debate, we present two alternatives for consid- eration. One alternative is to eliminate the 4.9 percent regional reduction by repealing current law. A second alternative would be to gradually phase-in the 4.9 percent grant reduction by freezing the SSP portion of the grant in low-cost counties until the 4.9 percent differential between the high-cost and low-cost counties is achieved. Under this alternative, the federal SSI portion would continue to increase, so grants in low-cost counties would go up each year, but not as fast as in the high-cost coun- ties where both the SSI and SSP portion of the grant would be increasing each year. Repeal Current Law. Compared to current law, this approach would have no fiscal impact in 1999-00 or 2000-01. In 2001-02, there would be a half-year cost of approximately $55 million. The full-year cost in 2002-03 would be approximately $115 million and would continue at about that level, adjusted each year for caseload changes. Under this approach, grants for individuals in low-cost counties would be identical to grants in high-cost counties and remain just above the federal poverty guideline. Thus, there would be no regional grant differential to compensate for differences in the cost of living. Phase-in the 4.9 Percent Regional Reduction. Under current law, the entire 4.9 percent reduction would be implemented in January 2002. At that time a recipient’s maximum benefit will drop from $710 in 2001 to $702. An alternative would be to raise SSI\/SSP benefits more slowly in the low-cost counties than in the high-cost counties until a 4.9 percent differential between the high-cost and low-cost counties is achieved. To do this gradually, for example, the SSP portion of the grant could be frozen at its current level ($176) while continuing to pass through the increase in the federal SSI portion each year. Figure 3 (see next page) shows the annual SSI\/SSP grant under this alternative from 1999 through 2005. As the figure shows, grants would increase each year, thus eliminat- ing the cliff effect of current law. We note, however, that this approach results in lower combined SSI\/SSP grants in low-cost counties in 1999-00 and 2000-01 than would be required by current law. Under this option, C – 128 Health and Social Services 1999-00 Analysis SSI\/SSP grants for individuals would be at the poverty line in January 2000, and would decline to about 97 percent of poverty in 2005. Figure 3 Projected Maximum Monthly SSI\/SSP Grants For Individuals Under Phase-in of Regional 4.9 Percent Grant Reduction 1999 Through 2005 January 1999 January 2000 January 2001 January 2002 January 2003 January 2004 January 2005 High-cost counties SSI $500 $512 $527 $543 $560 $577 $595 SSP 176 180 183 189 195 201 207 Totals $676 $692 $710 $732 $755 $778 $802 Low-cost counties SSI $500 $512 $527 $543 $560 $577 $595 SSP 176 176 176 176 176 176 176 Totals $676 $688 $703 $719 $736 $753 $771 Compared to current law, this alternative would result in General Fund savings of about $13 million in 1999-00, and $39 million in 2000-01. During the subsequent four fiscal years, there would be annual General Fund costs that peak at approximately $55 million in 2002-03 and decline to less than $20 million in 2004-05. Conclusion. With respect to the 4.9 percent regional grant reduction, the Legislature has three broad options. The first option would be to retain current law and implement the reduction which would probably occur in January 2002. The second option would be to repeal current law and eliminate the regional grant differential. The third option would be to gradually phase-in the regional grant differential. We present one such approach to this latter option whereby the SSP grant would be increased more slowly in the low-cost counties as compared to the high-cost coun- ties until the 4.9 percent differential is achieved. County Administration of Welfare Programs C – 129 Legislative Analyst’s Office COUNTY ADMINISTRATION OF WELFARE PROGRAMS The budget (Item 5180-141) appropriates funds for the state and fed- eral share of the costs incurred by the counties for administering the following programs: (1) Food Stamps; (2) Child Support Enforcement; (3) Aid to Families with Dependent Children\u2014Foster Care (AFDC-FC); (4) Special Adults, including emergency assistance for aged, blind, and disabled persons; (5) Refugee Cash Assistance; and (6) Adoptions Assis- tance. The budget also includes funding for the development, implemen- tation, and maintenance of major welfare automation projects. Pursuant to the reorganization of the budget, Item 5180-141 does not include the county costs for administering the California Work Opportu- nity and Responsibility to Kids (CalWORKs) program, because these costs are reflected in the CalWORKs program appropriation in Item 5180- 101 (see our analysis of CalWORKs). The budget proposes an appropriation of $323.9 million from the General Fund for county administration of welfare programs (excluding CalWORKs) in 1999-00. This represents a decrease of $9 million, or 2.7 percent, from estimated current-year expenditures. Automation Projects The budget proposes an appropriation of $36.8 million in the Depart- ment of Social Services for the state’s share of the costs of four major welfare automation projects. These projects are the Statewide Automated Welfare System (SAWS), the California Child Support Automation pro- ject, the Statewide Fingerprint Identification System, and the Electronic Benefit Transfer program. The Health and Welfare Agency Data Center (HWDC) is responsible for administering these projects. The SAWS\u2014Los Angeles County Contract Amendment. We note that the budget does not reflect a request from Los Angeles County for $55.3 million for a seven-year contract amendment pertaining to the develop- C – 130 Health and Social Services 1999-00 Analysis ment of the Los Angeles Eligibility Automated Determination Evaluation and Reporting (LEADER) system for automating welfare. (LEADER is one of four SAWS consortia.) This request, which includes $29.2 million for 1998-99 and $9.1 million for 1999-00, was made too late for inclusion in the budget, but is likely to be reflected in the May revision to the budget. Child Support Automation. The budget proposes General Fund spending of $6.3 million in 1999-00 for the costs associated with child support automa- tion. This is a reduction of $4.6 million (42 percent) from estimated expendi- tures for 1998-99. We note that development of the Statewide Automated Child Support System (SACSS) was terminated in November 1997. Chapter 329, Statutes of 1998 (AB 2779, Aroner) requires (1) all counties to transition into specified consortia for automation purposes and (2) the devel- opment of interim and long-term solutions for child support automation that will meet federal requirements and minimize federal penalties. The reduction in spending for 1999-00 reflects completion of county transitions to non- SACSS systems and reductions in one-time equipment purchases. For a discussion of the major welfare automation projects, please see our review of the HWDC in the General Government Section of this Analysis. Budget Proposes No State Share Of Federal Penalty on Automation The budget estimates that federal reimbursements to California will be reduced by $37.1 million in the current year and $52.8 million in the budget year, due to the penalty on the state for not meeting the deadline for imple- menting a statewide child support enforcement automation system. The budget proposes to pass the full penalty on to the counties, which is not consistent with current law. We recommend adjusting the budget to reflect the state’s proportional share, for a General Fund cost of $2.2 million in the current year and $3.2 million in the budget year. (Increase Item 5180-001-0001 by $2,645,000 and increase Item 5180-141-0001 by $537,000.) Due to the failure of the state to implement a statewide automated child support system, California is subject to federal penalties in the form of a reduction in federal reimbursements for child support enforcement. Federal law allows the Secretary of Health and Human Services to waive the regular penalty and instead impose an alternative penalty if states have made good faith efforts to meet the federal automation require- ments. The budget assumes that the alternative penalty will be enforced, resulting in a reduction in federal reimbursements of $37.1 million in the current year and $52.8 million in the budget year. County Administration of Welfare Programs C – 131 Legislative Analyst’s Office Current state law provides that federal penalties shall be considered a reduction in federal financial participation in county and state adminis- trative costs of the child support program. The budget, however, pro- poses to pass the full amount of the penalty on to the counties, with the state bearing no share. The administration has provided no explanation for this variation from the requirements of current law, with respect to allocating the penalty between the state and county governments. Consequently, to be consis- tent with current law, we recommend that the budget be adjusted to reflect the state’s proportional share of the penalty and to backfill for the loss of federal funds. This would result in a General Fund cost of $2.2 million in the current year and $3.2 million in the budget year, and county savings of the corresponding amounts. We also note that the budget assumes the counties will maintain the level of spending on the program to backfill for the federal reductions. Because the counties are not required to backfill for reductions in federal funds, there is no assurance that the budget assumptions for county spending will be realized. As we have discussed in previous analyses of this program, there is a strong relationship between county administra- tive effort and child support collections. Thus, if the counties reduce their spending below the amount assumed in the budget, collections could be affected and the associated General Fund savings (in CalWORKs grant expenditures) could be less than budgeted. We also note, on the other hand, that the estimated amount of federal reimbursements after the penalty, when combined with state and federal incentive payments that are distributed to the counties, exceeds the bud- get estimates for administrative spending. This suggests that most of the counties probably have the ability to meet the budget expectations for administrative spending in spite of the federal penalty. Budget Assumes Other Counties Will Absorb Los Angeles County Share of Federal Penalty The federal government has levied penalties (in the form of reduced reimbursements) against California for failure to implement a statewide child support automation system. Current state law prohibits passing the federal penalty onto Los Angeles County because the county has implemented its component of the statewide automation system. The budget proposes to pass Los Angeles County’s proportional share of the penalty onto the other counties rather than the state. C – 132 Health and Social Services 1999-00 Analysis Los Angeles County, with the approval of the federal administration, has developed and implemented its own child support automation sys- tem as part of the required statewide system. Because of this, Chapter 404, Statutes of 1998 (SB 1410, Burton) provides that no portion of the federal penalty for delayed implementation of the statewide system shall be assessed against Los Angeles County (unless the county system fails to interface with the statewide system, which has not been imple- mented). The federal government has applied penalties (in the form of reduced reimbursements) to California for failure to implement a statewide child support automation system. The reduced reimbursements mean fewer federal funds for county administration of the child support system. (Although the federal administration certified the Los Angeles County system, this did not reduce the federal penalty on the state.) Chapter 329, Statutes of 1998 (AB 2779, Aroner) permits the Depart- ment of Social Services (DSS) to backfill with state funds any dollar reduction to county administrative funding, subject to the availability of funds in the annual budget act. The budget, however, proposes to pass Los Angeles County’s proportional share of the penalty (about $8 million in the current year and $11 million in the budget year) onto the other counties. We do not believe that it is reasonable to expect the other counties (rather than the state) to backfill for the reduction in federal reimburse- ments attributable to Los Angeles County’s share of those reimburse- ments. Furthermore, it is not clear whether this was the Legislature’s intent in enacting SB 1410, even though separate legislation governing the allocation of the federal penalty, in general, gives the department this discretion. Consequently, we recommend that the Legislature address this issue in the budget hearings. Child Welfare Services C – 133 Legislative Analyst’s Office CHILD WELFARE SERVICES The Child Welfare Services (CWS) Program provides services to abused and neglected children and children in foster care and their fami- lies. The CWS Program provides: Immediate social worker response to allegations of child abuse and neglect. Ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect. Services to children in foster care who have been temporarily or permanently removed from their families because of abuse or neglect. Child Welfare Caseload Forecast Should Be Revised Data collection problems make it difficult to forecast Child Welfare Services caseloads, but we believe the budget forecast overstates current- year caseload and understates the budget year. Additional data should permit a better estimate in the May revision of the budget. The budget forecasts that CWS caseloads will increase by 7.2 percent in 1998-99, which is somewhat higher than the annual growth rate in recent years. Because of data collection problems associated with the implementation of the new statewide automation system\u2014the Child Welfare Services\/Case Management System\u2014the department indicates that only two complete months of current-year data are available, making forecasting more difficult than in the past. As a result, the decision was made to (1) base the current-year estimate on last year’s May revision estimate for the current year and (2) assume no caseload growth in the budget year. The CWS caseload generally has been characterized by annual growth rates of roughly 4 percent since 1992-93. Based on this trend, we believe that it is unrealistic to assume no caseload growth in the budget year. On C – 134 Health and Social Services 1999-00 Analysis the other hand, the department indicates that based on a few months of data, caseloads for the current year are running below the budget forecast (a 7.2 percent increase over the prior year). Because additional monthly data will be available for the May revision of the budget, the department will be able to provide a better forecast at that time. Consequently, we suggest that the budget subcommittees wait until the May revision to consider the appropriation for CWS basic case- loads. Independent Living Program Is Overbudgeted We recommend reducing General Fund support for the Independent Living Program by $4.9 million in 1998-99 and $5.7 million in 1999-00 because the budget exceeds the amount needed to fully fund the program. (Reduce Item 5180-151-0001 by $ 5,733,000.) The Independent Living Program (ILP) provides training designed to prepare youths for emancipation from foster care. Chapter 311, Statutes of 1998 (SB 933, Thompson) extended eligibility for the program from ages 16 through 18 to ages 16 through 21. The 1998-99 Budget Act aug- mented funding for the program in order to serve all eligible foster care participants. The budget proposes $24.9 million ($11.4 million General Fund) to support the ILP in 1998-99 and $28.7 million ($15.2 million General Fund) in the budget year. The proposal is the estimated amount needed to fully fund the program. We believe that the budget proposal goes beyond the amount needed to fully fund the program for two reasons. First, it is based on an assump- tion that all eligible foster care youths will choose to participate in the program, even though participation is voluntary. In our view, this as- sumption is unrealistic. We believe that some foster youths will choose not to attend the training program, perhaps on the basis that they have received adequate guidance from their foster parents. Secondly, the budget assumes that all individuals who participate in the program in the current year will choose to participate again in the following year if they have not emancipated from foster care. We believe that this also is an unrealistic assumption, as many of these foster youths are likely to view repeat participation as unnecessary. Both of these factors will affect the participation rate for the ILP. Un- fortunately, it is difficult to estimate the degree of voluntary participation because in past years the program was not fully funded and therefore it Child Welfare Services C – 135 Legislative Analyst’s Office is not known to what degree the lack of funding was responsible for nonparticipation. Absent such data, we believe that it would be more reasonable to assume an overall participation rate of 80 percent for the budget year (as applied to the baseline and expansion components of the program) rather than the 100 percent rate assumed in the budget. Accord- ingly, we recommend adjusting the budget to reflect this assumption, which would result in a General Fund savings of $4.9 million in the cur- rent year and $5.7 million in 1999-00. C – 136 Health and Social Services 1999-00 Analysis ADOPTIONS The department administers a statewide program of services to par- ents who wish to place children for adoption and to persons who wish to adopt children. Adoptions services are provided through state district offices, 28 county adoptions agencies, and a variety of private agencies. Counties may choose to operate the Adoptions Program or turn the program over to the state for administration. There are two components of the Adoptions Program: (1) the Relin- quishment (or Agency) Adoptions Program, which provides services to facilitate the adoption of children in foster care; and (2) the Independent Adoptions Program, which provides adoption services to birth parents and adoptive parents when both agree on placement. In addition to the Adoptions Program, the Adoptions Assistance Program (AAP) provides grants to parents who adopt difficult to place children. State law defines these children as those who, without assis- tance, would likely be unadoptable because of their age, racial or ethnic background, handicap, or because they are a member of a sibling group that should remain intact. State Reporting Problems Could Jeopardize Receipt of Federal Adoptions Incentive Payments Delays in implementing the statewide child welfare automation system could prevent the department from meeting the August 1999 reporting deadline to qualify for federal adoptions incentive payments. We recommend that the department (1) consult with the federal adminis- tration on possible alternative means of submitting the required data, should it become necessary, and (2) provide the budget subcommittees with a status report on this issue during the hearings. The federal Adoptions and Safe Families Act of 1997 (PL 105-89) au- thorizes the Secretary of Health and Human Services to make incentive payments to states that increase the number of adoptions of children in foster care. The incentive payment amounts to $4,000 per child, plus an Adoptions C – 137 Legislative Analyst’s Office additional $2,000 for each special needs adoption, although the total amount allocated to the states is capped at $20 million annually through federal fiscal year (FFY) 2003. Chapter 1056, Statutes of 1998, (AB 2773, Committee on Human Services) indicated the intent of the Legislature that incentive payments allocated to California be used for post-adoptions services. In order to qualify for the incentive payments authorized for adoptions in FFY 1998 (October 1997-September 1998), states must report the num- ber of finalized adoptions to the federal administration by August 1, 1999. The federal statute requires that the states report their qualifying adop- tions via the federal Adoption and Foster Care Automated Reporting System (AFCARS). In California, the new statewide Child Welfare Ser- vices\/Case Management System (CWS\/CMS) was designed to meet the AFCARS reporting requirements. The CWS\/CMS is operating in all counties, but the department indi- cates that due to start-up and implementation problems, adoptions data reporting currently are incomplete and may not be accurate. Thus, at the time this analysis was prepared, the department was uncertain whether the state will be able to meet the August 1999 deadline. We recommend that the department provide the budget subcommit- tees with a status report on this issue during the hearings. We further recommend that prior to the hearings, the department consult with the federal administration on the possibility of using alternative means of reporting\u2014such as a sample of CWS\/CMS counties or the use of a data- base separate from the new statewide automation system\u2014in the event that the CWS\/CMS problems cannot be resolved in time to meet the deadline. This would help to guard against the possibility that technical reporting problems will prevent the state from receiving funds that it otherwise would earn on the basis of its performance. No Clear Rationale for Proposal to Eliminate New Program In its proposal to eliminate the Substance Abuse\/HIV Child Adoption Program for a General Fund savings of $1 million, the budget incorrectly states that the program is scheduled to sunset at the end of the current year. Because this is a new program established by statute in the current year and the administration has no policy rationale for eliminating it, we recommend continuing the program. We withhold recommendation on the appropriation, pending receipt of information from the depart- ment on estimated current-year expenditures for the program. C – 138 Health and Social Services 1999-00 Analysis We further recommend adoption of supplemental report language requiring the department to submit reports on the program’s implemen- tation, outcomes, and effectiveness. Background. In 1989, the Legislature established the Options for Re- covery pilot project, which provided funds for the recruitment, training, and respite care for foster parents to care for children who have medical problems related to drug or alcohol exposure or to AIDS. The program was made permanent in 1997 by Chapter 606, Statutes of 1997 (AB 67, Escutia). From 1995 to 1997, the federal Department of Health and Human Services funded a demonstration project in Los Angeles County to pro- mote the adoption of children who were exposed prenatally to alcohol or drugs. The evaluation was based on clients’ ratings\u2014which were favor- able\u2014but no other outcome-based study was done. New Program. In September 1998, the Legislature enacted Chapter 1014 (AB 2198, Washington) and appropriated $1 million from the General Fund to extend the Options for Recovery services to adoptive and preadoptive parents. To be eligible for the funds, counties must submit a plan for approval by the Department of Social Services. The department, however, has not implemented the program, indicating that the delay is due to higher priorities and a lack of staff resources. The department plans to prepare the required all-county letters with the goal of allocating funds by this April. Budget Proposal. The budget proposes to eliminate the new adoptions program in 1999-00, indicating that it is scheduled to sunset at the end of the current year. In fact, however, there is no statutory sunset date for this program. While acknowledging the error, the Department of Finance indicates that the administration will continue to propose elimination of the new program because it is discretionary (that is, subject to annual budget act appropriations) and there was a need to achieve savings. LAO Recommendations. The administration has provided no policy basis for eliminating the program and no rationale for distinguishing it from other existing programs supported by the General Fund or from the original Options for Recovery program. As a new program which has yet to be implemented, it is obviously too early to determine whether it will accomplish its purpose. Consequently, we recommend that the program be continued so the Legislature will have an opportunity to assess its performance. We withhold recommend on the amount of the appropria- tion, pending receipt of information from the department on estimated Adoptions C – 139 Legislative Analyst’s Office current-year expenditures and the possibility of reappropriating unex- pended current-year balances in the budget year. In order to facilitate the Legislature’s oversight of the program, we further recommend adoption of supplemental report language requiring the department to submit a report by March 1, 2000 on the program’s implementation, and a subsequent report by December 30, 2000 on the program’s outcomes and effectiveness, and the extent to which it has accomplished its purposes. We note that if necessary, the department can use the resources of its Research Branch to help prepare these reports. We suggest adoption of the following supplemental report language: The department shall submit a report to the Legislature, by March 1, 2000, on the implementation of the Substance Abuse\/HIV Adoptions program. The department shall submit a subsequent report by December 30, 2000 on the program’s outcomes, and an assessment of its effectiveness and the degree to which it has accomplished its goals. C – 140 Health and Social Services 1999-00 Analysis Legislative Analyst’s Office FINDINGS AND RECOMMENDATIONS Health and Social Services Analysis Page Crosscutting Issues 1. Budget Proposal to Increase Federal Medicaid Match Not Under- states General Fund Savings. Reduce Various Items by a Total of $2,339,000. Recommend technical correction so the budget will be consistent, for a General Fund savings of $2.3 million. C-15 Health and Human Services Agency 2. Secretary to Develop Plan for Health Care Reforms. The budget proposes a $37.3 million General Fund set-aside to implement a plan that will be submitted by the Secretary. We identify several approaches for the Legislature to consider (1) regarding expansion of health care coverage for uninsured working families in the HFP and the Medi-Cal programs, (2) simplification of administration, and (3) improved participation. C-17 California Medical Assistance Program (Medi-Cal) 3. Budget Depends on Risky Federal Assumptions. The Medi-Cal budget includes a total of $332 million of General Fund savings that depend on federal actions: (1) an increase in the Federal Medical Assistance Percentage (the federal sharing ratio for Medi-Cal bene- fit costs) and (2) approval of a Medicaid waiver to provide federal funding for the current state-only family planning program. Nei- ther of these assumed actions is assured. C-35 4. Delay in Implementing Section 1931(b) Eligibility is Costly. More than 250,000 former California Work Opportunity and Responsibil- ity to Kids (CalWORKs) recipients have been kept on the Medi-Cal rolls indefinitely due to delays by Department of Health Services C-38 C – 142 Health and Social Services Analysis Page 1999-00 Analysis (DHS) in issuing criteria and implementation guidelines for Section 1931(b) eligibility. We estimate that the General Fund cost of Medi- Cal coverage for these beneficiaries will total about $90 million through 1998-99, and that most of this cost will be for persons who would not otherwise be enrolled in Medi-Cal. 5. Lagging Section 1931(b) Redeterminations Could Increase Costs Further. We recommend that the department (1) provide a progress report at budget hearings on the Section 1931(b) redeterminations and (2) identify any additional resources or county incentives needed to complete the redeterminations expeditiously. C-41 6. Budget Overestimates CalWORKs-Related Medi-Cal Caseload. Reduce Item 4260-101-0001 by $124,077,000. Recommend total General Fund reduction of $126.7 million (including $2.7 million in 1998-99) because we project that Medi-Cal caseloads for the CalWORKs-related eligibles will be lower than the budget esti- mates due to (1) elimination of the Edwards Hold cases and (2) ongoing large declines in the CalWORKs welfare caseload. C-42 7. The DHS Expands Section 1931(b) Eligibility Beyond CalWORKs Income Limits. The department has adopted income limits for Section 1931(b) Medi-Cal eligibility significantly higher than needed to meet the Legislature’s mandate to cover CalWORKs recipients. Furthermore, while the budget includes additional ad- ministrative costs for this new eligibility category, it fails to recog- nize added benefit costs. Recommend that DHS provide an esti- mate of additional Medi-Cal benefit costs associated with Section 1931(b) eligibility at budget hearings. C-44 8. Smoking Cessation Drugs Overbudgeted. Reduce Item 4260- 101-0001 by $1,550,000. We recommend a General Fund reduction of $1,550,000 for the cost of smoking cessation drugs for Medi-Cal enrollees because the budget overestimates the number of enrollees who are smokers. C-46 9. Potential New Rate Setting Approaches. Recommend that the department report at budget hearings on its progress in developing new methods of setting Medi-Cal rates for Medi-Cal managed care plans, nursing homes, and hospital outpatient services. C-47 10. Hospital Construction Program\u2014Budget Spending Estimates and Future Projections Needed. Withhold recommendation on $39.6 million requested from the General Fund (plus $42.4 of fed- C-48 Findings and Recommendations C – 143 Analysis Page Legislative Analyst’s Office eral matching funds) for debt-service payments for hospital con- struction projects pending receipt and analysis of the basis for the request. Recommend that the department report at budget hearing with a projection of future annual program costs for projects that have received a state funding commitment. 11. Bringing the Medi-Cal Estimate Up to Date. Recommend enact- ment of legislation directing the department to revise the Medi-Cal estimate process in order to make it a more useful and timely tool for the Legislature to use in budgeting, monitoring, and evaluating the Medi-Cal Program. C-49 Public Health 12. Health Programs Hit by Proposition 99 Revenue Reductions. Due to sharp declines in Proposition 99 revenues resulting primarily from the effects of Proposition 10 and the tobacco lawsuit settle- ment, the budget proposes to reduce most programs that are sup- ported by this fund source. However, funding for state programs that are caseload-driven would be maintained. C-55 13. Budget Proposes Elimination of General Fund Support for County Medical Services Program (CMSP). The Governor’s bud- get proposes to eliminate the state’s General Fund allocation of $20.2 million to the CMSP. We comment on the proposal and pres- ent some options for the Legislature. C-57 14. Budget Underestimates Federal Funds for AIDS Drug Assistance Program (ADAP). Federal funds for the ADAP will be $5 million above the amount assumed in the budget. These additional federal funds could be used to reduce General Fund support for the pro- gram, but the General Fund savings may need to be redirected to other HIV-related activities in order to meet the federal maintenance-of-effort (MOE) requirement for future federal grants. Recommend that the department develop a projection of state spending that would count toward the MOE requirement in 1999-00 in order to assess the potential for General Fund reductions. C-60 15. Budget Proposes One-Year Extension for Community Challenge Grant Program. Recommend adoption of budget bill language to require the department to revise its grant guidelines to award only tested program designs, similar to the model used by the State De- partment of Education for its teen pregnancy prevention program. C-62 C – 144 Health and Social Services Analysis Page 1999-00 Analysis 16. Cancer Research Fund Balance Should Be Transferred to General Fund. Increase General Fund Revenues by $1,555,000. Recommend year-end unexpended balances in the Cancer Research Fund (pro- jected to be $1.6 million) be transferred to the General Fund because (a) these balances will not be needed to fund the program in 1999-00 and (b) the original source of these funds is the General Fund. C-65 17. Budget Does Not Maximize Federal Funds for Drinking Water Program. Increase Item 4260-111-0001 by $285,000 and Increase Item 4260-111-0890 by $1,408,000. Recommend increasing the Gen- eral Fund amount budgeted for transfer to the Safe Drinking Water State Revolving Fund by $285,000 in order to obtain all available federal funds from the federal fiscal year 1998 grant (an additional $1.4 million). We also recommend that the department report at budget hearings on the advisability of expediting the receipt of additional federal funds available for federal fiscal year 1999. C-65 Managed Risk Medical Insurance Board 18. New Policies Adopted to Increase Enrollment. To address lower- than-expected enrollment in the Healthy Families Program, the Managed Risk Medical Insurance Board and the Department of Health Services shortened the application form and prepared fact sheets on immigration status. C-68 19. Monthly Enrollments Falling Behind Budget Projections for Cur- rent Year. Actual enrollments for the Healthy Families Program in October 1998 through December 1998 are about 5 percent lower than the budget estimates. The administration will submit revised estimates for the current and budget years in the May Revision of the budget. C-69 20. Budget Proposes to Apply Income Deductions for Determining Eligibility. The budget proposes a $2.7 million General Fund set- aside to apply the Medi-Cal income deductions to the Healthy Fami- lies Program for purposes of determining eligibility. Funding the proposal is contingent on savings from another budget proposal to secure federal funding of the state-only family planning program. C-70 Findings and Recommendations C – 145 Analysis Page Legislative Analyst’s Office Department of Developmental Services 21. Self-Determination Pilot Projects Should Address Additional Questions Regarding Consumer Choice. Recommend enactment of legislation requiring the department, regional centers, and area boards to examine the limits that should be placed on consumer choice, the use of life quality assessments in service planning, the cost-effectiveness of alternative case management, and how perfor- mance measures can be used to help consumers make informed choices about the services they receive. C-72 22. Program Development Fund Surplus Can Offset General Fund. Reduce Item 4300-101-0001 by $2,000,000 and Increase Item 4300- 1010-0172 by $2,000,000. C-78 23. Budget Does Not Reflect Full Savings From Napa Closure. Re- duce Item 4300-003-0001 by $14,000, Item 4260-101-0001 by $102,000, and Item 4260-101-0890 by $109,000. Recommend techni- cal adjustment, for a General Fund savings of $116,000. C-79 24. Budget-Year Projections of Federal Waiver Funding May Be Overly Optimistic. Recommend that the department report at budget hearings on (1) the status of the ban on new admissions to the Home and Community Based Services waiver program, (2) its plan for enrolling new clients in the program, and (3) the projected loss of federal reimbursements in 1999-00 if budget assumptions are not met. C-80 Department of Mental Health (DMH) 25. Sexually Violent Predator Evaluation Unit Overbudgeted. Reduce Item 4440-001-0001 by $1,236,000. C-83 26. Early and Periodic Screening, Diagnosis, and Treatment Program (EPSDT) Spending Out of State’s Control. Reduce Item 4260- 101-0001 by $88,916,515 and Increase Item 4440-101-0001 by $88,916,515. Recommend that (a) the department report at budget hearings on projected 1999-00 EPSDT expenditures and (b) funds for mental health services be budgeted in DMH rather than Depart- ment of Health Services and distributed to the counties as part of their managed care allocations. C-85 C – 146 Health and Social Services Analysis Page 1999-00 Analysis 27. Mentally Disordered Offender Rate Differential Not Justified. Reduce Item 4440-001-0001 by $137,000 and Item 5440-001-0001 by $100,000. Recommend a rate of $490 per evaluation in both DMH and the Board of Prison Terms, for a General Fund savings of $237,000 in 1999-00. C-88 28. Mentally Disordered Offender (MDO) Caseload Growth Outpac- ing Budget Projections. Recommend that DMH report at budget hearings on its MDO caseload estimates, along with the projected support and capital outlay costs associated with an increasing num- ber of MDO referrals and state hospital commitments in 1999-00 and beyond. C-89 29. State Hospital Budget Methodology Needs Revision. Recommend adoption of budget bill language requiring the department to de- velop a marginal cost methodology for funding annual caseload changes at the state hospitals, rather than the current average cost methodology, in order to more accurately reflect the costs of sup- porting additional patients. C-91 Employment Development Department 30. Workforce Investment Act. This legislation amends federal law on job training, adult education and literacy, and vocational rehabilita- tion. We review the major provisions of the act and summarize the Governor’s proposal for state implementation. C-94 California Work Opportunity and Responsibility to Kids (CalWORKs) 31. Impact of Maintenance-of-Effort (MOE) Requirement. Because the Governor’s budget proposes to expend all available federal funds and the minimum amount of General Fund monies required by federal law, any net augmentation will result in General Fund costs and any net reductions will result in federal savings. C-98 32. Budget Underestimates Cost of Providing the Statutory Cost-of- Living Adjustment (COLA). The General Fund cost of providing the statutory COLA will be $27.5 million above the amount in- cluded in the budget, due to an upward revision in the California Necessities Index. C-99 Findings and Recommendations C – 147 Analysis Page Legislative Analyst’s Office 33. Spending on Programs for Women Offenders and Parolees To- ward MOE Requirement. Recommend that the department count toward the CalWORKs MOE requirement $4.8 million in General Fund expenditures in the Department of Corrections on programs for women offenders and parolees. C-101 34. Budget Underestimates Savings From Maximum Family Grant Policy. Reduce Item 5180-101-0890 by $20,400,000. Recommend that proposed spending for CalWORKs grants be reduced by $20.4 million (federal Temporary Assistance for Needy Families [TANF] funds) to reflect the incremental savings that will occur in 1999-00 due to the continuation of the Maximum Family Grant policy. C-102 35. Budget for Services and Child Care Should Reflect Impact of Nonparticipation. Reduce Item 5180-101-0890 by $150,775,000. Recommend reducing the budget for employment services and child care by $150.8 million (federal TANF funds) to account for nonparticipation of recipients. C-102 36. Incentive Payments Should Be Related to Improved County Per- formance. Reduce Item 5180-101-0890 by $192,573,000. Recommend enactment of legislation to modify the methodology for calculating incentives so that counties retain 50 percent of savings attributable to earnings (rather than the 100 percent included in the budget). This change would more closely relate fiscal incentive payments to improved county performance and would result in savings of $193 million (federal TANF funds) in 1999-00. C-103 37. Options for Using Identified Savings. Federal savings could be (a) redirected to other priorities in CalWORKs, (b) placed into a reserve for future years, and\/or (c) transferred to the Social Services Block Grant (Title XX), where the funds could be used to offset General Fund spending in other departments. Among these op- tions, recommend that the Legislature place at least 50 percent ($166 million) of our identified savings into a reserve for expendi- ture in future years. C-105 38. Budget Proposes to Use Carry-Over Balances as a Funding Source. In contrast to 1998-99, the Governor’s budget proposes to use $251 million in county carry over funds as a source of funding for the estimated need for CalWORKs employment services in 1999-00. C-107 C – 148 Health and Social Services Analysis Page 1999-00 Analysis 39. Transfer Extra Child Care Funds to Child Care Reserve. Recom- mend transferring $88 million in CalWORKs child care carry over funds from the county block grant to the child care reserve. This will ensure that (a) child care funds are available to recipients who need them and (b) these funds are used for their designated pur- pose. C-107 40. Penalty for Failure to Meet Federal Work Participation Rate. The federal Department of Health and Human Services has indicated that (a) California failed to meet the work participation rate for two- parent families during the final quarter of federal fiscal year 1997 and (b) the state is subject to a penalty of $6,964,000. We review California’s status with respect to federal work participation rates, and estimate the cost of potential future penalties. C-108 41. Withhold Recommendation on Savings Attributable to Diversion. Withhold recommendation on $15 million in projected net savings attributable to counties diverting clients from applying for CalWORKs. C-110 42. Withhold Recommendation on Budget for CalWORKs Commu- nity Service. Withhold recommendation on the proposed budget for community service employment pending receipt of revised estimates of caseload and costs from the Department of Social Ser- vices and county welfare departments. C-110 43. Options for Budgeting Community Service Employment. The 1999-00 Governor’s Budget assumes the workfare approach to com- munity service, with no funding for the incremental cost of the wage-based approach. We present two alternative approaches to budgeting these incremental costs. C-111 44. Rethinking the Budget for CalWORKs Services and Administra- tion. Current law requires the welfare reform steering committee to report to the Legislature on alternative ways of budgeting and allocating funds for CalWORKs services and administration. We review the current budget practices and present different ap- proaches for consideration by the steering committee and the Legis- lature. C-113 Findings and Recommendations C – 149 Analysis Page Legislative Analyst’s Office Foster Care 45. Counties Report Placing Children in Foster Family Agencies Who Should Be in Nonagency Foster Homes. Recommend adoption of supplemental report language requiring the department to (1) collect data to estimate the number of foster children placed in foster family agency homes due to a shortage of nonagency foster family homes and the net costs of these placements compared to the costs if nonagency homes were available, and (2) make recommen- dations, if appropriate, to reduce the incidence of placing foster children in a higher-cost placement than is warranted by the county’s assessment. C-116 Supplemental Security Income\/ State Supplementary Program (SSI\/SSP) 46. Budget Underestimates Cost of Providing Statutory Cost-of-Liv- ing Adjustment (COLA). The cost of providing the SSI\/SSP COLA will be $32 million above the budget estimate because of (1) an upward revision in the California Necessities Index ($12.5 million) and (2) the budget’s overestimate of the Consumer Price Index ($19.5 million). C-122 47. Alternatives For the Regional 4.9 Percent Grant Reduction. Cur- rent law requires that SSI\/SSP grants be reduced by 4.9 percent in the low-cost counties, but this reduction has not been implemented because it would violate the federal maintenance-of-effort require- ment. We project that under current law, the reduction will occur in 2001-02. We present alternatives the Legislature may wish to consider. C-125 County Administration of Welfare Programs 48. Budget Proposes No State Share of Federal Penalty on Automa- tion. Increase Item 5180-001-0001 by $2,645,000 and increase Item 5180-141-0001 by $537,000. To be consistent with current law, rec- ommend that the state assume its proportional share of the penalty, for a General Fund cost of $2.2 million in the current year and $3.2 million in the budget year (with corresponding county sav- ings). C-130 C – 150 Health and Social Services Analysis Page 1999-00 Analysis 49. Budget Assumes Other Counties Will Absorb Los Angeles County Share of Federal Penalty. Current state law prohibits passing the federal penalty onto Los Angeles County because the county has implemented its component of the statewide automa- tion system. The budget proposes to pass Los Angeles County’s proportional share of the penalty onto the other counties rather than the state. C-131 Child Welfare Services 50. Child Welfare Caseload Forecast Should Be Revised. Data collec- tion problems make it difficult to forecast Child Welfare Services caseloads, but we believe the budget forecast overstates current- year caseload and understates the budget year. Additional data should permit a better estimate in the May revision of the budget. C-133 51. Independent Living Program Is Overbudgeted. Reduce Item 5180- 151-0001 by $5,733,000. Recommend reducing the General Fund amount proposed by $4.9 million in 1998-99 and $5.7 million in 1999-00. C-134 Adoptions 52. State Reporting Problems Could Jeopardize Receipt of Federal Adoptions Incentive Payments. Recommend that the department (a) consult with the federal administration on possible alternative means of submitting the required data and (b) provide the budget subcommittees with a status report on this issue during the hear- ings. C-136 53. No Clear Rationale for Proposal to Eliminate Program Established in Current Year. Recommend continuing the Substance Abuse\/HIV Child Adoptions program. Withhold recommendation on the appropriation pending receipt of information from the de- partment on estimated current-year expenditures. Further recom- mend adoption of supplemental report language requiring the department to submit reports on the program’s implementation, outcomes, and effectiveness. C-137 MAJOR ISSUES TABLE OF CONTENTS OVERVIEW EXPENDITURE PROPOSAL AND TRENDS CASELOAD TRENDS SPENDING BY MAJOR PROGRAM MAJOR BUDGET CHANGES CROSSCUTTING ISSUES FEDERAL MEDICAID MATCH DEPARTMENTAL ISSUES HEALTH AND HUMAN SERVICES AGENCY (0530) DEPARTMENT OF HEALTH SERVICES (Medi-Cal 4260) PUBLIC HEALTH MANAGED RISK MEDICAL INSURANCE BOARD (4280) DEPARTMENT OF DEVELOPMENTAL SERVICES (4300) DEPARTMENT OF MENTAL HEALTH (4440) EMPLOYMENT DEVELOPMENT DEPARTMENT (5100) DEPARTMENT OF SOCIAL SERVICES CalWORKS PROGRAM (5180) FOSTER CARE FOOD STAMPS PROGRAM SUPPLEMENTAL SECURITY INCOME\/STATE SUPPLEMENTARY PROGRAM COUNTY ADMINISTRATION OF WELFARE PROGRAMS CHILD WELFARE SERVICES ADOPTIONS FINDINGS AND RECOMMENDATIONS ”

” Legislative Analyst’s Office MAJOR ISSUES 1998-1998 Health and Social Services \ufffd\ufffd CalWORKs Employment Services Budget Significantly Ex- ceeds the Amount Needed to Fully Fund the Program \ufffd We estimate that the budget proposal is more than $700 million in excess of the amount needed to fully fund CalWORKs employment services. \ufffd We recommend deleting $95 million (General Fund) proposed as the state match for the new federal Welfare-to-Work block grant because it can be deferred to future years when the match could be provided from within baseline expenditures for CalWORKs. \ufffd We recommend reducing the budget for employment services by $209 million in federal TANF block grant funds. In conjunc- tion with separate recommendations to reduce county welfare administration by $43 million, this would free up $252 million in federal TANF block grant funds. We recommend redirecting at least half of the savings ($126 million) to a reserve for future-year CalWORKs expenditures, and we identify options for the Legislature to consider in redirecting the remaining amount. (See pages C-118 and C-120 .) \ufffd\ufffd Budget Proposes to Make Permanent the CalWORKs Grant Reduction and COLA Suspension \ufffd The budget proposes to make permanent the 4.9 percent statewide grant reduction and the COLA suspension, for a General Fund cost avoidance of $248 million in 1998-99. Under current law, the grant reduction and COLA will be re- stored November 1, 1998. (See page C-116.) C – 2 Health and Social Services 1998-99 Analysis \ufffd\ufffd Budget Proposes to Make Permanent the State COLA Sus- pension for the SSI\/SSP \ufffd The budget proposal would result in a General Fund cost avoidance of $39 million in 1998-99. (See page C-148.) \ufffd\ufffd SSI\/SSP Caseload Growth Is Overestimated \ufffd We estimate that the General Fund amount needed to fund the program is $113 million less than in the budget. (See page C-147.) \ufffd\ufffd Over $200 Million of Budgeted Medi-Cal Savings Appear Arbitrary \ufffd In addition to specific adjustments made as a result of the transition to managed care, the Medi-Cal budget includes General Fund savings of $110 million in the current year and $133 million in 1998-99 as a result of uncertainty adjust- ments in the department’s cost forecasting model. These global adjustments appear to be arbitrary. (See page C-50.) \ufffd\ufffd Changes to the New Healthy Families Program Could Provide Better Coverage and Result in Savings \ufffd We recommend legislation to require children in the California Children’s Services program to enroll, if eligible, in the Healthy Families program. This would provide more compre- hensive health care coverage and result in an increase in federal funds and a $6.2 million reduction in state costs. \ufffd We also recommend that the administration report on the feasibility of including, as a benefit under the Healthy Families program, services provided by the regional centers for devel- opmentally disabled children. (See page C-20.) \ufffd\ufffd State Plan Amendment Would Result in General Fund Sav- ings in the In-Home Supportive Services (IHSS) Program \ufffd Certain IHSS recipients could be made eligible for federal funds by amending our State Medicaid Plan. We recommend such an amendment, and estimate that this would result in General Fund savings of $35 million. (See page C-150.) Legislative Analyst’s Office TABLE OF CONTENTS Health and Social Services Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-5 Expenditure Proposal and Trends . . . . . . . . . . . . . . . . C-5 Caseload Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-7 Spending by Major Program . . . . . . . . . . . . . . . . . . . . . C-9 Major Budget Changes . . . . . . . . . . . . . . . . . . . . . . . . . C-11 Crosscutting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-15 Healthy Families Program . . . . . . . . . . . . . . . . . . . . . . C-15 Departmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-23 Department of Aging (4170) . . . . . . . . . . . . . . . . . . . . C-23 Department of Alcohol And Drug Programs (4200) . . . . . . . . . . . . . . . . . . . . . . . C-30 Department of Health Services State Operations (4260) . . . . . . . . . . . . . . . . . . . . . . C-32 California Medical Assistance Program (Medi-Cal) . . . . . . . . . . . . . . C-36 Public Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-65 Department of Developmental Services (4300) . . . . C-79 Department of Mental Health (4440) . . . . . . . . . . . . . C-99 C – 4 Health and Social Services 1998-99 Analysis Employment Development Department (5100) . . . C-101 Department of Rehabilitation (5160) . . . . . . . . . . . . C-107 Department of Social Services CalWORKs Program (5180) . . . . . . . . . . . . . . . . . C-111 Foster Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-129 Child Support Enforcement . . . . . . . . . . . . . . . . . . . C-132 Food Stamps Program . . . . . . . . . . . . . . . . . . . . . . . . C-146 Supplemental Security Income\/ State Supplementary Program . . . . . . . . . . . . . . C-147 In-Home Supportive Services . . . . . . . . . . . . . . . . . . C-150 County Administration Of Welfare Programs . . . . C-153 Special Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-155 Adoptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-157 Community Care Licensing Division . . . . . . . . . . . C-160 Findings and Recommendations . . . . . . . . . . . . . . . . C-163 Legislative Analyst’s Office OVERVIEW Health and Social Services eneral Fund expenditures for health and social services programsGare proposed to increase by 2.5 percent in the budget year. This increase is due primarily to a variety of workload and cost increases, full-year funding of a new health insurance program implemented in the current year, and the provision of state matching funds for the new fed- eral Welfare-to-Work block grant. Also, state costs will increase because of a reduction in federal social services block grant funds (and a corre- sponding increase in General Fund expenditures), and increases due to certain program enhancements. EXPENDITURE PROPOSAL AND TRENDS The budget proposes General Fund expenditures of $15.1 billion for health and social services programs in 1998-99, which is 27 percent of total proposed General Fund expenditures. The health and social services share of the budget has been declining since 1993-94. The budget proposal represents an increase of $373 million, or 2.5 percent, over estimated expenditures in the current year. Figure 1 (see next page) shows that General Fund expenditures (cur- rent dollars) for health and social services programs are projected to increase by $1.4 billion, or 10 percent, between 1991-92 and 1998-99. This represents an average annual increase of 1.4 percent. In 1991-92, realignment legislation shifted $2 billion of health and social services program costs from the General Fund to the Local Revenue Fund, which is funded through state sales taxes and vehicle license fees. This shift in funding accounted for a significant increase in special funds starting in 1991-92. General Fund spending declined in 1992-93, due to various program reductions (the largest being welfare grant reductions). The following years reflect an upward trend in spending, except for a slight reduction in 1997-98, due primarily to a decline in California Work Figure 1 Health and Social Services Expenditures Current and Constant Dollars 1991-92 Through 1998-99 All State Funds (In Billions) Special Funds General Fund Current Dollars 1991-92 Dollars Total Spending General Fund Spending 91-92 98-99 Proposed Percent of General Fund Budget 10 20 30 40% Constant 92-93 94-95 96-97 98-99 C – 6 Health and Social Services 1998-99 Analysis Opportunity and Responsibility to Kids (CalWORKs, formerly Aid to Families with Dependent Children [AFDC]) program caseloads. Combined General Fund and special funds spending is projected to increase by 14 percent between 1991-92 and 1998-99. This represents an average annual increase of 1.9 percent. Figure 1 also displays the spending for these programs adjusted for inflation (constant dollars). On this basis, General Fund expenditures are estimated to decrease by 8.7 percent between 1991-92 and 1998-99. Com- bined General Fund and special funds expenditures are estimated to decrease by 5.2 percent during the same period. This is an average annual decrease of less than 1 percent. As noted previously, the 1991 realignment legislation significantly altered the financing of health and social services programs by transfer- ring funding for all or part of several mental health, public health, and social services programs to the counties. The sales tax and vehicle license fee revenues dedicated to realignment amounted to $2 billion in 1991-92, which was $239 million short of the amount that was initially estimated. This shortfall was primarily due to the effects of the recession. The budget estimates that realignment revenues will be $2.8 billion in 1998-99. Figure 2 Medi-Cal Caseloads Declining 1988-89 Through 1998-99 (In Millions) 1 2 3 4 5 6 88-89 90-91 92-93 94-95 96-97 98-99 Families\/Children Refugees\/illegal immigrants Disabled Aged Eligible Persons Overview C – 7 Legislative Analyst’s Office CASELOAD TRENDS Figures 2 and 3 (see next page) illustrate the caseload trends for the largest health and welfare programs. Figure 2 shows Medi-Cal caseload trends over the last decade, divided into four groups: families and chil- dren (primarily recipients of Temporary Assistance for Needy Families, or TANF\u2014formerly AFDC), the aged and the disabled (primarily recipi- ents of Supplemental Security Income\/State Supplementary Pro- gram\u2014SSI\/SSP), refugees, and illegal immigrants. (Pursuant to Califor- nia’s 1997 welfare reform legislation, TANF is implemented at the state level as the CalWORKs program.) Medi-Cal caseloads increased by 53 percent over the ten-year period shown in Figure 2. As the figure shows, most of this growth occurred during the period from 1989-90 through 1994-95. The growth in the num- ber of families and children receiving Medi-Cal during this period reflects the rapid growth in AFDC caseloads during this time as well as the ex- pansion of Medi-Cal to cover additional women and children with in- comes too high to qualify for cash aid in the welfare programs. Coverage of refugees and illegal immigrants also increased caseloads significantly Figure 3 CalWORKs Cases Declining, SSI\/SSP Increasing (In Millions) 0.2 0.4 0.6 0.8 1.0 1.2 88-89 90-91 92-93 94-95 96-97 98-99 CalWORKs SSI\/SSP 1988-89 Through 1998-99 Cases C – 8 Health and Social Services 1998-99 Analysis during this period. Since 1994-95, Medi-Cal caseloads have declined, including an estimated reduction of 4.8 percent in the current year and 2.9 percent in 1998-99, due primarily to a decline in AFDC\/CalWORKs caseloads. Figure 3 shows the caseload trend for the CalWORKs and SSI\/SSP programs. While the number of cases in SSI\/SSP is greater than in the CalWORKs program, there are more persons in the CalWORKs pro- gram\u2014about 2 million compared to about 1 million for SSI\/SSP. (The SSI\/SSP cases are reported as individual persons, while CalWORKs cases are primarily families.) Caseload growth in these two programs is due, in large part, to the growth of the eligible target populations. The increase in the rate of growth in the AFDC\/CalWORKs caseloads in 1990-91 and 1991-92 was partly due to the effect of the recession. During the next two years, the caseload continued to increase, but at a slower rate of growth. This slow- down, according to the Department of Finance, was due partly to (1) certain population changes, including lower migration from other states; and (2) a lower rate of increase in child-only cases (including citizen children of undocumented and newly legalized persons), which was the fastest growing segment of the caseload until 1993-94. (For a Overview C – 9 Legislative Analyst’s Office discussion of other factors affecting the AFDC caseload during this pe- riod, please see our report on the program in The 1991-92 Budget: Perspec- tives and Issues, page 189.) Figure 3 also shows that since 1994-95, AFDC\/CalWORKs caseloads have declined. As we discuss in our report, California’s Fiscal Outlook (November 1997), we believe that this trend is due largely to various factors affecting welfare caseloads, including the improving economy, lower birth rates for young women, a decline in legal immigration to California, and behavioral changes in anticipation of federal and state welfare reform. The SSI\/SSP caseload can be divided into two major components: the aged and the disabled. The aged caseload generally increases in propor- tion to increases in the eligible population\u2014age 65 or older. This compo- nent accounts for about one-third of the total caseload. The larger com- ponent\u2014the disabled caseload\u2014has been growing faster than the rate of increase in the eligible population group (primarily ages 18 to 64). This is due to several factors, including (1) the increasing incidence of AIDS- related disabilities, (2) changes in federal policy that liberalized the crite- ria for establishing a disability, (3) a decline in the rate at which recipients leave the program (perhaps due to increases in life expectancy), and (4) expanded state and federal outreach efforts in the program. We note, however, that in recent years the growth of the disabled caseload has slowed. Total SSI\/SSP caseload growth has also moderated in recent years. This is partly attributable to federal policy changes that (1) eliminated drug or alcohol addiction as a qualifying disability, (2) made aged noncitizens in the U.S. prior to August 1996 (but not yet on SSI\/SSP) ineligible for assistance, and (3) added restrictions on the eligibility of disabled children. SPENDING BY MAJOR PROGRAM Figure 4 (see next page) shows expenditures for the major health and social services programs in 1996-97 and 1997-98, and as proposed for 1998-99. As shown in the figure, the three major benefit payment programs\u2014Medi-Cal, CalWORKs, and SSI\/SSP\u2014account for a large share of total spending in the health and social services area. C – 10 Health and Social Services 1998-99 Analysis Figure 4 Major Health and Welfare Programs Budget Summarya 1996-97 Through 1998-99 (Dollars in Millions) Actual Estimated Proposed 1996-97 1997-98 1998-99 Amount Percent Change from 1997-98 Medi-Cal General Fund $6,838.3 $6,780.2 $6,819.7 $39.5 0.6% All Funds 18,370.2 18,175.8 18,523.2 347.4 1.9 CalWORKs (Grants and Services) General Fund $2,833.8 $2,076.2 $1,988.4 -$87.8 -4.2% All Funds 5,995.0 5,619.1 5,925.9 306.8 5.5 AFDC (Foster Care) General Fund $307.0 $375.4 $399.7 $24.3 6.5% All Funds 1,178.5 1,373.1 1,501.7 128.6 9.4 SSI\/SSP General Fund $2,012.7 $2,063.0 $2,159.1 $96.1 4.7% All Funds 5,608.0 5,806.2 6,142.1 335.9 5.8 In-Home Supportive Services General Fund $311.7 $385.4 $485.4 $100.0 25.9% All Funds 1,084.1 1,238.6 1,365.2 126.6 10.2 Regional Centers\/Community Services General Fund $458.0 $487.8 $578.5 $90.7 18.6% All Funds 1,046.0 1,162.0 1,328.2 166.2 14.3 Developmental Centers General Fund $28.5 $35.8 $32.0 -$3.8 -10.6% All Funds 522.8 464.5 474.1 9.6 2.1 Child Welfare Services General Fund $350.0 $448.8 $448.5 -$0.3 -0.1% All Funds 1,124.0 1,186.0 1,216.8 30.8 2.6 State Hospitals General Fund $240.4 $270.3 $299.0 $28.7 10.6% All Funds 479.4 477.4 484.8 7.4 1.6 Excludes departmental support, except for state hospitals. a Overview C – 11 Legislative Analyst’s Office MAJOR BUDGET CHANGES Figures 5 and 6 (see pages 12 and 13) illustrate the major budget changes proposed for health and social services programs in 1998-99. (We include the federal funds for CalWORKs because, as a block grant, they are essentially interchangeable with state funds within the program.) Generally, the major changes can be grouped into the following catego- ries: 1. The Budget Proposes to Fund Basic Caseload Growth in SSI\/SSP and Reflects Savings From Basic Caseload Reductions in Medi-Cal and CalWORKs. This includes a projected caseload reduction of 2.9 percent in the Medi-Cal Program, a decrease of 5.6 percent in the CalWORKs program, and an increase of 2.1 percent in SSI\/SSP (before adjusting for policy changes). 2. The Budget Proposes to Make Permanent Certain Grant Reduc- tions and Suspension of Statutory Cost-of-Living Adjustments (COLAs). Specifically, it: Makes permanent the 4.9 percent statewide grant reduction in CalWORKs enacted in 1996-97 ($151 million cost avoidance). Makes permanent the suspension of the statutory COLAs in CalWORKs ($97 million cost avoidance) and SSI\/SSP ($39 million cost avoidance). (The federal SSI COLA would be provided to the recipients as scheduled in January 1999.) 3. The Budget Funds the Full-Year Implementation Costs of the Ma- jor New Health and Welfare Programs Enacted in the Current Year. The budget proposes to increase spending for CalWORKs by $307 million in total funds, including an $88 million reduction from the General Fund. The increase is essentially funded by a large carry-over of unexpended federal TANF block grant funds from the current and prior years. The amount proposed for employment services includes $95 million from the General Fund to serve as part of the state match for the new federal Welfare-to-Work block grant, which will provide about $360 million in federal funds for local agencies (primarily Private Industry Councils) over the cur- rent and budget years. C – 12 Health and Social Services 1998-99 Analysis Figure 5 Health Services Programs Proposed Major Changes for 1998-99 General Fund Medi-Cal Requested: $6.8 billion Increase: $40 million (+0.6%) \ufffd $165 million due to higher utilization of services and other cost increases $102 million due to a caseload reduction\ufffd $66 million due to increases in the federal cost-sharing ratio\ufffd $44 million from full-year effect of eliminating prenatal care for\ufffd undocumented persons Healthy Families Program Requested: $64 million Increase: $59 million (+1,164%) \ufffd $59 million for first full year of program implementation (includes Medi-Cal Program costs) Public Health Requested: $332 million Increase: $1.9 million (+0.6%) \ufffd $23 million to expand the Cancer Research Program \ufffd $16 million due to increased caseload and costs for the AIDS Drug Assistance Program Mental Health Requested: $570 million Increase: $17 million (+3.1%) \ufffd 18 million for caseload growth in the state hospitals Overview C – 13 Legislative Analyst’s Office Figure 6 Social Services Programs Proposed Major Changes for 1998-99 General Fund CalWORKs Requested: $2 billion Decrease: $88 million (-4.2%) \ufffd $1.1 billion ($79 million General Fund and $1 billion federal block grant funds) for employment services and child care $248 million cost avoidance by not restoring the 4.9 percent\ufffd statewide grant reduction and cost-of-living adjustment (COLA) $241 million ($117 million General Fund and $124 million fed-\ufffd eral funds) from increased earnings and program exits $179 million ($88 million General Fund and $91 million federal\ufffd funds) due to a projected basic caseload decline SSI\/SSP Requested: $2.2 billion Increase: $96 million (+4.7%) \ufffd $40 million for basic caseload growth \ufffd $37 million for growth in eligible disabled noncitizen caseload $39 million cost avoidance by not providing the state COLA\ufffd In-Home Supportive Services Requested: $485 million Increase: $100 million (+26%) \ufffd $47 million due to reduction in federal Title XX funds \ufffd $30 million for full-year costs of minimum wage increase Regional Centers Requested: $579 million Increase: $91 million (+19%) \ufffd $74 million for caseload and cost increases \ufffd $10 million to reduce case management ratio and improve ven- dor services C – 14 Health and Social Services 1998-99 Analysis The budget proposes to increase total funding for the new Healthy Families Program from $21.1 million in the current year ($5.1 million General Fund) to $201 million in the budget year ($64.5 million General Fund). The budget-year amount includes $97.9 million ($33.3 million General Fund) for the Managed Risk Medical Insurance Board to implement a health insurance program for children in families that are not eligible for Medi-Cal, and whose incomes are up to 200 percent of the federal poverty level. Most of the remaining General Fund monies proposed for the Healthy Families Program are to expand eligibility in the Medi-Cal Program. 4. The Budget Proposes to Fund Caseload Increases and Enhanced Services for Developmentally Disabled Persons. This includes $114.9 million ($94.5 million General Fund, including Medi-Cal reim- bursements) for caseload and cost increases, $50.9 million ($35.2 million General Fund, including reimbursements) to enhance services for regional center clients placed in the community, and $31.1 million ($16.1 million General Fund, including reimbursements) for the first year of a four-year expansion of staffing for the developmental centers. Legislative Analyst’s Office CROSSCUTTING ISSUES Health and Social Services HEALTHY FAMILIES PROGRAM The Healthy Families Program is a new state program to expand health insurance coverage for low-income children. NEW PROGRAM TO EXPAND HEALTH COVERAGE FOR CHILDREN Federal Legislation Provides New Funding The federal Balanced Budget Act of 1997 created a new Children’s Health Insurance Program (CHIP). This new program provides federal funds to states on a matching basis to finance health care coverage for children (through age 18) in families with incomes that generally are less than 200 percent of the federal poverty level (FPL)\u2014currently $32,100 for a family of four\u2014but are too high to qualify for Medicaid (Medi-Cal in California). The federal legislation appropriates a total of $20.3 billion nationwide for the first five years of the program (beginning October 1997) and authorizes an additional $19.4 billion for the subsequent five- year period. Each state is entitled to an allotment of CHIP funds based primarily on its share of the national total of uninsured children in fami- lies with incomes under 200 percent of FPL. California’s initial allotment for the federal fiscal year ending September 30, 1998 (federal fiscal year 1998) is $854.9 million, with similar amounts available in the subsequent two years. C – 16 Health and Social Services 1998-99 Analysis Enhanced Federal Match Rate. For California, the federal government will pay about two-thirds of qualifying program costs compared with a federal share of about half in the Medi-Cal Program. In order to use all of the federal funds allotted to the state, California would have to spend an annual total of about $1.3 billion, including $443 million of state or local matching funds. Unused federal funds can be carried over for up to three years. Choice of Separate Insurance Program or Medicaid Expansion. To be eligible for the new federal funds, states can choose to expand their Medicaid programs to cover additional children at higher income levels, or they can establish a separate insurance program. The separate insur- ance programs may offer a more limited benefit package than Medicaid, and may require families to pay a portion of the cost of coverage. States also can use a combination of the two approaches. States receive funding at the enhanced federal match rate for the additional children that they cover through either approach. California’s Healthy Families Program Enacted Soon after the federal legislation was approved, the Legislature en- acted and the Governor signed legislation to implement the new federal program in California known as the Healthy Families Program. The legislation creates a new insurance program for children, separate from Medi-Cal, but it also incorporates a number of enhancements of Medi-Cal coverage for children. The legislation encompassed the following package of four bills: Chapter 623, Statutes of 1997 (AB 1126, Villaraigosa) Establishes the Healthy Families Insurance Program. The new insurance program, which is separate from Medi-Cal, will help low-income families purchase health coverage for their children starting July 1, 1998. It is administered by the Managed Risk Medical Insurance Board (MRMIB), which has been re- sponsible for operating the state’s health insurance purchasing pool for small businesses and several smaller subsidized health insurance pro- grams. The new insurance program has the following major features: Eligibility. Qualifying family income levels will be between 133 percent and 200 percent of FPL for children ages 1 through 5, and between 100 percent and 200 percent of FPL for children ages 6 through 18. Children at lower income levels (and infants up to 200 percent of FPL) are eligible for Medi-Cal coverage. Subsidized health coverage for infants up to 300 percent of FPL will continue to be available through MRMIB’s existing Access for Infants and Mothers (AIM) Program. Generally, children must not have been Crosscutting Issues C – 17 Legislative Analyst’s Office covered by employer-sponsored insurance for at least three months to qualify. Families will purchase coverage directly through MRMIB or receive purchasing credits from MRMIB to participate in employer-sponsored coverage, if available. Benefits. The program will provide comprehensive benefits equiv- alent to state employee health coverage, including vision, dental, and mental health coverage. Premiums and Copayments. Monthly premiums paid by families for the lowest cost plans will be $7 per child (up to 150 percent of FPL) or $9 per child (up to 200 percent of FPL), with family maxi- mums of $14 and $27, respectively. Families who choose higher cost plans would pay the difference, and families who choose the plan with the greatest participation of traditional Medi-Cal and safety net providers would receive a $3-per-child premium dis- count. Copayments for most outpatient services will be $5, exclud- ing preventive care, with an annual cap of $250. Chapters 624 and 626, Statutes of 1997 (SB 903, Lee and AB 217, Figueroa) Broaden and Simplify Medi-Cal Eligibility for Poor Children. Children ages 14 through 18 in families up to 100 percent of FPL will be eligible for coverage now, rather than being phased in a year at a time as under prior law. These measures also generally eliminate asset limits for Medi-Cal coverage of children, require the Department of Health Services (DHS) to allow enrollment of children through a simplified mail-in form, and allow one month of continuing eligibility to enable children losing Medi-Cal time to enroll in Healthy Families. Chapter 625, Statutes of 1997 (AB 1572, Villaraigosa) Provided Initial Funding. This measure appropriated $4.9 million ($1.8 million General Fund, $3.1 million federal funds) to MRMIB and DHS for start-up costs and outreach efforts for the Healthy Families Program. THE BUDGET REQUEST Governor’s Budget Proposes Net Spending Total of $197 million in 1998-99 The 1998-99 budget request for Healthy Families includes funding for both MRMIB and DHS as shown in Figure 7 (see next page). The total net funding request is $197.2 million, consisting of $62.6 million from the General Fund and $134.6 million of federal funds. About half of total spending ($97.9 million) is for health plan payments and administration at MRMIB, and about 40 percent of spending is in the Medi-Cal Program C – 18 Health and Social Services 1998-99 Analysis (net of offsetting savings). The Healthy Families budget also includes a total of $20.7 million of spending in existing health programs for children who will enroll in Healthy Families. By including these existing programs among Healthy Families benefits, the state will be able to obtain federal matching funds that will offset $14.6 million of state or local funding. Figure 7 Healthy Families Program Funding Governor’s Budget Proposal 1998-99 (In Thousands) General Federal Fund Funds Total New Programs\/Activities Children’s Health Insurance Program Managed Risk Medical Insurance Board (MRMIB) Administration $767 $1,491 $2,258 Health plan payments 32,488 63,150 95,638 Totals (MRMIB) $33,255 $64,641 $97,896 Medi-Cal Program Expansion: Department of Health Services (DHS) Administration $497 $1,152 $1,649 Eligibility expansions 21,984 42,409 64,393 Outreach 4,997 16,003 21,000 Offsetting savings -4,208 -4,208 -8,416a Totals (DHS\/Medi-Cal) $23,270 $55,356 $78,626 Totals (new programs\/activities) $56,525 $119,997 $176,522 Existing Programs Access for Infants and Mothers\u2014MRMIB $1,660 $3,228 $4,888 Child Health and Disability Prevention\u2014DHS 2,883 5,605 8,488 California Children’s Services\u2014DHS 1,497 5,806 7,303 Totals (existing programs) $6,040 $14,639 $20,679 Grand totals $62,565 $134,636 $197,201b Savings consist of $4.6 million from using mail-in applications and $3.8 million of avoided costs for a children in Healthy Families who incur large medical bills and would otherwise use Medi-Cal on a share- of-cost basis. The Governor’s Budget Summary (page 121) indicates total cost of $201 million, but omits savings ($3.8 b million) from the shift of share-of-cost children from Medi-Cal to Healthy Families. Crosscutting Issues C – 19 Legislative Analyst’s Office ANALYSIS AND RECOMMENDATIONS $1.4 Billion of Federal Funds Will Roll Forward Under the budget plan, about $1.4 billion of California’s federal allo- cation through June 1999 will remain unspent and will roll forward into 1999-00. It is likely that most, if not all, of these funds will remain un- spent. The budget proposes to spend $135 million of federal funds for the Healthy Families Program in 1998-99. This will result in a rollover of about $1.4 billion of unspent federal allocations. (As indicated above, unspent federal funds can be carried over for three years.) One reason for the large rollover is that the budget estimates that enrollment at the end of 1998-99 will be only 40 percent of the eligible children. However, even at full enrollment, the administration estimates that the state would use only about $320 million of federal funds annually, which is about $500 million less than the state’s current annual allotment. Consequently, under the administration’s projections, the Healthy Families Program will not be able to spend most of the federal funding allotted to California. One explanation for the discrepancy between the state’s federal funds allotment and planned spending is the federal allotments are based on the total number of low-income uninsured children. Most of these uninsured children, however, are in families with incomes low enough to qualify for Medi-Cal, and therefore they are not eligible for the new federal program. Absent Congressional action to expand the use of these federal funds, it appears likely that the state will not be able to spend a significant portion of its allotments. Federal Approval of Continuing Eligibility in Doubt We withhold recommendation on $27 million ($9.2 million General Fund) requested in the Department of Health Services’ Medi-Cal budget to provide one-month continuing eligibility for children, pending resolu- tion of federal objections to this proposal. The Medi-Cal budget request includes (in Item 4260-101-0001) a total of $27,034,000 ($9,183,500 General Fund) in 1998-99 and $2,253,000 ($769,000 General Fund) in the current year to provide one month of continuing Medi-Cal eligibility to children who otherwise would lose their eligibility for Medi-Cal without a share of cost, as required by SB 903. The purpose of providing continuing eligibility is to avoid gaps in coverage for children in families whose income rises above the limit for no-cost Medi-Cal coverage of the child. The additional month of Medi-Cal coverage would allow time for the family to enroll the child in the C – 20 Health and Social Services 1998-99 Analysis Healthy Families Program. Transitional Coverage Available for Most Medi-Cal Children. The budget request proposes to provide one-month continuing coverage to all Medi-Cal children who are not in CalWORKs families (about 750,000 children). About two-thirds of the children covered by Medi-Cal are in CalWORKs families. CalWORKs families would not need the one-month continuing coverage because currently they are eligible for up to one year of transitional Medi-Cal coverage after their income increases above the CalWORKs limit due to employment, child support payments, or mar- riage. About half of the children in non-CalWORKs families, however, are in the Medically Needy category and most (if not all) of them will be eligible for transitional Medi-Cal coverage as Section 1931(b) eligibles under the federal welfare reform law. (Please see our discussion of Section 1931(b) Medi-Cal eligibility in our analysis of the Medi-Cal Program.) Thus, the number of children who potentially might use the additional month of continuing coverage is about half the number assumed in the budget request. We estimate that providing one-month continuing coverage to this smaller number of children (at the regular federal match) would cost the General Fund $2.6 million less than the budget requests. Federal Approval in Doubt. The requirements of SB 903 are contingent on the approval of federal matching funds. Such approval currently appears doubtful. Federal law authorizes states to provide up to 12 months of continuous eligibility to children when they enroll for Medicaid, or at their annual redetermination, with federal funding at the regular Medicaid matching rate (about 51 percent). The budget proposal, however, calls for extending children’s Medi-Cal eligibility for one month after they have otherwise become ineligible, and assumes federal funding at the enhanced CHIP rate (about 66 percent). At this time, staff in the federal Health Care Financing Administration indicate that they doubt that the state’s proposal for one-month continuing eligibility will be approved. Pending a final federal decision, we withhold recommendation on this request. Requiring Children in the CCS Program to Enroll in The Healthy Families Program Would Result in Savings We recommend enactment of legislation to require qualifying partici- pants in the California Children’s Services (CCS) Program to enroll in the Healthy Families Program in order to provide more comprehensive health care services to CCS children at a net General Fund and county savings of $6.2 million each in 1998-99 compared with the Governor’s budget. Crosscutting Issues C – 21 Legislative Analyst’s Office (Reduce Item 4260-111-0001 by $9,118,000 and Increase Item 4280- 101-0001 by $2,972,000.) The California Children’s Services (CCS) Program provides diagnostic and treatment services, medical case management, and medical and occupational therapy services to children under 21 years of age who have eligible medical conditions, such as severe genetic diseases, chronic health problems, or major traumatic injuries. The Medi-Cal Program pays for eligible CCS services for those children who are in Medi-Cal. Other costs attributed to the CCS Program are shared equally by the state General Fund and county funds. Healthy Families Includes CCS Services. The Healthy Families Pro- gram includes CCS services as a benefit. Therefore, for those CCS children who also are enrolled in Healthy Families, federal funds will cover two- thirds of the cost of their CCS services, which otherwise would be borne entirely by the state and the counties. Currently, however, there is no requirement that CCS children enroll in Healthy Families if they are eligible. The budget assumes that CCS-eligible families will decide to enroll in Healthy Families at about the same pace as other families, so that about one-third of the eligible CCS children would be enrolled in Healthy Fami- lies by the end of 1998-99. The budget also estimates that CCS children enrolled in Healthy Families will receive a total of $8.8 million of CCS services in 1998-99. As a covered benefit, about two-thirds of this cost will be paid by federal funds, resulting in a state General Fund savings of $2.9 million (and equivalent county savings). Enrollment of Eligible CCS Children in Healthy Families Would Re- sult in Net Savings. Enrolling all eligible CCS children in Healthy Fami- lies would provide more comprehensive health coverage to CCS children while also reducing state and county costs. Healthy Families provides a full scope of health care services, plus dental and vision care, whereas the CCS Program only covers services that address a child’s CCS-eligible condition. Enactment of legislation requiring families that participate in CCS to also enroll in Healthy Families would ensure that all eligible CCS children have full health coverage without losing any existing CCS bene- fits. It also would allow the CCS Program to draw down additional fed- eral funds at the two-thirds match rate for the Healthy Families Program. We estimate that full enrollment of eligible CCS children in Healthy Families would result in a net General Fund savings of $6.2 million in 1998-99, assuming that the sign-up requirement is effective starting Octo- ber 1998. (General Fund CCS costs would decrease by $9.1 million, but increased General Fund costs for the Healthy Families Program would C – 22 Health and Social Services 1998-99 Analysis offset almost $3 million of these savings.) Counties would experience a similar net savings in their share of CCS costs. Our savings estimate assumes that the families of CCS children would pay the Healthy Families monthly premium. Waiving premiums for families of CCS children would reduce the net state savings to about $6 million in 1998-99. Including Regional Center Services As a Healthy Families Benefit Should Be Explored We recommend that the Department of Health Services, the Depart- ment of Developmental Services and the Managed Risk Medical Insur- ance Board report during the budget hearings on (1) the feasibility of including regional center services as a Healthy Families benefit and (2) the potential state savings that would result. The Governor’s budget proposes $558 million from the General Fund in the budget of the Department of Developmental Services (DDS) to support the regional centers, which provide community-based services to developmentally disabled clients. Many of these clients are children, some of whom are not eligible for Medi-Cal, but whose family incomes would qualify them for the Healthy Families Program. The regional centers provide a wide range of services to enable clients to live in the community. The federal CHIP legislation authorizes states to include home and community-based health care services and related supportive services as benefits under their children’s health insurance plans. The Healthy Families Program currently does not include regional center services as a covered benefit. We believe, however, that it may be feasible to include many of these services in the package of benefits pro- vided by the Healthy Families Program. Requiring enrollment in Healthy Families for eligible children who use regional center services would ensure broad health coverage for these children and would enable the state to maximize General Fund savings by using federal funds to offset a portion of the costs. Accordingly, we recommend that DHS, DDS, and MRMIB report during the budget hearings on (1) the feasibility of includ- ing regional center services as a Healthy Families benefit and (2) the potential state savings that would result. Legislative Analyst’s Office DEPARTMENTAL ISSUES Health and Social Services DEPARTMENT OF AGING (4170) The California Department of Aging (CDA) administers funds allo- cated to California under the federal Older Americans Act. These funds are used to provide services to the elderly including supportive services, nutrition programs, employment services, preventive health services, and the elder abuse prevention program. In addition, the CDA administers a range of programs, supported by state and federal funds, that provide noninstitutional services for older Californians and functionally impaired adults, including the Multipurpose Senior Services Program, Linkages, Adult Day Health Care, and the Alzheimer’s Day Care Resource Centers. Finally, the CDA administers the Foster Grandparent, Senior Companion, Respite Purchase of Services, Respite Registry, and Brown Bag programs. The budget proposes expenditures of $156.3 million ($41.5 million General Fund) for the CDA in 1998-99. This represents a 28 percent in- crease in General Fund expenditures over the current year, due to the proposed expansion of several programs. Proposed Expansion Would Not Allocate Funds According to Need We withhold recommendation on $12.2 million ($9.1 million General Fund) requested to expand several California Department of Aging pro- grams because the funds would not be allocated according to the need for services. C – 24 Health and Social Services 1998-99 Analysis Background. The CDA’s programs are carried out at the local level by the Area Agencies on Aging (AAA). There is one AAA for each Planning and Service Area (PSA). The budget proposes to expand the following programs administered by the CDA into PSAs where they do not cur- rently exist: Multipurpose Senior Services Program (MSSP). Adult Day Health Care program. Alzheimer’s Day Care Resource Center. Foster Grandparent program. Senior Companion program. Respite Purchase of Services. Respite Registry. Brown Bag program. Figure 8 shows the additional sites necessary to provide each PSA with at least one site for each program. Figure 8 California Department of Aging Proposed Program Expansion Planning and Service Area ADCRC L FG SC RR RPOS BB MSSP ADHC Programs Proposed to Be Expandeda Del Norte, Humboldt X X X Lassen, Modoc, Shasta, Siskiyou, Trinity X X X X X X Butte, Colusa, Glenn, Plumas, Tehama X X X X X Nevada, Placer, Sacramento, Sierra, X X X Sutter, Yolo, Yuba Marin X X X X X San Francisco Contra Costa X X X X X X San Mateo X X X Alameda X X Santa Clara X X X X Continued Department of Aging C – 25 Planning and Service Area ADCRC L FG SC RR RPOS BB MSSP ADHC Programs Proposed to Be Expandeda Legislative Analyst’s Office San Joaquin X X X Alpine, Amador, Calaveras, Mariposa, X X X X X X Tuolumne San Benito, Santa Cruz X X Fresno, Madera X X X X Kings, Tulare X X X X X X X X Inyo, Mono X X X X X X X X X San Luis Obispo, Santa Barbara X X X X X X Ventura X X X X X X X X Los Angeles County X San Bernardino X X X X Riverside X X X X X X Orange X X X X X San Diego X X X Imperial X X X X X X X Los Angeles City X X Lake, Mendocino X X Sonoma X X X X X Napa, Solano X X X X X X X X El Dorado X X X X X X X X Stanislaus X X X X X X Merced X X X X X X X X Monterey X X X Kern X X X X X X Totals 10 23 21 26 28 25 1 13 9 ADCRC\u2014Alzheimer’s Day Care Resource Center; L\u2014Linkages; FG\u2014Foster Grandparent; SC\u2014Senior a Companion; RR\u2014Respite Registry; RPOS\u2014Respite Purchase of Services; BB\u2014Brown Bag; MSSP\u2014Multipurpose Senior Services Program; and ADHC\u2014Adult Day Health Care. The budget proposes expenditures of $12.2 million ($9.1 million Gen- eral Fund) to expand these programs in 1998-99, including $3.3 million ($2.7 million General Fund) in one-time start-up costs. The budget as- sumes that the expansion would begin in February 1999. The full-year expansion costs in 1999-00 are estimated to be $20.5 million ($14.4 million General Fund). Proposed MSSP Expansion. The largest component of the budget proposal is the expansion of the MSSP\u2014$5.8 million in 1998-99, including $2.8 million General Fund. The MSSP provides case management services C – 26 Health and Social Services 1998-99 Analysis to frail elderly clients in order to prevent or delay institutionalization. Clients must be at least 65 years of age, Medi-Cal eligible, and certifiable as appropriate for nursing facility placement. Currently, there are 6,000 full-time equivalent slots in 19 PSAs, serving about 8,000 people state- wide each year. The department has estimated the need for MSSP services based on the size of the disabled elderly population in each PSA. Figure 9 shows for each PSA (1) the department’s estimate of potential MSSP clients, (2) the current distribution of MSSP slots, and (3) the department’s proposed distribution of new slots. The figure indicates that the proposed expansion would not distribute new MSSP slots according to the estimated need for MSSP services. For example, the expansion would create a new 600-slot site in the Riverside PSA, but would leave the neighboring San Bernardino and Orange PSAs\u2014which have a higher projected level of need\u2014with only their existing 200 slots. The expansion would also create a new 400-slot site in the Kings-Tulare PSA, but would leave the neighboring Fresno-Madera PSA, which is projected to have twice the level of need, with half the number of slots. Clearly, the proposed MSSP expansion would not match the distribution of MSSP slots with the projected need for these services. Proposed Expansion of Other Programs. The department does not have specific indicators of need for the other programs. Based on our discussions with the department, however, we believe that the size of the age 60-plus population is a reasonable proxy for the level of need for the services provided by these programs. However, the budget proposes to expand most of these programs by replicating the size of an average existing site in the PSAs that are currently without a site. This plan is unlikely to match the distribution of service capacity with the need for services for two reasons. First, the PSAs without existing program sites tend to have smaller age 60-plus populations, and therefore have a lower level of need for services than PSAs with existing sites. Second, although PSAs without existing sites vary in terms of the size of their age 60-plus populations, the proposal would establish sites of equal size in each new PSA. Figure 10 (see page 28) illustrates these two problems by describing the proposed expansion of the Linkages program\u2014the second largest compo- nent of the budget proposal ($3 million General Fund in 1998-99). The Linkages program provides case management services to about 2,000 functionally impaired adults and frail elderly each year who are at risk of institionalization, but who need not be Medi-Cal eligible. Figure 10 re- Department of Aging C – 27 Legislative Analyst’s Office Figure 9 Proposed Expansion of MSSP Potential Clients and Full-Time Service Slots Planning and Service Area Clients Slots New Slots Potential Current Proposed Del Norte, Humboldt 138 130 \u2014 Lassen, Modoc, Shasta, Siskiyou, Trinity 296 \u2014 200 Butte, Colusa, Glenn, Plumas, Tehama 371 200 \u2014 Nevada, Placer, Sacramento, Sierra, Sutter, Yolo, Yuba 1,907 200 \u2014 Marin 103 200 100a San Francisco 2,548 400 \u2014 Contra Costa 760 \u2014 300 San Mateo 742 200 \u2014 Alameda 1,927 410 \u2014 Santa Clara 2,127 200 \u2014 San Joaquin 760 200 \u2014 Alpine, Amador, Calaveras, Mariposa, Tuolumne 98 \u2014 200b San Benito, Santa Cruz 234 250 \u2014 Fresno, Madera 1,505 200 \u2014 Kings, Tulare 822 \u2014 400 Inyo, Mono 24 \u2014 \u2014b San Luis Obispo, Santa Barbara 468 200 \u2014 Ventura 599 \u2014 300 Los Angeles County 17,197 1,810 \u2014c San Bernardino 1,617 200 \u2014 Riverside 1,407 \u2014 600 Orange 2,500 200 \u2014 San Diego 3,133 500 \u2014 Imperial 466 \u2014 200 Los Angeles City \u2014 \u2014 \u2014c Lake, Mendocino 180 300 \u2014 Sonoma 268 \u2014 \u2014a Napa, Solano 426 \u2014 200 El Dorado 73 \u2014 \u2014b Stanislaus 607 200 \u2014 Merced 332 \u2014 200 Monterey 373 \u2014 200 Kern 830 \u2014 400 PSAs currently share a 200-slot MSSP site. The proposed expansion would serve 100 additional clients a in the Marin PSA. PSAs would share a 200-slot MSSP site. b Figures for the Los Angeles County PSA include data for the Los Angeles City PSA. c C – 28 Health and Social Services 1998-99 Analysis Figure 10 Proposed Expansion of Linkages Program Current and Proposed Full-time Service Slots Planning and Service Area Population Slots New Slots 60-Plus Current Proposed Del Norte, Humboldt 28,036 120 \u2014 Lassen, Modoc, Shasta, Siskiyou, Trinity 56,192 \u2014 151 Butte, Colusa, Glenn, Plumas, Tehama 73,601 \u2014 151 Nevada, Placer, Sacramento, Sierra, Sutter, Yolo, Yuba 297,630 \u2014 151 Marin 43,909 \u2014 151 San Francisco 143,907 110 \u2014 Contra Costa 150,067 \u2014 151 San Mateo 115,361 109 \u2014 Alameda 199,086 266 \u2014 Santa Clara 222,315 \u2014 151 San Joaquin 84,789 123 \u2014 Alpine, Amador, Calaveras, Mariposa, Tuolumne 38,376 \u2014 151 San Benito, Santa Cruz 40,851 \u2014 151 Fresno, Madera 132,748 \u2014 151 Kings, Tulare 65,288 \u2014 151 Inyo, Mono 5,890 \u2014 151 San Luis Obispo, Santa Barbara 113,427 \u2014 151 Ventura 101,761 \u2014 151 Los Angeles County 747,310 481 \u2014 San Bernardino 205,743 \u2014 151 Riverside 241,246 \u2014 151 Orange 376,659 \u2014 151 San Diego 412,207 138 \u2014 Imperial 18,409 \u2014 151 Los Angeles City 498,206 318 \u2014 Lake, Mendocino 33,630 158 \u2014 Sonoma 72,997 \u2014 151 Napa, Solano 74,934 \u2014 151 El Dorado 26,850 \u2014 151 Stanislaus 63,963 \u2014 151 Merced 26,477 \u2014 151 Monterey 50,442 135 \u2014 Kern 92,194 \u2014 151 Department of Aging C – 29 Legislative Analyst’s Office ports for each PSA (1) the size of the age 60-plus population, (2) the cur- rent distribution of Linkages slots, and (3) the proposed distribution of new slots. The figure shows that replicating the average existing site in new PSAs would give the tiny Inyo-Mono PSA a larger service capacity (that is, more Linkages slots) than more populated PSAs with existing Linkages sites, such as San Diego, San Mateo, and San Francisco. In addition, the figure shows that Inyo-Mono would have the same service capacity as larger PSAs receiving new Linkages sites, such as Orange, Fresno- Madera, and Santa Clara. Consequently, the proposed expansion of the Linkages Program would not match the distribution of service capacity with the need for services. Recommendation. Because the proposed expansion of CDA programs would not allocate new service capacity according to the need for ser- vices, we withhold recommendation on the budget proposal. Further, we recommend that the department develop, prior to the budget hearings, an allocation plan that would better align new service capacity with the need for services. Budget Does Not Reflect Savings From an Increase in Federal Funds We recommend a General Fund reduction of $125,000 in the amount proposed for the Multipurpose Senior Services Program because the budget does not reflect additional federal funds that the state will receive due to an increase in the federal share of costs of this program. (Reduce Item 4170-101-0001 by $125,000 and increase Item 4170-101-0890 by $125,000.) The Federal Medical Assistance Percentage (FMAP) determines the federal share of costs in the Medicaid Program (Medi-Cal in California) as well as certain other programs. The FMAP will increase from 51.23 percent to 51.55 percent beginning October 1, 1998. The federal share of costs in the MSSP program is based on the FMAP. The budget, however, does not reflect the change in the federal share of costs. We estimate that the additional federal funds would result in Gen- eral Fund savings of $125,000 in 1998-99. Accordingly, we recommend that the budget be amended to reflect these anticipated savings. C – 30 Health and Social Services 1998-99 Analysis DEPARTMENT OF ALCOHOL AND DRUG PROGRAMS (4200) The Department of Alcohol and Drug Programs (DADP) directs and coordinates the state’s efforts to prevent or minimize the effects of alcohol-related problems, narcotic addiction, and drug abuse. The depart- ment also serves as the coordinating agency for the California Mentor Initiative. The budget proposes $352 million from all funds for support of DADP programs in 1998-99, which is a decrease of 9.3 percent from estimated current-year expenditures. The budget proposes $82 million from the General Fund in 1998-99, which is a decrease of $6 million, or 7.4 percent, below estimated current-year expenditures. The decrease is primarily due to a one-time carryover of $25 million ($6 million General Fund) from 1996-97 to 1997-98. Budget Does Not Reflect Increase In Federal Medi-Cal Sharing Ratio We recommend a General Fund reduction of $317,000 in the Drug Medi-Cal program because the Department of Alcohol and Drug Pro- grams budget does not reflect the increased federal sharing ratio for Medi-Cal expenditures effective October 1, 1998. (Reduce Item 4200- 101-0001 by $280,000 and Item 4200-102-0001 by $37,000.) The DADP administers the Drug Medi-Cal (D\/MC) program, an op- tional benefit under the state Medi-Cal program. The Governor’s budget proposes expenditures of $64.7 million ($31.7 million from the General Fund for this program in 1998-99). However, the proposal does not take into account the increased federal sharing ratio for Medi-Cal services, from 51.23 to 51.55 percent, effective October 1, 1998. The effect of this change is to increase the amount of federal funds and reduce the amount of General Fund. Accordingly, we recommend that the budget be ad- justed to reflect the increase in federal funds. If this change is taken into Department of Alcohol and Drug Programs C – 31 Legislative Analyst’s Office account, General Fund expenditures would decrease by $317,000. C – 32 Health and Social Services 1998-99 Analysis DEPARTMENT OF HEALTH SERVICES STATE OPERATIONS (4260) The Department of Health Services (DHS) has four major responsibili- ties. First, it provides access to health care for low-income persons through the Medi-Cal Program. Second, it administers a broad range of public health programs in cooperation with local health agencies. Third, it licenses hospitals and certain other health facilities. Fourth, it functions as the state’s central agency for vital statistics. The budget proposes $666 million from all funds ($201 million from the General Fund) and 5,033 personnel-years of staff for DHS state opera- tions in 1998-99. Proposed General Fund spending represents an increase of 19 percent compared with estimated General Fund spending in the current year. Excluding a proposed new allocation of $25 million for ovarian and prostate cancer research, the budgeted growth in DHS state operations is 4.4 percent. Armed and Over Budget We recommend a General Fund reduction of $193,000 in the amount requested for the California Zero Fraud Tolerance Initiative because (1) large travel allotments are unnecessary, (2) additional border inspec- tors should be budgeted at the entry-level position classification, and (3) armed officers are not required to conduct eligibility verifications in hospitals, or computer database checks of aliens. (Reduce Item 4260-001-0001 by $193,000.) The budget requests a total of $1,725,000 ($863,000 from the General Fund) to add 19 new positions and make permanent three limited-term positions for the California Zero Fraud Tolerance Initiative. The proposal would add 12 new fraud investigators located at ports of entry along the Mexican Border and at major airports. These investigators work with the U.S. Immigration and Naturalization Service (INS) to identify aliens seeking to enter the state who are nonresidents and have fraudulently Department of Health Services C – 33 Legislative Analyst’s Office used Medi-Cal services in the past. Aliens who are so identified are re- ferred to the INS for possible exclusion. The budget also proposes to add seven new investigators to screen visa applicants for prior Medi-Cal use, verify residence of hospital patients, and consult in cases of document fraud. The budget also assumes that the new positions will result in $2.2 million of General Fund savings in 1998-99 (and indicates that the savings could potentially be greater) by preventing fraud. Proposed Investigator Positions. The budget request seeks to make three current limited-term airport investigator positions permanent and add the following new positions: Twelve positions (two supervisors and ten investigators) to pro- vide 24-hour coverage at two border crossings and enhance cover- age at four other crossings. Three limited-term positions to check the Medi-Cal eligibility data- base for past use of benefits by aliens applying for visas at U.S. embassies and consulates abroad. Three limited-term positions to be located at hospitals to verify residency of patients seeking care. One position to work with the department’s Office of Vital Records to handle fraudulent document referrals from the INS and other agencies. High Travel Needs Not Justified. The budget request includes a total of $208,000 ($104,000 General Fund) for travel, budgeted at the depart- ment’s heavy travel allotment of almost $11,000 annually for each of the new positions. The need for heavy travel, however, has not been justified. The border inspectors will be working regular shifts at permanent border crossings\u2014primarily in the San Diego metropolitan area. The new staff to handle foreign inquiries should not require any travel. Reducing travel to $2,000 per position would provide adequate funding for attending training and meetings and results in a General Fund savings of $83,000. Investigators. The department’s budget request does not justify the need to hire the new border and hospital investigators at the senior classi- fication. Budgeting these 13 positions at the entry level, Special Investiga- tor I class, saves $50,000 (General Fund). Peace Officers and Guns Unnecessary For Some Tasks. All of the re- quested new positions are armed peace officers. The budget provides guns, ammunition, and body armor for all of the new positions. While C – 34 Health and Social Services 1998-99 Analysis there may be some justification for using armed peace officers at the border crossings, where access is uncontrolled and criminal apprehen- sions are not uncommon, we question whether the other positions require armed peace officers. The need for armed inspectors to verify the resi- dence of hospital patients has not been explained. Furthermore, we fail to understand what threat requires arming investigators who will be run- ning computer checks on visa applicants who are overseas or who are consulting on document verification. Classifying these positions more appropriately as analysts saves $57,000 (General Fund), and an additional General Fund savings of $3,000 results from deleting ammunition, guns, and body armor requested for these seven positions. Filling Positions Would Generate Savings We recommend a General Fund augmentation of $1.1 million to fill 39.3 vacant positions in order to increase recoveries from third parties and reduce General Fund Medi-Cal costs by $4.8 million, for a net savings of $3.7 million. (Increase Item 4260-001-0001 by $1,090,000 and reduce Item 4260-101-0001 by $4,761,000.) The budget estimate includes General Fund cost increases of $1.4 million in 1997-98 and $4.8 million in 1998-99 to offset a loss of reve- nue from the recovery of Medi-Cal costs from estates, insurance compa- nies, and other third parties. The department indicates that the revenue loss results from its inability to fill 39.3 authorized, but vacant, positions due to budget constraints. The department advises that the General Fund cost of filling the positions would be $1,090,000 in 1998-99. Since filling the positions would result in a net General Fund savings of $3.7 million, leaving the positions vacant, rather than filling them, appears to constrain the budget. Accordingly, we recommend an augmentation in the depart- ment’s state operations budget to fund the vacant positions and a reduc- tion in the Medi-Cal local assistance budget to recognize the resulting third-party recoveries for a net savings of $3.7 million. Phantom Positions Undermine Legislative Oversight We recommend that the department present a staffing plan to the budget subcommittees that identifies and proposes to eliminate approxi- mately 500 vacant positions that the budget does not fund in 1998-99. The DHS budget requests 293 new authorized positions for 1998-99, raising the total number of authorized positions in the department to 5,832. The request for almost 300 new positions comes despite the fact that the department has 731 vacant positions in the current year. With the additional positions, the number of vacant positions will increase to 799 Department of Health Services C – 35 Legislative Analyst’s Office (13.7 percent of all authorized positions) in 1998-99, according to the budget, in order to meet the department’s salary savings requirement. All departments have some vacant positions due to normal personnel turnover and hiring delays, but generally these unavoidable vacancies are only about 5 percent of total positions (the statewide average is 4.9 percent). The high vacancy rate at DHS results from intentionally leaving positions vacant in order to live within the dollars provided in the budget. The discrepancy between positions and funding may result, in part, from the department’s failure to adjust its staffing levels after unallocated funding cuts made in previous years. Instead of identifying low-priority functions and eliminating those positions, the department has absorbed funding cuts by increasing its salary savings allotment (savings from position vacancies). As a result, the department’s staffing looks considerably more formidable on its organization chart than it is in reality. Budgeting such a high vacancy rate undermines the Legislature’s ability to effectively oversee the department’s programs because it weak- ens the Legislature’s oversight of the organization and staffing of the department. The programs or functions that are adversely affected by vacancies are determined by chance or by the preferences of department administrators, without giving the Legislature an effective means of reviewing these decisions. For this reason, we recommend that the de- partment develop and present to the budget subcommittees a revised staffing plan that identifies and proposes to eliminate approximately 500 vacant positions to reduce its salary savings requirement to 5 percent and eliminate forced vacancies. C – 36 Health and Social Services 1998-99 Analysis CALIFORNIA MEDICAL ASSISTANCE PROGRAM (MEDI-CAL) In California, the federal Medicaid Program is administered by the state as the California Medical Assistance (Medi-Cal) Program. This program provides health care services to welfare recipients and other qualified low-income persons (primarily families with children and the aged, blind, or disabled). Expenditures for medical benefits are shared about equally by the General Fund and by federal funds. The Medi-Cal budget also includes additional federal funding for (1) disproportionate share hospital (DSH) payments, which provide additional funds to hospi- tals that serve a disproportionate number of Medi-Cal or other low-in- come patients and (2) matching funds for state and local funds in other related programs. At the state level, the Department of Health Services (DHS) adminis- ters the Medi-Cal Program. Other state agencies, including the California Medical Assistance Commission (CMAC), the Department of Social Ser- vices (DSS), the Department of Mental Health, the Department of Devel- opmental Services, and the Department of Alcohol and Drug Programs receive Medi-Cal funding from DHS for eligible services that they provide to Medi-Cal beneficiaries. At the local level, county welfare departments determine the eligibility of applicants for Medi-Cal and are reimbursed by DHS for the cost of those activities. The federal Health Care Financing Administration (HCFA) oversees the program to ensure compliance with federal law. Proposed Spending. The budget for DHS proposes Medi-Cal expendi- tures totaling $18.7 billion from all funds for state operations and local assistance in 1998-99. The General Fund portion of this spending ($6.9 billion) increases by a relatively small amount ($41.6 million or 0.6 percent) compared with estimated General Fund spending in the current year. The spending total for the Medi-Cal budget includes an estimated $2.8 billion (federal funds and local matching funds) for pay- ments to DSH hospitals, and about $1.4 billion of federal funds to match California Medical Assistance Program C – 37 Legislative Analyst’s Office state and local funds budgeted elsewhere for programs operated by other departments, by counties, or by the University of California. Including these other state and local funds, total proposed Medicaid spending in California would be about $20.1 billion in 1998-99. MEDI-CAL BENEFITS AND ELIGIBILITY What Benefits Does Medi-Cal Provide? Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nursing care, doctor visits, laboratory tests and X-rays, family planning, and regular examinations for children under the age of 21. California also has chosen to offer 32 optional services, such as outpatient drugs and dental care, for which the federal government provides matching funds. Certain Medi-Cal services\u2014such as hospitalization in many circumstances\u2014 require prior authorization from DHS as medically necessary in order to qualify for payment. How Medi-Cal Works About two-thirds of the Medi-Cal caseload consists of participants in the state’s two major welfare programs, which include Medi-Cal coverage in their package of benefits. These programs are (1) the California Work Opportunity and Responsibility to Kids (CalWORKs) Program, which provides assistance to families with children and replaces the former Aid to Families with Dependent Children (AFDC) Program, and (2) the Sup- plemental Security Income\/State Supplementary Program (SSI\/SSP), which assists elderly, blind, or disabled persons. Counties administer the CalWORKs Program and county welfare offices determine eligibility for CalWORKs benefits and Medi-Cal coverage concurrently. Counties also determine Medi-Cal eligibility for persons who are not eligible for (or do not wish) welfare benefits. The federal Social Security Administration determines eligibility for SSI\/SSP, and the state automatically adds SSI\/SSP beneficiaries to the Medi-Cal rolls. Generally, persons who have been determined eligible for Medi-Cal benefits (Medi-Cal eligibles ) receive a Medi-Cal card, which they may use to obtain services from providers who agree to accept Medi-Cal pa- tients. Medi-Cal uses two basic types of arrangements for health care\u2014fee-for-service and managed care. Fee-for-Service. This is the traditional arrangement for health care in which providers are paid for each examination, procedure, or other ser- vice that they furnish. Beneficiaries may obtain services from any pro- C – 38 Health and Social Services 1998-99 Analysis vider who has agreed to accept Medi-Cal payments. The Medi-Cal Pro- gram employs a variety of utilization control techniques (such as re- quiring prior authorization for some services) designed to avoid costs for medically unnecessary or duplicative services. Managed Care. Prepaid health plans generally provide managed care. The plans receive monthly capitation payments from the Medi-Cal Program for each enrollee in return for providing all of the covered care needed by those enrollees. These plans are similar to health plans offered by many public and private employers. By the end of 1998-99, DHS ex- pects to have just over half (2.5 million) of the projected 4.9 million Medi- Cal eligibles enrolled in managed care organizations. Beneficiaries in managed care choose a plan and then must use providers in that plan for most services. Since payments to the plan do not vary with the amount of service provided, there is much less need for utilization control by the state. Instead, plans must be monitored to ensure that they provide ade- quate care to enrollees. Who Is Eligible for Medi-Cal? Almost all Medi-Cal eligibles fall into two broad groups of people. They either are aged, blind, or disabled or they are in families with chil- dren. More than two-thirds of Medi-Cal eligibles are welfare recipients. Figure 11 shows for each of the major Medi-Cal eligibility categories the maximum income limit in order to be eligible for benefits, and the esti- mated caseload and total benefit costs for 1997-98. The figure also indi- cates for each category whether an asset limit applies and whether eligible persons with incomes over the limit can participate on a spend-down basis. If spend-down is allowed, then Medi-Cal will pay the portion of any qualifying medical expenses that exceed the person’s share of cost, which is the amount by which that person’s income exceeds the applica- ble Medi-Cal income limit. Aged, Blind or Disabled Persons. About 1.3 million low-income per- sons who are (1) at least 65 years old or (2) disabled or blind persons of any age receive Medi-Cal coverage. Overall, the disabled make up more than half (61 percent) of this portion of the Medi-Cal caseload. Most of the aged, blind or disabled persons on Medi-Cal (85 percent) are recipients of SSI\/SSP welfare benefits and receive Medi-Cal coverage automatically. The other aged, blind or disabled eligibles are in the medically needy category. They also have low incomes, but do not qualify for, or choose not to participate in, the SSI\/SSP Program. For example, aged low-income noncitizens generally may not apply for SSI\/SSP (although they may California Medical Assistance Program C – 39 Legislative Analyst’s Office Figure 11 Who is Eligible for Medi-Cal? Major Eligibility Categories 1997-98 Maximum Annual Monthly Asset Spend- Benefit Income Limit Down Enrollees Costs Or Grants Imposed? Allowed? (Thousands) (Millions)a b c Aged, Blind, or Disabled Persons Welfare (SSI\/SSP) $1,156 \ufffd \u2014 1,103 $5,417 Medically needy 934 \ufffd \ufffd 112 876 Medically needy\u2014long Special term care limits \ufffd \ufffd 69 2,177 Families, Pregnant Women, Children Single-parent or unemployed families Welfare (CalWORKs) $1,014 \ufffd \u2014 2,582 $3,017d Medically needy 1,190 \ufffd \ufffd 436 724 Any women or children Pregnant women 200 percent of poverty \u2014pregnancy services $2,765 \u2014 \u2014 92 $336 Medically indigent\u2014 all services 1,190 \ufffd \ufffd 11 95 Children 200 percent of poverty\u2014infants $2,765 \u2014 \u2014 40 \u2014e 133 percent of pov- erty\u2014ages 1 through 5 1,869 \u2014 \u2014 93 $56f 100 percent poverty\u2014 ages 6 through 18 1,428 \u2014 \u2014 38 21f f Medically indigent\u2014 ages 0 through 21 $1,190 \ufffd \ufffd 278 $371 Emergency-Only Illegal immigrants and nonimmigrant aliens who qualify in any eligibil- ity group are limited to emergency services (including labor and deliv- ery and long-term care). 235 $509 Amounts are for aged or disabled couple (blind slightly more) or for a four-person family with children (including a $90 work a expense disregard). Indicates whether persons with higher incomes may receive benefits on a share-of-costs basis. b Combined state and federal cost. c Income limit to apply for CalWORKs (including a $90 work expense disregard). After going on aid, the income limit increase to d $1,355 (family of four) with the maximum earned income disregard. costs included in amount for 200 percent of poverty pregnant women group. e Reflects changes made by Chapter 624, Statutes of 1997 (SB 903, Lee), which are scheduled to take effect in March 1998. f C – 40 Health and Social Services 1998-99 Analysis continue on SSI\/SSP if they already were in the program as of August 22, 1996). As another example, about one-fifth of the medically needy persons in this category have incomes above the Medi-Cal limit and participate on a share-of-cost basis. The number of Medi-Cal eligibles in long-term care is small, only 69,000 people or 1.3 percent of the total caseload; but because long-term care is very expensive, benefit costs for this group total $2.2 billion, or 16 percent of total Medi-Cal benefit costs. About half of the aged or disabled Medi-Cal eligibles also have health coverage under the federal Medicare Program. Medi-Cal generally pays the Medicare premiums, deductibles and any co-payments for these dual beneficiaries, and Medi-Cal pays for services not covered by Medicare, such as drugs and long-term care. Medi-Cal also provides some limited assistance to a small number of Medicare eligibles who have incomes somewhat higher than the medically needy standard. Families. About half of all Medi-Cal eligibles are CalWORKs welfare recipients in single-parent or unemployed families, who automatically receive Medi-Cal coverage. Although CalWORKs recipients constitute the largest group of Medi-Cal eligibles by far, they account for only 22 percent of total Medi-Cal benefit costs. This is because almost all CalWORKs recipients are children or nondisabled working-age adults, who generally are relatively healthy. Single-parent or unemployed families who are not in CalWORKs also may enroll in Medi-Cal in the medically needy family category. Medi-Cal covers both the adults and the children in these families. The income and asset limits for medically needy families are somewhat higher than for CalWORKs applicants. Qualifying families with higher incomes also may participate in the medically needy category on a share-of-cost basis. Women and Children. Medi-Cal includes a number of additional eligi- bility categories for pregnant women and for children. Women and chil- dren in these categories may be in any type of family, including working, two-parent families. Medi-Cal covers all health care services for poor pregnant women in the medically indigent category, which has the same income and asset limits and spend-down provisions as apply to medically needy families. However, pregnancy-related care is covered with no share of cost for women up to 200 percent of poverty (an annual income of $33,180 for a family of four, including a $90 monthly work expense disre- gard). The medically indigent category also covers children and young adults through age 20. Several special categories provide coverage without a California Medical Assistance Program C – 41 Legislative Analyst’s Office share of cost or an asset limit to children in families with higher in- comes\u2014200 percent of poverty for infants, 133 percent of poverty for children ages 1 through 5, and 100 percent of poverty for children ages 6 through 18. Chapter 624, Statutes of 1997 (SB 903, Lee) extends the 100- percent-of-poverty group to ages 14 through 18 and eliminates the asset limit for poverty-group children. The budget indicates that these changes will be implemented in March 1998. Emergency-Only Medi-Cal. Noncitizens who are illegal immigrants or who are not here as immigrants (such as tourists or students) may apply for Medi-Cal coverage in any of the regular categories (except those linked to welfare). However, benefits are restricted to emergency care (including labor and delivery). Existing coverage for prenatal care (a state-only program) was scheduled to end in February 1998, according to the Governor’s budget, pursuant to restrictions placed on services to nonqualified aliens as a result of the federal welfare reform legislation of 1996. However, DHS now indicates that the termination of prenatal ser- vices has been delayed until March 1998 due to litigation. Nonemergency long-term care continues to be provided until various legal issues are resolved, according to the budget. MEDI-CAL EXPENDITURES Figure 12 (see next page) presents a summary of Medi-Cal General Fund expenditures in the DHS budget for the past, current, and budget years. The budget estimates that the 1997-98 General Fund share of Medi-Cal benefit costs will be $119.4 million (1.8 percent) less than in 1996-97 and that there will be a slight additional reduction of $15.3 million in 1998-99. These reductions in General Fund benefit costs primarily result from declines in the CalWORKs-related portion of the Medi-Cal caseload and from a modest increase in the federal medical assistance percentage (FMAP) for California, which is the federal share of Medi-Cal benefit costs. Increases in the cost and utilization of health care services, however, offset some of these savings and moderate the spending decline for bene- fits. The budget projects that total Medi-Cal local assistance costs from the General Fund will increase by $39.5 million (0.6 percent) in 1998-99. This is because increased costs for county administration and for debt service payments more than offset the slight decline in projected spending on benefits. C – 42 Health and Social Services 1998-99 Analysis Figure 12 Medi-Cal General Fund Budget Summary Department of Health Servicesa 1996-97 Through 1998-99 (Dollars in Millions) Actual Estimated Proposed 1996-97 1997-98 1998-99 Amount Percent Change From 1997-98 Support (state operations) $64.6 $66.2 $68.2 $2.0 3.1% Local Assistance Benefits $6,474.9 $6,355.5 $6,340.1 -$15.3 -0.2% County administration (eligibility) 312.2 317.6 349.9 32.3 10.2 Fiscal intermediaries (claims processing) 41.5 72.5 72.2 -0.3 -0.5 Hospital construction debt service 9.6 34.6 57.5 22.8 66.0 Subtotals, local assistance ($6,838.3) ($6,780.1) ($6,819.7) ($39.5) (0.6%) Totals $6,902.9 $6,846.4 $6,887.9 $41.6 0.6% Excludes General Fund Medi-Cal spending budgeted in other departments. a 1997-98 Budget Savings The estimated General Fund costs for Medi-Cal benefits in the current year will be $238 million less than the amount appropriated in the 1997-98 Budget Act. Caseload\u2014$199 Million Savings. The major reason for the savings in the current year is that the budget’s caseload estimate is 3.3 percent (173,300 eligibles) less than the amount assumed in the 1997-98 budget appropriation. The lower caseload results in estimated General Fund savings of $199.4 million. The biggest adjustment is for CalWORKs eligibles (a reduction of 75,300 from the 1997-98 budget assumption). CalWORKs-linked eligibles now are estimated to decline by 8.4 percent in the current year (a decline of 236,000 from 1996-97). The more rapid decline in CalWORKs eligibles results in about $44 million of savings compared with the budget appropriation. However, there are even larger caseload-related savings in other eligibility groups. A reduction of about 27,000 disabled eligibles (versus the 1997-98 budget assumptions) results in about $100 million of savings. There also has been a steeper than antici- California Medical Assistance Program C – 43 Legislative Analyst’s Office pated decline in the number of illegal immigrants on Medi-Cal, which will save about $40 million. Rate Increases\u2014$60.8 Million Cost. The current-year estimate includes General Fund increases of $38.3 million to increase managed-care rates by 6.4 percent (effective October 1997) and an additional $22.5 million in- crease in nursing home rates to include the ripple effect of the mini- mum wage increase on wages of higher-paid employees. Prenatal Elimination Delayed\u2014$22.4 Million Cost. The administra- tion assumes the elimination of prenatal care for illegal immigrant women on February 1, 1998, rather than in October 1997 as the 1997-98 budget assumed. This results in increased costs of $22.4 million. Costs will in- crease by an additional $6.2 million, however, due to a further one-month delay resulting from recent litigation, as noted earlier in this analysis. Estimate Uncertainty Adjustment\u2014$110 Million Reduction. On a net basis, the cost increases identified above and other smaller changes offset about $72 million of the estimated caseload savings. The budget, however, includes an additional downward General Fund adjustment of $109.6 million to the Medi-Cal estimate in the current year (and $133 million in 1998-99). This adjustment represents a 2 percent reduction to the midrange cost estimate produced by the DHS Medi-Cal forecasting model. According to DHS, the adjustment is warranted by (1) more recent drops in the CalWORKs caseload that were not reflected in the data used to prepare the budget forecast and (2) potential distortions in the fee-for- service cost trends in the model that result from the current shift of eligibles to managed care. The department also notes that it believes that its Medi-Cal estimating model has a variance of plus or minus 4 percent, based on the accuracy range of other large economic models; and that the budget adjustment reduces the estimate by half of this variance range. Budget Year Although proposed General Fund spending for Medi-Cal stays rela- tively flat in 1998-99, there are a number of General Fund spending changes and assumptions within the budget. Caseload and FMAP Savings Offset by Cost\/Utilization Growth. Total Medi-Cal eligibles are projected to decline by 148,000 (2.9 percent) in 1998-99, resulting in a General Fund savings of about $102 million. An increase in the FMAP for California saves an additional $65.8 million (the FMAP will be 51.55 percent by October 1998). These savings, however, are almost entirely offset by underlying increases in the cost of health care services and in the rate of utilization of these services, which increase General Fund spending by approximately $165 million. C – 44 Health and Social Services 1998-99 Analysis Uncertainty Adjustment\u2014$133 Million Reduction. The 1998-99 budget projection includes an estimate uncertainty adjustment of $133 million, similar to the current-year adjustment described above. Termination of Prenatal Benefits\u2014$43.7 Million Savings. Full-year savings from eliminating prenatal care for illegal immigrants reduces General Fund spending by an additional $43.7 million compared with the current year. Healthy Families\u2014$20.6 Million Increase. The Legislature and Gover- nor recently enacted a new Healthy Families Program, which expands health coverage for children. The Medi-Cal changes associated with this new program include (1) providing one month of continued eligibility for children who otherwise would lose Medi-Cal eligibility in order to allow for transfers to the Healthy Families insurance program, (2) extending Medi-Cal coverage to children ages 14 through 18 in families with in- comes up to 100 percent of poverty, and (3) eliminating the asset limita- tion for children who apply for Medi-Cal. The budget increase also pro- vides a total of $5 million from the General Fund for Medi-Cal outreach activities. Most of the Healthy Families-related General Fund spending is budgeted to receive an enhanced federal match of about 2-to-1. Developmental Services Case Management\u2014$17 Million Increase. Proposed Medi-Cal spending includes an additional $17 million for trans- fer to the Department of Developmental Services for increased case man- agement services. Full-Scope Benefits for New Legal Immigrants\u2014$14.9 Million In- crease. This increase reflects the full-year cost of providing full-scope Medi-Cal coverage to qualifying recently-arrived legal immigrants. The federal government will share in the costs only for emergency services. Nonemergency services are being provided on a state-only basis starting December 1997. Hearing Screens for Newborns\u2014$1.3 Million Increase. The budget proposes to require hearing screens for newborns as part of the Gover- nor’s Early Childhood Prevention Initiative. The budget estimates that 30 percent of Medi-Cal babies will be screened in 1998-99. Hospital Debt Service\u2014$22.8 Million Increase. This increase reflects the anticipated completion of several major construction projects for hospitals with a significant proportion of Medi-Cal patients, for which the state has previously agreed to share in the repayment of construction debt. County Administration\u2014$32.3 Million Increase. The budget includes an increase of $17.9 million in county administration costs for caseload California Medical Assistance Program C – 45 Legislative Analyst’s Office growth (subject to later revision for caseload trends). An additional in- crease of $7.8 million funds the full-year cost of administering a new Medi-Cal eligibility category that was created by the federal welfare reform legislation. Finally, allocating a portion of the cost of eligibility determinations for CalWORKs applicants to the Medi-Cal Program re- sults in an increase of $7.7 million in the Medi-Cal budget, but results in an overall savings in state funds due to reductions reflected in the CalWORKs Program. Some Potential Costs Not Included in the Budget. The January budget includes no funding for any rate increases for nursing homes or for man- aged care organizations in 1998-99. The current-year General Fund cost of these rate increases totals about $70 million (these costs usually are added in the May Revision). The budget also does not include any fund- ing to pay San Diego County’s mandate reimbursement claim for $15.2 million for health care costs for medically indigent adults. The basis for the county’s claim was affirmed by the California Supreme Court, which also set aside a lower court award to the county and remanded the claim to the Commission on State Mandates to determine the amount of any reimbursement to the county. The commission expects to adjudicate the claim this summer. MEDI-CAL SPENDING AND CASELOAD TRENDS Medi-Cal spending and caseloads grew rapidly in the early 1990s, driven by two general trends. First, caseloads grew rapidly in response to the recession and higher unemployment, which increased dependence on public assistance programs, and because of federal eligibility expan- sions. Second, California (like other states at the time) was able to use the Medicaid program as a mechanism to obtain additional federal funds to offset or augment state and local spending for indigent care and other health-related programs. Spending Trends Figure 13 (see next page) shows trends in the total amount of Medi-Cal local assistance spending by DHS and the composition of that spending from 1991-92 through 1998-99 (as proposed). Total spending has in- creased by 59 percent over this period. The percentage increase in General Fund spending has been somewhat smaller\u201442 percent\u2014while the per- centage increase in federal spending has been larger\u201469 percent\u2014than the average growth. As a result, the General Fund share of DHS Medi-Cal spending has declined from 41 percent in 1991-92 to 37 percent currently. This trend towards a greater use of federal funds reflects the following Figure 13 Federal Funds for Medi-Cal Have Grown Rapidly 1991-92 Through 1998-99 (In Billions) 5 10 15 $20 92-93 94-95 96-97 98-99 Federal funds Local transfers General Fund C – 46 Health and Social Services 1998-99 Analysis factors: Disproportionate Share Hospital Payments. The SB 855\” and SB 1255\” programs have doubled in size. These programs provide additional financial assistance to DSH hospitals, which serve large numbers of Medi-Cal and indigent patients. Hospital payments under these programs consist of local funds transferred to the state by county hospitals, and then allocated back to public and non- profit DSH hospitals along with federal matching funds. The state currently retains $155 million of the local transfer funds annually to help offset General Fund Medi-Cal costs. These DSH hospital payments (including the state’s offset) have grown from about $1.6 billion in 1991-92 to about $3.1 billion in the current year (ap- proximately half local transfers and half federal funds). Federal Match for Additional State Programs. In 1992-93, the state amended its Medicaid Plan so as to make most of the In-Home Supportive Services (IHSS) Program (administered by the Depart- ment of Social Services) eligible for federal matching funds as Medi-Cal personal care services. The federal match for this pro- gram is included in Medi-Cal spending ($442 million in the current year), but the DSS budget contains the state funding for the pro- California Medical Assistance Program C – 47 Legislative Analyst’s Office gram. Medi-Cal spending in the current year and 1998-99 also includes $58 million of federal matching funds for clinical teaching support and medical education at University of California hospi- tals. Federal Match for Local Services. During the period shown in Figure 14, annual spending from federal funds has increased by about $180 million to provide matching payments to counties and school districts for their costs of administration, case management, and services to Medi-Cal eligibles in a variety of qualifying local programs. Medi-Cal spending also includes federal funding for the Los Angeles County Medicaid Demonstration Project ($147 million in the current year)\u2014a five-year federal waiver program that pro- vides additional federal funding to stabilize the county’s health care system. Caseload Declines Change Case Mix During the five-year period from 1991-92 through 1996-97, General Fund spending for Medi-Cal local assistance increased at an average annual rate of 9.2 percent. This period of rapid growth has halted. The budget estimates that Medi-Cal General Fund spending will decline by $58 million, or 1 percent, in 1997-98 and projects that spending in 1998-99 will be essentially flat (an increase of 0.6 percent). The earlier rapid growth in General Fund spending was largely driven by a rapid increase in the Medi-Cal caseload, as shown in Figure 14 (see next page). The most important reason for the end of rapid spending growth is that the Medi-Cal caseload is now declining. The budget esti- mates that the number of Medi-Cal eligibles will fall by 4.8 percent in the current year and projects an additional decline of 2.9 percent in 1998-99. Essentially all of this decline is due to large reductions in the CalWORKs- related portion of the Medi-Cal caseload, which the budget estimates will decline by an estimated 8.4 percent in 1997-98 and by 6.5 percent in 1998-99. The total number of Medi-Cal eligibles in other categories re- mains almost constant. Figure 14 also illustrates why spending remains roughly flat, despite the significant caseload reductions in the budget. The cost of services per Medi-Cal eligible continues to rise\u2014offsetting the caseload savings. Most of the increase in the cost per eligible results from increases in medical care costs caused by inflation, new and more expensive technologies and drugs, and increased use of services. A significant portion of the projected increase in the cost per Medi-Cal eligible, however, results from a shift to a more expensive caseload mix, as shown in Figure 15. Figure 14 Medi-Cal Caseload Falls But Cost Per Eligible Still Grows 1989-90 Through 1998-99 Annual Cost Per Eligible Eligibles In Millions Eligibles (left axis) Cost per Eligible (right axis) C – 48 Health and Social Services 1998-99 Analysis The average cost per eligible for the aged and disabled Medi-Cal case- load (including those in long-term care) is more than four-and-a-half times greater than the average cost per eligible for families and children on Medi-Cal (most of whom are CalWORKs beneficiaries). Because the number of aged and disabled Medi-Cal eligibles is holding steady, while the number of families and children on Medi-Cal declines, a gradual shift to a more expensive mix of eligibles is occurring. Figure 15 shows that the budget estimates that the average cost per eligible will grow by 4.8 percent in 1998-99, compared with the current year. We estimate that one-third of this increase is due to the change in case mix, so that the growth in the cost of Medi-Cal services with a constant case mix would be 3.2 percent. California Medical Assistance Program C – 49 Legislative Analyst’s Office Figure 15 Medi-Cal Program Changing Case Mix Increases Cost Per Eligible 1998-99 Eligibility Category (Thousands) From 1997-98 Amount From 1997-98 Eligibles Cost Per Eligible Number Percent Change Percent Change Disabled 801 -0.6% $ 6,980 4.0% Aged 489 \u2014 $ 6,497 2.3 Families and children 3,656 -6.2 $ 1,387 2.8 Totals 4,947 -2.9% $ 2,799 4.8% Cost per eligible\u2014percent change with constant case mix 3.2% THE MEDI-CAL ESTIMATE Medi-Cal Estimate Includes Adjustments for Shift to Managed Care The Medi-Cal budget estimate has been reduced by $14.9 million in 1997-98 and $93.9 million in 1998-99 (about half General Fund) in order to correct for distortions in the department’s forecasting model caused by the shift to managed care. We find that these adjustments are appropriate in concept and do not seem unreasonable in size. We will review the specific methodology for these adjustments as part of our overall review of the Medi-Cal estimate for the May Revision. Reporting Requirement. The 1997-98 Budget Act directed our office to report on the effect of the increasing number of Medi-Cal eligibles en- rolled in managed care on the DHS Medi-Cal estimating process. We also were directed to identify any methodology issues that require further study and refinement to ensure the accuracy of the Medi-Cal estimate. In enacting the 1997-98 budget, the Legislature reduced the depart- ment’s Medi-Cal cost estimate by $64 million from the General Fund. The Legislature took this action based on our finding that the ongoing shift of Medi-Cal eligibles to managed care was distorting the cost trends used in the DHS Medi-Cal estimating model, resulting in an overestimate. The reason for the department’s overestimate was that the model depended primarily on fee-for-service cost trends, which were overstated because the model did not adjust for the effect of the shift of generally less costly C – 50 Health and Social Services 1998-99 Analysis persons into managed care. The DHS Has Revised Its Methodology. The Medi-Cal estimate in the 1998-99 Governor’s Budget incorporates two adjustments intended to correct the upward bias discussed above. First, the estimate budgets the cost of persons shifting to managed care at the managed care rates, rather than at projected average fee-for-service costs, which are higher. This adjustment reduces the estimate by $14.9 million and $18.9 million in 1997-98 and 1998-99, respectively (about half General Fund). The second adjustment reduces the 1998-99 estimate by an additional $75 million (about half General Fund). This adjustment reduces the cost of the re- maining fee-for-service eligibles. Legislative Analyst’s Office Initial Assessment. Our preliminary review of the department’s adjustments to the Medi-Cal estimating model suggests that they appear to be appropriate. They seem to correct for distortions in the model caused by the current shift to managed care. Also, the magnitude of the proposed adjustments does not appear unrea- sonable. However, we did not have an opportunity to review the adjust- ments or the methodology behind them prior to the release of the budget, and the department has not yet provided us with its calculations for the adjustments. We will evaluate them as part of our overall review of the Medi-Cal estimate for the May Revision of the budget, as discussed in our next finding. Savings From Uncertainty Adjustments Appear Arbitrary The Medi-Cal budget estimate includes General Fund savings of $109.6 million in 1997-98 and $133 million in 1998-99 as a result of global adjustments that reduce expenditures 2 percent below the department’s mid-range estimate. These adjustments, unlike the managed care adjust- ments, appear arbitrary. Consequently, we recommend excluding these savings at this time, for the Legislature’s budget planning purposes. In addition to the specific adjustments for the shift to managed care discussed above, the Medi-Cal estimate also includes General Fund sav- ings that result from global adjustments that reduce the department’s mid-point cost projections for Medi-Cal benefits by 2 percent. The depart- ment believes that its Medi-Cal estimating model has a range of uncer- tainty of plus or minus 4 percent. The adjustments represent half of this range, on the minus side. The department indicates that the global adjust- ments are warranted by recent continued caseload drops and because of the uncertain impacts of the shift to managed care on cost trends for fee- for-service Medi-Cal eligibles. Although we raised concerns about overestimates in the Medi-Cal California Medical Assistance Program C – 51 Legislative Analyst’s Office model last year, the current downward adjustments for uncertainty ap- pear to be arbitrary. As we discussed in our previous finding, the budget estimate already includes two specific adjustments intended to correct trend distortions caused by the shift to managed care. Furthermore, the most recent caseload data appear to be consistent with the budget’s Medi- Cal caseload projections. At this time, we believe that the most prudent course is to exclude these adjustments from the budget estimate, which would increase esti- mated General Fund spending in the budget for Medi-Cal by a cumula- tive total of $242.6 million in 1997-98 and 1998-99. For the May Revision, we will provide the Legislature with a specific recommendation on ad- justments to the updated Medi-Cal estimate, based on a more detailed evaluation of the department’s methodology and using the most recent available caseload and expenditure information. County Administration Estimate\u2014 Caseload Growth Funding Unnecessary We recommend reducing the proposed appropriation for Medi-Cal county administration by $16.7 million from the General Fund in 1998-99, and recognizing a current-year savings of $9.4 million, because these amounts have been budgeted for caseload growth which the department’s Medi-Cal estimate indicates will not occur. (Reduce Item 4260-101-0001 by $16,700,000). The budget includes a total of $18.9 million ($9.4 million General Fund) in the current year and $35.8 million ($17.9 million General Fund) in 1998-99 for county Medi-Cal administrative functions related to caseload growth for beneficiaries who are not on welfare. (Most county administra- tion costs for welfare recipients are included in the Department of Social Services’ budget). The funding for caseload increases would cover admin- istrative costs for an additional 62,806 average monthly nonwelfare Medi- Cal eligibles in 1997-98 and a further increase of 58,674 eligibles in 1998-99. The county administration estimate is based on a straight-line projection of administrative workload trends over the last five years, during which caseloads generally increased. This estimate is made inde- pendently from the Medi-Cal caseload estimate. Based on our review, however, we conclude that the department’s proposal is overbudgeted because it does not reflect recent and projected trends in the nonwelfare Medi-Cal caseload. Specifically, the nonwelfare portion of the Medi-Cal caseload has been essentially flat for the last year, and the Medi-Cal caseload estimate projects that the size of this group will remain almost constant through 1998-99 (while the caseload on wel- C – 52 Health and Social Services 1998-99 Analysis fare declines). Because it is a linear trend, the county administration workload projection continues to assume caseload growth that is no longer occurring. There will be some additional county Medi-Cal work- load as more welfare recipients find jobs and shift to transitional Medi- Cal categories that provide temporary continued coverage. However, the budget separately includes an additional $5.1 million (state and federal) for this purpose in 1998-99. Based on the Medi-Cal caseload estimate, no caseload adjustment for county administration is necessary in the current year, and only $2.4 million ($1.2 million General Fund) will be needed in 1998-99. Ac- cordingly, we recommend reducing the current-year General Fund spending estimate by $9.4 million and reducing the 1998-99 General Fund budget request by $16.7 million. EXPANDING MEDI-CAL COVERAGE FOR POOR WORKING FAMILIES Welfare reform efforts at both the state and federal levels have made moving welfare recipients off of welfare and into jobs a priority. The combination of this welfare-to-work emphasis and the opportunities provided by the strong economic and job growth that California currently is experiencing have resulted in a significant reduction in the number of families on welfare (CalWORKs). The number of families in CalWORKs (formerly AFDC) has dropped by roughly 170,000, or almost 20 percent, compared with the peak caseload in 1994-95. The decline is expected to continue through 1998-99. Health Coverage for Families That Are Not on Welfare. Most low- income working families do not have access to affordable employer- sponsored health coverage (particularly for dependents). State and federal policies have been adopted to maintain health coverage for families that leave welfare for work, and to make it available for working poor fami- lies. These policies stem from a desire to (1) protect and improve the health of poor families\u2014especially children\u2014and (2) eliminate the incen- tive to be on welfare in order to receive health coverage. Working poor families may obtain free or subsidized health coverage in a number of Medi-Cal categories or in several other state programs, including the following: Medi-Cal Medically Needy Families. Single-parent or unemployed families who are not in CalWORKs, but who meet (or slightly exceed) CalWORKs entrance limits on income and assets can get Medi-Cal coverage for both parents and children at no cost, or with California Medical Assistance Program C – 53 Legislative Analyst’s Office a share of cost if their incomes are somewhat higher. Coverage for Children and Pregnant Women. The Medi-Cal medi- cally indigent and poverty group programs provide no-cost coverage for pregnant women and infants up to 200 percent of the poverty level and for children in families with incomes under 133 percent of poverty (ages 1 through 5) or 100 percent of poverty (ages 6 through 18). The Access for Infants and Mothers (AIM) program offers subsidized coverage for pregnant women and infants with family incomes between 200 percent and 300 percent of poverty. This summer, the new Healthy Families Program will begin offering low-cost health coverage for children through age 18 in families with incomes up to 200 percent of poverty, but above the Medi-Cal income limits. Transitional Medi-Cal. Families that leave CalWORKs because of increased earnings (or child support payments or marriage) are entitled to six months of continued Medi-Cal coverage for parents and children at no cost, regardless of their income, and an addi- tional six months of coverage if their income is below 185 percent of poverty. These programs currently provide health coverage for almost one million Californians. Transitional Medi-Cal Because transitional Medi-Cal coverage directly helps those leaving welfare for work, such coverage has taken on more importance in the context of welfare reform. 1997-98 Budget Legislation Expands Transitional Medi-Cal. The 1997-98 budget trailer bill for health services (Chapter 294, Statutes of 1997 [SB 391, Solis]) includes a number of provisions to expand eligibility for, and increase participation in, transitional Medi-Cal coverage as out- lined below: Waiver for Second Year of Coverage. The DHS must apply for a federal waiver to increase the time limit for transitional Medi-Cal benefits to two years from the current limit of one year. This exten- sion originally was authorized by the 1996-97 budget trailer bill for health services (Chapter 197, Statutes of 1996 [AB 3483, Fried- man]). C – 54 Health and Social Services 1998-99 Analysis Transitional Benefits for Welfare Look-Alike Families. By May 1998, families on Medi-Cal-only \u2014that is, they are not on welfare but would meet the requirements for getting on aid\u2014must be informed that they may be eligible for transitional Medi-Cal cover- age, and provided with an opportunity to claim transitional bene- fits when their incomes increase. Outreach and Education. The DHS must implement community outreach and education efforts to inform families about Medi-Cal generally and to make the availability of transitional coverage known to families who are on Medi-Cal. Monitoring and Evaluation. The department must monitor partici- pation rates in transitional Medi-Cal and contract for an independ- ent evaluation to be completed by January 1, 2001. The 1997-98 Budget Act provided $1.5 million ($138,000 General Fund) to improve outreach and simplify the eligibility process for transitional Medi-Cal. The Governor’s budget proposes to continue this funding in 1998-99. Are Transitional Medi-Cal Participation Rates Too Low? We recommend that the department report during budget hearings on (1) the reasons for the apparent low participation rate in Medi-Cal tran- sitional coverage, (2) the number of eligible families that do not partici- pate and lack other health coverage, and (3) its progress in improving the administration of the transitional Medi-Cal program and related out- reach and education efforts. Participation Rates. Relatively few of the families who leave the CalWORKs rolls participate in the transitional Medi-Cal program. Based on DHS caseload data, we estimate that less than 10 percent of those leaving the welfare rolls participate in the initial six months of transitional coverage. Of those who do enroll in the initial six-month transitional period, about 40 percent go on to participate in the second six-month period of coverage. As of September 1997, enrollment in transitional coverage was about 60,000 for the first six-month period and about 20,000 for the second six-month period. Although participation rates remain low, enrollment in the transitional categories has grown rapidly over the last year, increasing by 31 percent between September 1996 and September 1997. Benefit Costs. Not only do relatively few of those leaving welfare use transitional coverage, but those that do participate use less expensive health services and\/or use them less often. Specifically, the department California Medical Assistance Program C – 55 Legislative Analyst’s Office estimates that the average annual cost per eligible in the transitional coverage programs is $518, which is about half of the average annual Medi-Cal benefit cost for CalWORKs recipients. Factors Underlying the Low Participation Rate. The apparent low participation rate in transitional coverage is somewhat misleading be- cause many of those who leave the welfare rolls are not eligible for transi- tional coverage. Frequently, people are terminated from welfare because they have stopped filing required reports. And of these, some (perhaps a substantial number) have not filed due to a temporary disruption in their lives, such as moving to another county, and soon return to the welfare rolls (and automatic Medi-Cal coverage) after the disruption is over. A DSS analysis of AFDC enrollment found that about a third of those leaving welfare returned to the rolls within six months. Other per- sons leave the state’s welfare rolls on a more permanent basis, but not because of increased earnings. For example, they may move to another state or receive help from their family so that they no longer need welfare. Usually, county eligibility workers do not immediately know why families stop reporting, and need additional information to redetermine Medi-Cal eligibility. Pending redetermination, these families are placed in a temporary continuing Medi-Cal category (called the Edwards v. Kizer category, after a court decision), generally for one month. Based on the information that they provide, these families then are placed in transi- tional Medi-Cal or in another Medi-Cal category if they (or their children) are eligible. If, however, the family cannot be located or does not provide information, their Medi-Cal eligibility ends, and their potential eligibility for transitional coverage remains unknown. For the reasons discussed above, the meaning of the apparent low participation rate (and low cost of care) in transitional Medi-Cal is un- clear. It may indicate serious shortcomings in education and outreach or that the eligibility redetermination process needs to be changed. On the other hand, it may be that most people who go off welfare do not qualify for transitional Medi-Cal and there is no need for fundamental changes in existing practice. Likewise, the low cost of transitional benefits may indicate that beneficiaries are not able to access adequate care, or it may indicate that they need less care (because women returning to work may delay childbearing, for example). We believe that a number of approaches could be used to gain a better understanding of participation rates for transitional Medi-Cal and deter- mine the need for program changes. For example, DHS and DSS could analyze recent caseload data to better estimate how many of those who leave CalWORKs return to welfare or to another Medi-Cal eligibility C – 56 Health and Social Services 1998-99 Analysis category in a short time; DHS and the counties could perform follow-up interviews with a sample of former welfare recipients; and DHS could survey clinics and community organizations. Accordingly, we recom- mend that DHS report at the time of budget hearings on the extent to which qualified families are using transitional Medi-Cal; the department’s use of the funding provided in the 1997-98 Budget Act, and progress to date in carrying out the outreach, education, and monitoring and evalua- tion improvements mandated in Chapter 294; and any program changes needed to improve the transitional Medi-Cal program. Additional Year of Transitional Medi-Cal in Doubt We withhold recommendation on $2.6 million ($1.2 million General Fund) proposed to fund extended Medi-Cal transitional benefits (up to two years) pending the outcome of discussions between the Department of Health Services and the Health Care Financing Administration to obtain a federal waiver necessary to implement the additional coverage. The budget proposes $2,563,000 ($1,281,500 General Fund) for the cost of providing extended transitional Medi-Cal benefits in 1998-99. Under the extended benefit, the state would provide transitional Medi-Cal for up to two years, rather than the current one-year limit. Federal Medicaid law limits transitional benefits to a maximum of one year, but federal law also allows HCFA to issue waivers of many Medicaid requirements, including the one-year limit, to enable states to expand coverage. Waivers, however, require a finding of budget neutrality\u2014that is, the waiver must not in- crease federal costs compared with projected spending under existing law. State law (Chapter 294) makes extended transitional coverage contin- gent on federal approval. Chapter 197, which originally authorized the extension of transitional coverage, was enacted in July 1996\u2014a month prior to passage of federal welfare reform. When Chapter 197 was enacted, the offsetting federal savings required to gain a waiver for extending transitional Medi-Cal were to have come from reduced AFDC costs that would result because continued health coverage would help low-income working families stay off welfare. California, however, did not submit a formal waiver request until after enactment of federal welfare reform in August 1996, which replaced the federal matching funds in the AFDC program with the TANF block grant. As a result of this change to a block grant, the state cannot claim federal savings from reducing the CalWORKs caseload. The state’s initial waiver request was rejected by HCFA in July 1997. The DHS currently is seeking HCFA approval for a modified waiver to allow the state to provide an additional year of transitional coverage to California Medical Assistance Program C – 57 Legislative Analyst’s Office determine if their subsequent use of Medi-Cal services over a five-year period is less than for families that received only one year of transitional coverage prior to the waiver. Accordingly, we withhold recommendation, pending the outcome of those discussions. New Medi-Cal Coverage for Welfare Look-Alikes The 1996 federal welfare reform legislation eliminated the previous automatic ( categorical ) link between welfare and Medicaid that had existed under the former AFDC Program. Instead, families that receive welfare assistance under the new TANF Program must separately meet Medicaid eligibility criteria in order to qualify for health coverage. Welfare Reform Created New 1931(b) Eligibility Category. In order to ensure that health coverage would remain at least as accessible to poor families after welfare reform as it was under the former AFDC categorical linkage, Congress created a new class of Medicaid eligibles under Section 1931 of Title XIX of the Social Security Act (the Medicaid law). Section 1931(b) requires states to grant automatic (categorical) Medicaid eligibil- ity to anyone who would have met the AFDC requirements in place in that state on July 16, 1996. This guarantees continued Medicaid eligibility to welfare look-alikes, people who would have met the former AFDC rules, regardless of whether states choose to be more restrictive in their TANF welfare programs. States Can Use 1931(b) Category to Retain Link Between Welfare and Medicaid. The federal welfare reform legislation gave states flexibility in Section 1931(b) to revise the July 16 requirements by adopting more liberal income or resource standards (or, alternatively, reduce the income standard down to its level on May 1, 1988). The legislation also allows states to continue Medicaid coverage expansions authorized under previ- ously granted AFDC waivers. This flexibility generally allows states to retain automatic Medicaid coverage for TANF welfare recipients even if their TANF eligibility criteria are more liberal than their former AFDC eligibility criteria. States can do so by adopting 1931(b) criteria that are no more restrictive than their TANF requirements, so that all of their TANF welfare recipients automatically become eligible for Medicaid under Section 1931(b). Section 1931(b) eligibility, however, is not limited to welfare recipients. Anyone who qualifies is eligible for Medi-Cal, regardless of whether they are on welfare or not. The CalWORKs Program Linked to Medi-Cal Through 1931(b) Re- quirement. The legislation establishing the CalWORKs Program\u2014 C – 58 Health and Social Services 1998-99 Analysis Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy)\u2014requires the state to exercise its option under federal law to increase its 1931(b) income and resource standards to the new CalWORKs levels. (The maximum earned income disregard after going on aid and the asset limit both are higher under CalWORKs than under the state’s July 1996 AFDC rules.) Increasing the 1931(b) income and asset standards to the CalWORKs amounts\u2014 CalWORKs confor- mity \u2014ensures that all CalWORKs recipients will automatically qualify for Medi-Cal. Because of 1931(b) requirements, however, families that meet the CalWORKs requirements now are eligible for Medi-Cal regard- less of whether or not they are on welfare. Medi-Cal Eligibility for Poor Families Expands Under 1931(b). There are four ways in which Section 1931 can expand Medi-Cal eligibility beyond the current Medi-Cal Medically Needy Program for poor working families who are not on welfare: Higher Earnings Disregards. The state can adopt income disre- gards for 1931(b) eligibility that are equal to or greater than the CalWORKs maximum income levels. The medically needy income limit ($1,190 per month for a family of four) is higher than the maximum income to apply for a welfare grant ($1,014). Once on aid, however, families qualify for earned income disregards that allow them to continue on aid with monthly incomes up to $1,355. Under CalWORKs conformity, families whose incomes initially are low enough to get on welfare would remain eligible for Medi-Cal as their incomes rise, up to the maximum CalWORKs level. More Liberal Asset Limits. The state could choose to adopt more liberal asset limits for 1931(b) eligibles than those used in the CalWORKs Program. For example, the 1931(b) limits could incor- porate the more liberal features of the Medically Needy asset lim- its. Combining the two asset limits or adopting more liberal limits also would simplify eligibility determination and provide more equitable treatment of similar families. Waiver of 100-Hour Rule. To qualify as unemployed, the princi- pal earner in a two-parent family may not work more than 100 hours per month. California obtained a federal waiver of this limit for families in the AFDC program (after they have initially quali- fied for aid) in order to encourage work participation (CalWORKs continues this policy). The Medically Needy Program, however, retained the 100-hour rule. Section 1931(d) allows states to con- tinue former AFDC waivers for the purpose of determining Medicaid 1931(b) eligibility. The DHS has notified HCFA that the California Medical Assistance Program C – 59 Legislative Analyst’s Office state intends to exercise this option in order to enable unemployed two-parent families who return to work to remain on Medi-Cal (if they meet the income and asset limits). Transitional Medi-Cal. Previously, only families that had been on aid could qualify for extended coverage under transitional Medi- Cal (when their earning exceeded welfare limits). Under Section 1931(b), however, families that have not been on welfare also are eligible for transitional coverage. Plan Needed for Implementing Medi-Cal Eligibility Under Section 1931(b) We recommend that the Department of Health Services develop, prior to budget hearings, a specific proposal and cost estimate for fully imple- menting Section 1931(b) Medi-Cal eligibility expansion and coordinating 1931(b) eligibility with the current medically needy and transitional Medi-Cal eligibility categories. We present some issues for the Legisla- ture to consider in evaluating this proposal. The Governor’s budget does not address the eligibility expansions authorized under Section 1931(b) that we have discussed above. For example, the Medi-Cal budget estimate does not include any additional benefit costs due to increased eligibility for transitional Medi-Cal or potentially greater earnings disregards that may result from eligibility expansions under Section 1931(b). Furthermore, the budget proposal to increase county administration funding for 1931(b) determinations (dis- cussed in the next recommendation in this section) is fundamentally flawed. Finally, the administration does not address coordination of 1931(b) eligibility with eligibility under the existing Medically Needy category, and does not indicate how 1931(b) eligibility will be monitored and linked with transitional Medi-Cal eligibility. Prior to budget hearings, the department should develop a specific and comprehensive proposal and cost estimate for implementing Section 1931(b) Medi-Cal eligibility. Figure 16 (see next page) summarizes issues that we have identified and that should be addressed in the plan and indicates potential options for the state. C – 60 Health and Social Services 1998-99 Analysis Figure 16 Issues and Options for Implementing Section 1931(b) Medi-Cal Eligibility Comparison With Existing CalWORKs and Medi-Cal Medically Needy Programs CalWORKs Medically Needy Eligibility Issues\/Options Medi-Cal Section 1931(b) Monthly Income Limit (Examples for family of four) Options $1,014 to apply $1,190\u2014no difference be- Allow CalWORKs earned in- $1,355 after entry with maxi- tween entry level and ongoing come disregard after initial en- mum earned amount rollment (minimum) income disregard Allow CalWORKs earned in- come disregard at time of initial enrollment and ongoing Increase income disregards above CalWORKs levels Issues Availability of options depends on HCFA interpretation of fed- eral law and waivers A single income limit is easier to understand and to administer Single limit with CalWORKs disregard eliminates need for separate Medically Needy limit (except for share-of-cost cases) Higher income limit will in- crease eligibility, but also in- crease state costs Asset Limits Options $2,000 ($3,000 if over age $3,300 Use CalWORKs limits (mini- 60) Home, household items, and mum) Home, household items, and personal effects are exempt Combine: add more liberal personal effects are exempt First vehicle is exempt, equity Medically Needy limits\u2014first Vehicles in other vehicles counts vehicle always exempt and Generally value of each against limit $3,300 limit vehicle over $4,650 counts Increase asset limit above against limit $3,300 Exempt if used for business or disabled persons After entry, $5,000 allowed in restricted account for educa- tion, home purchase, or busi- ness start-up Continued California Medical Assistance Program C – 61 CalWORKs Medically Needy Eligibility Issues\/Options Medi-Cal Section 1931(b) Legislative Analyst’s Office Asset Limits Issues Combined asset limit allows use of single standard and in- cludes all Medically Needy whose incomes meet 1931(b) limits Higher limits allow more tempo- rarily poor families to participate without depleting their assets or savings Unemployment Test for Two-Parent Families Options Less than 100 hours of work Less than 100 hours of work Adopt CalWORKs waiver of per month at entry (main per month 100-hour limit after entry earner) No limit on work hours after entry Issues Availability of options depends on HCFA interpretation of fed- eral law and waivers. 100-hour waiver allows poor working families to remain on Medi-Cal without using their limited transitional coverage Adopting 100-hour waiver sim- plifies administration and re- porting, but will increase benefit costs Linkage and Access to Transitional Medi-Cal Coverage Options Allow children and pregnant women who remain in the poverty groups or Medically Indigent cate- gory to qualify for transitional Medi-Cal if they met the 1931(b) requirements for the necessary pe- riod of time. Issues Can 1931(b) income or asset limits be higher than for CalWORKs without eliminating eligibility for transitional Medi-Cal under federal law? Requiring counties to monitor status of other Medi-Cal eligibles for 1931(b) eligibility would in- crease awareness and use of coverage that it provides for parents and for transitional Medi-Cal, but would increase administrative costs and impose additional reporting burdens on beneficiaries. C – 62 Health and Social Services 1998-99 Analysis Augmentation for 1931(b) Eligibility Determinations Not Justified We recommend a General Fund reduction of $15.6 million in 1998-99 and a reduction of $7.8 million in estimated 1997-98 spending for addi- tional county eligibility determinations because the new workload will substitute for existing workload. (Reduce Item 4260-101-0001 by $15,630,400). The budget proposes an increase of $62.5 million in 1998-99 ($15.6 million General Fund and $46.9 million federal funds) to cover additional county administration costs for (1) determining Section 1931(b) eligibility for families and children applying for Medi-Cal (other than those also applying for welfare) and (2) monitoring ongoing cases with respect to 1931(b) eligibility. The budget also estimates that the counties will require an additional $31.3 million ($7.8 million General Fund and $23.5 million federal funds) in the current year for these tasks. Federal funds would be provided at a three-to-one matching ratio from California’s share of a special allocation provided to help states cover added administrative costs to implement Section 1931 Medicaid eligibility provisions. This proposal would use $70.4 million of California’s total share of $83 million from the special allocation. After the $83 million is exhausted, the federal share of these costs will revert to the regular 50 percent share for Medicaid administrative costs. The budget assumes that making 1931(b) eligibility determinations will add an average of 30 minutes per intake and 5 minutes per month for each continuing Medi-Cal case involving children. The budget proposal indicates that these 1931(b) screenings are needed to determine whether Medi-Cal recipients will be eligible for transitional coverage if they be- come employed, and to notify beneficiaries of this eligibility. New Determinations Will Substitute for Existing Workload. Cur- rently, county eligibility workers generally first screen families applying for Medi-Cal to determine whether they qualify for medically needy coverage for both parents and children. Families that exceed the medi- cally needy income or asset limits, or who are working two-parent fami- lies, then are evaluated for eligibility under the medically indigent or poverty-level programs, which cover only children or pregnant women. The new 1931(b) income and asset limits for Medi-Cal intakes (which are the same as the CalWORKs application limits) are somewhat less than the medically needy limits. To accommodate this new category, families should first be evaluated for 1931(b) eligibility. Most families that cur- rently fall into the medically needy category probably will qualify in the California Medical Assistance Program C – 63 Legislative Analyst’s Office 1931(b) category instead, and those that do not will be evaluated for other categories in the same manner as done currently. Thus, the 1931(b) deter- mination will simply substitute for the current medically needy determi- nation in most cases. We also note that screening for 1931(b) eligibility will not be feasible for children and pregnant women who use the new simplified mail-in application process authorized by Chapter 624, Statutes of 1997 (SB 903, Lee) because those forms will not include information about assets. For the reasons discussed above, additional funding for 1931(b) eligi- bility determinations is unnecessary. Accordingly, we recommend delet- ing the proposed augmentation and reducing the associated current-year expenditures. LONG-TERM CARE Department Plans New Payment Approach for Nursing Homes We recommend that the Department of Health Services report at bud- get hearings on its plans for revising payments to long-term-care facili- ties. In the current year and 1998-99, the Medi-Cal budget includes about $37 million annually from the General Fund for the 1997-98 rate increase for long-term-care facilities that was effective on August 1, 1997. How- ever, the budget does not include any funding for a 1998 rate increase. Existing law requires DHS to audit nursing homes in order to deter- mine their costs and to adjust rates annually in August to reflect those costs. This process conformed with the Boren Amendment provision of federal law, which required Medi-Cal rates for long-term care facilities to be sufficient to cover the costs of efficiently and economically operated facilities. Congress repealed the Boren Amendment in the Balanced Budget Act of 1997, however, so the state no longer is bound to provide cost-based rates to long-term care facilities. The budget indicates that DHS will convene interested parties to con- sider alternatives to the current rate-setting mechanism for 1998-99 and subsequent years. We note, in this respect, that we have previously rec- ommended that the state contract for Medi-Cal nursing facility services through the California Medical Assistance Commission (CMAC), as the state does for hospital inpatient services, in order to obtain the best rates and ensure adequate capacity for Medi-Cal patients (please see our Analy- sis of the 1996-97 Budget Bill, p. C-44). C – 64 Health and Social Services 1998-99 Analysis Because long-term care is a major Medi-Cal expense and a critical service on which many elderly and disabled people depend, we recom- mend that the department report at budget hearings on its plans for revising the way in which nursing home payments are determined. Finally, we note that the Legislature directed DHS in the 1997-98 Bud- get Act to report on the feasibility of using regional clearinghouses to facilitate the transfer of Medi-Cal patients from hospitals to nursing homes. The department indicates that it currently is in the process of completing this report. Public Health C – 65 Legislative Analyst’s Office PUBLIC HEALTH The Department of Health Services administers a broad range of public health programs. Some of these programs complement and support the activities of local health agencies in controlling environmental hazards, preventing and controlling disease, and providing health services to populations who have special needs. Other programs are solely state- operated programs such as those which license health facilities. The Governor’s budget proposes $1.8 billion (all funds) for public health local assistance. This represents an increase of $72 million, or 3.9 percent, over estimated current-year expenditures. The budget pro- poses $332 million from the General Fund, which is less than 1 percent above estimated current-year expenditures. Proposition 99 We recommend (1) deletion of three of the proposed eight new posi- tions in the department because they are not justified by workload in- creases, and (2) redirection of the $286,000 in savings to the Proposition 99 media campaign. Proposition 99, the Tobacco Tax and Health Protection Act of 1988, established a surtax on cigarettes and tobacco products. The proposition provides that the revenues from the surtax are to be distributed to six accounts within the Cigarette and Tobacco Products Surtax Fund (C&T Fund), according to specified percentages, and further provides that expenditures from each account must be for specific kinds of activities. Budget Proposal. The Governor’s budget proposes expenditures of $469.6 million from the C&T Fund in 1998-99, which is a reduction of $131.4 million, or 22 percent, from estimated expenditures in the current year. This decrease can be attributed primarily to a significant increase in current-year spending in the Health Education and Research accounts, generally due to the accumulation of relatively large balances in these accounts. Major changes proposed for 1998-99 include: C – 66 Health and Social Services 1998-99 Analysis $61.5 million reduction in research by the University of California. $45.9 million reduction in health education programs administered by the Department of Health Services (DHS), and a $12.1 million reduction in health education programs administered by the State Department of Education. $10.7 million reduction in the California Healthcare for Indigents Program (CHIP), which provides funds for county indigent health care. $8.7 million increase for the Breast Cancer Early Detection Pro- gram. $4.5 million reduction for clinic grants. The budget plan also reflects reserves in excess of the standard 2 percent in two accounts\u2014Health Education ($32.5 million) and Research ($7 million), pending clarification of a recent California Supreme Court decision regarding the distribution of funds from these accounts. New Positions Requested. The budget also proposes to establish eight new positions in the DHS, at a cost of $636,000 from the C&T Fund. This would be funded by a redirection of funds from the media campaign and the evaluation component. The department indicates that these positions are needed to accom- plish the following: Provide leadership, coordination, and guidance to the local pro- grams that have been implemented at the local level (for example, by enabling the department to conduct site visits). Implement new and innovative activities, including activities to address the use of spit tobacco and cigars by youth and young adults, the tobacco industry’s sponsorship of sporting events and concerts, and the entertainment industry’s use of tobacco products in movies and television. Deal with the increasing number and complexity of legal issues associated with tobacco control. Recommendation. The department’s Tobacco Control Section currently has 33 positions, so the budget proposal represents a significant increase in departmental staff. Nevertheless, it is difficult to assess the potential Public Health C – 67 Legislative Analyst’s Office benefits of activities such as increased technical assistance to local agen- cies and the proposed new initiatives against the benefits of maintaining the funding levels for the media campaign and evaluation activities. With respect to three of the proposed positions, however, we believe the de- partment has provided insufficient justification: one Public Health Medi- cal Officer III, who would be the Section Chief; one Office Technician to provide clerical support for the Section Chief; and one Staff Counsel III to deal with tobacco litigation. The department indicates that it is requesting a new position to assume the duties of the Section Chief because currently there is no chief of the section. Consequently, managers of the two major units in the section report directly to the Cancer Control Branch Chief. We note that the absence of a Section Chief is by choice of the depart- ment. The department currently has four Health Manager positions in the Tobacco Control Section, more than enough to manage the two major units in the section and have a Section Chief. Thus, we suggest that the department reorganize the section if it places a priority on establishing a Section Chief position rather than retain the current configuration. The department indicates that the new legal counsel position is needed to deal with the increasing number of legal issues dealing with tobacco control. As one reason, the department cites the state’s lawsuit against tobacco companies. We note, however, that the budget includes a separate proposal for 21 positions in DHS (including five staff counsels) and 121.4 positions (34 attorneys) in the Department of Justice specifically for activi- ties related to this lawsuit. The department also cites a pending lawsuit that could generate work- load in the budget year. We note, however, that the state has been in- volved in several major lawsuits related to Proposition 99 during the past several years and we see no indication that workload related to such litigation will increase in the budget year. Thus, we believe that the de- partment’s Office of Legal Affairs\u2014currently staffed with 59 attor- neys\u2014will be able to handle the workload without the new position. In summary, we recommend deletion of these three positions, and redirection of the $286,000 in savings to the Proposition 99 media cam- paign which has generally been regarded as one of the more successful components of the program. C – 68 Health and Social Services 1998-99 Analysis Family Education Proposal\u2014Redirecting Funds to Existing Program Would Increase Chances of Success We recommend redirecting the proposed $2.6 million General Fund augmentation to establish an early childhood family education (parenting) program into the department’s existing Adolescent Family Life Program because the latter program has a similar function, is tar- geted to a high-risk group, has been shown to be effective, and is not fully funded to meet its need. The budget proposes $2,606,000 from the General Fund for local assis- tance and $544,000 ($294,000 General Fund) for six new positions in the Department of Health Services (DHS) to establish an early childhood family education program. The new program would award grants, rang- ing from $50,000 to $100,000 each, to local organizations to support from 27 to 54 projects designed to educate parents of children up to age three regarding appropriate parent-child interactions to ensure optimal social, mental, and emotional development. The department lists the following examples of the type of activities that could be funded: Training and overseeing of volunteers to provide home visits and follow-up telephone calls to parents at their request. A parent center as a location where parents will bring children, learn about parenting, and relate to other parents. Parenting classes. Providing a source of referral for parenting classes or other com- munity services. Providing a source of information by providing or lending pam- phlets, books, or videos on parenting. The department also indicates that an unspecified amount of the funds allocated to local assistance would be used to contract for a toll-free tele- phone line that would respond to questions concerning child develop- ment. Related Programs. We note that several existing programs provide information and support services related to parenting of young children. These programs, many of which are targeted to particular populations, include the Preschool, Head Start, Healthy Start, and School-Age Parent and Infant Development programs in the State Department of Education, the Early Start program in the Department of Developmental Services, the Early Mental Health Initiative and the Children’s System of Care program in the Department of Mental Health, the Cal Learn program in the De- partment of Social Services, and the Child Health and Disability Preven- Public Health C – 69 Legislative Analyst’s Office tion program, the California Children Services program, the Women, Infants, and Children program, and the Adolescent Family Life Program in the Department of Health Services. Generally, these programs are targeted to specific populations, often in high-risk categories. Thus, it could be argued that there is a need for a program that could serve persons not eligible to participate in any of the existing ones. We note, however, that the proposal is not structured so as to avoid potential duplication of effort. We further note that parents have a variety of sources of information (family physicians, for example) on issues related to parenting. Redirect Funds to Expand Existing Programs. We have no analytical basis for determining the cost-effectiveness of the proposal. We do not believe, however, that the administration has justified the establishment of a new program that, potentially, would duplicate the efforts of at least some of the existing programs. Instead, we think that it would make more sense to expand programs that have already been shown to be effective. There are several existing state programs that fall into this category\u2014for example, the Adolescent Family Life Program (AFLP) and the Women, Infants, and Children program in DHS and the Children’s System of Care program in the Department of Mental Health. Because the AFLP comes closer to the budget proposal with respect to its focus (parenting) and the general age group of the children, we recommend redirecting the pro- posed augmentation to this program. The AFLP provides case management for pregnant and parenting teens, and is therefore targeted to a high-risk population. According to the department, it is not funded to fully meet its need. The department esti- mates that it would need over $25 million to serve all eligible persons who are not otherwise served by the Cal Learn program (a similar pro- gram in the Department of Social Services) and who would elect to partic- ipate in the program. Evaluations have indicated that the program is effective. Rather than establish a new program, with additional funds for admin- istration and with no basis for predicting effectiveness, we recommend redirecting the proposed $2.9 million in General Fund monies to expand the AFLP. Redirecting the funds proposed for the new program into this existing program would increase the likelihood that these funds will be used in a cost-effective manner. C – 70 Health and Social Services 1998-99 Analysis Childhood Lead Poisoning Prevention Program We recommend deleting the nine new positions proposed for the Child- hood Lead Poisoning Prevention Program because the budget also pro- poses to eliminate the program’s salary savings requirement, which would permit the department to fill nine positions that the department has been holding vacant. We further recommend eliminating two existing positions because their duties would be assumed by a new contract pro- posed in the budget. These recommendations would result in a savings of $786,000 to the Childhood Lead Poisoning Prevention Fund in 1998-99. (Reduce Item 4260-001-0080 by $786,000.) The budget proposes an increase of $3.2 million in the current year (federal funds) and $11.1 million in the budget year ($6.5 million from the Childhood Lead Poisoning Prevention (CLPP) Fund and $4.6 million federal funds) for the Childhood Lead Poisoning Prevention Program. The CLPP Fund is supported by industry fees (primarily manufacturers of certain products containing lead). New Positions. The amount proposed for the budget year includes funding for nine new positions. The department indicates that the intent is to restore nine of the 14 positions that were eliminated in 1996-97 when support for the program was temporarily shifted to the General Fund, pending the outcome of a court case related to the use of the fees in the CLPP Fund. The budget is requesting the new positions on the basis that they are needed to rebuild the core program at the state and local lev- els. More specifically, the positions would conduct various activities such as program monitoring, fiscal oversight, policy development, and technical support of local programs. As part of the supporting materials accompanying the budget pro- posal, the department documented the workload increase that would justify nine positions. We note, however, that the proposal also includes an augmentation of $364,000 to eliminate the program’s salary savings requirement. This will have the effect of permitting the department to fill nine positions that the department has been holding vacant. These posi- tions are generally equivalent to the new positions requested in the bud- get, and any differences can be reconciled through position reclassifications at no additional cost. Consequently, we recommend approval of the salary savings relief proposal and rejection of the nine new positions, for a savings of $616,000 to the CLPP Fund. Contract Services. The budget also proposes approximately $200,000 to contract for laboratory services. According to the department, these services currently comprise a major part of the workload of three posi- tions in the program. The department intends to redirect these existing Public Health C – 71 Legislative Analyst’s Office positions entirely to the core program, but has not justified the need to do so. Accordingly, we recommend deletion of two of the three positions (roughly equivalent to the redirection of staff resources) whose duties would be assumed under the contract, for a savings of $170,000 to the CLPP Fund. Summary. In total, we recommend deletion of 11 positions, for a sav- ings of $786,000 to the CLPP Fund. In conjunction with other components of the budget proposal, our recommendation would provide sufficient resources to address the additional workload documented by the depart- ment. Administration Renews Request to Implement Federal Abstinence Education Program The budget proposes $7.2 million in federal funds to implement the federal abstinence education program. We comment on the proposal and related research. Budget Proposal. The budget proposes to spend $7.2 million in federal Title V Abstinence Education Project Grant funds in order to implement an abstinence education program in 1998-99. This would be a competitive grant program, administered by six new positions in the Department of Health Services (DHS). The required matching funds (75 percent of the federal grant) would be provided by grantees. The proposal would in- clude an independent evaluation, although no specific amount is set aside for this activity. Pursuant to the authorizing federal statute, abstinence education is defined as an educational or motivational program which: Has as its exclusive purpose, teaching the social, psychological, and health gains to be realized by abstaining from sexual activity. Teaches abstinence from sexual activity outside marriage as the expected standard for all school age children. Teaches that abstinence from sexual activity is the only certain way to avoid out-of-wedlock pregnancy, sexually transmitted diseases, and other associated health problems. Teaches that a mutually faithful monogamous relationship in the context of marriage is the expected standard of human sexual activity. Teaches that sexual activity outside of the context of marriage is likely to have harmful psychological and physical effects. C – 72 Health and Social Services 1998-99 Analysis Teaches that bearing children out-of-wedlock is likely to have harmful consequences for the child, the child’s parents, and soci- ety. Teaches young people how to reject sexual advances and how alcohol and drug use increases vulnerability to sexual advances. Teaches the importance of attaining self-sufficiency before engag- ing in sexual activity. According to the department, projects may incorporate any or all of these elements, as long as they are abstinence-only programs and do not incorporate any elements not listed in the federal definition. Similar Proposal Rejected Last Year. Last year, the administration advanced a similar proposal through an amendment letter to the 1997-98 budget, requesting $4.3 million in federal funds. This proposal was re- jected by the Legislature. In order to meet the July 15, 1997 federal appli- cation deadline, however, the DHS applied for the initial grant in July and the state was awarded $5.8 million in November 1997. These funds are included in the $7.2 million proposed for expenditure in 1998-99. State Funded Teen Pregnancy Prevention Programs in California. One version of an abstinence education program\u2014the Education Now and Babies Later (ENABL) program\u2014was implemented in California in 1992. The program’s focus was on adolescents ages 12 to 14, and emphasized the postponement of sexual activity by helping adolescents resist pres- sures to become sexually active. The curriculum in the classroom compo- nent of the program was based on a program developed in Georgia, which was evaluated as being effective. The evaluation of the ENABL program, however, found that the classroom component did not have any effect; and the administration terminated the program in February 1996. In the 1996-97 Budget Act, in response to a proposal by the Governor, the Legislature appropriated $20 million to establish the Challenge Grants program to fund local teen pregnancy prevention projects, which could include abstinence components or strategies. The current-year budget also appropriated $20 million for the program, and the budget proposes $20 million for 1998-99. The department indicates that of 328 grants awarded as of January 1998, 89 included abstinence as a strategy and two included abstinence-only strategies. Finally, we note that Chapter 311, Statutes of 1995 (SB 1170, Lockyer) established a teenage pregnancy prevention grant program in the State Department of Education. The budget proposes $10 million to continue the program in 1998-99. Public Health C – 73 Legislative Analyst’s Office Research on Teen Pregnancy Prevention Programs. To provide a brief summary of the research, we relied on a review of the literature submit- ted by Philliber Research Associates to the Centers for Disease Control in December 1995. Thus, we caution that it does not encompass any evalua- tions reported during the past two years. The authors made the following points with respect to the research on teen pregnancy prevention pro- grams generally and, more specifically, abstinence education: Relatively few teen pregnancy prevention programs have been subject to rigorous evaluations. Possibly for this reason, few pro- grams have been found with clearly demonstrated impacts on teen pregnancy prevention. Most programs have shown only modest impacts on behavior. No single intervention will work for all teens, or will last throughout the adolescent years. The most successful programs include a wide variety of ap- proaches to preventing teen pregnancy, including information giving, skills building, group support, service provision, and life options building. There is no evidence that programs directed only toward absti- nence can prevent teen pregnancy. The most successful abstinence programs delay the onset of sexual intercourse for only a few months. Conclusion. The administration indicates that its proposal has gener- ated considerable interest at the local level. Furthermore, it would be implemented at no cost to the General Fund. On the other hand, the research, while limited, suggests that an abstinence-only approach is not likely to be effective. In this respect, we note that both of the existing state programs for teen pregnancy prevention grants (described above) may include abstinence education but are not restricted to an abstinence-only approach as would be required by the program under which the federal funds are offered. Should the Legislature decide to adopt the budget proposal, we sug- gest that sufficient funding be set aside to ensure that the program has a strong evaluation component. C – 74 Health and Social Services 1998-99 Analysis Funding Alternatives Available for Emerging Infectious Diseases and Food Safety Programs We recommend deleting the 13 new positions proposed for the Emerg- ing Infectious Diseases program and instead reducing the department’s salary savings requirement by $573,000 so the department can fill 12 vacant positions, for a net General Fund savings of $178,000. These 12 positions would be available for the Emerging Infectious Diseases program. (Reduce Item 4260-001-0001 by $178,000.) We further recommend enactment of legislation to establish an indus- try fee to support the proposed Food Safety program, for a General Fund savings of $828,000. (Reduce Item 4260-001-0001 by $828,000 and increase Item 4260-001-0177 by $828,000.) The budget proposes $3,109,000 from the General Fund to expand the department’s activities to address (1) emerging infectious diseases and (2) food safety. The proposal would add 20 new positions, and an addi- tional 10.5 positions through contract funds. According to the department, the augmentation is designed to (1) control outbreaks and prevent the spread of emerging infectious dis- eases; (2) expand infectious disease surveillance activities to include emerging infections; (3) improve laboratory diagnostic methods for these emerging disease threats; (4) educate health care providers, policy mak- ers, industries, and at-risk communities about emerging infectious disease prevention and control; and (5) prioritize food safety and food borne illness prevention by addressing raw and minimally processed food production practices and retail food safety. The department has several core infectious disease and food safety programs, under the administration of the Communicable Disease Con- trol (CDC) Division and the Food and Drug Division. These divisions consist of several branches and laboratories, including the following that would be augmented under the proposal: the Disease Investigations and Surveillance Branch (20 positions currently), the Microbial Diseases Labo- ratory (56 positions), the Viral and Rickettsial Diseases Laboratory (50 positions), and the Food and Drug Branch (131 positions). Emerging Infectious Diseases Program. Because of the size of the CDC Division, the department has some flexibility to respond to emerging infectious diseases by redirecting resources. In fact, the department ac- knowledges that, to some extent, it has been able to do this but has ne- glected its ongoing tasks with respect to existing or traditional infectious diseases. The department points out that between 1987-88 and 1996-97, the number of authorized positions in its diagnostic laboratory, infectious disease epidemiology, surveillance, and investigation programs de- Public Health C – 75 Legislative Analyst’s Office creased by 12 percent, while the number of reportable infectious diseases increased by over 60 percent; and the number of reported cases of com- municable diseases\u2014excluding sexually transmitted diseases, tuberculo- sis, and vaccine-preventable infections\u2014increased by more than 25 percent. While it is difficult to determine the exact number of new positions that are needed, we believe that some increase is warranted. We note, how- ever, that the department currently has 38 vacant positions ($1.5 million) in its CDC Division, most of which are being held vacant to meet the department’s relatively high salary savings requirement of about 13 percent (see our analysis of Department of Health Services State Oper- ations). Consequently, rather than add 13 new positions to the division, we recommend reducing the department’s salary savings requirement by an amount sufficient to fill 12 vacant positions in the CDC Division, which correspond generally to 12 of the 13 positions requested. (If neces- sary, the department can request position reclassifications to align the positions more closely with the duties assigned.) This would result in a net General Fund savings of $110,000 in salaries\u2014a savings of $683,000 for the proposed 13 new positions offset by a cost of $573,000 to reduce the salary savings requirement. We are excluding one of the two proposed Public Health Medical Officer (PMHO) III positions because we believe the tasks described by the department can be accommodated by one PMHO III (which is in- cluded in the 12 vacant positions). We also note that the excluded position would not have managerial responsibilities and would be assigned to an existing four-person unit that already includes two of these high-level positions. After adjusting for differences in personnel benefits and operating expenses, our recommendation would result in a net General Fund sav- ings of $178,000. Food Safety and Food-Borne Illness Prevention Program. Included in the proposal is $828,000 from the General Fund (seven positions) for a food safety and food-borne illness prevention program. This program is designed to improve surveillance and investigation of food-borne illness, raw and minimally processed food production practices, and retail food safety. Activities of the new staff would include analysis of food contami- nation, research on food-borne pathogens, inspections of raw and mini- mally processed food producers, and food safety training for the food service industry. The department currently operates food safety and inspection pro- grams, and has a separate budget proposal to establish a food safety C – 76 Health and Social Services 1998-99 Analysis education and training program, for the processed food industry. These activities are funded by fees assessed on processed food manufacturers and wholesalers (with an exemption for small businesses), and deposited in the Food Safety Fund. This raises the issue of whether the new food safety and food-borne illness program should be funded from the General Fund, as proposed, or from fees deposited in a special fund, as is the case with the aforemen- tioned programs. The new program, if successful, would benefit the public in general; but\u2014as the department indicates\u2014it would also benefit the raw and minimally processed food industry and the retail food ser- vice industry by providing training for their employees, and preventing food contamination problems that can be costly to individual manufactur- ers and retailers as well as the industries in general. Given that the Legis- lature has deemed it appropriate to fund related activities through a fee assessed on the processed food industry, we believe that it would be consistent to follow the same practice with respect to the raw and mini- mally processed food industry and the retail food service industry. Accordingly, we recommend legislation to authorize such a fee, and further recommend transferring the $828,000 proposed for support of the new program from the General Fund to the Food Safety Fund. Newborn Hearing Screening Proposal Has Merit, But Cost Estimate Needs Justification We withhold recommendation on $6.2 million ($3.5 million General Fund) proposed to establish a newborn hearing screening program, pend- ing submission of additional justification for the cost estimate by the department. Background and Budget Proposal. Currently, the California Children’s Services (CCS) program provides for infant hearing screens for children in CCS-approved Neonatal Intensive Care Units if the child is at high risk of becoming deaf. The department indicates, however, that these hospital units do not routinely conduct hearing screens, even for high risk children. The budget proposes $6.2 million ($3.5 million General Fund) to estab- lish a newborn hearing screening program. Under this program, all hospi- tals approved by the CCS program (191 hospitals, which deliver about 70 percent of all newborns in the state) would be required to offer hearing screening tests to newborn infants. The proposed funding consists of (1) $3.4 million ($2.2 million General Fund) and ten new positions for the Department of Health Services state operations, (2) $2.5 million ($1.3 million General Fund) for local assistance in the Medi-Cal program, and (3) $221,000 ($111,000 General Fund) for local assistance in the CCS Public Health C – 77 Legislative Analyst’s Office program. The funds allocated to the Medi-Cal and CCS programs would be used to reimburse providers, on a fee-for-service basis, to conduct the screening tests for those infants eligible for these programs. The proposal includes $1.5 million in contract funds to establish three Regional Early Hearing Detection and Intervention Centers to certify hospitals for participation in the program and assist hospitals in start-up and ongoing management activities, including the provision of staff training and technical assistance. In addition, the centers would maintain a database and would be responsible for (1) advising physicians of the results of the screen, (2) assuring that follow-up testing and diagnostic evaluations are performed, and (3) assuring that referrals are made for further intervention when appropriate. The proposal also includes $750,000 to contract for a public awareness educational and outreach program and $300,000 to contract for the devel- opment of a computerized tracking system. Program Has Merit but Cost Estimates Need Better Documentation. We agree that the proposal to establish a state newborn hearing screening program has merit. Even though a very small percentage of children have a permanent significant hearing loss, early detection followed up by appropriate interventions can enable a child to realize his or her full potential in the development of language and other communication skills. This, in turn, can lead to long-term public savings by reducing the need for special school programs. We note that several other states have imple- mented universal newborn hearing screening programs. The department, however, has very little documentation of the specific cost estimates for the various components of the proposal. While it is difficult to estimate the costs of a new program, we believe that the de- partment should provide an expenditure plan for the proposed contract funds, and should better justify the need for these funds and the proposed new positions by collecting data on programs that have already been established in other states. Regarding the state operations request, we agree that some level of state support is needed to provide coordination, monitor the tracking system, and provide technical assistance. The request for ten new posi- tions and three regional centers at $500,000 each, however, seems some- what excessive. We note, in this respect, that many hospitals in California have implemented, without external assistance from the state, audiology programs that include hearing screens for infants. We also recommend the establishment of a computerized tracking system. The department, however, has submitted no basis for its esti- mated cost of $300,000, other than to indicate that a software package C – 78 Health and Social Services 1998-99 Analysis could be leased from another state for $1 per screen, or about $115,000 in 1998-99. No other alternatives were presented, nor were the remaining costs justified by any expenditure plan. We note that the department currently operates a tracking system for genetic disease testing. Similarly, we agree with the concept of contracting for an outreach program; but the department has no basis for the estimated cost of $750,000, other than to indicate that the proposal would include bro- chures distributed to the hospitals, public announcements, and other materials. We also note that the budget proposal includes an additional increase of $107,000 for printing expenses. The department indicates that this would be used for items such as regulations and notices to the hospi- tals. We believe that the amount is excessive. To put it in perspective, the entire budget for printing expenses in 1998-99 for the Managed Risk Medical Insurance Board, which administers several health insurance programs (including the new Healthy Families Program) amounts to $55,000. With respect to the local assistance costs, the $2.5 million proposed for Medi-Cal benefits assumes that only 30 percent of the newborns will be tested in 1998-99, due to the time it will take to implement the program. This assumes a relatively slow ramp-up for the program, given that the requirement for hospital screening would take effect at the beginning of the fiscal year. Finally, the Medi-Cal estimate assumes a cost per screen- ing test of $30. We note that the corresponding cost in Colorado, accord- ing to the program administrator, is $25 per screen. Accordingly, we withhold recommendation on the proposal, pending submission of additional justification of the cost estimate by the depart- ment. California’s Litigation Against the Tobacco Companies The Governor’s budget proposes $10 million ($5 million General Fund) in the current year and $10.9 million ($5.5 million General Fund) in the budget year for the Department of Health Services\u2014and additional funds for the Department of Justice\u2014to support litigation activities in connec- tion with the state’s lawsuit against the major tobacco companies. The lawsuit seeks damages against the tobacco companies to recover state- paid costs of medical care for tobacco-related illnesses. For a discussion of this issue, please see the Crosscutting Issues in the Judiciary and Criminal Justice chapter of this Analysis. Department of Developmental Services C – 79 Legislative Analyst’s Office DEPARTMENT OF DEVELOPMENTAL SERVICES (4300) A developmental disability is defined as a disability, related to certain mental or neurological impairments, that originates before a person’s eighteenth birthday, constitutes a substantial handicap, and is expected to continue indefinitely. The Lanterman Developmental Disabilities Ser- vices Act of 1969 entitles individuals with developmental disabilities to receive a variety of services, which are overseen by the state Department of Developmental Services (DDS). The department contracts with 21 nonprofit regional centers (RCs) to coordinate educational, vocational, and residential services for approximately 140,000 clients each year. In addition to providing some services directly, such as diagnosis and case management, the RCs purchase services from providers in the commu- nity. Individuals with developmental disabilities have a number of residen- tial options. While most live with their parents or other relatives, thou- sands live in their own homes or in group homes that are designed to meet their medical and behavioral needs. An additional 4,000 live in five state-run developmental centers (DCs). The budget proposes $1.8 billion from all funds for support of DDS programs in 1998-99, an increase of 11 percent over estimated current- year projections. The budget proposes $634 million from the General Fund, which is $87 million, or 16 percent, above estimated current-year expenditures from this funding source. COMMUNITY SERVICES PROGRAM The Department of Developmental Services’ Community Services Program includes community-based services provided to clients through the RCs. These services include assessment and diagnosis of children and adults, early intervention services for young children, placement in resi- C – 80 Health and Social Services 1998-99 Analysis dential care facilities and daytime treatment\/activity programs, arrange- ment for transportation when needed, and family supports such as respite care and counseling. Proposal to Augment Regional Center Case Management Staff Is Incomplete We recommend that funds appropriated for case management be scheduled separately in the Budget Bill in order to facilitate legislative oversight. We also recommend adoption of supplemental report language requiring the department to report on the implementation of its plan to augment case management. Background. Regional centers coordinate the delivery of services to developmentally disabled persons residing in the community. The care centers are private nonprofit corporations under contract with the depart- ment. Client program coordinators (CPCs) at the RCs provide case manage- ment services for RC clients. The recent federal review of California’s Home and Community Based Services federal waiver program cited the state for deficiencies in case management activities. Specifically, the defi- ciencies were: (1) unreasonably high caseloads; (2) a lack of in-service training for case managers; (3) a high rate of turnover among case man- agement staff; and (4) inadequate or unavailable client records, such as physical and mental health histories, which are essential to the proper management of client services. In response, the budget proposes to in- crease RC funding by $31 million ($21 million from the General Fund) in order to lower the actual case manager\/client ratio from an estimated 1:90 to 1:62. Actual Staffing Ratios Higher Than Budgeted. Although CPCs cur- rently are budgeted at a 1:62 ratio, a 1997 survey by the Association of Regional Center Agencies estimates that RCs actually operate at a ratio of one CPC per 90 clients. The department indicates that RCs, on average, operate at this higher ratio for the following reasons: Four consecutive years of unallocated reductions totaling $40.6 million have caused RCs to cut staff positions. Although the RC salary schedule has not been adjusted since 1989-90, RCs have found it necessary to pay higher salaries than the schedule allows in order to fill positions. Department of Developmental Services C – 81 Legislative Analyst’s Office Regional centers have left case management positions unfilled in order to meet the 5.5 percent salary savings level required by the budget. Regional centers redirected funding from case management and other areas in order to create new positions, such as information systems personnel and training officers. According to the department, these high caseloads prevent CPCs from providing adequate case management services to clients and from making quarterly monitoring visits to clients’ residences as required by state law. In order to increase the number of case management staff hired by the RCs and restore case management services to the preferred 1:62 ratio, the department proposes the following actions, phased in over a two-year period: Restore 64 percent of the unallocated reduction in order to fully fund case management staff, at a half-year cost of $13 million ($6.5 million General Fund) in 1998-99. Adjust budgeted salaries for CPCs, supervising counselors, and intake workers to reflect the average salary level for equivalent state positions, at a half-year cost of $12.2 million ($8.2 million General Fund) in 1998-99. Reduce salary savings for case management positions from 5.5 percent to 1 percent, at a half-year cost of $1.9 million ($950,000 General Fund) in 1998-99. Add and fund seven new classifications (a total of 218 new posi- tions) in the RC staffing schedule, at a cost of $6.8 million from the General Fund in 1998-99. These are positions that the department has determined are essential at every RC, such as information systems personnel, training officers, and fiscal officers. Proposal Contains Technical Errors. The department indicates that it completed its proposal to augment case management services before it completed the November 1997 RC caseload estimate. Because of this, the case management proposal was based on caseload numbers that have since been revised upward. In addition, the case management proposal and the RC budget overlap in a number of areas, which, if approved, would result in double-funding of the same items. The department indi- cates it will submit a revised case management proposal based on more recent caseload estimates and make other technical adjustments to the plan in the spring. The department also indicates it will add one or more substantive items to the proposal. The Legislature cannot fully consider the proposal without knowing what these items entail. C – 82 Health and Social Services 1998-99 Analysis Analysis and Recommendations. We believe that providing additional funds to make RCs more capable of achieving a 1:62 case management ratio is reasonable. In this respect, we note that the 1997-98 Budget Act appropriated $5.6 million for increased case management staff in the RCs and required the DDS to report by April 1, 1998 on (1) the number of positions created and filled with the funds and (2) the prior and new case management ratios at each RC. We recommend that the department meet this deadline so the Legislature can consider the report in conjunction with the revised augmentation plan. We will review the department’s report and the revised plan when they are submitted, and report our findings and recommendations to the budget subcommittees. We note, however, that the proposal does not include budget bill language to ensure that RCs use the funding solely for its intended pur- pose. The department indicates that it will include such requirements in its 1998-99 contracts with the RCs. To facilitate legislative oversight and control, however, we recommend that all funds appropriated for case management staff be scheduled separately in the Budget Bill. We further recommend the adoption of supplemental report language requiring DDS to report on the outcomes of its augmentation plan, includ- ing but not limited to: The number of case management positions created and filled by each RC. Caseload ratios before and after implementation of the plan. The number of clients who received monitoring visits in their residences during each quarter and the outcome of those visits. Specifically, we recommend the following supplemental report lan- guage: The Department of Developmental Services shall, by November 30, 1999, submit a report on the implementation of its plan to increase regional center case management staff to the appropriate legislative fiscal committees, the Joint Legislative Budget Committee, and the Department of Finance. The report shall contain the number of case management positions created and filled during 1998-99, the prior and new caseload ratios, and the number of quarterly monitoring visits made during 1998-99 and the outcomes of those visits. Department of Developmental Services C – 83 Legislative Analyst’s Office Proposed Position Upgrades and Salaries Are Excessive We recommend a reduction of $3.3 million from the General Fund to more closely align proposed regional center position upgrades with actual duties and salaries. We further recommend that proposed new positions in the centers be funded at the first salary step, to be consistent with standard budgeting practice, for an additional General Fund savings of $2.9 million. (Reduce Item 4300-101-0001 by $4,511,000, Item 4260- 101-0001 by $1,686,000, and Item 4260-101-0890 by $1,789,000.) Background. The RC budget for case management and related staff is based on a salary schedule that was created in the 1970s. The schedule is based on state job classifications that the department considers to be equivalent to RC positions. Although this schedule is used to formulate the department’s annual budget and is the basis for contracts with the RCs, the RCs ultimately set their own salaries because they are nonprofit organizations, not state entities. As a result, there currently exists a signif- icant disparity between the actual salaries paid by the RCs for certain types of staff and the salary schedules that are used by the DDS to budget funds for the RCs. Budget Proposal. The budget proposes $16.7 million ($11.7 million General Fund) to increase the salary schedule for several job classifica- tions at the RCs (part of which is included in the case management pro- posal described previously). This proposal would affect 3,775 positions, including 2,484 that currently exist and 1,291 that would be created through proposals to increase the number of case management staff in 1998-99. Figure 17 compares the salaries currently used by the DDS to budget funds for RCs with the proposed salaries. Figure 17 Budgeted and Proposed Case Management Salaries Regional Centers Position Salary Salary Increase Budgeted Proposed Percent Supervising counselor $38,036 $52,392 38.0%a Client program coordinator: With master’s degree 28,649 37,824 32.0 Without master’s degree 28,649 30,240 5.5 Clerical 18,757 27,096 44.4b One supervising counselor is budgeted for every eight client program coordinators. a One clerical position is budgeted for every four professional positions. b C – 84 Health and Social Services 1998-99 Analysis Proposed Changes Represent Position Upgrades. The current salaries for these positions are based on 1989-90 salaries for the equivalent state job classifications. Salary increases granted to state workers since then were not automatically budgeted for the RCs because RC staff are not state employees. However, a 1996 survey by the department found that RCs have been redirecting funds from other areas to pay case manage- ment staff at salaries above the budgeted levels. In response, the Gover- nor’s budget for 1998-99 proposes to increase budgeted salaries to more closely reflect the actual salaries being paid by RCs as shown in Figure18. The budget proposes to change the state job classifications that are used in the existing salary schedule. For example, supervising counselors would receive the average salary for a Community Program Specialist III and clerical employees would receive the average salary for an Office Technician. Our analysis indicates that the proposed classifications for three of the four types of positions represent, in effect, position upgrades in that they go beyond the salary increases that would be needed to reflect the cost-of-living adjustments that have occurred since 1989-90 (a total of about 13 percent). As a result of these upgrades, the proposed salaries are significantly higher than the actual salaries for three of the four positions as shown in Figure 19 (see page 86). Position Upgrades Excessive. The position reclassifications are justified if they reflect the duties performed and are necessary to compete in the market for qualified employees. On this basis, we recommend approval of the two client program coordinator classifications. However, we be- lieve that the proposed classifications for supervising counselors and clerical employees represent excessive position upgrades as shown in Figure 19. Supervising counselors have a wide range of duties, from direct super- vision and training of CPCs to communication with service providers, advocates, clients and their representatives, and other members of the community. While the proposed upgrade to Community Program Spe- cialist (CPS) III would take into account the supervisory function of the position, the CPS duties are more policy-oriented and analytical in nature than is required of a supervising counselor. In addition, basing the super- vising counselor salary on the CPS III classification would result in an 18 percent increase above the actual salary for existing RC staff. Department of Developmental Services C – 85 Legislative Analyst’s Office Figure 18 Actual and Proposed Case Management Salaries Regional Centers Position Salary Salary Increase Actual Proposed Percenta Supervising counselor $44,364 $52,392 18.0% Client program coordinator: With master’s degree 33,938 37,824 11.0 Without master’s degree 30,297 30,240 -0.2 Clerical 21,880 27,096 24.0 Estimate based on 1996 survey by Department of Developmental Services. a We reviewed a variety of state position classifications and found sev- eral that would be more closely related, with respect to duties and salary, to the supervising counselor position. Of these, we recommend that the department use the Rehabilitation Supervisor I (Administrator) classifica- tion as the basis for setting the salary for supervising counselor. The core duties of a Rehabilitation Supervisor I (Administrator) are consistent with those required of a supervising counselor\u2014the position coordinates and directs staff whose jobs are similar to those of client program coordina- tors, performs duties in a client-oriented setting, and communicates with agencies and providers in the community. Updating the salary schedule to reflect the current Administrator salary would raise the budgeted salary by 17 percent and increase the average supervising counselor salary just above the actual salary being paid by the RCs (see Figure 18). We also recommend a more appropriate state classification for clerical staff. We believe that the Office Assistant (Typing)\u2014Range B job specifi- cation would be more closely aligned with the types of duties performed by RC clerical staff and would better reflect the actual salaries currently paid. Individuals in Range B of the Office Assistant classification can work independently on a variety of relatively complex clerical duties that require strong typing skills and entail regular communication with the general public. Accordingly, we recommend that the clerical positions be upgraded to the Office Assistant (Typing)\u2014Range B level. This would raise the budgeted salary by about 25 percent and increase it to about 7 percent above the actual salary being paid by the Rcs. C – 86 Health and Social Services 1998-99 Analysis Figure 19 Case Management Position Classifications Governor’s Proposal and LAO Recommendations Position Budget Recommendation Governor’s LAO Supervising Counselor Actual salary $44,364 New position classification Community Rehabilitation Program Supervisor I Specialist III (Administrator) Proposed average salary $52,398 $44,628 Percent difference 18.0% 0.6% Client Program Coordinator (Master’s ) Actual salary $33,938 New position classification Psychiatric Psychiatric Social Worker Social Worker Proposed average salary $37,824 $37,824 Percent difference 11.0% 11.0% Client Program Coordinator (Without Master’s) Actual salary $30,297 New position classification Social Work Social Work Associate Associate Proposed average salary $30,240 $30,240 Percent difference -0.2% -0.2% Clerical Actual salary 21,880 New position classification Office Technician Office Assistant (Typing) (Typing) Range B Proposed average salary $27,096 $23,388 Percent difference 24.0% 6.9% Adoption of our recommendations for the supervising counselor and clerical staff classifications would result in a General Fund savings of $3.3 million in 1998-99 ($3.1 million in the DDS budget and $192,000 in the Department of Health Services [DHS] budget). Budget New Positions at First Salary Step. The proposal to upgrade salaries does not distinguish between existing positions and proposed new positions, in that both categories are budgeted at the average or mid- Department of Developmental Services C – 87 Legislative Analyst’s Office range salary levels for their classifications. The department has not justi- fied the need to budget new positions at the mid-range salary level of the relevant position classification, rather than the first step as is consistent with standard budgeting procedures. Accordingly, we recommend that the proposed 1,291 new positions for case management be budgeted at the first salary step. This would result in a General Fund savings of $2.9 million in 1998-99 ($1.4 million in the DDS budget and $1.5 million in the DHS budget). Care Facility Training Program Is Overbudgeted We recommend a reduction of $4 million from the General Fund for the proposed training program for community care facility employees so the budget will be consistent with the department’s planned phase-in of training classes and pay increases associated with these classes. (Reduce Item 4300-101-0001 by $1,569,000, Item 4260-101-0001 by $2,412,000, and Item 4260-101-0890 by $2,558,000.) Background. An estimated 23,000 individuals with developmental disabilities live in 4,400 community care facilities (CCFs). These facilities are licensed by the Department of Social Services (DSS) and governed by both DSS and the Department of Development Services (DDS) regula- tions. The DDS training regulations require new CCF employees to com- plete an on-site orientation within their first 40 hours of work and receive an average of eight hours of continuing education each year. The recent federal review of California’s Home and Community Based Services federal waiver program cited the state for deficiencies in the quality of care provided in some CCFs, specifically: (1) a lack of supervi- sion needed to ensure resident safety, (2) unsanitary conditions in bath- rooms and kitchens, (3) a lack of basic necessities such as clean linens and adequate food, (4) inadequate services to help clients integrate into the community and improve their functioning ability, and (5) homes that were in disrepair to the point of being dangerous. In response to these findings and other concerns regarding the quality of care in community facilities, the budget proposes $19.8 million ($14.5 million from the General Fund) in 1998-99 to plan and implement a formal training program for CCF employees. As part of the proposal, DDS plans to adopt regulations requiring all CCF employees to complete two 35-hour training courses within two years, beginning in January 1999. Employees would receive a 10 percent pay increase after completing each course and passing subsequent competency exams. C – 88 Health and Social Services 1998-99 Analysis The department estimates that about 18,000 employees would be affected by the new regulations. However, the department intends to allow experienced staff to take the first competency test without attending classes. Those who pass would receive an automatic pay increase and be exempted from the initial 35-hour training course. The department esti- mates that about 1,600 CCF employees (half of those who are expected to seek an exemption) would pass the test and receive a 10 percent pay increase early in 1999. Funding for the training program would be provided over three fiscal years. The budget proposal would fund four components of the training plan in 1998-99: Planning and Coordination\u2014$546,000 from the General Fund for four positions and related operating expenses at DDS headquar- ters. Classes and Competency Tests\u2014$1.7 million from the General Fund for certified trainers and other training costs. Overtime\/Coverage Costs\u2014$3.1 million from the General Fund to allow CCFs to maintain adequate facility staffing while employees attend training classes. Pay Increases for Trained Staff\u2014$14.3 million ($8.8 million from the General Fund) to provide a 10 percent pay increase to CCF employees who pass the competency exam between January 1, 1999 and June 30, 1999. Pay Increase Is Overbudgeted. The department intends to allocate the funding for pay increases and overtime\/coverage costs through CCF rate increases that would take effect January 1, 1999. The department indicates that it would grant a rate increase to all providers on this day, to cover the salary and overtime costs. The proposed rate increase, however, is based on the amount of funds that would be needed if all employees who would undergo training in 1998-99 had completed the required training as of January 1, 1999\u2014the date on which the program will be implemented. This is unrealistic and inconsistent with the department’s implementation plan, which calls for the training to be phased in throughout 1999. If train- ing is phased in as planned, the total amount needed in 1998-99 would be $7.8 million ($4.8 million from the General Fund), taking into account the employees who are expected to be exempt from the first training course. We recommend that the budget be adjusted so that it is consistent with the department’s plan to phase in the training classes. This would result in a General Fund savings of $4 million in 1998-99. Department of Developmental Services C – 89 Legislative Analyst’s Office Federal Waiver for Habilitation Services Could Result in State Savings We recommend that the Department of Developmental Services, in cooperation with the Department of Rehabilitation (DR), include services provided under the DR Habilitation Services Program in the state’s request for a new Medicaid Home and Community Based Services federal waiver. This could result in a significant increase in federal funds and commensurate savings to the state. Background. In December 1997 the Health Care Financing Administra- tion (HCFA) refused to renew California’s Home and Community Based Services waiver, which allows the state to collect federal Medicaid reim- bursements for up to 35,105 developmentally disabled clients who receive community-based services as an alternative to institutionalization. In making its determination, HCFA cited instances of inadequate state oversight of the program and a lack of monitoring to ensure that waiver recipients receive quality services. The state continues to receive federal funds for existing waiver recipients under two 90-day extensions while it prepares a new waiver application to submit to HCFA. The application is due by March 28, 1998, and HCFA indicates that it plans to act on the new waiver by July 1, 1998. In a report issued January 12, 1998, HCFA suggests that DDS consider adding expanded habilitation services to its allowable waiver services. Expanded habilitation includes supported employment services, prevocational training, and educational services that are designed to help developmentally disabled individuals develop skills that could lead to employment. These services are provided to some developmentally dis- abled clients at day programs funded by DDS, and the HCFA report refers to these services in its recommendation. Department of Rehabilitation Also Provides Habilitation Services. Regional center-funded day programs are not the only providers of habil- itation services to developmentally disabled clients. About 6,000 clients who receive services through the supported employment component of DR’s Habilitation Services Program (HSP\/SEP) could be eligible for waiver services. Not all of the HSP\/SEP clients would automatically qualify for the waiver, which requires a determination that an individual would require institutionalization without the provision of waiver ser- vices. The DDS indicates that it could develop an estimate of who would be eligible. The department also informs us that it is interested in expand- ing the waiver to include DR clients, but has not indicated whether it intends to do so. C – 90 Health and Social Services 1998-99 Analysis The budget proposes General Fund expenditures of $35 million for HSP\/SEP services in 1998-99. Thus, federal funding at the Medicaid sharing ratio of approximately 51 percent could result in significant state savings, depending on the amount of expenditures that are eligible for federal funds and the increased state administrative costs to document eligibility and report the client costs. We note that the state would receive matching federal funds for these administrative costs. Based on DDS’s experience with the existing waiver, we believe it is very likely that the savings would outweigh the administrative costs. Accordingly, we recommend that DDS include DR clients in its applica- tion for a new waiver, and that the two departments report during the budget hearings, prior to the application deadline, on their intentions and the estimated fiscal effects of this action. Legislature Needs More Information On Supported Living Augmentation We withhold recommendation on the $2 million proposed for expan- sion of supported living services in 1998-99 because the department (1) has yet to allocate $1 million appropriated in the current year for expansion of these services and (2) is in the process of collecting data from the regional centers regarding the demand for the services. Background. Supported living arrangements are designed to give developmentally disabled individuals the ability to live in their own homes while receiving a variety of support services that are tailored to their needs. Commonly provided assistance includes personal care (such as bathing and grooming), domestic services (such as cooking, shopping, and housecleaning), paid roommates or personal attendants, 24-hour emergency care, and adaptive equipment. These services may be pro- vided in addition to similar services that are available through the In- Home Supportive Services program in the DSS. Supported living services are highly individualized and change as a client’s needs evolve. Services generally are coordinated by supported living agencies, upon referral by a RC. More than 1,250 RC clients live in supported living arrangements, and the department expects that number to increase due to growing interest in supported living as a residential option. The department estimates that RCs spent about $28 million for supported living services in 1996-97. The DDS is in the process of surveying RCs to determine the precise number of clients receiving supported living services, current expenditures for supported living, and the projected future demand for these services. Current-Year Expansion. The 1997-98 Budget Act appropriated Department of Developmental Services C – 91 Legislative Analyst’s Office $1 million from the General Fund to expand supported living services for RC clients in the current year. At the time that this analysis was prepared, the department was receiving project proposals from the RCs and indi- cated that it would allocate these funds to selected projects in late Febru- ary. Regional centers were encouraged to propose projects that would help start new supported living agencies; expand existing agencies; or assist consumers with one-time costs such as furnishings, appliances, rental deposits, and modifications to make homes accessible. Budget Proposal. The budget proposes to continue the $1 million appropriated for expansion in the current year and add another $1 million to further expand services in 1998-99. However, because DDS has not yet allocated the funds appropriated in 1997-98, it has been unable to deter- mine the actual need for continuation funds in 1998-99. The department indicates that it will adjust the budget proposal in the spring to reflect the projects funded in the current year and the results of the RC survey. The survey should also help to determine the need for further expansion in the budget year. Accordingly, we withhold recommendation on the $2 million proposed for continuation and further expansion of supported living services in 1998-99. We also recommend that the department report at budget hearings on the projects funded for the current year and the outcome of its survey. Technical Issue\u2014Case Management For Community Placements Overbudgeted We recommend a technical adjustment to the budget for ongoing case management services for developmental center clients placed into the community, for a General Fund savings of $375,000. (Reduce Item 4300- 101-0001 by $276,000, Item 4260-101-0001 by $99,000, and Item 4260- 101-0890 by $106,000.) The budget proposes $1.4 million to provide enhanced case manage- ment services to 2,667 individuals who were placed from DCs into the community between 1993-94 and 1997-98 as a result of the settlement of Coffelt v. Department of Developmental Services. The goal of this funding is to provide a 1:45 case management ratio to these individuals, rather than the 1:62 ratio provided in the core staffing formula. Our analysis indicates that the proposal to continue the baseline fund- ing for these case managers in 1998-99 is overbudgeted due to a technical error in estimating these costs. We recommend adjusting for this error, C – 92 Health and Social Services 1998-99 Analysis which would result in a General Fund savings of $375,000 ($276,000 in the DDS budget and $99,000 in DHS’ budget). DEVELOPMENTAL CENTERS PROGRAM The budget proposes $482 million from all funds ($39 million from the General Fund) for support of the DCs in 1998-99. Placement Decisions for DC Residents Should Be Reviewed We recommend enactment of legislation directing the Department of Developmental Services to institute a process for conducting judicial reviews to determine the appropriateness of developmental center place- ments for current residents who have never had such reviews. Background. Generally, the RCs and DDS determine whether a person with developmental disabilities qualifies for placement in a DC. This determination is made after consulting with a number of people, includ- ing the person who is disabled, their parents or conservator, physicians and other staff who can evaluate the needs of the person, and any other friends, relatives, or advocates who help plan the services that will be provided to the client. To be admitted to a DC, an individual must fall into one of the legal categories for which admission is authorized. These categories are de- fined in various sections of the Welfare and Institutions Code and Penal Code, which generally spell out due process requirements for making such placements. In this respect, Welfare and Institutions Code Section 4825 allows for the placement of nonprotesting adults into a DC at the request of their parent, guardian, or conservator, without a judicial re- view before admission. In its 1981 decision In re Hop, however, the Cali- fornia Supreme Court ruled Section 4825 unconstitutional stating that persons with developmental disabilities who are unable to provide in- formed consent regarding their placement in a DC are entitled to a judicial review regarding the need for and appropriateness of such place- ment. Subsequent to the Hop decision, various county entities (such as courts, district attorneys, and county counsels) adopted a variety of procedures to provide judicial reviews, often called Hop reviews, for all new DC admissions. With a few exceptions, however, counties generally did not conduct Hop reviews for residents who had been admitted to DCs as nonprotesting adults or minors under Section 4825 prior to the 1981 deci- sion. Therefore, although the placements of all DC residents are reviewed Department of Developmental Services C – 93 Legislative Analyst’s Office annually by developmental center staff and client representatives (who prepare each client’s individual program plan), the ongoing placements of most residents admitted to DCs prior to 1981 have never been judicially reviewed. Implementation of the In re Hop Decision Has Been Mixed. Counties, RCs, and DCs varied in their responses to the Hop decision. For example, Orange County, where Fairview Developmental Center is located, re- quired Hop reviews for all residents who had been placed as nonprotesting adults prior to the Hop decision. These placements are reviewed annually, and the county district attorney’s office is involved in the process. In contrast, nonprotesting adult residents of Agnews Devel- opmental Center in Santa Clara County did not have Hop reviews, al- though residents admitted as minors have been judicially reviewed as they reached the age of 18. As of December 1997, about 1,600 current DC residents\u2014most of whom were placed after the Hop decision\u2014had re- ceived a judicial review designed to meet the due process standards set for Hop. In contrast, about 1,700 current residents\u2014most, if not all of whom were placed prior to the Hop decision\u2014had not received a judicial review (see Figure 20 below). Figure 20 Developmental Center Residents With and Without Hop Reviews December 1997 Developmental With Hop Without Hop Center Review Review Agnews 134 357 Fairview 706 30a Lanterman 207 491 Porterville 155 418 Sonoma 397 398 Total 1,599 1,694 Includes 44 pending cases. a Any DC resident may file a writ of habeas corpus asking to be released at any time; however, the Supreme Court noted in Hop that it is inappro- priate to place the burden of requesting release on individuals who have been determined mentally incompetent due to a disability. Failing to provide judicial hearings for these individuals also is contrary to legisla- C – 94 Health and Social Services 1998-99 Analysis tive intent as expressed by Senate Concurrent Resolution 45 in 1987, which stated that persons admitted to DCs prior to 1981 were entitled to judicial review of their placements. We note that the Supreme Court also declared unconstitutional the indefinite nature of placement under Section 4825, which requires no periodic review of the commitment to a DC. Most of the counties that have instituted Hop review procedures provide for annual or biennial review of the commitment, although some do not. Because of the Hop ruling, we believe that commitments should be periodically reviewed to determine if continued placement in a DC is warranted. Community Living Options May Exist for Many Unreviewed Clients. In recent years, the DC population and the number of annual admissions have dropped substantially as more community-based services have been developed, enabling more individuals with disabilities to live in private or group homes rather than DCs. More than 2,500 DC residents have moved into the community since 1994 as a result of the settlement of Coffelt v. DDS, which called for a reduction in the DC population and increased monitoring of community placements. It is unknown how many of the 1,700 unreviewed DC residents could live in a less restrictive environment than the institutions. Nearly all Hop reviews conducted so far have resulted in a recommitment of the individ- ual to the DC. However, staff at DCs, RCs, and the department suggest that a number of the unreviewed residents might be served just as well, if not more appropriately, in the community (notwithstanding the fact that the annual review of individual program plans has not led to changes in residential status). We note that reviews resulting in community place- ment generally would result in a net savings to the state. A 1991 study estimated that treatment in a DC costs roughly $24,000 more per year than treatment in the community. Safeguards for Community Placements Are Increasing. Recent concern over the quality of care provided in the community has heightened awareness of the dangers developmentally disabled individuals face when moving from an institution. In response to these concerns, funds were appropriated in the current year to enhance case management and the monitoring of community-based services, and the 1998-99 Governor’s Budget proposes increased quality assurance activities by DDS and the Department of Health Services. In addition, Chapter 414, Statutes of 1997 (SB 1039, Thompson) allows DC residents to be given provisional place- ment in the community for up to 12 months, with heightened monitoring of their cases and the ability to return to a DC at any time. This doubled the previous six-month provisional placement period. Department of Developmental Services C – 95 Legislative Analyst’s Office Estimated Cost to Review Cases. The following types of costs are associated with judicial reviews: (1) Writing and compiling reports by physicians, case managers, and other parties at the DC and RC; (2) filing court documents to initiate the review process and notifying concerned parties that a hearing will be held, which is done by the county counsel or district attorney in a majority of the cases; (3) representing the client, generally done by a public defender (clients and their families or conser- vators are not required to retain private counsel, and most do not); and (4) conducting the hearings, which generally take place in Superior Court and last from 15 to 30 minutes. We estimate a per-case cost of about $590 to $745 to review clients who already live in a DC, or a total cost of $1 million to $1.2 million for all 1,700 unreviewed residents. This estimate assumes that district attorneys or county counsels would file petitions and represent the petitioner at hearings, rather than a regional center using in-house counsel or contract- ing for legal work. When district attorneys do not represent the petitioner, estimated costs increase by about $235 to $280 per case\u2014an additional $400,000 to $500,000 in total\u2014primarily due to a significantly higher per- case cost for the regional centers within Los Angeles County. (Nearly one- third of the unreviewed residents live at Lanterman Developmental Center in Los Angeles County.) We note that the budget proposes to add 16 health records technician positions in the DCs in 1998-99. In addition to other duties, these employ- ees would be responsible for compiling records, processing court papers, and maintaining data on the commitment status of all DC residents. The department indicates that these activities would be directed toward pro- cessing additional cases for judicial reviews, including the 1,700 unre- viewed cases. We estimate that the budget proposal, if enacted, would fund roughly $100,000 of the total costs we identified above. Recommend Legislation Mandating Hearings for Unreviewed Clients. We recommend that legislation be enacted directing DDS to implement a process to review the nearly 1,700 DC residents whose placements have never been judicially reviewed. More community living options exist today than at the time of the Hop decision, and recent concern regarding the possible dangers of community placement is being addressed in the form of longer provisional placement, increased monitoring of cases, and enhanced quality assurance activities. We further recommend that in developing this process, the department consider the following actions to reduce state costs: Time the Initial Judicial Reviews for the 1,700 Residents\u2014and Periodic Recommitment Hearings for All Residents\u2014to Coincide C – 96 Health and Social Services 1998-99 Analysis With the Annual Preparation of Residents’ Individual Program Plans. This action could save an estimated $130,000 to $190,000 in overall costs. Savings would occur as a result of consolidating otherwise separate (1) assessments of a client’s needs, (2) evalua- tions of potentially appropriate community facilities, and (3) travel to the DC where the client resides. This would also help phase in the new judicial reviews, rather than immediately increasing the workload of the developmentally disabled and judicial systems. Review Commitments Every Three Years, Rather Than Annually or Biennially as Most Counties Currently Do. As noted above, Hop took issue with the indefinite nature of commitments under Sec- tion 4825 as compared to other commitments that are reviewed on a periodic basis. Those involved with the process, however, indi- cate that reviewing Hop commitments annually is largely ineffec- tual because a client’s status is unlikely to change significantly over a one-year period. Reviewing cases every three years would result in estimated ongoing annual costs of $330,000 to $420,000, com- pared to $1 million to $1.2 million for annual reviews. Recoup Costs for Public Defense of Residents When Possible. This is done for clients placed into DCs under Welfare and Institutions Code Section 6500, but is not done for Hop placements. Individuals involved in the process indicate confusion regarding the legality of recouping public defender costs for these clients because it is not expressly allowed in the law. We recommend that any legislation enacted include clarifying language regarding the authority of public defenders to recoup costs from DC clients when feasible. Use Court Commissioners or Referees to Hear the Cases. Court commissioners and referees generally have lower salaries than superior court judges, whose salaries represent about one-third of annual superior court costs. Using commissioners or referees to hear cases could cut court costs by $8,000 to $17,000 and free judges’ time for other cases. Consider Requiring District Attorneys or County Counsels to Handle Hop Cases. Although this requirement appears to create a state-mandated local program, we believe the additional state costs to reimburse the counties would be more than offset by savings to the state-funded RCs that no longer retained private legal counsel to represent them at hearings. This cost avoidance is especially pronounced in Los Angeles County, where the use of private coun- sel would cost an estimated $362,000 more than using the district attorney in Hop cases. Department of Developmental Services C – 97 Legislative Analyst’s Office Continue Funding for Camarillo Maintenance We recommend that the Legislature augment the budget by $3.8 million from the General Fund to continue maintenance of Camarillo State Hospital and Developmental Center because California State Uni- versity’s proposal to assume control of the site is premature. (Increase Item 4300-003-0001 by $3,799,000.) Pursuant to language in the 1996-97 Budget Act, Camarillo State Hospi- tal and Developmental Center was closed in July 1997. The 1997-98 Budget Act appropriated $4.6 million from the General Fund for continued main- tenance at the site, temporary administrative staff to finalize the closure, and related operating expenses. The budget proposes that these funds not continue in the DDS budget for 1998-99 because California State Univer- sity (CSU) has been negotiating with DDS to assume control of the site by July 1, 1998. The budget proposal for CSU includes $16.5 million for this transfer. As we discuss in our analyses of CSU in the Higher Education and Capital Outlay chapters, we believe this proposal is premature. Accord- ingly, we recommend that the Legislature continue $3.8 million in the DDS budget, which is our estimate of the amount needed for maintenance staff and operating expenses at Camarillo in 1998-99. New Nursing Staff Should Be Budgeted at First Salary Step We recommend that most of the proposed new positions in the devel- opmental centers be funded at the first salary step, to be consistent with standard budgeting practice, for a General Fund savings of $819,000 in 1998-99. (Reduce Item 4300-003-0001 by $97,000, Item 4260-101-0001 by $722,000, and Item 4260-101-0890 by $767,000.) Background. Two of the state’s five DCs, Fairview and Porterville, are facing sanctions as a result of recent licensing surveys by the Department of Health Services (DHS) and the federal Health Care Financing Adminis- tration. The surveys cited the DCs for numerous examples of inadequate care and understaffed residential and treatment units. As a result of the surveys, the state is currently unable to receive federal Medicaid funding for individuals who are newly admitted to the two institutions. If the state does not increase staffing in all five of its institutions, the department indicates that the DCs could all face some level of sanctions when they are next surveyed. In response to these concerns, the budget proposes to add 1,703 posi- tions in the DCs at a total cost of $107 million ($55 million from the Gen- C – 98 Health and Social Services 1998-99 Analysis eral Fund) over the next four years. In 1998-99, the department would add 606 positions at a half-year cost of $31 million ($16 million from the Gen- eral Fund). The proposed positions include medical and nursing staff to provide care to residents, train care providers, and assist DC residents who are placed into the community. The largest component of this plan would provide 475 new nursing staff to treat and supervise DC clients, at a half-year cost of $10.1 million ($5.2 million from the General Fund) in 1998-99. The DCs employ several types of nursing staff, including registered nurses, licensed vocational nurses, and psychiatric technicians. Psychiatric technicians, senior psychi- atric technicians, and psychiatric technician assistants comprise 75 percent of the current DC nursing complement. New Positions Not Funded at First Step. We agree with the general intent of increasing staffing to meet federal and state licensing require- ments. However, the budget proposes funding the new nursing positions at the average current salary for existing nursing staff, rather than the first salary step as is consistent with standard budgeting procedures. Due to a shortage of registered nurses in the state, we believe that budgeting registered nurse positions at the mid-range salary is justified in order for the state to compete in the market for these staff. However, the depart- ment has not justified the need to budget the remaining new positions at the mid-range level. Accordingly, we recommend that this group of positions be budgeted at the first salary step. This would result in a Gen- eral Fund savings of $819,000 in 1998-99 ($97,000 in the DDS budget and $722,000 in the DHS budget). Department of Mental Health C – 99 Legislative Analyst’s Office DEPARTMENT OF MENTAL HEALTH (4440) The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department’s primary responsibilities are to (1) administer the Bronzan-McCorquodale and Lanterman-Petris-Short Acts, which provide for the delivery of men- tal health services through a state-county partnership and for involuntary treatment of the mentally disabled, (2) operate four state hospitals, (3) manage treatment services at the California Medical Facility at Vacaville (a state prison), and (4) administer nine community programs directed at specific populations. The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly com- mitted as sexually violent predators, and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections (CDC) and California Youth Authority. The budget proposes $1.3 billion from all funds for support of DMH programs in 1998-99, which is an increase of 1.9 percent over estimated current-year expenditures. The budget proposes $570 million from the General Fund, which is an increase of $17 million or 3.1 percent above estimated current-year expenditures. This increase is primarily due to (1) increases in the Judicially Committed\/Penal Code and Sexually Vio- lent Predator populations in the state hospitals and (2) an increase in funding for managed care to reflect increased costs and additional ser- vices provided by counties. Inflation Increase Overbudgeted We recommend a reduction of $2.1 million from the General Fund for support of the Mental Health Managed Care Programs because the cost adjustment proposed for the program is overbudgeted. (Reduce Item 4440- 103-0001 by $2,096,000.) C – 100 Health and Social Services 1998-99 Analysis The Governor proposes a net increase of $7.3 million from the General Fund for support of the Mental Health Managed Care Program. This augmentation includes an increase in the amount budgeted to allocate among the counties, reflecting a $6.3 million cost adjustment for inpatient care based on the medical component of the U.S. Consumer Price Index (CPI). The proposed increase is calculated using the Department of Fi- nance’s planning forecast, which projects a medical CPI of 4.8 percent for 1998-99. However, the department’s final forecast projects a medical CPI of 3.2 percent, which yields a $4.2 million cost adjustment. Accordingly, we recommend that the Legislature reduce the Mental Health Managed Care Program augmentation by $2.1 million. Employment Development Department C – 101 Legislative Analyst’s Office EMPLOYMENT DEVELOPMENT DEPARTMENT (5100) The Employment Development Department (EDD) is responsible for administering the Employment Services (ES), the Unemployment Insur- ance (UI), and the Disability Insurance (DI) Programs. The ES Program (1) refers qualified applicants to potential employers, (2) places job-ready applicants in jobs, and (3) helps youths, welfare recipients, and economi- cally disadvantaged persons find jobs or prepare themselves for employ- ment by participating in employment and training programs. In addition, the department collects taxes and pays benefits under the UI and DI Programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contri- butions for DI. It also collects personal income tax withholdings. In addi- tion, it pays UI and DI benefits to eligible claimants. The budget proposes expenditures totaling $5.9 billion from various funds for support of the EDD in 1998-99. This is a decrease of $239 million, or 3.9 percent, from estimated current-year expenditures, primarily due to a decrease in projected UI and DI benefit payments and a decrease in expenditures in the Job Training Partnership Act Program. The budget proposes $23.6 million from the General Fund in 1998-99, which represents the same level of funding as in the current year. FEDERAL WELFARE-TO-WORK BLOCK GRANT PROGRAM The federal Welfare-to-Work block grant program will provide Cali- fornia with up to $363 million in federal funds to serve specified hard-to- employ Temporary Assistance for Needy Families (TANF) recipients, if the state provides the necessary one-third match. We comment on the Governor’s proposal, present alternatives for legislative consideration, and recommend that the number of long-term TANF recipients be incor- porated into the formula for allocating funds to the Private Industry Councils (PICs). C – 102 Health and Social Services 1998-99 Analysis Background The federal Balanced Budget Act of 1997 includes $1.5 billion in both federal fiscal year (FFY) 98 and FFY 99 for Welfare-to-Work block grants administered by the Department of Labor. About 75 percent of these funds are allocated to states based on a formula that includes two factors: (1) the state’s share of individuals in poverty and (2) the state’s share of TANF recipients. (These are referred to as Formula Grants. ) The re- maining 25 percent is available to specified local entities on a competitive basis. If California provides the one-third match ($181.5 million) required for the Formula Grants, the state is eligible to receive up to approximately $190 million in federal funds in FFY 98 (October 1997 through September 1998) and $173 million in FFY 99 (October 1998 through September 1999). At least 85 percent of these federal funds must be allocated to PICs, which are regional organizations created by the Job Training Partnership Act to provide employment and training services to both welfare and non-wel- fare recipients. The remaining discretionary funds \u2014up to 15 percent\u2014 are to be spent on projects to help long-term welfare recipients. All Formula Grant expenditures are subject to state legislative appro- priation, according to the following rules: Funds must Be Spent on Eligible Individuals According to the 70\/30 Rule. At least 70 percent must be spent on TANF recipients on aid 30 or more months who meet two of three specified condi- tions, or to certain noncustodial parents. Up to 30 percent must be spent on other TANF recipients who have characteristics associ- ated with long-term welfare dependence. Once awarded, states have three years to spend the federal funds. Funds Must Be Spent on Allowable Activities. These activities are: (1) community service or work experience programs; (2) job cre- ation through public or private sector employment wage subsidies; (3) contracts with public or private providers of readiness, place- ment, and post-employment services; (4) job vouchers for place- ment, readiness, and post-employment services; or (5) job retention or support services if such services are not otherwise available. State Match. States shall receive $2 in Welfare-to-Work formula grants for each $1 in state matching expenditures (up to the state maximum allotment). State matching funds must be in addition to the funds spent to meet the TANF maintenance-of-effort (MOE) requirement and must be spent on eligible individuals and activi- ties. States have three years to spend the necessary match. Employment Development Department C – 103 Legislative Analyst’s Office Formula for Allocating Funds to PICs. Federal law establishes three factors for states to use when allocating funds to their local PICs: (1) excess poverty (number of persons in poverty above a 7.5 percent threshold), (2) adults receiving TANF for 30 months or more ( long-term TANF recipients ), and (3) the number of unem- ployed persons. The first factor (excess poverty) must be weighted at least 50 percent. States may use excess poverty as the sole factor or may combine it with one or both of the other two factors. Governor’s Proposal The administration released its draft state plan for implementing the Welfare-to-Work program in California on January 16, 1998. The adminis- tration plans to hold five public hearings before submitting the plan to the federal Department of Labor in March. The Governor’s proposal includes the following elements. State Match. The state will provide the first part of the required match by allocating to counties $95 million from the General Fund for the California Work Opportunity and Responsibility to Kids (CalWORKs) program employment services. As required by fed- eral law, this is above the state MOE for the TANF (CalWORKs) program. The remaining $86.5 million in required matching funds are proposed to come from future expenditures between July 1, 1999 and September 30, 2001, as permitted by federal regulations. Formula Grant Allocation to PICs. Following the award of federal funds (probably in April or May of 1998), the budget proposes to allocate the required 85 percent of the federal funds to the PICs\u2014specifically, $162 million in 1997-98 and $147 million in 1998-99. The PICs will have three years to spend the funds on eligible individuals and activities pursuant to plans that they are required to submit to the EDD. These local plans, developed by the PICs, must be approved by the local county welfare director. Allocation Formula. The proposed formula for allocating funds to the PICs assigns (1) a weight of 55 percent to the number of per- sons in poverty above the 7.5 percent threshold, (2) a weight of 30 percent to the number of adults receiving TANF for at least 30 months, and (3) a weight of 15 percent to the number of unem- ployed individuals. Local Competitive Grants. With most of the remaining 15 percent of the Formula Grants ($50.5 million), the budget proposes to cre- ate a local competitive grant program. Cities, counties, community- based organizations, and faith-based organizations would be eligi- C – 104 Health and Social Services 1998-99 Analysis ble to apply for these grants based on their proposals for assisting hard-to-employ CalWORKs recipients. Administration. The budget proposes to spend $4 million of the federal funds for state administration of the program, by allocating $1 million in 1998-99 and $1 million annually in the following three years. The PICs may spend no more than 13 percent of their For- mula Grant allocation on administration. Legislature Has Options We believe that the proposal to draw down all of the federal funds is reasonable, given the attractive $2 for $1 federal match. We note, how- ever, that the Legislature has several options regarding (1) how and when the state match should be spent, (2) how the 15 percent discretionary funds should be spent, and (3) whether to free-up federal TANF block grant funds in anticipation of the expenditure of the new Welfare-to- Work funds. Use of Matching Funds. In order to qualify as a match for the Welfare- to-Work block grants, state spending must meet two tests. The first test is that total state spending on TANF must exceed the TANF MOE require- ment. This amount can be thought of as the TANF overmatch. This TANF overmatch will count toward the Welfare-to-Work match if the second test is satisfied. The second test is that an amount of spending equal to the TANF overmatch must be identified\u2014out of either the over- match itself or the baseline spending for CalWORKs\/TANF ser- vices\u2014which meets the federal criteria for expenditures of the Welfare-to- Work grant. We note that the budget proposal to spend $95 million as the state match does not have to be spent for employment services, as proposed in the budget. The budget proposal would fully fund the employment ser- vices component of CalWORKs without the $95 million, based on the budget’s caseload and cost assumptions. Thus, the Legislature might wish to consider alternative uses for these funds, which could include grants, employment services for non-custodial parents who have child support obligations, CalWORKs job creation programs, or allocating the funds to the PICs. Under this last option, the funds could be used as a state match on the condition that the PICs choose to spend the federal money in a manner consistent with legislative priorities. Should the Legislature choose any of these alternatives, however, it would need to identify $95 million from the remaining General Fund expenditures for Employment Development Department C – 105 Legislative Analyst’s Office CalWORKs which meet the federal criteria for the Welfare-to-Work state match. We believe that this would be feasible. Timing of State Match Expenditures. The Governor proposes to spend $95 million toward the state match in 1998-99 and the remaining $86.5 million sometime between July 1, 1999 and September 30, 2001. We note that the Legislature could elect to spend the matching funds on its own schedule, which could be faster or slower than the schedule pro- posed by the Governor, with virtually no impact on the timing of the availability of the federal funds. In our analysis of the CalWORKs pro- gram (Item 5180), we recommend deferring this match payment until 1999-00 because we estimate that the required match could be identified from the base budget for CalWORKs services in that year, at no additional cost to the General Fund. State Discretionary Funds. Up to 15 percent of the federal funds ($54.5 million) must be spent on projects designed to help long-term welfare recipients. The Governor proposes to use these funds to create a competitive grant program for local entities. We note that this proposed state competitive grant program is in addition to the federal competitive Welfare-to-Work grant program which will provide approximately $368 million per year to local entities throughout the United States in FFY 98 and FFY 99. The Legislature could, as an alternative, use the dis- cretionary funds to further its own priorities in CalWORKs, as long as the funds are spent on Welfare-to-Work eligible individuals and activities. Freeing-Up Federal TANF Block Grant Funds. Pursuant to the fed- eral welfare reform legislation enacted in August 1996, California is entitled to receive an annual federal block grant of $3.7 billion, provided that the state meets the TANF MOE requirement that the state spend 80 percent of what it spent in FFY 94 on TANF recipients. Unlike the Welfare-to-Work funds which must be spent within three years, federal TANF funds may be carried over indefinitely. The federal Welfare-to-Work block grant funds included in the Bal- anced Budget Act of 1997 are an additional source of federal funding for services for certain TANF\/CalWORKs recipients. The issue facing the Legislature is whether to take into account the new Welfare-to-Work funds in determining the budget for the CalWORKs program. If the Legis- lature wishes to treat the new funds as a partial funding source for CalWORKs, it could reduce the proposed appropriation for the program. Because of the TANF MOE requirement, state and county spending could not be reduced. Federal block grant funds, however, could be reduced and carried over indefinitely into future years. These freed-up TANF funds could be placed in a reserve for future years or could be used for C – 106 Health and Social Services 1998-99 Analysis other legislative priorities in the CalWORKs program. We will address this issue in our analysis of the CalWORKs program (Item 5180). Allocating Funds to PICs. As noted above, the three factors established by federal law for states to use when allocating Welfare-to-Work funds to the PICs are: (1) the incidence of poverty above a specified threshold, (2) the number of adults receiving TANF for 30 months or more, and (3) the number of unemployed persons. The law further provides that the pov- erty factor must be weighted at least 50 percent. Because almost all of these funds must be spent on TANF recipients that have been on aid for 30 months or more, or on TANF recipients having characteristics associated with long-term welfare receipt, we believe that the number of long-term TANF recipients residing in each PIC should be one of the allocation factors. Specifically, we recommend legislation be enacted providing that the formula assign a weight of at least 25 percent to this factor. We note that the Governor’s proposed weight of 30 percent for this factor is consistent with our recommenda- tion. (In our January report, CalWORKs Welfare Reform: Major Provisions and Issues, we illustrate the fiscal impact on the PICs under three alterna- tive distribution formulas that would meet our recommended criterion.) Department of Rehabilitation C – 107 Legislative Analyst’s Office DEPARTMENT OF REHABILITATION (5160) The Department of Rehabilitation (DR) provides basic vocational rehabilitation and habilitation services to persons with disabilities. Voca- tional rehabilitation services seek to place disabled individuals in suitable employment, while habilitation services help individuals who are unable to participate in vocational rehabilitation programs achieve a higher level of functioning. Services are provided in sheltered workshops under the Work Activity Program (WAP) and to groups or individuals on job sites through the Supported Employment Program (SEP). In addition, the department helps legally blind clients support themselves as operators of vending stands, snack bars, and cafeterias throughout the state; provides prevocational rehabilitation services to newly blind adults; and assists community-based rehabilitation facilities such as independent living programs, halfway houses, and alcoholic recovery homes. The budget proposes $368 million from all funds for support of DR programs in 1998-99, an increase of less than 1 percent over estimated current-year expenditures. The budget proposes $126 million from the General Fund, which is $1.8 million, or 1.4 percent, above estimated current-year expenditures from this funding source. Governor’s Proposal Does Not Fund Statutory Rate Increase The department is statutorily required to recalculate rates paid to Work Activity Program (WAP) providers effective July 1, 1998. Rates paid to some Supported Employment Program (SEP) providers also would change, because SEP group-placement rates are linked to WAP rates. The Governor proposes to suspend the rate increase, for an esti- mated General Fund cost avoidance of $9.6 million in 1998-99. Current state law requires the department to recalculate rates for WAP providers every two years. The next recalculation is scheduled to take effect July 1, 1998, and the department expects total payments to WAP providers to increase during 1998-99 if this statutory requirement is fol- lowed. In addition, payments would increase to some SEP providers C – 108 Health and Social Services 1998-99 Analysis because rates for the group-placement component of SEP are tied to the rates for WAP providers. Based on preliminary calculations, the depart- ment estimates that the rate increase would cost a total of $10.9 million ($9.6 million from the General Fund and $1.3 million in federal funds) in 1998-99. Caseload Projections Do Not Reflect Trends We recommend a net reduction of $4.8 million from the General Fund for the Work Activity Program and Supported Employment Program so that caseloads will reflect recent trends. (Reduce Item 5160-101-0001 by $5,448,000, increase Item 5160-001-0001 by $644,000, and increase Item 5160-001-0890 by $2,381,000.) The budget proposes expenditures of $112 million in total funds ($91 million General Fund) to support vocational rehabilitation and habil- itation services programs for clients with developmental disabilities. This is an increase of $1.8 million from the General Fund, or 1 percent, to add 201 clients to the caseload. Our analysis of the department’s caseload projections indicates that the projections do not account for recent Habilitation Services Program\/WAP (HSP\/WAP), Vocational Rehabilitation\/WAP (VR\/WAP) and SEP group- placement caseload trends. Habilitation Services Program\/Work Activity Program Projection Too High. The budget proposal projects an increase of ten HSP\/WAP cases per month during 1998-99, with total cases increasing from 9,850 at the beginning of the fiscal year to 9,960 in June 1999, as shown in Figure 21. Based on our analysis of the most recent 12 months of data (October 1996 through September 1997), the actual caseload is decreasing by an average of 29 cases monthly. Applying this trend to the actual caseload of 9,341 in September 1997, we estimate that the caseload will decrease to 8,732 by June 1999, which is 1,228 cases lower than the department’s projection. This caseload adjustment would result in a General Fund savings of $5.2 million in 1998-99. Vocational Rehabilitation\/Work Activity Program Projection Too Low. The budget proposal projects a steady VR\/WAP caseload of 1,950 clients during 1998-99. However, our review of the most recent 12 months of data shows that the actual caseload is increasing by an average of 18 cases per month. Applying this trend to the actual caseload of 2,243 cli- ents in September 1997, we estimate that the caseload will increase to 2,621 clients in 1998-99, which is 671 clients above the department’s pro- jection. This caseload adjustment results in an increase of $3 million ($644,000 General Fund) in 1998-99. Department of Rehabilitation C – 109 Legislative Analyst’s Office Figure 21 Department of Rehabilitation Program Caseload Trends Recent Caseload Trends 1998-99 Year-End Projection June 1999 Program Change 1997 Budget Office Difference Monthly September Governor’s Analyst’sa Actual Legislative HSP\/WAP -29 9,341 9,960 8,732 -1,288 VR\/WAP 18 2,243 1,950 2,621 671 Based on most recent 12 months (October 1996 through September 1997). a Habilitation Services Program\/Supported Employment Program Group-Placement Projection Does Not Reflect Seasonal Trend. The bud- get proposal projects a monthly increase of 20 HSP\/SEP group-placement clients during 1998-99. Our analysis of the most recent 24 months of data from the HSP\/SEP group-placement program shows an average increase in cases during nonsummer months offset by a pronounced decrease in cases during the months of May, June, July, and August. According to the department, this trend could be caused by an increased number of clients taking vacations during the summer months. Given an actual caseload of 2,930 in September 1997 and taking the seasonal trend into account results in a slightly lower average projected caseload than assumed in the budget. Our projection would result in a $273,000 decrease in General Fund expenditures in 1998-99. Summary. We recommend that the Legislature reduce caseload-related funding for a net reduction of $4.8 million from the General Fund. We note that more recent caseload data will be available at the time of the May Revision, allowing for further analysis of these trends. C – 110 Health and Social Services 1998-99 Analysis Legislative Oversight: Delay in Submission Of Supported Employment Cost Study The department has not submitted a legislatively mandated report on the cost of providing supported employment services, due February 1, 1997. We recommend that the department advise the Legislature on the status of the report and on its recommendations for standardizing rates. The 1996-97 Budget Act appropriated $175,000 for the department to contract for an independent study of the costs of providing work activity and supported employment services, with the purpose of developing a proposal for standardized rates that would reimburse providers on the same basis for providing a particular type of service. The department was required to report the results of the study to the Legislature by February 1, 1997. Due to problems with the contractor, the work activity section of the study was submitted after the deadline. At the time that this analysis was prepared, the department had not submitted the supported employment section of the study. We recommend that the department report at budget hearings on the status of the study or, if the study has been submitted by that time, on its findings and recommendations. Federal Waiver for Habilitation Services Could Result in State Savings Please refer to our analysis of the Department of Developmental Ser- vices for our discussion of this issue. California Work Opportunity and Responsibility to Kids C – 111 Legislative Analyst’s Office DEPARTMENT OF SOCIAL SERVICES CALWORKS PROGRAM (5180) In response to federal welfare reform legislation, the Legislature cre- ated the California Work Opportunity and Responsibility to Kids (CalWORKs) program. The CalWORKs program implemented the new Temporary Assistance for Need Families (TANF) program in California, replacing the Aid to Families with Dependent Children (AFDC) program. Like its predecessor, the new program\u2014enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy)\u2014provides cash grants and welfare-to-work services to families with children whose incomes are not adequate to meet their basic needs. A family is eligible for the Family Group component of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for grants under the Unemployed Parent component if it includes a child who is financially needy due the unemployment of one or both parents. (We describe the principal features of CalWORKs below.) The budget proposes expenditures of $5.9 billion ($2 billion General Fund, $27 million county funds, and $3.9 billion federal funds) for the CalWORKs program in 1998-99. In total funds, this is an increase of $307 million, or 5.5 percent. General Fund spending is projected to decline by $88 million, or 4.2 percent. This decrease in General Fund spending is primarily due to the availability in the budget year of a large carryover balance ($489 million) of TANF bock grant funds from the current and prior years. CURRENT-YEAR UPDATE OF CALWORKS\/TANF PROGRAM Major Changes in 1997-98 Welfare Reform. Figure 22 summarizes the major features of the CalWORKs program. The program established a five-year lifetime limit C – 112 Health and Social Services 1998-99 Analysis Figure 22 CalWORKs Program (AB 1542) Major Features Eligibility \ufffd\ufffd Look Back Provision. Eliminates the requirement that two-parent fami- lies applying for assistance have a prior connection to the labor force. \ufffd\ufffd Resource Limits. Conforms resource limits to the amounts permitted under federal law for the Food Stamps program. (This increases the asset limit for automobiles, as applied to applicants, from $1,500 to $4,650.) \ufffd\ufffd Diversion Program. Permits counties to provide eligible applicant families with up to three months of aid payments in the form of a lump sum for pur- poses of providing temporary assistance so that the family does not enter the program. Grants \ufffd\ufffd Maximum Grants. Continues 4.9 percent statewide grant reduction and suspension of the statutory COLA through October 31, 1998. \ufffd\ufffd Beno Exemptions. Eliminates Beno court case grant reduction exemptions (applicable to certain recipients not able to work). \ufffd\ufffd Income Disregards. Replaces the existing fill the gap and $30 and one- third disregard with a $225 plus 50 percent earned income disregard, whereby the first $225 of earnings plus 50 percent of each additional dollar of earnings are disregarded in determining the family’s grant. Services \ufffd\ufffd Welfare-to-Work Activities. Specifies the following sequence of services: job search; assessment; welfare-to-work activities (education and training); and community service employment. \ufffd\ufffd Child Care. Creates a new delivery system administered by county welfare departments and the State Department of Education. \ufffd\ufffd Employment Retention. Authorizes up to one year of case management and other job retention services for persons leaving aid due to employment. Continued California Work Opportunity and Responsibility to Kids C – 113 Legislative Analyst’s Office Participation Requirements \ufffd\ufffd Weekly Hours. Adults in single parent families must participate in work or approved education or training activities for 20 hours per week effective January 1, 1998, 26 hours effective July 1, 1998, and 32 hours effective July 1, 1999 and thereafter. An adult recipient in a two-parent family must participate for 35 hours per week. \ufffd\ufffd Sanctions. The sanction for failure to participate in work activities or com- munity service is removal of the adult portion of the grant. Time Limits \ufffd\ufffd Welfare-to-Work Services. New applicants are limited to 18 months of job training\/education services. Existing recipients are limited to 24 months. Counties may extend the 18 month limit by 6 months if the extension is likely to lead to nonsubsidized employment or if no jobs are available. Able- bodied adults must commence community service employment at the end of these time limits, if the county certifies that a nonsubsidized job is not available. \ufffd\ufffd Five-Year Time Limit\/Safety Net. After five cumulative years on aid, the amount of the grant is reduced by the portion for the adult. Counties have the option of providing subsequent aid in the form of cash or vouchers. Cer- tain recipients are exempt, including specified caretaker relatives and dis- abled persons. County Administration \ufffd\ufffd County Training. Provides funding for county training and retooling. \ufffd\ufffd County Fiscal Incentives. Provides 100 percent of certain grant savings to the counties. Specifically, allocates 75 percent of the state’s grant savings resulting from (1) program exits due to employment lasting six months, (2) increased earnings due to employment, and (3) diversion of applicants from the program. The remaining 25 percent of such grant savings shall be allocated to counties that have not achieved savings but have performed in a manner worthy of recognition. Counties must use these savings in the CalWORKs program unless expenditure of these funds is not needed to meet the federal TANF maintenance-of-effort requirement. \ufffd\ufffd Fraud Savings. Reallocates 25 percent of the state’s savings from fraud detection activities to the counties. C – 114 Health and Social Services 1998-99 Analysis for adult recipients, a participation mandate for certain recipients that exceeds federal requirements, a community service component for recipi- ents on aid after 18 months (with county discretion to extend to two years), and a simplified grant structure whereby recipients retain the first $225 of any earned income and 50 percent of any earnings above $225. (Please see the K-12 Education chapter for a discussion of child care issues related to the CalWORKs program.) Grants. Chapter 270 also extended the statewide 4.9 percent grant reduction and the suspension of the statutory cost-of-living adjustment (COLA) through October 31, 1998. These changes result in a General Fund cost avoidance of $218 million in 1997-98. Recent Federal Action on Welfare Reform The Balanced Budget Act of 1997 makes significant changes in federal welfare policy. The act, and the proposed federal regulations on welfare reform, have significant implications for California. We summarize these recent federal actions. The Balanced Budget Act (BBA) of 1997. On August 5, 1997, the Presi- dent signed the BBA (H.R. 2015), which significantly amended the 1996 federal welfare reform provisions. Key changes are summarized below. Welfare-to-Work Block Grant Program. The BBA includes $1.5 billion in both federal fiscal year (FFY) 98 and FFY 99 for Welfare-to-Work block grants administered by the Department of Labor. If California provides the required one-third match, the state is eligible to receive a total of $363 million in Formula Grants, $190 million in FFY 98 and $173 million in FFY 99. These funds must be spent on certain hard-to-employ TANF\/CalWORKs recipients. We discuss this new program in our analysis of the Employment Development Department budget in this chapter of the Analysis. Pass-Through of Child Support. The BBA allows states to count up to $50 per month in child support that is passed through to TANF families toward meeting the federal maintenance-of-effort (MOE) requirement. (This change means that California’s countable MOE spending increases by about $40 million in both the current year and the budget year.) Federal Penalties. The BBA adds and modifies the penalties for not meeting specified federal performance measures. For a discussion of the changes in the federal penalties, please see our report California Work Opportunity and Responsibility to Kids C – 115 Legislative Analyst’s Office CalWORKs Welfare Reform: Major Provisions and Issues (January 23, 1998). Simplified Transfer to the Social Services Block Grant (SSBG). The BBA allows states to transfer up to 10 percent of their federal block grant into the SSBG. Previously, states had to transfer $2 into the child care development block grant for each $1 transferred into the SSBG, subject to a combined total transfer of 30 percent. Supplemental Security Income\/State Supplementary Program (SSI\/SSP) Eligibility for Noncitizens. The BBA reversed earlier policy and retains SSI\/SSP eligibility for all noncitizens in the United States who were receiving such grants as of August 22, 1996. The act also allows noncitizens in the U.S. prior to August 1996 who subsequently become disabled to obtain SSI\/SSP bene- fits. Proposed Federal Regulations. On November 20, 1997, the federal Department of Health and Human Services (DHHS) issued proposed regulations for the TANF program. Although these regulations are subject to change when the final rules are issued, they give an indication of the department’s thinking on many issues, including the imposition of penal- ties. Some of the most significant regulations are summarized below. Work Participation Penalty. Federal welfare reform requires states to meet work participation rates for both the overall caseload and separate higher rates for two-parent families. The DHHS pro- poses that any states that meet the overall work participation re- quirement, but fail to meet the higher rate for two-parent families, should have their penalty based on the proportion of the caseload represented by two-parent families. Because approximately 14 percent of California’s TANF cases are two-parent families, this would reduce the potential first year penalty from $185 million (5 percent of the $3.7 billion block grant) to $26 million ($185 million times 14 percent). States will be eligible for further reductions if they come within 90 percent of the required rates of work participation. Corrective Action Plans. States that come into compliance within six months of acceptance of a corrective action plan by the DHHS will not be penalized. States that achieve a 50 percent or greater improvement within six months will have their penalties reduced. No Penalty Relief for States That Game the System. States that attempt to evade work participation requirements or retain the federal share of child support collections\u2014for example, through C – 116 Health and Social Services 1998-99 Analysis the creation of state-only funded programs\u2014will be denied speci- fied penalty relief (such as the proration of the penalty for failure to meet the two-parent work participation rate). 1998-99 BUDGET ISSUES Budget Proposes to Continue Past Grant Reduction and Eliminate Cost-of-Living Adjustment The Governor proposes to (1) make permanent the statewide 4.9 percent grant reduction, and (2) eliminate the statutory cost-of-living adjustment, resulting in a General Fund cost avoidance of $248 million. We review the Governor’s proposals and comment on them. Making Past Reductions Permanent. The budget proposes to (1) make permanent the statewide 4.9 percent grant reduction that is scheduled to be restored November 1, 1998 and (2) eliminate the statutory requirement to resume the COLA, which has been suspended since 1991-92. As Figure 23 shows, these changes result in a combined General Fund cost avoidance of $247.6 million. Specifically, the proposal to make the 4.9 percent grant reduction permanent results in a General Fund cost avoidance of $150.8 million in 1998-99. The proposal to delete the require- ment to restore the COLA (2.84 percent for 1998-99) results in a General Fund cost avoidance of $96.8 million in 1998-99. Figure 23 Governor’s CalWORKs Grant Proposals General Fund Savings 1998-99 (In Millions) Proposal Savings General Fund a Make permanent the 4.9 percent statewide grant reduction $150.8 Eliminate the requirement to restore the statutory COLA 96.8 Total $247.6 Assumes that total cost of policy proposals will, at the margin, be General Fund costs with no federal a share. California Work Opportunity and Responsibility to Kids C – 117 Legislative Analyst’s Office As indicated, the Governor’s proposals will result in significant sav- ings. To assist the Legislature in evaluating these proposals, we offer the following comments and findings on how the proposals would affect the income of nonworking families and how they would affect the financial work incentives for CalWORKs recipients. Figure 24 CalWORKs Maximum Monthly Grant and Food Stamps Family of Three Current Law and Governor’s Proposal 1998-99 Current Governor’s Current Law Proposal Law Change From Region 1: High-cost counties January 1, 1998 actual grant $565 1998-99 grant assuming: Make 4.9 percent statewide reduction perma- nent and delete statutory COLA \u2014 $565 Restore 4.9 percent statewide grant reduction November 1, 1998 $594 \u2014 Restore COLA (2.84 percent) November 1, 1998 611 \u2014 Food Stamps 253 267 Totals $864 $832 -$32 Region 2: Low-cost counties January 1, 1998 actual grant $538 \u2014 1998-99 grant assuming: Make 4.9 percent statewide reduction perma- nent and delete statutory COLA \u2014 $538 Restore 4.9 percent statewide grant reduction November 1, 1998 $565 \u2014 Restore COLA (2.84 percent) November 1, 1998 582 \u2014 Food Stamps 262 275 Totals $844 $813 -$31 Impact on Families. Figure 24 shows how both current-law provisions and the Governor’s proposals would affect monthly grants for a family C – 118 Health and Social Services 1998-99 Analysis of three (assuming the family is not exempt from past grant reductions). As the figure shows, the proposed maximum grant in Region 1 (counties with high rental costs) is $565, or $46 below the level required by current law in 1998-99. Under the Governor’s proposal, the combined maximum monthly grant and food stamp allowance is $832 (75 percent of the pov- erty level), or $32 below the level required by current law ($864, 78 percent of poverty). In Region 2, the proposed grant level is $538, or $44 below the level required by current law. When combined with food stamps, total benefits under the Governor’s proposal are $813 (73 percent of poverty), which is $31 less than the level required by current law ($844, 76 percent of poverty). Impact on the Work Incentive. Under CalWORKs, the first $225 and 50 percent of each additional dollar of earned income are disregarded in determining a family’s grant. Restoring the 4.9 percent grant reduction, and thereby raising grants pursuant to current law, would not reduce from a financial perspective the work incentive for CalWORKs recipi- ents. (We note that under prior law, raising grants could have reduced the work incentive because it would have reduced the gap between the need standard [$778, family of three] and the maximum grant [$565, family of three]. Previously, recipients could earn the difference between the maximum grant and the need standard with no reduction in their grant.) Impact on Caseload. Increasing grants will not affect a family’s eligibil- ity for the CalWORKs program. (Eligibility will continue to be based on a need standard established in statute.) However, a grant increase might induce some families, that are currently eligible but have elected not to participate, to apply for assistance. Conclusion. In summary, an assessment of the Governor’s grant pro- posals involves balancing the benefits of budgetary savings against the impact of setting grants for families with children further below the poverty line. Defer Expenditure of State Match For Welfare-to-Work Program Until 1999-00 We recommend deferring the proposed General Fund expenditure of $95 million in state matching funds for the federal Welfare-to-Work block grant by one year because the state may be able to identify the required match from within the base budget for CalWORKs in 1999-00, at no additional cost to the General Fund. (Reduce Item 5180-101-0001 by $95,000,000.) Background. To receive the annual federal TANF block grant California Work Opportunity and Responsibility to Kids C – 119 Legislative Analyst’s Office ($3.7 billion for California), states must meet a MOE requirement that state spending on welfare for needy families be at least 80 percent of the FFY 94 level, which is $2.9 billion for California. The MOE requirement drops to 75 percent if states meet two specified work participation rates, but California is unlikely to meet both rates in the budget year. For 1998-99, the Governor’s budget for CalWORKs is at the MOE floor, with the exception of $95 million above the MOE for purposes of providing matching expenditures for the federal Welfare-to-Work block grant funds. A total of $181.5 million in state matching funds must spent by September 30, 2001 in order to receive the maximum allocation of these federal funds. As discussed in our analysis of the Employment Development Depart- ment, it is in the state’s interest to put up the state match in order to qual- ify for the federal Welfare-to-Work block grant funds. Federal law, how- ever, permits the states to spend the match at any time prior to September 30, 2001 and still receive the federal allocation in the current and budget years as assumed in the budget. Thus, the Legislature can fund the state match on its own schedule, which may be faster or slower than the schedule proposed by the Governor. Recommendation. As discussed above, the Governor proposes to spend the first $95 million in 1998-99 toward the total match obligation of $181.5 million. We recommend delaying this expenditure by one year because we estimate that General Fund spending for CalWORKs in 1999-00 will be at least $200 million above the TANF MOE floor, thus allowing the match to be identified from within the base budget in that year at no additional cost to the General Fund. We project that General Fund spending for CalWORKs will increase in 1999-00 for two reasons. First, the $489 million carryover balance of federal funds that the budget proposes to use as an offset to General Fund costs in CalWORKs in 1998-99 will not be available in 1999-00. Second, 1999-00 is the first state fiscal year in which all recipients will be receiving CalWORKs services for an entire year, which will result in additional costs for employment services. We also note that in 1999-00, many CalWORKs recipients will have phased into the community service com- ponent of the program, which is an allowable activity for matching funds for the Welfare-to-Work grant. For these reasons we believe that it will be feasible to identify the entire required match for the Welfare-to-Work funds out of the base budget requirement for the CalWORKs program in 1999-00. Accordingly, we recommend deleting the proposed expenditure of $95 million in matching funds in 1998-99, for a corresponding General Fund savings. C – 120 Health and Social Services 1998-99 Analysis Impact of Budget Reductions in CalWORKs Because of the federal maintenance-of-effort requirement, any budget reductions in the CalWORKs program identified by the Legislature would result in a savings in federal funds. Such savings could be (1) redirected to other priorities in CalWORKs, (2) placed into a reserve for future years, and\/or (3) transferred to the Social Services Block Grant (Title XX), where the funds could be used to offset General Fund spending. Options for the Legislature. As indicated above, the budget proposal for state spending in CalWORKs is at the MOE floor (excepting the $95 million match for the Welfare-to-Work block grant). Thus, if the Legislature makes any budget reductions (beyond the $95 million) the resulting savings would be in federal funds. The savings are retained by the state because they are TANF block grant funds. The Legislature has three options with respect to any such savings: (1) redirecting the savings into other priorities in the CalWORKs program (such as increasing grants or establishing job creation programs); (2) placing the federal savings in a reserve for expenditure in future years; and\/or (3) transferring the federal funds into the SSBG, where the funds could be used to replace General Fund spending in certain other depart- ments. This last option requires some explanation. In accordance with federal law (TANF and the BBA), California may transfer up to $370 million in federal TANF funds into the SSBG, also known as Title XX funds. Once transferred, the funds become subject to the rules of the SSBG, subject to the condition that spending of any trans- ferred TANF funds must be for children or their families with incomes under 200 percent of poverty. For 1998-99, the budget proposes to use about $255 million in Title XX SSBG funds to offset General Fund costs, primarily in the In-Home Sup- portive Services (IHSS) program and in the community-based programs of the Department of Developmental Services (DDS). We estimate that additional SSBG funds (from a TANF transfer) could be used to supplant approximately $100 million in General Fund spending for low-income children and families in these two programs. To illustrate the impact of such a transfer on the General Fund, the residual (state-only) component of the IHSS program can be used as an example. Currently, the budget allocates $87 million in SSBG funds to the residual IHSS program, which results in a corresponding General Fund savings. We estimate that about 6 percent of the residual IHSS caseload consists of children whose family incomes are under 200 percent of pov- erty and that General Fund spending for these children is about $15 million. Thus, the state could transfer $15 million in TANF funds into California Work Opportunity and Responsibility to Kids C – 121 Legislative Analyst’s Office the SSBG, which could be used to offset $15 million in General Fund spending. Using a similar approach in the DDS, about $85 million in General Fund spending could be offset by TANF funds transferred into the SSBG. Alternatively, these SSBG funds could be used to augment spending in these programs, subject to the conditions noted above. In the following discussion, we identify various savings with respect to the Governor’s budget for CalWORKs. As noted above, proposed General Fund spending cannot be reduced, so we identify all savings as federal TANF savings. In each of the following issues, we recommend that expenditure of federal TANF funds be reduced. Following the spe- cific budget issues, we make a recommendation on how the identified savings should be allocated among the three options discussed above. Budget for CalWORKs Administration Does Not Reflect Savings From Projected Caseload Decline We recommend that proposed expenditures for county administration of the CalWORKs program be reduced by $40 million in federal funds because the budget does not reflect savings from its projected caseload declines. (Reduce Item 5180-101-0890 by $39,991,000.) Typically, the methodology used to budget for county administration of the CalWORKs program is based on the amount counties actually spent in the past year, adjusted for projected changes in caseload and inflation in the budget year. This amount is also adjusted for policy changes, if any. The budget proposal for county administration, however, does not reflect the 5.6 percent caseload reduction that the budget projects for the CalWORKs program in 1998-99. Making this adjustment would result in General Fund savings of $14.5 million and federal TANF savings of $20 million, based on the former state\/federal cost sharing ratios. Because of the federal MOE requirement, General Fund spending cannot be reduced, so the reduction must be in federal funds. Accordingly, we recommend that the budget for county administration be reduced by $34.5 million to be consistent with the caseload projections. In addition, our recommendation would result in a $5.4 million reduc- tion for the county share of expenditures, but for technical reasons this would also translate into a reduction of federal TANF block grant funds. (This is due to the interaction between our recommended action and an existing statutory provision.) Historical Context. In recent years, we made similar recommendations with respect to the budget proposal for county welfare administration. The counties responded by pointing out that the current-year baseline level of expenditures understates the counties’ needs because of recent C – 122 Health and Social Services 1998-99 Analysis historical budgeting trends. Prior to 1993-94, the budget for county ad- ministration was based on workload standards developed in the 1980s, projected changes in caseload, and changes in the county cost of doing business (inflation). During the tight fiscal constraints of the early 1990s, counties generally spent less on administration than was required to match the entire state appropriation (the county share was about 15 percent of total program costs). In reaction to this, beginning in 1993-94 the state appropriation for county administration was reduced to reflect this inability of the counties to provide their match. Essentially, adminis- tration of the welfare programs was underfunded with respect to the previously developed workload standards due to the counties’ inability to match. Our analysis of spending for CalWORKs (AFDC) administra- tion, however, indicates that since 1993-94 it has increased substantially in real dollars (that is adjusted for inflation and excluding policy changes) on a per-case basis. Figure 25 shows the basic administrative cost per case from 1989-90 through 1998-99 in constant 1989-90 (inflation adjusted) dollars. In terms of constant dollars, the Governor’s budget proposes an appropriation for 1998-99 equal to $796 dollars per case, a level that is higher than in all of the past nine state fiscal years except 1991-92. We note that if our recom- mendation is adopted, the budget for 1998-99 would be $752 per case in constant dollars, just above the current-year level and higher than in six of the past nine fiscal years. CalWORKs Employment Services Are Overbudgeted We recommend that the budget for CalWORKs employment services be reduced by $209 million because the budget exceeds the estimated amount needed to fully fund the program. (Reduce Item 5180-101-0890 by $209,174,000.) Background. The budget for CalWORKs employment services is based on the estimated caseload that requires such services, and the estimated cost of the various service components, such as job search. For 1998-99, the total budget for CalWORKs basic employment services is $883 million. This budget allocation is designed to fully fund the pro- gram, assuming that counties would begin implementing CalWORKs in January 1998 and would phase in all existing recipients by January 1999 at the latest. Figure 25 Spending for CalWORKs Administration Has Increased Substantially in Recent Years Expenditures Adjusted for Inflation 1989-90 Through 1998-99 (Constant 1989-90 Dollars) 450 550 650 750 $850 90-91 92-93 94-95 96-97 98-99 Cost per case LAO Projection Budget Proposal 1998-99 Actual 1989-90 to 1997-98 Est. California Work Opportunity and Responsibility to Kids C – 123 Legislative Analyst’s Office The budget, however, proposes substantially more for employment services than the amount in the basic allocation. Figure 26 (see next page) shows all funds budgeted for employment services for CalWORKs recipi- ents in 1997-98 and 1998-99. According to the figure, the budget for em- ployment services exceeds the estimated need by $766 million over the two-year period. Not all of this excess funding, however, should neces- sarily be considered overbudgeting. We review specific elements be- low. Current-Year CalWORKs Employment Services Augmentations. The current-year appropriation for CalWORKs includes a legislative augmen- tation of $62.5 million for CalWORKs employment services. This funding was placed in the budget to permit counties to implement the program more quickly than assumed in the basic cost estimate for 1997-98. There is some indication, however, that the counties are implementing CalWORKs more slowly than assumed in the budget (for example, Los Angeles County is not likely to begin until April 1998). Nevertheless, the funds have been allocated to the counties and, pursuant to Chapter 270, they may retain the funds until July 2000. Given that counties apparently are implementing CalWORKs more slowly than budgeted, and given that the Legislature has already provided an augmentation of $62.5 million, C – 124 Health and Social Services 1998-99 Analysis we see no analytical basis for increasing the current-year appropriation by $42.9 million as proposed by the Governor. Accordingly, we recom- mend rejecting this proposal. We further recommend that the $42.9 million in available federal TANF funds be carried over into 1998-99, and that they be considered for other legislative priorities, as we discuss later in this Analysis. Figure 26 CalWORKs Employment Services Budget Total Funds 1997-98 and 1998-99 (In Thousands) 1997-98 1998-99 Total Two-Year Budgeted for Services CalWORKs\/AFDC basic allocation GAIN basic $192,933 \u2014 $192,933 GAIN augmentation 60,000 \u2014 60,000 Reappropriation of GAIN augmentation 59,000 \u2014 59,000 CalWORKs basic 160,086 $882,822 1,042,908 CalWORKs augmentations Legislative $62,520 \u2014 $62,520 Governor’s budget 42,899 \u2014 42,899 Welfare-to-Work funds State matching funds \u2014 $95,000 $95,000 Federal funds (to PICs) $29,000 192,700 221,700a Federal funds (local competitive grants) \u2014 50,500 50,500 County fiscal incentives 26,005 266,879 292,884 Total budget $632,443 $1,487,901 $2,120,344 Estimated Need for Servicesb GAIN basic $192,933 \u2014 $192,933 GAIN augmentations 119,000 \u2014 \u2014 CalWORKs basic 160,086 $882,822 1,042,908 Total estimated need $472,019 $882,822 $1,235,841 Budgeted amount in excess of estimated need $160,424 $605,079 $765,503 Although the budget proposes $162 million in 1997-98 and $147 million in 1998-99 for allocation to the a PICs, the draft state plan indicates that only $29 million and $192.7 million, in 1997-98 and 1998-99 respectively, are likely to be spent by the PICs. Based on caseload and service costs. b California Work Opportunity and Responsibility to Kids C – 125 Legislative Analyst’s Office County Fiscal Incentives. As discussed previously, under CalWORKs, the state and federal grant savings from increased earnings and specified exits due to employment are to be allocated to the counties as fiscal incentives. The budget estimates these fiscal incentives to be $26 million in 1997-98 and $267 million in 1998-99. Because the Governor’s budget is set at the MOE floor, however, counties will be required to expend the state share of the fiscal incentives in the CalWORKs program in the year they are paid to the counties. (The federal share must be spent on TANF eligible recipients and activities, but could be carried over by the counties into future years.) We believe it would be reasonable to assume that the CalWORKs legislation intended that county fiscal incentives be provided to the counties even if total budgeted expenditures exceed the amount needed. Accordingly, we recommend that the fiscal incentives be consid- ered a county-run program enhancement, and we therefore do not as- sume these funds represent overbudgeting. Federal Welfare-to-Work Funds Allocated to Private Industry Coun- cils (PICs). The budget proposes to allocate $162 million in 1997-98 and $147 million in 1998-99 to PICs in order to serve hard-to-employ TANF recipients. Although a total of $309 million will be available to the PICs, over the two-year period, the administration’s draft state Welfare-to- Work plan indicates that counties are likely to spend just $29 million in 1997-98 and $192.7 million in 1998-99 as shown in Figure 27. These funds will be used to provide specified welfare-to-work services to certain hard- to-employ CalWORKs recipients. It is likely that a significant amount of these funds will address the projected need for employment services in the CalWORKs program because PICs must use these funds to serve CalWORKs recipients. We recommend that 75 percent of these Welfare- to-Work funds ($166 million) be considered as an offset to the basic bud- get for CalWORKs employment services. (In other words, the new federal Welfare-to-Work funds could replace federal TANF funds that are bud- geted to meet the projected need for employment services.) Accordingly, we recommend reducing the amount proposed for CalWORKs employ- ment services by $166 million in federal TANF funds. Welfare-to-Work State Competitive Grant Program. The budget also proposes allocating $50.5 million of the federal funds to establish a state competitive grant program. Funds will be awarded to local organizations based on their ability to assist CalWORKs recipients in obtaining employ- ment and their ability in leveraging other funding. We also note that the federal Welfare-to-Work program includes a separate competitive grants program which could make additional funds available to local entities in California, including county welfare departments. Because there is signifi- cant uncertainty concerning how the funds provided under these grant C – 126 Health and Social Services 1998-99 Analysis programs will be used, at this time, we do not recommend considering these funds as an offset to the CalWORKs employment services budget. State Matching Funds for the Welfare-to-Work Program. As discussed above, we recommend deleting the $95 million for employment services that is proposed to serve as part of the state match for the federal Welfare- to-Work funds. Consequently, we do not need to address this component of employment services overbudgeting in this issue. Summary. To summarize our specific recommendations, we believe that the budget for CalWORKs employment services is overbudgeted by a total of $209 million, and should be reduced accordingly. These savings would be in federal TANF block grant funds. Figure 27 shows the compo- nents that result in this total. We note that, in conjunction with our previ- ous recommendation to delete the $95 million state match, this recom- mendation would still leave about $450 million (out of the $766 million identified in Figure 26) over the estimated amount needed to fully fund CalWORKs employment services. Figure 27 Recommended Reductions in CalWORKs Employment Services Program Federal Block Grant Funds (In Millions) LAO Recommendation Amount Treat 75 percent of federal funds for Welfare-to-Work allocated to PICs as an offset to basic employment services budget -$166.3 Reject Governor’s proposed current-year augmentation to employment services budget -42.9 Total -$209.2 Establish a TANF Reserve We recommend that the Legislature place at least 50 percent ($126 million) of our identified federal savings in the CalWORKs pro- gram into a reserve for expenditure in future years. The remaining savings ($126 million) could be (1) redirected to other legislative priorities in the CalWORKs program and\/or (2) transferred to the Social Services Block Grant (up to $100 million) in order to offset General Fund expenditures. Background. As discussed in the previous section, we recommend reducing the employment services budget by $209 million. Because of the California Work Opportunity and Responsibility to Kids C – 127 Legislative Analyst’s Office federal MOE requirement, all of these savings are in federal funds. In addition, we have recommended that the budget proposals for CalWORKs administration and Food Stamps administration be reduced, based on the budget’s projected caseload decline. If the Legislature adopts the latter two recommendations, there will be $42.6 million in additional federal TANF savings. In total, we recommend reducing CalWORKs federal TANF funds expenditures by $252 million. Below, we discuss four options for using these funds. Option 1: Allocating Excess Employment Services Funds to the Coun- ties. Essentially, the Governor proposes to overbudget employment services and let the counties decide how best to spend these funds on services for CalWORKs recipients. An advantage of this approach is that it provides counties with flexibility. (Pursuant to the CalWORKs legisla- tion, counties may shift funds between administration, services, and child care.) While it is reasonable to assume that some benefit will be derived from these expenditures, we note that this spending presumably will be for purposes not encompassed in the estimated need for employment services in the program and may not reflect legislative priorities. Option 2: Reducing General Fund Expenditures by Transferring TANF Funds to the SSBG. As described above, we believe that about $100 million of the identified savings could be transferred to the SSBG and then used to offset General Fund spending in the residual IHSS program or in the community-based programs in the DDS. An advantage of this approach is that it maximizes the Legislature’s discretion by free- ing up General Fund monies for any legislative priorities, while not result- ing in a reduction in IHSS or community-based programs. Option 3: Other CalWORKs Priorities. The identified savings could be redirected to other legislative priorities in the CalWORKs program, such as grants or job creation programs. Option 4: Establish a TANF Reserve. Another option is to set aside the identified savings into a reserve for future years. There are three advan- tages to this approach. First, we note that in the event of a recession, the state will be responsible for 100 percent of any increased CalWORKs grant costs associated with an increase in the caseload. Establishing a TANF reserve would help mitigate the impact of a recession. Second, General Fund spending for CalWORKs is likely to increase in 1999-00 because the Governor proposes to spend all available TANF federal funds in 1998-99, including $489 million carried over from prior years. These carry-over funds will not be available in 1999-00, thereby creating a po- tential General Fund obligation to replace the one-time carry-over funds. (We note, for example, that if this balance were not available, General C – 128 Health and Social Services 1998-99 Analysis Fund spending would have increased by $393 million in 1998-99 com- pared to the prior year.) The third advantage to creating a TANF reserve is that it would provide legislative flexibility. If counties need more funds for CalWORKs services, they could request them during the budget year and the Legislature could authorize additional funding. Recommendation. We recommend that the Legislature place at least 50 percent of the savings we have identified in the CalWORKs program (or $126 million) into the TANF reserve. The remaining savings\u2014about $100 million of which could be transferred into the SSBG and used to offset General Fund costs\u2014could be used for other legislative priorities. Aid to Families with Dependent Children C – 129 Legislative Analyst’s Office FOSTER CARE Children are eligible for grants under the Aid to Families with De- pendent Children-Foster Care (AFDC-FC) program if they are living with a foster care provider under (1) a court order or (2) a voluntary agreement between the child’s parent and a county welfare or probation department. Children in the foster care system can be placed in either a foster family home (FFH) or a foster care group home (GH). Both types of foster care provide 24-hour residential care. Foster family homes must be located in the residence of the foster parent(s), provide services to no more than six children, and be either licensed by the Department of Social Services (DSS) or certified by a foster family agency. Foster care group homes are licensed by the DSS to provide services to seven or more children. The budget proposes total expenditures of $1.5 billion ($406 million General Fund, $518 million county funds, and $590 million federal funds) for the AFDC-FC program in 1998-99. This is an increase of 9.4 percent (7 percent General Fund) from estimated expenditures in the current year, primarily due to caseload growth. Budget Underestimates Proportion Of Cases Eligible for Federal Funds We recommend reducing the General Fund amount budgeted for the Aid to Families with Dependent Children-Foster Care program by $4.3 million in 1997-98 and $7.9 million in 1998-99 because the budget underestimates the number of cases that are eligible for federal funding. (Increase Item 5180-101-0890 by $19,690,000 and reduce Item 5180- 101-0001 by $7,894,000.) Under the AFDC-FC Program, the state receives matching federal funds (51 percent of total expenditures) for those cases meeting federal eligibility criteria. Non-federal costs are shared 40 percent General Fund and 60 percent county funds. The budget estimates that 83 percent of children in FFH placements and 77 percent of children in GH placements will be federally eligible in Figure 28 Foster Family Home Cases Budget Underestimates Proportion Federally Eligible Percent of Cases Federally Eligible May 1996 Through June 1999 80 81 82 83 84 85% Actual Budget Estimate LAO Estimate Jun 96 Dec 97 Dec 98 Jun 97 Jun 98 Dec 99 Jun 99 C – 130 Health and Social Services 1998-99 Analysis both the current and budget years. Our analysis indicates that this under- states the number of children who will be eligible for federal funds for two reasons: Proportion of Federally Eligible Cases Currently Higher Than Budget Estimate. Figures 28 and 29 show that, at last count (Octo- ber 1997), the proportion of federally eligible cases was higher than the proportion assumed in the budget for both FFH and GH cases. Proportion of Federally Eligible Cases Is Increasing. Figures 28 and 29 also indicate that the proportion of federally eligible FFH and GH cases has been growing over the last 18 months. In fact, the proportion of federally eligible cases has been growing over the last several years. According to the department, this trend primar- ily reflects improvements in county eligibility determination proce- dures. Figures 28 and 29 also illustrate our approach to estimating federal eligibility in the current and budget years. First, we assumed that the rate of increase in the proportion of federally eligible cases observed in the latest six months of data would continue for the remainder of the current year. Then we assumed that the federally eligible proportion would Figure 29 Foster Care Group Home Cases Budget Underestimates Proportion Federally Eligible Percent of Cases Federally Eligible May 1996 Through June 1999 Jun 96 Dec 97 Dec 98 Jun 97 Jun 98 Dec 99 Jun 99 71 73 75 77 79 81 83% Actual Budget Estimate LAO Estimate Aid to Families with Dependent Children C – 131 Legislative Analyst’s Office remain fixed in the budget year at the level projected to be achieved at the end of the current year. Our approach assumes continued improvements in county eligibility determination procedures in the near term, but ac- knowledges that there is a limit to future growth in the proportion of cases that are federally eligible. Based on this approach, we estimate that 80 percent of FFH cases and 84 percent of GH cases will be federally eligible in the current year, and that 81 percent of FFH cases and 85 percent of GH cases will be federally eligible in the budget year. Consequently, we estimate that federal expen- ditures for the Foster Care program are understated by $10.6 million in the current year and $19.7 million in the budget year, and combined state and county expenditures are therefore overstated by the same amount. Accordingly, we recommend that the budget be adjusted to reflect our estimates, resulting in General Fund savings of $4.3 million in 1997-98 and $7.9 million in 1998-99. C – 132 Health and Social Services 1998-99 Analysis CHILD SUPPORT ENFORCEMENT All children are legally entitled to support from both parents. Federal law requires the states to provide child support enforcement services to families receiving Temporary Assistance for Needy Families (TANF). Non-TANF families may request the same services, or seek to obtain child support through a private attorney. Child support payments that are collected on behalf of TANF recipients are used to offset the public costs of TANF grants, except the first $50 of monthly payments which are distributed to the custodial parent. Collections on behalf of non-TANF recipients are distributed directly to the custodial parents. In California, the child support enforcement program is administered by county district attorneys under the supervision of the Department of Social Services (DSS). The federal government picks up two-thirds of county administrative expenditures, and makes incentive payments to states designed to encourage them to collect child support. California passes the federal incentive payments to the counties along with addi- tional state incentive payments. These payments are used to support the county costs of the program. CHILD SUPPORT INCENTIVE PAYMENT SYSTEMS We recommend enactment of legislation establishing a state child support incentive payment system in which county incentive payments are a function of county administrative effort and cost-effectiveness. We further recommend that this legislation establish an administrative review procedure\u2014or performance enhancement process \u2014for counties that rank low in performance. The Current State Incentive System In the current year, state incentive payments to a county are the prod- uct of the county’s collections and an incentive rate: Incentive Payment = (Incentive Rate) x (Collections) Child Support Enforcement C – 133 Legislative Analyst’s Office The same flat incentive rate of 13.6 percent is applied to the total collec- tions for each county. In other words, all collections\u2014TANF and non- TANF\u2014are weighted equally in calculating the incentive payments to a county, and each county’s incentive rate is independent of its score on any performance measure. The current system does reward performance in that the incentive payment increases directly with the amount of collec- tions. We note that the budget proposes to continue the flat rate meth- odology in 1998-99. In response to the provisions of the federal welfare reform act\u2014the Personal Responsibility and Work Opportunity Reconciliation Act of 1996\u2014the Secretary of Health and Human Services recently proposed a new federal performance-based incentive system for child support en- forcement. A bill currently in the House\u2014H.R. 3130\u2014contains the basic structure of the Secretary’s proposal. Mirroring the Proposed Federal System Chapter 926, Statutes of 1997 (SB 936, Burton), requires our office to develop a state child support incentive system that (1) continues the flat- rate methodology for 1998-99 and (2) for subsequent years, would mirror the latest draft federal incentive plan. In this section, we describe a state incentive system that mirrors the system contained in H.R. 3130 and analyze its potential effects on county performance. In the following section, we present a different incentive system that, in our judgement, is a better alternative. The New Collections Base. Under the federal proposal, the new col- lections base would be the sum of collections on behalf of families who have never received TANF, plus twice the sum of collections on behalf of current and former TANF recipients. This change would give more weight to TANF and former-TANF collections than the current state system, in which all collections are weighted equally. The New Performance Measures. The new incentive rate would be a function of five performance measures: Paternity Establishment. A county may use either (1) the ratio of the number of children in the child support program caseload for whom paternity was established in the year to the total number of children in the program caseload who were born out of wedlock or (2) the ratio of the total countywide number of children born out of wedlock for whom paternity was established in the year to the total number of children born out of wedlock in the prior year. C – 134 Health and Social Services 1998-99 Analysis Support Order Establishment. The percentage of cases in which there is a support order. Current Support Collections. The percentage of total current sup- port owed that is collected. Arrearage Collections. The percentage of cases with arrearages in which past-due support is collected. Cost-Effectiveness. Total collections divided by total administra- tive expenditures. How the Performance Measure Scores Would Determine the New Incentive Rate. The incentive rate earned on each performance measure would be determined by a specified schedule that depends both on the county’s level of performance and its rate of improvement. Figure 30 depicts, for illustration purposes, the incentive rate schedule for the sup- port order establishment measure. For example, if at least 80 percent of a county’s cases have support orders, then the county would earn the maximum incentive rate for the support order establishment criterion. If fewer than 50 percent of the county’s cases have orders, then the county would generally earn no incentive rate for that criterion. However, if the county had improved its support order establishment performance by at least 5 percentage points over the previous fiscal year, then it would earn half of the maximum incentive rate for that criterion. Figure 30 Incentive Rate Schedule for Support Order Establishment Proposed Federal Incentive System Performance Level Percent of Maximum Incentive 80% and above 100% 70% to 79% 80% to 98% (increases by 2% increments) 50% to 69% 60% to 79% (increases by 1% increments) 49% and below 50% if performance level increased by 5% over previous year, otherwise 0% The maximum incentive rates for paternity establishment, support order establishment, and current support collections would be one-third higher than the maximum rate for arrearage collections and cost-effective- ness. The incentive rates earned for each of the five performance measures Child Support Enforcement C – 135 Legislative Analyst’s Office would be added to produce a total incentive rate. The total incentive rate would then be applied to the collections base to determine the incentive payment. Evaluation of the Proposed Federal System Proposed System Unlikely to Improve Collection Efficiency. We at- tempted to determine whether a state incentive payment system that mirrors the proposed federal system would accomplish the goal of in- creasing child support collections. We did this by analyzing the relation- ship between collections and the five performance measures\u2014as well as other selected variables\u2014in a series of statistical analyses using data from the 58 counties in California. In our analysis, the only variables we found to be statistically significant in explaining differences in collections among the counties were (1) overall administrative expenditures per case in the program (a measure of administrative effort ) and (2) cost-effectiveness. As we noted in previous analyses of the program, administrative effort shows a particularly strong relationship to collections\u2014explaining about 70 percent of the variation in collections. Besides cost-effectiveness, we found no statistically significant relation- ship between the proposed performance variables and collections. We also found no relationship between collections and demographic vari- ables (for example, unemployment and per capita income) which, accord- ing to some program administrators, might have had an effect on the ability to collect child support. While we recognize that the proposed performance measures represent important components of the enforcement process, we also note that they are only part of a network of elements in that process. The issue is whether collections will be enhanced by giving program administrators fiscal incentives to place greater weight on particular components of the process than they would in the absence of these incentives or, alterna- tively, whether the administrators should be left to make their resource allocation decisions without bias toward particular program elements. Our findings suggest that the latter course may be wiser. Proposed System Would Not Resolve Case-Closing Problem. The proposed federal system does not resolve a problem with existing federal regulations, which allow counties to close old cases (those in which collections have not been made in three years). A county’s performance score on the support order establishment, current support collections, and arrearage collections measures, and the first of the two paternity estab- lishment measures would increase if the county closed difficult cases. Because counties have closed cases at different rates (some close all old C – 136 Health and Social Services 1998-99 Analysis cases, others keep these cases open), comparisons of performance among counties based on the proposed performance measures may be distorted. For purposes of measuring county performance, we believe that these cases should not be closed, in order to derive an accurate picture of the program. As long as the federal government permits case closure on this basis, however, it might make sense to follow this practice only for federal reporting purposes in order to compete with the other states for federal incentive funds (until the federal administration addresses the problem). Proposed System Would Create an Indirect Incentive to Recruit Never-on-TANF Cases. As indicated earlier, the proposed federal sys- tem would reduce the weight assigned to never-on-TANF collections in the collections base. Nevertheless, by making incentive rates a function of performance on never-on-TANF cases, it would create an additional indirect incentive to recruit such cases into the county program. (As noted above, non-TANF parents have the option of using either the county district attorney or a private attorney.) Some counties have begun to recruit these cases\u2014which tend to have relatively large orders that are easier to enforce\u2014by setting up programs that immediately refer all court orders directly to the county program. Through such programs, counties could increase their performance scores and earn a higher incentive rate on all collections. Consequently, a county’s fiscal reward for pursuing never-on-TANF cases would include both the additional incentive payments earned on the increase in the collections base and the additional payments earned from the increase in the incentive rate applied to all collections. The potential problems are twofold. First, recruiting never-on-TANF cases may divert county resources from the enforcement of TANF cases, where the custodial parent does not have the option of using a private attorney. Second, this diversion of resources may result in lower TANF collections, which partially offset the government costs of TANF grant expenditures. In light of this, the Legislature may want to consider an incentive system that contains greater rewards for TANF collections. Summary of Findings on Federal Proposal. In summary, we find: The performance measures do not, with the exception of cost-effec- tiveness, demonstrate a statistically significant relationship with the principal variable that reflects the program’s objec- tives\u2014collections. The performance measures do not resolve the case-closing prob- lem, which gives a distorted picture of program performance and makes county comparisons difficult. Child Support Enforcement C – 137 Legislative Analyst’s Office Although the proposed system reduces the relative weight applied to never-on-TANF collections in the collections base, it creates an additional indirect\u2014and potentially strong\u2014incentive to recruit such cases into the program. This could result in the diversion of resources away from the enforcement of TANF cases. An Alternative Incentive System In this section, we describe an alternative performance-based incentive system with performance measures that (1) are directly related to collec- tions, (2) avoid the case-closing problem, and (3) replace the indirect incentive to recruit never-on-TANF cases with an incentive to more vigor- ously pursue TANF collections. The Incentive Rate. Under our proposed alternative, the incentive rate would be a function of two performance measures: Cost-Effectiveness. Total TANF collections divided by total admin- istrative expenditures on TANF cases. Administrative Effort. Total administrative expenditures on TANF cases divided by average TANF\/California Work Opportunity and Responsibility to Kids (CalWORKs) Family Group caseload. Each county’s performance score would be the product of cost-effec- tiveness and administrative effort: Performance Score = (Cost-Effectiveness) x (Administrative Effort) A county’s performance score would determine the incentive rate that would be applied to its collections base when determining the amount of the incentive payment. The Collections Base. The collections base would be identical to the base in the proposed federal system: the sum of collections on behalf of families who have never received TANF, plus twice the sum of collections on behalf of current and former TANF recipients. Note that although each county’s incentive rate would be a function only of variables related to TANF cases, incentive payments would continue to be made on non- TANF collections as well because they would contribute to the collections base. Evaluation of the Legislative Analyst’s Office Alternative Incentive System Promotes Efficiency. As indicated, the incentive rate would be partly a function of administrative effort, but only spending on productive C – 138 Health and Social Services 1998-99 Analysis administrative activities would be rewarded. In other words, the Legisla- tive Analyst’s Office (LAO) alternative would promote efficiency because only expenditures that result in increased child support collections would increase a county’s incentive payments. In order to illustrate this point, our proposed performance score would work as follows: Cost-Effectiveness Administrative Effort Performance Score = x TANF Collections Administrative Costs Administrative Costs TANF Cases Note that the formula operates in a way whereby expenditures that do not increase collections would produce completely offsetting changes in the two components of the performance score: the increase in administra- tive effort would be offset by a corresponding decrease in the cost-effec- tiveness ratio. Avoids Case-Closing Problem. Because counties have taken different approaches toward the practice of closing child support cases, using this caseload to calculate administrative effort could create a distorted picture of performance. Until a uniform measure of the program caseload is required and reflected in the program reporting systems, we propose measuring performance using the county average TANF\/CalWORKs (Family Group) caseload as the case measure. By using a measure of caseload that is outside of the control of the county child support pro- gram, the case-closing problem would be avoided. This measure, more- over, should have a high correlation to the child support TANF caseload because all CalWORKs (formerly Aid to Families with Dependent Chil- dren [AFDC]) cases must be referred to the county for child support enforcement. Eliminates Indirect Incentive to Recruit Never-on-TANF Cases. Be- cause the incentive rate is determined only by enforcement activities on behalf of families that are currently receiving TANF, the LAO alternative would remove the indirect incentive to recruit never-on-TANF cases. Counties would continue to earn incentive payments on the never-on- TANF collections, but these collections would not affect performance scores and incentive rates. Net Fiscal Effect. We note that if proposals being considered at the federal level are adopted, our alternative may not maximize the federal incentive payments earned by the state in the short run. This is because our proposal bases incentive payments on variables directly related to collections rather than on the federal performance measures. In other Child Support Enforcement C – 139 Legislative Analyst’s Office words, there may be a tradeoff between maximizing federal incentive payments and maximizing program effectiveness, at least in the short run. In the long run, however, we believe that our alternative is more likely to increase collections, which would lead to higher federal incentive pay- ments. Moreover, because its performance measures are based on TANF collections, the LAO alternative would give counties a greater incentive to increase these collections and, therefore, would encourage recoupment of the public costs of TANF\/CalWORKs grants. Finally, by eliminating the indirect incentive to recruit never-on-TANF cases into the program, the LAO alternative would reduce the risk that program resources will be diverted from TANF cases and toward cases that could be enforced through the private sector. Impact of the Proposals on County Incentive Payments To assess the potential impact of the two alternatives on the distribu- tion of incentive payments among the counties, we estimated the pay- ments that counties would have received in 1995-96 under the proposed federal system and the LAO proposal. (In order to calculate the incentive payments, we had to make certain assumptions. First, we assumed that 75 percent of each county’s non-TANF collections were made on behalf of families that were formerly TANF recipients. Second, for the LAO alternative system, we developed a schedule to translate performance scores into incentive rates.) Figure 31 (see page 140) compares county performance in 1995-96 under (1) a flat incentive rate (similar to the methodology in current state law and the budget proposal for 1998-99), (2) the proposed federal incen- tive system, and (3) the LAO alternative. The figure reveals significant differences in incentive payments under the proposed federal system and the LAO alternative for some counties. Figure 32 (see page 141) illustrates the reasons for these differences by focusing on the performance of Orange and Fresno Counties. (Orange County’s performance on TANF collections has improved substantially since 1995-96, so the figure is used for illustration purposes and does not reflect the county’s current performance.) Orange County scored higher on the federal performance measures, and would have earned a higher incentive rate than Fresno County under the proposed federal system. However, Fresno would have earned a higher incentive rate under the LAO alternative because it had better cost-effectiveness and higher ad- ministrative effort. The proposed federal system would have rewarded a county like Orange that scores highly on the federal performance measures. How- C – 140 Health and Social Services 1998-99 Analysis Figure 31 Comparison of Three Incentive Payment Systems Hypothetical Example Based on 1995-96 Data Twenty Largest Countiesa (In Millions) County (Current Law) Proposal Alternative Flat Rate Federal LAO Los Angeles $24.2 $8.7 $16.9 Orange 8.2 10.1 8.3 Alameda 7.4 9.8 7.7 San Bernardino 6.8 5.6 5.6 Santa Clara 6.8 8.1 7.3 Fresno 6.7 7.3 8.0 San Diego 6.4 8.3 5.5 Sacramento 6.4 5.7 5.5 Riverside 6.0 5.3 5.0 Kern 4.3 5.7 4.5 Ventura 4.3 4.8 6.1 Contra Costa 3.8 4.3 3.8 San Joaquin 3.5 4.0 3.4 Stanislaus 3.3 4.7 3.9 Tulare 3.0 3.5 3.5 San Francisco 3.0 3.9 3.3 San Mateo 2.4 2.6 2.6 Sonoma 2.3 2.9 3.0 Santa Barbara 2.0 2.6 2.4 Monterey 2.0 2.6 2.3 Total (58 counties) $136.3 $136.3 $136.3 As measured by total child support collections. a ever, an examination of program data indicates that Orange was an aver- age performer in 1995-96 on measures related to collections, such as the AFDC (or CalWORKs) recoupment rate. On the other hand, the LAO alternative would have rewarded a county like Fresno that manages to combine relatively high levels of administrative effort and cost-effective- ness, which reflects the ability to collect a substantial amount of child support in an efficient manner. To phrase it another way, counties that have only a moderate level of collections but do well on the cost-effective- ness measure by holding costs down to a very low level will not fare well on the administrative effort measure; and counties that have high levels Child Support Enforcement C – 141 Legislative Analyst’s Office of administrative effort but whose collections do not keep pace with this effort will not do well on the cost-effectiveness measure. Figure 32 Federal Incentive System and the LAO Alternative Effect on Incentive Rates Hypothetical Example Based on 1995-96 Data Orange Fresno AFDC recoupment rate 13.8% 17.3%a Administrative effort (AFDC) $360\/case $451\/case Cost-effectiveness ratio (AFDC) 2.61 2.74b Proposed federal incentive rate 8.4% 7.2% LAO alternative incentive rate 6.9% 7.9% Child support collections on AFDC cases divided by AFDC grant expenditures. a Collections per $1 of administrative expenditures. b Finally, we conclude that in addition to being superior to the proposed federal system, our proposal is preferable to an incentive system based on a single flat rate applied to collections\u2014as provided by existing law for the current and budget years only. This is because under our proposal the counties will have a specific incentive to increase their administrative effort, and to apply this effort so as to increase collections in a cost-effec- tive manner. Legislative Analyst’s Suggested Performance Enhancement Process Chapter 926 also requires that our proposed incentive program include a provision to require poorly performing counties to agree to technical assistance as a condition of receiving any incentive payments. In re- sponse, we propose the following performance enhancement process, which is a modified version of a recommendation we made in the 1990-91 Analysis of the Budget Bill (please see pp. 707-710). The process would consist of an administrative review procedure, as explained below. Identify those counties that are (1) performing poorly and (2) showing a relatively low level of improvement in performance over the prior year. We define this group as counties that (1) rank in the bottom quartile on the LAO performance score and (2) are below the median in improvement in that score over the prior year. C – 142 Health and Social Services 1998-99 Analysis Among the counties that are not performing well and not showing adequate improvement in performance there are two strategies. First, for counties that are making a low level of administrative effort, the department and the county would be required to estab- lish a three-year expenditure plan designed to reach targeted levels of administrative effort. Second, for counties with relatively high levels of administrative effort but a relatively low level of collec- tions, the Department of Social Services would be required to con- duct a program review and provide technical assistance. For coun- ties in the latter category (which are characterized as having low cost-effectiveness ratios), the program review would attempt to discover the causes for the county’s low level of collections, exam- ining management practices such as the use of automation and the allocation of resources. We note that the intent is not to sanction these counties but to assist them in improving their performance. Conclusion Although mirroring the proposed federal incentive system may maxi- mize California’s share of federal incentive payments in the short run, our analysis suggests that a different incentive system may be a better alterna- tive. The proposed federal system is based on performance measures that (1) are not\u2014with the exception of cost-effectiveness\u2014strongly related to collections, (2) do not resolve the case-closing problem, and (3) create an indirect incentive to recruit never-on-TANF cases into the program, which could divert resources from TANF cases. The LAO alternative is more likely to increase program effectiveness because it is based on per- formance measures that are directly related to collections. In addition, our alternative is more likely to accurately measure county performance because its performance measures do not depend on the rate at which counties have closed cases solely because they have been unable to make collections within three years. Finally, by replacing the indirect incentive to recruit never-on-TANF cases with an incentive to more vigorously pursue TANF collections, the LAO alternative may generate additional General Fund savings. Accordingly, we recommend that legislation be enacted establishing a child support incentive payment system in which county incentive payments are a function of county administrative effort and cost-effective- ness. In addition, we recommend that legislation be enacted establishing a performance enhancement process for counties that rank low in perfor- mance. Child Support Enforcement C – 143 Legislative Analyst’s Office BUDGETING ISSUES Budget Overestimates Child Support Incentive Payments We recommend reducing the General Fund amount budgeted for child support incentive payments by $20.3 million in 1997-98 and $26.3 million in 1998-99 because the budget overestimates state incentive payments to counties for non-CalWORKs child support collections. (Reduce Item 5180-101-0001 by $26,307,000.) The Governor’s budget assumes that child support collections on behalf of non-CalWORKs families will increase by 51 percent in 1997-98 and 29 percent in 1998-99. Based on these estimates of collections, the budget projects the amount of incentive payments which will be made to the counties in the current and budget years. We surveyed the child support enforcement programs in 13 of the largest counties in the state and found that non-CalWORKs collections in the first six months of 1997-98 have increased by 18 percent over the same period in 1996-97. We anticipate that non-CalWORKs collections will continue to increase, due to the effect of certain policy changes adopted in 1997. However, given the actual experience to date, it seems unlikely that these collections will grow enough to register a 51 percent increase between the current and past years. While it is difficult to predict the impact of the 1997 policy changes, we believe it would be reasonable to assume an increase in the growth rate to 29 percent for the second half of 1997-98 and all of the budget year\u2014the same rate of growth assumed in the budget for 1998-99. Based on these assumptions, we have projected non-CalWORKs child support collections for the current and budget years. Figure 33 (see page 144) compares our estimates with the Governor’s budget, as well as showing actual collections in 1994-95, 1995-96, and 1996-97. Based on our assumptions, we estimate that the General Fund expendi- tures for non-CalWORKs child support incentive payments are overstated in the budget by $20.3 million in the current year and $26.3 million in 1998-99. Accordingly, we recommend that the budget be reduced to reflect these estimates. Budget Overestimates Effect of Arrearage Distribution Changes We recommend a General Fund reduction of $26.4 million to more accurately reflect the amount of collections on arrearages on CalWORKs grant expenditures. (Reduce Item 5180-101-0001 by $26,416,000 and reduce Item 5180-101-0890 by $32,270,000.) Figure 33 Non-CalWORKs Child Support Collections Governor’s Budget and LAO Projections (In Millions) 200 400 600 800 1,000 1,200 $1,400 94-95 95-96 96-97 97-98 98-99 LAO Projection Budget Projection Actual Collections C – 144 Health and Social Services 1998-99 Analysis Child support collections made for custodial parents receiving CalWORKs grants are used to offset the public costs of the grants (except for the first $50 per month which goes to the parent). In addition, the custodial parent currently must permanently assign to the state the rights to pre-assistance arrearages\u2014that is, collections on arrearages that accrued prior to a family going on aid. Permanently assigned pre-assis- tance arrearages are used to offset the family’s CalWORKs grants, even if the arrearages are collected after the family goes off aid. Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy), in response to provisions of the federal welfare reform act, requires changes in the distribution of pre-assistance arrearages begin- ning October 1, 1998. Under Chapter 270, a family that goes on aid after October 1, 1998 must temporarily assign the rights to pre-assistance arrearages to the state\u2014that is, until the family goes off aid. The budget incorrectly assumes that all pre-assistance arrearages will be paid directly to the family (instead of assigned to the state), beginning October 1, 1998. Under Chapter 270, however, pre-assistance arrearages collected while a family is still on aid will continue to be assigned to the state. In addition, pre-assistance arrearages collected for families who Child Support Enforcement C – 145 Legislative Analyst’s Office went on aid prior to October 1, 1998 remain permanently assigned to the state, even if the arrearages are collected after the family goes off aid. Consequently, the budget overestimates the amount of pre-assistance arrearage collections that will be paid directly to families, and underesti- mates the amount that will offset the cost of CalWORKs grants. We esti- mate that expenditures for the arrearage distribution changes are over- stated in the budget by $61.5 million ($26.4 million General Fund). Ac- cordingly, we recommend that the budget be reduced to reflect these estimates, for a General Fund savings of $26.4 million C – 146 Health and Social Services 1998-99 Analysis FOOD STAMPS PROGRAM The Food Stamps Program provides food stamps to low-income per- sons. The cost of the food stamp coupons ($2 billion) is borne entirely by the federal government, with the exception of the new state-only pro- gram, as discussed below. Administrative costs are shared between the federal government (50 percent), the state (35 percent), and the counties (15 percent). (We discuss an issue concerning the administration of food stamps in the County Administration of Welfare section of this chapter.) California Food Assistance Program Federal welfare reform makes legal noncitizens (with certain excep- tions) ineligible for food stamps. Chapter 287, Statutes of 1997 (AB 1576, Bustamante) created a state-only program that provides food stamps for noncitizens under the age of 18 or over the age of 64 who were residing in the United States prior to August 22, 1996. Under this new program, California purchases the food stamp coupons from the federal govern- ment and distributes them to eligible recipients. This temporary program began on September 1, 1997 and sunsets on July 1, 2000. The budget proposes an appropriation of $24.3 million from the Gen- eral Fund for the cost of coupon purchases and program administration. This is a decrease of $16.8 million from estimated expenditures in 1997-98, mostly attributable to noncitizens attaining citizenship. We note that the President, in his budget for federal fiscal year 1999 (October 1998 through September 1999), proposes to restore federal food stamp benefits to cer- tain noncitizens, including the groups covered in California’s state-only program. Supplemental Security Income\/State Supplementary Program C – 147 Legislative Analyst’s Office SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $2.2 billion from the General Fund for the states’s share of the SSI\/SSP in 1998-99. This is an increase of $96 million, or 4.7 percent, over estimated current-year expen- ditures. This increase is due primarily to projected caseload growth and an increase in the federal administrative fee. In December 1997, there were 322,756 aged, 21,360 blind, and 668,513 disabled SSI\/SSP recipients. Caseload Growth Is Overestimated We recommend reducing the General Fund amount budgeted for the state portion of Supplemental Security Income\/State Supplementary Program grants by $49 million in 1997-98 and $64 million in 1998-99 because the caseload growth is overestimated. (Reduce Item 5180- 111-0001 by $63,980,000.) The Governor’s budget assumes that the SSI\/SSP caseload will in- crease by 1.4 percent in 1997-98 and 3.1 percent in 1998-99. The projected growth rate of 3.1 percent for the budget year includes 2.1 percent for basic caseload growth, and 1 percent for the net impact of other factors such as the 1997 federal law change that made legal noncitizens residing in the U.S. prior to August 22, 1996, but not yet receiving SSI\/SSP, eligible for SSI\/SSP if they become disabled. Our review indicates that during the first six months of 1997-98, the caseload actually declined by about 5,200 cases, or 0.5 percent, and was 1.7 percent below the administration’s current estimate for that period. During this period of caseload decline, however, there was an increase in the number of applicants seeking disability evaluations for purposes of qualifying for SSI\/SSP. Despite the recent caseload decline, we believe that in the long run growth in the aged portion of the caseload will mirror C – 148 Health and Social Services 1998-99 Analysis statewide population growth for aged individuals, and that growth in the disabled portion of the caseload will ultimately reflect the addition of disabled noncitizens who were not yet receiving aid as of August 1996. Accordingly, we have adjusted the department’s forecast to reflect the latest actual caseload data but have followed their projected future trend. After making these adjustments, we project the caseload will decline by 1 percent in 1997-98 and increase by 2.5 percent in 1998-99. Based on these projections, we estimate that the General Fund expenditures for SSI\/SSP grants are overstated by $49 million in the current year and $64 million in the budget year. We recommend that the budget be reduced to reflect these estimates. Budget Proposes to Eliminate State Cost-of-Living Adjustment By proposing to delete the requirement to restore the statutory state cost-of-living adjustment, the budget would achieve a cost avoidance of $39 million in 1998-99. Background. Chapter 606, Statutes of 1997 (AB 67, Escutia)\u2014the 1997-98 budget trailer bill for social services\u2014extended the suspension of the state cost-of-living adjustment (COLA) through December 31, 1998, but did not extend the 4.9 percent statewide grant reduction. Accordingly, the 4.9 percent statewide grant reduction ended on October 31, 1997, and the state COLA is scheduled to resume on January 1, 1999. Calculating the State COLA. The SSP grant adjustments for the state COLA depend on both (1) the California Necessities Index (CNI), which is applied to the combined SSI\/SSP grant, and (2) the U.S. Consumer Price Index (CPI), which is used to determine the amount of the federal COLA and is applied only to the SSI component of the grant. (Specifically, the state COLA sets the SSP portion of the grant equal to the difference be- tween the combined SSI\/SSP grant as increased by the CNI, less the amount of the federally funded SSI portion.) Budget Impact of Governor’s Proposal. The Governor’s budget esti- mates that the CPI will be 2.6 percent, and that the CNI will be 3.2 percent. Based on these assumptions, restoring the state COLA on January 1, 1999 would result in a six-month General Fund cost of $51.7 million in 1998-99. Based on our review of more recent data, we estimate that the CNI will be 2.84 percent. Using our lower estimate of the CNI, we estimate that restoring the state COLA would result in a six- month General Fund cost of approximately $39 million. We note that the actual cost will depend on both the final CNI and CPI figures. Supplemental Security Income\/State Supplementary Program C – 149 Legislative Analyst’s Office Impact on Recipients. Figure 34 shows SSI\/SSP grants on January 1, 1999 for individuals and couples under both current law and the Gover- nor’s proposal. Although the budget proposes permanent elimination of the state COLA, the budget includes the pass through of the federal COLA to recipients, resulting in grant increases of $13 per individual and $19 per couple. After this increase, grants under the Governor’s proposal would be 0.8 percent less (for individuals) and 1.2 percent less (for cou- ples) than current law. As a point of reference, we note that the federal poverty guideline in 1997 is $658 per month for an individual and $884 per month for a couple. Thus, under both the Governor’s proposal and current law, the grant for an individual would be just above the poverty guideline\u2014specifically, 1 percent above the poverty guideline under the Governor’s proposal and 2 percent above the guideline under current law. Grants for couples would be 33 percent above the poverty guideline under the Governor’s proposal and 34 percent above the guideline under current law. Figure 34 SSI\/SSP Maximum Monthly Grants Current Law and Governor’s Proposala January 1998 and January 1999 January 1999 Change from Current Law Recipient Category 1998 Law Proposal Amount Percent January Current Governor’sb c Individuals $650 $669 $663 -$6 -0.8% Couples 1,156 1,189 1,175 -14 -1.2 The grant levels shown in this figure do not reflect the effect of the 4.9 percent grant reduction in low- a cost counties (pursuant to current law) because this grant reduction requires relief from the federal maintenance-of-effort requirements. Such relief has not been enacted and the budget assumes no relief in 1998-99. Includes federal SSI COLA of $13 per individual and $19 per couple and application of the state COLA b (about $6 for individuals and $14 for couples). Includes federal COLA of $13 per individual and $19 per couple. c C – 150 Health and Social Services 1998-99 Analysis IN-HOME SUPPORTIVE SERVICES The In-Home Supportive Services (IHSS) program provides various services to eligible aged, blind, and disabled persons who are unable to remain safely in their own homes without such assistance. An individual is eligible for IHSS if he or she lives in his or her own home\u2014or is capable of safely doing so if IHSS is provided\u2014and meets specific criteria related to eligibility for the Supplemental Security Income\/State Supplementary Program (SSI\/SSP). The IHSS program consists of two components: the Personal Care Services Program (PCSP) and the Residual IHSS program. Services pro- vided in the PCSP are federally reimbursable under the Medicaid Pro- gram. The PCSP limits eligibility to categorically eligible Medi-Cal recipi- ents (California Work Opportunity and Responsibility to Kids and SSI\/SSP recipients) who satisfy a disabling condition requirement. Personal care services include activities such as: (1) assisting with the administration of medications; and (2) providing needed assistance with basic personal hygiene, eating, grooming, and toileting. The following cases are excluded from the PCSP and therefore receive services through the Residual IHSS program: cases with domestic services only, protective supervision tasks, spousal providers, parent providers of minor children, income eligibles (generally, recipients with income above a specified threshold), advance pay recipients (eligible for payments prior to the provision of services), and recipients covered by third party insurance. State Plan Amendment Would Result in General Fund Savings We recommend adoption of budget bill language directing the Depart- ment of Health Services to submit a State Medicaid Plan amendment to allow In-Home Supportive Services income eligibles to be included in the Personal Care Services Program. This action would enable the state to receive additional federal funds, resulting in General Fund savings of approximately $35 million in 1998-99. (Increase Item 5180-111-0890 by $81,902,000 and reduce Item 5180-111-0001 by $35,136,000.) In-Home Supportive Services C – 151 Legislative Analyst’s Office Background. In order to be eligible for services under the IHSS pro- gram, a person must be living in his or her own home and be either status eligible or income eligible. An individual is considered to be status eligible if he or she is receiving SSI\/SSP. An individual is consid- ered to be income eligible if he or she: Meets all SSI\/SSP eligibility requirements but has nonexempt income that exceeds the maximum SSI\/SSP payments levels. Per- sons in this category may have to pay for a share of IHSS costs. Meets all SSI\/SSP eligibility requirements, but chooses not to ac- cept SSI\/SSP benefits. These individuals would not be required to pay a share of cost. Has been eligible for SSI\/SSP based on a disability (and is still disabled) but has lost eligibility due to employment. These individ- uals may be required to pay a share of IHSS costs. Federal Funds Could Be Obtained for Income Eligibles. Income eligibles currently are excluded from the PCSP component of the IHSS program. These cases are funded in the Residual IHSS program, at a ratio of 65 percent General Fund and 35 percent county funds. The income eligibles population falls into two categories: (1) those who are not eligible for the PCSP because of federal Medicaid regulations (for example, because they are receiving services from a spouse or paying for services using the advance pay option), and (2) those who may be eligible for the PCSP at the option of the state under Medicaid regulations but are excluded by the provisions of the State Medicaid Plan. Our analysis indicates that the second category could be made eligible for federal funding simply by amending our State Medicaid Plan to allow this group to be eligible for the PCSP. This would result in federal reimbursement for services at the Medicaid sharing ratio of approximately 51 percent. We estimate that including income eligibles in the PCSP would result in additional federal Medicaid funds of $81.9 million in 1998-99, with a net savings of $35.1 million to the General Fund and $18.9 million in county funds. (Our estimate accounts for the possibility that some addi- tional people, who are not currently receiving services through IHSS but rather are paying for personal care services out of pocket, will become eligible for the PCSP.) Accordingly, we recommend that the Legislature adopt budget bill language directing the Department of Health Services to submit the necessary State Medicaid Plan amendment to the federal Department of Health and Human Services to allow IHSS income eligibles to be included in the PCSP. C – 152 Health and Social Services 1998-99 Analysis This could be accomplished by adoption of the following budget bill language in Item 4260-001-0001: The Department of Health Services shall, by September 30, 1998, submit to the Secretary of Health and Human Services an amendment to the State Medicaid Plan so as to allow income eligibles in the In-Home Supportive Services (IHSS) program, who are not otherwise excluded under Title XIX of the Social Security Act, to be eligible for services under the IHSS Per- sonal Care Services Program. Federal Funds Not Budgeted We recommend that federal funds budgeted for the In-Home Support- ive Services program be increased by $12.7 million, and that General Fund support be reduced by the same amount, to reflect additional federal Social Services Block Grant funds that the state will receive, but which are not included in the budget. (Increase Item 5180-111-0890 by $12,662,000 and reduce Item 5180-111-0001 by $12,662,000.) Federal Title XX Social Services Block Grant funds are allocated to the states and can be used for a variety of purposes in social services pro- grams, with no state maintenance-of-effort requirement. The budget projection of the Title XX funds that will be available for expenditure in 1998-99 is based on an assumption which underestimates the amount actually allocated to California in federal fiscal year 1998. In recognition of this, the department revised its estimate of available Title XX funds after the budget was introduced, indicating that the state will receive an additional $12.7 million of these funds in the budget year. We agree with the department’s new projection. These additional federal funds can be used to offset state General Fund expenditures. Consequently, we recommend that the additional funds be budgeted for the IHSS program, in lieu of General Fund support, for a state savings of $12.7 million. This is consistent with how Title XX funds currently allocated to the department are budgeted, and will not result in a reduction in the level of services provided under the program. County Administration of Welfare Programs C – 153 Legislative Analyst’s Office COUNTY ADMINISTRATION OF WELFARE PROGRAMS The Budget Bill (Item 5180-141) appropriates funds for the state and federal share of the costs incurred by the counties for administering the following programs: (1) Food Stamps; (2) Child Support Enforcement; (3) Aid to Families with Dependent Children\u2014Foster Care; (4) Special Adults, including emergency assistance for aged, blind, and disabled persons; (5) Refugee Cash Assistance; and (6) Adoptions Assistance. The budget also includes funding for the development, implementation, and maintenance of major welfare automation projects. Pursuant to the reorganization of the budget, Item 5180-141 does not include the county costs for administering the California Work Opportu- nity and Responsibility to Kids (CalWORKs) program, because these costs are reflected in the CalWORKs program appropriation in Item 5180-101 (see our analysis of CalWORKs). The budget proposes an appropriation of $269.7 million from the General Fund for county administration of welfare programs (excluding CalWORKs) in 1998-99. This represents a decrease of $38.4 million, or 12 percent, from estimated current-year expenditures. This reduction is primarily due to (1) substantially reduced costs for the Statewide Auto- mated Child Support System as the state temporarily suspends its child support automation effort and (2) the shifting of certain child support court commissioner costs to the Judicial Council. (The budget, however, separately includes a $20 million set-aside for child support automa- tion.) Food Stamps Budget Does Not Reflect Savings From Projected Caseload Decline We recommend that proposed General Fund expenditures for county administration of the Food Stamps program be reduced by $7.8 million because the budget does not reflect savings from its projected caseload C – 154 Health and Social Services 1998-99 Analysis decline. (Reduce Item 5180-141-0001 by $7,766,000, reduce Item 5180- 141-0890 by $10,545,000, and reduce Item 5180-101-0890 by $2,614,000.) Typically, the methodology used to budget for county administration of the Food Stamps program is based on the amount counties actually spent in the past year, adjusted for projected changes in caseload and inflation in the budget year. This amount is also adjusted for policy changes, if any. The budget proposal for county administration, however, does not reflect the 7.9 percent caseload reduction that the budget projects for the Food Stamps program in 1998-99. Making this adjustment would result in General Fund savings of $7.8 million. Accordingly, we recom- mend that the budget for county administration be reduced to be consis- tent with the caseload projections. In addition, our recommendation would result in a $2.6 million reduc- tion for the county share of expenditures, but for technical reasons this would translate into a reduction of federal TANF funds. (This is due to the interaction between our recommendation and an existing statutory provision.) Because these funds are part of a block grant, they would be retained by the state and could be used for other CalWORKs activities. Automation Projects The budget proposes an appropriation of $48.1 million in the Depart- ment of Social Services for the state’s share of the costs of four major welfare automation projects. These projects are the Statewide Automated Welfare System, the Statewide Automated Child Support System, the Statewide Fingerprint Identification System, and the Electronic Benefit Transfer program. The Health and Welfare Agency Data Center (HWDC) is responsible for administering these projects. For a discussion of the major welfare automation projects, please see our review of the HWDC in the General Government Section of this Analysis. Special Programs C – 155 Legislative Analyst’s Office SPECIAL PROGRAMS The Department of Social Services (DSS) has several special programs which include the following: Specialized Services; Deaf Access Assistance; Licensed Maternity Home Care (LMHC); Refugee Assistance Services; and the County Services Block Grant. The budget proposes expenditures of $77.2 million ($30 million General Fund) for Special Programs in 1998-99. This represents a 42 percent increase in General Fund expendi- tures from the current year, largely due to a $9 million increase in the County Services Block Grant to augment the Adult Protective Services Program. Licensed Maternity Home Care Program Overbudgeted We recommend a General Fund reduction of $1.6 million to reflect actual expenditures in the Licensed Maternity Home Care program. (Re- duce Item 5180-151-0001 by $1,595,000.) The LMHC program provides residential care and maternity-related services to unmarried pregnant women under the age of 18. The budget proposes General Fund expenditures of $2 million for support of the program in 1998-99. Figure 35 (see page 156) shows the amount of funds budgeted and spent by maternity homes since 1994-95. As the figure indicates, expenditures have fallen short of the amount appropriated for the program in the last three years. Based on our discussions with the department, we estimate that the program will revert $1.6 million to the General Fund in the current year. The department advises that the expenditure levels accurately reflect the need for LMHC program services. We note that many unmarried pregnant women under the age of 18 are placed in foster care group homes instead of licensed maternity homes because they require addi- tional nonmaternity related services that LMHC facilities are not licensed to provide. Given the demonstrated level of demand for LMHC program services, we recommend a General Fund reduction of $1.6 million to more accurately reflect the program’s anticipated spending level. Figure 35 Consistent Pattern of Overbudgeting in Licensed Maternity Home Care Program 1994-95 Through 1998-99 (In Thousands) 500 1,000 1,500 2,000 $2,500 94-95 95-96 96-97 97-98 a 98-99 b Appropriation Expenditures a b Expenditures estimated by LAO. Appropriation based on Governor’s Budget. Expenditures based on LAO estimate. C – 156 Health and Social Services 1998-99 Analysis Adoptions C – 157 Legislative Analyst’s Office ADOPTIONS The department administers a statewide program of services to parents who wish to place children for adoption and to persons who wish to adopt children. Adoptions services are provided through state district offices, 28 county adoptions agencies, and a variety of private agencies. Counties may choose to operate the Adoptions Program or turn the pro- gram over to the state for administration. There are two components of the Adoptions Program: (1) the Relin- quishment (or Agency) Adoptions Program, which provides services to facilitate the adoption of children in foster care; and (2) the Independent Adoptions Program, which provides adoption services to birth parents and adoptive parents when both agree on placement. In addition to the Adoptions Program, the Adoptions Assistance Pro- gram (AAP) provides grants to parents who adopt difficult to place children. State law defines these children as those who, without assis- tance, would likely be unadoptable because of their age, racial or ethnic background, handicap, or because they are a member of a sibling group that should remain intact. Budget Underestimates Proportion of AAP Cases Eligible for Federal Funds We recommend reducing the General Fund amount budgeted for the Adoptions Assistance Program by $3.9 million in 1997-98 and $6.6 million in 1998-99 because the budget underestimates the number of cases that are eligible for federal funding. (Increase Item 5180-101-0890 by $8,848,000 and reduce Item 5180-101-0001 by $6,636,000.) The AAP provides grants to parents who adopt difficult to place children. For those cases meeting federal eligibility criteria, the federal government will fund 51.23 percent of costs (51.55 percent beginning October 1998). For nonfederally eligible cases, the state covers 75 percent of costs and counties fund 25 percent. Figure 36 Adoptions Assistance Program Federal Cases Increasing Due to County Review Total Cases Non-Federal Cases Federal Cases 30,000 25,000 20,000 15,000 10,000 5,000 Jun 96 Oct 96 Feb 97 Jun 97 Oct 97 Federal, Non-Federal, and Total Cases June 1996 Through October 1997 C – 158 Health and Social Services 1998-99 Analysis The budget estimates the proportion of AAP cases that are federally eligible using caseload data from June 1996 through April 1997. Begin- ning in May 1997, Los Angeles County corrected an error in its eligibility determination procedures that had resulted in many AAP cases that met the federal criteria being counted as not federally eligible. The county redetermined federal eligibility for all of its AAP cases, and a much larger proportion of cases have been determined to be federally eligible. Figure 36 shows that the changes reported by the county have substan- tially increased the statewide proportion of AAP cases that are receiving federal funding, with the percentage of federally eligible cases increasing from 72 percent in April 1997 to 83 percent in September 1997. The budget estimate of the proportion of AAP cases that are eligible for federal funding\u201471 percent statewide\u2014does not reflect the corrected eligibility determination procedures in Los Angeles County. Based on recent data, we project that 82 percent of AAP cases will be federally eligible in 1998-99. Combining this projection with the rate of total case- load growth assumed in the budget, we estimate that federal expendi- tures for the AAP are understated by $8.8 million, and combined state and county expenditures are therefore overstated by the same amount. Accordingly, we recommend that the budget be adjusted to reflect our Adoptions C – 159 Legislative Analyst’s Office estimates, resulting in a General Fund savings of $6.6 million and a county funds savings of $2.2 million. State May Earn Federal Adoptions Incentive Payments California could receive up to $15 million in federal adoptions incen- tive payments, beginning October 1998, depending primarily on how much is appropriated by Congress for the new program in federal fiscal year 1999. The federal Adoptions and Safe Families Act of 1997 (PL 105-89) autho- rizes the Secretary of Health and Human Services to make incentive payments to states that increase the number of adoptions of children in foster care in federal fiscal years (FFY) 1998-02. The incentive payment would be $4,000 per child, plus an additional $2,000 for each special needs adoption, with a maximum allocation to all states of $20 million in each fiscal year. The incentive payments may be used to augment services that are provided under the foster care, child welfare services, and adop- tions programs, or to supplant General Fund money that is currently spent on these programs and is not used to match federal funds. If the authorized level of federal adoptions incentive funds is appropri- ated for FFY 99 (October 1998 through September 1999), and if counties meet their state Adoptions Initiative performance agreement targets in 1997-98 and 1998-99, we estimate that the state could earn as much as $15 million in incentive payments in FFY 99. As noted above, the maxi- mum incentive payment allocation to all states is capped at $20 million. Therefore, unless other states perform poorly, California would probably earn less than the full $15 million. The Legislature could express its preferences on this issue by adopting budget bill language\u2014either to augment programs or reduce General Fund expenditures\u2014in anticipation of the potential receipt of these funds. C – 160 Health and Social Services 1998-99 Analysis COMMUNITY CARE LICENSING DIVISION The Community Care Licensing Division (CCLD) within the Depart- ment of Social Services (DSS) develops and enforces regulations designed to protect the health and safety of individuals in 24-hour residential care facilities and day care. Licensed facilities include day care homes and centers, foster family homes and group homes, adult residential facilities, and residential facilities for the elderly. The budget proposes expenditures of $85.2 million ($36 million Gen- eral Fund) for the CCLD in 1998-99. This represents a 45 percent increase in General Fund expenditures from the current year, largely due to a projected increase in licensing program workload and a proposal to provide early childhood development training to child care providers. Use Special Fund Balances to Increase Technical Assistance and Achieve General Fund Savings We recommend an augmentation of $386,000 from the Technical Assis- tance Fund to establish five new positions in order to provide technical assistance to community care licensees. We further recommend appropri- ating $1.2 million from the Technical Assistance Fund, with a corre- sponding reduction from the General Fund, to support certain one-time expenditures for community care licensing in 1998-99. (Reduce Item 5180-001-0001 by $1,200,000 and increase Item 5180-001-0270 by $1,586,000.) Background. Under current law, the DSS collects annual fees which fund some of the costs of licensing community care facilities. Current law also provides that for each year, fee revenues exceeding $6 million (after deducting administrative costs) shall be deposited in the Technical Assis- tance Fund, and shall be available for appropriation to establish and maintain CCLD staff to provide technical assistance to licensees. Technical Assistance. The Technical Support Program (TSP) within the CCLD includes eight program analysts who provide technical assistance to residential care providers licensed by the division. The TSP provides Community Care Licensing Division C – 161 Legislative Analyst’s Office both group training sessions for care providers and in-depth consulta- tions with individual providers who are having difficulty in complying with licensing standards. The TSP is supported by $450,000 from the Technical Assistance Fund and $360,000 from the General Fund in the current year. The Child Care Advocate Program (CCAP) within the CCLD includes 13 program analysts who provide technical assistance to child care pro- viders licensed by the division. The CCAP is supported by $360,000 from the Technical Assistance Fund, $386,000 from the Child Health and Safety Fund, and $280,000 from the General Fund in the current year. Large Balance in Technical Assistance Fund. The budget projects that the Technical Assistance Fund year-end balance will increase from $784,000 in 1996-97 to $1.3 million in the current year and $1.7 million in the budget year. The budget estimates annual revenues of $1.3 million and expenditures of $868,000 in 1998-99. If annual revenues and expendi- tures continue at these levels, the fund balance will increase by approxi- mately $400,000 annually. Additional Technical Assistance Could Result in Savings. The depart- ment reports that, although the TSP is effective in increasing compliance with licensing standards, providers who desire an in-depth consultation often must wait several months before staff are available to provide assis- tance. To the extent that technical assistance enables providers to comply with licensing regulations, expenditures on such assistance could result in future General Fund savings by decreasing the workload in other areas of the licensing program. Based on our discussions with the department, we believe that using Technical Assistance Fund resources for additional TSP positions would reduce the backlog for in-depth consultations, and would increase the number of providers who are in compliance with licensing regulations. Accordingly, we recommend increasing Technical Assistance Fund expenditures by $386,000 in 1998-99 to augment the TSP by five new positions. With these additional staff, the department would then have one program analyst in each of the division’s 13 district offices. Excess Fund Balances Could Be Used to Achieve General Fund Savings. Expanding the TSP by five positions would align Technical Assistance Fund revenues and expenditures at a level of about $1.3 million. How- ever, the fund would continue to have a year-end balance of about $1.4 million, or 110 percent of expenditures, which is well in excess of a prudent reserve. C – 162 Health and Social Services 1998-99 Analysis These funds could be used to provide additional technical assistance; however, this would create an ongoing expenditure which, at some point, would exhaust the reserves unless revenues increase. Furthermore, adop- tion of our recommendation would, by staffing all of the district offices, bring the resources for technical assistance to a level which we believe are sufficient to meet the program’s needs. Thus, we believe it would be reasonable to use the reserves to replace one-time General Fund monies proposed in the budget for community care licensing activities. Specifi- cally, we recommend appropriating $1.2 million from the Technical Assis- tance Fund, with a corresponding reduction in the General Fund, to support the following one-time expenditures proposed in the budget: $800,000 for furniture, computers, and printers for additional li- censing division staff. $300,000 for a new training curriculum in early childhood develop- ment. $100,000 for furniture, computers, and printers for new Trustline Registry staff. Adoption of our recommendation would leave a projected year-end fund balance of about $100,000 in the Technical Assistance Fund, which would amount to about 8 percent of ongoing expenditures from the fund. We note that because the authorizing legislation requires that Technical Assistance Fund monies be expended to fund the creation and mainte- nance of new Technical Assistance positions, our recommendation would require trailer bill legislation to supersede this provision in 1998-99. Legislative Analyst’s Office FINDINGS AND RECOMMENDATIONS Health and Social Services Analysis Page Crosscutting Issues Healthy Families Program 1. $1.4 Billion of Federal Funds Will Roll Forward Into 1999-00. Under the budget plan, about $1.4 billion of California’s federal allocation through June 1999 will remain unspent and roll for- ward. It is likely that most, if not all, of these funds will remain unspent. C-19 2. Federal Approval of Continuing Eligibility in Doubt. With- hold recommendation on $9.2 million from the General Fund requested in the Department of Health Services’ (DHS) Medi- Cal budget to provide one-month continuing eligibility for children, pending resolution of federal objections to this pro- posal. C-19 3. Requiring Children in the California Children’s Services (CCS) Program to Enroll in the Healthy Families Program, If Eligible, Would Result in State and Local Savings. Reduce Item 4260-111-0001 by $9,118,000, Increase Item 4280-101-0001 by $2,972,000. Recommend enactment of legislation to require qualifying participants in the CCS Program to enroll in the Healthy Families Program in order to provide more comprehen- sive health care services to CCS children and to reduce net Gen- eral Fund and county costs by $6.2 million each in 1998-99 com- pared with the Governor’s budget. C-20 4. Including Regional Center Services As a Healthy Families Benefit Should Be Explored. Recommend that DHS, the De- partment of Developmental Services and the Managed Risk C-22 C – 164 Health and Social Services Analysis Page 1998-99 Analysis Medical Insurance Board report at budget hearings on the feasi- bility of including regional center services as a Healthy Families benefit, including an estimate of any potential state savings. Department of Aging 5. Proposed Expansion Would Not Allocate Funds According to Need. Withhold recommendation on $12.2 million ($9.1 million General Fund) requested to expand several California Depart- ment of Aging programs because the program expansion is not based on the need for services. C-23 6. Budget Does Not Reflect Savings From an Increase in Federal Funds. Reduce Item 4170-101-0001 by $125,000 and Increase Item 4170-101-0890 by $125,000. Recommend a General Fund reduction of $125,000 in the amount proposed for the Multipur- pose Senior Services Program to reflect additional federal funds due to an increase in the federal share of costs of this program. C-29 Department of Alcohol and Drug Programs 7. Budget Does Not Account for Increased Federal Medicaid Sharing Ratio. Reduce Item 4200-101-0001 by $280,000 and Item 4200-102-0001 by $37,000. Recommend budget adjustment, for a $317,000 General Fund savings. C-30 Department of Health Services\u2014State Operations 8. Armed and Over Budget. Reduce Item 4260-001-0001 by $193,000. Recommend reduction in the amount requested for the California Zero Fraud Tolerance Initiative because (1) large travel allotments are unnecessary, (2) additional border inspec- tors should be budgeted at the entry-level position classifica- tion, and (3) armed officers are not required to conduct eligibil- ity verifications in hospitals or computer database checks of aliens. C-32 9. Filling Positions Would Generate Savings. Increase Item 4260-001-0001 by $1,090,000 and Reduce Item 4260-101-0001 by $4,761,000. Recommend General Fund augmentation of C-34 Findings and Recommendations C – 165 Analysis Page Legislative Analyst’s Office $1.1 million to fill 39.3 vacant positions in order to increase recoveries from third parties and reduce General Fund Medi- Cal costs by $4.8 million, for a net savings of $3.7 million. 10. Phantom Positions Undermine Legislative Oversight. Recom- mend that the department present a revised staffing plan to the budget subcommittees that identifies and proposes to eliminate approximately 500 vacant positions that the budget does not propose to fund in 1998-99. C-34 California Medical Assistance Program (Medi-Cal) 11. Medi-Cal Estimate Includes Adjustments for Shift to Man- aged Care. The Medi-Cal estimate has been reduced by $14.9 million in 1997-98 and $93.9 million in 1998-99 (about half General Fund) in order to correct for distortions caused by the shift to managed care. We find that these adjustments are ap- propriate in nature and do not seem unreasonable in size. We will review the specific methodology of these adjustment as part of our overall review of the Medi-Cal estimate for the May Revision. C-49 12. Savings from Uncertainty Adjustments Appear Arbitrary. The Medi-Cal budget estimate includes General Fund savings of $109.6 million in 1997-98 and $133 million in 1998-99 as a result of adjustments that reduce expenditures 2 percent below the department’s mid-range estimate. These adjustments appear arbitrary at this time, and we recommend excluding these sav- ings for budget planning purposes, pending a more complete analysis of the Medi-Cal estimate and the most recent available caseload and expenditure information for the May Revision. C-50 13. Caseload Growth Funding for County Administration is Un- necessary. Reduce Item 4260-101-0001 by $16,700,000. Recom- mend total General Fund reduction of $26.1 million (including current-year savings of $9.4 million) because these amounts have been budgeted for caseload growth which the depart- ment’s Medi-Cal estimate indicates will not occur. C-51 14. Are Transitional Medi-Cal Participation Rates Too Low? Rec- ommend that the department report during budget hearings on (1) the reasons for the apparent low participation rate in Medi- C-54 C – 166 Health and Social Services Analysis Page 1998-99 Analysis Cal transitional coverage, (2) the number of eligible families that do not participate and lack other health coverage, and (3) prog- ress in implementing recent legislation to improve administra- tion of the transitional program and outreach and education efforts. 15. Additional Year of Transitional Medi-Cal in Doubt. Withhold recommendation on $2.6 million ($1.3 million General Fund) proposed to fund extended Medi-Cal transitional benefits, pending the outcome of discussions between the Department of Health Services (DHS) and the Health Care Financing Adminis- tration to obtain a federal waiver necessary to implement the additional coverage. C-56 16. Plan Needed for Implementing Medi-Cal Eligibility Under Section 1931(b). Recommend that DHS develop, prior to budget hearings, a proposal for implementing Section 1931(b) Medi-Cal eligibility and coordinating 1931(b) eligibility with the current medically needy and transitional Medi-Cal eligibility categories. We present some issues for the Legislature to consider in evalu- ating this proposal. C-59 17. Augmentation for Section 1931(b) Eligibility Determinations Not Justified. Reduce Item 4260-101-0001 by $15,630,400. Rec- ommend total General Fund reduction of $23.4 million (includ- ing current-year savings of $7.8 million) for additional county eligibility determinations because the new workload will substi- tute for existing workload. C-62 18. Department Plans New Payment Approach for Nursing Homes. We recommend that DHS report at budget hearings on its plans for revising payments to long-term-care facilities. C-63 Public Health 19. Proposition 99\u2014New Positions Not Justified by Workload. Recommend deletion of three of the eight new positions re- quested, and redirection of the $286,000 savings into the Propo- sition 99 media campaign. C-65 20. Redirecting Funds Proposed for New Program Into Proven Existing Program Likely to Be More Cost Effective. Recom- C-68 Findings and Recommendations C – 167 Analysis Page Legislative Analyst’s Office mend redirecting proposed $2.6 million General Fund augmen- tation to establish a new early childhood family education pro- gram into the existing Adolescent Family Life Program. 21. Positions Not Needed in Childhood Lead Poisoning Preven- tion Program. Reduce Item 4260-001-0080 by $786,000. Recom- mend deleting nine new positions proposed in the budget and two existing positions because the workload can be addressed by related budget proposals. C-70 22. Administration Renews Request to Implement Federal Absti- nence Education Program. We comment on the proposal and related research. C-71 23. Funding Alternatives Available for Emerging Infectious Dis- eases and Food Safety Programs. Reduce Item 4260-001-0001 by $1,006,000 and Increase Item 4260-001-0177 by $828,000. Recommend deleting 13 new positions proposed for the Emerg- ing Infectious Diseases program and instead permitting the department to fill 12 position vacancies by reducing the salary savings requirement, for a net General Fund savings of $178,000. Further recommend funding the proposed Food Safety program with industry fees instead of $828,000 from the General Fund. C-74 24. Newborn Hearing Screening Proposal Has Merit, But Cost Estimate Needs Justification. We withhold recommendation, pending submission of additional justification by the depart- ment. C-76 Department of Developmental Services 25. Reporting Changes Would Improve Legislative Oversight of Case Management Funding. Recommend that funds appropri- ated for case management be scheduled separately in the Bud- get Bill. Further recommend adoption of supplemental report language requiring the department to report on the implemen- tation of its plan to augment case management. C-80 26. Proposed Position Upgrades Are Excessive. Reduce Item 4300- 101-0001 by $4,511,000, Item 4260-101-0001 by $1,686,000, and Item 4260-101-0890 by $1,789,000. Recommend reduction of C-83 C – 168 Health and Social Services Analysis Page 1998-99 Analysis $3.3 million from the General Fund to align proposed regional center position upgrades more closely with actual duties and salaries. Further recommend that new case management posi- tions be budgeted at the first salary step of the relevant state classification, for a General Fund savings of $2.9 million. 27. Care Facility Training Program is Overbudgeted. Reduce Item 4300-101-0001 by $1,569,000, Item 4260-101- 0001 by $2,412,000, and Item 4260-101-0890 by $2,558,000. Recommend budget reduction to reflect the department’s planned phase-in of train- ing and associated pay increases for community care facility employees, for a General Fund savings of $4 million in 1998-99. C-87 28. Federal Waiver for Habilitation Services Could Result in State Savings. Recommend that DDS, in cooperation with the Depart- ment of Rehabilitation (DR), include services provided under the Department of Rehabilitation’s Habitation Services program in the state’s application for a new Home and Community Based Services federal waiver. This could result in a significant increase in federal funds and commensurate savings to the state. C-89 29. Legislature Needs More Information on Supported Living Augmentation. Withhold recommendation on $2 million pro- posed for the expansion of supported living services in 1998-99 because the department (1) has not yet allocated $1 million appropriated for expansion in the current year and (2) is in the process of surveying regional centers to determine the level of demand for these services. C-90 30. Technical Issue\u2014Case Management for Community Place- ments Overbudgeted. Reduce Item 4300-101-0001 by $276,000, Item 4260-101-0001 by $99,000, and Item 4260-101-0890 by $106,000. Recommend adjusting the budget to correct for a technical error, which would result in a General Fund savings of $375,000. C-91 31. Developmental Center Placements Should Be Judicially Re- viewed. Recommend enactment of legislation requiring the DDS to institute a process for conducting judicial reviews to determine the appropriateness of developmental center place- ment for current residents who have never had such reviews. C-92 Findings and Recommendations C – 169 Analysis Page Legislative Analyst’s Office 32. Continue Funding for Camarillo Maintenance. Increase Item 4300-003-0001 by $3,799,000. Recommend $3.8 million General Fund augmentation to continue maintenance of the state hospi- tal and developmental center because California State Univer- sity’s proposal to assume control of the site is premature. C-97 33. Proposed Developmental Center Positions Should Be Bud- geted at First Salary Step. Reduce Item 4300-003-0001 by $97,000, Item 4260- 101-0001 by $722,000, and Item 4260-101-0890 by $767,000. Recommend that most of the new nursing positions be budgeted at the first salary step, to be consistent with standard budgeting procedures, for a General Fund savings of $819,000 in 1998-99. C-97 Department of Mental Health 34. Inflation Adjustment Is Overbudgeted. Reduce Item 4440- 103-0001 by $2,096,000. Recommend a technical adjustment to reflect an updated forecast of the 1998-99 medical Consumer Price Index. C-99 Employment Development Department 35. Federal Welfare-to-Work Block Grant Program. California will receive up to $363 million in federal Welfare-to-Work block grant funds to serve specified hard-to-employ Temporary As- sistance for Needy Families recipients, if the state provides the necessary one-third match. The Governor proposes to spend $95 million from the General Fund for the state match and fur- ther proposes a plan for the entire federal allotment. We review the proposal and identify options available to the Legislature. C-101 Department of Rehabilitation 36. Governor Proposes to Suspend Statutory Rate Increase for the Work Activity Program. Suspension of the rate increase would result in a General Fund cost avoidance of $9.6 million. C-107 37. Caseload Projections Do Not Reflect Recent Trends. Reduce Item 5160-101-0001 by $5,448,000, Increase Item 5160-001-0001 C-108 C – 170 Health and Social Services Analysis Page 1998-99 Analysis by $644,000, and Increase Item 5160-001-0890 by $2,381,000. Recommend a net reduction of $4.8 million from the General Fund to reflect recent trends in the Work Activity Program and Supported Employment Program. 38. Department Should Report on Supported Employment Cost Study. Recommend department advise Legislature on the status and findings of the statutorily required study. C-110 Department of Social Services\u2014 CalWORKs Program 39. Recent Federal Changes in Welfare Reform Have Significant Implications for California. We review the key features of the Balanced Budget Act and the recently issued proposed federal regulations. C-114 40. Governor Proposes to Continue Past Grant Reduction and Eliminate Statutory Cost of Living Adjustments. These changes result in a General Fund cost avoidance of $248 million. We review the Governor’s proposals and comment on them. C-116 41. Defer Expenditure of State Match for Welfare-to-Work Pro- gram Until 1999-00. Reduce Item 5180-101-0001 by $95,000,000. Recommend deferring the proposed General Fund expenditure of $95 million in state matching funds for the federal Welfare- to-Work block grant by one year because the state may be able to identify the required match from within the base budget for the CalWORKs program in 1999-00, at no additional cost to the General Fund. C-118 42. Impact of Budget Reductions in CalWORKs. Because of the federal maintenance-of-effort requirement, any budget reduc- tions in the CalWORKs program identified by the Legislature would result in a savings of federal funds. Such savings could be (1) redirected to other priorities in CalWORKs, (2) placed into a reserve for future years, and\/or (3) transferred to the Social Services Block Grant (Title XX), where the funds could be used to offset General Fund spending in other departments. C-120 Findings and Recommendations C – 171 Analysis Page Legislative Analyst’s Office 43. Budget Does Not Reflect Savings From Projected Caseload Decline. Reduce Item 5180-101-0890 by $40,011,000. Recom- mend that proposed expenditures for county administration of the CalWORKs program be reduced by $40 million in federal funds to reflect the budget’s projected caseload decline. C-121 44. CalWORKs Employment Services Are Overbudgeted. Reduce Item 5180-101-0890 by $209,174,000. Recommend that the bud- get for CalWORKs employment services be reduced by $209 million because the budget exceeds the estimated amount needed to fully fund the program. C-122 45. Establish a Temporary Assistance for Needy Families Re- serve. Recommend that the Legislature place at least 50 percent of our identified savings in the CalWORKs program into a re- serve for expenditure in future years. C-126 Aid to Families with Dependent Children\u2014 Foster Care 46. Budget Underestimates Proportion of Cases Eligible for Fed- eral Funds. Increase Item 5180-101-0890 by $19,690,000 and Reduce Item 5180-101-0001 by $7,894,000. Recommend reduc- ing the General Fund amount budgeted for the Aid to Families with Dependent Children-Foster Care program by $4.3 million in 1997-98 and $7.9 million in 1998-99 because the budget un- derestimates the number of cases that are eligible for federal funding. C-129 Child Support Enforcement 47. Adoption of New Incentive Payment System Could Improve Child Support Enforcement Program. Recommend legislation be enacted to establish a child support incentive payment sys- tem in which county incentive payments are a function of county administrative effort and cost-effectiveness. Further recommend legislation to establish a specified administrative review procedure for low-performing counties. C-132 48. Child Support Incentive Payments Are Overstated. Reduce Item 5180-101-0001 by $26,307,000. Recommend reducing the C-143 C – 172 Health and Social Services Analysis Page 1998-99 Analysis General Fund amount proposed for child support incentive payments by $20.3 million in 1997-98 and $26.3 million in 1998-99 because the budget overestimates state incentive pay- ments to counties for non-CalWORKs child support collections. 49. Budget Underestimates Arrearages Available to Offset CalWORKs Grant Costs. Reduce Item 5180-101-0001 by $26,416,000 and Reduce Item 5180-101-0890 by $32,270,000. Recommend reducing proposed General Fund expenditures to more accurately reflect amount of arrearages available to offset CalWORKs grant costs. C-143 Supplemental Security Income\/ State Supplementary Program 50. Supplemental Security Income\/State Supplementary Program (SSI\/SSP) Caseload Growth Is Overestimated. Reduce Item 5180-111-0001 by $63,980,000. Recommend reducing the Gen- eral Fund amount proposed for SSI\/SSP grants by $49 million in 1997-98 and $64 million in 1998-99 because caseload growth is overestimated. C-147 51. Budget Proposes to Eliminate State Cost-of-Living Adjust- ment. By proposing to delete the requirement to restore the statutory state cost-of-living adjustment, the budget would achieve a cost avoidance of $39 million in 1998-99. C-148 In-Home Supportive Services 52. State Plan Amendment Would Increase Eligibility for the Personal Care Services Program (PCSP). Increase Item 5180- 111-0890 by $81,902,000 and Reduce Item 5180-111-0001 by $35,136,000. Recommend adoption of budget bill language to direct the Department of Health Services to submit a State Medicaid plan amendment to allow In-Home Supportive Ser- vices income eligibles to be included in the PCSP, which would result in $81.9 million in additional federal funds and a General Fund savings of $35.1 million. C-150 53. Federal Funds Not Budgeted. Increase Item 5180-111-0890 by $12,662,000 and Reduce Item 5180-111-0001 by $12,662,000. C-152 Findings and Recommendations C – 173 Analysis Page Legislative Analyst’s Office Recommend that federal funds budgeted for the IHSS program be increased by $12.7 million, and General Fund support be reduced by the same amount, to reflect federal Social Services Block Grant funds that the state will receive and which are not reflected in the budget. County Administration of Welfare Programs 54. Budget Does Not Reflect Savings From Projected Caseload Decline. Reduce Item 5180-141-0001 by $7,766,000, Reduce Item 5180-141-0890 by $10,545,000, and Reduce Item 5180- 101-0890 by $2,614,000. Recommend proposed expenditures for county administration of the Food Stamps program be reduced by $7.8 million from the General Fund to reflect the budget’s projected caseload decline. C-153 Special Programs 55. Licensed Maternity Home Care Program Overbudgeted. Re- duce Item 5180-151-0001 by $1,595,000. Recommend a General Fund reduction of $1.6 million to reflect the actual expenditure trend. C-155 Adoptions 56. Budget Underestimates Proportion of Adoptions Assistance Program (AAP) Cases Eligible for Federal Funds. Increase Item 5180-101-0890 by $8,848,000 and Reduce Item 5180- 101-0001 by $6,636,000. Recommend reducing the General Fund amount budgeted for the AAP by $6.6 million in 1998-99 be- cause the budget underestimates the number of cases that are eligible for federal funding. C-157 57. State May Earn Federal Adoptions Incentive Payments. Cali- fornia could receive up to $15 million in federal adoptions in- centive payments, beginning October 1998, depending primar- ily on how much is appropriated for the new program in federal fiscal year 1999. C-159 C – 174 Health and Social Services Analysis Page 1998-99 Analysis Community Care Licensing Division 58. Use Special Fund Balance to Increase Technical Assistance and Achieve General Fund Savings. Reduce Item 5180-001-0001 by $1,200,000, and Increase Item 5180-001-0270 by $1,586,000. Recommend augmenting the budget by $386,000 from the Technical Assistance Fund to establish five new posi- tions for technical assistance in the Community Care Licensing Division. Further recommend appropriating $1,200,000 from the Technical Assistance Fund, with a corresponding reduction from the General Fund, to support certain one-time expendi- tures in 1998-99. C-160 ”

“[image: http:\/\/www.lao.ca.gov\/lao_images\/LAO_Web_Banner.gif] [bookmark: _GoBack]FY 1997-1998 Aid to Families with Dependent Children\/ Temporary Assistance for Needy Families Program Welfare Reform. Assembly Bill 1542 (Ducheny, Ashburn, Thompson, and Maddy) creates the California Work Opportunity and Responsibility to Kids (CalWORKs) program and creates and modifies other related programs. This act, in conjunction with budget legislation, results in a state cost of $217 million in 1997-98, compared to prior law. This includes $111 million from the Proposition 98 allocation for schools and community colleges. (We note that because of declining caseloads, the budget appropriation for the Aid to Families with Dependent Children\/CalWORKs Program is less than estimated expenditures for 1996-97.) Figure 2 provides detail on this fiscal impact and Figure 3 describes the major features of AB 1542. [image: http:\/\/www.lao.ca.gov\/1997\/082297_bud_major_features\/pb82197_ii-2a.gif] [image: http:\/\/www.lao.ca.gov\/1997\/082297_bud_major_features\/pb82197_ii-2b.gif] Figure 3 CalWORKsa (Assembly Bill 1542) Major Features Eligibility \u00b7 \”Look Back\” Provision. Eliminates the requirement that two-parent families applying for assistance have a prior connection to the labor force. \u00b7 Resource Limits. Conforms resource limits to the amounts permitted under federal law for the Food Stamps program. (This increases the asset limit for automobiles, as applied to applicants, from $1,500 to $4,650.) \u00b7 Diversion Program. Permits counties to provide eligible applicant families with up to three months of aid payments in the form of a lump sum, for purposes of providing temporary assistance so that the family does not enter the program. Grants \u00b7 Maximum Grants. Continues 4.9 percent statewide grant reduction and suspension of the statutory cost-of-living adjustment through October 31, 1998. \u00b7 Beno Exemptions. Eliminates Beno court case grant reduction exemptions (applicable to certain recipients not able to work). \u00b7 Income Disregards. Replaces the existing \”fill the gap\” and \”$30 and one-third disregard\” with a $225 plus 50 percent earned income disregard, whereby the first $225 of earnings plus 50 percent of each additional dollar of earnings are disregarded in determining the family’s grant. Services \u00b7 Welfare-to-Work Activities. Specifies the following sequence of services: job search; assessment; welfare-to-work activities (education and training); and community service employment. \u00b7 Child Care. Creates a new delivery system administered by county welfare departments and the state Department of Education. \u00b7 Employment Retention. Authorizes up to one year of case management and other job retention services for persons leaving aid due to employment. Participation Requirements \u00b7 Weekly Hours. Adults in single-parent families must participate in work or approved education or training activities for 20 hours per week effective January 1, 1998, 26 hours effective July 1, 1998, and 32 hours effective July 1, 1999 and thereafter. An adult recipient in a two-parent family must participate for 35 hours per week. \u00b7 Exemptions. Disabled, elderly, specified caretaker relatives, caretaker of disabled person, teen parent in school, parent with child six months or under (with county discretion to change to 3-12 months). Temporary deferral for \”good cause.\” \u00b7 Sanctions. The sanction for failure to participate in work activities or community service is removal of the adult portion of the grant. Time Limits \u00b7 Welfare-to-Work Services. New applicants are limited to 18 months of job training\/education services. Existing recipients are limited to 24 months. Counties may extend the 18 month limit by six months if the extension is likely to lead to nonsubsidized employment or if no jobs are available. Able-bodied adults must commence community service employment (work for grant) at the end of these time limits, if the county certifies that a nonsubsidized job is not available. \u00b7 Five-Year Time Limit\/Safety Net. After five cumulative years on aid, the amount of the grant is reduced by the portion for the adult. The child’s portion of the grant would be continued, but counties have the option of providing this aid in the form of cash or vouchers. Certain recipients are exempt, including specified caretaker relatives and disabled persons. County Administration \u00b7 County Training. Provides funding for county training and \”retooling.\” \u00b7 County Fiscal Incentives. Provides 100 percent of certain grant savings to the counties. Specifically, allocates 75 percent of the state’s grant savings resulting from (1) program exits due to employment lasting six months, (2) increased earnings and (3) diversion of applicants from the program. The remaining 25 percent of grant savings shall be allocated to counties that have not achieved savings but have performed in a manner \”worthy of recognition.\” Counties must use these savings in the CalWORKsa program unless expenditure of these funds is not needed to meet the federal TANFb maintenance-of-effort requirement. \u00b7 Fraud Savings. Reallocates 25 percent of the state’s savings from fraud detection activities to the counties. a California Work Opportunity and Responsibility to Kids program. b Temporary Assistance for Needy Families. Supplemental Security Income\/State Supplementary Program Grant Payments. Pursuant to current law, the budget rejected the Governor’s proposal to make permanent the 4.9 percent statewide grant reduction enacted in 1995. The budget legislation, however, extends the suspension of the statutory cost-of-living adjustment for one year, resulting in General Fund savings of $27 million. Elderly Noncitizens. Federal welfare reform, as amended by the Balanced Budget Act of 1997, makes elderly legal noncitizens, who were in the United States prior to August 22, 1996 but not yet receiving aid, ineligible for the Supplemental Security Income\/State Supplementary Program. The budget, as passed by the Legislature, provided state-only funded benefits for such legal noncitizens, resulting in a General Fund cost of $17 million in 1997-98. Subsequently, the Governor vetoed these funds. Food Stamps Program State-Only Program for Children and Elderly Noncitizens. Federal welfare reform makes legal noncitizens (with certain exceptions) ineligible for food stamps benefits. The budget legislation provides state-only funded food stamp benefits for noncitizens under the age of 18 or over the age of 64. This temporary program commences on September 1, 1997 and sunsets on July 1, 2000. Prepared by the Health and Social Services Section\u2014(916) 445-6061 ‘Search eee ro ro CalWORKs\” (Assembly Bl 152) and Related Programs Fiscal Summar (In ilions) ‘Change trom Prior Law Nor Propesiion88 Proposition 8 Depantwenr oF Soci Sences (DSS) Eligiity Conlomtasoirc io Food lamps saa – Emnats ook back requrenart re parent amis 10 = Medty eat lung sum nce and rove of everpayments 4 = Senos Ware ork series (GAN) ws ~ Merial heath and sitsane abuse 215 = 1064 = 20 = Chi cars capacity bulge Deparment ol Easton) ag = Mcrererpse poets = deb anieabon program a = ‘County Administration Potanng and rtoing s0s ~ County sel ncanves (uty savings) 193 = Shee 60 ‘Subioale\u2014DSS costs 28 = Grants and County Admiistation nue 49 parent art eduction i382 – Suspend oe vg aditment 710 = 350 = 22 = Flimnat cniseaederaare Ev = Enis duets erplomnent, 2 = Ireeaed eaminge a1 = Fale paral (sncons) a7 = GAIN cana (county sdminisbaon) a9 = Petey esablone 40 = ‘Subtotal-DSS savings S707 ‘Not impact\u2014DS3 ‘oad ‘kb Gevaopent| = Depart OF EDUCATION al ediaicn| = seo Chicas = 160 Entonwen Devevorment DEPARTMENT Enyloymer Tring Parl Progam $200 5 Trae io Commence AaENCY bere seo \u2014 Depatwenr oF Housna ano Communrry Deveroewent Chil care an urs 70 Toll (all departments) ‘106.4 e110 Toll (al fate funds) sans | Ed FY 1997-1998 Aidt Famer wth Dependent ‘Temporary Anintance fr Needy Meter Reform Sy Dasa tr, and May) ree Ct CE pry a Ren or CuO pear ‘iia cnn wa ian ‘Gilrcaonis Png tin emesis D658) Fae 2 ”

” Legislative Analyst’s Office January 23, 1997 Policy Brief Welfare Reform in California: A Welfare-to-Work Approach SUMMARY The Issue: Welfare Reform Welfare reform is one of the most important policy issues facing the Legislature and Governor this year. With federal enactment of the 1996 welfare reform law, the Aid to Families with Dependent Children (AFDC) program was repealed and replaced with a new Temporary Assistance for Needy Families (TANF) program. The decisions that the Legislature and Governor make in formulating a new TANF program in California will affect one out of 13 persons in the state, including 1.8 million children. The dilemma facing any welfare reform proposal is that it must address at least three competing goals: provide support for children, establish incentives for their parents to work, and control public costs. There are few easy answers in resolving the conflicts among these goals. Many different welfare reform models can be devised depending on which of the competing goals the Legislature wishes to emphasize. In this report, we offer one such alternative\u2014a welfare-to-work approach\u2014that attempts to strike a balance among these competing goals. Where possible, the model is based on research findings; but in some instances, research is not available to help make the necessary choices in formulating the approach. In those cases, we have had to rely upon our judgment and that of various practitioners in the field of welfare and employment programs. It is our hope that the model will serve as a starting point for legislative discussions of reforming California’s AFDC and General Assistance (GA) programs, in response to the federal legislation. An Approach With respect to the goal of moving adults from welfare to work, our approach includes a wide array of employment preparation services, based largely on the existing Greater Avenues for Independence (GAIN) program but with participation mandates that affect more individuals. The most prominent of the new employment preparation services would require employable recipients, who are not otherwise working, to participate in community service jobs after two years on aid. These would generally be wage-paying jobs where an individual can get the practical experience of working and\u2014in addition Legislative Analyst’s Office to the wage\u2014the financial benefit of qualifying for the Earned Income Tax Credit. In addition, the model continues various existing work incentives and adds new ones. As regards providing assistance for children, our approach does not call for a cutoff of state aid at the end of five years, as the federal welfare reform act does with respect to federal TANF funds. Rather, families with children would continue to be eligible for state benefits at the end of five years, but at a reduced level. In addition, they would remain eligible for Medi-Cal and food stamp benefits. Thus, the model attempts to strike a balance between maintaining some of the behavioral effects associated with a time limit on aid while recognizing the importance of providing some support for needy families. With respect to adults without children, the model calls for a two-year time limit on aid for able-bodied recipients. Under current state law, counties are authorized to limit GA to 3 out of every 12 months for employable recipients. Our approach combines the state’s AFDC\/TANF and county-operated GA programs into a new program providing grants and services to families with children, as well as adults with no children. This is based on the premise that redistributive programs, such as AFDC and GA, represent statewide functions, where state policy control is needed to ensure uniform levels of support. The state would have responsibility for the program and would fund most of the costs. However, counties have an important role to play in delivering employment and related health and social services to low-income persons. Therefore, the counties generally would administer the program and would be given a financial incentive to get recipients off aid. In addition, counties would have the option of developing and implementing their own plan for providing services, instead of the approach encompassed by the model. The Fiscal Effects Projecting the fiscal effects of our welfare-to-work approach is difficult, in part because there is insufficient historical data from which to predict the effects of some of the program components. Nevertheless, given what is known about some of the program components, we project that the model would lead to a significant increase in the number of recipients who obtain nonsubsidized jobs and a significant reduction in the caseload. We also assume, however, that a number of recipients will have their grants reduced or, in the case of adults with no children, eliminated. We estimate that the model would result in significant costs in the initial years offset by savings in subsequent years. The costs are due to the investment in services. Assuming that these services, and the behavioral effects of the work incentives, will lead to increased employment among recipients, we project that the model would result in long-term savings compared to current law. Due to the lack of research on the effects of provisions such as time limits, however, there is considerable uncertainty surrounding these projections. Policy Brief Table of Contents Chapter I: Background . . . . . . . . . . . . . . . . . . . . . . . . 1 Chapter II: Overview of the LAO’s Welfare-to-Work Approach . . . . . . . . . . . . . . . . . . . 4 Chapter III: The Temporary Assistance for Needy Families Program . . . . . . . . . . . . . . . . . . . . . 8 Chapter IV: The General Assistance Program . . . . . 30 Chapter V: Summary of Fiscal Effects . . . . . . . . . . . 36 Chapter VI: County Option to Choose a Different Plan . . . . . . . . . . . . . . . . . . . . . 39 Chapter VII: Conclusion . . . . . . . . . . . . . . . . . . . . . . 40 Legislative Analyst’s Office Figures 1. Aid to Families with Dependant Children and General Assistance Programs, 1996-97 . . . . . . . . . . . . . . . . . 1 2. Legislative Analyst’s Office’s Welfare-to-Work Approach State and County Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. Legislative Analyst’s Office’s Welfare-to-Work Approach Key Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4. Legislative Analyst’s Office’s Welfare-to-Work Approach Major Program Components and Time Frames . . . . . . . . . . . . . . . 7 5. Legislative Analyst’s Office’s Welfare-to-Work Approach TANF\u2014Families With Children . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6. Legislative Analyst’s Office’s Welfare-to-Work Approach Effect of Five-Year Time Limit on Monthly Family Income Family of Three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7. Legislative Analyst’s Office’s Welfare-to-Work Approach TANF\u2014Families With Children, Fiscal Effects . . . . . . . . . . . . . . . 27 8. Legislative Analyst’s Office’s Welfare-to-Work Approach TANF\u2014Families With Children Projected Caseload Outcomes After Seven Years . . . . . . . . . . . . 28 9. Legislative Analyst’s Office’s Welfare-to-Work Approach General Assistance Component (Adults Without Children) . . . . . . 31 10. Legislative Analyst’s Office’s Welfare-to-Work Approach General Assistance Component (Adults Without Children) Fiscal Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 11. Legislative Analyst’s Office’s Welfare-to-Work Approach Combined TANF and General Assistance Components Fiscal Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12. Legislative Analyst’s Office’s Welfare-to-Work Approach Annual Fiscal Effects Higher- and Lower- Employment Impact Scenarios . . . . . . . . . . . 38 13. Legislative Analyst’s Office’s Welfare-to-Work Approach Major Employment Preparation and Work Incentive Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Page 1 Policy Brief Figure 1 Aid to Families With Dependant Children (AFDC) And General Assistance (GA) Programs 1996-97 Program Expenditures for Grants (In Millions) Cases Monthly GrantsFederal State County AFDC (FG&U)a $2,896 $2,229 $41 885,000 $565\/538b GA \u2014 \u2014 355c 150,000c 175-345d Family Group and Unemployed Parent components. a Maximum grants for high-cost and low-cost counties, family of three. b Based on June 1996 data. c Based on 1995-96 data (grants for individuals) from reporting counties. Data for 1996-97 not available. d Chapter I: Background Major Income Assistance Programs in California California currently has three major income assistance programs that provide cash grants to poor persons and families: The AFDC program, which serves families with children; the Supplemental Security In- come\/State Supplementary Program (SSI\/SSP), which serves aged, blind, and disabled persons; and the county General Assistance (GA) program, which serves indigents not eligible for AFDC or SSI\/SSP (typically single adults). This report addresses reform of the AFDC and GA programs. Figure 1 provides data on grant expenditures, caseloads, and monthly grants for these programs in 1996-97. AFDC. The AFDC program (ex- cluding the foster care program) consists of two components: the Family Group (FG) component, which consists of one-parent families and accounts for most of the cases (about 82 percent), and the Unemployed Parent (U) component, which consists of two-parent families. The number of persons in the assistance unit ranges from one to more than ten, with the average at three. In over 90 percent of the AFDC (FG) cases, the mother is the custodial parent. The average age of these women is 31 years. About 20 percent of the total AFDC caseload consists of child-only cases, such as children who are citizens but whose parents are undoc- umented persons and children whose caretakers are relatives. With respect to race and ethnicity, in October 1995 about 30 percent of the persons on aid were reported as white, 39 percent Hispanic, 19 percent black, and the remaining 12 percent primarily Asian. Page 2 Legislative Analyst’s Office General Assistance. Statewide data shown as reporting earned income on the GA program are not available. at some time during the period. Data A survey conducted in March 1996 from a study of California’s GAIN by Los Angeles County, which ac- program, for example, indicate that counts for about 60 percent of the in the early 1990s about 35 percent statewide GA caseload, indicates that of AFDC (FG) household heads (in about 62 percent of the county’s GA those counties in the study) were recipients are male, the average age employed at some time during a one- is about 40, and close to half of the year period. (The sample in two of recipients in the county are African- the counties was restricted to recipi- American. The county also reports ents on aid for more than two years, that 58 percent of its GA recipients so the figure probably understates the are classified as employable. A review proportion of working recipients.) of data provided by selected counties indicates that many GA recipients have potential barriers to employ- ment, such as prior criminal convic- tions, substance abuse problems, or mental health problems. Employment of Recipients. Because self-sufficiency is an overriding objective for programs that assist able-bodied persons, it is worth reviewing the data regarding the degree to which welfare recipients in California are employed. Statewide data are available only for the AFDC program. According to the October 1995 survey conducted by the Depart- ment of Social Services, 13 percent of the cases reported earned income during the month\u20149.6 percent of AFDC (FG) cases and 31 percent of AFDC (U) cases. These figures proba- bly understate, to some extent, the actual number of AFDC cases where the parent is working, because of unreported income. We also note that if the time frame is expanded beyond one month, a larger proportion of cases would be Thus, the data suggest that while a significant number of AFDC recipi- ents work on a sporadic basis, a relatively small number work on a regular basis. Federal Welfare Reform In August 1996, Congress enacted federal welfare reform legislation. (For details, please see our policy brief Federal Welfare Reform (H.R. 3734): Fiscal Effect on California.) To summarize some of the key provi- sions related to the AFDC program, the new law: Repeals federal AFDC require- ments and establishes a new TANF program, with no entitle- ment to benefits. Replaces federal matching funds with a block grant to the states. Requires that state plans include a provision that at least one adult in a family that has been receiving aid for more than two Page 3 Policy Brief years participate in work activi- will review the Governor’s proposal ties, as defined by the state. in our upcoming Analysis of the Requires states to reduce grants for recipients who refuse to engage in work (as defined by the state). Penalizes states for not meeting specified rates of participation by TANF recipients in work- related activities. Establishes a maintenance-of- effort requirement on state expenditures for needy families. Limits to five years the amount of time a family can receive federal TANF funds. In October 1996, the Governor submitted a preliminary state plan to the federal government in order to implement the TANF program. By doing so, the state will receive federal block grant funds for 1996-97, result- ing in increased federal funds of over $300 million for the current year, compared to what the state would have received under the prior law. The plan, however, indicated that the state would continue to operate its AFDC program during 1996-97, as provided by current state law. Governor’s Welfare Reform Proposal In January 1997, the Governor submitted a welfare reform proposal as part of his budget for 1997-98. We 1997-98 Budget Bill. Welfare Reform: Competing Goals It is clear that welfare reform will be one of the major topics of debate in this new legislative session. One of the dilemmas the Legislature and the administration will face is that in welfare reform, the goals often are competing rather than complemen- tary. Consider, for example, the following two goals of welfare re- form: Ensure that individuals and families do not live in a condi- tion of poverty\u2014a goal that suggests the provision of suffi- cient aid to bring family income above the poverty line. Minimize welfare dependency and associated public costs\u2014a goal that suggests the obligation to work and the use of work incentives such as low levels of aid and time limits on eligibility to encourage welfare recipients to work. Generally, in developing welfare systems, policymakers strike some balance between these goals. It is important to recognize, however, that the emphasis given to one goal over another is often based on philosophy as well as on cost\/benefit analysis. Page 4 Legislative Analyst’s Office Chapter II: Overview of the Legislative Analyst’s Office’s Welfare-to-Work Approach With the enactment of federal (1) the welfare system should assist welfare reform, the state has consider- and encourage recipients to achieve able flexibility to revise its AFDC self-sufficiency and (2) recipients program and to develop a more should, as a condition of receiving comprehensive approach to the state’s aid, participate in activities designed safety net programs for low- income to move them toward self-sufficiency. persons. There are numerous ways Within the broader goal of self-suffi- in which this could be accomplished. ciency, the principal objective of the Other states are crafting their plans approach is to achieve a significant in response to welfare reform, some increase in the number of recipients of which include significant depar- who are employed. tures from the previous federal requirements for AFDC. Due to the absence of empirical research find- ings, however, on key provisions of welfare reform (for example, time- limited aid), it is impossible to predict the effects of many of these program components. In order to assist the Legislature children and the other serving adults in its efforts to formulate a welfare without children. The state would reform plan, we offer a welfare-to- have responsibility for the program work approach (or model ) for and would pay for most of the costs, consideration. We recognize that but would contract with the counties many different welfare reform plans for administration. Counties would can be drafted, depending on the have a share of the program costs. In Legislature’s policy objectives. It is order to give counties an incentive our hope that the approach we offer to take actions to help get program in this report will help to illustrate the recipients off of aid, the county share various choices the state faces, given of costs would increase as recipients’ the interrelationship of elements that time on aid increases. such a plan requires. Our approach is based largely on the state and counties in our approach. the principles, or expectations, that A secondary objective is to orga- nize the state’s income assistance programs on a more uniform and rational basis. To accomplish this, the model combines the state’s AFDC and county-operated GA programs into a single program with two compo- nents\u2014one serving families with Figure 2 summarizes the roles of Page 5 \u2714 \u2714 \u2714 \u2714 \u2714 \u2714 Policy Brief Figure 2 Legislative Analyst’s Office’s Welfare-to-Work Approach State and County Roles State role Set policy and funding levels for all welfare programs for able-bodied people in California, subject to the limits of federal law. Pay most of the nonfederal costs of welfare programs in California for a time period sufficient to allow recipients to become self-sufficient. Organize the economic incentives to local government to ensure that counties work to promote a welfare recipient’s departure from welfare. Ensure compliance with federal welfare requirements. County role Organize and deliver social services, mental health, job training, and other services to welfare recipients in a manner which promotes welfare recipients’ self-sufficiency. Gradually face increased responsibility for paying a share of the costs to provide welfare as recipients’ time on aid increases. As the primary means to achieve the objective of self-sufficiency, the model includes various components designed to prepare recipients for employment and to give them greater incentives to work. Some of the employment preparation compo- nents\u2014job search, basic education, and job training\u2014are derived from the existing GAIN program, which has been found to be effective in increasing the level of employment among AFDC recipients. The model also includes (1) a requirement for community service jobs for able-bodied adults not other- wise working and (2) provisions for time-limited aid. The time limit for families with children (with certain exemptions) would be five years, but the limit would not result in the loss of aid altogether; rather, the grant would be reduced significantly. In contrast, the time limit would be two years for adults without children, and would result in the loss of eligibility for cash benefits. In both cases, time in which a recipient is working in a nonsubsidized job at least 20 hours per week would not count against the time limit, but time in community service jobs would count. While the approach calls for the provision of services during specified time frames, it gives local administra- tors considerable discretion over how to allocate resources. Recognizing that local administrators might believe Page 6 \u2714 \u2714 \u2714 \u2714 \u2714 \u2714 \u2714 \u2714 Legislative Analyst’s Office Figure 3 Legislative Analyst’s Office’s Welfare-to-Work Approach Key Features Consolidates the state’s major safety net programs\u2014Temporary Assistance for Needy Families and General Assistance. Shifts responsibility for General Assistance to the state. Includes time limits, but provides a safety net for families with children. Builds on existing Greater Avenues for Independence employment model and infrastructure. Includes strong participation mandates\u2014in employment preparation and work activities. Provides work incentives for welfare recipients. Establishes incentives for county administrators to operate cost- effectively. Provides for county flexibility in service delivery. that they can come up with a better Figure 4 illustrates the major plan, however, we also include a components and time frames of the provision whereby the counties model. It shows how a recipient would have the option to provide would move through the components services in a different manner, pursu- of the model based on the amount of ant to a performance-based contract time on aid. As we explain later in the with the state. report, the sequence and duration of Figure 3 summarizes the key features of our approach. the program components are de- signed to provide the services in the most cost-effective manner. Page 7 Policy Brief Figure 4 Legislative Analyst’s Office’s Welfare-to-Work Approach Major Program Components and Time Frames Families With Children (TANF )a Adults Without Children (General Assistance) 0 to 6 Months GAIN orientationb GAIN orientation Job search\/job club Job search\/job club Community service jobs 7 to 24 Months Basic education Community service jobs Job training Basic education Services to address disabilities Job training Voluntary work Services to address disabilities Job search Job search 25 to 60 Months Over 24 Months Community service jobs\u2014 Minimum wage Aid discontinued (able-bodied recipients) Job search Eligible for job search Over 60 Months Significant grant reduction Eligible for job search Temporary Assistance for Needy Families. a Greater Avenues for Independence. b Page 8 Legislative Analyst’s Office Chapter III: The Temporary Assistance For Needy Families Program In this chapter, we discuss the detail) and allowances for work- TANF program\u2014that is, the program related expenses\u2014exceeds the need for families with children. Figure 5 standard. Because of the disregard (see page 10) summarizes our ap- and work-related allowances, families proach for this component of the with incomes above the need stan- welfare reform program. dard can qualify for a grant. How- Program Eligibility Under current state law, the AFDC program is available to all needy single-parent families (illegal immi- grant parents are excluded but their children, if citizens, are provided with aid) and to certain two-parent fami- lies. Specifically, only those two- parent families in which the primary wage earner is unemployed and has accumulated a specified minimum amount of work history are eligible for AFDC. Family income is the primary determinant of eligibility for grants under the AFDC program. Currently, eligibility is based mainly on an income need standard, also known as the Minimum Basic Standard of Adequate Care. The need standard for a family of three, as an example, Maximum grants in California vary is $735 per month in the high-cost according to family size and whether counties under California’s regional the family lives in a high- or low-cost grant system. county. In the high-cost counties, for Generally, eligibility for an AFDC grant depends on whether the family income\u2014after excluding a portion of this income pursuant to an earnings disregard (discussed below in more ever, anyone with a gross income above 185 percent of the need stan- dard is automatically ineligible for the program. We note that the need standard is set above the maximum grant level. For example, the maximum grant for a family of three is $565 (in high-cost counties), or $170 below the need standard. This acts as a work incen- tive feature, by allowing working recipients to keep any earnings between the need standard and the maximum grant ($170 in this case) without having their grant reduced or losing eligibility for the program. We assume, in our approach, the need standard as provided under current law. Grant Levels example, maximum monthly grants range from $279 for a one-person (child-only) case to $1,196 for a family of ten or more persons. Page 9 Policy Brief The existing grant structure con- a work incentive and controlling tains the following work incentive costs\u2014we chose to incorporate the features: (1) the $30 and one-third grant levels under existing law, with disregard, whereby about one-third certain exceptions discussed below. of work earnings are disregarded in determining the amount of a recipi- ent’s income that offsets his or her grant, and (2) the fill-the-gap grant structure, in which there is a gap between the need standard and the maximum grant (as previously de- scribed). Current state law also includes the of research recently conducted in Maximum Family Grant provision California and Minnesota. for the AFDC program. Under this provision, grants do not increase for additional children born while a recipient is on aid. Finally, current law includes the disregard, (2) the elimination of a Alternative Assistance Program, provision that prohibited persons under which AFDC applicants or working more than 100 hours per recipients with earned income are month from eligibility for AFDC (U) permitted to receive Medi-Cal bene- benefits, and (3) the establishment fits and child care payments if they (through maximum grant reductions) choose to decline cash grants. of a fill-the-gap grant structure in What is the Appropriate Grant Structure? A review of the research does not provide clear guidance as to what constitutes the right grant level. Increasing the maximum grant would help bring nonworking fami- lies out of poverty, but would reduce to some extent the financial incentive to work (and, of course, would in- crease costs). Conversely, reducing the grant would tend to have the opposite effects. After considering these factors\u2014in the context of bal- ancing the objectives of providing income support while maintaining Our approach retains the fill-the- gap budgeting structure but limits the $30 and one-third disregard. Specifi- cally, the disregard would be applied in full to a recipient’s first year of employment, reduced by half for the second year, and then eliminated. We include these modifications in light California contracted for an evalua- tion of certain work incentive provi- sions enacted in 1991-92\u2014(1) the expansion of the $30 and one-third which there is a gap between the need standard and the maximum grant (as previously described). In a report submitted in January 1997, the evalu- ators found that the work incentives had a positive effect on employment among AFDC (U) recipi- ents\u2014possibly due to the elimination of the 100-hour rule\u2014but did not show a positive impact among AFDC (FG) recipients, who comprise over 80 percent of the AFDC caseload. If the $30 and one-third disregard and the fill-the-gap structure do not Page 10 Legislative Analyst’s Office Figure 5 Legislative Analyst’s Office’s Welfare-to-Work Approach TANF\u2014Families With Children Current Law LAO Approach Eligibility Income threshold based primarily on need standard\u2014 Same as current law. varies with family size and set above the maximum grant. Grants\/Services No Time Limit: 0-6 Months: Maximum grants vary with family size. Same as current law. About one-third of earnings disregarded in calculating Phase out $30 and one-third disregard within first two years grant (earnings do not offset grant). of employment. Maximum Family Grant provision\u2014no increase for Same as current law. children born while parent is on aid. GAIN program: GAIN program: Case management. Case management. Job search\/job club. Job search\/job club. Basic education. \u2014 Job training. \u2014 Child care and transportation. Child care and transportation. Exempt if child under three; child-only case, elderly, Exempt if child under one year. caretaker of disabled person, teen parent in school. Other exemptions: same as current law. 7-24 Months: Maximum grants: same as current law. Case management. Assessment. Job search. Exempt if child-only case, teen parent in school, recipient is elderly or caretaker of disabled person, or parent has child under one year. Other services as needed. Basic education (if progress made). Job training. Counseling, treatment. Volunteer work positions. Child care and transportation. Two years after initiating GAIN: county option to make Case management. work slot available if recipient not working. Community service job. 25-60 Months: Exempt if working 20 hours\/week in nonsubsidized job, recipient is teen parent in school, needy caretaker relative, caretaker of disabled person, or parent with child under one year, or for medically-verified disability or illness. Required 20 hours\/week in first year, increasing by 5 hours\/week each year. Continued Page 11 Policy Brief Current Law LAO Approach Paid minimum wage plus Earned Income Tax Credit. Periodic job search. Other services if needed. Child care and transportation. Sanctions for Nonparticipation GAIN Program: Grant reduction for nonparticipation. Proportional grant\/wage reduction. Deferred for reasons such as illness, family crisis. Deferred for medically-verified illness or disability. After two years, grant reduction if refuse work slot, if county makes a slot available. Transitional Benefits Child care: two years. Child care: same as current law. Medi-Cal: two years. Medi-Cal: same as current law. Case management: one year. Time Limits None. Five years total time on aid: Exclude time if working 20 hours\/week in nonubsidized job. Exempt if child-only case with disabled or relative care- taker, or recipient is a relative caretaker or caretaker of disabled person. Extend limit if jobs not available or for medically-verified illness or disability. After Five Years: Safety Net Not applicable (no time limits). Monthly grants: $300-$450. Eligible for job search services. Administration Counties. State contracts with counties or private organizations. Funding (Non-Federal Share) AFDC program Grants: Grants: 95 percent state, 5 percent counties. Cases 0-12 months: Administration and GAIN: 70 percent state, 100 percent state. 30 percent counties. Cases 13-24 months: Non-GAIN services: varies. 95 percent state, 5 percent counties. Cases 25-36 months: 90 percent state, 10 percent counties. Cases 37-48 months: 85 percent state, 15 percent counties. Cases 49-60 months: 80 percent state, 20 percent counties. Cases over 60 months: 75 percent state, 25 percent counties. Administration and services: 85 percent state, 15 percent counties. Performance incentives: Reduce county share up to 5 percentage points. Page 12 Legislative Analyst’s Office bring about increased employment Credit [EITC], which provides a tax among recipients, they will result in reduction or refundable credit for a cost to government. This is because low-income working persons). they will result in higher grant pay- ments to working recipients, and in some cases recipients will remain on aid for a longer period of time. The evaluation provides some evidence that this has been the case in California. An interim evaluation of a welfare reform program in Minnesota, which includes financial work incentives similar to California’s, had more mixed results: the program had the effect of increasing the number of persons on aid who were working, but kept working recipients on aid for a longer period of time. The program also had the effect of increas- ing average grant expenditures, but the long-term impact on cost-effec- tiveness is not known at this time. We note, moreover, that the evaluation does not isolate the impacts of the financial work incentives from the impacts of other program compo- nents. Thus, the research suggests that the earnings disregard may not have the intended impacts. We believe that to the extent the disregard does affect a recipient’s decision to obtain a job, phasing it out is unlikely to alter that initial decision or to cause the recipi- ent to give up the job when the disregard is reduced and eliminated. This is primarily because recipients who lose the disregard would still retain a significant financial benefit from continuing to work (for exam- ple, from the Earned Income Tax Wage Replaces Grant for Commu- nity Service Job Participants. Under our approach community service employment would be required for adult recipients who are on aid after 24 months and not working at least 20 hours per week. These participants would be paid the minimum wage and would be eligible for the EITC. For example, a person who works 20 hours per week would earn $498 in an average month and be eligible for $183 per month through the EITC (assuming a single parent with two children). After adjusting for social security taxes, the family’s income would total $643 per month. When combined with food stamps, this family would have a monthly income of $953, or 88 percent of the federal poverty level. (We discuss commu- nity service employment in more detail below.) Services The principal employment-related services used by able-bodied adults on welfare consist of job search assistance, basic education (including English as a Second Language courses), and job training. Some AFDC and GA recipients, however, have disabilities that inhibit their prospects of obtaining employment, even though they do not qualify for aid under the SSI\/SSP program (which requires a disability that continues for one year and prevents Page 13 Policy Brief gainful employment). Services to Even in the Riverside program, address these conditions include however, 41 percent of the partici- health and social services such as pants were still on aid after three drug and alcohol abuse treatment and years. Nevertheless, the Riverside mental health counseling and treat- program was found to be ment. cost-effective from the government’s Currently, these employment, health, and social services are pro- vided through a variety of programs, generally administered by counties, school districts, and community What Services Should Be Provided? colleges. Counties indicate, however, that the availability of these services is limited and sometimes inadequate, due primarily to funding constraints; and there is relatively little coordina- tion of such services for welfare recipients. The GAIN program pro- vides some degree of coordination of job search, education, and job training services through its case management, but the program cur- rently is available only to AFDC recipients and has never been funded to serve more than about 25 percent of eligible persons. An independent evaluation of the GAIN program found that as imple- mented by Riverside County\u2014one of the six counties studied\u2014the program produced larger earnings gains and grant reductions than found in any previous large-scale study of welfare-to-work programs. The evaluation, as well as a related study covering programs in various states, found that an approach that emphasizes getting recipients into jobs as soon as possible\u2014rather than one that emphasizes education and training\u2014is more effective. perspective, compared to the AFDC program without GAIN\u2014generating $2.84 in savings and revenues for every dollar spent. The Riverside GAIN approach can be characterized as including a strong employment message to recipients, relatively more (and earlier) use of job search and job development activities, broader participation, and greater use of sanctions. Our model includes the basic features of the Riverside GAIN program, with some modifications, as summarized below. We note that the time lines for provid- ing specific services are intended as norms, and case managers would have the flexibility to vary from these guidelines where it is determined that it would be cost-effective to do so. Participation requirements would be broader. All adults, with cer- tain exceptions, would be ex- pected to participate in activities designed to assist them in ob- taining employment. The excep- tions would be parents with children under age one, caretak- ers of disabled persons, and relatives who are the caretakers of children on aid. Under cur- rent law, parents with children under the age of three are ex- empt from the GAIN program. Page 14 Legislative Analyst’s Office We note, however, that referred to basic education or job nonwelfare parents with chil- training during this period. As dren one and two years old indicated above, evaluations frequently have jobs. We also have found that the labor force note that AFDC parents who attachment approach (empha- have very young children when sizing up-front job search) is they go on aid tend to remain more effective than the human on assistance for a longer time, capital development approach indicating the need to establish (emphasizing education and a connection with the labor force training). In order to maximize at an early stage of welfare efficiency, case managers would receipt. Finally, under our have flexibility to determine model, deferrals would be more which recipients would need limited than under GAIN (which more intensive job search or includes instances that are diffi- group job club assistance, based cult to document, such as fam- on the recipients’ prospects of ily crises )\u2014specifically, defer- obtaining jobs without this level rals would be limited to of assistance. The six-month medically-verified illnesses or time frame is established in disabilities. recognition of the fact that a All recipients would receive case management, as in the GAIN program, with the amount de- pending on the needs of the clients. This would include a case plan designed to achieve self-sufficiency, based on the needs and abilities of the recipi- ents. During the first six months on aid, GAIN orientation would be fol- lowed by job search\/job club ser- vices\u2014supervised and unsuper- vised activities focusing on making job contacts and inter- viewing for positions, as well as group job clubs which include a classroom instruction compo- nent . This time frame differs in some respects from GAIN cur- rently, where recipients may be large number of recipients (about 25 percent historically) go off of aid without any ser- vices. Thus, in order to control program costs, case managers generally would delay the provi- sion of more expensive services (such as assessment, education, and job training) until after six months. Job developers would assist in finding jobs by establishing direct contacts with potential private and public sector employers. This is a component of the River- side program, but not used in many other counties. For persons still on aid after six months, an employment assessment would be conducted. Pursuant to the assessment, other services Page 15 Policy Brief would be provided to address educational achievement im- barriers to employment, with pacts in two of the three counties periodic job search. These ser- studied or welfare and employ- vices could include basic educa- ment impacts in any of the tion, English-as-a-Second Lan- counties. An integrated ap- guage courses, job training, and proach appears to yield much services\u2014such as counseling, better results\u2014for example, the home visits, and drug or alcohol job training\/basic education abuse treatment\u2014designed to courses offered by the Center for address certain problems or Employment Training, a private disabilities. Case managers organization based in San Jose. would have discretion in deter- mining what services are appro- priate, taking into account the cost-effectiveness of these activi- ties. This is similar to how the GAIN program operates, but we note that while case managers in GAIN currently may refer recipients to providers of health and social services, typically they confine their activities to basic education and job training services. Basic education would be provided only through programs that can demonstrate that they are effective, and only to the extent progress is made by the recipient. Typi- cally, basic education courses offered by adult education pro- grams and community colleges are provided independently of vocational training courses. This delivery mode, however, gener- ally has not been successful. For example, an evaluation of basic education provided to GAIN participants\u2014typically through public education institu- tions\u2014did not find significant Case managers and job developers would identify opportunities for volunteer work, and place recipi- ents, on a voluntary basis, in such positions. While this is currently not part of the GAIN program, this activity is one of the components of a welfare-to- work program (Project Match) in Chicago. Program administra- tors indicate that there are a large number of such work slots available in local areas. Child care and transportation expenses would be provided as needed. Child care reimburse- ment, however, would cover costs up to the 75 percentile ofth regional costs, as provided under current law for non-GAIN AFDC recipients. The higher limit for the GAIN pro- gram\u2014approximately the 93 percentile\u2014would be elimi-rd nated. (For a discussion of this issue, see our review of the GAIN program in the Analysis of the 1995-96 Budget Bill.) Page 16 Legislative Analyst’s Office With respect to other services provided outside the context of the GAIN program, the model includes the following: The Cal Learn Program would be retained, pending the results of an evaluation currently in progress. This program serves teen par- ents on AFDC by providing case management and fiscal bonuses and penalties based on school attendance and performance. A new service\u2014one year of transi- tional case management for recipi- ents going off of aid due to em- ployment\u2014would be provided. This is designed to facilitate stable employment, in light of the relatively high rate of recidi- vism in the AFDC program. (For example, an estimated 26 percent of AFDC recipients in October 1995 had been on aid more than once.) The existing transitional child care and Medi-Cal benefits would be continued as provided by cur- rent state law\u2014for up to two years after an AFDC recipient goes off of aid due to employ- ment or marriage. (The second year of transitional Medi-Cal currently is subject to approval of a waiver of federal regula- tions.) Community Service Employment What is Community Service Em- ployment? Community service jobs, in the context of this report, are jobs outside the regular labor market that are arranged by the government specifically for welfare recipients. Participants either work for their grant or are paid regular wages in lieu of their grant. Under current state law, adult recipients who have been on AFDC for two years from the date of their GAIN assessment must participate in a work preparation assignment (similar to community service jobs) if made available by the county, unless they are working at least 15 hours per week. This provision became effective during 1995-96, so recipients will begin to be affected by the two-year time frame in 1997-98. It is important to recognize that the provision of work slots is at the option of the counties. In addition, counties typically provide such jobs as part of a require- ment that GA recipients work. Contra Costa County, for example, requires employable recipients (who are not otherwise working) to work in county-provided jobs within a few months of application for aid. A wide variety of county jobs are provided, such as paper recycling, clerical work, and roadside litter removal, as well as jobs in nonprofit organizations such as certain hospitals in the county. Page 17 Policy Brief Some other states have imple- Participation in these jobs would mented, or plan to implement, wel- be supplemented by job search and fare reform proposals that include other activities designed to address community service employment as obstacles to obtaining nonsubsidized one of the components (Wisconsin employment, if prescribed in the case and Vermont, for example). In fact, plan. Work would generally be for the federal welfare reform act re- 11 months, with periodic job search, quires states to include such provi- followed by one month of intensive sions in their state plans, unless the job search prior to placement in Governor specifically chooses not to another work slot. do so.(The Governor’s 1997-98 wel- fare reform proposal would authorize counties to include community service as a work-related activity for recipients.) The LAO Approach. In our ap- year, with essentially no increase in proach, as noted above, parents (or the wage. This is designed to increase household heads in the case of two- the incentive for recipients to find a parent families) who have been on nonsubsidized job. (In order to retain aid for 24 months, and not working the federal EITC, this would be at least 20 hours per week, would be accomplished by reimbursing the placed in a community service job recipient with a nominal grant\u2014$10 unless they have a child under one per month\u2014for the additional hours year, are caretaker relatives, are worked.) caretakers for a disabled person, or have a medically-verified illness or disability that precludes employment. By design, the community service term intensive job training program, jobs would be operated in the same if the recipient could benefit from manner as nonsubsidized jobs. Recipi- such training. For example, the Center ents would be paid a wage, not given for Employment Training, a private a welfare grant. The wage would be organization that operates job train- set at the minimum wage level ($498 ing programs in 19 sites in California, per month on average, for a 20-hour provides courses where the student work week) and the employees attends full time for three to eight would be eligible for the EITC ($183 months, depending on the course. per month for a single parent with Such job training programs could also two children). They would also be be operated directly by individual eligible for Medi-Cal and food businesses. stamps. During the first year of community service jobs, recipients would work 20 hours per week. The number of hours would increase to 25 in the second year, and to 30 in the third Under our approach, case manag- ers could redirect a recipient from a community service job into a short- Page 18 Legislative Analyst’s Office The Pros and Cons of Community unpaid work experience pro- Service Employment. Community service jobs constitute just one of a variety of activities that could be adopted to facilitate the movement of recipients into private or public nonsubsidized employment. Propo- nents of community service employ- ment generally cite two broad reasons for such an approach: (1) the mone- tary benefits of moving recipients off welfare and into employment, and (2) the nonmonetary benefits, to recipients and society alike, from engaging in work. The specific bene- fits are summarized below: It can help prepare participants for employment by teaching them good work habits. Similarly, it can increase partici- pants’ chances of obtaining nonsubsidized employment by giving them an opportunity to gain work experience and dem- onstrate a good work record. By requiring welfare recipients to participate in such work (and counting this time against time limits on aid), it can increase the incentive to seek nonsubsidized jobs, when compared to a sys- tem where no such participation mandate exists. When compared to not working, such jobs can contribute to partic- ipants’ self-esteem and enhance their status as role models for their children. We note, in this respect, that participants in grams in the 1980s reported that the work was meaningful, not make work jobs. Some public value can be attrib- uted to the work itself. It is consistent with the notion, held by many, that able-bodied welfare recipients should partici- pate in work-related activities in exchange for the aid they receive. Community service jobs, on the other hand, would result in signifi- cant administrative costs and addi- tional costs for child care and trans- portation. It also may be difficult to develop enough work slots if imple- mented on a large scale. Research on a few small workfare programs in the 1980s (in which recipients worked for their grant) did not find consistent positive effects on employment and earnings. The researchers indicated, however, that programs offered on a larger scale and with broader participation mandates could prove to be effective. We also note that better outcomes might be achieved if such programs were operated in the context of a time-limited aid environment, where the incentive to get a nonsubsidized job would be greater. Moreover, the research indicated that by assuming some public value from the output of the work, the benefits exceeded the costs, from the perspective of the taxpayer. Page 19 Policy Brief Finally, we note that the State of This will help to control the costs of Virginia has implemented a commu- this component while targeting the nity service job requirement for activity to those recipients who are AFDC recipients who have been on most likely to benefit from it. Main- aid for 90 days. This is part of a taining the requirement until the time welfare reform program that includes limit, moreover, will ensure that a time limit of 24 months of assistance work-ready recipients of aid are within any 60-month period. (Some participating in a work activity. recipients would be eligible for the state’s General Relief program after the time limit.) Program administra- tors indicate that in those counties where the provision has been imple- mented, caseload reductions have occurred and many recipients found nonsubsidized employment prior to the time the community service job requirement took effect. Conse- quently, the state has had to develop a much smaller number of commu- nity service work slots than had been anticipated. The program, however, has not been evaluated. On Balance, It’s Worth Trying. After considering the factors summa- rized above, we believe the potential benefits justify including this activity in our approach. This recognizes both the potential monetary benefits associated with moving recipients into nonsubsidized jobs, as well as the nonmonetary societal benefits from a program that requires able- bodied welfare recipients to work rather than remain at home. Because studies indicate that from 40 percent to 50 percent of AFDC recipients leave aid within two years, the community service job require- ment would not begin until a recipi- ent has been on aid for two years. As is the case for most community service employment programs, there would be a provision that these jobs not displace workers in existing jobs. We estimate that approximately 93,000 community service work slots would need to be developed in the first year that the provision is imple- mented. To put this in some perspec- tive, there are currently about 13 million jobs in California. Counties and cities are the employer for over 500,000 of these jobs, and over 700,000 persons are employed by nonprofit organizations. Sanctions The model assumes sanctions for failure to participate in activities prescribed in the case plan and community service jobs. The sanc- tions would be proportional reduc- tions in the recipient’s grant or wages, for hours of nonparticipation. Time Limits Federal Requirements versus State Discretion. As indicated previously, the federal welfare reform legislation sets a five-year lifetime limit on any family’s use of federal block grant funds. The law also permits states to Page 20 Legislative Analyst’s Office exempt up to 20 percent of its cases the program can increase the number for reasons of hardship. of recipients who work\u2014including It is important to note that the federal act places no time limits on the use of state funds. As a result, the state does not necessarily have to impose any time limits on recipients’ eligibility for aid. Those on aid for more than five years could be funded entirely with state funds, and the Thus, it appears that support federal funds that would have other- services by themselves\u2014even with the wise supported these recipients potential to impose sanctions as would, in effect, be shifted to other provided under the GAIN program\u2014 recipients. Thus, whether to impose will not be sufficient to move a high a time limit on state funds is a key percentage of recipients into stable decision facing the Legislature. employment and off of welfare. How Many Persons Might Be Subject to Time Limits? As back- ground for the consideration of time- limited aid, we note that according to the 1995 survey of AFDC recipients, 35 percent of the cases were on aid for five years or more. This consisted of 36 percent of AFDC (FG) cases and 29 percent of AFDC (U) cases. Viewed from a different perspective, the Department of Social Services esti- mates that of those AFDC (FG) recipi- ents who began aid in 1988, about 30 percent were on aid five years later. Some other studies estimate that over 40 percent of the persons receiving AFDC eventually will accumulate five years of time on aid. The large number of long-term recipients is probably related to the Effectiveness of Time Limits? Time- fact that these recipients tend to have limited aid has the potential to act as lower levels of education and work a powerful work incentive\u2014in terms experience prior to going on aid. The of encouraging recipients to seek recent GAIN evaluation shows that work and participate in work prepa- long-term recipients\u2014but a signifi- cant number still do not obtain em- ployment. Even in the best-perform- ing county, for example, 33 percent of the participants did not work at any time during the three years of the study. Whether time limits would prove to be more successful is not known. We note that estimates of the number of recipients who could be affected by a time limit, such as those cited above, assume a continuation of the AFDC program as it operated in past years. It is important to keep in mind that welfare reform inter- ventions\u2014such as the GAIN pro- gram, community service jobs, tar- geted tax credits, and time limits themselves\u2014are designed with the intent of increasing the number of participants who obtain employment, thereby reducing the number of recipients who actually reach the time limit. What Do We Know About the Page 21 Policy Brief ration activities\u2014but carries the risk discretion, however, would inevitably of depriving families of any source lead to problems of equitable treat- of income. While several states are ment of recipients and possibly beginning to implement various increased costs for administration. In forms of time-limited aid, no evalua- addition, the behavioral effect on tions have been completed on such recipients (as a work incentive) might provisions. An interim report on not be as great if they do not have a Florida’s time-limited welfare pro- clear idea, from the outset, of when gram should be available within a few the limit will occur. months, but the findings will be preliminary. What Should the State Do? It is specific characteristics of recipi- clear that time limits entail consider- ents\u2014for example, a shorter time able risk, but there is also much that limit for those who are the most can be gained. The relatively large work-ready based on measurable number of able-bodied welfare recipi- criteria. This approach may also lead ents who are not employed on a to problems of equitable treatment regular basis, even when GAIN (between those who fall just below services are provided, suggests that and just above the threshold) and there is room for improvement. As increased administrative costs to indicated previously, time limits may collect and verify the data on the prove to be effective when combined criteria. with other interventions designed to increase employment. The state savings resulting from time limits, moreover, could help to finance the costs of providing services to recipi- ents. Based on these factors, we believe that some type of time-limited aid is worth trying. How Should Time Limits Be Ap- cases would be exempt\u2014those where plied? In considering time limits, the state could adopt the premise that aid should not be provided past the time that a recipient could reasonably be expected to obtain employment. Of course, this would vary considerably among welfare recipients. One way to address this issue would be to give case managers discretion to decide when aid would be terminated. Such Another approach is to adopt differential time limits according to Given these difficulties\u2014and after considering the time on aid data for AFDC recipients\u2014our approach incorporates the same limit that applies to the federal funds\u2014five years of total time on aid. (Time would be counted as of the date of program implementation.) Certain the adult recipient is caring for a disabled person or is a caretaker relative, and child-only cases with disabled parents or caretaker rela- tives. As discussed below, the model provides for a safety net for those families that reach the time limit. The model assumes that time on aid is not counted against the limit Page 22 Legislative Analyst’s Office where (1) the adult recipient is work- is reached for the TANF program, ing in a nonsubsidized job at least 20 families would be eligible for cash hours per week or (2) the state does benefits but at a much lower level. The not provide services pursuant to the grants would be set at $300 per month recipient’s case plan, as determined for a family of two, $375 for a family by the case manager. (Note that time of three, and $450 for a family of four in community service jobs would or more (generally about two-thirds count against the limit.) In addition, of the existing grant levels). the time limit would be extended if (1) jobs are not available, according to specified local labor market mea- sures, or (2) local administrators find that a recipient has a medically- verified health or psychological impairment that precludes employ- ment, and the recipient has made a good faith effort to comply with case plan provisions to address these problems. Even if time limits were to prove to be relatively successful, it is likely that some individuals and families will reach the limit without securing employment. This raises the question of how hard the limit should be. For example, should there be a safety net such as the one provided by the existing GA program? The dilemma confronting policymakers is that the more restrictive the time limit, the more likely it is to be suc- Tax policies represent another cessful in terms of the number of potential means of reforming welfare. recipients who become employed This can be accomplished through (assuming the behavioral effects work broad policies that affect the general as intended) but the greater the risk population or through efforts targeted of adverse effects to the extent it is not to welfare recipients. We do not successful. propose changes in tax policies in our Our approach does not include a strict time limit that would cut off cash assistance to families completely. Instead, after the five-year time limit These families would remain eligible for Medi-Cal benefits and food stamps. In addition, they would be permitted to use job search services at their option. By reducing, but not eliminating, grants for families after five years on aid, our model strikes a balance between the objectives of achieving the behavioral effects associated with time-limited aid and providing some income support for families with children. Figure 6 shows the change in monthly income when a family of three persons shifts from the commu- nity service job component to the five- year safety net program. Tax Policies and Welfare Reform model. We include a brief discussion of such provisions, however, because they have received some attention from policymakers in the context of welfare reform. Page 23 Policy Brief Figure 6 Legislative Analyst’s Office’s Welfare-to-Work Approach Effect of Five-Year Time Limit on Monthly Family Income Family of Three Before Time Limit (Community Service Job) After Time Limit (Safety Net) Earningsa $460 \u2014 Grant \u2014 $375 Earned Income Tax Credit 183 \u2014 Food stamps 310 315 Totals $953 $690 Percent Change -28% After social security taxes. a There has been some discussion, In addition, the President has for example, of the possibility of proposed a new program in which adopting a state EITC. As noted employers could (1) claim a above, the federal ETIC provides a 50 percent tax credit on the first tax reduction or refundable credit for $10,000 of wages paid to long-term low-income working persons. En- welfare recipients and (2) treat acted in 1975, the EITC was expanded employer-provided education and significantly in recent years. training, health care, and dependent Another alternative to consider is the adoption of targeted tax policies to bring about more employment Targeted wage subsidies, in which among low-income persons. In Au- the government would subsidize the gust 1996, the President signed the wages of welfare recipients employed Work Opportunity Tax Credit, which in the private sector, have also been provides tax credits to employers proposed as a way to increase em- who hire persons from specified ployment among recipients. A study target groups, including AFDC of a targeted wage subsidy program recipients. The program replaces the for welfare recipients in Dayton, federal Targeted Jobs Tax Credit, Ohio\u2014and a separate study of a which expired in 1994. These pro- similar program in two cities in grams have the effect of subsidizing Wisconsin\u2014 found that the subsidy the wages paid to individuals in the actually reduced the prospects of target groups. Generally, research on recipients obtaining employment. the Targeted Jobs Tax Credit program indicates that it was not effective in increasing the employment of disad- vantaged workers. care spending as wages for purposes of claiming the tax credit. Finally, we note that state law includes tax policies designed to increase the employment of certain Page 24 Legislative Analyst’s Office target groups and stimulate invest- to note that while the state would ment in depressed areas. This in- contract for administration, we cludes programs offering economic envision that local administrators incentives\u2014such as tax credits for would have considerable discretion hiring disadvantaged persons\u2014for in how services are provided. The businesses in 29 designated enter- local administrators would develop prise zones throughout the state. A case plans and would make decisions study by the Bureau of State Audits on resource allocation. For example, in 1995 indicated that data were not they would determine the distribu- sufficient to determine whether the tion of funds allocated for services enterprise zone program was effec- such as basic education and job tive. training, and would have the option Administration Currently, counties are responsible for administration of the AFDC program. Last year, in the Governor’s 1996-97 proposal to redesign the program, the state would have con- tracted for administration. Counties would have been given first choice, and if they chose not to administer the program, other entities such as private organizations could have been Under current law, the state pays selected\u2014presumably with the state for 95 percent of the nonfederal costs as the final option. If counties chose of AFDC grants, and the counties pay not to administer the program, they for 5 percent. The state pays for still would have been responsible for 70 percent of the nonfederal costs of paying their share of the costs. We administration, and the counties pay have adopted this approach in our for 30 percent. model. (This is not part of the Gover- nor’s 1997-98 proposal.) As Riverside County demonstrated matic responsibility for the TANF in its implementation of the GAIN program. Thus, one could argue that program, a successful welfare-to- the state should also assume the full work program requires local welfare costs of the program. The advantages departments to change the focus of to such an arrangement would be that their mission from one that empha- it would clarify that the state is sizes eligibility and grant determina- responsible for program outcomes tion to one that emphasizes employ- and would insulate the counties ment. In this respect, it is important (which have a more limited revenue of contracting with public or private providers for such services. This allows for local innovation in areas such as developing collaborative arrangements between service pro- viders (community colleges and private industry councils, for exam- ple) and ways to integrate services such as education and job training. Funding Structure Under our approach, the state would continue to have program- Page 25 Policy Brief base) from the fluctuations in costs aid from 13 to 24 months, the county due to the effects of economic cycles share would be 5 percent. The county on program caseloads. share would increase in a similar We also note, however, that under the model the counties would con- tinue to be partners in the new program\u2014not only as administrative agencies but also as providers of related services such as mental health In addition, the model includes a and drug abuse treatment. In this provision for performance incentives, situation, giving counties some share whereby the counties would have of program costs could act as an their share of costs reduced by up to incentive for counties to take actions 5 percentage points for achieving that would contribute toward positive positive program outcomes. The program outcomes as well as efficient outcome measures, for example, administration. could be based on employment and After considering these factors, our approach incorporates a funding structure as follows: For administra- tion and services, the state would pay Basing the state and county shares 85 percent of the nonfederal costs and of cost on recipients’ time on aid the counties 15 percent. The county requires the means to track this time share of costs is set at a level that is on a statewide basis. The state is designed to encourage efficiency but currently in the process of implement- not so high as to give counties an ing a statewide automation system. incentive to underspend for fiscal According to the Health and Welfare rather than policy reasons. Agency Data Center, counties will be For grants and community service job wages, the state would also pay for most of the costs but\u2014in order to give counties an incentive to maxi- mize their efforts to get recipients off of aid\u2014the county share of costs would increase gradually as recipi- ents’ time on aid increases, up to a limit. Specifically, for recipients on aid for up to one year (beginning with the date of implementation of the program), the state would pay for all of the grant costs. For recipients on manner by 5 percentage points as recipients’ time on aid increases in one-year increments, reaching a maximum of 25 percent for recipients on aid for more than five years. recidivism rates, possibly accounting for demographic and socioeconomic factors related to time on aid. able to use an existing statewide data base (the MEDS file) in 1997-98 to track time on aid. Program Implementation There are many ways in which welfare reform programs can be implemented. They could be estab- lished as pilot projects, for example, or on a statewide basis. If imple- mented statewide, they could be made effective for all recipients immediately or they could be phased in. Phasing Page 26 Legislative Analyst’s Office could be accomplished by applying the changes only to new recipients as of the effective date of the program. Alternatively, the changes could be applicable to all cases in which the parent was born after a particular year. This approach was suggested by President Clinton in his 1994 welfare reform proposal. (For details of the President’s proposal, please see our policy brief The President’s Welfare Reform Proposal: Fiscal Effect on Califor- nia, August 11, 1994). A phase-in approach would reduce the initial costs needed to finance the services and make the community service job component more manage- able from an administrative stand- point. On the other hand, it would delay the long-term savings that result from these components. A phase-in approach also would entail the operation of a dual system of TANF for an extended period of time. We assume, in our estimates of the fiscal effects of the model (discussed below), that the program would be implemented on a statewide basis. Program Evaluation It will, of course, be important for the Legislature to assess the impact of any major changes to the state’s welfare programs. Consequently, our model assumes a long-term evalua- tion of the new program, to be con- ducted by an independent evaluator. Fiscal Effects of the Model Below we summarize our estimate of the fiscal effects (on the state and county governments) of implement- ing our TANF approach. Before doing so, we must emphasize that because of the uncertain behavioral effects of provisions such as community service job requirements and time limits, it is impossible to make fiscal projec- tions with precision. Thus, we had to rely on several assumptions. While we believe these assumptions are reasonable, they are also subject to a significant margin of error. We base our cost estimates on data from a variety of sources, including the state’s GAIN evaluation, the CALDATA study on drug and alco- hol treatment, and research on com- munity service employment. We assumed annual increases in em- ployment\u2014based in part on the GAIN evaluation\u2014from the com- bined effect of the program compo- nents. We discuss these impacts below in more detail. Fiscal Impact on State and Local Governments. As Figure 7 shows, we estimate that our TANF approach would result in net total costs initially ($360 million in the first year) and net savings in later years ($120 million in the fourth year, increasing to roughly $650 million per year in the sixth and seventh years). The costs result primarily from the various services and the administrative and support costs of the community service jobs. The savings result from Page 27 Policy Brief Figure 7 Legislative Analyst’s Office’s Welfare-to-Work Approach TANF \u2014Families With Childrena Fiscal Effects (In Millions) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Seven-Year Program impacts Costs\/(savings) $360 $290 $70 ($120) ($350) ($680) ($640) ($1,070) Impact by level of government State costs\/(savings) $450 $290 ($10) ($220) ($460) ($830) ($810) ($1,560) County costs\/(savings) (90) \u2014 80 100 120 150 170 530 Temporary Assistance for Needy Families. a Totals may not add due to rounding. the effects of these interventions and the time limits (which result in in- from the GA component of the model, creased employment and earn- as described later in this report.) ings).Considering the stream of total costs and savings to the state and counties, the payback period\u2014after adjusting the future stream of costs and savings for inflation\u2014would be 5.5 years. In other words, this is the point where the initial costs are offset by the savings generated in later years. The figure also shows that the eligible for Proposition 98 funds. model is projected to result in net costs to the state in the first two years and net savings annually thereafter, with savings of about $800 million annually in the sixth and seventh years. The model would result in net savings to the counties in the first year and net costs that increase annually thereafter to $170 million in the seventh year. This pattern is primarily the result of the provisions whereby counties assume an increasing share of costs as recipients stay on aid longer. (The county costs, however, would be more than offset by savings Looking more closely at the first full year of implementation, we estimate that state General Fund costs would amount to about $450 million, and county savings would be about $90 million. Of the General Fund costs, we estimate that about $120 million would be for education and training services potentially Caseload Impacts. Figure 8 (see next page) shows the projected out- comes of the model in terms of the impact on caseloads and the percent- age of recipients who are working. It shows that by the end of the sev- enth year, the number of recipients who are on aid but working at least 20 hours per week in nonsubsidized jobs is expected to increase by about 77,000, or 84 percent, over the base- line projection. In addition, we project that about 101,000 families will go off Page 28 Legislative Analyst’s Office Figure 8 Legislative Analyst’s Office’s Welfare-to-Work Approach TANF \u2014Families With Childrena Projected Caseload Outcomes After Seven Years Cases Percent Change Welfare caseload -124,065 -14% Employment in nonsubsidized jobb While on aid +77,000 +84% Left welfare 101,090 -11% Temporary Assistance for Needy Families. a At least 20 hours per week. b aid by the end of the seventh year due seven years. In addition, the model to employment, representing an assumes that in the sixth year, 11 percent caseload reduction from 9 percent of the projected baseline the baseline projection. This is a caseload would be subject to grant significant reduction when consider- reductions due to the five-year time ing that a substantial portion of the limit. caseload would not be provided services under the model because of exemptions\u2014for example, child-only cases and cases with needy caretaker relatives. Based on these projections, about 25,000 additional jobs, on average, would be filled by former welfare recipients per year. We note that given the size of the labor market in Califor- nia (300,000 to 400,000 new jobs created annually), we would not expect job availability to present a major obstacle to achieving these results. After accounting for caseload reductions due to both employment and nonemployment factors (such as failure to comply with community service job requirements), we estimate that the total welfare caseload reduc- tion will be about 14 percent after How Can the Initial Costs Be Financed? As indicated, the model would result in significant General Fund costs in the first two years (about $460 million and $300 million, respectively).Therefore, if the Legisla- ture should desire to adopt this approach, or any other welfare reform plan that requires a similar up-front investment of funds, it will have to consider some funding alternatives. These alternatives include: Changes to current law that would generate savings that could be redirected to welfare reform. Within the welfare area, two such options would be (1) post- ponement of the resumption of the statutory cost-of-living ad- justment (COLA) for the AFDC program, for a General Fund Page 29 Policy Brief savings of $75 million in 1997-98 recipients priority for federal Job and $245 million in 1998-99, and Training Partnership Act funds, (2) continuation of the statewide but this would result in reallo- 4.9 percent grant reductions that cating such funds from other are scheduled to be restored in low-income persons. November 1997, for a savings of $168 million in 1997-98 and $253 million in 1998-99. Outside the welfare area, one such op- tion would be continuation of the suspension of the renters’ tax credit, for a General Fund sav- ings of $525 million in 1997-98 and $530 million in 1998-99. Phasing in implementation of the program in order to reduce initial costs. For example, applying the program only to new recipients as of the date of implementation would substantially reduce the first-year costs, but the savings would be delayed. Increasing taxes to raise addi- tional revenue. Due to the provi- sions of Proposition 98, how- ever, from 40 percent to 60 percent of such revenues would have to be allocated to education in grades K-14. (Some of these funds could be used for the costs of education services in the welfare program.) Using available federal funds. We estimate, for example, that about $100 million in anticipated an- nual increases in federal child care funds could be made avail- able to AFDC parents needing these services. Another possibil- ity would be to give AFDC New federal funds may be made available in the future. President Clinton, for example, has pro- posed to make $3 billion avail- able nationwide to local commu- nities over three years for a welfare-to-work jobs initiative. Uncertainty in Projecting Savings. It is important to recognize that from a fiscal standpoint, our approach entails an element of risk. Simply stated, the costs are more certain than the savings. We have provided the underlying rationale for assuming positive impacts from the welfare interventions in the model, and the research on the GAIN program helps guide us in making such assumptions. However, for some of the program components\u2014for example, mandated community service employment when provided in the context of time- limited aid\u2014the data are not ade- quate to estimate the impacts with a high degree of confidence. Thus, the actual impact on employment levels could be significantly less\u2014or more\u2014than we have projected; and as a result, the costs or savings could vary from our projections. This variation could be on the order of magnitude of several hundred million dollars in combined net state and county costs or savings over the seven-year period. Page 30 Legislative Analyst’s Office Chapter IV: The General Assistance Program As indicated at the beginning of ties. Similarly, counties differ in this report, the GA program in Cali- how they administer their Gen- fornia is financed and operated by the eral Assistance programs. counties. Currently, the counties serve about 150,000 cases, but the number is likely to increase due to the federal welfare reform legisla- tion\u2014particularly the provision denying SSI\/SSP eligibility to legal noncitizens. As part of our approach for welfare reform, the existing GA program would be integrated with the TANF program, with the state assuming responsibility for both program components. (Eligibility for Medi-Cal and indigent health care would remain the same as under current law.) The rationale for such a change can be summarized as follows: Both programs have the same basic objectives\u2014to assist recipi- ents in achieving self-sufficiency. Combining the programs would permit the state to maintain policy consistency across these income maintenance programs. Combining the programs would result in more equitable treat- ment of recipients. Under the current system, the level of aid provided to adults varies be- tween the AFDC and GA pro- grams and, within the GA sys- tem, among the different coun- A uniform system of support would avoid migration effects where GA recipients move to counties that offer higher grants. Summary of the Model for General Assistance Under our approach, the provisions applying to adults without children (GA recipients) would be similar to the existing GA program, with the following exceptions: grants would be uniform across the state, with variations only for regional cost differences similar to the existing AFDC program; recipients would receive services commensurate with the services provided to TANF recipi- ents; and there would be a limit of two years on total time on aid for able-bodied recipients. For reasons relating to costs, however, under the model the GA provisions would not begin until three years after imple- mentation of the new program for families with children. Figure 9 summarizes the GA component of the model, compared to current law. Page 31 Policy Brief Figure 9 Legislative Analyst’s Office’s Welfare-to-Work Approach General Assistance (GA) Component (Adults Without Children) Current Law LAO Approach Eligibility GA: Indigent persons not eligible for AFDC \/TANF or SSI (mainly singlea b c adults). Same as current law. Combine AFDC and GA. Grants\/Services GA grants vary by county (on average, roughly $225 per month). Services: Varies by county. Job search. Work requirement (county-provided jobs)\u2014typically within a few months of application. Other services\u2014varies. Uniform grant structure statewide, with regional variation based on cost of living. Grants of $225 per month. GAIN program:d Services\u2014same as TANF (families with children). Community service job: Begins within three months of application. Same as current practice in GA. Recipient works 15 to 20 hours per week in exchange for grant. Not eligible for Earned Income Tax Credit. Time Limits Counties authorized to limit aid for employable recipients to 3 out of every 12 months. Two years total time on aid: Exclude time if working 20 hours\/week in nonsubsidized job. Exempt if recipient is elderly or caretaker of disabled person. Extend limit if jobs not available or for medically-verified illness or disability. Funding 100 percent counties. Grants: Cases 0-12 months: 80 percent state, 20 percent counties. Cases over 12 months (until time limit): 70 percent state, 30 percent counties. Administration and services: 85 percent state, 15 percent counties. Performance incentives: Reduce county share up to 5 percentage points. Aid to Families with Dependent Children. a Temporary Assistance for Needy Families. b Supplemental Security Income. c Greater Avenues for Independence. d Page 32 Legislative Analyst’s Office Grant Levels General Assistance grants vary considerably among the counties. Based on county reports for 1995-96, the grants ranged from $175 to $345 for single persons. Counties are authorized to reduce grants for specified reasons, such as when recipients are living in a shared- housing arrangement. Pursuant to Ch 72\/93 (SB 1033, Committee on Budget and Fiscal Review) and Ch 6\/96 (SB 681, Hurtt), the Commis- sion on State Mandates may, on a finding that a county is in significant financial distress, permit the county to reduce its grants by a specified amount for a period of three years. Under our approach, grants for adults without children (GA recipi- ents) would be uniform statewide, except there would be provision for variation according to regional cost We have previously discussed the differences, such as the existing advantages and disadvantages of adjustments for the AFDC program. establishing time limits, and sug- The grants would be set at a level that gested a time limit\u2014in the form of approximates the projected average a significant grant reduction and grants in the existing GA pro- referral to a county-operated safety gram\u2014roughly $225 per month. The net program\u2014for families with grant levels are designed to maintain children on aid more than five years. an incentive to obtain employment Regarding the existing GA program, and to control the costs of the pro- current law authorizes counties to gram. limit eligibility for employable recipi- Services and Community Service Jobs Services for adults without chil- dren\u2014and the related sanctions for nonparticipation\u2014would essentially be the same as those available to recipients with children. These ser- vices would include job search during the first six months on aid, and basic education, job training, and services to address disabilities in the following months. Community service jobs, however, would be required at an earlier stage\u2014within a few months of application. This is currently the practice in most counties for GA recipients who are capable of work- ing, and is consistent with findings indicating that GA recipients tend to stay on aid for shorter periods of time than do AFDC recipients, as we discuss below. To control program costs, the model assumes that partici- pants in community service jobs would work for their grant. This is also consistent with current practice for GA recipients. Time Limits ents to 3 out of every 12 months. Under our approach, any such time limit would be imposed on a state- wide basis. Rather than impose a limit of 3 out of every 12 months, however, we suggest basing the limit for adults without children on continuous time Page 33 Policy Brief on aid, consistent with the type of with the same qualifications for limit applied to families with chil- extensions as the TANF component. dren. We believe that this approach would be more conducive to the establishment of a comprehensive case plan for these recipients (for example, a plan that includes a five- month job training program). The time limit, however, would differ from the limit on families with chil- dren in two respects. First of all, we assume a substan- tially shorter time limit\u2014 two years of time on aid for able-bodied recipi- ents, with essentially the same excep- tions and extensions noted for the families with children. Our approach reflects a shorter time frame primarily on the basis of data indicating that GA recipients generally are on aid for a much shorter period of time than are AFDC recipients. Statewide data are not available, but a study con- ducted by San Francisco County indicates that of those GA recipients who entered the program in 1991, about 21 percent were on aid two years later (in contrast to about 50 percent in a similar study of AFDC recipients). Secondly, our approach assumes a complete cut-off of cash assistance after the two-year limit. As indicated previously, our model does not have a strict cut-off for families, in large part because of our concern for the welfare of those children who might be affected. With respect to adults who have no children and are able to work, we believe that the balance shifts in favor of a strict time limit, Finally, we note that individuals who lose cash assistance due to the time limit would, under our model, continue to be eligible for job search services, as well as food stamps (subject to federal limitations) and indigent health services. Funding Structure Currently, counties pay for 100 percent of the costs of their GA programs. Under our model, the state would assume most of the costs of the program. Specifically, the state would pay for 80 percent of the costs of grants for each recipient’s first year on aid, and the counties 20 percent. The county share would increase to 30 percent for recipients on aid more than one year, thereby giving counties a fiscal incentive to get recipients off aid. As is the case for the program with respect to families with children, the counties would pay for 15 percent of the costs of administration and services. In addition, counties would be eligible for a 5 percentage point reduction in their cost shares for positive performance. Program Implementation Under normal circumstances, we would suggest implementing the GA provisions simultaneously with the implementation of the new TANF program. As we noted above, how- ever, the projected condition of the state’s General Fund will likely make Page 34 Legislative Analyst’s Office it difficult to finance the costs re- in the first two years and about quired for the TANF model in the $190 million per year for the remain- first two years. These problems would der of the seven-year period. The be exacerbated if the GA component additional costs result primarily from were included, because (as we discuss two factors: (1) savings from the two- below) it is expected to result in year time limit are projected to be additional state costs. Consequently, less than baseline savings from the we would delay the implementation 3-out-of-12 months limit authorized of the GA component until three by current law (although this will years after implementation of the depend on which counties elect to program for families. adopt this limit), and (2) our ap- Fiscal Effects Net Fiscal Effects. Figure 10 summarizes our estimate of the fiscal effects (on state and county govern- ments) of our approach regarding the GA program. It shows that the model is projected to result in costs throughout the seven-year pe- riod\u2014roughly $250 million per year proach assumes the provision of more services than currently pro- vided, such as education, job train- ing, and treatment for disabilities. Because of the characteristics of the GA population\u2014a large proportion of recipients who have disabilities and other problems such as prior criminal convictions\u2014we assume that Figure 10 Legislative Analyst’s Office Welfare-to-Work Approach General Assistance Component (Adults Without Children) Fiscal Effects (In Millions) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Seven-Year Program costs $240 $270 $190 $190 $190 $190 $190 $1,460 Less SSP noncitizen savings (200) (220) (240) (250) (270) (290) (300) (1,770)a Net costs\/(savings) $40 $50 ($50) ($60) ($80) ($100) ($110) ($310) Impact by level of government State costs $640 $630 $520 $530 $540 $560 $570 $3,980 Less SSP noncitizen savings (200) (220) (240) (250) (270) (290) (300) (1,770) Net state costs $440 $410 $280 $270 $270 $270 $270 $2,210 County savings ($390) ($360) ($320) ($340) ($350) ($370) ($380) ($2,520) State Supplementary Program (SSP) savings shown in Year 1 for the general assistance (GA) program corresponds to the fourth year of the SSP a savings in order to be consistent with our proposed implementation schedule for the GA program component. Totals may not add due to rounding. Page 35 Policy Brief it would be more difficult to bring Fiscal Impact on the State and about gains in employment than would be the case for AFDC recipi- ents. We note, however, that our projections do not assume fiscal benefits outside the welfare arena that might result from the additional services that would be provided. Even with this qualification, our fiscal projections raise the question as to whether GA recipients should be provided services that are com- mensurate with those provided to families with children. Our approach is based largely on the premise that it is both appropriate and consistent with the Legislature’s policy (in authorizing local mental health and drug\/alcohol abuse treatment pro- grams, for example) for the govern- ment to provide services to its citizens to address disabilities. Should the Legislature choose to limit these costs, however, one option would be to cap the funding for this program element at a lower level. The figure also shows the net fiscal impact if the state SSI\/SSP savings resulting from the federal provision making noncitizens ineligible for SSI\/SSP were applied toward the state cost of supporting these individ- uals in the GA component of the new program. For most years, these savings more than offset the increased program costs. Counties. With respect to the impact on the state and county governments, we estimate that the model would result in significant costs to the state and savings to the counties, due to the change in cost sharing ratios that reflect state assumption of most of the program costs. Specifically, state costs are projected to be about $600 million per year in the first two years and roughly $500 million to $575 million annually thereafter. By applying the state SSP savings from the change in noncitizen eligibility, the net state costs would be roughly $400 million per year in the first two years and about $275 million annually thereaf- ter. (If the Legislature were to adopt a state-only program to retain SSP benefits for noncitizens, the costs of the GA component would be lower than estimated in our model and, of course, there would be no offsetting SSP savings.) The county savings are projected to be about $400 million in the first year and roughly $350 million annu- ally thereafter. Impact on Caseload. With respect to the impact on caseload, we project that in the seventh year of implemen- tation, the model would result in a caseload that is about 10 percent below the current-law baseline esti- mate. This occurs primarily because of the anticipated effects of the addi- tional services that would be pro- vided under the model. Page 36 Legislative Analyst’s Office Chapter V: Summary of Fiscal Effects Summary of Fiscal Effects Of the TANF\/GA Model Figure 11 summarizes the fiscal effects of the model, assuming imple- mentation of the GA component (adults without children) three years after implementation of the TANF component (families with children). As the figure shows, net costs would be incurred in the initial years\u2014$360 million in the first year and $290 million in the second year\u2014due to the investment in services. Savings from anticipated increases in employment would begin to occur in the first year, but net savings for the program are not expected to be realized until the fourth year. Net savings would increase to a level of about $700 million annually in the sixth and seventh year. On a cumulative basis over the seven-year period, we project net savings of about $1 billion. The inflation-adjusted payback period (the point where the initial costs are offset by subsequent savings) is projected to occur midway through the fifth year. These fiscal projections assume that the state SSP savings from the federal provisions denying SSI\/SSP eligibility to Figure 11 Legislative Analyst’s Office’s Welfare-to-Work Approach Combined TANF and General Assistance (GA) Componentsa Fiscal Effects (In Millions) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Seven-Year TANF (families with children)a Costs\/(savings) $360 $290 $70 ($120) ($350) ($680) ($640) ($1,070) GA (adults without children) b Costs\/(savings) \u2014 \u2014 \u2014 40 50 (50) (60) (20) Combined costs\/(savings) $360 $290 $70 ($70) ($300) ($720) ($710) ($1,090) Impact by level of government State costs\/(savings) $450 $290 ($10) $200 ($50) ($550) ($530) ($200) County costs\/(savings) (90) \u2014 80 (290) (250) (170) (170) (890) Temporary Assistance for Needy Families. a Net of State Supplementary Program noncitizen savings. b Totals may not add due to rounding. Page 37 Policy Brief noncitizens would be used to offset than one year and again for persons the state costs of the GA program, on aid more than two years. In the beginning in the fourth year when following years, counties would the GA program would be transferred realize net savings, primarily because to the state. of the implementation of the GA From the standpoint of the state and counties, we estimate that the model would result in state General Fund costs of about $450 million in the first year and about $290 million in the second year. As net costs We note that our estimated savings continue to decline due to the effects are limited to the impacts on grant of increased employment among expenditures and the relatively small recipients, some state savings are impacts on the Medi-Cal program. projected for the third year. State The government would also benefit costs, however, would be incurred from increased tax revenues due to in the fourth year when the GA the effect on employment earnings, component is implemented (with the which we have not calculated. In state assuming most of the costs of addition, some public value would GA). As employment among recipi- accrue from the output of the ents continues to increase, the model newly-created community service is projected to result in a small jobs. Some of the studies of commu- amount of net savings to the state in nity work experience programs the fifth year and savings of about (discussed previously in this report) $550 million annually in the following used 90 percent of the wages as the two years. Over the seven-year basis for measuring this value. If we period, the state would realize net assume, conservatively, that the savings of about $200 million (not productivity of these jobs is equal to adjusted for inflation). 75 percent of the wages paid, the We project that the counties would realize savings of about $90 million in the first year. In the second year, the costs from increased services would generally be offset by savings from a somewhat lower net share of As we stated previously, there is costs for the counties in this time considerable uncertainty in making period. Some costs would be incurred these fiscal projections. In order to in the third year, primarily because provide some indication of what, in the county share of costs for TANF our judgment, represents the range recipients (families with children) of possible outcomes, Figure 12 (see increases for persons on aid more next page) displays the annual fiscal component in the fourth year of the model. Over the seven-year period, we project that the counties would realize net savings of about $900 million. expected net value of these services to the employers (generally the government and nonprofit organiza- tions) would amount to about $1.3 billion over the seven-year period. Page 38 1 2 3 4 5 6 7 (1,000) (1,200) (800) (600) (400) (200) 0 200 400 $600 Legislative Analyst’s Welfare-to-Work Approach Annual Fiscal Effects Higher- and Lower-Employment Impact Scenarios Figure 12 Costs\/(savings) in Millions Lower-Employment LAO Projection Higher-Employment Year of Implementation Legislative Analyst’s Office impacts if the employment and caseload outcomes were two-thirds of the levels that we project (the lower-employment scenario) and one-third better than we project (the higher-employment scenario). Financing the Costs of the Approach The means to finance the costs of the model in the initial years would essentially be the same as described earlier for the TANF program (fami- lies with children). Page 39 Policy Brief Chapter VI: County Option to Choose a Different Plan In the course of describing our This provision is designed to allow approach, we explained our rationale counties to provide services in a for establishing the various compo- manner that differs from the one nents and for providing them in a outlined in our approach. In order to particular sequence. While the model provide equitable treatment of recipi- gives local administrators consider- ents and to avoid adverse able discretion in how to provide inter-county migration effects, grants services, we recognize that a county and time limits would not be subject might believe that it can develop a to change. better plan. Consequently, counties would have the option to submit an alternative plan to the state. The state, in turn, would establish a perfor- mance-based contract with these counties, which would include fiscal incentives and penalties according to specified program outcomes. Counties that choose this option, in other words, would benefit finan- cially from better-than-expected performance, but would also assume the risk of financial sanctions for performance that does not meet expectations. Even with the restriction on grants and time limits, this provision would give the counties a great deal of latitude. Thus, the Legislature might wish to consider adding other requirements\u2014for example, that there be some minimum provision of community service employment in order to provide some assurance that the program includes work participa- tion mandates. Page 40 Legislative Analyst’s Office Chapter VII: Conclusion As indicated earlier, one of the work incentive offered to the recipi- objectives of our approach is to ents by the government. achieve a significant increase in the number of welfare recipients who are employed, and to do so in a cost-effective manner. To accomplish this, we suggest certain components designed to prepare recipients for employment and other components designed to give them a greater incentive to work. The employment preparation compo- nents are based largely on the GAIN program, but with more emphasis on mandated participation, up-front job search, and services to address dis- abilities that are barriers to employ- ment. We also include some addi- tional program elements, such as transitional case management to assist welfare recipients for a limited time after they go off of aid due to employment. In addition, participa- tion in community service jobs would be required for work-ready recipients who are not otherwise employed. We include work incentive features in our model not because of any belief that welfare recipients wish to avoid work, but because people in general respond to financial incentives. In fact, data from a pilot program in Canada (the Self Sufficiency Project) show that some welfare recipients have sought and obtained jobs solely in response to a particular financial The principal employment prepa- ration and work incentive features of our model (including those that would be continued under current law) are summarized in Figure 13. In designing our approach, we attempted to reach a balance between the objectives of providing strong incentives to work and providing income support for recipients. Be- cause of the employment preparation components and the emphasis on participation, the model is expected to result in significant up-front costs for additional services. These costs will be offset by savings that occur in later years, primarily from (1) additional nonsubsidized employ- ment resulting from the impact of the services and activities provided and the behavioral effects of the work incentives, and (2) the reduced level of aid when the time limits are reached. Even with significant increases in employment, it may take several years to recover the costs of a wel- fare-to-work program. There also is a risk that the employment impacts will not be achieved as projected. Fiscal projections are obviously important, but the decision to estab- lish social services programs typically Page 41 \u2714 \u2714 Policy Brief does not rest solely on cost\/benefit creating and enforcing a participation criteria. In the final analysis, whether expectation among welfare recipients to adopt a welfare reform proposal (in work or work preparation activi- with a strong service component may ties); providing services to address depend in large part on how much disabilities; and ensuring that some non-monetary value is attributed to level of income support is available program characteristics such as to families with children. Figure 13 Legislative Analyst’s Office’s Welfare-to-Work Approach Major Employment Preparation And Work Incentive Features Employment Preparation Components Job search\/job club Basic education Job training Services to address disabilities Community service jobs Work Incentives Grant structure \u2014 Fill-the-gap grant determination \u2014 $30 and one-third disregard (limited) Tax policies \u2014 Federal Earned Income Tax Credit Broad participation mandates \u2014 Expand mandatory participation in GAIN Program Work required after specified time on aid \u2014 Subsidized job if not working 20 hours\/week Time limits \u2014 Families with children: significant grant reduction after five years on aid \u2014 Adults with no children: no cash benefits after two years on aid \u2014 Time in subsidized job counts against limit \u2014 Time in nonsubsidized job (if 20 hours\/week) does not count Transitional benefits for recipients going off of aid \u2014 Continue Medi-Cal and child care benefits \u2014 One year of case management assistance Page 42 Legislative Analyst’s Office This report was prepared by Chuck Lieberman and Todd Bland. The Legislative Analyst’s Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-2375. This report and others are available on the LAO’s World Wide Web site at http:\/\/www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. ”

” HEALTH & SOCIAL SERVICES MAJOR ISSUES %$2 Billion in State Savings Depends on Federal Action. Many of the Governor’s proposals for health and welfare savings\u2014 amounting to $2 billion\u2014depend on federal action. Federal legisla- tion which would accomplish these savings is being considered as part of the negotiations on the budget and welfare reform. To the extent these actions are delayed or not taken, there will be a budgetary hole in these programs. (See page C-14.) %Budget Proposes to Make Temporary Grant Reductions and Cost-of-Living Adjustment Suspensions Permanent. The bud- get proposes to make permanent the AFDC and SSI\/SSP grant reductions adopted in 1992-93 (5.8 percent) and 1995-96 (4.9 percent statewide), and the cost-of living adjustment suspen- sion that was implemented in 1991-92, which are scheduled to be restored in 1996-97. This proposal would result in a General Fund cost avoidance of $1.1 billion. (See pages C-100 and C-125.) %Budget Proposes a 4.5 Percent AFDC Grant Reduction. This proposal would result in General Fund savings of $111 million in 1996-97. We discuss the potential impact of the proposed AFDC grant reductions on families. (See page C-102.) %Governor Proposes to Redesign the AFDC Program in 1997-98. The Governor proposes major changes in the AFDC Program, including revised eligibility criteria, a flat grant for all families regardless of size, time limits on eligibility, and the imple- mentation of four programs that would offer different types of C – 2 Health and Social Services assistance (including cash and vouchers) based on certain char- acteristics of the recipients. We present criteria for evaluating the Governor’s proposal. (See page C-105.) %Child Welfare Services Program Needs Improvement. We review the performance of the Child Welfare Services Program and conclude that improvements are needed in how the state addresses the problem of child abuse and neglect. (See page C-134.) %Budget Proposes Elimination of State-Only Medi-Cal Pro- gram for Prenatal Services for Undocumented Women. Con- gress is currently considering welfare reform legislation that would prohibit a state from providing benefits to undocumented persons unless the state chooses to reauthorize these benefits after enact- ment of the federal law. The budget does not propose reauthorization of the prenatal program, and assumes elimination of the benefits effective March 1996, for a General Fund savings of $22 million in 1995-96 and $65 million in 1996-97. (See pages C-30 and C-37.) %Proposals to Eliminate Medi-Cal Optional Benefits Could Result in Cost Shifting. The budget proposes to eliminate eight of the 29 optional benefits, for a net General Fund savings of $34 million in 1996-97. We note that these actions could result in increased costs for county indigent health programs. (See page C-38.) %Budget Proposes Augmentations for Teen Pregnancy Pre- vention and Family Planning Programs. The budget proposes $46 million from the General Fund for teen pregnancy prevention activities in order to expand the media campaign, expand a pro- gram for the prosecution of statutory rape, establish a new grant program, and develop school curricula. The budget also proposes $20 million from the General Fund to consolidate and expand family planning programs. We provide an assessment of these proposals. (See pages C-48 and C-60.) Aid to Families With Dependent Children C – 95 AID TO FAMILIES WITH DEPENDENT CHILDREN (5180) The Aid to Families with Dependent Children (AFDC) Program provides cash grants to families and children whose incomes are not adequate to meet their basic needs. Families are eligible for the AFDC- Family Group (AFDC-FG) Program if they have a child who is finan- cially needy due to the death, incapacity, or continued absence of one or both parents. Families are eligible for grants under the AFDC-Unem- ployed Parent (AFDC-U) Program if they have a child who is finan- cially needy due to the unemployment of one or both parents. Children are eligible for grants under the AFDC-Foster Care (AFDC-FC) Program if they are living with a foster care provider under a court order or a voluntary agreement between the child’s parent and a county welfare or probation department. The budget proposes total expenditures of $6.4 billion ($2.5 billion General Fund, $0.5 billion county funds, and $3.4 billion federal funds) for the AFDC Program in 1996-97. This is a decrease of 8.7 percent (17 percent General Fund) from estimated expenditures in the current year. This decrease is due to proposed grant reductions, implementation of past grant reductions that have been delayed, and the assumed enactment of federal welfare reform. CURRENT-YEAR UPDATE OF AFDC PROGRAM Major Changes in 1995-96 Statewide and Regional Grant Reductions. The 1995-96 budget trailer bill legislation for welfare programs\u2014Ch 307\/95 (AB 908, Brulte)\u2014 reduced AFDC grants by 4.9 percent, with an additional 4.9 percent reduction for recipients residing in low-cost counties (as measured by rental housing costs), effective October 1995. The Budget Act assumed that the 4.9 percent statewide grant reduction would generate a General Fund savings of $101 million in 1995-96 and that the 4.9 percent re- gional grant reduction in low-cost counties would generate an addi- tional savings of $40 million. The high-cost counties are Alameda, Contra Costa, Los Angeles, Marin, Monterey, Napa, Orange, San Diego, San Francisco, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, and Ventura. The statewide 4.9 percent C – 96 Health and Social Services reduction terminates June 30, 1996, and the regional reduction to recipi- ents living in low-cost counties is ongoing. Implementation of these grant reductions requires either a federal waiver of regulations or a change in federal law. Although there has been no enabling federal action to date, the Governor’s Budget assumes the enactment of federal welfare reform legislation that will permit the reductions to be implemented in March 1996. The budget reflects a revised General Fund savings of $63 million (down from $141 million) in 1995-96 from the grant reductions. Greater Avenues for Independence (GAIN) Program. Budget trailer bill legislation\u2014Ch 306\/95 (AB 1371, Weggeland)\u2014modified the GAIN Program to place a greater emphasis on employment. The budget re- flects a General Fund savings of $8 million in 1995-96 and $17 million in 1996-97 from these changes. Edwards v. Carlson. Beginning in 1992-93, the Edwards v. Carlson decision required the state to provide higher AFDC grants in specific cases (certain children residing with caretaker relatives). In 1995, the U.S. Supreme Court reversed this lower court decision. The 1995-96 budget legislation eliminates the grant differential for a General Fund savings of $9.5 million in 1995-96 and $10.4 million in 1996-97. PENDING FEDERAL LEGISLATION Federal Welfare Reform If enacted, federal welfare reform could have a significant impact on California. We review the congressional proposal, and estimate that the major provisions would result in a loss of $8 billion in federal funds to California over a five-year period. In December 1995, Congress approved the Conference Report for H.R. 4\u2014The Personal Responsibility and Work Opportunity Act of 1995. The President, however, subsequently vetoed the measure. Despite the presidential veto, many observers believe that the Presi- dent and Congress will ultimately reach agreement on a welfare reform bill that will encompass a number of the major features of the congres- sional measure. The Governor’s Budget, in fact, assumes the enactment of the H.R. 4 provisions affecting the AFDC Program, the Supplemental Security Income\/State Supplementary Program (SSI\/SSP), and Child Welfare Services. Consequently, we summarize these and related com- ponents of the Congressional measures. Aid to Families With Dependent Children C – 97 AFDC\/Temporary Assistance for Needy Families. The major provi- sions include the following: Block Grant and Maintenance of Effort. The existing entitlement program is replaced with a Temporary Assistance for Needy Families (TANF) block grant, which would be fixed at federal fiscal year (FFY) 1995 spending levels ($3.73 billion annually for California) from FFY 96 through FFY 01. Receipt of the block grant is contingent upon a maintenance-of-effort (MOE) require- ment that state spending on welfare programs remain at 75 percent of the FFY 94 level. Elimination of Entitlement. By eliminating AFDC as an entitle- ment, states will have flexibility to redesign their welfare sys- tems, thereby determining who is eligible for benefits, the dura- tion of benefits (within certain limits), and the amount of bene- fits. The existing MOE requirement on grant levels would be eliminated, thereby allowing the state to reduce grants as pro- vided in the current- and prior- year budget acts and as pro- posed for 1996-97. Work Requirements. The H.R. 4 requires that states have an increasing percentage of their welfare caseload (families with children over age one) engaged in work or some other type of qualified job training or job search activity. The overall caseload requirement is 15 percent in FFY 96, increasing to 50 percent by FFY 02. For two-parent families, the requirement is 50 percent in 1996 and increases to 90 percent by FFY 99. Failure to meet work participation requirements subjects a state to an annual penalty equal to 5 percent of their block grant. Time Limits. The H.R. 4 establishes a five-year time limit on families for receipt of cash assistance; however, states are permit- ted to exempt 15 percent of the caseload from this requirement due to hardship. SSI\/SSP. The major changes in this program include the elimination of benefits for certain disabled children and the elimination of the state’s MOE requirement. This latter change would enable the state to reduce grants, as provided in the 1995 Budget Act. Restricting Welfare Benefits for Noncitizens. Effective January 1, 1997, legal noncitizens that were in the United States at the time of enactment of the measure\u2014with certain exceptions for veterans, refu- gees, and those who have worked 40 quarters\u2014are ineligible for SSI\/SSP and food stamps. Also effective January 1, 1997, states may determine the eligibility of such legal noncitizens for benefits under the C – 98 Health and Social Services TANF Program, the Title XX Social Services Block Grant, and the Med- icaid Program. Noncitizens arriving after enactment of this measure, with certain exceptions for veterans and refugees, are ineligible for all means-tested federal benefits for five years, except for emergency medi- cal services and certain child nutrition programs. Food Stamps. The major food stamps provisions (1) reduce the maxi- mum food stamp benefit by 3 percent due to a change in the calculation of the thrifty food plan, (2) freeze certain deductions from income used in determining food stamp benefits, (3) expand work requirements for physically and mentally fit individuals between the ages of 18 and 50, and (4) offer the states an option of receiving funds in a food assis- tance block grant. In order to participate in the block grant program, California must either (1) adopt a statewide electronic benefit transfer (EBT) system, or (2) pay the federal government for the difference between its food stamp error rate and 6 percent of the total amount of food stamp benefits provided to the state. Block Grant to States for the Protection of Children. The major provisions of this component of H.R. 4 include the following. Block Grant. The measure replaces existing categorical programs with a block grant. The programs include Child Welfare Services, Family Preservation and Support, Independent Living, and ad- ministration for Foster Care and Adoptions Assistance. The na- tionwide block grant amounts are specified for FFY 97 through FFY 02 and are increased annually based on specified percent- ages. States may receive additional funds which are subject to federal appropriation. The nationwide appropriation for the additional funds is limited to $325 million annually. The state’s share of the block grant and additional funds is determined by formula, based on past-year expenditures. During the first two years of the block grant, states must maintain their spending at 100 percent of the amount spent in FFY 94, and must maintain spending at 75 percent in the remaining years. Foster Care and Adoptions Assistance. These grants would re- main as entitlement payments. However, a MOE requirement, identical to the provision described above, would be established for these programs. Fiscal Impact on California. We estimate that the provisions pertain- ing to the TANF, SSI\/SSP, and noncitizens would result in a loss of federal funds of about $8 billion over five years, compared to what the state would receive under current law. This includes a $700 million loss in federal funds in 1996-97. We estimate that the fiscal effect of the Child Protection Block Grant would result in a gain in federal funds of Aid to Families With Dependent Children C – 99 $83 million over five years. This includes a loss of $16 million in 1996-97. The net five-year gain is generally due to a low caseload growth trend in California, relative to the nation as a whole. National Governors’ Association Welfare Reform Proposal In February 1996, the National Governors’ Association submitted a proposal that included welfare reform. The proposal included provision for a block grant as well as other components of the Congressional proposal. The Governors proposed the following major changes to H.R. 4: (1) adding $4 billion in child care funding, (2) increasing by $1 billion the contingency fund to assist states experiencing high unem- ployment, (3) raising the permissible exemption on the five-year lifetime limit on eligibility from 15 percent to 20 percent of the caseload, (4) providing states an option to receive foster care funds as a capped entitlement which may be transferred into the Child Protection Block Grant, and (5) delaying the effective date for restrictions on SSI disabled children until January 1, 1998. The association indicated that the Gover- nors did not reach consensus on the issue of restricting welfare benefits for noncitizens. GOVERNOR’S 1996-97 WELFARE PROPOSALS Governor Assumes Welfare Reform Will Be Enacted Into Law The budget for the AFDC Program proposes General Fund savings of $172 million in 1995-96 and $667 million in 1996-97 that require federal action. The budget assumes that this will be achieved by enactment of federal welfare reform. As Figure 26 (see next page) shows, the Governor’s Budget proposes over $800 million in General Fund savings, in the current and budget years, that are predicated on enactment of federal welfare reform legis- lation. These savings can be grouped in three categories. First, federal welfare reform (the version passed by Congress, but vetoed by the President) will enable California to implement previous grant reduc- tions as well as the Governor’s proposed 4.5 percent reduction for 1996-97. Second, welfare reform will permit the state to implement existing state policies to bar sponsored aliens from receiving AFDC and to prohibit grant increases for children born while a family is on aid (the Maximum Family Grant provision). Finally, the budget indicates that under the proposed block grant, California will receive more fed- C – 100 Health and Social Services eral funds than it would receive under the current federal sharing system, assuming that the state enacts the Governor’s proposals to reduce grants by 4.5 percent and makes certain past grant reductions permanent that under current law are temporary. Figure 26 State Savings Dependent on Federal Action AFDC Program Governor’s Budget (In Millions) Budget Proposal 1995-96 1996-97 Previous budget actions 1994-95 2.3 percent grant reduction $22 $44 1995-96 regional 4.9 percent grant reduction 20 58 1995-96 statewide grant reduction 43 \u2014 Barring sponsored aliens \u2014 28 Maximum family grant \u2014 4 New proposals Make statewide 4.9 percent reduction permanent \u2014 129 1996-97 4.5 percent grant reduction \u2014 111 Savings from federal block grant 82 299 Child support provisions\u2014federal welfare reform 1 -14 Foster care emergency assistance funds\u2014federal welfare reform 4 8 Totals $172 $667 Budget Proposes AFDC Aid Payment Reductions The Governor proposes to (1) make the 1992-93 and the 1995-96 statewide grant reductions permanent, (2) eliminate the statutory cost of living adjustment, and (3) reduce AFDC grants by 4.5 percent, result- ing in General Fund savings or cost avoidance of $440 million. We review the Governor’s proposals and comment on them. The Governor’s Budget proposes several major changes that would reduce grants in the AFDC Program. As Figure 27 shows, these changes would result in combined General Fund savings and cost avoidance of $440 million, under the existing state and federal cost sharing, or $876 million if federal funds were provided as a block grant. General Fund savings and cost avoidance would be greater under the block grant system because federal funding would be fixed and the state would no longer share the savings (or costs) of any change in grant levels with the federal government. Aid to Families With Dependent Children C – 101 Figure 27 Governor’s AFDC Grant Proposals General Fund Savings 1996-97 (In Millions) Fiscal Effect Under Proposal Existing State\/Federal Sharing Federal Block Grant Make permanent the statewide 4.9 percent grant reduction $129 $256 Make permanent the 5.8 percent grant reduction 165 327 Delete requirement to restore statutory COLA 37 73 Reduce grants by 4.5 percent 111 221 Totals $440 $876 The budget contains three separate proposals that would have the effect of reducing AFDC grants below the levels required by current law. These proposals are to (1) make permanent the temporary 5.8 percent grant reduction enacted in 1992-93 and the one-year state- wide 4.9 percent grant reduction enacted in 1995-96, (2) delete the requirement to resume the statutory COLA that was suspended in 1991-92, and (3) reduce grants by an additional 4.5 percent. Budget Proposes to Make Temporary Grant Reductions Permanent. Budget trailer bill legislation for 1992-93 reduced AFDC grants by 5.8 percent and specified that this reduction would remain operative until July 1, 1996. As noted above, budget trailer bill legislation for 1995-96 reduced grants by 4.9 percent statewide, with an additional 4.9 percent reduction for recipients residing in low-cost counties. The statewide reduction terminates on June 30, 1996. The Governor proposes to make both of these temporary reductions permanent, for a General Fund cost avoidance of $294 million (assuming existing state\/federal sharing ratios). Budget Proposes Deleting Requirement to Resume Statutory COLA. The 1991-92 budget trailer bill legislation suspended the statutory COLA for AFDC grants through the end of 1995-96. In deleting the requirement to restore the COLA (1.48 percent for 1996-97), the budget achieves a General Fund cost avoidance of $37 million in 1996-97. C – 102 Health and Social Services Budget Proposes to Reduce Grants by 4.5 Percent.The budget proposes to reduce grants by 4.5 percent, for a General Fund savings of $111 million in 1996-97. As is the case for the current-year grant reduc- tions, this proposed reduction would require a waiver or a change in federal law because it would reduce the maximum grant below the feder- ally required MOE level. The reduction would be effective July 1, 1996. Figure 28 summarizes how both current law provisions and the Governor’s proposals would affect monthly grants for a family of three in 1996-97. As the figure shows, the proposed 1996-97 maximum grant level in Region 1 (counties with high rental costs) is $540, or $67 below the current-year level ($607) and $103 below the level required by cur- rent law ($643). In Region 2, the proposed grant level is $514, or $93 below the current-year level ($607) and $99 below the current law re- quirement ($613). These grant reductions would be partially offset by increases in food stamps. Figure 28 AFDC Maximum Monthly Grant Family of Three Current Law and Governor’s Proposal Current Law Governor’s Proposal Region 1: High-cost counties 1995-96 actual grant $607 $607 1996-97 grant assuming: Implement 1994-95 2.3 percent reductiona 594 594 Make permanent 1995-96 4.9 percent reductiona \u2014 565 Restore 1992-93 5.8 percent reduction 633 \u2014 Restore COLA 643 \u2014 Adopt proposed 4.5 percent reductiona \u2014 540 Region 2: Low-cost counties 1995-96 actual grant $607 $607 1996-97 grant assuming: Implement 1994-95 2.3 percent reductiona 594 594 Implement 1995-96 regional 4.9 percent reductiona 565 565 Make permanent 1995-96 statewide 4.9 percent reductiona \u2014 538 Restore 1992-93 5.8 percent reduction 604 \u2014 Restore COLA 613 \u2014 Adopt proposed 4.5 percent reductiona \u2014 514 a Requires federal approval. Aid to Families With Dependent Children C – 103 Evaluating the Proposals to Reduce AFDC Grants The Governor’s proposed grant reductions will result in significant savings and increase the financial incentives for recipients to work. We conclude that while some families will be able to compensate for the grant reductions through work, others will find this difficult due to low levels of education and employment experience, as well as a potential lack of job opportunities. In presenting his proposals, the Governor has offered several reasons why these changes are needed, including (1) the need to promote per- sonal responsibility, (2) the need to reinforce the premise that AFDC is a temporary program, and (3) the need to make work an attractive alter- native to AFDC. These are reasonable premises; but in evaluating the proposals, the Legislature needs to weigh the identified budgetary sav- ings to government against its policy objectives for the AFDC Program and the potential impact of the proposed changes on needy families. Fiscal Impact on Government. The budget estimates that the pro- posed reforms will result in significant savings to the state. In 1996-97, combined General Fund savings and cost avoidance are estimated to be $440 million under existing federal sharing ratios. The savings would be offset, by an unknown amount, to the extent that the reductions in grants leads to an increase in the use of other public services such as health and foster care. Impact on Families. The grant reductions proposed by the Governor would reduce the resources available to many families. We note that currently, the combined maximum monthly grant and food stamps benefit ($838) for a family of three is equal to about 80 percent of the poverty guideline. Under the Governor’s proposal, families in Region 1 would have their resources reduced to $792 or about 75 percent of the poverty guideline. Families in Region 2 would have their resources reduced to $773 or about 74 percent of the poverty guideline. Increasing the Work Incentive. In The 1991-92 Budget: Perspectives and Issues, we concluded that the AFDC Program, as structured at the time, offered relatively little financial incentive to work. There were two main sources of the work disincentives: (1) the grant levels when combined with food stamps often were higher than what could be earned by recipients through low-wage employment and (2) program rules al- lowed working recipients to retain, at best, only a small part of each increment of income. In addition, recipients who worked were likely to weigh the possible loss of Medi-Cal benefits (after a transition period) if they lost AFDC eligibility. Since then, the combination of grant reduc- tion (14 percent since 1990-91), rule changes, and an increase in the federal earned income tax credit have, to some extent, mitigated these C – 104 Health and Social Services problems; and the additional grant reductions proposed by the Gover- nor could further increase the financial incentive to work. It is impossible to predict with accuracy, however, the degree to which these proposals will induce more AFDC recipients to work. Those nonworking recipients who do not compensate for the grant reductions through an increase in earnings will suffer a reduction in their standard of living. This reduction will be significant, recognizing that these fami- lies’ incomes are currently below the federal poverty guidelines. It is therefore important, in assessing the impact of the budget proposal, to consider the extent to which AFDC recipients can obtain employment given their education levels and employment experience. Are AFDC Recipients Work-Ready? In spite of the increased work incentives provided under the Governor’s proposals, AFDC recipients are likely to face several obstacles to employment, including lack of training and low education levels and work experience. Lack of employment-related skills, including low educational attain- ment, is often cited as a major impediment to AFDC recipients return- ing to the labor force. Some studies show that low educational attain- ment is associated with a higher probability of staying longer on assis- tance. The GAIN Program is California’s primary employment training program for AFDC recipients. It is a more complex program and is more expensive per participant than most previous programs. The program, however, is not funded at a level sufficient to accommodate all mandatory and voluntary participants. In fact, the Department of Social Services (DSS) estimates that only 21 percent of mandatory GAIN cases were served in 1994-95. An independent evaluation of the GAIN Program found it to be the most successful welfare to work program ever studied, both from the standpoint of increasing earnings for long-term AFDC recipients as well as from a cost-benefit perspective. However, the evaluation found that even in the most successful county (Riverside), 47 percent of the AFDC- FG GAIN participants were still on aid after two years and 37 percent had not been employed at any time during the first two years of the evaluation. Finally, we note that the economy plays an important role in the ability of AFDC recipients to obtain jobs. The recent recession suggests that AFDC recipients may find it difficult to obtain employment if the economy’s recovery is not sustained. In summary, the relatively low level of education and employment experience of the typical AFDC parent, combined with limited job Aid to Families With Dependent Children C – 105 opportunities, suggests that it may not be possible for many nonwork- ing adult AFDC recipients to fully compensate for the proposed grant reductions by obtaining a job in the private sector. GOVERNOR’S 1997-98 WELFARE PROPOSAL Governor Proposes to Redesign the Welfare System The Governor proposes to redesign the welfare system in California, effective in 1997-98. The proposed redesign would replace the existing AFDC Program with four new programs. We summarize the Governor’s welfare reform proposal and comment on it. The Governor proposes legislation to redesign the AFDC Program, effective in 1997-98. Key Program Changes. Figure 29 (see next page) compares the exist- ing AFDC Programs to the Governor’s proposal. The new program includes the following major changes: Eligibility Expanded to Additional Two-Parent Families. Under current law, low income two-parent families are eligible for the AFDC-U Program if the primary wage earner is unemployed when applying for aid and has worked for a specified amount of time prior to applying. The Governor proposes to eliminate these restrictions. Need Standards Replaced by Single Work Equivalency Bench- mark. The need standard \u2014the maximum income a household may have while maintaining eligibility\u2014would be replaced by a Work Equivalency Benchmark. Unlike the need standard, which increases with family size, the new benchmark would be fixed at a constant level. The level is not specified, but would generally be based on the income and benefits available to low income working families. Recipients would be able to work and continue to receive a grant as long as total earnings are below the bench- mark. Flat Grants. The maximum grant level is not specified. Similar to current law, the maximum grant would be set at a level below the Work Equivalency Benchmark. In contrast to the current benefit structure, however, grant levels would not increase with family size. The grant would be the Work Equivalency Bench- mark less the recipient’s income, up to the maximum grant level. Under current law, about one-third of the recipient’s earnings is excluded from this calculation. C – 106 Health and Social Services Figure 29 AFDC Program Current Law and Governor’s Proposal for 1997-98 Current Law Governor’s Proposal Eligibility Family Size\/Work History AFDC-Family Group: one-parent families. AFDC-Unemployed Parent: two-parent families; pri- mary wage earner must be unemployed when apply- ing for aid and must have a work history. Four separate programs, depending on specified characteristics of recipients. Eliminates restrictions on eligibility of two-parent fam- ilies. Income threshold Based on Need Standard: Varies with family size. Grant plus income (excluding $30 and one-third of earnings) cannot exceed need standard. Based on unspecified Work Equivalency Benchmark: Does not vary with family size. All income counts when computing grant. Assets Cannot exceed specified levels. Unspecified limits. Time Limits No limit on eligibility. (After two years from commencing the GAIN Program, recipients must accept a work slot if provided by county, or grant is reduced. Two years for cases in the Ready-to-Work Program, but clients may be transferred to the Family Transi- tion Assistance Program (five-year total time limit) if significant employment barriers are identified. Five years for other recipients, but may be extended in certain cases (disability, for example). Maximum Grant Set at specified levels, below need standard. Set below Work Equivalency Benchmark\u2014 amount not specified. Varies with family size. Does not vary with family size Adjusted annually by statutory COLA, beginning in 1996-97. No statutory COLA. No increase for children born while on aid. Same. Cash grant for all recipients. Cash grant except for recipients in Family Transition Assistance Program, who receive vouchers or direct payments to providers, for specified services such as housing, transportation, and child care. Support Services Work-related expenses Provided, up to specified limit. Provided, up to unspecified limits. Child care Provided, up to specified limits. Provided, up to unspecified limits. Employment preparation GAIN Program\u2014basic education, job search, and job training. Short-term assistance for work-ready families. Intensive services for others capable of work. Teen parents Cal Learn Program\u2014case management and bonuses\/sanctions for school performance. Teen Parent Support Program\u2014primarily in-home coun- seling and guidance. Other services Provided through separate programs (food stamps, health services, drug treatment, mental health, etc.). Essentially the same, but may be provided with assis- tance of case management. Sanctions After two years from commencing GAIN, must accept job or work slot if offered by county, or grant is re- duced. Automatic reductions to maximum grant at six months and one year for work-ready families. Loss of eligibility for noncooperation. Aid to Families With Dependent Children C – 107 Performance-Based Local Administration. The state would estab- lish minimum standards for eligibility, benefits, maximum time on assistance, and performance-based outcome measures. The state would contract for local administration. New Programs. The four new programs are (1) the Ready-to-Work (RTW) Program, for those families in which an adult has been em- ployed, (2) the Family Transition Assistance Program (FTAP), for par- ents without employment experience and teen parents under age 18, (3) the Disabled Family Assistance Program (DFAP), for families with a disabled child or parent, and (4) the Child-Only Assistance Program (COAP), for cases with no adult eligible for assistance. The programs are summarized below. Ready-to-Work Program. This program would serve adults with a work history or who are currently working. The DSS estimates that 59 percent of the existing caseload has a work history. The program would provide cash assistance in the form of a flat grant that is reduced after six months and again after one year, with a total time limit of two years. Local administering agencies would have the discretion to pro- vide a 90-day exemption from grant reductions or from the two-year limit. The program would offer short-term employment services, child care, work-related expenses, and a voluntary program of support ser- vices for 18- and 19-year-old teen parents. After a preliminary appraisal at intake, progress evaluations would be conducted in order to identify barriers to employment at the end of six months, one year, and two years. There would be a three month maximum exemption from the two-year limit, or the grant reductions, for birth of a newborn. Family Transition Assistance Program. This program is designed for parents with no work history, and minor teen parents. The DSS esti- mates that this program would serve approximately 15 percent of the existing caseload. Instead of a cash grant, recipients would receive vouchers and other forms of non cash assistance. Case managers would provide assistance and may arrange for direct payment of rent and other necessities. Families would receive intensive employment and counseling services for the purpose of removing barriers to employ- ment. Teen parents would be required to participate in a Teen Parent Support Program, which would include in-home counseling. There would be a five-year time limit. At the end of five years (or earlier if it is determined that the parent is not likely to benefit from further inter- vention), the case would be referred to a child welfare services profes- sional to assess the capability of the parents to continue to care for their children. C – 108 Health and Social Services Disabled Family Assistance Program. This program would serve families where either the parent or child is disabled. The DSS estimates that approximately 10 percent of the caseload would be assigned to the DFAP. Work expectations would be based on the capability of the adult to participate in the labor market. Recipients would receive cash assis- tance for as long their disability prevents them from being self suffi- cient. Child-Only Assistance Program. This program is designed to serve two distinct populations: (1) children with parents who are not eligible for aid (such as undocumented persons) and (2) children living with adult relatives acting as the primary caretaker. The DSS estimates that ap- proximately 16 percent of the caseload would be assigned to the COAP. Cash grants in this program would be lower than in the other programs because the grant is for the child only. For children with parents not eligible for aid, there would be a flat cash grant for the child, no sup- port services, and a five-year time limit. For children with caretaker relatives, the grant would be based on the total number of children (not to exceed the Work Equivalency Benchmark), child care services would be provided, and there would be no time limit. Movement Between the Programs. Each program is designed to help participants become self-sufficient, with a recognition that disabled clients may not attain this goal. While recipients in the RTW would have a two-year limit on eligibility for aid, we note that local adminis- trators would have the discretion to transfer them to the FTAP (where they would be subject to a five-year limit on total time on aid) if it is determined that the client is faced with significant barriers to employ- ment. Conversely, recipients in the FTAP could be transferred to the RTW program if they obtain a labor force connection, such as through part-time employment. Figure 30 summarizes the key features of the three programs that are designed to assist families in becoming self-sufficient. The DSS esti- mates that these three programs would serve approximately 785,000 cases, or 84 percent, of the current caseload. The remainder of the case- load would be in the COAP, which is summarized in Figure 31 (see page 110). Administration. The state would contract for local administration, with counties given the first choice. If counties refuse, they would continue to pay their share of welfare costs, and the state would con- tract with cities, non profit corporations, other counties, or the private sector. Local administering entities would be funded on a per capita basis for each program, based on the number of eligibles and poten- tially other risk factors. Local administrators could contract with other Aid to Families With Dependent Children C – 109 organizations to provide various services, including eligibility determi- nation. The department indicates that some type of fiscal incentives could be built into the contracts with the local administrators, based on a managed care model. In other words, if local entities succeed in mov- ing clients into self sufficiency, they could achieve financial rewards. Counties would continue to administer the General Assistance program. Figure 30 Governor’s Proposed Redesign of the Welfare System Summary of Programs for Families with Adult Recipients Ready to Work Program Family Transition Assistance Program Disabled Family Assistance Program Target population Recipients with work history Recipients lacking work experience and teens Families with disabled parents or children Program size 546,000 cases 59 percent of caseload 139,000 cases 15 percent of caseload 92,000 cases 10 percent of caseload Focus of program Employment Intensive case management and services to overcome barriers to employment Within limits of their disability, help parents become self sufficient Type of aid Cash grant, reduced after six months and one year Vouchers and direct pay- ments to service providers Cash grant Time limit Two years If local administrators iden- tify barriers to employment, recipients may be trans- ferred to FTAP Five years Parents unable to be self sufficient may receive benefits indefinitely Exemptions from time limits Up to three months follow- ing birth of a child Up to three months for cause, at the discretion of local administrator None Not applicable, program is not time limited Services provided Short-term employment Child care Work-related expenses Voluntary teen parent support services Intensive employment Child care Work-related expenses Mandatory teen support services Case management, other services on referral Employment services Child care Work-related expenses (including ancillary services) C – 110 Health and Social Services Figure 31 Proposed Redesign of the Welfare System Summary of Child-Only Assistance Program Target Populations Children With Ineligible Parents Children Living With Adult Relatives Other Than Parents Program size 110,800 cases 12 percent of caseload 36,288 cases 4 percent of caseload Focus of program Provide assistance to children with ineligible parents Assist relative caretakers Type of aid Flat cash grant Cash grant based on number of children Time limit Five years No limit Exemptions from time limits None Not applicable Services provided None Child care Needy caretaker relatives may receive other services if they are in RTW, FTAP, or DFAP Framework for Evaluating the Governor’s Proposal We believe that the Governor’s proposal is a useful starting point for the Legislature’s deliberations on welfare reform. Little is known, however, about whether proposals such as the flat grant and time- limited eligibility would result in a significant increase in the number of welfare recipients who obtain employment. We recommend that the department submit a report prior to budget hearings that estimates the fiscal effect of the proposal. There appears to be substantial agreement among policymakers that one of the overarching goals of the AFDC Program is that it be struc- tured so as to move adult recipients into stable employment as soon as possible. Beyond this basic goal, there is little consensus on the key elements that should be in a welfare program. We believe, however, that the following set of criteria could be used as a framework for evaluating the Governor’s proposals. Recipients Should Receive Aid in an Amount, and for a Period of Time, That Is Adequate to Give Them the Opportunity to Become Aid to Families With Dependent Children C – 111 Self-Sufficient. The Governor’s proposal does not specify the amount of the maximum grant or the Work Equivalency Benchmark (which is the maximum income a household could have and remain eligible for the program). While the Work Equivalency Benchmark is not specified, the administration indicates that it will generally be based on the income of a low-income working person (an average of $736 per month assum- ing the minimum wage). We note that the benchmark would not vary with family size, indicating that large families would have greater difficulty meeting their needs if they rely solely on income from grants. Similarly, the amount of the maximum grant is not specified, but would also be set at a fixed level that does not vary with family size. To get some sense of the potential impact of these changes, we note that in October 1994, an estimated 13 percent of families on AFDC had five or more persons in the household. As the Governor indicates, the flat grant (which does not vary with family size) is analogous to the fact that wages do not increase with family size; although, we note that working parents do receive some financial benefits for additional chil- dren through income tax deductions. The Governor’s proposal also provides for automatic grant reduc- tions, at six months and one year, for recipients in the RTW Program. It is uncertain whether the automatic grant reductions for RTW fami- lies\u2014particularly at six months\u2014would provide sufficient aid, for a sufficient amount of time, to recipients. The fact that all of these house- hold heads have, at some point within the past ten years, held a job does not mean that they are equally work-ready and will be capable of obtaining and holding a job for a sustained period of time after being on aid for six months. It is worth noting that even in the best-perform- ing county studied in the recent GAIN Program evaluation, 47 percent of the participants were still on aid after two years. Regarding the duration of aid, we note that about 32 percent of the state’s AFDC cases have been on aid for a total time of five years or more. Thus, a five-year limit as proposed for FTAP represents a signifi- cant policy change. Given the lack of data on the impact of such a change, this policy entails some risk because if it does not result in increased employment among recipients, more families with children will be further below the poverty line. At the same, such a limit on eligibility could result in significant benefits if, by increasing recipients’ incentive to work, it leads to a large increase in the number of recipi- ents who obtain employment. We note that in October 1994, about 10 percent of AFDC households reported earnings from employment. The two-year limit for RTW Program participants would have poten- tial effects similar to the five-year limit, although program administra- C – 112 Health and Social Services tors would be authorized to refer these clients to the FTAP if they identify significant employment barriers. We note that in October 1994, an estimated 65 percent of the caseload had been on AFDC for more than two years. In assessing these proposals, job availability will be an important variable. The Employment Development Department (EDD) projects that approximately three million new jobs will be created in California between 1995 and 2005, or approximately 300,000 new jobs per year. The EDD further estimates that approximately one-half of these new jobs will be low-skilled jobs requiring one year or less of vocational preparation and eight years or less of education. The data, however, are not sufficient to determine whether the anticipated new jobs will be sufficient to reduce existing unemployment and absorb persons entering the labor force from California’s growing population as well as from the AFDC caseload. The System Should Include Work Incentives and Be Based on an Expectation That Recipients Make an Effort to Achieve Self-Sufficiency. The Governor’s proposal, particularly with the imposition of time limits on persons capable of working, is predicated on this criterion. The emphasis on effort on the part of parents is reinforced by the proposal to give administrators discretion to discontinue aid in the event of non cooperation with program requirements (presumably for reasons such as refusing drug treatment upon referral from a case manager). The Governor’s proposal includes various components designed to provide an incentive for recipients to become self-sufficient by seeking employment. These include the time limits, the flat grant, and the differ- ential between the Work Equivalency Benchmark and the maximum grant. Regarding the latter factor, we note that it would operate simi- larly to current law, whereby the difference between the need stan- dard and the maximum grant represents an amount that recipients can earn without these earnings offsetting their grants. We also note, how- ever, that the Governor proposes to eliminate an existing work incentive feature of the AFDC Program\u2014the $30 and one-third disregard. Under this rule, the first $30 of earned income plus one-third of remain- ing earnings are not counted as offsets to the grant. In addition, we note that the final report of an evaluation of recent maximum grant reductions and the $30 and one-third disregard in California, and their combined impact on increasing the percentage of AFDC recipients who work, is due to be submitted this spring. Prelimi- nary results submitted two years ago showed some impact on AFDC-U recipients but virtually no impact on AFDC-FG recipients. Aid to Families With Dependent Children C – 113 Services Should Be Designed to Give Recipients an Opportunity to Achieve Self-Sufficiency. Generally, the Governor’s proposal recognizes the need to provide support services to AFDC families and to differentiate among the needs of these families. This is particularly true of the FTAP, which would provide intensive services, including case management. We note, however, that none of the programs would provide basic education services. This apparently is in response to the successful employment- focused approach adopted in the Riverside County GAIN Program. Re- search on the GAIN Program, moreover, did not find significant employ- ment impacts from mandatory basic education, although the evaluators indicated that a longer-term analysis would be more appropriate because some of the beneficial effects may not materialize in the initial years. We also note that, like the existing program in California, the pro- posal makes no provision for case management services once a family goes off aid. Given the large number of AFDC families that go on aid more than once (estimated at 48 percent), the provision of such assis- tance should be given some consideration. The System Should Strike a Balance Between the Provision of Admin- istrative\/Programmatic Flexibility and the Assurance of Equitable Treat- ment of Recipients. The proposal would give local program administra- tors significant flexibility to make key decisions regarding program ser- vices, time limits, and sanctions. Local administrators, for example, would have some discretion to reassign clients among programs, provide limited extensions to delay grant reductions or the two-year limit in the RTW program, and effectively extend the two-year time limit to five years by transferring clients from the RTW program to the FTAP. This flexibility permits local administrators to tailor their decisions to the individual needs of clients and to take into account differences in families’ circumstances. At the same time, it could result in treating similar clients differently because of differences in the administrators rather than the recipients. We believe that if the Legislature adopts the proposal, guidelines or regulations should be included in this area\u2014for example, to better define the circumstances that would permit an RTW Program participant to be transferred to the FTAP. Conversely, we believe that the FTAP, in requiring that all non dis- abled adult recipients with no employment experience receive vouchers or other non cash aid rather than a cash grant, does not have sufficient administrative flexibility. The voucher provision rests on the premise that these recipients need some form of money management assistance. The proposal, however, does not recognize that many of these recipi- ents\u2014who are assigned to the program solely because they have not been employed within the past ten years when applying for aid\u2014will C – 114 Health and Social Services have no more need for money management than will participants in the other program components. Similarly, recipients in the RTW Program would differ significantly with respect to their readiness for work, as noted above. Some could have relatively high levels of education and employment experience, while others could have relatively low levels. The System Should Be Administered Efficiently. Although relatively little detail has been provided regarding program administration, the Governor proposes to use a per-capita funding mechanism in the state’s contracts with local entities. This could be an innovative approach to welfare administration, but it will be important to ensure that the incen- tive system accounts for effectiveness (outcomes) as well as costs so that local administrators do not deny needed services in an effort to maxi- mize their net revenues. In other words, the system should reward administrative agencies for moving recipients into jobs, as opposed to simply moving them out of the AFDC Program (and onto General Assistance, for example). We also point out that the use of vouchers and direct payments to providers, as proposed for the FTAP, will entail considerably higher administrative costs than the use of cash grants. The System Should Be Cost-Effective. Cost-effectiveness can be mea- sured in different ways\u2014from the perspective of the government, the taxpayer, or the society as a whole, for example. From the government’s perspective, the cost-effectiveness of the Governor’s proposal would depend primarily on the cost of the grants and services and the revenues from additional tax receipts to the extent that employment is increased, compared to these costs and revenues under the existing system. The costs of the Governor’s proposal cannot be estimated without additional information, including the levels proposed for the grants and the Work Equivalency Benchmark. Future costs, moreover, would depend on caseload levels as well as impacts on other state and county programs, which cannot be projected with any reliability primarily because little is known about the impact of provisions such as time limits. For the same reason, it is not possible to estimate the impact on revenues. We can predict, however, that the time limits would significantly reduce the state costs of grants and related administration, once these limits begin to take effect. The extent to which this translates into a shift of costs to the counties depends on the extent to which recipients obtain jobs rather than go onto General Assistance. As indicated, the initial costs of grant expenditures under the Gover- nor’s proposal cannot be estimated until the grant levels are known. Aid to Families With Dependent Children C – 115 Likewise there is no estimate, at this time, of the cost of support ser- vices. These costs probably would be higher than current expenditures for AFDC-related services if, unlike the existing GAIN Program, the authorized services are fully funded. We can get some idea of the potential costs of support services in the RTW Program by utilizing data from the recent evaluation of the GAIN Program. Based on the orientation\/assessment and job search costs in the Riverside County GAIN Program, we estimate that providing these services to the anticipated RTW program caseload could exceed $675 million in the first year. This would be more than twice the current direct costs of the entire GAIN Program, which includes basic education and job training. These costs, moreover, exclude child care services, which also would likely exceed current-year spending. We note, how- ever, that ongoing annual costs would be substantially reduced because in the first year, services would be needed for all existing cases referred to the RTW Program, whereas in subsequent years the services would be largely for new applicants. We believe that the cost of support services in the Family Transitional Assistance Program also would exceed the corresponding costs of services provided currently because of the provision of intensive case management and other services called for in the Governor’s plan. Further, the use of vouchers instead of cash grants is likely to increase administrative costs. In summary, it is not possible to estimate the fiscal effects of the proposal without additional information. The time limits, however, would result in significant long-term savings to the state and potentially a shift of costs to the counties, depending on the effect of the proposal on employment among AFDC recipients. We also note that a prelimi- nary report from an evaluation of recently implemented time-limited welfare programs in three states indicates that the states are incurring significant net costs in the first year (for activities such as support services and automation), but it is too soon to determine longer-term impacts. In order to assist the Legislature in considering the Governor’s proposed redesign of the welfare program, we recommend that the department submit a report, prior to budget hearings, that estimates the fiscal effect of the proposal, including the cost of grants and support services, as well as the estimated savings from increased employment. Conclusion. While we have raised several areas of concern regarding certain aspects of the Governor’s proposal, we believe that it is a useful starting point for the Legislature’s deliberations on welfare reform. In summary, we draw the following conclusions regarding the proposal: Recognizing Differences Among Recipients. We believe that it makes sense to structure the successor to the AFDC Program in C – 116 Health and Social Services a way that takes into account the differences among recipients. Dividing the caseload into four programs is consistent with this concept, but we believe that the criteria established for the two major programs\u2014the RTW and the FTAP\u2014may be too inflexible in that there will be significant differences among families within and between each program, with respect to their readiness for work and their need for support services. Structuring Work Incentives. The proposal includes several ele- ments designed to increase the work incentive, the most signifi- cant being the flat grant and time limits on eligibility. Little is known about the impact of such proposals. The time limits would result in significant state savings in AFDC grants. If they do not increase employment levels significantly, however, they could also result in a major shift of costs to other state programs and, in particular, to county programs. The potential shift of costs to counties would be mitigated to some degree by recent legislation (Ch 6\/96 [SB 681, Hurtt]) which permits counties to limit General Assistance to three months in any 12-month period, for persons considered employable. Impact on Children. Any sanctions against parents for failing to become self-sufficient will have consequences for their children. Thus, it is important to consider what happens to families when aid is reduced or discontinued due to time limits. Given the limitations on General Assistance, the final safety net for chil- dren may be the child welfare system. In fact, under the Gover- nor’s proposal, families that reach the five-year time limit would be referred to a child welfare professional for an assessment of the capability of the parents to continue to care for their child. The proposal, however, does not address the potential conse- quences\u2014both to children and to the child welfare programs\u2014of such assessments. Support Services. The proposal provides for support services in order to help recipients achieve self-sufficiency. The provision of case management and other services, if needed, for all FTAP participants represents a significant change from current law. While additional information is needed, there is some evidence that under the proposal the cost of support services would be significantly higher than under current law, if the proposed pro- gram is fully funded. Cost-Effectiveness. Because (1) the grant levels are not specified and (2) the long-term impact on employment levels cannot be predicted, we cannot estimate the cost-effectiveness of the proposal. Aid to Families With Dependent Children C – 117 Finally, we note that the proposal to redesign the AFDC Program serves as an opportunity to consider the state’s welfare system in a broader perspective. More specifically, we recommend that the Legisla- ture consider state assumption of responsibility for the General Assis- tance program, as we discuss in our companion volume, The 1996-97 Budget: Perspectives and Issues. At a minimum, the Legislature should ensure that any welfare redesign clearly links program responsibility, accountability, and financing to achieve its policy objectives. CHILD SUPPORT ENFORCEMENT PROGRAM Child support enforcement services are provided by county district attorneys to all persons who request such assistance. Collections made on behalf of AFDC recipients offset AFDC grant expenditures and therefore result in state and county savings. Budget Underestimates Savings From Franchise Tax Board Program We recommend that the budget’s estimate of the impact of the Fran- chise Tax Board’s child support enforcement program be adjusted to more accurately reflect recent data on monthly collections, for a Gen- eral Fund savings of $6.2 million in 1995-96 and $5.3 million in 1996-97. (Reduce Item 5180-101-0001 by $5,300,000.) Chapter 1223, Statutes of 1992 (AB 3589, Speier), established a pro- gram in which counties forward delinquent child support cases to the Franchise Tax Board (FTB) to attempt to recover these obligations. The budget estimates that the program will increase AFDC collections by $12.6 million in 1995-96 and $16.5 million in 1996-97, resulting in Gen- eral Fund savings of $5.9 million and $8 million, respectively. In reviewing the actual monthly collections from September through December 1995 (the most recent data available), we found that the FTB recovered an average of $2.3 million per month in AFDC collections for the 22 participating counties. If this trend continues, collections would amount to about $26 million in the current year and $28 million in the budget year, significantly higher than the budget’s estimates. Accordingly, we recommend that the budget’s estimated AFDC child support collections be adjusted to reflect the current-year trend, requir- ing an increase of $13.4 million in 1995-96 and $8.5 million in 1996-97. This would result in additional General Fund savings of $6.2 million in 1995-96 and $5.3 million in 1996-97, due to the effect of the additional collections in offsetting AFDC grant expenditures. C – 118 Health and Social Services We note that our estimate is conservative in that (1) we based our estimate on collections for September through December even though collections in December (the latest month of data) were significantly higher than in the preceding months and (2) the board anticipates that additional counties will choose to participate in the program in the budget year, thereby resulting in increased collections above the current year. We will review these factors with the department and the board prior to the budget hearings, and modify our recommendation if appro- priate. Proposed Child Support Court Commissioner System Needs Implementation Plan We withhold recommendation on $19 million ($6.5 million General Fund) proposed to implement a commissioner-based child support court system, pending receipt of an implementation plan from the Department of Social Services. Currently, most child support cases referred to the courts are heard by judges. In some counties, however, court commissioners are used to hear some of the cases. The Governor’s Child Support Court Task Force recommended in 1995 that counties establish a statewide system in which court commissioners are dedicated specifically to the establish- ment of child support paternity and support orders. The budget pro- poses to fund such a system, effective January 1, 1997, assuming enact- ment of pending legislation (AB 1058, Speier). The new court commissioner system would be designed to include streamlined procedures, dedicated support staff, automation, and better information and guidance for parents through the system. Federal financial participation at 66 percent of total costs would be available, provided that a plan of cooperation exists between the courts and the DSS. The budget proposes $6.5 million from the General Fund to sup- port the half-year costs of 50 commissioners and five new positions for state-level administration by the Judicial Council. (An unspecified por- tion of these funds would replace county funds currently used for court commissioners.) The DSS estimates that the program will result in state savings of $2.1 million in 1996-97 due to additional child support collections. Thus, the proposal is estimated to result in a net General Fund cost of $4.4 million in 1996-97. By 1998-99, the DSS estimates that the program will result in net General Fund savings of $17.9 million because of in- creased child support collections. We also note that the program would free up time for judges to hear other cases and would provide some savings to those counties that currently use county-funded commissioners. Aid to Families With Dependent Children C – 119 We believe that the proposal to expand the use of commissioners has merit. The administration, however, has not provided sufficient infor- mation to justify the need for 50 commissioners in 1996-97. In fact, a workload study completed by the department in 1994 indicated that 25 commissioners would be needed. Caseload growth since 1994 would not justify increasing the number of commissioners needed to 50. In our discussions with the department, however, staff indicated that they would be able to provide additional information justifying the need for 50 commissioners because the 1994 study did not account for the back- log of child support cases. Accordingly, we withhold recommendation on the proposal, pending receipt of an implementation plan that shows (1) when each county will make the transition to the commissioner- based system and (2) the number of commissioners needed in each county or group of counties. Budget Does Not Reflect Savings From Expanded License Match Program We recommend that the budget’s estimate of child support collec- tions be adjusted to reflect the impact of expanding the State Licensing Match System, for a General Fund savings of $26 million in 1996-97. (Reduce Item 5180-101-0001 by $26,000,000.) Chapter 481, Statutes of 1995 (AB 257, Speier) expanded the State Licensing Match System (SLMS) to require the Department of Motor Vehicles (DMV) to suspend or revoke the driver’s license of delinquent child support obligors, and made other modifications to the state’s child support collection system. When the bill was enacted, the Department of Finance estimated that AB 257 would result in a General Fund sav- ings of $26 million in 1996-97, due to the impact on AFDC child support collections. We also note that similar legislation in Maine substantially increased child support collections. Based on the experience in Maine and our discussions with staff at the DSS, we conclude that a net General Fund savings of $26 million is a reasonable estimate. The budget, however, does not reflect any sav- ings from this program. Accordingly, we recommend that the budget’s estimate for AFDC child support collections be increased to reflect a General Fund savings of $26 million in 1996-97. C – 120 Health and Social Services AFDC\u2014FOSTER CARE Budget Should Reflect Additional Revenue and Savings We recommend (1) increasing General Fund revenues by $172,000 and (2) reducing General Fund expenditures by $317,000 in order to reflect the impact of foster care group home audits. (Increase General Fund revenues by $172,000 and reduce Item 5180-101-0001 by $317,000.) Current law requires the department to perform program and fiscal audits of foster care group homes. Group homes are paid a rate based on the level of care and supervision that is provided. The department is authorized to reduce the rate being paid to the group home and to collect any overpayments identified in audit findings that the required level of care and services was not provided. The budget proposes $745,000 ($484,000 General Fund) to continue eight limited-term positions and establish two new positions to conduct group home audit activities. In addition to these positions, the depart- ment currently has five permanent positions performing group home audits. Based on our review, we find that continuation of the eight positions is justified on a workload basis. Budget Does Not Reflect Revenues and Savings from Proposed Ac- tivities. Our analysis indicates that the Governor’s Budget does not reflect any revenue or savings that would result from proposed group home audit activities. The department, however, estimates that addi- tional General Fund revenues of approximately $172,000 will be gener- ated from the collection of overpayments. In addition, the department estimates General Fund savings of $317,000 resulting from group home rate reductions. Accordingly, we recommend that the budget reflect the $172,000 in General Fund revenues and $317,000 in reduced expendi- tures resulting from these activities in 1996-97. Technical Error in Calculating General Fund Share of Costs We recommend a reduction of $1.3 million from the General Fund because a technical error in calculating the state share of costs for foster care resulted in overbudgeting. (Reduce Item 5180-101-0001 by $1,312,000.) Aid to Families With Dependent Children C – 121 The budget proposes an increase in the Foster Care Program of $2.3 million from the General Fund ($4.8 million from all funds) as a result of a federal policy change affecting certain cases where the foster parent is a relative of the child. Our analysis indicates that the General Fund costs are overbudgeted because the department applied an incor- rect state\/county cost sharing ratio. Therefore, we recommend that the General Fund amount be reduced based on the correct cost sharing ratio. This would result in General Fund savings of $1,265,000 in 1995-96 and $1,312,000 in 1996-97. We note that this would also result in corresponding increases in county costs. Budget Does Not Reflect Savings Anticipated From an Increase in Federal Funds We recommend a General Fund reduction of $485,000 in the amount proposed for the Foster Care Program to reflect anticipated additional federal funds due to an increase in the federal share of costs of this program. (Reduce Item 5180-101-0001 by $485,000.) The Federal Medical Assistance Percentage (FMAP) determines the federal share of costs in the Medicaid Program (Medi-Cal in California) as well as certain other programs. The Governor’s Budget anticipates that the federal sharing ratio will increase from 50 percent to 50.23 percent of total costs for the affected programs, effective October 1, 1996. The budget assumes General Fund savings in certain programs (primarily Medi-Cal) due to the anticipated increase in federal funds, beginning in 1996-97. The federal share of costs for foster care grants is also based on the FMAP. The budget, however, does not reflect a change in the federal share of costs. We estimate that the additional federal funds would result in General Fund savings of $485,000 in 1996-97. Accordingly, we recom- mend that the budget be amended to reflect these anticipated savings. Department Will Not Meet Deadline for Report on a Revised Foster Care Rate Setting System At the time this analysis was prepared, the Department of Social Services had not yet convened a working group to recommend a revised foster care rate setting system, as required by the Legislature. We rec- ommend that the department report during budget hearings on the status of its efforts to meet this requirement. Children who are placed in foster family homes generally receive the basic foster family home grant, ranging from $345 to $484 per month. Children with special medical and\/or behavioral needs are also eligible C – 122 Health and Social Services for a specialized care increment over and above the basic foster family home grant. Foster family agencies (FFAs) recruit and certify foster homes and provide training and support services to the foster parents. One of their objectives is to provide placement settings for children who have special needs and require a higher level of care than typically provided in a foster family home. The FFA rates generally range from $1,283 to $1,515 a month. The Supplemental Report of the 1995 Budget Act requires the Depart- ment of Social Services to convene a working group to review the rate setting system for foster family homes and FFAs and to report its rec- ommendations for a new or revised system by March 1, 1996. The working group must include representatives from the department, counties, providers, consumers, and the Legislature. The purpose of the review is to recommend a system that could help to provide for a greater range of service levels and placements for children in foster care. At the time this analysis was prepared, departmental staff indi- cated that they were still in the process of identifying potential partici- pants of the working group. It is apparent that the Legislature’s dead- line for the report will not be met and we find no justification for the delay. To facilitate legislative oversight of this issue, we recommend that the department report during budget hearings on the status of its efforts to comply with the Legislature’s directive. Flexibility in Use of Foster Care Funds Could Increase Family Reunifications We recommend the enactment of legislation to establish a pilot program whereby counties could use state foster care funds to provide ongoing support services to children and their families after reunifica- tion. One of the goals of the Child Welfare Services Program is to safely reunify foster care children with their families, when appropriate. Al- though in some cases it may not be appropriate to return a foster child home to his\/her family, there are instances where reunification is in the child’s best interest. As some child welfare professionals have indicated, more children in long-term foster care could return home if ongoing support services were provided to the families. Currently, very few families receive ongoing services when a child is returned home, mainly due to lack of funding. It is likely that some children who are in long-term foster care could be reunified if more resources were available to fund these ongoing services. Currently, state law prohibits the use of foster care funds to Aid to Families With Dependent Children C – 123 provide ongoing support services to families. Instead, the funds must be used to maintain the child in foster care placement (food, clothing, shelter, etc.). We recommend the enactment of legislation to establish a pilot program whereby counties could use state foster care funds to provide support services to children and their families after reunifica- tion. In other words, the program would give counties flexibility to use foster care funds to support a child in his\/her family. This program would target the services to children in long-term foster care who could be returned home with the support of such services. We note that this legislation could be designed so that at a minimum the General Fund costs of participating in the pilot program would not exceed current foster care costs for those cases. In some instances this proposal could result in net savings to the General Fund. This is be- cause long-term foster care children typically remain in foster care homes until they reach age 18. This proposal, if it is successful, would reunify these children with their families, thereby avoiding long-term foster care costs. Closure of County Probation Facilities Could Lead to Increases in Foster Care Costs Possible closure of county juvenile camps and ranches could result in higher caseloads and costs in the Foster Care program. Several counties are reporting that, as a consequence of reductions in federal funds, they intend to close local camps and ranches for juve- nile offenders. Because foster care is an alternative placement option for some of these juvenile offenders, the closure of county camps and ranches (funded by the counties) could lead to higher caseloads in the Foster Care program (partially funded by the state). The budget, how- ever, does not assume closure of any county camps and ranches. We discuss this issue in detail in our analysis of the Department of the Youth Authority. C – 124 Health and Social Services SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $1.6 billion from the General Fund for the state’s share of the SSI\/SSP in 1996-97. This is a decrease of $375 million, or 19 percent, from estimated current-year expenditures. This decrease is due primarily to the full-year effect of previous grant reductions (which have so far been delayed because of lack of federal approval), and the elimination of SSI\/SSP benefits for noncitizens pursuant to proposed federal welfare reform legislation. In December 1995, there were 330,852 aged, 21,833 blind, and 673,197 disabled SSI\/SSP recipients. Assumed Federal Law Changes Create a General Fund Risk In the SSI\/SSP, the budget proposes General Fund savings of $102 million in 1995-96 and $512 million in 1996-97 that are dependent on federal action to eliminate the maintenance-of-effort requirement and restrict program eligibility. The budget assumes that this will be achieved by the enactment of federal welfare reform legislation. Background. Federal law allows states the discretion to set the level of the SSP grant (the state-funded component of SSI\/SSP) as long as the payment remains at or above the federally-mandated maintenance-of- effort (MOE) level. The MOE level is the SSP grant level in effect in July 1983. Budget trailer bill legislation for 1995-96\u2014Chapter 307, Statutes of 1995 (AB 908, Brulte)\u2014reduced payments by 4.9 percent statewide, with an additional 4.9 percent reduction for persons living in low-cost coun- ties, effective December 1995. The statewide reduction is scheduled to terminate on June 30, 1996 and the additional reduction to recipients in low-cost counties will be ongoing. These grant reductions would reduce the grants for most recipients below the federally mandated MOE, but federal legislation permitting this reduction has not been enacted. Budget Savings Contingent on Federal Welfare Reform. Figure 32 (see next page) lists past and proposed budget actions that are depen- Supplemental Security Income\/State Supplementary Program C – 125 dent on federal legislation. As the figure shows, $614 million in General Fund savings in the current and budget years are at risk. With the exception of the elimination of drug and alcohol addiction as qualifying disabilities (which is included in separate pending legislation), the most recent version of federal welfare reform (passed by Congress but vetoed by the President) would enable the state to implement the proposals shown in Figure 32. We note however, that the budget assumes that the current-year grant reductions will become effective April 1, 1996. Be- cause of recipient notification and other administrative requirements, it will not be possible to achieve all of the savings assumed in the budget for the current year even if federal welfare reform is enacted in March 1996. Figure 32 State Savings Dependent on Federal Legislation SSI\/SSP 1995-96 and 1996-97 (In Millions) Budget Proposal 1995-96 1996-97 Total Previous Budget Actions: 1995-96 regional 4.9 percent grant reduction $25 $101 $126 1995-96 statewide grant reduction 76 \u2014 76 Eliminate drug\/alcohol addiction as criteria \u2014 3 3 New Proposals: Make statewide 4.9 percent reduction permanent \u2014 $309a $309 Restrict eligibility for noncitizens 1 90b 91 Restrict eligibility for disabled children \u2014 9 9 Totals $102 $512 $614 a Total savings are estimated at $335 million, of which $309 million is dependent on federal action. b $96 million in SSI\/SSP savings partially offset by net costs of $6 million in Medi-Cal. Budget Proposes to Make Temporary Reductions Permanent By proposing to make past grant reductions permanent and to delete the requirement to restore the statutory cost of living adjustment, the budget would achieve a General Fund cost avoidance of $777 million in 1996-97. Budget trailer bill legislation for 1991-92 and 1992-93 reduced SSI\/SSP grants by 5.8 percent, suspended the statutory state cost of C – 126 Health and Social Services living adjustment (COLA), and specified that the grant reduction and the COLA suspension would remain operative until July 1, 1996. Restoring the 5.8 percent grant reduction in 1996-97 would result in General Fund costs of $442 million. There would be no cost in 1996-97 to restore the COLA because of the interaction between the state COLA\u2014which is based on the California Necessities Index (1.5 percent) and is applied to the entire SSI\/SSP grant\u2014and the federal COLA, which is based on the Consumer Price Index (2.9 percent) and is ap- plied to the SSI portion of the grant. The Governor’s Budget proposes to make the grant reduction and the COLA suspension permanent, for a General Fund cost avoidance of $442 million in 1996-97. The budget also proposes to make permanent the statewide 4.9 percent grant reduction enacted in 1995-96. This would result in a General Fund cost avoidance of $335 million in 1996-97. Figure 33 shows the SSI\/SSP grants in 1996-97 for individuals and couples in Region 1 (high-cost counties) and Region 2 (low cost-coun- ties) under both current law and the Governor’s proposal. Grants under the Governor’s proposal would be roughly 10 percent less than under current law. As a point of reference, we note that the federal poverty guideline in 1995 is $623 per month for an individual and $836 per month for a couple. Thus, under the Governor’s proposal, the grant for an individual would be below the poverty guideline (96 percent of the poverty level in high-cost counties and 91 percent of poverty in low-cost counties). Under current law, the grant for an individual would be somewhat above the poverty line (107 percent of poverty in high-cost counties and 102 percent of poverty in low-cost counties). Figure 33 SSI\/SSP Monthly Payment Standards Current Law and Governor’s Proposala 1996-97 Region and Recipient Category Current Law Governor’s Proposal Difference Region 1\u2014High-cost counties Individuals $663 $596 -$67 Couples 1,170 1,066 -104 Region 2\u2014Low-cost counties Individuals $633 $568 -$65 Couples 1,135 1,014 -121 a Does not include federal COLA which will be applied to SSI portion of grant on January 1, 1997. Supplemental Security Income\/State Supplementary Program C – 127 SSI\/SSP Benefits for Noncitizens\u2014 Budget Internally Inconsistent We recommend a technical adjustment in the amount proposed for SSI\/SSP grants because the proet underestimates the savings from eliminating SSI\/SSP benefits for noncitizens, based on its own assump- tion of federal welfare reform legislation. (Reduce Item 5180-111-0001 by $34,052,000.) The budget proposes to make most legal noncitizens ineligible for SSI\/SSP effective January 1, 1997, assuming enactment of federal welfare reform legislation, which includes these restrictions. The most recent version of federal welfare reform legislation excepted certain legal noncitizens from the bill’s prohibition. The budget, however, excludes two categories of recipients that are not excluded in the latest version of wel- fare reform legislation\u2014specifically, noncitizens over age 75 and noncitizens that are too disabled to become citizens. The administration advises us that these exclusions were inadvertent and do not accurately reflect its proposal. Correcting for this error would result in a net increase in General Fund savings of $34.1 million which is not reflected in the Governor’s Budget. Accordingly, we recommend this technical adjustment so that the budget will be consistent with its own assumptions. Governor Proposes to Deny General Assistance to Noncitizens The Governor proposes legislation to prohibit counties from provid- ing General Assistance to those noncitizens who lose eligibility for federal benefits as a result of federal welfare reform. If federal legislation is enacted to eliminate noncitizens from eligibility for SSI and Food Stamps, many of these persons would become eligible for county General Assistance benefits. The Governor proposes legislation to prohibit counties from providing General Assistance to those noncitizens who lose eligibility for federal benefits as a result of such legislation. We note that denying aid to those noncitizens who do not attain citizenship would have a significant adverse effect on these individuals unless they can compensate for the loss of income through employment or some other means. In this respect, it is important to recognize that under federal law, noncitizens must reside in the country for five years and then must initiate an application process which currently takes more than a year to complete. For a discussion of how this proposal affects the state-county rela- tionship, please see Part V of our companion volume, The 1996-97 Bud- get: Perspective and Issues. C – 128 Health and Social Services COUNTY ADMINISTRATION OF WELFARE PROGRAMS The budget appropriates funds for the state and federal share of the costs incurred by counties for administering the following programs: (1) Aid to Families with Dependent Children (AFDC); (2) Food Stamps; (3) Child Support Enforcement; (4) Special Adults, including emergency assistance for aged, blind, and disabled persons; (5) Refugee Cash Assis- tance; and (6) Adoption Assistance. The budget proposes an appropriation of $496.9 million from the General Fund for the state’s share of the costs that counties will incur in administering welfare programs in 1996-97. This represents an in- crease of $23.1 million, or 4.9 percent, over estimated current-year expenditures. Statewide Fingerprint Imaging System Needs Further Review We withhold recommendation on the $15.7 million ($7.9 million General Fund) proposed to implement a new Statewide Fingerprint Imaging System that is designed to detect and prevent fraud in the Aid to Families with Dependent Children Program, pending receipt of addi- tional information from the Health and Welfare Data Center. The budget proposes $15.7 million ($7.9 million General Fund) to implement a Statewide Fingerprint Imaging System (SFIS) modeled on an existing fraud detection program in Los Angeles County. The Health and Welfare Data Center (HWDC) is responsible for developing and procuring the statewide system. The Department of Social Services (DSS) will provide the data center with $11.6 million ($5.8 million Gen- eral Fund) for its costs related to its development and procurement of the system. The remaining funds will be used for county administration of the program ($3.8 million total, and $1.9 million General Fund) and for state operations at the DSS ($264,000 total, $132,000 General Fund). Counties will phase into the program over a six-month period, begin- ning in January 1997. Partial year AFDC grant savings are estimated to be $11.7 million ($5.6 million General Fund) in 1996-97. When the sys- tem is fully operational in 1997-98, the program is estimated to provide net savings of $60.1 million ($28.5 million General Fund). County of Administration of Welfare Programs C – 129 Background. Los Angeles County implemented its Automated Fin- gerprint Reporting and Match (AFIRM) pilot program in April 1994. The program requires all adult AFDC recipients to be fingerprinted in order to continue to receive AFDC benefits. A database stores finger- print images, and the system compares these images to those of new applicants. If there is a positive match, aid will be denied. An evalua- tion of AFIRM concluded that the program would reduce AFDC benefit payments by $86 million over a 26-month period. A follow-up study of 137 randomly selected cases that were termi- nated due to noncompliance with AFIRM found that 104 cases (76 percent) were engaged in some kind of fraudulent activity. Failure to confirm fraud in the remaining 24 percent of cases raises the issue of whether some of the AFDC grant savings should be attributed to reasons other than actual fraud. Process Should Conform to Action Taken in HWDC Budget. In our analysis of the HWDC (please see the State Administration section of this Analysis), we discuss several issues pertaining to the expedited procurement process and the estimated cost of the SFIS. In that discus- sion, we withhold recommendation on all funds pertaining to the imple- mentation of the SFIS pending receipt of additional information from the HWDC. Accordingly, we withhold recommendation on the $15.7 million proposed in this item for the SFIS. Welfare Automation Projects Transferred To the Health and Welfare Data Center We withhold recommendation on proposed funding for the Statewide Automated Welfare System and the Statewide Automated Child Sup- port System, pending receipt of additional information from the Health and Welfare Data Center. The responsibility of developing the Statewide Automated Welfare System (SAWS) and the Statewide Automated Child Support System (SACSS) has been moved from the DSS to the HWDC. A brief summary of these projects is provided below. For a more complete description of these programs and our recommendations, please see the State Admin- istration section of this Analysis. SAWS. The budget proposes $68.2 million ($29 million federal funds, $31 million General Fund, $4.6 million county funds, and $3.5 million in reimbursements) for the DSS and the HWDC to continue the devel- opment and implementation of the SAWS. The 1995 Budget Act re- quired the HWDC to provide two reports to the Legislature regarding C – 130 Health and Social Services the SAWS. The first report, released November 1, 1995, presented a multiple county consortium strategy for implementing a SAWS. Under this approach counties join together into consortia based on common business needs and working relationships. The report included a preliminary assignment of counties into four consortia, a summary of the consortia concept and rationale for each consortium, and a descrip- tion of the responsibilities for key project stakeholders. The second report, to be released February 1, 1996, covers implementation issues, consortia government structures, and action plans. Funding for the Implementation of Interim Statewide Automated Welfare System Should Conform to Action Taken in the HWDC Budget. In our analysis of the HWDC, we withhold recommendation on Imple- mentation of Interim Statewide Automated Welfare System (ISAWS) implementation and maintenance pending receipt of additional informa- tion for the HWDC. The ISAWS is one of four proposed consortia that counties may choose to join in implementing SAWS. Accordingly, we also withhold recommendation on $40.9 million ($20.1 million General Fund) in the DSS budget for the ISAWS. SACSS. The budget proposes $50.4 million ($42.1 million federal funds, $4.2 million General Fund, and $4.1 million county funds) for the implementation and the ongoing operation and maintenance of the SACSS in 1996-97. As of December 1995, seven pilot counties had imple- mented the SACSS. Statewide implementation is scheduled to be com- pleted in February 1997. In January 1996, the Department of Finance approved a revised Special Project Report (SPR) which projected an additional $108 million in total costs, through June 2000, above the $152 million previously estimated. However, none of these costs are reflected in the budget proposal for 1996-97. Implementation of SACSS Should Conform to Action Taken in the HWDC Budget. In our analysis of the HWDC, we discuss several issues pertaining to the revised SPR for the SACSS project. In that analysis, we withhold recommendation on the SACSS project pending the receipt of additional information from the HWDC. Accordingly, we also withhold recommendation on the $50.3 million ($4.2 million General Fund) in the DSS budget for the project in 1996-97. County of Administration of Welfare Programs C – 131 Proposal to Prohibit General Assistance for Noncitizens The Governor proposes to prohibit counties from providing General Assistance to noncitizens made ineligible for federally funded programs, if pending welfare reform legislation is enacted. If enacted into law, current versions of federal welfare reform now pending in Congress, would make legal noncitizens (with certain excep- tions) ineligible for Supplemental Security Income (SSI) and Food Stamps effective January 1, 1997, and would give states the option of denying AFDC benefits to these individuals. With respect to AFDC, the Governor proposes to follow current state law and bar sponsored aliens from receiving these benefits. Based on these policies, we estimate that approximately 180,000 noncitizens would be denied SSI\/State Supple- mentary Program (SSP) benefits, roughly 225,000 would be denied food stamps, and 8,339 sponsored aliens would be denied AFDC, unless the individuals attain citizenship status. Under current law, counties would be required to provide General Assistance to these noncitizens, pro- vided they met county eligibility guidelines. The Governor, however, proposes legislation to prohibit counties from providing General Assis- tance to these noncitizens. Essentially, this is a policy decision for the Legislature. We note, however, that General Assistance is part of the safety net for indigents. Thus, denying this aid to those noncitizens who do not attain citizen- ship would have a significant adverse effect on these individuals unless they can compensate for the loss of income through employment or some other means. In this respect, we also note that under federal law, noncitizens must reside in the country for five years, and then must initiate an application process which currently takes more than a year to complete. Budget Exceeds Projected Spending Based on Recent Trends We recommend that the proposed expenditure for unidentified activi- ties ($8.9 million General Fund) in county administration be deleted because it is in excess of projected county spending in 1996-97, based on past trends adjusted for caseload growth, inflation, and policy changes. We further recommend that the Legislature consider redirecting the savings to expand the Greater Avenue for Independence Program because of its demonstrated effectiveness in increasing participant’s employment and earnings. (Reduce Item 5180-141-0001 by $8,883,000). Amount Budgeted Exceeds Projected County Spending. The current methodology used to budget for county administration is based on the amount counties actually spent in the past year, adjusted for projected C – 132 Health and Social Services changes in caseload and inflation in the budget year. This amount is also adjusted for policy changes. Because of recent economic conditions, the counties have not matched all the state and federal monies available for administrative costs in recent years. This experience is reflected in actual expenditures, and therefore is the basis used to project budget- year spending. The budget reflects county administrative savings in 1996-97 from various fraud activities, legislation barring sponsored aliens from AFDC eligibility, and the consolidation of eligibility determination in the AFDC and Food Stamps Programs. The budget, however, proposes to allow counties to use $8.9 million of these General Fund savings (if matched by $3.8 million in county funds) to pay for other unidentified activities. The DSS’s rationale is that the trend used to project the 1996-97 expenditures understates the amount counties would spend because, in recent years, the counties have cut back on spending due to their limited resources. By adding $8.9 million from the General Fund to the baseline projec- tion, the budget is assuming that counties will be willing to increase their match beyond the level reflected in recent years. We find no basis for this assumption. If anything, county fiscal resources are coming under more pressure, not less. Moreover, the department has not justi- fied the request on the basis of programmatic needs because it has not been able to identify the activities for which these monies would be spent. Greater Avenue for Independence (GAIN) Program Increases Earnings and Reduces AFDC Grant Payments. A recent evaluation of the Greater Avenue for Independence Program concluded that, on average, the program increased earnings for AFDC-FG (Family Group) cases by 22 percent over a three-year period and increased earnings for AFDC-U (Unemployed Parent) cases by 12 percent. Further, AFDC grant pay- ments were reduced by an average of 6 percent. In Riverside County, moreover, the GAIN Program returned $2.84 to government budgets for every dollar spent on the program. Budget trailer bill legisla- tion\u2014Ch 306\/95 (AB 1371, Weggeland)\u2014modified the GAIN Program to make it more like the employment-oriented program operated by Riverside County. Program Not Fully Funded. The DSS indicates that the proposed funding for the GAIN Program is substantially below the amount needed to accommodate all eligible AFDC recipients. Given the demon- strated effectiveness of the program, we recommend that the Legislature consider redirecting the savings realized by adoption of our recommen- dation for county administration to expand the GAIN Program. In County of Administration of Welfare Programs C – 133 effect, this would make additional state funds available to the counties, but with some assurance that the funds will be spent in an effective manner. Overbudgeting for Food Stamps Program Administration We recommend reducing the General Fund amount proposed for county administration of the Food Stamps Program by $9 million, because the budget overstates the caseload (based on the budget’s own assumption of federal welfare reform legislation). (Reduce Item 5180- 141-0001 by $9 million). As indicated previously, the Governor’s Budget proposal assumes the enactment of federal welfare reform legislation which would make legal noncitizens, with certain exceptions, ineligible to receive certain federal benefits, including food stamps. Pursuant to this provision, we estimate that approximately 225,000 noncitizens will lose eligibility for Food Stamps. The Governor’s Budget, however, inadvertently fails to account for this reduction in the food stamps Program caseload and therefore overstates the state costs of program administration by $9 million. Accordingly, in order to make the budget consistent with its own as- sumptions, we recommend reducing the General Fund amount pro- posed for Food Stamps Program administration in 1996-97 by $9 mil- lion. C – 134 Health and Social Services CHILD WELFARE SERVICES The Child Welfare Services (CWS) Program provides services to abused and neglected children and children in foster care and their families. The CWS Program provides: Immediate social worker response to allegations of child abuse and neglect. Ongoing services to children and their families who have been identified as victims, or potential victims, of abuse or neglect. Services to children in foster care who have been temporarily or permanently removed from their families because of abuse or neglect. Child Welfare Services Program Needs Improvement In January 1996, we issued a report in which we concluded that California’s Child Welfare Services Program needs improvement. We recommend that the Department of Social Services (DSS) report at budget hearings on its efforts to improve the program. In our report, Child Abuse and Neglect in California (January 1996), we present a variety of performance-related information that indicates a need for improvement in the state’s CWS Program. We discuss our major findings below. Significant Variation Among Counties in Percentage of Reports Screened Out. One of the functions of the CWS Program is to respond to reports of child abuse and neglect. Counties are required to screen, by use of telephone assessments, reports of child abuse\/neglect to determine whether an in-person investigation is necessary. Ideally, only those reports that do not constitute abuse or neglect are screened out in the initial response stage. As Figure 34 shows, there is significant variation among the counties in the percentage of reports that are screened out. Without further investigation, we cannot determine whether some counties are screening out too many or not enough re- ports of abuse\/neglect. We believe this is an area that warrants investi- gation by the department. Child Welfare Services C – 135 Los Angeles Orange Riverside Fresno San Bernardino Santa Clara San Diego Sacramento Alameda Contra Costa 20 30 40 50 60 CA 10% Proportion of Abuse\/Neglect Reports \”Screened Out\” Among Counties 1994 Figure 34 Recidivism Increasing. As shown in figure 35 (see next page), the percentage of children returning to the CWS Program has increased significantly over the years, from 29 percent in 1985 to 46 percent in 1993. These data suggest that the program has not been effective in preventing reabuse and neglect in a significant and growing number of cases. The increased recidivism may be partly due to changes in the CWS caseload, such as an increase in the number of families who are more difficult to serve effectively (for example, a higher proportion of cases where children have severe behavioral problems or parents who have substance abuse problems). Currently, there is a lack of informa- tion identifying those factors which contribute to the success of family maintenance and reunification services. If these services are working well we would expect to see recidivism mitigated. We believe that collecting such performance data could ultimately improve program outcomes. Reliance on Foster Care Increasing. One of the goals of the CWS Program is to minimize the use of foster care placements in serving abused children and instead maintain or reunify such children with their families when appropriate. The data, however, suggest that reli- ance on foster care has been increasing because (1) foster care placement rates (relative to the population of children in the state) have increased C – 136 Health and Social Services April 1985 January 1989 January 1993 10 20 30 40 50% Percent of Children Previously In the CWS Program Figure 35 since 1988, (2) family reunifications (returning foster care children to their parents) have not increased relative to the growth in foster care cases, and (3) the proportion of children in the CWS Program who are being placed in foster care (rather than receiving support services at home) has been increasing. These trends are not likely to be reversed until the effectiveness of family maintenance and reunification services is improved. Multiple Foster Care Placements. Another measure of the success of the CWS Program is the extent to which multiple foster care placements for the same child are minimized. The data show that in 1993-94, about one-third of children in foster care had experienced three or more dif- ferent placements. (See Figure 36.) We note that Chapter 1294, Statutes of 1989 (SB 370, Presley) requires the department to develop a Level of Care Assessment tool to facilitate the assignment of a foster care child to the most appropriate placement, thereby reducing the chances of multiple placements. Although there is no statutory completion date, the department has not provided the Legislature with a project status report which was due in January 1995. We find no justification for the delay in completing this project. Child Welfare Services C – 137 One Two Three Four 10 20 30 40 Placements Percent of Foster Care Caseload 50% Five or More Number of Different Placements For Foster Care Children 1993-94 Figure 36 Use of Foster Care Group Homes Increasing More Than Foster Fam- ily Homes. When placing a child in foster care, current law gives prior- ity to more family-like foster care settings and requires placement in foster family homes instead of group homes, when appropriate. The proportion of children placed in foster family homes, however, has actually decreased slightly over the years\u2014from 88 percent in 1984 to 86 percent in 1995. Less Than Half of Eligible Foster Care Children Receive Services Through Independent Living Program. Children who are emancipated from the foster care system (generally at age 18) must have a service plan to help them transition to independent living. As shown in Figure 37 (see next page), less than half of the eligible children receive services through the state’s Independent Living Program (ILP). In our field visits, child welfare professionals have indicated that additional funds are needed to expand the ILP to serve all eligible youth. We note, however, that data are not sufficient to determine whether the program is effective. C – 138 Health and Social Services 89 90 91 92 93 94 10 20 30 40 50% Percent of Eligible Foster Care Children Served by Independent Living Program 1989 Through 1994 Figure 37 Current law requires the department to complete an evaluation of the ILP and develop recommendations on how independent living services could better prepare foster youth for independence. The evaluation was due in January 1995 but has not been completed. This evaluation is important in order to help the Legislature determine the appropriate funding level for the program. We find no justification for the depart- ment’s delay in providing the report. Recommendation. Reversing some of these trends will not be an easy task. The provision of additional resources could help, but given the competing demands for such resources it is important that available funding\u2014whether new or existing\u2014be used effectively. Some of these trends may be caused by factors that cannot be easily addressed by government agencies. Nevertheless, we believe that efforts should be made to improve the CWS Program. Thus, we recommend that the DSS comment during budget hearings on our findings and report on what actions could be taken\u2014including activities by the department\u2014to address the problems that we identified. Adoptions Programs C – 139 ADOPTIONS PROGRAMS The department administers a statewide program of services to parents who wish to place children for adoption and to persons who wish to adopt children. Adoptions services are provided through state district offices, 28 county adoption agencies, and a variety of private agencies. Counties may choose to operate the Adoptions program or to turn the program over to the state for administration. There are two components of the Adoptions program: (1) the Relin- quishment (or Agency) Adoptions program, which provides services to children in foster care, and (2) the Independent Adoptions program, which provides adoption services to birth parents and adoptive parents when both agree on placement. The Adoptions program is supported by the General Fund and federal funds. The budget proposes expenditures of $54 million ($36 million General Fund) for the program in 1996-97. The General Fund amount represents an increase of $7 million, or 24 percent, above current-year expenditures. This is due to the Governor’s proposed Adoptions Initiative. Adoptions Initiative The administration indicates that the goal of the Governor’s Adop- tions Initiative is to increase the number of adoptions for children who would otherwise remain in long-term foster care. The two components of the initiative are described below. Additional Staff for State’s Adoptions Branch. The budget proposes $963,000 ($626,000 General Fund) and 14 limited-term (five-year) posi- tions in the department’s adoptions branch to develop and implement proposals to facilitate the adoption of children in foster care. The objec- tives are to improve the effectiveness of the service delivery system and to increase the productivity of adoptions caseworkers. The proposed activities include establishing performance goals, streamlining the adop- tions process, and providing technical assistance and training. County Performance Agreements and Increased Funding for Case- workers. The budget proposes an augmentation of $10.6 million ($6.6 million General Fund) to increase the number of county casework- ers in the Adoptions program in 1996-97. The DSS advises that county C – 140 Health and Social Services agencies have historically been underfunded for the program and that the augmentation would fund counties at a level justified by their workload. The department estimates that the augmentation will fund 184 additional staff and allow counties to place 810 more children in adoptive homes in 1996-97. In addition, the DSS plans to establish performance agreements with county agencies under which the counties will be required to increase the number of adoptions as a condition for continuing to receive the higher level of funding. The budget assumes General Fund savings in the Foster Care and Child Welfare Services programs of $726,000 from reduced foster care placements and General Fund costs in the Adoptions Assistance Pro- gram of $564,000 in 1996-97 from increased adoptions assistance grants (for those children who are eligible) resulting from the increased num- ber of adoptions. While this proposal would result in net costs during the first years of implementation, we note that eventually there should be ongoing annual net savings (avoidance of foster care costs) associ- ated with these adoptions. Information Needed for Proposed Staff Increase We withhold recommendation on General Fund expenditures of $626,000 for 14 new positions in the department’s adoptions branch, pending receipt of additional information. In order to evaluate the department’s proposal for 14 additional staff in the adoptions branch, we requested information from the department regarding the workload of the existing staff. At the time this analysis was prepared, we had not received the information necessary to com- plete our review. Thus, we withhold recommendation on the proposal for new staff, pending receipt and review of this information from the department. Details Lacking on Implementation of Performance Agreements We recommend that the department report during budget hearings on its plans to implement performance agreements with county adoption agencies. If the Legislature adopts the proposal, we recommend that it be modified to include the establishment of performance agreements with state adoption offices as well as with the county agencies. As mentioned above, the department proposes to establish perfor- mance agreements with counties, linking the increased funding to increased adoptions. In developing the agreements, the department plans to establish a baseline of placements against which counties must improve. At the time this analysis was prepared, the department did Adoptions Programs C – 141 not have any details regarding the performance agreements, such as the specific number of adoptions needed to qualify for increased funding, or the disposition of funds withheld from counties that do not meet the standards (for example, whether these funds would be redirected to other counties). The department, however, indicated that it was in the process of reviewing alternative methods for implementation. We be- lieve that the Legislature needs to review this information prior to approving the budget proposal. In addition, we note that the proposal does not address the establish- ment of performance agreements with state adoption offices. We are not aware of any reason to distinguish between the county and state com- ponents. Under the budget proposal, both the state and county pro- grams would be fully funded to serve estimated caseloads. Conse- quently, it seems reasonable to apply the performance criteria equally to both components of the program. Accordingly, we recommend that the department report during budget hearings on its plans to develop and implement performance agreements with county adoption agencies. Furthermore, if the proposal is adopted, we recommend that the Legislature require that perfor- mance agreements also be established with state adoption offices. C – 142 Health and Social Services COMMUNITY CARE LICENSING DIVISION The Community Care Licensing Division (CCLD) within the Depart- ment of Social Services develops and enforces regulations designed to protect the health and safety of individuals in 24-hour residential care facilities and day care. Licensed facilities include day care, foster family homes and group homes, adult residential facilities, and residential facilities for the elderly. The budget proposes expenditures of $70.3 million ($15 million General Fund) for the CCLD in 1996-97. This represents a 16 percent increase in General Fund expenditures from the current year. Proposed Staffing Increase Does Not Reflect Efficiencies From Automation We recommend that the Legislature delete 13 of the 54 proposed new positions for the Community Care Licensing Division, for a General Fund savings of $586,000, because the budget does not reflect efficiencies resulting from automation. (Reduce Item 5180-001-0001 by $586,000.) The budget proposes an augmentation of $3.3 million ($2.8 million General Fund) for 54 new positions to address workload associated with an increase in the number of community care facilities that require licensure. Our analysis indicates that 13 of these additional licensing staff\u2014 proposed for the child day care section\u2014are not needed due to antici- pated automation efficiencies. In January 1996, the Department of Fi- nance approved a Special Project Report (SPR) for an automation project to provide child day care licensing staff with portable computers. The project will be implemented during 1995-96. The SPR indicated there would be annual savings of $586,000 and 13 positions resulting from efficiencies due to this automation project. These efficiencies stem from eliminating the need to manually complete parts of the licensing report, automating research capabilities for legal and technical questions, and providing the ability to print copies of necessary forms during a licens- ing visit. The projected savings, however, are not reflected in the de- partment’s budget. Accordingly, we recommend that the Legislature delete 13 positions from the budget proposal in order to reflect the impact of automation, for a General Fund savings of $586,000 in 1996-97. LIST OF FINDINGS AND RECOMMENDATIONS Analysis Page Crosscutting Issues 1. Counties Are Experiencing Greater Difficulty in Pro- viding Indigent Health Care Services. We review the health care safety net and the factors underlying recent trends. C-17 California Medical Assistance Program 2. Budget Does Not Assume Enactment of Federal Med- icaid Reform Legislation. At this time it is uncertain what, if any, changes will be made in the Medicaid Program as the result of negotiations taking place at the federal level. C-34 3. Budget Assumes Federal Welfare Reform. The budget assumes enactment of federal welfare reform legislation affecting the Aid to Families with Dependent Children (AFDC), Supplemental Security Income\/State Supple- mentary Program (SSI\/SSP), and California Medical Assistance (Medicaid) programs. We review the bud- get’s assumptions of how the legislation would affect the Medi-Cal Program. C-36 4. Services for Illegal Immigrants\u2014Budget Internally Inconsistent. Reduce Item 4260-101-0001 by $4,233,000. Recommend a technical adjustment in the amount pro- posed for long-term care services because the budget does not reflect the savings from the administration’s proposal to eliminate these services to illegal immi- grants who apply for benefits after enactment of fed- eral welfare reform. C-38 C – 144 Health and Social Services Analysis Page 5. Elimination of Optional Services. We find that (1) the proposal could place an additional burden on county indigent health programs, and (2) the department’s savings estimate probably is optimistic because federal law requires Medi-Cal to provide necessary transporta- tion services. C-38 6. Beneficiary Copayments Proposal Should Be Modi- fied. Reduce Item 4260-101-0001 by $5,527,000. Recom- mend that the Legislature modify budget proposal to assume collection of beneficiary copayments by (1) reducing the dispensing fee for all prescriptions, irre- spective of whether copayments can be collected, and (2) exempting physician and clinic services from copayments to avoid potential primary care access and cost-shifting problems. C-40 7. Budget Proposes Distinct Part Facility Rate Reduc- tion. The budget assumes passage of federal legislation to repeal the Boren amendment, thereby allowing the state to reduce hospital-based distinct part nursing facility rates. C-43 8. Nursing Facility Contracting Program Could Result in Savings. Reduce Item 4260-101-0001 by $10,000,000 and increase Item 4270-001-0001 by $175,000. Recom- mend legislation to establish a contracting program for nursing facilities similar to the one currently in place for hospitals. C-44 9. Expansion of Assisted Living Could Result in State Savings. Recommend that the Department of Health Services report on the feasibility of expanding the as- sisted living model of service delivery in order to allow the provision of certain medical services to bene- ficiaries in less restrictive residential settings, and at lower costs. C-47 Findings and Recommendations C – 145 Analysis Page 10. Need Additional Information on Family Planning Proposal. Withhold recommendation on the $20 million proposed to establish the family planning program, pending review of additional information. C-48 11. Strategic Plan Implementation Proceeds. The depart- ment’s strategic plan to expand managed care services is projected to enroll over half of all Medi-Cal benefi- ciaries in a managed care arrangement by the end of 1996-97. C-54 12. Targeting AFDC-Linked Beneficiaries Ignores Dem- onstrated Savings Potential. Recommend that the Leg- islature include newly enrolled SSI\/SSP-linked benefi- ciaries in managed care expansion in order to maxi- mize savings potential. C-56 13. Budget Does Not Reflect Workload-Related Reduc- tions Due to Managed Care Expansion. Reduce Item 4260-101-0001 by $3,280,000. Recommend reducing the General Fund amount by $3.3 million to account for the workload-related reductions in field office staffing and claims processing expenditures due to expansion of managed care arrangements. C-57 14. Quality Review Contract Overbudgeted. Reduce Item 4260-001-0001 by $274,000. Recommend the amount proposed to contract for managed care quality reviews be reduced by $274,000 in order to account for the ef- fect of delays in implementing managed care. C-58 Public Health 15. Legislature Needs Increased Role in Proposed Teen Pregnancy Prevention Initiative. Recommend enact- ment of legislation specifying criteria for the proposed allocation of teenage pregnancy prevention grants in order to ensure that grants are awarded in a manner consistent with legislative intent. Recommend that the C-60 C – 146 Health and Social Services Analysis Page department report at budget hearings on how it plans to coordinate the proposed new program and an exist- ing teenage pregnancy prevention program. Further recommend the adoption of Budget Bill language re- quiring that the department contract for an evaluation of the teenage pregnancy prevention media campaign. 16. Shelter Program Staff Not Justified. Reduce Item 4280-001-0001 by $250,000. Recommend deleting four positions because they are not justified on a workload basis. C-64 17. Department’s Plan to Evaluate Program Should Be Reviewed By Legislature. Recommend that the depart- ment report at budget hearings on (1) its plan to evalu- ate the Battered Women Shelter Program and (2) the feasibility of expanding the evaluation to encompass the newly proposed prevention component of the pro- gram and the related domestic violence program ad- ministered by the Office of Criminal Justice Planning. C-65 18. AIDS Drug Assistance Program Faces Potential Short- fall. Withhold recommendation, pending review of updated expenditure data. Recommend that the depart- ment report, during budget hearings, on whether it intends to add two recently-approved drugs to the ADAP drug formulary and, if so, how this will affect program costs. Finally, we present some options that could reduce the costs of the program. C-66 19. Statutory Authority for Appropriating Proposition 99 Funds Expires June 30, 1996. We identify several issues for the Legislature to consider in appropriating Propo- sition 99 funds for 1996-97. C-68 Findings and Recommendations C – 147 Analysis Page Managed Risk Medical Insurance Board 20. Legislative Oversight: The Access for Infants and Mothers Program Eligibility Expanded By Adminis- trative Decision. The Managed Risk Medical Insurance Board expanded the Access for Infants and Mothers (AIM) Program eligibility by increasing the income limit from 250 percent of the poverty level to 300 percent. C-75 21. The Access for Infants and Mothers Program Overbudgeted in Current and Budget Years. (Reduce Item 4280-001-0309 by $5,460,000.) Recommend reduc- ing the proposed level of spending for the AIM Pro- gram by $15.5 million in the current year and $5.5 million in the budget year, for a corresponding savings to the Perinatal Insurance Fund, to reflect more realistic caseload growth. C-76 22. Fund Reserve Excessive. Recommend that the budget be adjusted to reflect a 5 percent reserve in the Perina- tal Insurance Fund (AIM Program) and that the excess balances (up to $33 million) be reverted from the Peri- natal Insurance Fund to the Cigarette and Tobacco Products Surtax Fund because these funds are not needed to support the AIM Program in 1996-97. This action would make these funds available for appropria- tion to support Proposition 99-funded programs. C-78 Department of Developmental Services 23. Federal Funds Available for Early Start\/Part H Pro- gram. Reduce Item 4300-101-0001 by $4,178,000. Rec- ommend a reduction of $4.2 million from the General Fund for support of the Early Start\/Part H program because federal funds are available to support the pro- gram. C-79 C – 148 Health and Social Services Analysis Page 24. Day Training Activity Center (DTAC) Program Dou- ble Budgeted. Reduce Item 4300-101-0001 by $1,011,000. Recommend reducing the General Fund amount budgeted for the Day Training Activity Center (DTAC) Program by $355,000 in 1995-96 and $1 million in 1996-97 to correct for double budgeting for clients being transferred from the Department of Rehabilita- tion. C-81 Department of Mental Health 25. Implementation Problems with the Sexually Violent Predator Program. Withhold recommendation on $22 million requested from the General Fund to imple- ment the program until the Department of Mental Health and other state agencies responsible for opera- tion of the program resolve significant implementation issues. C-82 26. Additional Peace Officers at Metropolitan State Hos- pital Are Not Needed. Reduce Item 4440-011-0001 by $2,139,000. Recommend deleting the proposed General Fund augmentation of $2.1 million for 53 positions because security requirements can be met with existing resources by more efficient use of available space. C-83 Department of Community Services and Development 27. Details Lacking on Program Implementation. Recom- mend that the department report during budget hear- ings on its plans to implement the Governor’s Mentor Initiative in order to facilitate legislative review. C-87 28. Federal Funds Should Replace General Fund Support for Mentor Initiative Program. Reduce Item 4700-101- 0001 by $1,250,000. Recommend a reduction of $1,250,000 from the General Fund because federal funds are available to support the program. C-87 Findings and Recommendations C – 149 Analysis Page Employment Development Department 29. Excess Special Fund Revenues Should Be Transferred to General Fund. Increase General Fund Revenues by $3,500,000. Recommend adoption of Budget Bill lan- guage to transfer the amount of the year-end balance in excess of $1 million from the Benefit Audit Fund (BAF) to the General Fund, because the revenues are not needed to support BAF expenditures, and it is ap- propriate to consider these revenues as fungible with the General Fund. C-89 30. Better Information Needed on Expansion of Targeted Industries Partnership Program. Withhold recommen- dation on $2.1 million, pending review of information from the Department of Industrial Relations. C-90 31. Budget Assumes Major Reductions in Federal Funds for Job Training and Employment Services Programs. The budget assumes a major reduction of $213 million in federal funds under the Job Training Partnership Act and $9 million in federal funds under the Wagner- Peyser Act in 1996-97, due to pending federal appropri- ations. Recommend that the department report during budget hearings on the potential impact of this reduc- tion and what efforts the department proposes to mini- mize this impact. C-91 Department of Rehabilitation 32. Fees and Copayments Could Raise Revenues to Serve Additional Vocational Rehabilitation Clients. Recom- mend that the department report at budget hearings on the feasibility of expanding the use of client fees and copayments for vocational services and the extent to which the additional revenues could be used to reduce the waiting list for rehabilitation services. C-93 C – 150 Health and Social Services Analysis Page Aid to Families with Dependent Children 33. Federal Welfare Reform Could Have a Significant Impact on Public Assistance Programs in California. We review the major provisions of the Congressional proposal, and estimate that it would result in a loss of $8 billion in federal funds to California over a five-year period. C-96 34. Assuming Federal Welfare Reform Creates Budgetary Risk. The budget for the AFDC Program proposes General Fund savings of $172 million in 1995-96 and $667 million in 1996-97 that require federal action. C-99 35. The Governor’s Budget Proposes to Reduce Grants in the AFDC Program. These changes result in combined General Fund savings and cost avoidance of $440 million. We review the Governor’s proposals and comment on them. C-100 36. Evaluating the Proposals to Reduce AFDC Grants. The Governor’s proposed grant reductions will result in significant savings and increase the financial incen- tives for recipients to work. We conclude that while some families will be able to compensate for the grant reductions through work, others will find this difficult due to low levels of education and employment experi- ence, as well as a potential lack of job opportunities. C-103 37. Governor Proposes to Redesign the Welfare System. The Governor proposes to redesign the Aid to Families With Dependent Children (AFDC) Program, effective in 1997-98. The proposed redesign would replace the existing AFDC Program with four new programs. We summarize the Governor’s welfare reform proposal and comment on it. C-105 Findings and Recommendations C – 151 Analysis Page 38. Evaluating the Governor’s Proposal to Redesign the AFDC Program. We believe that the Governor’s pro- posal is a useful starting point for the Legislature’s deliberations on welfare reform. Little is known, how- ever, about whether proposals such as the flat grant and time-limited eligibility would result in a significant increase in the number of welfare recipients who ob- tain employment. We recommend that the department submit a report, prior to budget hearings, that esti- mates the fiscal effect of the proposal. C-110 39. Budget Underestimates Savings From Franchise Tax Board Program. Reduce Item 5180-101-0001 by $5,300,000. Recommend that the budgeted level of child support collections for AFDC families be increased to more accurately reflect the most recent data for the program, for a General Fund savings of $6.2 million in 1995-96 and $5.3 million in 1996-97. C-117 40. Proposed Child Support Court Commissioner System Needs Implementation Plan. Withhold recommenda- tion on $19 million ($6.5 million General Fund) pro- posed to implement a commissioner-based child sup- port court system, pending receipt of an implementa- tion plan from the Department of Social Services. C-118 41. Budget Does Not Reflect Savings from Expanded License Match Program. Reduce Item 5180-101-0001 by $26,000,000. Recommend that the budget’s estimate of child support collections be adjusted to reflect the impact of expanding the State Licensing Match System, for a General Fund savings of $26 million in 1996-97. C-119 Foster Care 42. Budget Should Reflect Additional Revenue and Sav- ings. Increase General Fund Revenues by $172,000 and reduce Item 5180-101-0001 by $317,000. Recom- mend that the budget reflect General Fund revenues of C-120 C – 152 Health and Social Services Analysis Page $172,000 and expenditure reductions of $317,000 antici- pated from the proposed continuation of foster care group home audits. 43. Reduce Foster Care Appropriation to Correct Techni- cal Error. Reduce Item 5180-101-0001 by $1,312,000. Recommend a reduction of $1.3 million from the Gen- eral Fund because a technical error in calculating the state share of cost resulted in overbudgeting. C-120 44. Budget Does Not Reflect Savings Anticipated From an Increase in Federal Funds. Reduce Item 5180-101- 0001 by $485,000. Recommend a reduction of $485,000 in the Foster Care Program to reflect an increase in federal funds due to the anticipated change in the fed- eral\/state cost sharing ratio. C-121 45. Department Will Not Meet Deadline for Report on a Revised Foster Care Rate Setting System. Recommend that the department report during budget hearings on the status of its efforts to develop a revised foster care rate setting system, as required by the Legislature. C-121 46. Flexibility in Use of Foster Care Funds Could In- crease Family Reunifications. Recommend legislation to establish a pilot program whereby counties could use state foster care funds to provide ongoing support services to children and their families after reunifica- tion. C-122 47. Closure of County Probation Facilities Could Lead to Increases in Foster Care Costs. Possible closure of ju- venile camps and ranches could result in higher case- loads and costs in the Foster Care program. C-123 Findings and Recommendations C – 153 Analysis Page Supplemental Security Income\/ State Supplementary Program 48. Assumed Federal Law Changes Create a General Fund Risk. In the SSI\/SSP, the budget proposes Gen- eral Fund savings of $102 million in 1995-96 and $512 million in 1996-97 that are dependent on federal action to eliminate the maintenance-of-effort requirement and restrict eligibility. The budget assumes that this will be achieved by the enactment of federal welfare reform. C-124 49. Budget Proposes to Make Temporary Reductions Per- manent. By proposing to make past grant reductions permanent and deleting the requirement to restore the statutory cost of living adjustment, the budget would achieve a General Fund cost avoidance of $777 million. C-125 50. SSI\/SSP Budget Internally Inconsistent. Reduce Item 5180-111-0001 by $34,052,000. Recommend technical adjustment in the amount proposed for SSI\/SSP grants because the savings from eliminating SSI\/SSP benefits for noncitizens, pursuant to budget’s own assumption of federal welfare reform legislation, have been under- estimated. C-127 51. Governor Proposes to Deny General Assistance to Noncitizens. The Governor proposes legislation to pro- hibit counties from providing General Assistance to those noncitizens who lose eligibility for federal bene- fits as a result of federal welfare reform. C-127 County Administration of Welfare Programs 52. Statewide Fingerprint Imaging System Needs Further Review. Withhold recommendation pending receipt of additional information from the Health and Welfare Data Center (HWDC). C-128 C – 154 Health and Social Services Analysis Page 53. Welfare Automation Projects Transferred to the HWDC. Please refer to our analysis of the HWDC’s budget. C-129 54. Proposal to Prohibit General Assistance for Noncitizens. If enacted into law, federal welfare reform could result in the denial of Supplemental Security Income\/State Supplementary Program and Food Stamps to legal noncitizens. The Governor proposes to prohibit counties from providing General Assistance as well. C-131 55. Budget Exceeds Projected Spending Based on Recent Trends. Reduce Item 5180-141-0001 by $8,883,000. Rec- ommend that a proposed expenditure for unidentified activities ($8.9 million General Fund) be deleted be- cause the budget is in excess of projected county spending in 1996-97. Further recommend that the Leg- islature consider redirecting the savings to expand the Greater Avenue for Independance Program because of its demonstrated effectiveness in increasing participants employment and earnings. C-131 56. Administration of Food Stamps Program is Overbudgeted. Reduce Item 5180-141-0001 by $9 million. Reduce proposed expenditures for county administration of the Food Stamps Program because the budget overstates the caseload (assuming federal welfare reform is enacted). C-133 Child Welfare Services 57. Child Welfare Services Program Needs Improvement. Recommend that the Department of Social Services (1) comment during budget hearings on the findings of our report regarding the performance of the CWS Pro- gram and (2) report on what efforts can be made to improve the program. C-134 Findings and Recommendations C – 155 Analysis Page Adoptions 58. Information Needed for Proposed Staff Increase. Withhold recommendation on General Fund expendi- tures of $626,000 for 14 new positions in the depart- ment’s adoptions branch, pending receipt of additional information. C-140 59. Details Lacking on Implementation of Performance Agreements. Recommend that the department report during budget hearings on its plans to implement per- formance agreements with county adoption agencies. Further recommend that, if the proposal is adopted, the Legislature require that performance agreements also be established with state adoption agencies. C-140 Community Care Licensing 60. Proposed Staffing Increase Does Not Reflect Efficien- cies From Automation. Reduce Item 5180-001-0001 by $586,000. Recommend that the Legislature delete 13 of the 54 proposed positions for a General Fund savings of $586,000, because the budget does not reflect effi- ciencies resulting from automation. C-142 ”

“[image: http:\/\/www.lao.ca.gov\/lao_images\/LAO_Web_Banner.gif] [bookmark: _GoBack] LAO Analysis of the 1995-96 Budget Bill Health and Social Services [bookmark: A34]Aid to Families With Dependent Children (5180) The Aid to Families with Dependent Children (AFDC) Program provides cash grants to families and children whose incomes are not adequate to meet their basic needs. Families are eligible for the AFDC-Family Group (AFDC-FG) Program if they have a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. Families are eligible for grants under the AFDC-Unemployed Parent (AFDC-U) Program if they have a child who is financially needy due to the unemployment of one or both parents. Children are eligible for grants under the AFDC-Foster Care (AFDC-FC) Program if they are living with a foster care provider under a court order or a voluntary agreement between the child’s parent and a county welfare or probation department. The budget proposes total expenditures of $6.4 billion ($2.5 billion General Fund, $0.5 billion county funds, and $3.4 billion federal funds) for the AFDC Program in 1996-97. This is a decrease of 8.7 percent (17 percent General Fund) from estimated expenditures in the current year. This decrease is due to proposed grant reductions, implementation of past grant reductions that have been delayed, and the assumed enactment of federal welfare reform. [bookmark: A35]Current-Year Update of AFDC Program [bookmark: A36]Major Changes in 1995-96 Statewide and Regional Grant Reductions. The 1995-96 budget trailer bill legislation for welfare programs–Ch 307\/95 (AB 908, Brulte)– reduced AFDC grants by 4.9 percent, with an additional 4.9 percent reduction for recipients residing in low-cost counties (as measured by rental housing costs), effective October 1995. The Budget Act assumed that the 4.9 percent statewide grant reduction would generate a General Fund savings of $101 million in 1995-96 and that the 4.9 percent regional grant reduction in low-cost counties would generate an additional savings of $40 million. The high-cost counties are Alameda, Contra Costa, Los Angeles, Marin, Monterey, Napa, Orange, San Diego, San Francisco, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, and Ventura. The statewide 4.9 percent reduction terminates June 30, 1996, and the regional reduction to recipients living in low-cost counties is ongoing. Implementation of these grant reductions requires either a federal waiver of regulations or a change in federal law. Although there has been no enabling federal action to date, the Governor’s Budget assumes the enactment of federal welfare reform legislation that will permit the reductions to be implemented in March 1996. The budget reflects a revised General Fund savings of $63 million (down from $141 million) in 1995-96 from the grant reductions. Greater Avenues for Independence (GAIN) Program. Budget trailer bill legislation–Ch 306\/95 (AB 1371, Weggeland)–modified the GAIN Program to place a greater emphasis on employment. The budget reflects a General Fund savings of $8 million in 1995-96 and $17 million in 1996-97 from these changes. Edwards v. Carlson. Beginning in 1992-93, the Edwards v. Carlson decision required the state to provide higher AFDC grants in specific cases (certain children residing with caretaker relatives). In 1995, the U.S. Supreme Court reversed this lower court decision. The 1995-96 budget legislation eliminates the grant differential for a General Fund savings of $9.5 million in 1995-96 and $10.4 million in 1996-97. [bookmark: A37]Pending Federal Legislation [bookmark: A38]Federal Welfare Reform If enacted, federal welfare reform could have a significant impact on California. We review the congressional proposal, and estimate that the major provisions would result in a loss of $8 billion in federal funds to California over a five-year period. In December 1995, Congress approved the Conference Report for H.R. 4–The Personal Responsibility and Work Opportunity Act of 1995. The President, however, subsequently vetoed the measure. Despite the presidential veto, many observers believe that the President and Congress will ultimately reach agreement on a welfare reform bill that will encompass a number of the major features of the congressional measure. The Governor’s Budget, in fact, assumes the enactment of the H.R. 4 provisions affecting the AFDC Program, the Supplemental Security Income\/State Supplementary Program (SSI\/SSP), and Child Welfare Services. Consequently, we summarize these and related components of the Congressional measures. AFDC\/Temporary Assistance for Needy Families. The major provisions include the following: \u00b7 Block Grant and Maintenance of Effort. The existing entitlement program is replaced with a Temporary Assistance for Needy Families (TANF) block grant, which would be fixed at federal fiscal year (FFY) 1995 spending levels ($3.73 billion annually for California) from FFY 96 through FFY 01. Receipt of the block grant is contingent upon a maintenance-of-effort (MOE) requirement that state spending on welfare programs remain at 75 percent of the FFY 94 level. \u00b7 Elimination of Entitlement. By eliminating AFDC as an entitlement, states will have flexibility to redesign their welfare systems, thereby determining who is eligible for benefits, the duration of benefits (within certain limits), and the amount of benefits. The existing MOE requirement on grant levels would be eliminated, thereby allowing the state to reduce grants as provided in the current- and prior- year budget acts and as proposed for 1996-97. \u00b7 Work Requirements. The H.R. 4 requires that states have an increasing percentage of their welfare caseload (families with children over age one) engaged in work or some other type of qualified job training or job search activity. The overall caseload requirement is 15 percent in FFY 96, increasing to 50 percent by FFY 02. For two-parent families, the requirement is 50 percent in 1996 and increases to 90 percent by FFY 99. Failure to meet work participation requirements subjects a state to an annual penalty equal to 5 percent of their block grant. \u00b7 Time Limits. The H.R. 4 establishes a five-year time limit on families for receipt of cash assistance; however, states are permitted to exempt 15 percent of the caseload from this requirement due to hardship. SSI\/SSP. The major changes in this program include the elimination of benefits for certain disabled children and the elimination of the state’s MOE requirement. This latter change would enable the state to reduce grants, as provided in the 1995 Budget Act. Restricting Welfare Benefits for Noncitizens. Effective January 1, 1997, legal noncitizens that were in the United States at the time of enactment of the measure–with certain exceptions for veterans, refugees, and those who have worked 40 quarters–are ineligible for SSI\/SSP and food stamps. Also effective January 1, 1997, states may determine the eligibility of such legal noncitizens for benefits under the TANF Program, the Title XX Social Services Block Grant, and the Medicaid Program. Noncitizens arriving after enactment of this measure, with certain exceptions for veterans and refugees, are ineligible for all means-tested federal benefits for five years, except for emergency medical services and certain child nutrition programs. Food Stamps. The major food stamps provisions (1) reduce the maximum food stamp benefit by 3 percent due to a change in the calculation of the \”thrifty food plan,\” (2) freeze certain deductions from income used in determining food stamp benefits, (3) expand work requirements for physically and mentally fit individuals between the ages of 18 and 50, and (4) offer the states an option of receiving funds in a food assistance block grant. In order to participate in the block grant program, California must either (1) adopt a statewide electronic benefit transfer (EBT) system, or (2) pay the federal government for the difference between its food stamp error rate and 6 percent of the total amount of food stamp benefits provided to the state. Block Grant to States for the Protection of Children. The major provisions of this component of H.R. 4 include the following. \u00b7 Block Grant. The measure replaces existing categorical programs with a block grant. The programs include Child Welfare Services, Family Preservation and Support, Independent Living, and administration for Foster Care and Adoptions Assistance. The nationwide block grant amounts are specified for FFY 97 through FFY 02 and are increased annually based on specified percentages. States may receive additional funds which are subject to federal appropriation. The nationwide appropriation for the additional funds is limited to $325 million annually. The state’s share of the block grant and additional funds is determined by formula, based on past-year expenditures. During the first two years of the block grant, states must maintain their spending at 100 percent of the amount spent in FFY 94, and must maintain spending at 75 percent in the remaining years. \u00b7 Foster Care and Adoptions Assistance. These grants would remain as entitlement payments. However, a MOE requirement, identical to the provision described above, would be established for these programs. Fiscal Impact on California. We estimate that the provisions pertaining to the TANF, SSI\/SSP, and noncitizens would result in a loss of federal funds of about $8 billion over five years, compared to what the state would receive under current law. This includes a $700 million loss in federal funds in 1996-97. We estimate that the fiscal effect of the Child Protection Block Grant would result in a gain in federal funds of $83 million over five years. This includes a loss of $16 million in 1996-97. The net five-year gain is generally due to a low caseload growth trend in California, relative to the nation as a whole. [bookmark: A39]National Governors’ Association Welfare Reform Proposal In February 1996, the National Governors’ Association submitted a proposal that included welfare reform. The proposal included provision for a block grant as well as other components of the Congressional proposal. The Governors proposed the following major changes to H.R. 4: (1) adding $4 billion in child care funding, (2) increasing by $1 billion the contingency fund to assist states experiencing high unemployment, (3) raising the permissible exemption on the five-year lifetime limit on eligibility from 15 percent to 20 percent of the caseload, (4) providing states an option to receive foster care funds as a capped entitlement which may be transferred into the Child Protection Block Grant, and (5) delaying the effective date for restrictions on SSI disabled children until January 1, 1998. The association indicated that the Governors did not reach consensus on the issue of restricting welfare benefits for noncitizens. [bookmark: A41]Governor’s 1996-97 Welfare Proposals [bookmark: A42]Governor Assumes Welfare Reform Will Be Enacted Into Law The budget for the AFDC Program proposes General Fund savings of $172 million in 1995-96 and $667 million in 1996-97 that require federal action. The budget assumes that this will be achieved by enactment of federal welfare reform. As Figure 26 (see next page) shows, the Governor’s Budget proposes over $800 million in General Fund savings, in the current and budget years, that are predicated on enactment of federal welfare reform legislation. These savings can be grouped in three categories. First, federal welfare reform (the version passed by Congress, but vetoed by the President) will enable California to implement previous grant reductions as well as the Governor’s proposed 4.5 percent reduction for 1996-97. Second, welfare reform will permit the state to implement existing state policies to bar sponsored aliens from receiving AFDC and to prohibit grant increases for children born while a family is on aid (the Maximum Family Grant provision). Finally, the budget indicates that under the proposed block grant, California will receive more federal funds than it would receive under the current federal sharing system, assuming that the state enacts the Governor’s proposals to reduce grants by 4.5 percent and makes certain past grant reductions permanent that under current law are temporary. Figure 26 State Savings Dependent on Federal Action AFDC Program Governor’s Budget (In Millions) Budget Proposal 1995-96 1996-97 Previous budget actions 1994-95 2.3 percent grant reduction $22 $44 1995-96 regional 4.9 percent grant reduction 20 58 1995-96 statewide grant reduction 43 — Barring sponsored aliens — 28 Maximum family grant — 4 New proposals Make statewide 4.9 percent reduction permanent — 129 1996-97 4.5 percent grant reduction — 111 Savings from federal block grant 82 299 Child support provisions–federal welfare reform 1 -14 Foster care emergency assistance funds–federal welfare reform 4 8 Totals $172 $667 [bookmark: A44]Budget Proposes AFDC Aid Payment Reductions The Governor proposes to (1) make the 1992-93 and the 1995-96 statewide grant reductions permanent, (2) eliminate the statutory cost of living adjustment, and (3) reduce AFDC grants by 4.5 percent, resulting in General Fund savings or cost avoidance of $440 million. We review the Governor’s proposals and comment on them. The Governor’s Budget proposes several major changes that would reduce grants in the AFDC Program. As Figure 27 shows, these changes would result in combined General Fund savings and cost avoidance of $440 million, under the existing state and federal cost sharing, or $876 million if federal funds were provided as a block grant. General Fund savings and cost avoidance would be greater under the block grant system because federal funding would be fixed and the state would no longer share the savings (or costs) of any change in grant levels with the federal government. Figure 27 Governor’s AFDC Grant Proposals General Fund Savings 1996-97 (In Millions) Fiscal Effect Under Proposal Existing State\/Federal Sharing Federal Block Grant Make permanent the statewide 4.9 percent grant reduction $129 $256 Make permanent the 5.8 percent grant reduction 165 327 Delete requirement to restore statutory COLA 37 73 Reduce grants by 4.5 percent 111 221 Totals $440 $876 The budget contains three separate proposals that would have the effect of reducing AFDC grants below the levels required by current law. These proposals are to (1) make permanent the temporary 5.8 percent grant reduction enacted in 1992-93 and the one-year statewide 4.9 percent grant reduction enacted in 1995-96, (2) delete the requirement to resume the statutory COLA that was suspended in 1991-92, and (3) reduce grants by an additional 4.5 percent. Budget Proposes to Make Temporary Grant Reductions Permanent. Budget trailer bill legislation for 1992-93 reduced AFDC grants by 5.8 percent and specified that this reduction would remain operative until July 1, 1996. As noted above, budget trailer bill legislation for 1995-96 reduced grants by 4.9 percent statewide, with an additional 4.9 percent reduction for recipients residing in low-cost counties. The statewide reduction terminates on June 30, 1996. The Governor proposes to make both of these temporary reductions permanent, for a General Fund cost avoidance of $294 million (assuming existing state\/federal sharing ratios). Budget Proposes Deleting Requirement to Resume Statutory COLA. The 1991-92 budget trailer bill legislation suspended the statutory COLA for AFDC grants through the end of 1995-96. In deleting the requirement to restore the COLA (1.48 percent for 1996-97), the budget achieves a General Fund cost avoidance of $37 million in 1996-97. Budget Proposes to Reduce Grants by 4.5 Percent. The budget proposes to reduce grants by 4.5 percent, for a General Fund savings of $111 million in 1996-97. As is the case for the current-year grant reductions, this proposed reduction would require a waiver or a change in federal law because it would reduce the maximum grant below the federally required MOE level. The reduction would be effective July 1, 1996. Figure 28 summarizes how both current law provisions and the Governor’s proposals would affect monthly grants for a family of three in 1996-97. As the figure shows, the proposed 1996-97 maximum grant level in Region 1 (counties with high rental costs) is $540, or $67 below the current-year level ($607) and $103 below the level required by current law ($643). In Region 2, the proposed grant level is $514, or $93 below the current-year level ($607) and $99 below the current law requirement ($613). These grant reductions would be partially offset by increases in food stamps. Figure 28 AFDC Maximum Monthly Grant Family of Three Current Law and Governor’s Proposal Current Law Governor’s Proposal Region 1: High-cost counties 1995-96 actual grant $607 $607 1996-97 grant assuming: Implement 1994-95 2.3 percent reduction a 594 594 Make permanent 1995-96 4.9 percent reduction a — 565 Restore 1992-93 5.8 percent reduction 633 — Restore COLA 643 — Adopt proposed 4.5 percent reduction a — 540 Region 2: Low-cost counties 1995-96 actual grant $607 $607 1996-97 grant assuming: Implement 1994-95 2.3 percent reduction a 594 594 Implement 1995-96 regional 4.9 percent reduction a 565 565 Make permanent 1995-96 statewide 4.9 percent reduction a — 538 Restore 1992-93 5.8 percent reduction 604 — Restore COLA 613 — Adopt proposed 4.5 percent reduction a — 514 a Requires federal approval. [bookmark: A1]Evaluating the Proposals to Reduce AFDC Grants The Governor’s proposed grant reductions will result in significant savings and increase the financial incentives for recipients to work. We conclude that while some families will be able to compensate for the grant reductions through work, others will find this difficult due to low levels of education and employment experience, as well as a potential lack of job opportunities. In presenting his proposals, the Governor has offered several reasons why these changes are needed, including (1) the need to promote personal responsibility, (2) the need to reinforce the premise that AFDC is a temporary program, and (3) the need to make work an attractive alternative to AFDC. These are reasonable premises; but in evaluating the proposals, the Legislature needs to weigh the identified budgetary savings to government against its policy objectives for the AFDC Program and the potential impact of the proposed changes on needy families. Fiscal Impact on Government. The budget estimates that the proposed reforms will result in significant savings to the state. In 1996-97, combined General Fund savings and cost avoidance are estimated to be $440 million under existing federal sharing ratios. The savings would be offset, by an unknown amount, to the extent that the reductions in grants leads to an increase in the use of other public services such as health and foster care. Impact on Families. The grant reductions proposed by the Governor would reduce the resources available to many families. We note that currently, the combined maximum monthly grant and food stamps benefit ($838) for a family of three is equal to about 80 percent of the poverty guideline. Under the Governor’s proposal, families in Region 1 would have their resources reduced to $792 or about 75 percent of the poverty guideline. Families in Region 2 would have their resources reduced to $773 or about 74 percent of the poverty guideline. Increasing the Work Incentive. In The 1991-92 Budget: Perspectives and Issues, we concluded that the AFDC Program, as structured at the time, offered relatively little financial incentive to work. There were two main sources of the work disincentives: (1) the grant levels when combined with food stamps often were higher than what could be earned by recipients through low-wage employment and (2) program rules allowed working recipients to retain, at best, only a small part of each increment of income. In addition, recipients who worked were likely to weigh the possible loss of Medi-Cal benefits (after a transition period) if they lost AFDC eligibility. Since then, the combination of grant reduction (14 percent since 1990-91), rule changes, and an increase in the federal earned income tax credit have, to some extent, mitigated these problems; and the additional grant reductions proposed by the Governor could further increase the financial incentive to work. It is impossible to predict with accuracy, however, the degree to which these proposals will induce more AFDC recipients to work. Those nonworking recipients who do not compensate for the grant reductions through an increase in earnings will suffer a reduction in their standard of living. This reduction will be significant, recognizing that these families’ incomes are currently below the federal poverty guidelines. It is therefore important, in assessing the impact of the budget proposal, to consider the extent to which AFDC recipients can obtain employment given their education levels and employment experience. Are AFDC Recipients Work-Ready? In spite of the increased work incentives provided under the Governor’s proposals, AFDC recipients are likely to face several obstacles to employment, including lack of training and low education levels and work experience. Lack of employment-related skills, including low educational attainment, is often cited as a major impediment to AFDC recipients returning to the labor force. Some studies show that low educational attainment is associated with a higher probability of staying longer on assistance. The GAIN Program is California’s primary employment training program for AFDC recipients. It is a more complex program and is more expensive per participant than most previous programs. The program, however, is not funded at a level sufficient to accommodate all \”mandatory\” and voluntary participants. In fact, the Department of Social Services (DSS) estimates that only 21 percent of \”mandatory\” GAIN cases were served in 1994-95. An independent evaluation of the GAIN Program found it to be the most successful welfare to work program ever studied, both from the standpoint of increasing earnings for long-term AFDC recipients as well as from a cost-benefit perspective. However, the evaluation found that even in the most successful county (Riverside), 47 percent of the AFDC-FG GAIN participants were still on aid after two years and 37 percent had not been employed at any time during the first two years of the evaluation. Finally, we note that the economy plays an important role in the ability of AFDC recipients to obtain jobs. The recent recession suggests that AFDC recipients may find it difficult to obtain employment if the economy’s recovery is not sustained. In summary, the relatively low level of education and employment experience of the typical AFDC parent, combined with limited job opportunities, suggests that it may not be possible for many nonworking adult AFDC recipients to fully compensate for the proposed grant reductions by obtaining a job in the private sector. [bookmark: A2]Governor’s 1997-98 Welfare Proposal [bookmark: A3]Governor Proposes to Redesign the Welfare System The Governor proposes to redesign the welfare system in California, effective in 1997-98. The proposed redesign would replace the existing AFDC Program with four new programs. We summarize the Governor’s welfare reform proposal and comment on it. The Governor proposes legislation to redesign the AFDC Program, effective in 1997-98. Key Program Changes. Figure 29 (see next page) compares the existing AFDC Programs to the Governor’s proposal. The new program includes the following major changes: \u00b7 Eligibility Expanded to Additional Two-Parent Families. Under current law, low income two-parent families are eligible for the AFDC-U Program if the primary wage earner is unemployed when applying for aid and has worked for a specified amount of time prior to applying. The Governor proposes to eliminate these restrictions. \u00b7 Need Standards Replaced by Single Work Equivalency Benchmark. The \”need standard\”–the maximum income a household may have while maintaining eligibility–would be replaced by a Work Equivalency Benchmark. Unlike the need standard, which increases with family size, the new benchmark would be fixed at a constant level. The level is not specified, but would generally be based on the income and benefits available to low income working families. Recipients would be able to work and continue to receive a grant as long as total earnings are below the benchmark. \u00b7 Flat Grants. The maximum grant level is not specified. Similar to current law, the maximum grant would be set at a level below the Work Equivalency Benchmark. In contrast to the current benefit structure, however, grant levels would not increase with family size. The grant would be the Work Equivalency Benchmark less the recipient’s income, up to the maximum grant level. Under current law, about one-third of the recipient’s earnings is excluded from this calculation. \u00b7 Performance-Based Local Administration. The state would establish minimum standards for eligibility, benefits, maximum time on assistance, and performance-based outcome measures. The state would contract for local administration. Figure 29 AFDC Program Current Law and Governor’s Proposal for 1997-98 Current Law Governor’s Proposal Eligibility Family Size\/Work History \uf0b7 AFDC-Family Group: one-parent families. \uf0b7 AFDC-Unemployed Parent: two-parent families; primary wage earner must be unemployed when applying for aid and must have a work history. \uf0b7 Four separate programs, depending on specified characteristics of recipients. \uf0b7 Eliminates restrictions on eligibility of two-parent families. Income threshold Based on Need Standard: \uf0b7 Varies with family size. \uf0b7 Grant plus income (excluding $30 and one-third of earnings) cannot exceed need standard. Based on unspecified Work Equivalency Benchmark: \uf0b7 Does not vary with family size. \uf0b7 All income counts when computing grant. Assets Cannot exceed specified levels. Unspecified limits. Time Limits No limit on eligibility. (After two years from commencing the GAIN Program, recipients must accept a work slot if provided by county, or grant is reduced. \uf0b7 Two years for cases in the Ready-to-Work Program, but clients may be transferred to the Family Transition Assistance Program (five-year total time limit) if significant employment barriers are identified. \uf0b7 Five years for other recipients, but may be extended in certain cases (disability, for example). Maximum Grant Set at specified levels, below need standard. Set below Work Equivalency Benchmark– amount not specified. Varies with family size. Does not vary with family size Adjusted annually by statutory COLA, beginning in 1996-97. No statutory COLA. No increase for children born while on aid. Same. Cash grant for all recipients. Cash grant except for recipients in Family Transition Assistance Program, who receive vouchers or direct payments to providers, for specified services such as housing, transportation, and child care. Support Services Work-related expenses Provided, up to specified limit. Provided, up to unspecified limits. Child care Provided, up to specified limits. Provided, up to unspecified limits. Employment preparation GAIN Program–basic education, job search, and job training. Short-term assistance for work-ready families. Intensive services for others capable of wore TaTD> Teen parents Cal Learn Program–case management and bonuses\/sanctions for school performance. Teen Parent Support Program–primarily in-home counseling and guidance. Other services Provided through separate programs (food stamps, health services, drug treatment, mental health, etc.). Essentially the same, but may be provided with assistance of case management. Sanctions After two years from commencing GAIN, must accept job or work slot if offered by county, or grant is reduced. Automatic reductions to maximum grant at six months and one year for work-ready families. Loss of eligibility for noncooperation. New Programs. The four new programs are (1) the Ready-to-Work (RTW) Program, for those families in which an adult has been employed, (2) the Family Transition Assistance Program (FTAP), for parents without employment experience and teen parents under age 18, (3) the Disabled Family Assistance Program (DFAP), for families with a disabled child or parent, and (4) the Child-Only Assistance Program (COAP), for cases with no adult eligible for assistance. The programs are summarized below. Ready-to-Work Program. This program would serve adults with a work history or who are currently working. The DSS estimates that 59 percent of the existing caseload has a work history. The program would provide cash assistance in the form of a flat grant that is reduced after six months and again after one year, with a total time limit of two years. Local administering agencies would have the discretion to provide a 90-day exemption from grant reductions or from the two-year limit. The program would offer short-term employment services, child care, work-related expenses, and a voluntary program of support services for 18- and 19-year-old teen parents. After a preliminary appraisal at intake, progress evaluations would be conducted in order to identify barriers to employment at the end of six months, one year, and two years. There would be a three month maximum exemption from the two-year limit, or the grant reductions, for birth of a newborn. Family Transition Assistance Program. This program is designed for parents with no work history, and minor teen parents. The DSS estimates that this program would serve approximately 15 percent of the existing caseload. Instead of a cash grant, recipients would receive vouchers and other forms of non cash assistance. Case managers would provide assistance and may arrange for direct payment of rent and other necessities. Families would receive intensive employment and counseling services for the purpose of removing barriers to employment. Teen parents would be required to participate in a Teen Parent Support Program, which would include in-home counseling. There would be a five-year time limit. At the end of five years (or earlier if it is determined that the parent is not likely to benefit from further intervention), the case would be referred to a child welfare services professional to assess the capability of the parents to continue to care for their children. Disabled Family Assistance Program. This program would serve families where either the parent or child is disabled. The DSS estimates that approximately 10 percent of the caseload would be assigned to the DFAP. Work expectations would be based on the capability of the adult to participate in the labor market. Recipients would receive cash assistance for as long their disability prevents them from being self sufficient. Child-Only Assistance Program. This program is designed to serve two distinct populations: (1) children with parents who are not eligible for aid (such as undocumented persons) and (2) children living with adult relatives acting as the primary caretaker. The DSS estimates that approximately 16 percent of the caseload would be assigned to the COAP. Cash grants in this program would be lower than in the other programs because the grant is for the child only. For children with parents not eligible for aid, there would be a flat cash grant for the child, no support services, and a five-year time limit. For children with caretaker relatives, the grant would be based on the total number of children (not to exceed the Work Equivalency Benchmark), child care services would be provided, and there would be no time limit. Movement Between the Programs. Each program is designed to help participants become self-sufficient, with a recognition that disabled clients may not attain this goal. While recipients in the RTW would have a two-year limit on eligibility for aid, we note that local administrators would have the discretion to transfer them to the FTAP (where they would be subject to a five-year limit on total time on aid) if it is determined that the client is faced with significant barriers to employment. Conversely, recipients in the FTAP could be transferred to the RTW program if they obtain a labor force connection, such as through part-time employment. Figure 30 summarizes the key features of the three programs that are designed to assist families in becoming self-sufficient. The DSS estimates that these three programs would serve approximately 785,000 cases, or 84 percent, of the current caseload. The remainder of the caseload would be in the COAP, which is summarized in Figure 31 (see page 110). Administration. The state would contract for local administration, with counties given the first choice. If counties refuse, they would continue to pay their share of welfare costs, and the state would contract with cities, non profit corporations, other counties, or the private sector. Local administering entities would be funded on a per capita basis for each program, based on the number of eligibles and potentially other \”risk factors.\” Local administrators could contract with other organizations to provide various services, including eligibility determination. The department indicates that some type of fiscal incentives could be built into the contracts with the local administrators, based on a managed care model. In other words, if local entities succeed in moving clients into self sufficiency, they could achieve financial rewards. Counties would continue to administer the General Assistance program. Figure 30 Governor’s Proposed Redesign of the Welfare System Summary of Programs for Families with Adult Recipients Ready to Work Program Family Transition Assistance Program Disabled Family Assistance Program Target population Recipients with work history Recipients lacking work experience and teens Families with disabled parents or children Program size 546,000 cases 59 percent of caseload 139,000 cases 15 percent of caseload 92,000 cases 10 percent of caseload Focus of program Employment Intensive case management and services to overcome barriers to employment Within limits of their disability, help parents become self sufficient Type of aid Cash grant, reduced after six months and one year Vouchers and direct payments to service providers Cash grant Time limit Two years If local administrators identify barriers to employment, recipients may be transferred to FTAP Five years Parents unable to be self sufficient may receive benefits indefinitely Exemptions from time limits \uf0b7 Up to three months following birth of a child \uf0b7 Up to three months for cause, at the discretion of local administrator None Not applicable, program is not time limited Services provided \uf0b7 Short-term employment \uf0b7 Child care \uf0b7 Work-related expenses \uf0b7 Voluntary teen parent support services \uf0b7 Intensive employment \uf0b7 Child care \uf0b7 Work-related expenses \uf0b7 Mandatory teen support services \uf0b7 Case management, other services on referral \uf0b7 Employment services \uf0b7 Child care \uf0b7 Work-related expenses (including ancillary services) Figure 31 Proposed Redesign of the Welfare System Summary of Child-Only Assistance Program Target Populations Children With Ineligible Parents Children Living With Adult Relatives Other Than Parents Program size 110,800 cases 12 percent of caseload 36,288 cases 4 percent of caseload Focus of program Provide assistance to children with ineligible parents Assist relative caretakers Type of aid Flat cash grant Cash grant based on number of children Time limit Five years No limit Exemptions from time limits None Not applicable Services provided None \uf0b7 Child care \uf0b7 Needy caretaker relatives may receive other services if they are in RTW, FTAP, or DFAP [bookmark: A4]Framework for Evaluating the Governor’s Proposal We believe that the Governor’s proposal is a useful starting point for the Legislature’s deliberations on welfare reform. Little is known, however, about whether proposals such as the flat grant and time-limited eligibility would result in a significant increase in the number of welfare recipients who obtain employment. We recommend that the department submit a report prior to budget hearings that estimates the fiscal effect of the proposal. There appears to be substantial agreement among policymakers that one of the overarching goals of the AFDC Program is that it be structured so as to move adult recipients into stable employment as soon as possible. Beyond this basic goal, there is little consensus on the key elements that should be in a welfare program. We believe, however, that the following set of criteria could be used as a framework for evaluating the Governor’s proposals. Recipients Should Receive Aid in an Amount, and for a Period of Time, That Is Adequate to Give Them the Opportunity to Become Self-Sufficient. The Governor’s proposal does not specify the amount of the maximum grant or the Work Equivalency Benchmark (which is the maximum income a household could have and remain eligible for the program). While the Work Equivalency Benchmark is not specified, the administration indicates that it will generally be based on the income of a low-income working person (an average of $736 per month assuming the minimum wage). We note that the benchmark would not vary with family size, indicating that large families would have greater difficulty meeting their needs if they rely solely on income from grants. Similarly, the amount of the maximum grant is not specified, but would also be set at a fixed level that does not vary with family size. To get some sense of the potential impact of these changes, we note that in October 1994, an estimated 13 percent of families on AFDC had five or more persons in the household. As the Governor indicates, the flat grant (which does not vary with family size) is analogous to the fact that wages do not increase with family size; although, we note that working parents do receive some financial benefits for additional children through income tax deductions. The Governor’s proposal also provides for automatic grant reductions, at six months and one year, for recipients in the RTW Program. It is uncertain whether the automatic grant reductions for RTW families–particularly at six months–would provide sufficient aid, for a sufficient amount of time, to recipients. The fact that all of these household heads have, at some point within the past ten years, held a job does not mean that they are equally \”work-ready\” and will be capable of obtaining and holding a job for a sustained period of time after being on aid for six months. It is worth noting that even in the best-performing county studied in the recent GAIN Program evaluation, 47 percent of the participants were still on aid after two years. Regarding the duration of aid, we note that about 32 percent of the state’s AFDC cases have been on aid for a total time of five years or more. Thus, a five-year limit as proposed for FTAP represents a significant policy change. Given the lack of data on the impact of such a change, this policy entails some risk because if it does not result in increased employment among recipients, more families with children will be further below the poverty line. At the same, such a limit on eligibility could result in significant benefits if, by increasing recipients’ incentive to work, it leads to a large increase in the number of recipients who obtain employment. We note that in October 1994, about 10 percent of AFDC households reported earnings from employment. The two-year limit for RTW Program participants would have potential effects similar to the five-year limit, although program administrators would be authorized to refer these clients to the FTAP if they identify significant employment barriers. We note that in October 1994, an estimated 65 percent of the caseload had been on AFDC for more than two years. In assessing these proposals, job availability will be an important variable. The Employment Development Department (EDD) projects that approximately three million new jobs will be created in California between 1995 and 2005, or approximately 300,000 new jobs per year. The EDD further estimates that approximately one-half of these new jobs will be low-skilled jobs requiring one year or less of vocational preparation and eight years or less of education. The data, however, are not sufficient to determine whether the anticipated new jobs will be sufficient to reduce existing unemployment and absorb persons entering the labor force from California’s growing population as well as from the AFDC caseload. The System Should Include Work Incentives and Be Based on an Expectation That Recipients Make an Effort to Achieve Self-Sufficiency. The Governor’s proposal, particularly with the imposition of time limits on persons capable of working, is predicated on this criterion. The emphasis on effort on the part of parents is reinforced by the proposal to give administrators discretion to discontinue aid in the event of non cooperation with program requirements (presumably for reasons such as refusing drug treatment upon referral from a case manager). The Governor’s proposal includes various components designed to provide an incentive for recipients to become self-sufficient by seeking employment. These include the time limits, the flat grant, and the differential between the Work Equivalency Benchmark and the maximum grant. Regarding the latter factor, we note that it would operate similarly to current law, whereby the difference between the \”need standard\” and the maximum grant represents an amount that recipients can earn without these earnings offsetting their grants. We also note, however, that the Governor proposes to eliminate an existing work incentive feature of the AFDC Program–the \”$30 and one-third disregard.\” Under this rule, the first $30 of earned income plus one-third of remaining earnings are not counted as offsets to the grant. In addition, we note that the final report of an evaluation of recent maximum grant reductions and the \”$30 and one-third disregard\” in California, and their combined impact on increasing the percentage of AFDC recipients who work, is due to be submitted this spring. Preliminary results submitted two years ago showed some impact on AFDC-U recipients but virtually no impact on AFDC-FG recipients. Services Should Be Designed to Give Recipients an Opportunity to Achieve Self-Sufficiency. Generally, the Governor’s proposal recognizes the need to provide support services to AFDC families and to differentiate among the needs of these families. This is particularly true of the FTAP, which would provide intensive services, including case management. We note, however, that none of the programs would provide basic education services. This apparently is in response to the successful employment-focused approach adopted in the Riverside County GAIN Program. Research on the GAIN Program, moreover, did not find significant employment impacts from mandatory basic education, although the evaluators indicated that a longer-term analysis would be more appropriate because some of the beneficial effects may not materialize in the initial years. We also note that, like the existing program in California, the proposal makes no provision for case management services once a family goes off aid. Given the large number of AFDC families that go on aid more than once (estimated at 48 percent), the provision of such assistance should be given some consideration. The System Should Strike a Balance Between the Provision of Administrative\/Programmatic Flexibility and the Assurance of Equitable Treatment of Recipients. The proposal would give local program administrators significant flexibility to make key decisions regarding program services, time limits, and sanctions. Local administrators, for example, would have some discretion to reassign clients among programs, provide limited extensions to delay grant reductions or the two-year limit in the RTW program, and effectively extend the two-year time limit to five years by transferring clients from the RTW program to the FTAP. This flexibility permits local administrators to tailor their decisions to the individual needs of clients and to take into account differences in families’ circumstances. At the same time, it could result in treating similar clients differently because of differences in the administrators rather than the recipients. We believe that if the Legislature adopts the proposal, guidelines or regulations should be included in this area–for example, to better define the circumstances that would permit an RTW Program participant to be transferred to the FTAP. Conversely, we believe that the FTAP, in requiring that all non disabled adult recipients with no employment experience receive vouchers or other non cash aid rather than a cash grant, does not have sufficient administrative flexibility. The voucher provision rests on the premise that these recipients need some form of money management assistance. The proposal, however, does not recognize that many of these recipients–who are assigned to the program solely because they have not been employed within the past ten years when applying for aid–will have no more need for money management than will participants in the other program components. Similarly, recipients in the RTW Program would differ significantly with respect to their readiness for work, as noted above. Some could have relatively high levels of education and employment experience, while others could have relatively low levels. The System Should Be Administered Efficiently. Although relatively little detail has been provided regarding program administration, the Governor proposes to use a per-capita funding mechanism in the state’s contracts with local entities. This could be an innovative approach to welfare administration, but it will be important to ensure that the incentive system accounts for effectiveness (outcomes) as well as costs so that local administrators do not deny needed services in an effort to maximize their net revenues. In other words, the system should reward administrative agencies for moving recipients into jobs, as opposed to simply moving them out of the AFDC Program (and onto General Assistance, for example). We also point out that the use of vouchers and direct payments to providers, as proposed for the FTAP, will entail considerably higher administrative costs than the use of cash grants. The System Should Be Cost-Effective. Cost-effectiveness can be measured in different ways–from the perspective of the government, the taxpayer, or the society as a whole, for example. From the government’s perspective, the cost-effectiveness of the Governor’s proposal would depend primarily on the cost of the grants and services and the revenues from additional tax receipts to the extent that employment is increased, compared to these costs and revenues under the existing system. The costs of the Governor’s proposal cannot be estimated without additional information, including the levels proposed for the grants and the Work Equivalency Benchmark. Future costs, moreover, would depend on caseload levels as well as impacts on other state and county programs, which cannot be projected with any reliability primarily because little is known about the impact of provisions such as time limits. For the same reason, it is not possible to estimate the impact on revenues. We can predict, however, that the time limits would significantly reduce the state costs of grants and related administration, once these limits begin to take effect. The extent to which this translates into a shift of costs to the counties depends on the extent to which recipients obtain jobs rather than go onto General Assistance. As indicated, the initial costs of grant expenditures under the Governor’s proposal cannot be estimated until the grant levels are known. Likewise there is no estimate, at this time, of the cost of support services. These costs probably would be higher than current expenditures for AFDC-related services if, unlike the existing GAIN Program, the authorized services are fully funded. We can get some idea of the potential costs of support services in the RTW Program by utilizing data from the recent evaluation of the GAIN Program. Based on the orientation\/assessment and job search costs in the Riverside County GAIN Program, we estimate that providing these services to the anticipated RTW program caseload could exceed $675 million in the first year. This would be more than twice the current direct costs of the entire GAIN Program, which includes basic education and job training. These costs, moreover, exclude child care services, which also would likely exceed current-year spending. We note, however, that ongoing annual costs would be substantially reduced because in the first year, services would be needed for all existing cases referred to the RTW Program, whereas in subsequent years the services would be largely for new applicants. We believe that the cost of support services in the Family Transitional Assistance Program also would exceed the corresponding costs of services provided currently because of the provision of intensive case management and other services called for in the Governor’s plan. Further, the use of vouchers instead of cash grants is likely to increase administrative costs. In summary, it is not possible to estimate the fiscal effects of the proposal without additional information. The time limits, however, would result in significant long-term savings to the state and potentially a shift of costs to the counties, depending on the effect of the proposal on employment among AFDC recipients. We also note that a preliminary report from an evaluation of recently implemented time-limited welfare programs in three states indicates that the states are incurring significant net costs in the first year (for activities such as support services and automation), but it is too soon to determine longer-term impacts. In order to assist the Legislature in considering the Governor’s proposed redesign of the welfare program, we recommend that the department submit a report, prior to budget hearings, that estimates the fiscal effect of the proposal, including the cost of grants and support services, as well as the estimated savings from increased employment. Conclusion. While we have raised several areas of concern regarding certain aspects of the Governor’s proposal, we believe that it is a useful starting point for the Legislature’s deliberations on welfare reform. In summary, we draw the following conclusions regarding the proposal: \u00b7 Recognizing Differences Among Recipients. We believe that it makes sense to structure the successor to the AFDC Program in a way that takes into account the differences among recipients. Dividing the caseload into four programs is consistent with this concept, but we believe that the criteria established for the two major programs–the RTW and the FTAP–may be too inflexible in that there will be significant differences among families within and between each program, with respect to their readiness for work and their need for support services. \u00b7 Structuring Work Incentives. The proposal includes several elements designed to increase the work incentive, the most significant being the flat grant and time limits on eligibility. Little is known about the impact of such proposals. The time limits would result in significant state savings in AFDC grants. If they do not increase employment levels significantly, however, they could also result in a major shift of costs to other state programs and, in particular, to county programs. The potential shift of costs to counties would be mitigated to some degree by recent legislation (Ch 6\/96 [SB 681, Hurtt]) which permits counties to limit General Assistance to three months in any 12-month period, for persons considered employable. \u00b7 Impact on Children. Any sanctions against parents for failing to become self-sufficient will have consequences for their children. Thus, it is important to consider what happens to families when aid is reduced or discontinued due to time limits. Given the limitations on General Assistance, the final \”safety net\” for children may be the child welfare system. In fact, under the Governor’s proposal, families that reach the five-year time limit would be referred to a child welfare professional for an assessment of the capability of the parents to continue to care for their child. The proposal, however, does not address the potential consequences–both to children and to the child welfare programs–of such assessments. \u00b7 Support Services. The proposal provides for support services in order to help recipients achieve self-sufficiency. The provision of case management and other services, if needed, for all FTAP participants represents a significant change from current law. While additional information is needed, there is some evidence that under the proposal the cost of support services would be significantly higher than under current law, if the proposed program is fully funded. \u00b7 Cost-Effectiveness. Because (1) the grant levels are not specified and (2) the long-term impact on employment levels cannot be predicted, we cannot estimate the cost-effectiveness of the proposal. Finally, we note that the proposal to redesign the AFDC Program serves as an opportunity to consider the state’s welfare system in a broader perspective. More specifically, we recommend that the Legislature consider state assumption of responsibility for the General Assistance program, as we discuss in our companion volume, The 1996-97 Budget: Perspectives and Issues. At a minimum, the Legislature should ensure that any welfare redesign clearly links program responsibility, accountability, and financing to achieve its policy objectives. [bookmark: A5]Child Support Enforcement Program Child support enforcement services are provided by county district attorneys to all persons who request such assistance. Collections made on behalf of AFDC recipients offset AFDC grant expenditures and therefore result in state and county savings. [bookmark: A6]Budget Underestimates Savings From Franchise Tax Board Program We recommend that the budget’s estimate of the impact of the Franchise Tax Board’s child support enforcement program be adjusted to more accurately reflect recent data on monthly collections, for a General Fund savings of $6.2 million in 1995-96 and $5.3 million in 1996-97. (Reduce Item 5180-101-0001 by $5,300,000.) Chapter 1223, Statutes of 1992 (AB 3589, Speier), established a program in which counties forward delinquent child support cases to the Franchise Tax Board (FTB) to attempt to recover these obligations. The budget estimates that the program will increase AFDC collections by $12.6 million in 1995-96 and $16.5 million in 1996-97, resulting in General Fund savings of $5.9 million and $8 million, respectively. In reviewing the actual monthly collections from September through December 1995 (the most recent data available), we found that the FTB recovered an average of $2.3 million per month in AFDC collections for the 22 participating counties. If this trend continues, collections would amount to about $26 million in the current year and $28 million in the budget year, significantly higher than the budget’s estimates. Accordingly, we recommend that the budget’s estimated AFDC child support collections be adjusted to reflect the current-year trend, requiring an increase of $13.4 million in 1995-96 and $8.5 million in 1996-97. This would result in additional General Fund savings of $6.2 million in 1995-96 and $5.3 million in 1996-97, due to the effect of the additional collections in offsetting AFDC grant expenditures. We note that our estimate is conservative in that (1) we based our estimate on collections for September through December even though collections in December (the latest month of data) were significantly higher than in the preceding months and (2) the board anticipates that additional counties will choose to participate in the program in the budget year, thereby resulting in increased collections above the current year. We will review these factors with the department and the board prior to the budget hearings, and modify our recommendation if appropriate. [bookmark: A7]Proposed Child Support Court Commissioner System Needs Implementation Plan We withhold recommendation on $19 million ($6.5 million General Fund) proposed to implement a commissioner-based child support court system, pending receipt of an implementation plan from the Department of Social Services. Currently, most child support cases referred to the courts are heard by judges. In some counties, however, court commissioners are used to hear some of the cases. The Governor’s Child Support Court Task Force recommended in 1995 that counties establish a statewide system in which court commissioners are dedicated specifically to the establishment of child support paternity and support orders. The budget proposes to fund such a system, effective January 1, 1997, assuming enactment of pending legislation (AB 1058, Speier). The new court commissioner system would be designed to include streamlined procedures, dedicated support staff, automation, and better information and guidance for parents through the system. Federal financial participation at 66 percent of total costs would be available, provided that a plan of cooperation exists between the courts and the DSS. The budget proposes $6.5 million from the General Fund to support the half-year costs of 50 commissioners and five new positions for state-level administration by the Judicial Council. (An unspecified portion of these funds would replace county funds currently used for court commissioners.) The DSS estimates that the program will result in state savings of $2.1 million in 1996-97 due to additional child support collections. Thus, the proposal is estimated to result in a net General Fund cost of $4.4 million in 1996-97. By 1998-99, the DSS estimates that the program will result in net General Fund savings of $17.9 million because of increased child support collections. We also note that the program would free up time for judges to hear other cases and would provide some savings to those counties that currently use county-funded commissioners. We believe that the proposal to expand the use of commissioners has merit. The administration, however, has not provided sufficient information to justify the need for 50 commissioners in 1996-97. In fact, a workload study completed by the department in 1994 indicated that 25 commissioners would be needed. Caseload growth since 1994 would not justify increasing the number of commissioners needed to 50. In our discussions with the department, however, staff indicated that they would be able to provide additional information justifying the need for 50 commissioners because the 1994 study did not account for the backlog of child support cases. Accordingly, we withhold recommendation on the proposal, pending receipt of an implementation plan that shows (1) when each county will make the transition to the commissioner-based system and (2) the number of commissioners needed in each county or group of counties. [bookmark: A8]Budget Does Not Reflect Savings From Expanded License Match Program We recommend that the budget’s estimate of child support collections be adjusted to reflect the impact of expanding the State Licensing Match System, for a General Fund savings of $26 million in 1996-97. (Reduce Item 5180-101-0001 by $26,000,000.) Chapter 481, Statutes of 1995 (AB 257, Speier) expanded the State Licensing Match System (SLMS) to require the Department of Motor Vehicles (DMV) to suspend or revoke the driver’s license of delinquent child support obligors, and made other modifications to the state’s child support collection system. When the bill was enacted, the Department of Finance estimated that AB 257 would result in a General Fund savings of $26 million in 1996-97, due to the impact on AFDC child support collections. We also note that similar legislation in Maine substantially increased child support collections. Based on the experience in Maine and our discussions with staff at the DSS, we conclude that a net General Fund savings of $26 million is a reasonable estimate. The budget, however, does not reflect any savings from this program. Accordingly, we recommend that the budget’s estimate for AFDC child support collections be increased to reflect a General Fund savings of $26 million in 1996-97. [bookmark: A9]AFDC–Foster Care [bookmark: A10]Budget Should Reflect Additional Revenue and Savings We recommend (1) increasing General Fund revenues by $172,000 and (2) reducing General Fund expenditures by $317,000 in order to reflect the impact of foster care group home audits. (Increase General Fund revenues by $172,000 and reduce Item 5180-101-0001 by $317,000.) Current law requires the department to perform program and fiscal audits of foster care group homes. Group homes are paid a rate based on the level of care and supervision that is provided. The department is authorized to reduce the rate being paid to the group home and to collect any overpayments identified in audit findings that the required level of care and services was not provided. The budget proposes $745,000 ($484,000 General Fund) to continue eight limited-term positions and establish two new positions to conduct group home audit activities. In addition to these positions, the department currently has five permanent positions performing group home audits. Based on our review, we find that continuation of the eight positions is justified on a workload basis. Budget Does Not Reflect Revenues and Savings from Proposed Activities. Our analysis indicates that the Governor’s Budget does not reflect any revenue or savings that would result from proposed group home audit activities. The department, however, estimates that additional General Fund revenues of approximately $172,000 will be generated from the collection of overpayments. In addition, the department estimates General Fund savings of $317,000 resulting from group home rate reductions. Accordingly, we recommend that the budget reflect the $172,000 in General Fund revenues and $317,000 in reduced expenditures resulting from these activities in 1996-97. [bookmark: A11]Technical Error in Calculating General Fund Share of Costs We recommend a reduction of $1.3 million from the General Fund because a technical error in calculating the state share of costs for foster care resulted in overbudgeting. (Reduce Item 5180-101-0001 by $1,312,000.) The budget proposes an increase in the Foster Care Program of $2.3 million from the General Fund ($4.8 million from all funds) as a result of a federal policy change affecting certain cases where the foster parent is a relative of the child. Our analysis indicates that the General Fund costs are overbudgeted because the department applied an incorrect state\/county cost sharing ratio. Therefore, we recommend that the General Fund amount be reduced based on the correct cost sharing ratio. This would result in General Fund savings of $1,265,000 in 1995-96 and $1,312,000 in 1996-97. We note that this would also result in corresponding increases in county costs. [bookmark: A12]Budget Does Not Reflect Savings Anticipated From an Increase in Federal Funds We recommend a General Fund reduction of $485,000 in the amount proposed for the Foster Care Program to reflect anticipated additional federal funds due to an increase in the federal share of costs of this program. (Reduce Item 5180-101-0001 by $485,000.) The Federal Medical Assistance Percentage (FMAP) determines the federal share of costs in the Medicaid Program (Medi-Cal in California) as well as certain other programs. The Governor’s Budget anticipates that the federal sharing ratio will increase from 50 percent to 50.23 percent of total costs for the affected programs, effective October 1, 1996. The budget assumes General Fund savings in certain programs (primarily Medi-Cal) due to the anticipated increase in federal funds, beginning in 1996-97. The federal share of costs for foster care grants is also based on the FMAP. The budget, however, does not reflect a change in the federal share of costs. We estimate that the additional federal funds would result in General Fund savings of $485,000 in 1996-97. Accordingly, we recommend that the budget be amended to reflect these anticipated savings. [bookmark: A13]Department Will Not Meet Deadline for Report on a Revised Foster Care Rate Setting System At the time this analysis was prepared, the Department of Social Services had not yet convened a working group to recommend a revised foster care rate setting system, as required by the Legislature. We recommend that the department report during budget hearings on the status of its efforts to meet this requirement. Children who are placed in foster family homes generally receive the basic foster family home grant, ranging from $345 to $484 per month. Children with special medical and\/or behavioral needs are also eligible for a specialized care increment over and above the basic foster family home grant. Foster family agencies (FFAs) recruit and certify foster homes and provide training and support services to the foster parents. One of their objectives is to provide placement settings for children who have special needs and require a higher level of care than typically provided in a foster family home. The FFA rates generally range from $1,283 to $1,515 a month. The Supplemental Report of the 1995 Budget Act requires the Department of Social Services to convene a working group to review the rate setting system for foster family homes and FFAs and to report its recommendations for a new or revised system by March 1, 1996. The working group must include representatives from the department, counties, providers, consumers, and the Legislature. The purpose of the review is to recommend a system that could help to provide for a greater range of service levels and placements for children in foster care. At the time this analysis was prepared, departmental staff indicated that they were still in the process of identifying potential participants of the working group. It is apparent that the Legislature’s deadline for the report will not be met and we find no justification for the delay. To facilitate legislative oversight of this issue, we recommend that the department report during budget hearings on the status of its efforts to comply with the Legislature’s directive. [bookmark: A14]Flexibility in Use of Foster Care Funds Could Increase Family Reunifications We recommend the enactment of legislation to establish a pilot program whereby counties could use state foster care funds to provide ongoing support services to children and their families after reunification. One of the goals of the Child Welfare Services Program is to safely reunify foster care children with their families, when appropriate. Although in some cases it may not be appropriate to return a foster child home to his\/her family, there are instances where reunification is in the child’s best interest. As some child welfare professionals have indicated, more children in long-term foster care could return home if ongoing support services were provided to the families. Currently, very few families receive ongoing services when a child is returned home, mainly due to lack of funding. It is likely that some children who are in long-term foster care could be reunified if more resources were available to fund these ongoing services. Currently, state law prohibits the use of foster care funds to provide ongoing support services to families. Instead, the funds must be used to maintain the child in foster care placement (food, clothing, shelter, etc.). We recommend the enactment of legislation to establish a pilot program whereby counties could use state foster care funds to provide support services to children and their families after reunification. In other words, the program would give counties flexibility to use foster care funds to support a child in his\/her family. This program would target the services to children in long-term foster care who could be returned home with the support of such services. We note that this legislation could be designed so that at a minimum the General Fund costs of participating in the pilot program would not exceed current foster care costs for those cases. In some instances this proposal could result in net savings to the General Fund. This is because long-term foster care children typically remain in foster care homes until they reach age 18. This proposal, if it is successful, would reunify these children with their families, thereby avoiding long-term foster care costs. [bookmark: A15]Closure of County Probation Facilities Could Lead to Increases in Foster Care Costs Possible closure of county juvenile camps and ranches could result in higher caseloads and costs in the Foster Care program. Several counties are reporting that, as a consequence of reductions in federal funds, they intend to close local camps and ranches for juvenile offenders. Because foster care is an alternative placement option for some of these juvenile offenders, the closure of county camps and ranches (funded by the counties) could lead to higher caseloads in the Foster Care program (partially funded by the state). The budget, however, does not assume closure of any county camps and ranches. We discuss this issue in detail in our analysis of the Department of the Youth Authority. [bookmark: A16]Supplemental Security Income\/State Supplementary Program The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $1.6 billion from the General Fund for the state’s share of the SSI\/SSP in 1996-97. This is a decrease of $375 million, or 19 percent, from estimated current-year expenditures. This decrease is due primarily to the full-year effect of previous grant reductions (which have so far been delayed because of lack of federal approval), and the elimination of SSI\/SSP benefits for noncitizens pursuant to proposed federal welfare reform legislation. In December 1995, there were 330,852 aged, 21,833 blind, and 673,197 disabled SSI\/SSP recipients. [bookmark: A17]Assumed Federal Law Changes Create a General Fund Risk In the SSI\/SSP, the budget proposes General Fund savings of $102 million in 1995-96 and $512 million in 1996-97 that are dependent on federal action to eliminate the maintenance-of-effort requirement and restrict program eligibility. The budget assumes that this will be achieved by the enactment of federal welfare reform legislation. Background. Federal law allows states the discretion to set the level of the SSP grant (the state-funded component of SSI\/SSP) as long as the payment remains at or above the federally-mandated maintenance-of-effort (MOE) level. The MOE level is the SSP grant level in effect in July 1983. Budget trailer bill legislation for 1995-96–Chapter 307, Statutes of 1995 (AB 908, Brulte)–reduced payments by 4.9 percent statewide, with an additional 4.9 percent reduction for persons living in low-cost counties, effective December 1995. The statewide reduction is scheduled to terminate on June 30, 1996 and the additional reduction to recipients in low-cost counties will be ongoing. These grant reductions would reduce the grants for most recipients below the federally mandated MOE, but federal legislation permitting this reduction has not been enacted. Budget Savings Contingent on Federal Welfare Reform. Figure 32 (see next page) lists past and proposed budget actions that are dependent on federal legislation. As the figure shows, $614 million in General Fund savings in the current and budget years are at risk. With the exception of the elimination of drug and alcohol addiction as qualifying disabilities (which is included in separate pending legislation), the most recent version of federal welfare reform (passed by Congress but vetoed by the President) would enable the state to implement the proposals shown in Figure 32. We note however, that the budget assumes that the current-year grant reductions will become effective April 1, 1996. Because of recipient notification and other administrative requirements, it will not be possible to achieve all of the savings assumed in the budget for the current year even if federal welfare reform is enacted in March 1996. Figure 32 State Savings Dependent on Federal Legislation SSI\/SSP 1995-96 and 1996-97 In Millions) Budget Proposal 1995-96 1996-97 Total Previous Budget Actions: 1995-96 regional 4.9 percent grant reduction $25 $101 $126 1995-96 statewide grant reduction 76 — 76 Eliminate drug\/alcohol addiction as criteria — 3 3 New Proposals: Make statewide 4.9 percent reduction permanent — $309a $309 Restrict eligibility for noncitizens 1 90b 91 Restrict eligibility for disabled children — 9 9 Totals $102 $512 $614 a Total savings are estimated at $335 million, of which $309 million is dependent on federal action. b $96 million in SSI\/SSP savings partially offset by net costs of $6 million in Medi-Cal. [bookmark: A18]Budget Proposes to Make Temporary Reductions Permanent By proposing to make past grant reductions permanent and to delete the requirement to restore the statutory cost of living adjustment, the budget would achieve a General Fund cost avoidance of $777 million in 1996-97. Budget trailer bill legislation for 1991-92 and 1992-93 reduced SSI\/SSP grants by 5.8 percent, suspended the statutory state cost of living adjustment (COLA), and specified that the grant reduction and the COLA suspension would remain operative until July 1, 1996. Restoring the 5.8 percent grant reduction in 1996-97 would result in General Fund costs of $442 million. There would be no cost in 1996-97 to restore the COLA because of the interaction between the state COLA–which is based on the California Necessities Index (1.5 percent) and is applied to the entire SSI\/SSP grant–and the federal COLA, which is based on the Consumer Price Index (2.9 percent) and is applied to the SSI portion of the grant. The Governor’s Budget proposes to make the grant reduction and the COLA suspension permanent, for a General Fund cost avoidance of $442 million in 1996-97. The budget also proposes to make permanent the statewide 4.9 percent grant reduction enacted in 1995-96. This would result in a General Fund cost avoidance of $335 million in 1996-97. Figure 33 shows the SSI\/SSP grants in 1996-97 for individuals and couples in Region 1 (high-cost counties) and Region 2 (low cost-counties) under both current law and the Governor’s proposal. Grants under the Governor’s proposal would be roughly 10 percent less than under current law. As a point of reference, we note that the federal poverty guideline in 1995 is $623 per month for an individual and $836 per month for a couple. Thus, under the Governor’s proposal, the grant for an individual would be below the poverty guideline (96 percent of the poverty level in high-cost counties and 91 percent of poverty in low-cost counties). Under current law, the grant for an individual would be somewhat above the poverty line (107 percent of poverty in high-cost counties and 102 percent of poverty in low-cost counties). Figure 33 SSI\/SSP Monthly Payment Standards Current Law and Governor’s Proposala 1996-97 Region and Recipient Category Current Law Governor’s Proposal Difference Region 1–High-cost counties Individuals $663 $596 -$67 Couples 1,170 1,066 -104 Region 2–Low-cost counties Individuals $633 $568 -$65 Couples 1,135 1,014 -121 a Does not include federal COLA which will be applied to SSI portion of grant on January 1, 1997. [bookmark: A19]SSI\/SSP Benefits for Noncitizens–Budget Internally Inconsistent We recommend a technical adjustment in the amount proposed for SSI\/SSP grants because the proet underestimates the savings from eliminating SSI\/SSP benefits for noncitizens, based on its own assumption of federal welfare reform legislation. (Reduce Item 5180-111-0001 by $34,052,000.) The budget proposes to make most legal noncitizens ineligible for SSI\/SSP effective January 1, 1997, assuming enactment of federal welfare reform legislation, which includes these restrictions. The most recent version of federal welfare reform legislation excepted certain legal noncitizens from the bill’s prohibition. The budget, however, excludes two categories of recipients that are not excluded in the latest version of welfare reform legislation–specifically, noncitizens over age 75 and noncitizens that are too disabled to become citizens. The administration advises us that these exclusions were inadvertent and do not accurately reflect its proposal. Correcting for this error would result in a net increase in General Fund savings of $34.1 million which is not reflected in the Governor’s Budget. Accordingly, we recommend this technical adjustment so that the budget will be consistent with its own assumptions. [bookmark: A20]Governor Proposes to Deny General Assistance to Noncitizens The Governor proposes legislation to prohibit counties from providing General Assistance to those noncitizens who lose eligibility for federal benefits as a result of federal welfare reform. If federal legislation is enacted to eliminate noncitizens from eligibility for SSI and Food Stamps, many of these persons would become eligible for county General Assistance benefits. The Governor proposes legislation to prohibit counties from providing General Assistance to those noncitizens who lose eligibility for federal benefits as a result of such legislation. We note that denying aid to those noncitizens who do not attain citizenship would have a significant adverse effect on these individuals unless they can compensate for the loss of income through employment or some other means. In this respect, it is important to recognize that under federal law, noncitizens must reside in the country for five years and then must initiate an application process which currently takes more than a year to complete. For a discussion of how this proposal affects the state-county relationship, please see Part V of our companion volume, The 1996-97 Budget: Perspective and Issues. [bookmark: A21]County Administration of Welfare Programs The budget appropriates funds for the state and federal share of the costs incurred by counties for administering the following programs: (1) Aid to Families with Dependent Children (AFDC); (2) Food Stamps; (3) Child Support Enforcement; (4) Special Adults, including emergency assistance for aged, blind, and disabled persons; (5) Refugee Cash Assistance; and (6) Adoption Assistance. The budget proposes an appropriation of $496.9 million from the General Fund for the state’s share of the costs that counties will incur in administering welfare programs in 1996-97. This represents an increase of $23.1 million, or 4.9 percent, over estimated current-year expenditures. [bookmark: A22]Statewide Fingerprint Imaging System Needs Further Review We withhold recommendation on the $15.7 million ($7.9 million General Fund) proposed to implement a new Statewide Fingerprint Imaging System that is designed to detect and prevent fraud in the Aid to Families with Dependent Children Program, pending receipt of additional information from the Health and Welfare Data Center. The budget proposes $15.7 million ($7.9 million General Fund) to implement a Statewide Fingerprint Imaging System (SFIS) modeled on an existing fraud detection program in Los Angeles County. The Health and Welfare Data Center (HWDC) is responsible for developing and procuring the statewide system. The Department of Social Services (DSS) will provide the data center with $11.6 million ($5.8 million General Fund) for its costs related to its development and procurement of the system. The remaining funds will be used for county administration of the program ($3.8 million total, and $1.9 million General Fund) and for state operations at the DSS ($264,000 total, $132,000 General Fund). Counties will phase into the program over a six-month period, beginning in January 1997. Partial year AFDC grant savings are estimated to be $11.7 million ($5.6 million General Fund) in 1996-97. When the system is fully operational in 1997-98, the program is estimated to provide net savings of $60.1 million ($28.5 million General Fund). Background. Los Angeles County implemented its Automated Fingerprint Reporting and Match (AFIRM) pilot program in April 1994. The program requires all adult AFDC recipients to be fingerprinted in order to continue to receive AFDC benefits. A database stores fingerprint images, and the system compares these images to those of new applicants. If there is a positive match, aid will be denied. An evaluation of AFIRM concluded that the program would reduce AFDC benefit payments by $86 million over a 26-month period. A follow-up study of 137 randomly selected cases that were terminated due to noncompliance with AFIRM found that 104 cases (76 percent) were engaged in some kind of fraudulent activity. Failure to confirm fraud in the remaining 24 percent of cases raises the issue of whether some of the AFDC grant savings should be attributed to reasons other than actual fraud. Process Should Conform to Action Taken in HWDC Budget. In our analysis of the HWDC (please see the State Administration section of this Analysis), we discuss several issues pertaining to the expedited procurement process and the estimated cost of the SFIS. In that discussion, we withhold recommendation on all funds pertaining to the implementation of the SFIS pending receipt of additional information from the HWDC. Accordingly, we withhold recommendation on the $15.7 million proposed in this item for the SFIS. [bookmark: A23]Welfare Automation Projects Transferred To the Health and Welfare Data Center We withhold recommendation on proposed funding for the Statewide Automated Welfare System and the Statewide Automated Child Support System, pending receipt of additional information from the Health and Welfare Data Center. The responsibility of developing the Statewide Automated Welfare System (SAWS) and the Statewide Automated Child Support System (SACSS) has been moved from the DSS to the HWDC. A brief summary of these projects is provided below. For a more complete description of these programs and our recommendations, please see the State Administration section of this Analysis. SAWS. The budget proposes $68.2 million ($29 million federal funds, $31 million General Fund, $4.6 million county funds, and $3.5 million in reimbursements) for the DSS and the HWDC to continue the development and implementation of the SAWS. The 1995 Budget Act required the HWDC to provide two reports to the Legislature regarding the SAWS. The first report, released November 1, 1995, presented a multiple county consortium strategy for implementing a SAWS. Under this approach counties join together into consortia based on common business needs and working relationships. The report included a preliminary assignment of counties into four consortia, a summary of the consortia concept and rationale for each consortium, and a description of the responsibilities for key project stakeholders. The second report, to be released February 1, 1996, covers implementation issues, consortia government structures, and action plans. Funding for the Implementation of Interim Statewide Automated Welfare System Should Conform to Action Taken in the HWDC Budget. In our analysis of the HWDC, we withhold recommendation on Implementation of Interim Statewide Automated Welfare System (ISAWS) implementation and maintenance pending receipt of additional information for the HWDC. The ISAWS is one of four proposed consortia that counties may choose to join in implementing SAWS. Accordingly, we also withhold recommendation on $40.9 million ($20.1 million General Fund) in the DSS budget for the ISAWS. SACSS. The budget proposes $50.4 million ($42.1 million federal funds, $4.2 million General Fund, and $4.1 million county funds) for the implementation and the ongoing operation and maintenance of the SACSS in 1996-97. As of December 1995, seven pilot counties had implemented the SACSS. Statewide implementation is scheduled to be completed in February 1997. In January 1996, the Department of Finance approved a revised Special Project Report (SPR) which projected an additional $108 million in total costs, through June 2000, above the $152 million previously estimated. However, none of these costs are reflected in the budget proposal for 1996-97. Implementation of SACSS Should Conform to Action Taken in the HWDC Budget. In our analysis of the HWDC, we discuss several issues pertaining to the revised SPR for the SACSS project. In that analysis, we withhold recommendation on the SACSS project pending the receipt of additional information from the HWDC. Accordingly, we also withhold recommendation on the $50.3 million ($4.2 million General Fund) in the DSS budget for the project in 1996-97. [bookmark: A24]Proposal to Prohibit General Assistance for Noncitizens The Governor proposes to prohibit counties from providing General Assistance to noncitizens made ineligible for federally funded programs, if pending welfare reform legislation is enacted. If enacted into law, current versions of federal welfare reform now pending in Congress, would make legal noncitizens (with certain exceptions) ineligible for Supplemental Security Income (SSI) and Food Stamps effective January 1, 1997, and would give states the option of denying AFDC benefits to these individuals. With respect to AFDC, the Governor proposes to follow current state law and bar sponsored aliens from receiving these benefits. Based on these policies, we estimate that approximately 180,000 noncitizens would be denied SSI\/State Supplementary Program (SSP) benefits, roughly 225,000 would be denied food stamps, and 8,339 sponsored aliens would be denied AFDC, unless the individuals attain citizenship status. Under current law, counties would be required to provide General Assistance to these noncitizens, provided they met county eligibility guidelines. The Governor, however, proposes legislation to prohibit counties from providing General Assistance to these noncitizens. Essentially, this is a policy decision for the Legislature. We note, however, that General Assistance is part of the safety net for indigents. Thus, denying this aid to those noncitizens who do not attain citizenship would have a significant adverse effect on these individuals unless they can compensate for the loss of income through employment or some other means. In this respect, we also note that under federal law, noncitizens must reside in the country for five years, and then must initiate an application process which currently takes more than a year to complete. [bookmark: A25]Budget Exceeds Projected Spending Based on Recent Trends We recommend that the proposed expenditure for unidentified activities ($8.9 million General Fund) in county administration be deleted because it is in excess of projected county spending in 1996-97, based on past trends adjusted for caseload growth, inflation, and policy changes. We further recommend that the Legislature consider redirecting the savings to expand the Greater Avenue for Independence Program because of its demonstrated effectiveness in increasing participant’s employment and earnings. (Reduce Item 5180-141-0001 by $8,883,000). Amount Budgeted Exceeds Projected County Spending. The current methodology used to budget for county administration is based on the amount counties actually spent in the past year, adjusted for projected changes in caseload and inflation in the budget year. This amount is also adjusted for policy changes. Because of recent economic conditions, the counties have not matched all the state and federal monies available for administrative costs in recent years. This experience is reflected in actual expenditures, and therefore is the basis used to project budget-year spending. The budget reflects county administrative savings in 1996-97 from various fraud activities, legislation barring sponsored aliens from AFDC eligibility, and the consolidation of eligibility determination in the AFDC and Food Stamps Programs. The budget, however, proposes to allow counties to use $8.9 million of these General Fund savings (if matched by $3.8 million in county funds) to pay for other unidentified activities. The DSS’s rationale is that the trend used to project the 1996-97 expenditures understates the amount counties would spend because, in recent years, the counties have cut back on spending due to their limited resources. By adding $8.9 million from the General Fund to the baseline projection, the budget is assuming that counties will be willing to increase their match beyond the level reflected in recent years. We find no basis for this assumption. If anything, county fiscal resources are coming under more pressure, not less. Moreover, the department has not justified the request on the basis of programmatic needs because it has not been able to identify the activities for which these monies would be spent. Greater Avenue for Independence (GAIN) Program Increases Earnings and Reduces AFDC Grant Payments. A recent evaluation of the Greater Avenue for Independence Program concluded that, on average, the program increased earnings for AFDC-FG (Family Group) cases by 22 percent over a three-year period and increased earnings for AFDC-U (Unemployed Parent) cases by 12 percent. Further, AFDC grant payments were reduced by an average of 6 percent. In Riverside County, moreover, the GAIN Program returned $2.84 to government budgets for every dollar spent on the program. Budget trailer bill legislation–Ch 306\/95 (AB 1371, Weggeland)–modified the GAIN Program to make it more like the employment-oriented program operated by Riverside County. Program Not Fully Funded. The DSS indicates that the proposed funding for the GAIN Program is substantially below the amount needed to accommodate all eligible AFDC recipients. Given the demonstrated effectiveness of the program, we recommend that the Legislature consider redirecting the savings realized by adoption of our recommendation for county administration to expand the GAIN Program. In effect, this would make additional state funds available to the counties, but with some assurance that the funds will be spent in an effective manner. [bookmark: A26]Overbudgeting for Food Stamps Program Administration We recommend reducing the General Fund amount proposed for county administration of the Food Stamps Program by $9 million, because the budget overstates the caseload (based on the budget’s own assumption of federal welfare reform legislation). (Reduce Item 5180-141-0001 by $9 million). As indicated previously, the Governor’s Budget proposal assumes the enactment of federal welfare reform legislation which would make legal noncitizens, with certain exceptions, ineligible to receive certain federal benefits, including food stamps. Pursuant to this provision, we estimate that approximately 225,000 noncitizens will lose eligibility for Food Stamps. The Governor’s Budget, however, inadvertently fails to account for this reduction in the food stamps Program caseload and therefore overstates the state costs of program administration by $9 million. Accordingly, in order to make the budget consistent with its own assumptions, we recommend reducing the General Fund amount proposed for Food Stamps Program administration in 1996-97 by $9 million. [bookmark: A27]Child Welfare Services The Child Welfare Services (CWS) Program provides services to abused and neglected children and children in foster care and their families. The CWS Program provides: \u00b7 Immediate social worker response to allegations of child abuse and neglect. \u00b7 Ongoing services to children and their families who have been identified as victims, or potential victims, of abuse or neglect. \u00b7 Services to children in foster care who have been temporarily or permanently removed from their families because of abuse or neglect. [bookmark: A28]Child Welfare Services Program Needs Improvement In January 1996, we issued a report in which we concluded that California’s Child Welfare Services Program needs improvement. We recommend that the Department of Social Services (DSS) report at budget hearings on its efforts to improve the program. In our report, Child Abuse and Neglect in California (January 1996), we present a variety of performance-related information that indicates a need for improvement in the state’s CWS Program. We discuss our major findings below. Significant Variation Among Counties in Percentage of Reports \”Screened Out.\” One of the functions of the CWS Program is to respond to reports of child abuse and neglect. Counties are required to screen, by use of telephone assessments, reports of child abuse\/neglect to determine whether an in-person investigation is necessary. Ideally, only those reports that do not constitute abuse or neglect are \”screened out\” in the initial response stage. As Figure 34 shows, there is significant variation among the counties in the percentage of reports that are \”screened out.\” Without further investigation, we cannot determine whether some counties are screening out too many or not enough reports of abuse\/neglect. We believe this is an area that warrants investigation by the department. [image: http:\/\/www.lao.ca.gov\/analysis_1996\/a96c4_01.gif] Recidivism Increasing. As shown in figure 35 (see next page), the percentage of children returning to the CWS Program has increased significantly over the years, from 29 percent in 1985 to 46 percent in 1993. These data suggest that the program has not been effective in preventing reabuse and neglect in a significant and growing number of cases. The increased recidivism may be partly due to changes in the CWS caseload, such as an increase in the number of families who are more difficult to serve effectively (for example, a higher proportion of cases where children have severe behavioral problems or parents who have substance abuse problems). Currently, there is a lack of information identifying those factors which contribute to the success of family maintenance and reunification services. If these services are working well we would expect to see recidivism mitigated. We believe that collecting such performance data could ultimately improve program outcomes. Reliance on Foster Care Increasing. One of the goals of the CWS Program is to minimize the use of foster care placements in serving abused children and instead maintain or reunify such children with their families when appropriate. The data, however, suggest that reliance on foster care has been increasing because (1) foster care placement rates (relative to the population of children in the state) have increased since 1988, (2) family reunifications (returning foster care children to their parents) have not increased relative to the growth in foster care cases, and (3) the proportion of children in the CWS Program who are being placed in foster care (rather than receiving support services at home) has been increasing. These trends are not likely to be reversed until the effectiveness of family maintenance and reunification services is improved. [image: http:\/\/www.lao.ca.gov\/analysis_1996\/a96c4_02.gif] Multiple Foster Care Placements. Another measure of the success of the CWS Program is the extent to which multiple foster care placements for the same child are minimized. The data show that in 1993-94, about one-third of children in foster care had experienced three or more different placements. (See Figure 36.) We note that Chapter 1294, Statutes of 1989 (SB 370, Presley) requires the department to develop a Level of Care Assessment tool to facilitate the assignment of a foster care child to the most appropriate placement, thereby reducing the chances of multiple placements. Although there is no statutory completion date, the department has not provided the Legislature with a project status report which was due in January 1995. We find no justification for the delay in completing this project. [image: http:\/\/www.lao.ca.gov\/analysis_1996\/a96c4_03.gif] Use of Foster Care Group Homes Increasing More Than Foster Family Homes. When placing a child in foster care, current law gives priority to more family-like foster care settings and requires placement in foster family homes instead of group homes, when appropriate. The proportion of children placed in foster family homes, however, has actually decreased slightly over the years–from 88 percent in 1984 to 86 percent in 1995. Less Than Half of Eligible Foster Care Children Receive Services Through Independent Living Program. Children who are emancipated from the foster care system (generally at age 18) must have a service plan to help them transition to independent living. As shown in Figure 37 (see next page), less than half of the eligible children receive services through the state’s Independent Living Program (ILP). In our field visits, child welfare professionals have indicated that additional funds are needed to expand the ILP to serve all eligible youth. We note, however, that data are not sufficient to determine whether the program is effective. [image: http:\/\/www.lao.ca.gov\/analysis_1996\/a96c4_04.gif] Current law requires the department to complete an evaluation of the ILP and develop recommendations on how independent living services could better prepare foster youth for independence. The evaluation was due in January 1995 but has not been completed. This evaluation is important in order to help the Legislature determine the appropriate funding level for the program. We find no justification for the department’s delay in providing the report. Recommendation. Reversing some of these trends will not be an easy task. The provision of additional resources could help, but given the competing demands for such resources it is important that available funding–whether new or existing–be used effectively. Some of these trends may be caused by factors that cannot be easily addressed by government agencies. Nevertheless, we believe that efforts should be made to improve the CWS Program. Thus, we recommend that the DSS comment during budget hearings on our findings and report on what actions could be taken–including activities by the department–to address the problems that we identified. [bookmark: A29]Adoptions Programs The department administers a statewide program of services to parents who wish to place children for adoption and to persons who wish to adopt children. Adoptions services are provided through state district offices, 28 county adoption agencies, and a variety of private agencies. Counties may choose to operate the Adoptions program or to turn the program over to the state for administration. There are two components of the Adoptions program: (1) the Relinquishment (or Agency) Adoptions program, which provides services to children in foster care, and (2) the Independent Adoptions program, which provides adoption services to birth parents and adoptive parents when both agree on placement. The Adoptions program is supported by the General Fund and federal funds. The budget proposes expenditures of $54 million ($36 million General Fund) for the program in 1996-97. The General Fund amount represents an increase of $7 million, or 24 percent, above current-year expenditures. This is due to the Governor’s proposed \”Adoptions Initiative.\” [bookmark: A30]Adoptions Initiative The administration indicates that the goal of the Governor’s Adoptions Initiative is to increase the number of adoptions for children who would otherwise remain in long-term foster care. The two components of the initiative are described below. Additional Staff for State’s Adoptions Branch. The budget proposes $963,000 ($626,000 General Fund) and 14 limited-term (five-year) positions in the department’s adoptions branch to develop and implement proposals to facilitate the adoption of children in foster care. The objectives are to improve the effectiveness of the service delivery system and to increase the productivity of adoptions caseworkers. The proposed activities include establishing performance goals, streamlining the adoptions process, and providing technical assistance and training. County Performance Agreements and Increased Funding for Caseworkers. The budget proposes an augmentation of $10.6 million ($6.6 million General Fund) to increase the number of county caseworkers in the Adoptions program in 1996-97. The DSS advises that county agencies have historically been underfunded for the program and that the augmentation would fund counties at a level justified by their workload. The department estimates that the augmentation will fund 184 additional staff and allow counties to place 810 more children in adoptive homes in 1996-97. In addition, the DSS plans to establish performance agreements with county agencies under which the counties will be required to increase the number of adoptions as a condition for continuing to receive the higher level of funding. The budget assumes General Fund savings in the Foster Care and Child Welfare Services programs of $726,000 from reduced foster care placements and General Fund costs in the Adoptions Assistance Program of $564,000 in 1996-97 from increased adoptions assistance grants (for those children who are eligible) resulting from the increased number of adoptions. While this proposal would result in net costs during the first years of implementation, we note that eventually there should be ongoing annual net savings (avoidance of foster care costs) associated with these adoptions. [bookmark: A31]Information Needed for Proposed Staff Increase We withhold recommendation on General Fund expenditures of $626,000 for 14 new positions in the department’s adoptions branch, pending receipt of additional information. In order to evaluate the department’s proposal for 14 additional staff in the adoptions branch, we requested information from the department regarding the workload of the existing staff. At the time this analysis was prepared, we had not received the information necessary to complete our review. Thus, we withhold recommendation on the proposal for new staff, pending receipt and review of this information from the department. Details Lacking on Implementation of Performance Agreements We recommend that the department report during budget hearings on its plans to implement performance agreements with county adoption agencies. If the Legislature adopts the proposal, we recommend that it be modified to include the establishment of performance agreements with state adoption offices as well as with the county agencies. As mentioned above, the department proposes to establish performance agreements with counties, linking the increased funding to increased adoptions. In developing the agreements, the department plans to establish a baseline of placements against which counties must improve. At the time this analysis was prepared, the department did not have any details regarding the performance agreements, such as the specific number of adoptions needed to qualify for increased funding, or the disposition of funds withheld from counties that do not meet the standards (for example, whether these funds would be redirected to other counties). The department, however, indicated that it was in the process of reviewing alternative methods for implementation. We believe that the Legislature needs to review this information prior to approving the budget proposal. In addition, we note that the proposal does not address the establishment of performance agreements with state adoption offices. We are not aware of any reason to distinguish between the county and state components. Under the budget proposal, both the state and county programs would be fully funded to serve estimated caseloads. Consequently, it seems reasonable to apply the performance criteria equally to both components of the program. Accordingly, we recommend that the department report during budget hearings on its plans to develop and implement performance agreements with county adoption agencies. Furthermore, if the proposal is adopted, we recommend that the Legislature require that performance agreements also be established with state adoption offices. [bookmark: A32]Community Care Licensing Division The Community Care Licensing Division (CCLD) within the Department of Social Services develops and enforces regulations designed to protect the health and safety of individuals in 24-hour residential care facilities and day care. Licensed facilities include day care, foster family homes and group homes, adult residential facilities, and residential facilities for the elderly. The budget proposes expenditures of $70.3 million ($15 million General Fund) for the CCLD in 1996-97. This represents a 16 percent increase in General Fund expenditures from the current year. [bookmark: A33]Proposed Staffing Increase Does Not Reflect Efficiencies From Automation We recommend that the Legislature delete 13 of the 54 proposed new positions for the Community Care Licensing Division, for a General Fund savings of $586,000, because the budget does not reflect efficiencies resulting from automation. (Reduce Item 5180-001-0001 by $586,000.) The budget proposes an augmentation of $3.3 million ($2.8 million General Fund) for 54 new positions to address workload associated with an increase in the number of community care facilities that require licensure. Our analysis indicates that 13 of these additional licensing staff– proposed for the child day care section–are not needed due to anticipated automation efficiencies. In January 1996, the Department of Finance approved a Special Project Report (SPR) for an automation project to provide child day care licensing staff with portable computers. The project will be implemented during 1995-96. The SPR indicated there would be annual savings of $586,000 and 13 positions resulting from efficiencies due to this automation project. These efficiencies stem from eliminating the need to manually complete parts of the licensing report, automating research capabilities for legal and technical questions, and providing the ability to print copies of necessary forms during a licensing visit. The projected savings, however, are not reflected in the department’s budget. Accordingly, we recommend that the Legislature delete 13 positions from the budget proposal in order to reflect the impact of automation, for a General Fund savings of $586,000 in 1996-97. Return to LAO Budget Analysis Table of Contents Return to LAO Home Page Contra Cost San Diego Sacramento Santa Clara Fresno Riverside Los angele Orange Son Bomardine [EEEEEamnnnna 1994 Proportion of Abuse Neglect Reports \”Screened Out\” Among Counties 2 3 & \u00e9 3 3 3 3 g 3 = Apri 1985 January 1989 January 1993 Numberof0 ifferentPlacements ForFosterCare Children 1999-94 Parcertot Four Perentof E lig ble Foster Care Children Served by IndependentL wing P rogram 1989 Though 1994 en a a a _ a a _ ‘Search eee ro ro LAO Analysis ofthe 1995-96 Budget Bill Health and Social Services Aid to Families With Dependent Children (5180) tnt chlde whe merc atc a cd a ig ie Aesfimy crap ARDC) Pom ey each en ae tiene amine ef oe pee Foie ec mere AEDs (AFDC Pog ee ‘Sry dn nahh pa ct ae et ope apn 64 tan $25 ln Getta Fl $0.5 alan Sone ieee ape Current-Vear Update of AFDC Program SRESIS ec pg amas cy ”

” HEALTH & SOCIAL SERVICES MAJOR ISSUES (February 1994) %Budget Proposes to Restructure State-County Responsibili- ties. The budget proposes to increase the county share of cost for various health and social services programs, thereby shifting $3.3 billion in spending from the state General Fund to the counties. In order to make the proposal fiscally neutral, it would be accompanied by a shift to the counties of sales tax, property tax, and other revenues, and state assumption of a higher share of trial court costs. (See page C-14 and our companion volume, The 1994-95 Budget: Perspectives and Issues.) %Shifting State Costs to the Federal Government Entails Risk of Budget Shortfall. The budget assumes over $1 billion in General Fund savings in various health and social services programs by anticipating the federal enactment of legislation that would increase federal funding for these programs. The two largest shifts are (1) increasing the federal share of costs for the Medi-Cal and AFDC Programs and (2) reimbursing the state for the costs of providing federally required services to refugees and undocumented immigrants. To the extent these federal funds do not materialize, there will be a budgetary hole in these programs. (See pages C-13, C-100.) %Expansion of Managed Care in its Current Form Should Be Reevaluated. The department’s strategic plan for expanding managed care assumes that nearly half of all Medi-Cal beneficiaries will be enrolled in such programs by the end of 1994-95. We recommend that the Legislature reevaluate the broad C – 2 Health and Social Services authority it has granted to the department for this expansion because, as currently planned, these efforts are likely to result in additional costs to the Medi-Cal Program, rather than savings. (See page C-31.) %Proposal to Eliminate Medi-Cal Optional Benefits Has Fiscal and Program Implications. The budget proposal to eliminate nine optional benefits is estimated to result in net General Fund savings of $154 million in 1994-95, but could place additional fiscal burdens on county indigent health programs. We recommend that if the Legislature chooses to reduce benefits, it consider an approach based on treatments or diagnoses rather than entire categories of benefits. Such an approach would reduce cost-shifting and better target the service reductions. (See page C-41.) %Expanding Medi-Cal, Instead of the AIM Program, Would Save State Funds. The Access for Infants and Mothers (AIM) Program provides health insurance for pregnant women, and their infants, whose incomes are up to 250 percent of the poverty level. We recommend that instead of relying on the AIM Program to accomplish this, the Medi-Cal Program be expanded to serve AIM- eligible persons. This would permit the use of Overviewfederal funds and the reallocation of Cigarette and Tobacco Products Surtax Fund monies, resulting in a state General Fund savings of approximately $73 million in 1994-95. (See page C-53.) %Budget Proposes Major Welfare Policy Changes. One of the Governor’s stated reasons for proposing to reduce Aid to Families with Dependent Children (AFDC) grants and place a time limit on their availability is to make work an attractive alternative to the AFDC Program. We conclude that some families will be able to compensate for the grant reductions through work. Other families, however, probably will not be able to fully offset the grant reduction due to low levels of education and employment experience, as well as a potential lack of job opportunities. (See page C-76.) HEALTH & SOCIAL SERVICES TABLE OF CONTENTS Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-5 Expenditure Proposal and Trends . . . . . . . . . . . . . . . . C-5 Caseload Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-7 Spending by Major Programs . . . . . . . . . . . . . . . . . . . . C-9 Major Budget Changes . . . . . . . . . . . . . . . . . . . . . . . . . C-11 Departmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-17 Secretary for Health and Welfare (0530) . . . . . . . . . . C-17 Office of Statewide Health Planning and Development (4140) . . . . . . . . . . . . . . . . . . . . . C-19 Department of Alcohol and Drug Programs (4200) . . . . . . . . . . . . . . . . . . . C-23 California Medical Assistance Program (Medi-Cal) (4260) . . . . . . . . . . . . . . . . . . . C-24 Public Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-48 Managed Risk Medical Insurance Board (4280) . . . . C-53 Department of Developmental Services (4300) . . . . C-59 Department of Mental Health (4440) . . . . . . . . . . . . . C-65 Employment Development Department (5100) . . . . C-69 C – 4 Health and Social Services Department of Social Services\u2014 State Operations (5180) . . . . . . . . . . . . . . . . . . . . . . C-72 Aid to Families With Dependent Children . . . . . . . . C-74 Supplemental Security Income\/ State Supplementary Program . . . . . . . . . . . . . . . C-100 County Administration of Welfare Programs . . . . C-106 Child Welfare Services . . . . . . . . . . . . . . . . . . . . . . . . C-121 In-Home Supportive Services . . . . . . . . . . . . . . . . . . C-125 Adoptions Programs . . . . . . . . . . . . . . . . . . . . . . . . . C-126 List of Findings and Recommendations . . . . . . . . . . . C-129 HEALTH & SOCIAL SERVICES G OVERVIEW eneral Fund expenditures for health and social services programs are proposed to decrease significantly in the budget year. The savings would be achieved primarily by (1) shifting some of the state’s costs of certain programs to the counties, funded by a transfer of revenues to the counties and county savings from state assumption of a higher share of trial court costs, (2) shifting some of the state’s costs of certain programs to the federal government, (3) reducing grants provided under the Aid to Families with Dependent Children (AFDC) Program, and (4) eliminating certain Medi-Cal benefits. EXPENDITURE PROPOSAL AND TRENDS The budget proposes General Fund expenditures of $10.1 billion for health and social services programs in 1994-95, which is 26 percent of total proposed General Fund expenditures. The budget proposal represents a reduction of $3.5 billion, or 26 percent, from estimated expenditures in the current year. Most of this net reduction is due to shifting state costs to the counties and federal government. Figure 1 shows that General Fund expenditures for health and social services programs are projected to decrease by $274 million, or 2.6 percent, between 1987-88 and 1994-95. General Fund expenditures increased significantly until 1991-92, when realignment legislation shifted $2 billion of health and social services program costs from the General Fund to the Local Revenue Fund, which is funded through state sales taxes and vehicle license fees. This shift in funding accounts for the significant increase in special funds starting in 1991-92, as shown in Figure 1. General Fund spending declined in 1992-93, due to various C – 6 Health and Social Services Figure 1 Prop. Current Dollars Special Funds Ge nera l Fu nd 88-89 90-91 92-93 94-95 4 8 1 2 1 6 $ 2 0 Pe rc ent o f General Fund Budget Prop. 10 20 30 87-88 94-95 40% Health and Welfare Expenditures Current and Constant Dollars 1987-88 Through 1994-95 All State Funds (In Billions) Total Spending General Fund Spending Constant 1987-88 Dollars program reductions (the largest being welfare grant reductions). As discussed below, the budget proposes a significant General Fund reduction in 1994-95, partly offset by a sharp increase in special fund expenditures. Combined General Fund and special funds spending is projected to increase by 36 percent between 1987-88 and 1994-95. This represents an average annual increase of 4.5 percent. Figure 1 also displays the spending for these programs adjusted for inflation. On this basis, General Fund expenditures decreased by 22 percent between 1987-88 and 1994-95. Combined General Fund and special funds expenditures are estimated to increase by 8.7 percent from 1987-88 to 1994-95, on a constant dollar basis. This is an average annual rate of increase of 1.2 percent. As noted previously, the 1991 realignment legislation significantly altered the financing of health and social services programs by transferring funding for all or part of several mental health, public health, and social services programs to the counties. The sales tax and vehicle license fee revenues dedicated to realignment amounted to $2 billion in 1991-92, which was $239 million short of the amount that was initially estimated. The budget estimates that realignment revenues will be Overview C – 7 Number of Eligibles Prop. Figure 2 Traditional Eligibles Nontraditional Eligibles 86-87 88-89 90-91 92-93 94-95 3 4 5 6 Medi-Cal Caseloads Average Monthly Eligible Persons 1986-87 Through 1994-95 (In Millions) $2.2 billion in the current year, and the budget proposes an increase to $3.6 billion in 1994-95 as part of a broader restructuring proposal. We note that these state special fund expenditures do not reflect the proposed shift of $1.1 billion in property tax revenues from public schools to health and welfare programs in the counties, which is also part of the 1994-95 restructuring proposal. (Because the budget proposes to replace these revenues with General Fund monies, this will be reflected as a state expenditure for education programs.) CASELOAD TRENDS Figures 2 and 3 illustrate the caseload trends for the largest health and welfare programs. In both programs, significant increases coincide with the onset of the recession in 1990. Figure 2 shows the Medi-Cal caseload growth, broken out by traditional eligibility categories\u2014primarily AFDC and Supplemental Security Income\/State Supplementary Program ( S S I \/ S S P ) r e c i p i e n t s \u2014 a n d n o n t r a d i t i o n a l C – 8 Health and Social Services 86-87 88-89 90-91 92-93 94-95 0.4 0.5 0.6 0.7 0.8 0.9 1.1 AFDC SSI\/SSP Figure 3 a aSSI\/SSP cases are reported as individual persons. Cases 1.0 AFDC and SSI\/SSP Caseloads Average Monthly Cases 1986-87 Through 1994-95 (In Millions) eligibles\u2014groups recently made eligible by state and federal law, including newly legalized immigrants, undocumented persons, and pregnant women. Figure 2 shows there was a significant upswing in the rate of increase in the Medi-Cal caseload, beginning in 1989-90. This occurred primarily because of rapid growth in both the AFDC Program and in the nontra- ditional categories of Medi-Cal recipients. (For a more detailed discussion of this caseload growth, please refer to our Analysis of the 1992-93 Budget Bill, page V-90.) Figure 3 shows the caseload trend for the AFDC (Family Group and Unemployed Parent) and SSI\/SSP Programs. While the number of cases in the SSI\/SSP Program is greater than in the AFDC Program, there are more persons in the AFDC Program\u2014about 2.6 million compared to about 1 million for SSI\/SSP. (SSI\/SSP cases are reported as individual persons, while AFDC cases are primarily families.) Caseload growth in these two programs is due, in large part, to the growth of the eligible target populations. The increase in the rate of growth in the AFDC caseloads in 1990-91 and 1991-92 was partly due to the effect of the recession. Since then, the caseload has continued to Overview C – 9 increase but at a slower rate of growth. This slowdown, according to the Department of Finance, was due partly to (1) certain population changes, including lower migration from other states, and (2) a lower rate of increase in child-only cases (including citizen children of undocumented and newly legalized persons), which was the fastest growing segment of the caseload until 1993-94. (For a discussion of other factors affecting the AFDC caseload, please see our report on the program in The 1991-92 Budget: Perspectives and Issues, page 189.) The SSI\/SSP caseload can be divided into two major components: the aged and the disabled. The aged caseload generally increases in proportion to increases in the eligible population\u2014age 65 or older. This component of the caseload accounts for about one-third of the total. The larger component\u2014the disabled caseload\u2014has been growing faster than the rate of increase in the eligible population group (primarily ages 18 to 64). This is due to several factors, including (1) the increasing incidence of AIDS-related disabilities, (2) changes in federal policy that liberalized the criteria for establishing a disability, (3) a decline in the rate at which recipients leave the program (perhaps due to increases in life expectancy), and (4) expanded state and federal outreach efforts in the program. SPENDING BY MAJOR PROGRAMS Figure 4 shows expenditures for the major health and social services programs in 1992-93 and 1993-94, and as proposed for 1994-95. As shown in the figure, the three major benefit payment programs\u2014Medi-Cal, AFDC, and SSI\/SSP\u2014account for a large share of total spending in the health and social services area. C – 10 Health and Social Services Figure 4 Major Health and Welfare Programs Budget Summarya 1992-93 Through 1994-95 (Dollars in Millions) Actual 1992-93 Estimated 1993-94 Proposed 1994-95 Change From 1993-94 Amount Percent Medi-Cal General Fund $5,373.3 $5,784.2 $4,544.2b -$1,240.0 -21.4% All funds 13,888.5 16,843.1 17,056.4b 213.3 1.3 AFDC (FG&U) General Fund 2,696.4 2,789.8 1,183.9 -1,605.9 -57.6 All funds 5,638.0 5,785.3 5,040.7 -744.6 -12.9 AFDC (FC) General Fund 259.1 282.6 0.7 -281.9 -99.8 All funds 695.3 954.7 1,039.0 84.3 8.8 SSI\/SSP General Fund 2,295.3 2,081.9 2,120.4 38.5 1.8 All funds 5,082.6 5,305.9 5,904.4 598.5 11.3 County welfare administration General Fund 347.8 383.7 314.7 -69.0 -18.0 All funds 1,415.4 1,626.1 1,748.0 121.9 7.5 In-Home Supportive Services General Fund 159.1 251.1 \u2014 -251.1 -100.0 All funds 818.1 884.5 916.7 32.2 3.6 Regional centers General Fund 526.2 528.7 445.3 -83.4 -15.8 All funds 668.2 743.7 848.3 104.6 14.1 Developmental centers General Fund 29.9 32.9 35.9 3.0 9.1 All funds 566.7 590.7 594.5 3.8 0.6 Child welfare services General Fund 254.2 160.4 141.9 -18.5 -11.5 All funds 615.9 635.5 714.3 78.8 12.4 State hospitals General Fund 143.9 147.1 153.8 6.7 4.6 All funds 399.0 412.7 417.0 4.3 1.0 a Excludes departmental support. b Includes $60 million General Fund and $129 million all funds proposed for federally required long-term care rate increases but not reflected in the Budget Bill. Overview C – 11 MAJOR BUDGET CHANGES Figures 5 and 6 illustrate the major budget changes proposed for health and social services programs in 1994-95. Generally, the major changes can be grouped into the following categories: Figure 5 Health Services Programs Proposed Major Changes for 1994-95 General Fund Medi-Cal Requested: $4.5 billionDecrease: $1.3 billion (-23%) ! $338 million for caseload increase ! $278 million due to higher utilization of services and other cost increases ! $334 million due to expiration of federal SLIAG funds ! $1.4 billion from restructuring: giving counties a share of program costs ! $408 million from assuming an increase in the federal cost- sharing ratio ! $300 million by assuming additional federal funds for services for undocumented persons ! $168 million by eliminating nine optional benefits ! $92 million by eliminating the state-only program for prenatal care for undocumented persons Alcohol and Drug Programs Requested: $21 million Decrease: $57 million (-73%) ! $62 million from restructuring: transferring responsibility for most programs to the counties C – 12 Health and Social Services Figure 6 Social Services Programs Proposed Major Changes for 1994-95 General Fund AFDC Requested: $1.2 billionDecrease: $1.9 billion (-61%) ! $148 million to fund AFDC (FG&U) basic caseload increase ! $1.3 billion from restructuring: increasing county share of costs ! $282 million from 10 percent grant reduction ! $184 million from welfare reform: 15 percent grant reduction after six months, maximum family grant, and reduced pregnancy benefits ! $170 million from an assumed increase in the federal cost- sharing ratio ! $40 million from assumed federal reimbursement for refugee costs SSI\/SSP Requested: $2.1 billionIncrease: $38 million (+1.8%) ! $156 million to fund basic caseload increase ! $50 million due to expiration of federal SLIAG funds ! $64 million for full-year effect of not passing through January 1994 federal cost-of-living adjustment to recipients ! $37 million for full-year effect of current-year grant reduction IHSS Requested: \u2014Decrease: $251 million (-100%) ! $251 million from restructuring: increasing county share of costs Overview C – 13 1. The Budget Proposes to Fund Caseload Increases. This includes funding for projected caseload increases of 6.7 percent in the Medi-Cal Program, 3.7 percent in the AFDC Program, and 5.2 percent in the SSI\/SSP Program in 1994-95. 2. The Budget Proposes to Shift a Significant Amount of State Costs to the Counties. This would be accomplished as part of the Governor’s restructuring proposal ($3.3 billion General Fund savings in health and social services programs, offset by state special fund (realignment) costs for health and social services and General Fund costs for trial courts and backfilling of property tax reductions for education programs). 3. The Budget Proposes to Shift a Significant Amount of State Costs to the Federal Government. This would be accomplished by the following actions: ! Assume enactment of federal legislation to increase the federal Medicaid sharing ratio for California from 50 percent to 54.4 percent of total costs for Medi-Cal, AFDC, and certain other programs, effective October 1, 1994 ($599 million General Fund savings in 1994-95). ! Assume legislation for federal assumption of the costs of (1) federally required Medi-Cal services to undocumented immigrants; (2) Medi-Cal, AFDC, and SSI\/SSP services provided to refugees during the first 36 months of residence; and (3) administering SSP cases in the SSI\/SSP Program (total General Fund savings of $454 million in 1994-95). 4. The Budget Proposes Major Program Reductions in the Medi-Cal and AFDC Programs: ! Eliminate nine optional Medi-Cal benefits (net state savings of $154 million in 1994-95, after accounting for offsetting costs to maintain these benefits for developmentally disabled persons served by the Regional Centers). Most of the savings would result from elimination of adult dental services. ! Adopt a welfare reform package (net state savings of $460 million in 1994-95, including costs for administration). Most of the savings would result from across-the-board reductions in the AFDC maximum aid payment (MAP). ! Eliminate the state-only Medi-Cal program for prenatal care for undocumented persons, effective February 1, 1994 (state savings of $14 million in 1993-94 and $92 million in 1994-95). C – 14 Health and Social Services 5. The Budget Proposes State Funding to Compensate for the Expiration of Federal Funds From the State Legalization Impact Assistance Grant (SLIAG). Under federal law, federal funding from the SLIAG will not continue in the budget year, resulting in a General Fund cost of $400 million in 1994-95, primarily in the Medi-Cal and SSI\/SSP Programs. State and Local Restructuring The Governor’s restructuring proposal involves a shift of $3.3 billion in spending for various health and welfare programs from the state General Fund to the counties. In order to make the shift fiscally neutral, it would be accomplished by a shift to the counties of sales tax and property tax revenues, state hospital patient revenues, trial court fines and penalties revenues, and state assumption of a higher share of trial court costs. As shown in Figure 7, the spending shift would be accomplished by giving counties a share of the costs of the Medi-Cal Program (with some components excluded); increasing the county share of costs for the AFDC Program, the IHSS Program, the county services block grant program, and county welfare program administration; and shifting spending for most alcohol and drug programs to the counties. We discuss the restructuring proposal in more detail in our companion volume, The 1994-95 Budget: Perspectives and Issues. Elimination of Medi-Cal Optional Benefits The budget assumes that the Legislature will enact legislation to eliminate 9 of the 28 optional service categories in the Medi-Cal Program, for a General Fund savings of $168 million in 1994-95. These savings would be partially offset by additional costs of $14 million in the Depart- ment of Developmental Services in order to maintain these services for regional center clients. The services that would be eliminated are adult dental, nonemergency transportation, medical supplies (excluding incontinence), speech and audiology, psychology, acupuncture, podiatry, chiropractic, and independent rehabilitation centers. The budget proposes to continue these services for children under age 21, persons in long-term care facilities, and developmentally disabled clients. Overview C – 15 Figure 7 State and County Restructuring Proposal Expenditure Shift to Counties Health and Social Services Programs 1994-95 (Dollars in Thousands) Share of Nonfederal Costs General Fund Expenditure Shift Current Law Proposed Programs State County State County Medi-Cala 100% \u2014 77% 23% $1,352,903 AFDC grants 95 5% 50 50 1,041,774 AFDC and Food Stamps county administration 70 30 50 50 100,185 IHSS 65 35 \u2014 100 364,460 AFDC-Foster Care 40 60 \u2014 100 323,821 Alcohol and drugb 90 10 \u2014 100 62,258 County services block grant 70 30 \u2014 100 16,204 Other programsc 95 5 50 50 5,158 Total $3,266,763 a Proposal is for counties to assume 11.51 percent of total costs, which equates to 23 percent of nonfederal costs. Excludes state hospitals and developmental centers, targeted case management, and supplemental payments to disproportionate-share hospitals. b Applies to various programs; excludes perinatal substance abuse programs. No match is currently required for small counties. c Miscellaneous AFDC-related components of other programs: child care, Cal Learn administration, employment services, and staff development. Welfare Reform The Governor’s proposed welfare reform package is summarized below: ! Across-the-Board Grant Reductions. The budget proposes a 10 percent reduction in the AFDC maximum grant levels and an additional 15 percent reduction for families that have an able- bodied adult and are on aid more than six months. The impact of the reductions would be primarily on nonworking recipi- ents\u2014those who currently get the maximum grants. The grant reductions would be partially offset by increases in federally funded food stamps. ! Maximum Family Grant. Under this proposal, the MAP, which increases with family size, would not increase for a child born after the parent has been on aid for nine months. (In effect, the MAP C – 16 Health and Social Services would not increase for children conceived while the family is on aid.) ! Reduction in Pregnancy Benefits. AFDC pregnancy-related payments would be eliminated except for the federally assisted program, which provides payments during the last trimester of pregnancy. Specifically, the budget proposes to eliminate (1) grants provided to pregnant women without other children during the first six months of pregnancy and (2) a $70 monthly supplement that is provided to all pregnant women who are receiving AFDC. ! Teen Parent Provisions. The budget proposes to require parents under age 18, with some exceptions, to reside with their parents, legal guardian, or adult relative in order to receive AFDC. ! Time-Limited Aid. The budget proposes legislation to provide that AFDC grants for families with an able-bodied adult will be reduced by the amount of the grant associated with the adult, once the family has been on aid for more than two years cumulative time. These grant reductions would not affect the 1994-95 budget year but would be implemented beginning July 1, 1996. HEALTH & SOCIAL SERVICES DEPARTMENTAL ISSUES SECRETARY FOR HEALTH AND WELFARE (0530) The Secretary for the Health and Welfare Agency (HWA) is directly responsible to the Governor for general policy formulation in the health and social services area. The Secretary also oversees the operations of the departments in the agency’s jurisdiction. The budget proposes $1.8 million ($1.3 million General Fund) to support the agency in 1994-95. The General Fund amount represents an increase of $138,000, or 12 percent, over estimated current-year expenditures from this funding source. Federal Funds Potentially Available We recommend that the HWA report, during the budget hearings, on the feasibility of obtaining additional federal funds for health and social services programs and the potential state and county savings from securing these funds. In February 1994, the Department of Finance convened a meeting of legislative and executive staff to explore the possibility of obtaining additional federal funds for health and social services programs, for the purpose of saving state and county funds. We believe that some of the options presented are worth further consideration, including the following: C – 18 Health and Social Services ! Emergency Assistance Funds for Mental Health. Under Title IV-A of the Social Security Act, federal funds are provided for aid to families in emergency situations. The state currently claims these Emergency Assistance (EA) funds for certain services provided by county probation departments and county welfare departments. It is also permissible, however, to claim these funds for mental health services. ! Extend Period of Eligibility for Emergency Assistance Funds. Under the existing approved state plan for claiming EA funds for services provided by county probation and welfare departments, payment is made for a maximum of 6 months of services during a 12-month period. At least one state, however, has received approval to obtain EA funds for 12 months of services. ! Medicaid Funds for Foster Care Group Home Services. Los Angeles County is presently exploring the possibility of obtaining federal Medicaid funds for certain treatment services provided to children residing in foster care group homes. Currently, these specific services are funded entirely by state and county funds. We recommend that the HWA report, during the budget hearings, on the feasibility of obtaining additional funds not reflected in the budget, and the potential state and county savings from doing so. Office of Statewide Health Planning and Development C – 19 OFFICE OF STATEWIDE HEALTH PLANNING AND DEVELOPMENT (4140) The Office of Statewide Health Planning and Development (OSHPD) (1) develops state health plans, (2) administers demonstration projects, (3) operates health professions development programs, (4) reviews plans and inspects health facilities construction projects, and (5) collects health cost and utilization data from health facilities. Cal-Mortgage Reserves Are Inadequate We recommend that the OSHPD report during budget hearings on measures that could be taken to either increase the fund reserve levels in the Cal-Mortgage Loan Insurance Program or otherwise ensure that the General Fund is protected against unreasonable risk. Background. The Cal-Mortgage Loan Insurance Program was established in 1969 to administer, without cost to the state, an insurance program for health facility construction. Cal-Mortgage guarantees the amounts borrowed by health facilities for capital needs and pays off the lender in the event that a health facility defaults on a loan. The program is funded through annual premiums paid by health facilities based on a specified percentage of the outstanding principal of each insured loan. The premiums are deposited into the Health Facility Construction Loan Insurance Fund (HFCLIF). As of November 30, 1993, the HFCLIF reserve was approximately $118 million with loan guarantees totaling $2 billion. The state General Fund is the ultimate guarantor of the loans if the HFCLIF reserve is not adequate to cover defaults. Low Reserves Pose Potential Risk to the General Fund. During the first 20 years of operation, the program experienced no defaults. However, economic conditions and specific changes affecting funding for health care facilities, such as managed care and restrictions on government spending, have combined to increase the environment of risk for the Cal-Mortgage Program. In 1991-92 the fund paid out $4.5 million on its first default. In the current year, the program experienced a major default of $167 million and the OSHPD has identified additional projects that have not defaulted but may require assistance in making payments. C – 20 Health and Social Services It is our understanding that the current-year default and other identified pressures on the fund will be covered by payments on a monthly basis from the premiums and interest earned by the fund. We are concerned, however, about the increase in defaults in the past few years and the uncertainty regarding future defaults. Since the General Fund is the ultimate guarantor for the program, we believe that alternatives should be examined to ensure that the state is protected against unreasonable risk. In an April 1993 evaluation of the HFCLIF reserve, an accounting firm recommended that Cal-Mortgage adopt reserve levels consistent with those that would be required by an insurance company and concluded that the HFCLIF reserves as of September 30, 1992 were too low by $55 million. In September 1993, the OSHPD revised this amount to $96 million based on the methodology used in the report. The inadequate reserve level as well as the current loan default were cited by the office as reasons for a moratorium on new loan guarantees imposed in September 1993. Staff at Cal-Mortgage, however, indicated that the moratorium may be lifted in February 1994. In our review of the program, the OSHPD was not able to justify reserve levels lower than those normally required in private industry. We believe that given the current fiscal condition of the General Fund and the apparent increase in risk related to the Cal Mortgage program, evidenced by the recent loan defaults, the Legislature may want to consider whether current reserve levels in the HFCLIF are sufficient. We recommend that the OSHPD report during budget hearings on the risk to the General Fund in the budget year as well as discuss the impact of various options to reduce the risk. Such options could include statutory changes to increase the premiums charged to health facilities that borrow funds or to limit the number of new guarantees provided under the program. Proposition 99 Funds Could Be Used to Address Primary Care Provider Shortage We recommend enactment of legislation to appropriate $2 million from the Cigarette and Tobacco Products Surtax Fund for the Song- Brown Family Physician Training Program in order to help address the shortage of family physician assistants and nurse practitioners. Background. Shortages in primary care medical personnel continue in the state and nationwide. Furthermore, the demand for primary care providers has been projected to double in the state by the year 2000. Office of Statewide Health Planning and Development C – 21 The use of nurse practitioners and physician assistants can be a cost- effective means of providing health care. According to the Department of Health Services, primary care nurse practitioners and physician assistants can provide 80 percent of the services currently provided by primary care physicians, with considerable reductions in the cost of care as well as the cost of training these providers. Nurse practitioners can work independently of physicians but have restrictions on their ability to write prescriptions and admit patients. Physician assistants work under the supervision of a licensed physician. Most clinics operated by nurse practitioners have a physician on contract. Both nurse practitioners and physician assistants are used extensively in primary care clinics and county health care systems, especially in underserved areas. Rural areas, for example, rely heavily on nurse practitioners and physician assistants for primary care. These areas often cannot attract primary care physicians, either due to location or lack of funding. Song-Brown Program. The Song-Brown Family Physician Training Program, administered by the OSHPD, was established in 1974 in response to the shortage of primary care medical personnel. The program provides financial support to medical schools, teaching hospitals, and other training programs to increase the supply of primary care physicians, physician assistants, and nurse practitioners, particularly in medically underserved areas. Studies have shown the program to be effective in increasing the number of these professionals who are trained in California. The budget proposes $3.3 million ($2.9 million General Fund) for the Song-Brown program in 1994-95. This is a reduction of $900,000, or 21 percent, from estimated current-year spending. The reduction is due to one-time funding from the Cigarette and Tobacco Products Surtax Fund in the current year for physician assistant training programs. In the current year, program funding was allocated to physician residency programs ($2.3 million), nurse practitioner and physician assistant training programs ($1.4 million), and special projects ($500,000). Recommendation. Considering the lower cost of training primary care nurse practitioners and physician assistants, relative to physicians, and the potential savings in delivery of health care services, we believe that additional funding to train nurse practitioners and physician assistants is an efficient method for reducing the shortage of primary care providers in the state. Accordingly, we recommend that the program be augmented b y $ 2 m i l l i o n i n 1 9 9 4 – 9 5 . W e e s t i m a t e t h a t C – 22 Health and Social Services $2 million would allow training of an additional 130 nurse practitioners and physician assistants. Because of the constraints on the General Fund, we recommend that the additional funding be appropriated\u2014either in legislation reauthorizing Proposition 99 funds or in a separate bill\u2014from the Cigarette and Tobacco Products Surtax Fund. As discussed in our analysis of Proposition 99 funding (Public Health), the budget proposes a reserve level of 5.4 percent of expenditures (5 percent of revenues) for this fund in 1994-95. Appropriating the $2 million from the reserves would still leave the fund with an estimated reserve of 5 percent of expenditures (4.7 percent of revenues), which we believe is sufficient. Department of Alcohol and Drug Programs C – 23 DEPARTMENT OF ALCOHOL AND DRUG PROGRAMS (4200) The Department of Alcohol and Drug Programs (DADP) directs and coordinates the state’s efforts to prevent or minimize the effect of alcohol- related problems, narcotic addition, and drug abuse. The budget proposes $260 million from all funds for support of DADP programs in 1994-95, which is a decrease of 23 percent from estimated current-year expenditures. The budget proposes $25 million from the General Fund in 1994-95, which is $57 million, or 69 percent, below estimated current-year expenditures from this funding source. This is due to a proposed shift of most of the state-funded drug and alcohol programs to the counties, as part of the Governor’s restructuring proposal. We discuss the restructuring proposal in detail in our companion volume, The 1994-95 Budget: Perspectives and Issues. C – 24 Health and Social Services CALIFORNIA MEDICAL ASSISTANCE PROGRAM (MEDI-CAL) (4260) The California Medical Assistance Program (Medi-Cal) is a joint federal-state program to provide health care services to public assistance recipients and to other individuals who cannot afford to pay for these services themselves. The budget proposes Medi-Cal expenditures of $17 billion ($4.5 billion General Fund and $1.4 billion county funds) in 1994-95. This represents a General Fund decrease of $1.2 billion, or 22 percent, below estimated current-year expenditures. (These figures include $129 million all funds and $60 million General Fund for a mandatory long-term care rate increase, which has been reflected in the budget’s overall expenditure totals but does not appear in the Budget Bill.) Regarding the proposed General Fund decrease, $1.4 billion is due to a shift from the General Fund to the counties as part of a proposed restructuring of state and local programmatic and funding responsibilities. At the state level, the Department of Health Services (DHS) administers the Medi-Cal Program. Other state agencies, including the California Medical Assistance Commission (CMAC) and the Departments of Social Services, Developmental Services, Alcohol and Drug Programs, and Mental Health perform Medi-Cal-related functions under agreements with the DHS. At the local level, county welfare departments determine the eligibility of applicants for Medi-Cal and are reimbursed for those activities. The federal Health Care Financing Administration oversees the program to ensure compliance with federal law, and must approve significant policy changes. Generally, program expenditures are supported on a 50 percent General Fund, 50 percent federal funds basis under current federal law. CASELOADS AND EXPENDITURES Who Is Eligible for Medi-Cal? Persons eligible for Medi-Cal fall into four major categories: California Medical Assistance Program C – 25 ! Categorically Needy. Families or individuals who receive cash assistance under two programs\u2014Aid to Families with Dependent Children (AFDC) and Supplemental Security Income\/State Supplementary Program (SSI\/SSP)\u2014comprise the categorically needy. The categorically needy automatically receive Medi-Cal eligibility cards and pay no part of their medical expenses. ! Medically Needy. This category includes (1) families with dependent children and (2) aged, blind, or disabled persons with incomes higher than the June 1991 AFDC payment level ($694 for a family of three). These individuals pay no part of their medical expenses if their incomes are between 100 percent and 133a percent of the AFDC payment level for their household size. Indi- viduals with higher incomes can become eligible for Medi-Cal if their medical expenses require them to spend down their incomes to 133a percent of the June 1991 AFDC payment level. These persons are said to have a share of cost. (Medically needy beneficiaries who reside in long-term care facilities are required to pay all but $35 of their monthly income toward the costs of their care.) ! Medically Indigent. Under this category, the Medi-Cal Program provides services to pregnant women and children under the age of 21. Also, these services are available to persons in long-term care facilities who (1) do not belong to families with dependent children and are not aged, blind, or disabled but (2) meet income and share-of-cost criteria that apply to the medically needy category. ! Nontraditional Eligibles. Federal and state law extend coverage under the Medi-Cal Program to newly legalized and undocumented persons, and to pregnant women and children who meet various income criteria. Figure 8 summarizes the various eligibility categories for the Medi-Cal Program. The first four categories are required by federal law\u2014that is, the Medi-Cal Program must provide services to individuals meeting these criteria in order for the program to receive federal funds. The remaining eligibility categories are optional\u2014the state has discretion over whether to provide services to individuals in these categories, though it receives federal funds to the extent it chooses to do so. C – 26 Health and Social Services Figure 8 Who Is Eligible for Medi-Cal? (Dollars in Millions) Income Level Other Characteristics Number Eligible 1994-95 General Fund Expendituresa Federally Required Categories Categorically Needy AFDC or SSI\/SSP income standard ! Families with dependent children ! Aged, blind, or disabled persons 4,169,000 $3,943 Other Women and Children Percent of federal poverty level: Up to 185% ! Pregnant women and their infants 177,700 164 Up to 133% ! Children ages 1 to 6 Up to 100% ! Children ages 7 to 9 Newly Legalized Persons and Refugees ! Up to 133% of June 1991 AFDC payment level ! Persons meeting any Medi-Cal criteria receive emergency and pregnancy related services only 8,800 16 ! Persons with higher incomes may spend down to this level ! Aged, blind, and disabled per- sons and children to age 19 receive all services Undocumented Persons Same as newly legalized persons ! Persons meeting any Medi-Cal criteria may receive emergency services only, including labor and delivery 390,000 400 Additional Categories in California Long-Term Care Persons of any income must spend-down to $35 per month ! Require skilled nursing care 72,700 1,064 Medically Needy ! Up to 133% of June 1991 AFDC payment level ! Families with dependent children ! Aged, blind, or disabled persons 614,500 853 ! Persons with higher incomes may spend down to this level Medically Indigent Same as medically needy ! Pregnant women ! Children to age 21 294,900 212 Other Women and Children 186% to 200% of federal poverty level ! Pregnant women and their infants 4,000 6 Undocumented Persons Same as medically needy ! Pre- and postnatal services NA 92 a Figure assumes current law. Budget assumes $753 million less than amount shown due to requested increases in federal funds and $1.4 billion less due to a proposed county share of the program’s costs. California Medical Assistance Program C – 27 What Benefits Does Medi-Cal Provide? Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nursing care, doctor visits, laboratory tests and X-rays, family planning, regular examinations for children under the age of 21, and services in rural health clinics. Many Medi-Cal services require prior state authorization and may not be reimbursed unless the service is determined by the department’s field offices to be medically necessary. In addition, the federal government provides matching funds for optional services. California currently provides 28 of these 31 optional services, but the budget proposes to eliminate nine of them. We discuss this proposal in more detail below. Proposed Changes for 1994-95 The major General Fund changes proposed for the Medi-Cal Program in 1994-95 are in four categories: (1) $616 million for caseload, utilization, and cost increases; (2) $334 million to replace federal funds that were previously available under the State Legalization Impact Assistance Grant (SLIAG); (3) $1.4 billion due to a proposed county share of the program’s costs; and (4) $837 million in various program changes. The proposed program changes include the following: ! Assumed Receipt of Federal Funds (Savings of $753 Million General Fund). The budget assumes receipt of $753 million in additional federal funds to offset state expenditures. Specifically, the budget assumes receipt of (1) an additional $408 million in federal funds by assuming congressional action to adjust the formula by which Medicaid funding is distributed among the states, (2) $300 million in federal funds to offset the state’s share of expenditures for services to undocumented persons, and (3) $45.1 million to fully cover the costs of serving refugees who are eligible for Medi-Cal because they meet AFDC criteria. ! Elimination of Optional Services (Net Savings of $154 Million General Fund). The budget proposal assumes that the Legislature will enact legislation to eliminate nine optional services\u2014adult dental, nonemergency transportation, psychology, podiatry, acupuncture, independent rehabilitation centers, chiropractor, speech and audiology, and certain medical supplies. We discuss this proposal in more detail below. ! County Administration Underclaiming Adjustment (Combined Current- and Budget-Year Savings of $58 Million General Fund). The budget proposes to reduce General Fund support for county administration in both the current year and the budget year C – 28 Health and Social Services because it assumes that current underclaiming of these funds will continue. ! Statutory COLAs for Providers ($144.2 Million General Fund and County Funds). The budget contains $121 million ($60.1 million General Fund) for an 8.9 percent increase on drug ingredients and $48.3 million ($24.1 million General Fund) for a 7.9 percent increase for noncontract hospital inpatient services. The budget also proposes a federally required COLA for long-term care facilities ($60 million General Fund), although this amount is not reflected in the Budget Bill. ! Elimination of Prenatal Services for Undocumented Women (Combined Current- and Budget-Year Savings of $181 Million General Fund and County Funds). The budget proposal assumes that the Legislature will enact legislation to eliminate prenatal services for undocumented women by February 1, 1994. We discuss this proposal in more detail below. ! Pharmacy Contracting (Savings of $33.9 Million General Fund and County Funds). The budget assumes enactment of legislation authorizing the department to contract with an outside organization to manage the prescription drug program, effective January 1, 1995. We discuss this proposal in more detail later in this analysis. Budget Proposes County Share of Program Costs The budget proposes a General Fund reduction of almost $1.4 billion in the state’s share of costs for the Medi-Cal Program and a corresponding 11.5 percent county share of total program costs as part of a broader restructuring proposal. In our companion volume, The 1994-95 Budget: Perspectives and Issues, we recommend that the Legislature not adopt an across-the-board county share of the Medi-Cal Program because the program’s costs are heavily influenced by economic and demographic forces that are largely beyond the counties’ ability to control. In lieu of the administration’s proposal, however, we recommend: ! A 50 percent share of nonfederal long-term care costs (and a 50 percent share of the In-Home Supportive Services Program). ! A 100 percent share of nonfederal Medi-Cal costs for mental health and substance abuse services. California Medical Assistance Program C – 29 ! The development of outcome-based fiscal incentives, such as payments by counties for substance-exposed infants. In addition, we recommend in this analysis a number of specific steps that the state could take to achieve efficiencies in the Medi-Cal Program. Medi-Cal Program Growth Growth in California’s Medi-Cal Program over the last few years has been dramatic. As background for the recommendations that follow, we review some of the principal reasons for growth in the program and the department’s efforts to control Medi-Cal expenditures. As Figure 9 indicates, Medi-Cal General Fund expenditures have increased from $3 billion in 1988-89 to an estimated $5.8 billion in 1993-94, reflecting an increase of about $2.7 billion over the five-year period, or about 14 percent annually. Federal funding for the program has increased at a significantly higher rate largely due to the SB 855 Program, which provides payments to disproportionate-share hospitals, begun in 1991-92. The purpose of these payments is to recognize the financial burden of uncompensated care on safety net hospitals that serve a high number of indigent persons. These payments, and the required county match, comprise $1.8 billion of the total expenditure figures for 1991-92 and 1992-93 and $2.9 billion for 1993-94. Figure 9 Medi-Cal Expendituresa 1988-89 Through 1993-94 (Dollars in Billions) 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 Average Annual Increase General Fund $3.0 $3.5 $4.1 $5.8 $5.4 $5.8 14.1% All funds 6.2 7.2 8.8 13.8 13.9 16.8 22.1 a Figures for 1991-92 have been adjusted to eliminate one-time costs for change from cash to accrual accounting. Figures for 1993-94 are estimated. Reasons for Increased Medi-Cal Expenditures The dramatic increase in Medi-Cal expenditures over the last five years has resulted largely from caseload increases, which in turn reflect economic and societal changes, medical care inflation, and court decisions. We discuss these factors below. Caseload Increases. The largest single factor driving program expenditures is the significant increase in the number of persons eligible C – 30 Health and Social Services for Medi-Cal. In 1985-86, 2.9 million persons (one out of ten persons in the state) were eligible for the program, while in the current year the number of eligibles is estimated to reach 5.4 million persons (more than one out of every six residents). As a point of comparison, the number of persons who receive health care coverage through Medi-Cal is now greater than the number of children enrolled in California’s public school system. In general, three factors account for the increase in the number of eligible participants. The traditional recipients of Medi-Cal services\u2014primarily AFDC and SSI\/SSP recipients\u2014have been increasing significantly during the last few years, largely as the result of economic and demographic changes. In addition, the Medi-Cal Program caseload has increased as a result of state and federal changes that have expanded eligibility to nontraditional recipients of these services. Specifically, the federal government has mandated that the state provide medical services to newly legalized and undocumented persons and expand eligibility for pregnant women and children. Similarly, the state has elected to extend coverage to pregnant women and their infants beyond the federal requirements. Expenditures due to these state and federal policy changes account for about one-third of total expenditure growth since 1989-90. Societal Changes. One societal change that has affected the Medi-Cal Program is the emergence of the AIDS epidemic. Medi-Cal expenditures for AIDS-related illnesses were estimated to be $140 million during 1992-93. In addition, the growth in the number of unmarried teenage women having children, citizen children born to undocumented women, and children born to substance-abusing mothers also has increased expenditures. The extent to which these changes have contributed to expenditure growth is difficult to quantify, but it is likely that it is substantial. Medical Care Inflation. Medical care costs increase at rates that generally exceed other types of inflation. For example, medical care inflation has averaged 7.4 percent annually in California over the last three years, which is more than twice the rate of inflation for all other types of goods and services. Medi-Cal payment levels for some services (such as for physician services) are discretionary, while others are automatically adjusted pursuant to statute (such as for generic drugs and nursing facilities). Hospital inpatient rates generally are negotiated, but the state has little practical alternative to recognizing at least a portion of the cost increases that hospitals experience. Accordingly, because expenditures for hospital inpatient services, long-term care, and drugs account for the vast majority of Medi-Cal expenditures, medical care inflation has played a significant role in the program’s expenditure growth over the last several years. Court Decisions Concerning Provider Rates. Under federal law, the state must offer access to services comparable to those which are available in the community. The courts have interpreted this provision to require rate increases for certain services. For example, the state recently was California Medical Assistance Program C – 31 ordered to increase rates substantially for dental services, because the courts found that low Medi-Cal rates had the effect of denying access to those services. The administration estimates that this court decision will result in additional General Fund expenditures of $228 million in the current year. (Similar court cases are pending that could affect rates for all outpatient services.) MANAGED CARE Department Continues Major Expansion of Managed Care Under the department’s strategic plan, almost half of all Medi-Cal beneficiaries would be enrolled in a managed care arrangement by the end of 1994-95. In 1993, the department released a strategic plan intended to rapidly move the Medi-Cal Program toward a managed care approach to providing Medi-Cal services throughout California. In this section, we review existing managed care arrangements and the department’s strategy for expansion of managed care, and offer comments and recom- mendations for the Legislature’s consideration. Background. The Legislature and the department have, for several years, attempted to increase the number of Medi-Cal beneficiaries enrolled in managed care arrangements. In particular, legislation accompanying the 1992 Budget Act gave the department broad authority to expand managed care in California, with the goals of improving beneficiary access to care and making the Medi-Cal Program more cost- effective. Currently, approximately 600,000 out of 5.4 million Medi-Cal beneficiaries are enrolled in a managed care arrangement. The department anticipates this number will increase by 300,000 to a total of 900,000 beneficiaries in 1994-95. In addition, the department proposes the mandatory implementation of managed care in 13 counties by late 1994-95 or 1995-96, which will affect an additional 2.5 million beneficiaries. C – 32 Health and Social Services Under managed care arrangements, the Medi-Cal Program attempts to control costs by generally reimbursing providers on a capitated, or per- person basis regardless of the number of services any given individual uses. In addition, the use of specialists and high-cost services requires a physician referral. This approach contrasts with the fee-for-service system, where Medi-Cal pays providers for each service they provide, and the beneficiary has his or her choice in selecting providers. In fee-for-service, utilization is controlled by requiring prior authorization from the Medi- Cal field offices for the more expensive medical services. The principal managed care arrangements are: ! Prepaid Health Plans (PHPs). Medi-Cal contracts with private PHPs to provide care to AFDC-linked beneficiaries. The PHPs are paid a monthly capitation payment, based on an estimate of the costs of serving beneficiaries in the fee-for-service system. CIGNA Health Plan, Foundation Health, and Kaiser Permanente are among the PHPs that have existing Medi-Cal contracts. The department generally has not entered into contracts to enroll SSI\/SSP-linked beneficiaries in PHPs because it believes they are more likely to have existing relationships with primary care physicians. ! County-Organized Health Systems (COHS). Under this approach, the county acts as a prepaid plan, serving all Medi-Cal beneficiaries in the county. The COHS receive a capitated rate for each beneficiary in the county, and assume full financial risk. Currently, Santa Barbara and San Mateo Counties have fully implemented this approach, and two additional counties\u2014Solano and Santa Cruz\u2014will begin operations in 1994. (Orange County will begin operations in 1995-96.) Federal law prohibits additional county-organized systems in California beyond these five. ! Geographic Managed Care (GMC). Under this approach, the Medi- Cal Program negotiates contracts directly with providers to accept beneficiaries within a specified area, again paying a monthly rate based on the estimated cost of providing services to similar beneficiaries under the fee-for-service system. The department will begin implementation of this approach in Sacramento County in April 1994. ! Primary Care Case Management (PCCM). PCCM plans are paid a fixed monthly fee (per person) to manage the care of the Medi-Cal beneficiaries enrolled in the plan. They approve referrals to specialists, nonemergency hospitalizations, and other high-cost procedures. If the costs of care for enrollees in a PCCM plan are less than the estimated fee-for-service cost would have been for similar beneficiaries, the PCCM plan receives a payment equal to half the estimated savings. California Medical Assistance Program C – 33 In addition, the department is implementing a program to provide case management services to high-risk beneficiaries directly. Beneficiaries included in this program are selected on the basis of the expected cost of treating persons with certain diagnoses and demographic characteristics (for example, children with severe infections). The department began implementation of this program in February 1993. Figure 10 summarizes the budgeted fiscal effect for 1994-95 of managed care expansion efforts the department will initiate in the current and budget years. Although it shows anticipated General Fund savings of $8.8 million in the budget year, we note that some of these efforts had not been implemented at the time this analysis was prepared and the magnitude of savings ultimately realized may be less. Figure 10 1994-95 Impact of Current- and Budget-Year Managed Care Expansion Efforts (Dollars in Thousands) Affected Beneficiaries General Fund Savings Prepaid health plans 36,425 $830 Primary care case management 35,070 2,849 County-organized health systems Santa Cruz 26,522 \u2014 Solano 44,923 \u2014 Sacramento County Geographic Managed Care 160,000 5,085 Totals 302,940 $8,764 Principal Components of the Strategic Plan. The department’s strategic plan and the budget propose to enroll nearly half of all beneficiaries (2.5 million out of an estimated 5.7 million) in a managed care arrangement by late 1994-95. The plan proposes to expand the number of beneficiaries served under managed care arrangements in the following ways: ! Continue current expansion efforts to enroll a total of about 570,000 beneficiaries in PHPs or PCCM plans by July 1995. This is an increase of approximately 80,000 beneficiaries over current enrollment levels. C – 34 Health and Social Services ! Begin operation of COHS in Solano and Santa Cruz Counties, and the GMC project in Sacramento County. These three efforts will serve approximately 230,000 beneficiaries. ! Require the expansion of managed care in 13 additional counties, by a combination of (1) a local initiative to serve up to 70 percent of most AFDC-linked Medi-Cal beneficiaries (and medically indigent children) and (2) a single prepaid health plan to serve the remaining AFDC-linked beneficiaries. Additional eligibility categories (such as SSI\/SSP beneficiaries) may be included at the county’s option. If the county declines to develop a local initiative, the strategic plan envisions the implementation of GMC in that county. The department indicates that the 13 selected counties will be closed to fee-for-service reimbursement (for services to AFDC-linked beneficiaries) effective March 1, 1995, unless the counties request an additional one-year extension to begin implementation. The counties identified for mandatory expansion are shown in Figure 11. Figure 11 Counties Designated for Mandatory Implementation of Managed Care in 1993-94 and 1994-95 Affected Beneficiariesa Alameda 133,100 Contra Costa 61,600 Fresno 151,800 Kern 79,200 Los Angeles 1,105,500 Riverside 127,600 San Bernardino 227,700 San Diego 239,800 San Francisco 57,200 San Joaquin 89,100 Santa Clara 115,500 Stanislaus 61,600 Tulare 67,100 Total 2,516,800 a Figures are LAO estimates for 1994-95, based on September 1992 caseload. California Medical Assistance Program C – 35 Managed Care Implementation Should Be Reevaluated We recommend that the Legislature reevaluate the broad authority it has granted the department to expand managed care because we believe these efforts, as they are presently being pursued, are likely to result in additional costs to the Medi-Cal Program, rather than achieve savings. We offer specific recommendations to change the department’s approach. The department’s effort to reform the Medi-Cal Program through a rapid expansion of managed care has been noteworthy. The department has noted, correctly in our view, that managed care is likely to increase the availability of primary care and reduce the use of emergency room and acute care. As discussed below, however, we have serious reservations about the potential for the department’s current strategic plan to achieve savings, which was a primary goal of the Legislature in granting the department broad authority to expand managed care. More specifically, we are concerned that the department’s efforts, as they are currently being pursued, are resulting in additional costs to the Medi-Cal Program and may continue to do so unless the department’s approach is changed. Of particular concern is the department’s reliance on prepaid health plans as a tool to achieve cost containment in the Medi-Cal Program. The department’s strategic plan assumes a single prepaid health plan in each of the 13 counties to provide services to between 30 and 40 percent of AFDC-linked beneficiaries as an alternative to a county-operated local initiative. We have two concerns with this approach. First, the use of prepaid health plans does not appear cost-effective at existing reimbursement rates. Second, the reliance on one plan in each region does not ensure the competitive element the department seeks. We discuss these concerns in detail below. In addition, we believe that the cost-containment potential of managed care in the 13 counties would be enhanced by (1) encompassing all Medi- Cal beneficiaries, rather than only those who are linked to the AFDC Program, and (2) changing the methodology through which about $1 billion in supplemental payments are made in support of county indigent health programs. Reliance on PHPs Currently Not a Viable Cost-Containment Option We recommend that the Legislature (1) reduce the reimbursement rate the department pays to PHPs to ensure that they are less expensive to the General Fund than serving the same beneficiaries in the fee-for-service portion of the Medi-Cal Program, for a General Fund savings of $18 million in 1994-95, and (2) enact legislation that generally limits the proportion of Medi-Cal beneficiaries that may be enrolled in any C – 36 Health and Social Services individual PHP within a given geographic area. (Reduce Item 4260-101- 001 by $18 million.) Existing PHP Rates Result in Net Costs Rather Than Savings. The department acknowledges that its existing reimbursement rates for PHPs are higher than the General Fund cost of serving similar beneficiaries in the fee-for-service Medi-Cal Program. Accordingly, we do not see how the use of prepaid health plans can serve as an effective tool to control costs in the program. Background. Medi-Cal contracts with private PHPs to provide managed care, generally to AFDC-linked Medi-Cal beneficiaries. The plans receive a monthly capitated payment for services they provide to beneficiaries. These payments are determined by estimating the fees that the Medi-Cal Program would pay if a plan’s enrollees were served under the fee-for-service system. Under state and federal law, PHPs must be reimbursed at rates below those paid under the fee-for-service system. Analysis and Recommendation. Prior to 1990-91, the Medi-Cal Pro- gram paid PHPs a rate roughly equal to 97 percent of the fee-for-service equivalent for each beneficiary enrolled in the plans. Plan rates were increased in 1990-91 and have been frozen at the 1990-91 level in the years since. The budget proposes to continue this reimbursement level for 1994-95. Beginning in 1990-91, however, the cost per eligible has gone down in the fee-for-service Medi-Cal Program. This has occurred largely because the number of eligibles receiving services under the fee-for-service system has increased at a significantly higher rate than have costs. As a result, the department acknowledges that General Fund costs now exceed the cost that Medi-Cal would experience if it did not contract with PHPs to serve Medi-Cal beneficiaries. The relationship between PHP rates and Medi-Cal fee-for-service equivalent costs are shown in Figure 12. Based on data provided by the department for the current year, we estimate that if PHP rates for 1994-95 were computed using the same methodology as that used prior to 1990-91 (97 percent of the fee-for-service equivalent), total expenditures for PHP services would be reduced by about 8 percent, or about $36 million ($18 million General Fund). Accordingly, because PHP rates exceed the ceiling established by the Legislature, and unless changed indicate that PHPs are not a viable cost- containment option, we recommend that the Legislature reduce expenditures for PHP services by $36 million ($18 million General Fund) because the rates paid to such plans have not been adjusted to reflect 97 percent of costs that would be incurred if the beneficiaries were served through the fee-for-service providers. California Medical Assistance Program C – 37 88-89 89-90 90-91 91-92 92-93 72 76 80 84 88 PHP Rate Medi-Cal Fee- for-Service Cost Monthly Payment $92 Figure 12 Payments to Prepaid Health Plans Exceed Fee-for-Service Medi-Cal Costs 1988-89 Through 1992-93 PHPs Should Not Be Granted Monopolies. As discussed above, the department’s strategic plan generally assumes that a single nongovernmentally operated PHP will serve as the alternative provider network to the county-organized local initiative in each of the 13 counties. The department indicates that it relies on the PHP alternative to ensure competitiveness in the Medi-Cal Program, and thereby to control costs over time. We note, however, that a single alternative to the county- organized local initiative in no way assures competitiveness. In contrast, in certain situations, it may provide a recipe for increases in rates over time. This is because in future years, the department’s chosen private alternative plan (the single PHP) may in effect be in a monopoly situation by virtue of its enrollment size. The single PHP could use this leverage to demand higher rates. This in turn would create comparable rate pressure for the county-based plan. Accordingly, we recommend the enactment of legislation to prohibit the enrollment of the entire noncounty caseload in a single PHP within a given geographic area, unless a multi-year bid demonstrates that such a step is the most cost-effective option. Alternatives May Be Needed. Absent actions to reduce PHP rates and limit the number of Medi-Cal beneficiaries enrolled in any single plan, we C – 38 Health and Social Services are concerned that continued implementation of the department’s strategic plan to expand managed care in the Medi-Cal Program will result in increased General Fund costs for the program over time, rather than achieve savings as the Legislature intended. If, on the other hand, the Legislature reduces PHP rates and this has the effect of resulting in an insufficient number of PHPs that are willing to provide managed care services to Medi-Cal beneficiaries, it would be necessary to explore alternative cost-containment strategies. Targeting AFDC-Linked Beneficiaries Ignores Demonstrated Savings Potential We recommend enactment of legislation requiring that managed care expansion in 13 counties include SSI\/SSP-linked beneficiaries, rather than be at the counties’ option as the department proposes. The department’s strategic plan focuses on services provided to AFDC- linked beneficiaries and medically indigent children. Additional eligibility categories may be included at the counties’ option. However, as the department has stated, roughly 17 percent of all Medi-Cal beneficiaries\u2014including many who are not required to be incorporated in managed care\u2014account for 80 percent of the program’s cost. In contrast, AFDC-linked beneficiaries are among the lowest cost groups served by the Medi-Cal Program. In addition, the department has provided information demonstrating that SSI\/SSP-linked beneficiaries are among the eligibility groups where counties are most likely to achieve savings through managed care. According to the department, capitation rates paid to both San Mateo and Santa Barbara Counties in 1992-93 for their county-organized health systems exceeded the fee-for-service equivalent for AFDC-linked beneficiaries, but were significantly below the fee-for-service equivalent for SSI\/SSP-linked beneficiaries. These capitation rates suggest that these counties have been able to achieve savings among the higher-cost beneficiaries\u2014generally those who are linked to the SSI\/SSP Program. Accordingly, we believe that the department’s efforts to expand managed care neglect an area where savings potential exists: the high-cost groups of recipients. We recommend, therefore, the enactment of legislation requiring the inclusion of SSI\/SSP-linked beneficiaries in the 13 counties’ local initiatives, rather than allowing their inclusion at the counties’ option as the department proposes. California Medical Assistance Program C – 39 OTHER MEDI-CAL PROGRAM ISSUES Per-Discharge Payments Would Reduce Medi-Cal Costs We recommend enactment of legislation to implement a per- discharge reimbursement system for disproportionate share hospital (DSH) payments for a General Fund savings of $10.4 million. (Reduce Item 4260-101-001 by $10,400,000.) Background. The Medi-Cal Program makes supplemental payments to hospitals with a large, or disproportionate share, of indigent persons under Ch 279\/91 (SB 855, Robbins). These payments effectively provide approximately $1 billion in federal revenues, primarily to county hospitals, to offset the costs of services provided to uninsured persons who are not eligible for Medi-Cal. The amount of supplemental revenues each hospital receives under this program is determined in part by the number of days Medi-Cal beneficiaries are hospitalized in that facility. Accordingly, these facilities have a strong fiscal incentive to keep Medi- Cal beneficiaries hospitalized. While an incentive to increase the frequency and length of hospital stays would always be a cause for concern, they are particularly so in light of the department’s efforts to achieve cost containment through managed care. Because hospital inpatient services represent such a large portion of medical expenses (they account for about one-third of the fee- for-service Medi-Cal Program), there is little practical way to achieve savings through more efficient delivery systems without reducing unnecessary utilization of these services. DSH Payments Have Increased the Lengths of Stay in County Hospitals. Our review indicates that, prior to the enactment of the disproportionate-share program in 1991, the average length of hospital stay for Medi-Cal beneficiaries was declining in both county and community hospitals. At essentially the same time that the DSH program was enacted, however, the average lengths of stay in county hospitals\u2014which receive the vast majority of supplemental revenues under the program\u2014began to increase significantly. The effect is particularly strong in 1991-92, the first year of the program. In contrast, the average lengths of stay in community hospitals, which receive proportionately much less from the DSH program, appear unaffected by the payments. This pattern is shown for three large groups of Medi-Cal beneficiaries in Figure 13 below. (The reduction in the average length of stay in county hospitals for two of these groups in 1992-93 C – 40 Health and Social Services Average Length of Inpatient Stays County and Community Hospitals Major Medi-Cal Eligibility Categories AFDC Beneficiaries 87-88 88-89 89-90 90-91 91-92 92-93 4.1 4.2 4.3 4.4 4.5 DSH Payments County Community4.0 Medically Needy Families 87-88 88-89 89-90 90-91 91-92 92-93 4.4 4.6 4.8 5.2 DSH Payments County Community 5.0 Undocumented Persons 89-90 90-91 91-92 92-93 3.2 3.4 3.6 3.8 DSH Payments County Community 4.0 Days Days Days Figure 13 California Medical Assistance Program C – 41 probably reflects a resumption of the general trend toward shorter hospital stays due to technological advancements in diagnosis and treatment.) Recommendation. Because it appears that DSH payments have increased the average length of hospital stays, we recommend legislation to modify the current methodology for making supplemental DSH payments in order to reduce the counterproductive fiscal incentive that these payments currently represent. Specifically, we believe that these payments should be made on a per-discharge, rather than a per diem basis. Under a per-discharge approach, hospitals would receive the same supplemental payment, irrespective of the number of days a Medi-Cal beneficiary is hospitalized. This would not reduce the amount of DSH payments for the hospitals, but they would no longer face an incentive to keep patients hospitalized for longer periods. We estimate that this change will result in General Fund savings of approximately $10.4 million in 1994-95 through a reduction in hospital inpatient costs. We believe that this will also strengthen the cost-containment potential of the department’s efforts to implement more efficient county- organized service delivery systems through managed care. Elimination of Optional Services With respect to the department’s proposal to eliminate certain optional services, we make the following findings: (1) the proposal could place an additional burden on county indigent health programs; (2) although the department’s estimate does attempt to account for potential cost shifts resulting from the proposal, its savings estimate probably is still somewhat optimistic, due to the requirement that Medi-Cal provide necessary transportation; and (3) if adult dental services are not eliminated, continuation of this benefit would result in a General Fund cost of $201 million, rather than the $120 million estimated in the budget, due to a recent court decision. We also recommend that if the Legislature chooses to ration services, as the administration effectively proposes, the Legislature consider basing its approach on identifying specific medical diagnoses or treatments that will no longer be covered rather than eliminating entire categories of benefits. The budget assumes that the Legislature will enact legislation that will result in savings of $341.5 million ($168.1 million General Fund) in the budget year by eliminating the following optional service categories from coverage through Medi-Cal for most beneficiaries: ! Adult dental services. C – 42 Health and Social Services ! Medical supplies, excluding incontinence supplies. Examples are bandages and syringes for diabetics. ! Outpatient psychology services. ! Chiropractic services. ! Acupuncture services. ! Podiatry services. ! Speech and audiology services. ! Nonemergency transportation. ! Services provided at independent rehabilitation centers, including audiology, speech, occupational, and physical therapy. The budget proposal would continue to provide these services for developmentally disabled regional center clients, children to age 21, and persons in long-term care. The department indicates that it is proposing elimination of these services solely to reduce Medi-Cal costs. (An identical proposal was included in last year’s budget, and was rejected by the Legislature.) Figure 14 lists the department’s estimate of the Medi-Cal savings from eliminating each of these services and an estimate of the average number of Medi-Cal beneficiaries who currently use these services each month. Necessary Transportation Is Required. Even if optional benefits are eliminated, federal law requires Medi-Cal to provide necessary transportation to Medi-Cal beneficiaries. Accordingly, we do not believe the budgeted savings attributable to the elimination of medical transportation provided in vans can be achieved. Absent legislative action to augment the budget, we estimate that this will result in a General Fund deficiency of at least $21 million for 1994-95. Costs May Shift to Other Services. Actual savings from elimination of the proposal’s remaining eight optional benefits would depend on behavioral changes on the part of Medi-Cal beneficiaries. In some cases, elimination of optional services clearly will result in savings. In other cases, the savings may be offset because beneficiaries may substitute other Medi-Cal services for the service being eliminated or they may delay receiving treatment and ultimately require more acute care. The budget assumes cost shifts such as these ranging from 0 to 90 percent, depending on the service. The extent to which cost shifts will actually occur, however, is unknown. California Medical Assistance Program C – 43 Figure 14 Proposed Elimination of Optional Medi-Cal Services General Fund Savings 1994-95 (Dollars in Millions) Service Average Monthly Users Estimated Savings 1994-95 Adult dental 101,500 $119.7 Nonemergency transportation 10,400 20.8 Medical supplies 32,600 19.5 Psychology 10,400 3.6 Acupuncture 12,800 2.1 Podiatry 12,000 1.5 Speech and audiology 5,900 0.5 Chiropractic 4,200 0.3 Independent rehabilitation centers 80 0.04 Totals \u2014a $168.1 a Total monthly users cannot be estimated, since one beneficiary may use more than one optional service. Cost Shifts to Counties May Result. We note that counties are the provider of last resort for health services. Accordingly, they may experience increased demand for services they provide, to the extent that beneficiaries are unable to receive care under the Medi-Cal Program. Adult Dental Services. Due to a recent court decision barring the state’s practice of limiting certain adult dental procedures, begun in 1993-94, the cost of restoring funding for adult dental services would be higher than estimated in the budget. Accordingly, we note that if the Legislature chose to continue adult dental services as a Medi-Cal benefit, the General Fund cost to do so would be approximately $201 million in 1994-95, rather than the $120 million estimated in the budget. Rationing Services. Finally, we note that by proposing to eliminate optional benefits, the administration effectively proposes to limit services for Medi-Cal beneficiaries. If the Legislature chooses to limit services in order to achieve a given level of General Fund savings, we recommend that it instead consider adopting an approach based on identifying specific medical diagnoses or treatments that will no longer be covered, rather than eliminating entire categories of benefits. Such an approach has been implemented in Oregon. We believe that such an approach has important advantages over that proposed by the administration. First, we note that the administration’s C – 44 Health and Social Services approach indiscriminantly affects beneficiaries with greatly different levels of illness. For example, the proposal to eliminate medical supplies applies equally to both diabetics who require syringes to inject insulin, and a beneficiary who needs to purchase bandages. In contrast, a proposal to limit services based on diagnoses could cover medically necessary care for the treatment of diabetes but exclude coverage for minor injuries. In addition, the administration’s approach will result in some unknown amount of cost-shifting, as discussed above. By eliminating coverage for certain diagnoses, the Legislature could more effectively achieve a given level of General Fund savings because the potential for cost-shifting would be significantly reduced. Budgeted Rate Increases Can Be Avoided We recommend enactment of legislation authorizing the DHS to direct the California Medical Assistance Commission (CMAC) to negotiate reimbursement rates for skilled nursing facilities. We further recommend a reduction of up to $73 million from the General Fund by assuming that the CMAC can negotiate lower-than-projected reimbursement rate increases for hospital inpatient and skilled nursing facility services. (Reduce Item 4260-101-001 by $73,000,000.) The budget proposes expenditures of $43 million from the General Fund for rate increases for hospital inpatient services that the department expects will be negotiated by the CMAC. In addition, the budget proposes $60 million from the General Fund for anticipated rate increases for long- term care services provided in skilled nursing facilities. Hospital Inpatient Services. The CMAC negotiates on behalf of the Medi-Cal Program to establish rates for hospital inpatient services provided to Medi-Cal beneficiaries. It is generally acknowledged that the CMAC has been successful in negotiating rates that are lower than those which would otherwise be provided. For example, the 1993 Budget Act assumed about $37 million would be paid for rate increases, which was $50 million lower than the projected level. The commission indicates it will likely succeed in achieving this target. We believe the primary reason the CMAC is able to negotiate savings is due to generally low occupancy rates in California hospitals (frequently less than 50 percent). In effect, the low occupancy rates result in a buyer’s market for hospital inpatient services, which the CMAC has used to its advantage in negotiating reimbursement rates. We note that occupancy rates in the state continue to be low. In addition, the CMAC currently contracts for about four times the capacity that Medi-Cal California Medical Assistance Program C – 45 requires to serve its beneficiaries. Accordingly, because there continues to be an excess supply of hospital beds in the state, and because the CMAC’s contracted capacity appears to give it additional bargaining room, we believe that CMAC will be able to negotiate rate decreases in some areas and relatively low increases in others. It would be reasonable, in our judgment, to assume that on net, no additional funds will be needed for rate increases. Consequently, we recommend that the budgeted increase for hospital reimbursement rate increases be deleted for a General Fund savings of $43 million in 1994-95. Skilled Nursing Facility Services. Currently, the CMAC does not negotiate rates for long-term care services. We note, however, that like hospitals, skilled nursing facilities in some areas of the state have excess capacity. (For example, occupancy in Orange County is 79 percent of licensed capacity.) To take advantage of these market conditions, we recommend the enactment of legislation authorizing the department to (1) designate regions of the state where it believes savings can be achieved without adversely affecting access to services and (2) direct the CMAC to negotiate rates on its behalf in those areas. If, for example, the CMAC were able to hold rates constant for one-fourth of the nursing facility volume, about $15 million in General Fund savings would be achieved in 1994-95. To the extent rate reductions could be negotiated\u2014for example, in rates paid to distinct-part nursing facilities (those which are connected to acute-care hospitals), which have significantly higher reimbursement rates than freestanding facilities\u2014the savings figure would be higher. Although we do not have a basis on which to estimate the precise magnitude of savings that could be achieved through CMAC-negotiated contracting for long-term care services, we believe it is reasonable to assume General Fund savings of up to $30 million for 1994-95\u2014one-half the amount budgeted. This proposal would require a federal waiver. We note, however, that the state has obtained such a waiver to negotiate rates with hospitals. Mandatory Drug Rebates Should Be Reinstated We recommend the enactment of urgency legislation to reestablish supplemental rebates from pharmaceutical manufacturers, for a General Fund Savings of $10 million. This will permit the state to realize savings until the supplemental rebates are replaced by implementation of the budget proposal to contract with a pharmacy management company to assume programmatic and financial responsibility, effective January 1995, for the Medi-Cal prescription drug program. (Reduce Item 4260-101- 001 by $10,000,000.) The budget proposes expenditures of approximately $1.2 billion from all funds in 1994-95 to provide prescription drugs and other pharmacy C – 46 Health and Social Services services for Medi-Cal beneficiaries. This amount reflects savings from ongoing activities, such as negotiated rebates from pharmaceutical manufacturers, and a new proposal to select a pharmacy management company to assume financial and programmatic responsibility for the Medi-Cal prescription drug program, effective January 1, 1995. The department estimates that the contracting proposal will result in savings of $67.8 million ($33.9 million General Fund) in 1994-95. Budget Proposes Pharmacy Contracting. Under the department’s proposal, which requires legislation, a contractor would be selected, by competitive bids, to (1) negotiate dispensing fees with pharmacies that wish to serve Medi-Cal beneficiaries, (2) assume the prior authorization function that currently is carried out by the department’s field offices for certain drugs, (3) negotiate with pharmaceutical manufacturers to secure additional rebates, and (4) establish additional utilization controls, such as limits on the number of prescriptions that may be provided to a Medi- Cal beneficiary in a given time period. The contractor will be required to assure that the provider network it establishes meets a community standard regarding access, and that the access is sufficient to assure that travel time to participating pharmacies generally does not exceed 30 minutes. At the time this analysis was prepared, a number of details regarding the proposal were lacking. For example, the department had not indicated whether the pharmacy management company selected for the contract would have the authority to impose more stringent limits than the existing ten prescriptions per month. In addition, it is not clear how the company’s financial risk will be structured. Although the Legislature will need additional information to fully evaluate this proposal, we believe that the concept of pharmacy contracting has merit. Many private-sector insurers have entered into similar arrangements and have achieved savings as a result. Accordingly, if the proposal is structured so as to produce savings through more efficient operations and bulk purchasing, as opposed to reductions in benefit levels for Medi-Cal beneficiaries, we believe that it should be adopted. We note, however, that if the proposal is adopted by the Legislature, it will not become effective until January 1995 at the earliest. In order to achieve prescription drug savings in the interim, and to improve the long- term savings potential of the department’s proposal, we recommend that the Legislature take an additional step in this area. We discuss this below. Interim Step Would Result in Savings. In legislation accompanying the 1992 Budget Act, the Legislature directed the department to begin therapeutic category reviews to identify a relatively few number of drugs in each therapeutic category (for example, antibiotics) that the department judged favorably in terms of efficacy and price. Within each category, the department was authorized to impose prior authorization California Medical Assistance Program C – 47 requirements on drugs that were not judged favorably. In this way, the legislation allowed Medi-Cal to bargain for discounted prices in the drug program and achieve General Fund savings. The department was to complete these reviews by 1997. In addition, however, because significant savings from these reviews would not be realized for a number of years, the legislation also directed the DHS to seek rebates to the Medi-Cal Program of between 5.5 and 10 percent for a 15-month period, which expired September 1993. (Specifically, the legislation authorized the department to place prior authorization requirements on any drug for which the requested rebate was not provided.) Analyst’s Comments and Recommendations. Since the enactment of this legislation, the department has completed reviews in 3 therapeutic categories, out of more than 100 categories. The department indicates that an additional 5 categories will be completed in the current and budget years. Accordingly, because completion of therapeutic category reviews have been completed in a relatively few instances, we recommend that the supplemental rebate requirement enacted in 1992 be reestablished for 1994-95 until the department’s pharmacy contracting proposal, if it is adopted by the Legislature, is implemented. We note that, in addition to the immediate savings that this action would achieve, a temporary reestablishment of supplemental rebates could significantly strengthen the long-term savings potential of the department’s pharmacy contracting proposal by improving the contractor’s bargaining position with respect to negotiating future pharmaceutical rebates. We estimate that reestablishment of supplemental rebates will result in savings of approximately $10 million from the General Fund in the first half of 1994-95. It is important to note that existing state law requires that beneficiaries be notified 60 days before a drug is placed on prior authorization. Accordingly, if the Legislature wishes to achieve the full extent of these savings, it would need to enact this legislation on an urgency basis by mid-April, or include in the legislation a waiver of some portion of the 60-day notification requirement. C – 48 Health and Social Services PUBLIC HEALTH The Department of Health Services administers a broad range of public health programs, including (1) programs that complement and support the activities of local health agencies controlling environmental hazards, preventing and controlling disease, and providing health services to populations who have special needs and (2) state-operated programs such as those which license health facilities and certain types of technical personnel. The budget proposes $1.3 billion ($289 million General Fund) for public health local assistance. This represents an increase of 3.4 percent (12 percent General Fund) over the current year. For state operations, the budget proposes $372 million ($101 million General Fund), which is an increase of 9.2 percent (13 percent General Fund) over the current year. Low-Level Radioactive Waste Disposal Site Still Not On-Line We recommend that the department report at budget hearings on the status of the low-level radioactive waste disposal facility project, including an update on when the facility is anticipated to be on-line, a contingency plan for waste disposal if the facility is not operational by June 30, 1994, and the feasibility of repayment of a $500,000 General Fund loan. Background. State law requires that a low-level radioactive waste facility be developed in California. In 1993, the Department of Health Services issued a license to a private company to construct and operate such a facility. The department estimates that the facility will be operational ten months after the start of construction. However, two issues are delaying the start of construction. First, the department is litigating two lawsuits challenging the licensing of the facility. One of the cases is not yet scheduled for hearing, and the hearing on the other case has been tentatively set for April 1994. The second issue involves the purchase of the land from the federal government. Prior to making a decision to sell the land to the state, the federal government is requiring the state to hold a formal hearing regarding the safety of the proposed site. The hearing has not been scheduled since the lawsuits challenging the licensing decisions must first be resolved. Based on these factors, it appears likely that construction will not start until sometime in 1994-95 and that the facility will not open until 1995-96. Public Health C – 49 Federal law provides for a federal rebate to states for the development costs of low-level radioactive waste facilities if the facility is on-line by January 1, 1993, or if the state provides a plan for waste disposal. The department has stated that the requirements for the rebate, amounting to $3 million, have been met through submission of a plan. However, the federal government is currently in the process of reviewing policies related to the rebate and has not made a determination as to whether California qualifies. Program Funding. The budget proposes $1.6 million from the Low- Level Radioactive Waste Disposal Fund in 1994-95 for activities related to the development of a low-level radioactive waste disposal site. The program is currently funded by annual licensing fees from the company that will be operating the facility and from a $500,000 loan from the General Fund. The 1992 Budget Act requires repayment of the loan by March 31, 1994, but repayment has not yet been made. The budget assumes (1) the receipt of the $3 million rebate from the federal government for deposit to the Low-Level Radioactive Waste Disposal Fund in the current year, (2) that the site will be fully operational during the budget year with collection of $1.3 million in user fees, and (3) that the General Fund loan will not be repaid. Under these assumptions, the year-end balance for the Low-Level Radioactive Waste Disposal Fund would be $1.6 million. Recommendation. As noted above, it is not clear when or whether the state will receive the rebate, and the facility probably will not be on-line until 1995-96. Additional information concerning the likelihood of the receipt of the federal rebate and the time frame for completion of the project should be available in the spring. Consequently, we recommend that the department report at budget hearings on the status of the project, a contingency plan for interim storage in the event the facility is not on- line by June 30, 1994, and the feasibility of repaying the $500,000 General Fund loan in 1994-95. Reauthorization of Proposition 99 Funding Statutory authority for appropriating Proposition 99 funds expires June 30, 1994. The budget includes a plan for appropriating these funds in 1994-95. C – 50 Health and Social Services Proposition 99 of 1988, the Tobacco Tax and Health Protection Act, established a surtax on cigarettes and tobacco products. The proposition allocates the proceeds from the surtax to six accounts within the Cigarette and Tobacco Products Surtax Fund (C&T Fund) based on specified percentages, with expenditures from each account limited to specific activities. Figure 15 identifies the estimated 1994-95 revenues projected for each account and the statutory restrictions on their use. Funds in the Research and Public Resources Accounts are appropriated in the Budget Act and funds in the other accounts are appropriated by separate legislation\u2014Ch 278\/91 (AB 99, Isenberg) and Ch 1170\/91 (SB 99, Watson), which sunset on June 30, 1994. Figure 15 Proposition 99 Programs Distribution of Revenues (Dollars in Millions) Account 1994-95 Estimated Revenuesa Percent of Total Revenues Use of Revenue by Account Health Education $88.9 20% Programs for prevention and reduction of tobacco use Hospital Services 155.6 35 Payment to public and private hospitals for patients who cannot afford treatment Physician Services 44.5 10 Payment to physicians for patients who cannot afford services Research 22.2 5 Tobacco-related disease research Public Resources 22.2 5 In equal amounts for (1) wildlife habitat programs and (2) recreation resources Unallocated 111.1 25 Any of the uses identified above Totals $444.5 100% a Excludes $889,000 allocated to the State Board of Equalization. C&T Fund revenues have steadily declined since 1990-91. In anticipation of declining revenues, Chapter 278 authorizes the Department of Finance to make program reductions on a pro rata basis to reflect changes in revenue, with the exception of five programs protected by the legislation from reductions\u2014the Access for Infants and Mothers (AIM) Program, the Major Risk Medical Insurance Program, the Public Health C – 51 Medi-Cal Perinatal Program, the Child Health and Disability Program (CHDP), and the County Medical Services Program (CMSP). Reductions in revenue are anticipated to continue, due partly to education and prevention programs designed to reduce tobacco consumption. In addition, recent legislation, Ch 660\/93 (AB 478, Barbara Friedman), increased the tax on cigarettes by two cents per package, effective January 1, 1994. The impact on C&T revenues of this additional tax as well as the potential for an additional federal tax on cigarettes is unknown but could have a significant impact on the revenue stream. Proposed Funding Allocation. The budget anticipates enactment of legislation authorizing expenditure of Proposition 99 funds through 1995-96. The budget proposes expenditures of $437 million from the C&T Fund, which represents a 17 percent reduction from the revised current- year expenditure level. The budget also proposes a fund reserve level of 5 percent of total revenues (5.4 percent of expenditures) for 1994-95, compared to 2 percent in the current year. The budget estimates that annual revenues will decline by 4.8 percent between the current and budget years. The revenue projections are based on an assumption that per capita consumption of cigarettes will continue to decline in 1994-95, but at a lesser rate. We note the following features of the proposed C&T Fund allocation: ! The budget proposes to maintain the current-year level of spending for those programs currently protected under Chapter 278, as well as media campaigns administered by the Department of Health Services. The rationale cited by the administration for maintaining the expenditure level for the media campaigns is the program’s success in reducing smoking. The budget also proposes to increase funding for CHDP health screening by $2.3 million to fund increased caseload. ! Under Proposition 117 (The California Wildlife Protection Act of 1990), 10 percent of the funds in the C&T Fund Unallocated Account must be transferred to the Habitat Conservation Fund (HCF) for expenditure on natural resources programs. The budget instead proposes to allocate $8.6 million for the Department of Water Resources’ Mono Lake Project. To accomplish this, the budget indicates that an amendment to Proposition 117 will be submitted to the voters in 1994 to eliminate the HCF. C – 52 Health and Social Services ! A bill (AB 816, Isenberg) has been introduced to authorize expenditures of C&T Fund monies in 1994-95, pursuant to the provisions of Proposition 99. At the time this analysis was prepared, the bill did not specify how the funds will be allocated. Analyst’s Comments. In our review of the budget’s proposed expenditure plan, we note the following concerns: ! Proposition 117 Suspension. While the budget anticipates suspension of Proposition 117, this action will require a vote of the electorate. We discuss this in more detail in our analysis of the use of the HCF for resources programs (see Resources Crosscutting Issues). ! Impact on Health Programs. The budget proposes to maintain the current-year level of spending for certain public health programs. Since Proposition 99 revenues are expected to continue to decline, other programs would be reduced disproportionately. For example, the California Healthcare for the Indigent Program (CHIP) would be reduced by 16 percent rather than maintained at current levels. ! Potential Use of Reserves. As mentioned above, the budget proposes a reserve of 2 percent in the current year and 5 percent in the budget year. In our analysis of the Office of Statewide Health Planning and Development, we recommend the use of $2 million of the reserve monies to fund increased training of primary care providers. This would reduce the projected year-end reserves to $21.7 million, or 4.7 percent of revenues (5 percent of expenditures), a level that we believe is reasonable. If the May Revision of revenues projects an increase in budget-year reserves, the Legislature may want to consider appropriating additional reserves for programs that qualify for Proposition 99 funding. For example, the Legislature could restore funding for programs that have been reduced as a result of declining C&T Fund revenues, such as the CHIP. This program provides funding to counties for care of indigent persons. Managed Risk Medical Insurance Board C – 53 MANAGED RISK MEDICAL INSURANCE BOARD (4280) The Managed Risk Medical Insurance Board (MRMIB) administers (1) the Major Risk Medical Insurance Program (MRMIP), which provides health insurance to California residents who are unable to obtain it for themselves or their families because of pre-existing medical conditions; (2) the Small Employers Purchasing Pool Program, which will establish and operate a health insurance purchasing pool for small employers; and (3) the Access for Infants and Mothers (AIM) Program, which provides coverage for women seeking pregnancy-related and neonatal medical care. The budget proposes $130.9 million from all funds for support of MRMIB programs in 1994-95, which is virtually the same level as esti- mated current-year expenditures. The budget proposes legislation to appropriate $38.5 million from the General Fund in 1994-95 and $12.5 million in the current year for the AIM Program. We discuss these proposed General Fund augmentations below. Expanding Medi-Cal, In Lieu of the AIM Program, Would Save State Funds We recommend that the Legislature not adopt the budget proposal to continue the AIM Program and instead expand the Medi-Cal Program to serve AIM-eligibles, thereby securing additional federal funding for services to pregnant women and their infants and realizing General Fund savings of about $73 million in 1994-95. Background. The AIM Program is a health insurance program under which the state enters into contracts with private insurance plans to pro- vide health services to pregnant women, and their infants up to two years after birth, who: ! Have no health insurance coverage for their pregnancy. ! Have incomes below 250 percent of the federal poverty level. ! Are not eligible for services through the Medi-Cal Program. C – 54 Health and Social Services Women enrolled in the AIM Program receive health coverage from the time of enrollment until 60 days after birth. Program participants pay an initial fee of 2 percent of their family income toward the costs of services received by the mother and the infant (up to the infant’s first birthday). In 1993, for example, a pregnant woman with an annual income of $18,860 (200 percent of the federal poverty level) would pay a fee of $377. An additional fee of $100 is assessed to continue the infant’s health coverage through the second year. Under current law, the AIM Program is funded through revenues from the Cigarette and Tobacco Products Surtax (C&T) Fund established by Proposition 99. The AIM Program’s funding will sunset on June 30, 1994 unless reauthorized by the Legislature. However, the administration estimates that the program’s funding for new enrollees in the current year will be exhausted in January 1994. Consequently, the budget proposes legislation to appropriate additional funds for the program in the current as well as budget years, as explained later in this analysis. Evaluation of the AIM Program. The program was established as an alternative approach to the Medi-Cal Program for providing health care to pregnant women and their infants. In contrast to Medi-Cal, the AIM Program offers a simplified eligibility determination process, including the ability to receive and fill out applications at one’s home, and an in- surance model approach to services, with the beneficiary paying a por- tion of costs, rather than the welfare model of the Medi-Cal Program where the recipient generally does not pay a share of costs. The AIM Program also pays higher reimbursement rates to service providers than does the Medi-Cal Program. In authorizing the AIM Program, the Legislature required the board to report on birth outcomes of program participants and other factors in order to evaluate the program’s effectiveness. In reviewing the report, we believe that its most significant outcome measures are those which com- pare AIM Program participants to a similar income group in the Medi-Cal Program. According to the report, the program compares favorably to the Medi- Cal Program on some measures, such as the number of prenatal visits program recipients receive (an average of 12.5 visits in AIM versus 9.5 visits in Medi-Cal). However, the AIM Program did not result in im- proved birth outcomes as compared to Medi-Cal, even though it is signifi- cantly more expensive per case when compared to a comparable group of Medi-Cal participants. (For example, the cost per mother for AIM is $5,857, versus $3,500 for Medi-Cal). In addition, we note that Medi-Cal costs to the state are lower still, because 50 percent of Medi-Cal Program expenditures are offset by federal funds. Figure 16 shows what we believe Managed Risk Medical Insurance Board C – 55 Medi-CalAIM 2 4 Federal State AIM Medi-Cal 2 4 State $6 6% Cost Per Mother Percent Low Birthweight Comparison of AIM and Medi-Cal Program Costs and Outcomes In Thousands a a Medi-Cal figures are for beneficiaries between 185 and 200 percent of poverty. Figure 16 are the two key measures to assess the AIM Program: its costs and birth outcomes as compared to those for Medi-Cal recipients (women with incomes between 185 and 200 percent of poverty). Budget Proposal. The budget proposes legislation to continue the AIM Program through the remainder of 1993-94 and 1994-95. In addition, the administration proposes to expand the Medi-Cal Program to cover indi- viduals who would otherwise be eligible for the AIM Program. Under these proposals, an additional 1,000 pregnant women and infants with family incomes between 200 and 250 percent of poverty will be served each month by (1) appropriating General Fund and C&T Fund monies to continue the AIM Program and (2) implementing an asset test waiver in Medi-Cal, effective February 1, 1994, which would allow individuals to qualify for Medi-Cal who could not otherwise be served by the pro- gram due to excess assets. (Without such an asset waiver, these individu- als could be served only under the AIM Program at entirely state ex- pense.) C – 56 Health and Social Services Figure 17 shows the General Fund and C&T Fund costs of the adminis- tration’s proposal for both the AIM and the Medi-Cal Programs for the current and budget years, and the number of enrollees that would be served by each. Figure 17 Managed Risk Medical Insurance Board Budget Proposal to Continue AIM Program 1993-94 and 1994-95 (Dollars in Millions) C&T Fund General Fund Total State Funds New En- rollees per Month 1993-94 AIMa ($57.6) $12.5 $70.1 750 Medi-Cal \u2014 2.5 2.5 250b Totals, 1993-94a ($57.6) $15.0 $72.6 1,000 1994-95 AIMa $57.6 $38.5 $96.1 750 Medi-Cal \u2014 5.5 5.5 250b Totals, 1994-95 $57.6 $44.0 $101.6 1,000 a 1993-94 C&T Fund expenditures were appropriated under current law. b Medi-Cal caseload figure is an estimate, since the asset waiver creates a new entitlement. As Figure 17 indicates, the administration’s proposal will result in General Fund costs of $44 million for 1994-95 in the AIM and Medi-Cal Programs. Of this amount, $38.5 million will be in the AIM Program, supported entirely from the General Fund. This represents an increase of 67 percent over total AIM Program expenditures authorized for 1993-94. Analyst’s Comments and Recommendations. We are concerned that the administration proposes to continue the AIM Program despite the fact that it is considerably more costly to the state and results in no commen- surate improvement in birth outcomes. (In fact, as noted above, the AIM Program recorded a slightly lower percentage of successful birth out- comes than the comparison portion of the Medi-Cal Program, as mea- sured by the percent of newborns with birthweights above five pounds eight ounces.) Accordingly, we recommend an alternative to the adminis- Managed Risk Medical Insurance Board C – 57 tration’s proposal that would result in similar service levels at reduced General Fund cost. Under provisions of federal law, several states have expanded Medicaid coverage beyond the levels previously considered reimbursable with federal funds. Specifically, a 1988 federal law change allows states to implement less restrictive criteria for Medicaid eligibility with respect to pregnant women and children. We recommend that instead of adopting legislation to continue the AIM Program, the Legislature expand the Medi-Cal Program to cover pregnant women and their infants with family incomes between 200 and 250 percent of poverty, thereby serving the same target population that would be served under the administration’s proposal. We note however, that the AIM Program provides coverage for infants to age two, while Medi-Cal covers infants only to age one. We further recommend that the Legislature redirect the C&T Fund expenditures proposed for the AIM Program, which would be freed up by our recommendation, to other programs that currently are funded through the General Fund and eligible for C&T funds. Examples of such programs include: the Office of Family Planning, the Child Health and Disability Prevention Program, tuberculosis prevention, and immunization assistance (all within the Department of Health Services), Early Mental Health Intervention (Department of Mental Health), various programs in the Department of Developmental Services, and health services provided in state-funded correctional programs such as the Parole Outpatient Clinic. We estimate that adoption of these recommendations would result in approximately $73 million in net General Fund savings, due primarily to lower program costs and the availability of federal funds under Medi-Cal. This consists of an estimated General Fund increase of about $23.3 million in the Medi-Cal Program, elimination of the proposed $38.5 million for the AIM Program, and the replacement of $57.6 million General Fund support with C&T funds in various programs. The administration has expressed concern that higher-than-projected caseloads could result if services are made available to pregnant women in this income range under the Medi-Cal Program, which is an entitlement, as opposed to the AIM Program, where enrollments can be cut off if funding is not available. To address this concern, we recommend that legislation authorizing the Medi-Cal expansion set a ceiling of 250 percent of poverty (or a lesser amount), and allow the administration discretion to adjust the income limit annually. In this way, the Legislature will assure that costs and services are controlled on the basis of family C – 58 Health and Social Services income levels, rather than by cutting off enrollments when an appropriation limit is reached. This latter method, which currently is used by the AIM Program, randomly excludes some persons with incomes lower than others who are served because they happen to apply for services at an earlier date in the fiscal year. In addition, we recommend that the legislation incorporate the AIM Program’s enrollment fee provision for Medi-Cal beneficiaries between 200 and 250 percent of poverty, which is also permitted by federal law, provided that it is paid on a monthly basis. The enrollment fee provision would help to control caseload growth, thereby increasing the likelihood of achieving a given level of General Fund savings. Department of Developmental Services C – 59 DEPARTMENT OF DEVELOPMENTAL SERVICES (4300) The Department of Developmental Services (DDS) administers services in the community (through regional centers) and in state developmental centers for persons with developmental disabilities. A developmental disability is defined as a disability related to certain mental or neurological impairments originating before a person’s 18th birthday that is expected to continue indefinitely and that constitutes a substantial handicap. The budget proposes $1.5 billion from all funds for support of the DDS programs in 1994-95, which is an increase of 6 percent over estimated current-year expenditures. The budget proposes $504 million from the General Fund in 1994-95, which is $79 million, or 14 percent, below estimated current-year expenditures from this funding source. This reduction in state costs is primarily due to a $131 million increase in federal reimbursements for the regional centers, thereby reducing General Fund support. Court-Approved Settlement of Coffelt Lawsuit Background. The plaintiffs in the lawsuit Coffelt v. Developmental Services claimed that the DDS had not placed developmental center (DC) residents in community services despite the fact that they desired such placement and were entitled to these services. Approved in January 1994, a settlement requires the DDS and four defendant regional centers to provide alternative community living arrangements for 300 regional center (RC) target group persons and to reduce the DC population by 2,000 residents. The department is also required to make a good faith effort to improve the variety of living options in other regional centers in order to achieve the DC population reduction goal by 1997-98. Settlement Actions. In order to reduce the developmental center population, five major tasks will be undertaken by the DDS and the regional centers: ! Develop and implement consumer assessment\/placement planning materials. C – 60 Health and Social Services ! Provide additional funding for case management services. ! Increase the availability of community living options. ! Enhance the availability of crisis intervention services. ! Develop and implement a statewide quality assurance system for residential services and support. Financial Obligations. The budget for regional centers proposes expenditures of $38 million from all funds ($29 million General Fund) for statewide implementation of Coffelt-related activities in 1994-95. We note, however, that the obligation to meet the conditions of the settlement is contingent upon the department’s ability to receive increases in federal fund participation (FFP). The settlement recognizes that state support is subject to appropriations by the Legislature. Existing FFP, if continued at the current level, would be sufficient to fund the requirements of the settlement. Case Management Services Augmentation Not Justified We recommend a reduction of $5.1 million from the General Fund requested to augment case management services for regional centers because (1) the budget contains sufficient funds for case management to address the needs of DC clients transitioning to community living and (2) this amount is not justified on a workload basis. (Reduce Item 4300-101- 001 by $5,073,000.) The budget proposes expenditures of $10.1 million from the General Fund in 1994-95 to provide funding to enhance case management services in the regional centers in response to the Coffelt lawsuit settlement. This amount is in addition to other funds budgeted for regular caseload increases. This is an increase of $5,073,000, or 100 percent, over the current-year amount of $5.0 million, which was budgeted by the Legislature for the Coffelt lawsuit. We recommend deletion of the proposed $5.1 million augmentation, for the following reasons: ! The Coffelt settlement, in effect, requires that up to $10 million be expended for enhanced case management. In other words, it does not require the Legislature to appropriate $10 million from the General Fund for this purpose. As we indicated above, the Legislature appropriated $5.0 million in the current year for the Coffelt lawsuit, and the budget proposes to continue this amount into 1994-95. We believe that this amount is adequate to provide Department of Developmental Services C – 61 additional services to Coffelt-related clients and other regional center clients. ! The proposed $10 million is not tied to services needed by, or provided to, Coffelt-related clients. Instead, the additional case management would be apportioned to all regional centers as an across-the-board augmentation. (Other funds proposed in the budget would provide targeted services.) As a general principle, we believe that funds to comply with this lawsuit should be used to target services to Coffelt-related clients. In this respect, we note that the entire $10.1 million budgeted for enhanced case management is not targeted to these clients. Nevertheless, we would delete only the $5.1 million increase over the current-year amount in deference to the action taken by the Legislature in the 1993 Budget Act in anticipation of the Coffelt settlement. An alternative would be to reduce this amount to $1 million, which\u2014if targeted to Coffelt clients\u2014would reduce the client\/case manager ratio from about 88:1 to about 18:1 for these clients. Supplemental Client Services Expenditures Not Justified We recommend the deletion of $5.7 million from all funds ($2.8 million General Fund) proposed to support supplemental services for developmental center clients placed in regional center programs because other funding increases proposed in the budget are sufficient to provide the services needed by the clients. (Reduce Item 4260-101-001 by $2,830,000.) The budget proposes expenditures of $11.1 million from all funds for the regional centers in 1994-95 to provide services for DC clients who are expected to transition to community living, including clients affected by the Coffelt settlement. This amount consists of $5.4 million based on amounts that the department has budgeted in prior years, pursuant to a placement plan developed by the department, for placing non-Coffelt clients (that is, prior to the court case) from the developmental centers to community living arrangements. In addition, the budget includes $5.7 million because the department believes that the Coffelt-related clients will require more intensive services when being transitioned into the community. The department, however, has not been able to substantiate its claim that Coffelt-related clients will require a more intensive level of service. Even if these clients do require an intensive level of service, we believe that the $5.4 million is adequate because it assumes that a relatively C – 62 Health and Social Services intensive level of care and service would be provided to clients. Specifically, it assumes that 86 percent of clients are placed in intermediate care facilities (licensed medical facilities) and in the highest service category ( level 4 ) of community care facilities. Because of this lack of justification, and the relatively intensive level of care that can be provided with the allocation of $5.4 million, we conclude that the additional funds are not necessary. Accordingly, we recommend a reduction of $5.7 million in all funds ($2.8 million from the General Fund). DC Caseload-Related Staffing Adjustments Not Reflected in the Budget We recommend that the DDS develop and implement in 1994-95 a plan to reduce non-level-of-care staff at all developmental centers where such reductions are warranted by declining caseloads, for an estimated General Fund savings of $6 million. (Reduce Item 4300-003-001 by $690,000 and reduce Item 4260-101-001 by $5,302,000.) The DC population is projected to decrease from an estimated 6,191 residents at the end of 1993-94 to an estimated level of 5,690 residents at the end of 1994-95. This is a decrease of 501 residents, or 8.1 percent, from the current year. Non-Level-Of-Care Staffing Reductions Should Be Implemented in Budget Year. Level-of-care (LOC) staffing at developmental centers is primarily based on licensure and certification requirements, changes in client population, and the severity of the clients’ disabilities. The budget has included annual adjustments in LOC staff to correspond to changes in the client population. However, non-level-of-care (NLOC) staff, which includes administrative and nondirect client services, is not based on a caseload formula and is not automatically adjusted for changes in population. We found that the budget proposal for support of the DCs contains no plan for NLOC staffing reductions related to past and projected population declines at the DCs. The department has established a working group to examine NLOC staffing at each DC and develop recommendations for staffing adjustments. The work group plans to present its recommendations in March 1994 and expects staffing adjustments to be incorporated into the May revision of the 1994 Budget Bill. The department indicates that projected savings due to the NLOC staffing adjustments are not available at this time. Department of Developmental Services C – 63 Using historical LOC and NLOC staffing data and population projections as a guide, we estimate that the NLOC staffing reductions would result in a General Fund savings of $6 million ($690,000 in the DDS budget and $5.3 million in the Medi-Cal budget due to reduced reimbursements to DDS.) Consequently, we recommend that the budget be reduced to reflect these caseload-related reductions in NLOC staffing. The department should be prepared to provide a more precise estimate during budget hearings. Expenditure Plan for Quality Assurance System Not Submitted We withhold recommendation on $2.8 million from the General Fund to support the implementation of a statewide quality assurance system to evaluate community living facilities, pending submission of an expenditure plan by the department. The budget proposes expenditures of $2.8 million from the General Fund in 1994-95 to support the implementation of a quality assurance system to evaluate community care facilities and supportive living agencies. The system will contain standards to measure consumer satisfaction and quality of life as well as corrective action procedures for the facilities. While we agree with the objectives of the proposal, we note that the department has not provided a specific plan for the use of these funds. According to the department, a task force plans to release the standards in April 1994 and then propose an expenditure plan. Without an expenditure plan, the Legislature cannot determine whether this proposal is a cost-effective use of these funds. Therefore, we withhold recommendation on the $2.8 million expenditure request to support the implementation of a quality assurance system pending review of an expenditure plan, which the DDS expects to provide prior to the May revision. Crisis Intervention Project Lacks Plan We withhold recommendation on $8.1 million in total funds ($4.5 million from the General Fund) proposed for local crisis intervention facilities and services, pending submission of an expenditure plan by the department. The budget proposes expenditures of $8.1 million in total funds ($4.5 million General Fund) to provide funding for psychiatric C – 64 Health and Social Services intervention services, crisis intervention teams, and deflection facilities at the local level. These facilities and services would be designed to provide an alternative to institutionalization for clients needing temporary crisis intervention. While these objectives are desirable, we note that the department has not provided an expenditure plan for the use of these funds. According to the department, it is necessary for the regional centers to assess needed services and prepare a description of the proposed services, housing requirements, after-hours response systems, and funding levels required to implement these services before a complete proposal can be developed. The department expects this process to be completed and a detailed proposal available in June 1994. Unfortunately, this timing would be out of sync with legislative deadlines. Until the proposal is available, the Legislature cannot evaluate whether this is a cost-effective use of these funds. Therefore, we withhold recommendation on the $8.1 million requested to provide funding for these crisis intervention facilities and services, pending submission of an expenditure plan before legislative action on the budget is completed. Department of Mental Health C – 65 DEPARTMENT OF MENTAL HEALTH (4440) The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department’s primary responsibilities are to (1) administer the Bronzan-McCorquodale and Lanterman-Petris-Short Acts, which provide for the delivery of mental health services through a state-county partnership and for involuntary treatment of the mentally disabled, (2) operate five state hospitals and the acute psychiatric units at the California Medical Facility at Vacaville, and (3) administer six programs directed at specific populations. The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, and mentally disordered offenders and mentally disabled clients transferred from the Departments of Corrections and the Youth Authority. The budget proposes $771 million from all funds for support of DMH programs in 1994-95, which is an increase of 2 percent over estimated current-year expenditures. The budget proposes $242 million from the General Fund in 1994-95, an increase of $14 million, or 6.1 percent, above estimated current-year expenditures from this funding source. Budget Does Not Reflect Caseload-Related Staffing Reductions in State Hospitals We recommend that $245,000 from the General Fund proposed for the department to develop alternative levels of care for clients at state hospitals be deleted because the department has not submitted a plan or any supporting justification for the use of these funds. (Reduce Item 4440- 011-001 by $245,000.) We further recommend that the DMH develop and implement in 1994-95 a plan to reduce non-level-of-care staff at all state hospitals, where such reductions are warranted by declining caseloads, for an estimated General Fund savings of $100,000 annually. (Reduce Item 4440- 011-001 by $100,000.) C – 66 Health and Social Services The budget proposes expenditures of $417 million from all funds in 1994-95 to support the state hospitals. This is an increase of $4.4 million, or 1.1 percent, above estimated current-year expenditures. The budget proposes an appropriation of $154 million from the General Fund for these hospitals, which is an increase of $4.1 million, or 2.7 percent, above estimated current-year expenditures. The state hospital population will decrease from 4,687 clients at the end of 1990-91 to an estimated level of 4,014 clients at the end of 1994-95. This population reduction of 673 clients, or about 17 percent, is due largely to the effects of the 1991-92 realignment legislation and the development of more community living alternatives. Plan for Use of Funds Not Submitted. Level-of-care (LOC) staff provide direct services to patients at state hospitals. This staffing level is determined by a formula developed by the DMH in conjunction with the Department of Developmental Services. It is primarily based on licensing requirements and changes in patient population and level of illness. The budget has included annual adjustments in LOC staffing to correspond to changes in the state hospital population. However, non-level-of-care (NLOC) staffing, which includes administration and nondirect client services, is not based on a caseload formula and is not automatically adjusted with caseload changes. Recently, the department completed a review of Napa State Hospital’s NLOC staffing requirements. As a result of the department’s review, the budget proposes a reduction of 47 NLOC positions at the Napa hospital in 1994-95. These reductions would result in a savings of $490,000 from the General Fund and $994,000 in realignment funds for the counties. The budget, however, proposes that the department retain one-half of the General Fund savings ($245,000) for a one-year period to implement alternative levels, or modes, of care for patients at state hospitals. We found that the budget proposal contains no plan specifying the alternative modes of care, nor has the department been able to provide any details on how it would spend these funds. Without this information, the Legislature cannot evaluate whether this would be a cost-effective use of these funds, even if the general objective seems reasonable. Thus, we conclude that the request for these funds is not justified. Accordingly, we recommend that the $245,000 be deleted from the budget. Caseload-Related Staffing Reductions Should Be Implemented in Budget Year. As stated above, the department developed an NLOC staffing model based on Napa State Hospital. In addition, the department has initiated a review of the type of programs, number of beds, and level of illness at the other state hospitals in order to develop NLOC staffing Department of Mental Health C – 67 standards. However, the DMH does not plan to implement caseload- related NLOC reductions until 1995-96. C – 68 Health and Social Services We believe that the department has the capability of developing a plan during the current year for NLOC reductions related to past and projected caseload declines in all the hospitals. These reductions can be based on the model developed at Napa. Using this model as a guideline and applying it to caseload reductions at the other hospitals, we estimate that the NLOC staffing reductions would result in a General Fund savings of at least $100,000 in 1994-95. The department should be prepared to provide a more precise estimate during budget hearings. Accordingly, we recommend that the budget reflect caseload-related NLOC staffing reductions at all state hospitals, for an estimated General Fund savings of $100,000. School-Based Prevention Program Augmentation Should Be Redirected We recommend (1) a reduction of $10.3 million ($10 million Proposition 98) in the Early Mental Health Initiative (EMHI) Program and (2) redirecting the Proposition 98 funds to a block grant in order to provide school districts with flexibility over the use of available funds. (Reduce Item 4440-102-001 by $10 million and Item 4440-001-001 by $330,000.) We further recommend that the Department of Mental Health advise the budget subcommittees on (1) why it awarded more grants to local projects than the base EMHI Program budget could support and (2) the amount of funds that are likely to be available in 1994-95 from the 1991-92 statutory appropriation for the program. The EMHI Program is supported by $10 million from the General Fund (Proposition 98) in the current year. The budget proposes a $10 million increase in support from Proposition 98 funds. The EMHI Program awards grants to local education agencies for projects that provide school- based early mental health intervention and prevention services for K-3 pupils. In the K-12 education section of this Analysis, we recommend that the Legislature delete growth funds for most K-12 categorical programs that do not provide funding for basic instructional programs (programs that provide direct education services to students.) In addition, we recommend these funds be redirected to a categorical block grant program in order to provide local flexibility over the use of available funds. With respect to the DMH budget, we recommend that the proposed $10 million (Proposition 98) augmentation for expansion of the EMHI Department of Mental Health C – 69 Program be redirected and that the associated administrative costs (non- Proposition 98) be deleted, for a General Fund savings of $330,000. Although the EMHI proposal has merit, we believe that giving schools maximum flexibility to maintain their basic educational program should take priority over most specific program augmentations. The department indicates, however, that it may need additional funds in 1994-95 to maintain the current level of program activity. Specifically, the DMH indicates that it needs up to $11.1 million to support current- year programs in 1994-95, or $1.1 million over its base program budget. The department advises that more new project grants were awarded during 1993-94 than can be supported within its $10 million base appropriation. The department used $2.4 million in non-Proposition 98 funds remaining from the statutory appropriation made in Ch 757\/91 (AB 1650, Hansen) to augment the $10 million appropriated in the 1993 Budget Act. At the time this analysis was prepared, the DMH could not advise us on the exact amount it needs to support existing local programs in 1994-95. In particular, the department is uncertain about whether additional funds from its statutory appropriation may be available during 1994-95 to pay for all or part of the $1.1 million requested above its base budget. Therefore, we further recommend that the DMH report to the budget subcommittees on (1) the department’s justification for awarding more local grants than its existing budget could support on an ongoing basis and (2) the amount of funds from the statutory appropriation made in Chapter 757 that are likely to be available in 1994-95 to pay for the additional costs the DMH expects to incur for local programs in the budget year. C – 70 Health and Social Services EMPLOYMENT DEVELOPMENT DEPARTMENT (5100) The Employment Development Department (EDD) is responsible for administering the Employment Service (ES), the Unemployment Insurance (UI), and the Disability Insurance (DI) Programs. The ES Program (1) refers qualified applicants to potential employers; (2) places job-ready applicants in jobs; and (3) helps youth, welfare recipients, and economically disadvantaged persons find jobs or prepare themselves for employment by participating in employment and training programs. In addition, the department collects taxes and pays benefits under the UI and DI Programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contributions for DI. It also collects personal income tax withholdings. In addition, it pays UI and DI benefits to eligible claimants. The budget proposes expenditures totaling $6.3 billion from various funds for support of the EDD in 1994-95. This is a decrease of $1.2 billion, or 16 percent, from estimated current-year expenditures. Of the total amount proposed, $5.2 billion is for UI and DI benefits, and $1.1 billion is for various other programs and administration. The budget proposes $23.9 million from the General Fund in 1994-95, which is $4 million, or 20 percent, above estimated current-year expenditures from this funding source. Of this increase, $3.3 million is due to the expiration of one-time savings in the Job Agent Program reflected in the current year. Disability Insurance Tax Rate Should Be Reduced We recommend that the Legislature adopt Budget Bill language directing the EDD, subject to the approval of the Department of Finance, to reduce the disability insurance tax rate for 1995 by 0.1 percent because projected revenues exceed the amount needed for a prudent reserve. State law requires private-sector employees to pay contributions to the Unemployment Compensation Disability Fund for support of disability insurance benefits made to disabled employees who experience a wage loss because of a nonoccupational illness, injury, or pregnancy. Eligible claimants receive weekly benefits of up to $336 for a maximum of 52 Employment Development Department C – 71 weeks. A statutory formula establishes the employee contributions (tax rate), which apply to the first $31,767 of annual earnings. Because of concerns regarding the fund’s solvency, the Legislature enacted Ch 793\/91 (AB 2047, Margolin), which increased the statutory cap on the tax rate from 1.2 to 1.3 percent (the current rate). In addition, the administration used its statutory authority to decrease the maximum benefit amount from $336 to $266 per week from February through December of 1993. Several steps have been taken to help stabilize the fund, including the enactment of Ch 748\/93 (SB 4, Johnston), which makes various changes designed to reduce expenditures. The budget, moreover, proposes to expand efforts designed to reduce unwarranted benefit payments and eliminate fraud. The department believes that the combined effect of these changes will trigger a statutorily required decrease in the tax rate of 0.2 percent, beginning January 1995. The EDD, however, indicates that an additional 0.1 percent reduction in the rate would still provide sufficient revenues to maintain a prudent reserve. A reduction of this amount would result in cumulative savings of approximately $238 million to workers making contributions to the fund in 1995, and a fund balance of $1.3 billion, or 55 percent, of disbursements at the end of that calendar year. We note that a recent study on the fund’s solvency affirmed an actuarial recommendation that the fund maintain a year-end reserve of no less than 25 percent. We agree with the department that the tax rate could be reduced below the automatic adjustment that is triggered by the fund condition in 1995 while still maintaining sufficient reserves in the fund. Current law, moreover, authorizes the Director of the EDD to do so. Accordingly, we recommend that the Legislature adopt the following Budget Bill language in Item 5100-001-588 directing the EDD, subject to the approval of the Department of Finance, to reduce the disability insurance tax rate by the additional 0.1 percent (that is, to 1 percent) in 1995: The Director of the EDD, subject to the approval of the Department of Finance, shall reduce the worker contribution rate for 1995 to 1 percent. Administrative Staff Increase Not Justified We recommend that the Legislature reject a proposed augmentation of $395,000 in federal funds and 6.7 personnel-years in the Job Training Partnership Division (JTPD) because the need for these positions has not been demonstrated. We further recommend that the EDD report to the subcommittees, during hearings on the budget, on a plan to reallocate these funds to direct services. (Reduce Item 5100-001-869 by $395,000.) C – 72 Health and Social Services The 1993 Budget Act included an augmentation of $844,000 in federal funds (11 personnel-years) for the JTPD for administrative oversight, reporting, evaluation, and policy development in 1993-94. The budget proposes an additional $1.1 million in federal funds and 16 personnel- years in 1994-95 to establish a training unit, reorganize the program development section, and address increased administrative workload. Our analysis indicates that the request for additional staff (6.7 personnel-years) for the program development section is not supportable on a workload basis. This section conducts administrative activities such as bill analysis, policy oversight, and data collection. We base our conclusion on two findings. First, the proposal does not take into consideration the additional positions included in the 1993 Budget Act for these activities nor the program’s base level of analytical staff available in the division. The current-year augmentation included five positions related to program development. Second, the proposal does not demonstrate a workload increase in 1994-95. For these reasons, we recommend that the Legislature reject the proposed augmentation of $395,000 in federal funds for the 6.7 personnel- years in the JTPD because the need for these new positions has not been demonstrated. We further recommend that the EDD report to the subcommittees, during hearings on the budget, on a plan to reallocate these funds to direct services rather than administration. Technical Recommendation\u2014 Personal Services Are Overbudgeted We recommend that $989,000 be deleted from various funds because proposed new positions are overbudgeted. (Reduce Item 5100-001-184 by $31,000, reduce Item 5100-001-588 by $702,000, reduce Item 5100-001-869 by $198,000, and reduce Item 5100-001-870 by $58,000.) State personnel policy requires departments to hire new employees by placing them at the minimum salary step of the appropriate classification. The budget, however, proposes numerous new positions in the Disability Insurance, Job Training Partnership Act, Employment Services, and Tax Collection programs at the maximum step of the salary range. Consequently, we recommend an adjustment to correct this overbudgeting, for a savings of $31,000 to the Benefit Audit Fund, $702,000 to the Unemployment Compensation Disability Fund, $198,000 to the Consolidated Work Program Fund, and $58,000 to the Unemployment Administration Fund. Department of Social Services C – 73 DEPARTMENT OF SOCIAL SERVICES\u2014 STATE OPERATIONS (5180) The Department of Social Services (DSS) administers income maintenance, food stamps, and social services programs. It is also responsible for (1) licensing and evaluating nonmedical community care facilities and (2) determining medical\/vocational eligibility of persons applying for benefits under the Disability Insurance Program, Supplemental Security Income\/State Supplementary Program (SSI\/SSP), and Medi-Cal Program. The budget proposes $400 million from all funds ($93.8 million from the General Fund) for DSS state operations in 1994-95. The amount proposed from the General Fund represents an increase of 6.7 percent over estimated current-year expenditures from this funding source. Proposed Augmentation to Administer Welfare Reforms Not Fully Justified We recommend deletion of three new positions requested to administer provisions of welfare reform legislation enacted in the current year, for a General Fund savings of $109,000 in 1994-95, because the duties can be performed by contract services proposed for the department and by existing positions. (Reduce Item 5180-001-001 by $109,000.) The budget proposes $2.6 million ($1.3 million from the General Fund) for 22 limited-term positions and operating expenses, including contract services, to administer programs and activities established in the current year as a result of welfare reform provisions enacted in Ch 69\/93 (SB 35, Senate Committee on Budget and Fiscal Review). Of the 22 positions, 9.5 five-year limited-term positions were established in the current year by Ch 1252\/93 (SB 1078, Watson), and are proposed for continuation. Review and Evaluation Bureau and Research Branch. The budget proposal includes three new positions for the department’s Review and Evaluation Bureau and two new positions for the Planning and Research Branch. These positions would perform data collection and validation activities to assist in the evaluation of new programs and activities established by SB 35. C – 74 Health and Social Services We recommend rejection of two of the positions proposed for the Review and Evaluation Bureau and one of the positions proposed for the Research Branch, for a General Fund savings of $109,000 in 1994-95, because the duties associated with these positions can be performed by contract services to evaluate the new programs and by existing positions in the department. Specifically, we note the following: ! The budget proposes $801,000 from all funds to contract for an evaluation of the new programs established by SB 35. Data collection and validation activities can be\u2014and normally are\u2014included as part of the requirements for these contract services. ! The Review and Evaluation Bureau and Planning and Research Branch have a combined staffing level of 72 budgeted positions, of which 62 are supervisorial or analytical. Thus, the department should have the capacity to absorb any data collection and validation requirements that cannot be assumed under the evaluation contract and by the two new positions for which we recommend approval. Aid to Families With Dependent Children C – 75 AID TO FAMILIES WITH DEPENDENT CHILDREN The Aid to Families with Dependent Children (AFDC) Program provides cash grants to families and children whose incomes are not adequate to provide for their basic needs. Families are eligible for the AFDC-Family Group (AFDC-FG) Program if they have a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. Families are eligible for grants under the AFDC- Unemployed Parent (AFDC-U) Program if they have a child who is financially needy due to the unemployment of one or both parents. Children are eligible for grants under the AFDC-Foster Care (AFDC-FC) Program if they are living with a foster care provider under a court order or a voluntary agreement between the child’s parent and a county welfare or probation department. The budget proposes expenditures of $6.2 billion ($1.3 billion General Fund, $1.7 billion county funds, and $3.2 billion federal funds) for the AFDC Program in 1994-95. This is a net decrease of $635 million ($1.9 billion General Fund), or 9.2 percent (59 percent General Fund), below estimated expenditures for the current year. This decrease is due to proposed grant reductions and to the Governor’s state and county restructuring proposal. Governor Proposes to Increase County Share of AFDC Program Costs The Governor’s restructuring proposal would increase the counties’ share of the nonfederal cost of AFDC (FG&U) grant payments from 5 percent to 50 percent and increase the counties’ share of AFDC-Foster Care payments from 60 percent to 100 percent. We discuss the proposal in detail in our companion volume, The 1994-95 Budget: Perspectives and Issues. In this report, we agree that counties should assume full programmatic and financial responsibility for the Foster Care Program; but instead of increasing the county share of cost for the AFDC (FG&U) Program, we suggest using a more focused approach that relies on a system of incentives and sanctions to encourage counties to get AFDC recipients off of aid. C – 76 Health and Social Services CURRENT-YEAR STATUTORY CHANGES IN AFDC PROGRAM Maximum Aid Payments (MAPs) Reduced by 2.7 Percent. Chapter 69, Statutes of 1993 (SB 35, Senate Committee on Budget and Fiscal Review), reduced the MAPs by 2.7 percent, effective September 1, 1993. Thus, a family of three with no other income experienced an AFDC grant reduc- tion of $17 per month. This family was eligible for an additional food stamps allotment of about $5. Therefore, the net reduction in monthly benefits, including food stamps, was about $12. Cal Learn Program. Chapter 69 established the Cal Learn Program for parents under age 19 who receive AFDC and have not completed high school. The program provides intensive case management, supportive services such as child care and transportation, and fiscal incentives to stay in school. If these parents remain in school and maintain satisfactory progress, they receive a $100 bonus per report card period, and a $500 bonus upon graduation. However, participants not making satisfactory progress are subject to a sanction of $100 per report card period. The budget proposes expenditures of $57 million ($27 million General Fund) for the program in 1994-95. This is an increase of $45 million ($21 million General Fund), or 375 percent above estimated current-year expenditures. The current-year expenditures reflect a February 1, 1994 implementation date; therefore, a large part of the budget-year increase reflects the full-year effect of the program. Under the Governor’s restructuring proposal, the bonuses and sanctions and administrative costs of the Cal Learn Program would be realigned\u2014the state and county would each have 50 percent of the nonfederal share of cost; however, there would be no county share of cost for the intensive case management and child care components of the program. Earned Income Disregard. The 1993 Budget Act provided funding to implement a federal waiver to eliminate time limits on the $30 and one- third disregard of earnings. This is intended to encourage AFDC recipients to work, by allowing recipients to retain, for an indefinite period, the first $30 of their monthly earnings plus one-third of the remaining earnings without a reduction in their grant. Previously, the one-third disregard applied only to the first 4 months of earnings and the $30 disregard only to the first 12 months. Supplemental Child Care. The 1993 Budget Act also provided funding to cover a working recipient’s child care costs up to the 75th percentile of the local market. Under prior law, the monthly child care allowance was Aid to Families With Dependent Children C – 77 limited to $175 per child two years of age and over, and $200 per child under two years. Other Work Support Measures. Chapter 69 included several other changes in AFDC eligibility requirements designed to encourage AFDC recipients to work. The resource (assets) limit for recipients was increased from $1,000 to $2,000, the automobile equity limit was increased from $1,500 to $4,500, and a new provision was implemented to permit a recipient to have a restricted savings account of up to $5,000 to apply toward a child’s college education or training, a down payment on a home, or starting a business. GOVERNOR’S 1994-95 WELFARE PROPOSALS The Governor proposes legislation to make several changes that would reduce grants in the AFDC Program, for a net General Fund savings of $460 million in 1994-95. Most of these savings would result from a 10 percent across-the-board reduction and a 15 percent reduction after six months on aid. We review the Governor’s proposals and comment on them. The Governor’s Budget proposes several major changes that would reduce grants in the AFDC Program. As Figure 18 shows, these changes would result in an estimated General Fund savings of $460 million in AFDC grants and administration in 1994-95. Figure 18 Governor’s AFDC Grant Proposals General Fund Budget Summary 1994-95 (In Millions) Proposal Grants Administration 10 percent MAP reduction -$281.7 \u2014 15 percent additional MAP reduction -157.0 $6.8 Exclusion from MAP of children conceived while on aid -5.6 0.2 Elimination of pregnancy-related benefits -20.9 -2.3 Totals -$465.2 $4.8 C – 78 Health and Social Services Budget Proposes AFDC Maximum Aid Payment Reductions The budget contains five separate proposals that would have the effect of reducing AFDC grants below the levels required by current law. These are (1) a 10 percent reduction in the MAP for all AFDC recipients, effective July 1, 1994, (2) an additional 15 percent MAP reduction for AFDC recipients (with some exceptions) who have been on aid for more than six months, (3) a prohibition of MAP increases for children conceived while the parent is on aid, (4) a limit on AFDC pregnancy- related benefits, and (5) a two-year limit on AFDC eligibility for able- bodied adults. Budget Proposes to Reduce MAPs by 10 Percent. The budget proposes legislation to reduce the MAPs by 2.3 percent for all recipients, for a savings of $132 million ($63 million General Fund) in 1994-95. This reduction could occur under existing federal waiver authority. The budget also proposes legislation for an additional 7.7 percent reduction of the MAPs, for a savings of $456 million ($218 million General Fund) in 1994-95. This reduction would require a federal waiver. The combined reduction of 10 percent would be effective July 1, 1994. The 10 percent reduction would reduce monthly grants by $61 for a family of three. These grant reductions would be partially offset by an increase in food stamps. Because the Governor’s proposals affect only the maximum aid payment, recipients who have grants below the maximum\u2014due to employment earnings, for example\u2014would experience no grant reduction or only a partial reduction. Proposal to Reduce MAP by 15 Percent After Six Months. The budget proposes legislation to reduce the MAP by an additional 15 percent for AFDC recipients (with some exceptions) after they have been on aid for six months, for a net savings of $308 million ($150 million General Fund) in 1994-95. This would require a federal waiver. The additional 15 percent reduction would occur after a family (1) has been on assistance for more than 6 months or (2) went off aid after 6 months and returned to the program within 24 months. This reduction would not occur if all parents or caretaker relatives in the home are age 60 or over, disabled (receiving SSI\/SSP or In-Home Supportive Services), pregnant, the caretaker is a non-needy relative, or all parents in the family (assistance unit) are under age 19 and attending high school or other equivalent schooling. Proposal to Exclude From the MAP any Children Conceived While on Aid. The budget proposes legislation to exclude, for purposes of Aid to Families With Dependent Children C – 79 determining a family’s MAP, any children who are conceived while the family is on AFDC. Such children would continue to be excluded if the family leaves and returns to the program, unless the absence was for at least 24 consecutive months. Children excluded for purposes of determining the MAP would be eligible for both Medi-Cal benefits and food stamps. This proposal would require a federal waiver. The administration estimates that this proposal would result in net savings of $11 million ($5.4 million General Fund) in 1994-95. Savings for 1994-95 reflect two months of caseload impact. Savings would increase significantly annually thereafter, amounting to several hundred million dollars in ten years. Proposal to Limit Pregnancy-Related Benefits. The budget proposes legislation to limit pregnancy-related AFDC benefits, for a savings of $34 million ($23 million General Fund) in 1994-95. Specifically, the budget proposes to end the following benefits: ! State-Only AFDC Program. Under current law, the state operates a state-only (no federal financial participation) AFDC Program, whereby grants are provided to pregnant women without other children during the first six months of pregnancy. ! $70 Monthly Special Needs Payment. Current law also provides for a $70 monthly special needs payment to all pregnant women who are receiving AFDC. Under the budget proposal, the state would continue to participate in the federally assisted AFDC Program for pregnant women who are in their last three months of pregnancy (and for the month in which their baby is born). Limiting the pregnancy benefits to the last three months of pregnancy would cause about 3,000 women (those with no other children) to lose their AFDC benefits. These women could apply for general assistance in the counties where they reside. Thus, the elimination of these programs would, in effect, transfer responsibility for many pregnant women to the counties. These women would, however, be eligible both for pregnancy- related medical benefits under Medi-Cal and for food stamps. Teen Parent’s Residence. The budget anticipates legislation to require parents under age 18 who receive AFDC to live in the home of their parent, legal guardian, adult relative, or in certain other living arrangements in order to receive aid. The proposal includes exceptions under which the teen could maintain a separate residence. This program requirement is optional under the federal Family Support Act of 1988 and C – 80 Health and Social Services would not require any federal approval other than acceptance of an amended state plan. The budget does not reflect any savings from this proposal; however, to the extent that the teen parents stay with certain adults, such as parents or stepparents, part of the adult’s income could be used to offset the teen parent’s AFDC grant. This would result in unknown General Fund savings, probably less than $500,000. Proposal to Limit Eligibility to Two Years. The budget proposes legislation to limit the AFDC eligibility of able-bodied adults to two years, effective July 1, 1996. This would require a federal waiver. The proposal would also give priority to individuals affected by the time limit for services in the Greater Avenues for Independence (GAIN) Program. Under the proposal, able-bodied adults on aid for more than two years would be removed from the family unit for purposes of calculating the AFDC grant. Their children would continue to be eligible to receive aid. However, these adults would still be eligible for Medi-Cal and food stamps. Participants in the GAIN Program subject to the two-year limit would also have their grants reduced but would be able to complete the program. The Department of Social Services (DSS) indicates that adults affected by the time limit could become eligible for AFDC after 24 months. We estimate that this proposal would result in annual General Fund savings of approximately $300 million in AFDC grants, beginning in 1996-97. The DSS estimates that 479,000 AFDC recipients will be subject to the two-year limit upon implementation of the proposal. Some of these have previously been served by GAIN; others are currently being served by GAIN or are not in need of GAIN services because they are currently employed; and some recipients are expected to refuse GAIN services. The department estimates that after excluding these persons, 272,000 recipients will need GAIN services prior to June 30, 1996. To facilitate this, the budget proposes to reappropriate unspent GAIN Program funds in 1993-94 to be available during 1994-95. In addition, the budget proposes an augmentation of the GAIN Program of $2.7 million from all funds in 1994-95. Finally, the budget proposes performance incentives designed to increase the effectiveness of the GAIN Program. Figure 19 summarizes the effect of the Governor’s proposals on monthly grants for a family of three persons in the AFDC-Family Group Program. As the figure shows, the impact of the two-year limit would be mitigated, to some degree, by provisions of current law that restore grant reductions made in 1992-93 and provide a cost-of-living adjustment for grants, effective July 1, 1996. Taking these actions into account, the net Aid to Families With Dependent Children C – 81 effect of all of the Governor’s proposals on a three-person family subject to the two-year limit would be a reduction of $197, or 32 percent, from current monthly grant levels. This reduction would be partially offset by an increase of $59 in food stamps. Figure 19 AFDC Maximum Grant and Food Stamps Family of Threea Current Law and Governor’s Proposals Maximum Grant Food Stamps Total Change From Current Law Current law $607 $214 $821 \u2014 10 percent reduction 546 232 784 -$37 15 percent\/six months 464 257 721 -100 Two-year time limit (1996-97): Current law grant increasesb (507) (244) (751) \u2014 Proposed grant reductionsc 410 273 683 -138 a Assumes an AFDC-Family Group case. b Current law provides for restoration of 1992-93 AFDC grant reductions and resumption of annual cost-of-living- adjustments (COLAs) effective July 1, 1996. Figure assumes an estimated 3.5 percent COLA. c Assumes current law restoration of grants, as indicated in preceding note. Without these restorations, the two-year reduction would bring the monthly grant to $375. Evaluating the Proposals to Reduce AFDC Grants In presenting his proposals, the Governor has offered several reasons why these changes are needed, including (1) the need to promote personal responsibility, (2) the need to reinforce the premise that AFDC is a temporary program, and (3) the need to make work an attractive alternative to AFDC. These are reasonable premises; but in evaluating the proposals, the Legislature needs to weigh the identified budgetary savings to government against its policy objectives for the AFDC Program and the potential impact of the proposed changes on needy families. Impact of the Grant Reductions Fiscal Impact on Government. The budget estimates that the proposed reforms will result in significant savings to the federal, state, and county levels of government. Net General Fund savings are estimated to be $460 million in 1994-95. These savings would increase in subsequent years, due primarily to the two-year limit and the provision prohibiting increases in the MAP for children conceived while a family is on aid. The savings would be offset, by an unknown amount, to the extent that the C – 82 Health and Social Services reductions in the MAPs and pregnancy benefits lead to a reduction in family incomes, which, in turn, leads to an increase in the use of other public services such as health and foster care. Impact on Families. The grant reductions proposed by the Governor would reduce the resources available to many families. Figure 19 shows how the proposals could affect a family of three\u2014the most common family size. We note that under current law, the combined maximum monthly grant and food stamps benefit ($821) is equal to about 80 percent of the poverty guideline. Those subject to both the 10 percent and additional 15 percent reductions would have their resources reduced to $721, or about 70 percent of the guideline if they do not have other income. Those subject to the two-year limit would have their resources reduced to $683 if they do not have other income. Increasing the Percentage of Recipients Who Work The impact of the Governor’s proposals will depend largely on the degree to which they result in an increase in the percentage of recipients who are employed, thereby avoiding the financial loss that would result from reductions in the MAPs. Increasing the Work Incentive. In our 1991-92 Perspectives and Issues report on the AFDC Program, we concluded that the program, as structured at the time, offered relatively little financial incentive to work. There were two main sources of the work disincentives: (1) the grant levels when combined with food stamps often were higher than what could be earned by recipients through low-wage employment and (2) program rules allowed working recipients to retain, at best, only a small part of each increment of income. In addition, persons who worked were likely to weigh the possible loss of Medi-Cal benefits (after a transition period) if they lost AFDC eligibility. Since then, the combination of grant reductions, rule changes, and an increase in the earned income tax credit have, to some extent, mitigated these problems; and the additional grant reductions proposed by the Governor would further increase the financial incentive to work. It is impossible to predict with accuracy, however, the degree to which these proposals will induce more AFDC recipients to work. Those nonworking recipients who do not compensate for the MAP reductions through an increase in earnings will suffer a reduction in their standard of living, which will be significant recognizing that these families’ incomes are currently below the federal poverty guidelines. It is therefore important, in assessing the budget proposal, to consider whether the reforms are based on reasonable expectations that AFDC recipients can Aid to Families With Dependent Children C – 83 obtain employment given their education levels and employment experience, if combined with limited job opportunities. Are AFDC Recipients Work-Ready? In spite of the increased work incentives provided under the Governor’s proposals, it may be difficult for AFDC recipients to obtain employment due to factors such as lack of training, low education levels and work experience, and the effect of the economy on job availability. Lack of employment-related skills, including low educational attainment, is often cited as a major impediment to AFDC recipients returning to the labor force. Some studies show that low educational attainment is associated with a higher probability of staying longer on assistance. The GAIN Program is California’s primary employment training program for AFDC recipients. It is a more complex program and is more expensive per participant than most previous programs. The program, however, is not funded at a level sufficient to accommodate all mandatory and voluntary participants. The GAIN Program is currently being evaluated by an independent consulting firm. The final report is due this spring. (We discuss the GAIN Program and the evaluation later in this analysis.) The downturn in the state’s economy presents a significant challenge to existing and potential AFDC job seekers. We estimate that total nonagricultural employment will decrease in 1994 and will remain virtually unchanged in 1995. These projections suggest that AFDC job seekers are likely to be faced with significant competition from currently unemployed people and other new job seekers, at least in the near term. In summary, the relatively low level of education and employment experience of the typical AFDC parent, combined with limited job opportunities, suggests that it may not be possible for all nonworking AFDC household heads to fully compensate for the proposed MAP reductions by obtaining a job. Comments on Time-Limited Aid Proposal The Governor’s proposed two-year time limit on AFDC would not eliminate a family’s eligibility for aid but, in conjunction with his other proposed changes, would reduce grants substantially for those affected. We discuss some of the advantages and disadvantages of the proposal. C – 84 Health and Social Services The Governor’s proposal for two-year time-limited aid is essentially an extension of his proposal to reduce grants by 15 percent for families who have an able-bodied adult and have been on aid for more than six months. In other words, the grant would be reduced, not eliminated altogether; and the reduction would be partially offset by an increase in food stamps. If implemented in conjunction with the proposed 10 percent and 15 percent grant reductions, it would result in a substantial loss of available income to recipients, unless offset by employment earnings. Because of this, the proposal would increase the financial incentive for recipients to work. Underlying the concept of time-limited aid proposals is the premise that, after a certain period of time, able-bodied AFDC adults should be able to find employment and earn enough to offset any grant reduction that would be imposed or, ideally, to become self-sufficient. In this respect, it is appropriate to ensure that if such a proposal were to be implemented, recipients are given the opportunity to participate in, and complete, the GAIN Program, as the Governor proposes. This still leaves several questions unanswered, however: ! Will sufficient funding be made available for the GAIN Program? The DSS estimates that the amount proposed for the program in 1994-95, if continued at that level in 1995-96, will be sufficient to accommodate all those who subsequently would be affected by the two-year limit and who desire GAIN services. The department has not provided detail on all of its assumptions underlying this estimate. ! Will employment be available for those who seek it? This depends, in part, on the state of the economy. The Governor’s proposal does not make provision for alternatives\u2014such as placement in community service jobs\u2014for those unable to find employment through normal channels, although such a feature might be included in welfare reform legislation at the federal level. Recently, the President indicated that he would submit proposed legislation to Congress that would include a two-year time limit on AFDC eligibility. While details have not been provided, the administration has suggested that the proposal could include provision for community service jobs for those unable to find employment through other means. ! What will be the impact on families who do not compensate for grant reductions with additional income from other sources? The department, for example, estimates that 29,000 persons subject to the two-year limit will refuse GAIN services, based on the number who choose to take the existing sanctions (grant reductions) in the Aid to Families With Dependent Children C – 85 program because of refusal to participate. In addition, the current GAIN evaluation indicates that 50 percent of the persons who participated in the program did not obtain employment within the two-year time frame studied. GAIN PROGRAM State Will Not Reach Federal Participation Target in GAIN Program The state will lose $23 million in federal funds for the GAIN Program in 1994-95 because it will fall short of the requirement that at least 40 percent of AFDC-U (Unemployed Parent) adult recipients participate in specified GAIN activities. We find that this federal target acts as a disincentive for states to allocate their GAIN resources in the most effective manner. In order to receive enhanced federal funding for the GAIN Program (60 to 90 percent instead of the regular 50 percent match), federal law requires that at least 40 percent of AFDC-U (Unemployed Parent) adult recipients participate in specified GAIN activities for at least 16 hours per week. This requirement increases to 50 percent in federal fiscal year 1995 (October 1994 to September 1995) and to 75 percent by federal fiscal year 1997. According to the DSS, California will fall considerably short of this requirement in 1994-95. The department estimates that less than 24 percent of AFDC-U adults participate in the required program activities. As a result, the state will lose $23 million in federal funds, effective October 1994. Federal law also includes a participation requirement that applies to AFDC cases in general, which the state probably will satisfy in 1994-95. It is not clear why federal law imposes a participation requirement specifically for AFDC-U recipients. Such a requirement has the effect of encouraging states to place a higher emphasis on enrolling AFDC-U recipients in the GAIN Program than on AFDC-FG recipients. In doing so, states would be allocating their GAIN resources in a manner that is unlikely to give priority to recipients who are most in need of these services to obtain employment. This is because AFDC-U cases consist of two-parent families with an adult that has work experience; whereas AFDC-FG cases are single-parent (or child-only) cases, in which the parent usually has little or no work experience. C – 86 Health and Social Services In our judgment, therefore, the federal requirement acts as a disincentive for states to allocate their GAIN resources in the most effective manner. Budget Overestimates Savings From GAIN-Related Reduced Dependency We estimate that the budget overstates by $2 million the General Fund savings that would result from reduced dependency on AFDC due to increased participation in the GAIN Program. The budget estimates that, because of participation in the GAIN Program, General Fund spending for AFDC grants will be $8.2 million less than what would otherwise occur in 1994-95. This estimate of reduced dependency savings, however, does not account for the reduction in GAIN participation that is expected to result from the loss of federal enhanced funding, as discussed above. We estimate that this factor will reduce the budgeted savings by $2 million. Budget Proposes Performance Incentives in the GAIN Program The budget proposes a statewide demonstration project that would provide a fiscal incentive to any county that (1) operates its GAIN Program at a high level of performance or (2) improves its performance, as measured by increased AFDC grant savings. The fiscal incentive to the county would represent 50 percent of the state savings resulting directly from the county’s improved performance. Performance would be measured in terms of a cost\/benefit ratio based on the county’s GAIN expenditures and AFDC grant savings. To qualify for a fiscal incentive on the basis of high performance, a county would have to exceed a statewide standard. Counties below the statewide standard could also qualify for the incentive by improving their cost\/benefit ratio by a specified amount each year. The statewide performance standard would be one dollar of AFDC savings for every dollar of GAIN expenditure. We believe that this proposal has merit. New Targeting Strategies Needed for the GAIN Program We recommend that the Legislature (1) enact legislation to add to the list of GAIN Program target groups AFDC parents who have never been married and (2) direct the DSS to seek a federal waiver to count these program participants as a federal target group. We further recommend legislation, pending federal approval, to add to the list of mandatory GAIN participants AFDC parents whose youngest child is one or two years of age and who have never been married. Aid to Families With Dependent Children C – 87 Studies have shown that families that remain on AFDC for long periods of time represent a minority of recipients but account for a majority of the program costs. It has been estimated, for example, that those on aid for ten years or more represent about 25 percent of all recipients but account for 60 percent of program expenditures. In order to significantly reduce the public costs of the AFDC Program, therefore, it is important to reduce the incidence of long-term dependence. In recognition of this, the GAIN Program includes as one of its target groups\u2014that is, groups to receive services if resources are inadequate to serve all eligible persons\u2014those persons who have been on assistance for three or more years. The state target groups parallel federal legislation, which provides fiscal incentives to states that spend at least 55 percent of their program funds on specified groups. Targeting. The use of targeting can be a cost-effective strategy, particularly in the GAIN Program where resources are not sufficient to fund all eligible persons. Giving priority to those on aid for three years or more is based on data indicating that these families are much more likely to remain on aid for very long periods than are new applicants. It also helps to ensure that program resources are not allocated for those recipients who do not need them\u2014for example, those who will find employment and go off assistance shortly after applying for aid, without the use of the services provided by the program. We believe that it is likely, however, that programs, such as GAIN, that are designed to reduce welfare dependence will be more effective if their services are provided at an early stage. In other words, the state should provide the services within a few months of initial receipt of aid to those applicants who, absent such services, will remain on aid for a long period of time. One problem in adopting such an approach is the difficulty of predicting who will remain on aid for long periods. While there is no way to predict with certainty whether a particular applicant falls into this category, we note that there is research indicating that certain demographic characteristics can be used to identify groups that will have a large proportion of long-term recipients. One of the most comprehensive studies conducted to date found that 39 percent of AFDC recipients who had never been married (as distinguished from those who were separated or divorced) remained on aid for ten or more years. Of all the variables tested, never been married was by far the best predictor of long-term welfare receipt. C – 88 Health and Social Services We believe that this finding can serve as a useful means for targeting the use of resources designed to reduce dependence and the public cost of welfare. Accordingly, we recommend legislation to add to the list of GAIN target groups AFDC parents who have never been married. In order to ensure that this will not jeopardize the receipt of federal funds, we further recommend that the DSS seek a federal waiver enabling the state to count these program participants as a federal target group or, alternatively, to hold the state harmless for purposes of meeting target group participation standards. Mandatory Participants. Under the GAIN Program, AFDC recipients with children under three years of age are not required to participate in the program. Federal law, however, permits states to require the participation in GAIN of parents whose youngest child is one or two years of age. Given the GAIN Program’s provisions for child care, we believe that it would be reasonable to expect recipients with children aged one or more to participate in this program. We also note that in the aforementioned study, 32 percent of recipients whose youngest child was under three years of age when applying for AFDC remained on aid for nine years or more. As discussed above, the other findings in this research can provide a useful way\u2014specifically, focusing on never married persons\u2014to expand the number of mandatory GAIN participants so as to target resources to those who have the greatest risk of long-term dependence. Accordingly, we recommend that the Legislature direct the DSS to apply for a federal waiver to expand the group designated as mandatory GAIN participants by including AFDC recipients whose youngest child is one or two years of age, but only for those parents who have never been married. We believe that this will have the effect of targeting GAIN resources in the most cost-effective manner. Fiscal Impact. These recommendations, if adopted, could result in a reallocation of GAIN funds rather than additional costs. In the long run, the fiscal effect will depend on the cost-effectiveness of the targeting strategies. If federal waivers are contingent on an evaluation of the new approach, the evaluation would have to be funded either by redirection of GAIN funds or by an additional appropriation. Final Report of GAIN Evaluation Due in the Spring The two-year interim evaluation of the GAIN Program showed that the program had an effect\u2014particularly large in one county\u2014in increasing participants’ earnings and reducing AFDC grant expenditures. The final report is due in May 1994. Aid to Families With Dependent Children C – 89 Two-Year Follow-up Findings. The Manpower Demonstration Research Corporation (MDRC) is evaluating the GAIN Program in six counties in California. MDRC’s two-year interim report indicates that for AFDC-FG recipients (the largest category of recipients), the program increased average earnings by 21 percent, compared to the control group, and reduced AFDC grant expenditures by 6 percent more than the comparison group. Some counties\u2014notably Riverside\u2014showed substantially larger earnings gains and welfare savings. The Riverside approach tends to place more emphasis on immediate job placement than on skill-building through education and training. The final MDRC report on the program’s impact over a three-year follow-up period should be available in May 1994. This report will include data on program costs as well as savings, and will therefore provide an indication of the cost-effectiveness of the program. Evaluation of GAIN’s Basic Education Component. The MDRC recently completed a five-county interim study on the effects of the GAIN Program’s basic education component. Basic education is instruction\u2014usually provided by public school adult education programs and community colleges\u2014in the basic skills of reading, writing, and mathematics. The study found that the basic education component of GAIN produced no statistically significant increase in basic skills, except in San Diego County. San Diego County’s performance suggests that program structure may make a difference. The county applied an alternative approach to providing adult basic education. The curriculum was designed specifically for GAIN participants and combined computer-assisted learning with lessons tailored to everyday life such as household budgets, job applications, and resume writing. These results suggest that the San Diego approach could serve as a model for GAIN’s basic education component. The MDRC, however, cautions that because of the small sample size, using the study as the basis for widespread replication would not be warranted. CHILD SUPPORT ENFORCEMENT PROGRAM Child Support Pilot Project Likely to Result in Additional Savings We recommend that the department report during the budget hearings on the anticipated increase in child support collections from the Franchise Tax Board (FTB) child support pilot project and the estimated General Fund savings from these collections in the budget year. C – 90 Health and Social Services Child support enforcement services are provided by county district attorneys to all persons who request such assistance. Collections made on behalf of AFDC recipients offset AFDC grant expenditures and therefore result in state savings, after accounting for $50 monthly payments to the recipient and state incentive payments to the counties. Chapter 1223, Statutes of 1992 (AB 3589, Speier), established a pilot project in which six counties forward delinquent child support cases to the FTB to attempt to recover these obligations. After conducting a test of the procedures, the FTB began full implementation in December 1993. The FTB initially projected that collections will amount to $13.9 million from AFDC and non-AFDC cases in 1994-95. We estimate that this level of collections would result in $1.5 million in grant savings to the state, offset by $700,000 in state incentive payments to the counties and the FTB, for a net General Fund savings of $800,000 in 1994-95. The FTB, however, indicates that because of the limited data on actual collections, the board will not be able to provide a firm estimate of budget-year results until February or March of 1994. The budget does not reflect any impact on collections from the pilot project in 1994-95. In order to account for the anticipated fiscal effects, therefore, we recommend that the department, after consulting with the FTB, report during the budget hearings on the estimated collections and resulting General Fund savings in 1994-95. REVIEW OF THE TRANSITIONAL CHILD CARE (TCC) PROGRAM TCC Program Funding Methodology Should Be Changed We recommend that the Legislature adopt Budget Bill language to (1) require counties to spend a specified portion of their TCC Program administrative funds on outreach efforts and (2) revise the methodology for allocating administrative funds to counties so that the allocations are based primarily on factors related to service demand\u2014specifically, the number of TCC eligibles and the number of program participants. Chapter 36, Statutes of 1990 (AB 1706, Bates), requires the Legislative Analyst’s Office to review the TCC Program. The purpose of the review is to assess the implementation of the TCC Program, to determine its effectiveness in enabling welfare recipients to successfully remain off of AFDC, and to recommend policy and program changes regarding the program. Aid to Families With Dependent Children C – 91 Background. Federal law authorizes states to implement a TCC Program that provides subsidized child care for a maximum of 12 months after the family no longer receives AFDC. A primary goal of the program is to remove child care costs as a barrier to employment for former AFDC recipients as they transition into self-sufficiency. To be eligible for TCC, a recipient must have received aid for three of the six months before becoming ineligible for AFDC due to increased income from employment or because of increased hours of work. The 1994-95 Governor’s Budget proposes $2.7 million for TCC Program administration and $9.3 million for TCC benefits. Families qualifying for TCC must contribute a share of the cost of their child care determined by a fee schedule and ability to pay. The remainder of the program cost is paid by the federal government (50 percent) and the state (50 percent). County welfare departments provide informational materials regarding the TCC Program to applicants for AFDC, and to grant recipients at annual renewal and at the time of termination from AFDC. State law also expresses legislative intent that AFDC recipients receive TCC Program information at any other time that will effectively help families in planning their child care needs. Program Effectiveness. Data are not sufficient to allow us to measure the effectiveness of the TCC Program on AFDC recipients’ decisions to leave aid or the ability of the program to further self-sufficiency among TCC participants who have left aid. An evaluation of the TCC Program’s effectiveness would typically require a control group and an experimental group. The control group would include TCC-eligible persons who were denied benefits for purposes of the evaluation, while the experimental group would receive TCC Program services. Differences in outcomes\u2014such as use of child care, AFDC discontinuations due to employment, earnings levels, and AFDC recidivism\u2014could then be measured to determine program effectiveness. Because the TCC Program is a federal entitlement program, however, the state is unable to deny these benefits to eligible persons, thereby precluding the use of such a methodology without a federal waiver. We note that the DSS intends to expand an evaluation on welfare reform currently in progress to include questions relating to TCC underutilization by gathering data from apparently eligible persons who did not apply for TCC. Results of that study should be available in one year. Program Implementation. In spite of the limitation on available data, we can draw some conclusions regarding the program. TCC usage has been significantly lower than anticipated at the outset of the program, due to the difficulty of projecting usage in a new program. For example, the 1991-92 Governor’s Budget proposed $52 million for the TCC Program during its first full year of operation. However, actual program expendi- tures, including administrative costs, totaled $8.6 million. In 1992-93, TCC Program expenditures totaled $10.1 million, or an increase of 17 percent C – 92 Health and Social Services over prior-year expenditures. Estimated spending in 1993-94 is $11.4 million, which represents a 13 percent increase. Program Characteristics Data. Chapter 36 also required the DSS to submit specified information to the Legislative Analyst’s Office to assist in our evaluation of the program. The following is a summary of the data gathered by the department from a random sample of 426 cases in November 1990. ! Median length of time on AFDC since last application: 18 months. ! Average months from discontinuance to application for TCC: 1.1 month. ! Average monthly earnings: $1,333. ! Average monthly child care cost per case: $358. ! Average monthly family fee per case: $40. The department reported the following additional information gathered from a survey of the same cases one year later: ! Average number of months TCC benefits received: 10. ! Percent reapplied for AFDC: 21. ! Percent terminated from TCC because 12-month eligibility expired: 80. The DSS intends to perform an additional follow-up of the same recipients within the next year. Program Participation. The best measure of program participation is the percentage of eligible persons who use TCC. Unfortunately, data on the number of eligible persons are not available. We can, however, use proxy measures\u2014AFDC caseloads and AFDC terminations due to employment and certain other factors. In reviewing TCC cases as a percentage of AFDC caseloads, we find that California ranked the lowest among the ten largest states in program participation in federal fiscal year 1992 (Figure 20). The General Ac- counting Office (GAO) also examined the TCC Program, using April 1990 through June 1991 data. Based on limited data from 20 states, the GAO reported that the percentage of eligible families receiving TCC assistance ranged from 2 to 66 percent. California’s utilization rate was estimated to be 7 percent. The relatively low utilization rate in California may have been due partly to the fact that initially, the written materials prepared by the DSS and the counties were not developed in the language of all the eligible users. Aid to Families With Dependent Children C – 93 Pennsylvania North Carolina Texas Florida New Jersey Illinois Ohio Michigan New York California 1 2 TCC Program Usage Lowest in California Ten Largest States Federal Fiscal Year 1992 TCC Cases as Percent of AFDC Caseload 3% Figure 20 When comparing usage rates among the counties, we found significant differences as measured by the number of TCC cases per termination due to employment and other factors. As shown in Figure 21, the number of TCC cases per termination ranged from zero in Alpine County and Sierra County to 56 percent in Mendocino County. In our review, we identified two reasons that could explain this variation: ! Higher-usage counties generally went beyond the minimum notification requirements to inform potential eligibles about the program. ! Higher-usage counties tended to allocate more of their resources for administration of the program. C – 94 Health and Social Services We found that most of the high-usage counties devoted specific time to TCC Program awareness and outreach efforts during AFDC application, at redetermination, in the GAIN Program, and with child care providers. In addition, some counties dedicated specific positions to manage all of the TCC cases. These TCC workers had reduced in- take\/eligibility workloads and combined the TCC Program responsi- bilities with other transitional programs such as transitional Medi-Cal and the at-risk child care programs to personalize the service to clients and provide a coordinated delivery of services during a client’s transition to self-sufficiency. Figure 21 Transitional Child Care (TCC) Program Participation Rate TCC Cases per AFDC Case Terminationsa 1992-93 Mendocino 55.9% Del Norte 12.7% Amador 53.3 Glenn 12.3 Ventura 47.7 Monterey 12.0 Marin 44.1 Alameda 11.0 Yuba 38.7 Santa Clara 10.9 San Joaquin 35.1 Nevada 10.9 San Francisco 34.0 Santa Barbara 10.7 Butte 32.3 Shasta 10.6 San Mateo 32.0 Contra Costa 10.5 Santa Cruz 25.5 Madera 10.3 Sutter 25.1 Calveras 9.2 Tuolumne 23.8 Mariposa 8.2 Placer 23.6 Los Angeles 7.9 Inyo 21.4 San Luis Obispo 7.8 Modoc 19.6 San Bernardino 7.6 Sacramento 18.8 Colusa 7.5 El Dorado 18.8 Solano 5.7 Tehama 18.7 Kings 5.6 Yolo 18.2 Trinity 5.6 Siskiyou 18.1 Riverside 4.8 Humboldt 17.4 Mono 4.3 Sonoma 16.7 Orange 4.0 Lake 15.4 Imperial 2.3 Napa 15.1 Lassen 2.1 San Benito 15.0 Fresno 1.9 Plumas 14.4 Tulare 1.7 Kern 13.5 Merced 0.5 Stanislaus 12.7 Alpine \u2014 San Diego 12.7 Sierra \u2014 a Terminations due to employment and certain other factors.. Aid to Families With Dependent Children C – 95 Based on 1992-93 data from the 15 largest counties, we also generally found a strong relationship between TCC usage rates and administrative spending in the program, as reflected in Figure 22. Thus, it appears that administrative spending makes a difference in TCC program usage. Allocations for administrative costs are currently based on each county’s past year TCC caseload and administrative expenditures as a percentage of statewide totals. We believe that this methodology does not adequately measure the need for funds to administer the program because it does not take into account the workload for activities such as outreach. The allocation methodology should be based on measures of potential service demand. Thus, it would be preferable, for example, to incorporate a factor to measure the number of TCC eligibles. Figure 22 Transitional Child Care (TCC) Program Administrative Spending and Program Usage Among the 15 Largest Counties 1992-93 County Spending per Potential Case TCC Participation Rate Ventura $18.0 47.7% San Joaquin 13.2 35.1 San Francisco 5.8 34.0 San Mateo 20.9 32.0 Sacramento 8.1 18.8 Kern 11.0 14.4 San Diego 9.0 12.7 Alameda 2.6 11.0 Santa Clara 8.3 10.9 Contra Costa 8.8 10.5 Los Angeles 6.9 7.9 San Bernardino 3.9 7.6 Riverside 3.6 4.8 Orange 3.0 4.0 Fresno 1.1 1.9 Analyst Recommendations. While data are not available to evaluate the effectiveness of the TCC Program, we can offer recommendations to enhance program participation and allocate administrative funds in a more equitable manner. We recommend that (1) counties be required to spend a specified portion of their administrative allocation on outreach efforts based on the percentage spent by those counties which have served a high proportion of eligible persons and (2) the methodology for allocating administrative funds to the counties be based primarily on the factors related to potential service demand\u2014specifically, the number of TCC eligibles and the number of program participants. This is designed to increase awareness C – 96 Health and Social Services and usage of the program and distribute program allocations to counties in closer relation to the need for these funds. To accomplish this, we recommend adoption of the following Budget Bill language for Item 5180-141-001: 1. Counties shall spend a specified portion, as determined by the department, of their Transitional Child Care (TCC) Program administrative allocation on outreach efforts. 2. The department shall allocate administrative funds in the TCC Program to counties based primarily on factors related to potential service demand\u2014specifically including the number of TCC eligibles and the number of program participants. To the extent these recommendations, if adopted, increase program participation, there would be costs to the state and federal governments to pay for the child care allowances. On the other hand, to the extent that the TCC Program acts as an employment incentive and helps get AFDC recipients off of aid, there would be federal, state, and county savings. AFDC-FOSTER CARE State-County Restructuring Proposal The Governor’s restructuring plan proposes to transfer full program and funding responsibility for foster family homes and group homes to the counties, including placement and rate-setting functions. The budget proposes expenditures of $1.1 billion ($0.7 million General Fund, $402 million federal funds, and $684 million county funds) for local assistance for the foster care program (administration and grants) in 1994-95. This represents a shift of $324 million in General Fund costs to the counties. (For an analysis of the restructuring proposal, please see our companion document The 1994-95 Budget: Perspectives and Issues.) Budget Does Not Assume Savings From Expansion of Family Preservation Services We recommend (1) that the department report during budget hearings on how it intends to use the new federal Title IV-B funds for family preservation services and (2) a General Fund reduction of $5 million for the foster care program to reflect anticipated savings due to the expansion of family preservation services. (Reduce proposed property tax transfer and corresponding General Fund support for school apportionments by $5 million.) The Omnibus Budget Reconciliation Act (OBRA) of 1993 established a new federal Title IV-B capped entitlement program to provide funding to states for family preservation and community-based family support services. Family preservation services are defined as services designed to help children and families at risk or in crisis such as (1) programs to help children return to families from which they have been Aid to Families With Dependent Children C – 97 removed, (2) preplacement preventive services to help children at risk of foster care placement remain with their families, (3) respite care for parents and other caregivers, including foster parents, and (4) services designed to improve parenting skills. Family support services are defined as community-based services designed to promote the well-being of children and families to increase the strength and stability of families. The OBRA of 1993 authorizes the capped entitlement funding through federal fiscal year 1998, with a 75 percent federal match. States must submit a plan for federal approval, but they have considerable flexibility to design their programs. The federal law requires that at least 90 percent of expenditures must be used for family preservation and support services and does not allow the new funds to supplant existing state and local efforts. The budget includes $19 million in additional federal funds in the Child Welfare Services budget from the new Title IV-B program in 1994-95. Department Proposal. The department indicates that they are currently developing a plan to implement the new family preservation and community-based family support services program. In order for the Legislature to fully evaluate the programmatic and fiscal impact of the new program, we recommend that the department report during budget hearings on its plans for implementation and how it intends to use the additional federal funds. Budget Does Not Assume Savings in Foster Care Program. Although the budget includes an additional $19 million in federal funds in 1994-95 for family preservation and family support activities, the budget does not assume any foster care savings that would result from preventing children from entering into foster care placements or returning children in foster care placements to their families. Because the plans for the new program are unknown at this time, it is not possible to provide a precise estimate of savings in the foster care program. However, it is reasonable to assume that there will be some savings, and these should be included in the budget. Until the department can provide a more precise figure, we estimate General Fund savings of at least $5 million in the foster care program in 1994-95. Under the Governor’s restructuring proposal, these savings would be reflected in a reduction in the amount of property taxes that would need to be transferred from schools to counties, and a corresponding reduction in the amount of General Fund support for education needed to offset the property tax shift. Family Preservation Program Should Be Budgeted in Child Welfare Services Program We recommend that if the Governor’s restructuring proposal is adopted, funding for the Family Preservation Program be transferred from the Foster Care Program to the Child Welfare Services (CWS) Program, thereby requiring counties to pay a share of cost consistent with other CWS programs, because (1) the restructuring proposal makes the Family Preservation Program, as authorized by current law, C – 98 Health and Social Services inoperable and (2) if these funds are to be allocated without the restrictions of current law, they should be treated as a CWS activity. This would result in net General Fund savings of $10.5 million in 1994-95. (Reduce General Fund support for school apportionments by $34,907,000 and increase Item 5180-151-001 by $24,435,000.) The Family Preservation Program was established by Ch 105\/88 (AB 558, Hannigan) as a pilot program to provide intensive short-term family maintenance and family reunification services designed to avoid out-of-home placement of children or reduce the length of stay of such placements. Services include counseling, substance abuse treatment, respite care, parent training, crisis intervention, and teaching and demonstrating homemaking. In fact, family preservation services are essentially the same as services provided under the family maintenance and family reunification components of the CWS Program. Under the Family Preservation Program, counties are authorized to draw down a portion of the state share of the projected foster care costs in order to fund family preservation services. If counties are successful at reducing their actual foster care costs, they receive a share of the General Fund savings; if not, they pay for the excess costs. As discussed below, these provisions would be inoperable under the Governor’s restructuring proposal. The amount advanced for family preservation services is budgeted as a separate expenditure in the Foster Care Program. Savings due to family preservation services will be reflected in the foster care caseloads, to the extent these services prevent foster care cases. Permanent Transfer. Chapter 717, Statutes of 1992 (AB 2365, Bronzan), authorized a permanent transfer of General Fund monies in the Foster Care Program to the CWS Program, to be used for family preservation services by those counties which have operated a family preservation program for at least three years. In addition, those counties are required to pay a share of cost for these family preservation services consistent with other CWS programs. Foster Care Restructuring Proposal. The budget proposes General Fund expenditures of $35 million for the Family Preservation Program in 1994-95. Under the Governor’s state\/county restructuring proposal, counties would assume 100 percent of the nonfederal share of costs of the Foster Care Program, including the $35 million budgeted for the state’s Family Preservation Program. The statutory provisions governing the Family Preservation Program, however, would not be applicable under the restructuring plan because costs and savings in foster care would accrue entirely to the counties, making the draw down and the rewards\/penalties concepts inoperable. In other words, if the state were to have no share of foster care costs, it would be impossible for counties to draw down part of the state share or to be rewarded with part of the state savings. Aid to Families With Dependent Children C – 99 Analyst’s Recommendation. In order to provide for continuation of the program in the counties currently operating it, we recommend that the funds be appropriated in 1994-95. We note, however, that family preservation is generally\u2014and appropriately\u2014considered a CWS activity, not a Foster Care Program activity. As such, we recommend that it be budgeted in the CWS Program rather than the Foster Care Program. In doing so, the counties would pay for 30 percent of the costs and the state 70 percent. If the Family Preservation Program is as effective as has been argued, counties should be willing to pay for this relatively small share of costs in order to achieve potentially substantial savings in the Foster Care Program. Fiscal Effect. Our recommendation would reduce total spending in the Foster Care Program by $34.9 million and increase spending in the CWS Program by the same amount. This would reduce the amount of Foster Care Program expenditures that would be transferred to the counties under the Governor’s restructuring plan. This, in turn, would reduce the amount of property taxes that would have to be shifted from the schools to the counties\u2014and the corresponding General Fund expenditures for school apportionments to backfill for this shift\u2014by $34.9 million. Thus, our recommendation would result in a General Fund savings of $34.9 million in school apportionments and a General Fund cost of $24.4 million to pay for 70 percent of the costs in the CWS Program, for a net General Fund savings of $10.5 million in 1994-95. The counties would assume a corresponding cost of $10.5 million to pay for 30 percent of the program, but would benefit from any future reduction in foster care caseloads resulting from the family preservation activities. Trial Court Judges’ Training Program Should Be Funded Through Trial Court Funding Program We recommend a General Fund reduction of $229,000 to contract with the California Judicial Council to fund judges’ training programs because funding for such trial court training programs should be provided through the Trial Court Funding Program. (Reduce Item 5180-001-001 by $229,000.) For a discussion of this issue, please see our analysis of the Judicial Program in the Judiciary and Criminal Justice chapter of this Analysis. C – 100 Health and Social Services SUPPLEMENTAL SECURITY INCOME\/ STATE SUPPLEMENTARY PROGRAM The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. The budget proposes an appropriation of $2.1 billion from the General Fund for the state’s share of the SSI\/SSP in 1994-95. This is an increase of $38 million, or 1.8 percent, over estimated current-year expen- ditures. Assuming Termination of Federal Fees Creates General Fund Risk The budget assumes that legislation will be enacted by Congress to terminate the requirement for California to pay a fee for SSP administra- tion, thereby creating a potential General Fund shortfall of $43 million if federal action does not occur. The federal Social Security Administration (SSA) administers both the SSI and SSP components of the program. Under the federal Omnibus Budget Reconciliation Act (OBRA) of 1993, the SSA began charging states a fee for administering SSP benefits, effective October 1, 1993. The budget anticipates $42.7 million of General Fund savings in 1994-95 by assuming a federal law change to eliminate the administrative fee. Thus, adoption of the budget entails the risk of a General Fund shortfall if this legislation is not enacted and approved by the President. General Fund Savings From Proposed Federal Reimbursement of Refugee Costs Are Overstated The budget overstates the General Fund savings that could be realized from the proposed federal reimbursement of refugee costs by $5.8 million. The budget assumes that legislation will be enacted by Congress to appropriate additional funds to California, effective October 1, 1994, to pay for the state’s costs of providing Medi-Cal, AFDC, and SSI\/SSP benefits during the first 36 months of residence by refugees, for a savings of $114 million from the General Fund in 1994-95. Our review indicates Supplemental Security Income\/State Supplementary Program C – 101 that the budgeted savings are overstated by $5.8 million because the department overestimated the number of 36-month refugees currently receiving SSI\/SSP benefits. Therefore, we recommend that if the Legislature adopts this budget assumption, the savings be reduced by $5.8 million. Budget Should Reflect Savings From Deeming Sponsor’s Income We recommend reducing the proposed appropriation for SSI\/SSP grants in order to account for a statutory provision that increases the length of time a sponsor’s income is considered in determining grants for immigrants, for a General Fund savings of $4 million in 1993-94 and $8 million in 1994-95. (Reduce Item 5180-111-001 by $8 million.) Federal law requires that in determining the eligibility of legal immigrants applying for SSI\/SSP, the sponsor’s resources and income are to be considered. After allowing for the needs of the sponsor and the sponsor’s dependents, the remainder is deemed available for the support of the applicant for a certain period of time after admission as a permanent resident in the United States. A recent change in federal law increased the deeming period from three to five years, effective January 1, 1994. This statutory provision will reduce or eliminate SSI\/SSP benefits paid to immigrants in their fourth and fifth year of permanent residency. The budget, however, does not take this provision into account. Based on limited data, we estimate that the provision will result in General Fund savings of $4 million in 1993-94 and $8 million in 1994-95. Accordingly, we recommend that the budget be reduced to recognize these savings. We will attempt to develop a more precise estimate prior to the budget hearings and, if necessary, will modify our recommendation accordingly. Restricting Eligibility of Substance Abusers Would Result in Shift of Costs The budget proposal to restrict the eligibility of persons receiving SSI\/SSP benefits because of drug and alcohol disabilities (1) overstates General Fund savings by $1 million, due to a technical error, and (2) would result in a shift of costs to state and local governments for health and social services provided to those who lose benefits and are not rehabilitated. C – 102 Health and Social Services Existing SSI\/SSP eligibility criteria provide for disability payments to individuals on the grounds of drug addiction or alcoholism (DA\/A). Recipients of SSI\/SSP benefits are required to participate in an approved rehabilitation program when available and appropriate. The budget proposes to (1) withhold any retroactive payments due the recipient until after he or she commences participation in a rehabilitation program, (2) apply such payments toward the cost of the rehabilitation program, (3) require participation in a rehabilitation program before future benefits may be received, (4) terminate benefits when a recipient is no longer in such a program, and (5) seek federal legislation to restrict the length of SSI\/SSP eligibility to a maximum of 24 months for a DA\/A disability. The department indicates that federal regulations permit implementation of all of these proposals except the two-year limit. Implementation of these proposals would be the responsibility of the federal SSA as the administering agency of the program. The budget also assumes that the federal government will fund an additional 2,600 rehabilitation slots to serve all DA\/A persons affected by this proposal. In order to assist the Legislature in its consideration of this proposal, we note the following: ! Unlike the Governor’s two-year time limit proposed in the AFDC program\u2014in which priority for the GAIN Program is given to AFDC recipients who would experience a grant reduction\u2014this proposal does not give treatment priority to SSI\/SSP recipients who would be expected to enter rehabilitation programs. ! According to data from the Department of Alcohol and Drug Programs (DADP), of those persons discharged from DADP programs in 1992-93 (1) approximately 25 percent successfully completed treatment; (2) 13 percent left treatment early and, in the opinion of program counselors, made satisfactory progress; (3) 49 percent left treatment early and made unsatisfactory progress; and (4) 12 percent were transferred to other programs. ! The budget assumes that 30 percent of existing and pending (DA\/A) cases will be closed as a result of people refusing to participate in a rehabilitation program, for a savings of $28 million ($11 million General Fund and $17 million federal funds). ! The budget assumes savings from withholding retroactive payments due a recipient until he or she participates in a rehabilitation program. Our analysis indicates that the budgeted savings from withholding retroactive payments is overstated by $2.4 million ($950,000 General Fund), due to a technical error. Supplemental Security Income\/State Supplementary Program C – 103 ! The proposal would result in shifting costs to state and local governments in various programs that might be used to compensate for the effects of the loss of benefits to persons who are not rehabilitated. These programs include AFDC, General Assistance, Homeless Assistance, Child Welfare Services, Medi-Cal and indigent health, and the criminal justice system. ! To the extent that the proposal results in increasing the number of successful treatments, it would reduce SSI\/SSP costs as well as costs to other programs that are affected by substance abuse, such as the criminal justice system. In conclusion, we note that the decision to impose a two-year limit on eligibility is a federal one over which the Legislature has no control. The Legislature, however, does have the ability to modify eligibility criteria relating to drug and alcohol treatment programs. Accordingly, we believe that it is reasonable to expect persons receiving benefits as a result of those disabilities to seek treatment\u2014as required by current law\u2014and to give these persons priority for obtaining these services at the local level. State Should Seek Federal Medicaid Funds for Providing Personal Care to SSI\/SSP Recipients We recommend that (1) the Legislature direct the DSS to seek approval to claim federal Medicaid funds for personal care services provided to SSI\/SSP recipients receiving nonmedical out-of-home care and (2) the department develop an estimate of the net savings and report to the subcommittees during hearings on the budget. This could result in General Fund savings in the range of $20 million annually. Federal Medicaid regulations allow 50 percent federal funding to be claimed for direct services and administrative costs for personal care\u2014that is, services needed by recipients who have an illness diagnosed to be chronic and lasting at least one year and who are unable to care for themselves safely without this assistance. Personal care services may include one or more activities, such as providing assistance or supervision with basic personal hygiene, eating, grooming, or toileting. Of the 990,000 persons currently receiving SSI\/SSP grants in California, over 65,000 reside in residential care facilities. Part of the grant paid to the facility for these beneficiaries includes an allowance for care and supervision that ranges from a minimum of $275 to a maximum of $341 per month. Some of these funds should qualify for federal Medicaid reimbursements as personal care services. This would enable the state to use funds that are 50 percent state and 50 percent federal for the SSP component of the grant, which is currently supported by state funds. C – 104 Health and Social Services Consequently, we recommend that the Legislature direct the DSS to seek federal approval for claiming Medicaid reimbursements for personal care services provided to SSI\/SSP recipients. Based on federal approval of a similar request for the In-Home Supportive Services Program, we anticipate that such a request for the SSI\/SSP would be granted. While data are not available to provide a precise estimate of the savings at this time, we believe that net savings could be in the range of $20 million annually from the General Fund, after accounting for administrative costs. To provide a more precise estimate of the potential savings, we have asked the department to develop an estimate. We will review the estimate and report on it during the budget hearings. Department Is Seeking Federal Funds To Establish Fraud Pilot Projects We recommend that the department report to the subcommittees, during budget hearings, on (1) the status of its application for federal funds to support the SSI\/SSP fraud pilot projects that are proposed to be supported by state funds and (2) any state and federal statutory changes necessary to implement the pilot projects. Under the state’s current contract with the federal SSA for administration of the SSI\/SSP, the responsibility for fraud audits and investigations rests with the United States Department of Health and Human Services and the Office of Inspector General (OIG). According to the department, the OIG has 28 special agents to cover California and four other western states. Post-Eligibility Fraud Pilot Project. The budget proposes $811,000 from the General Fund to establish 11 positions for a three-year pilot project to focus on SSI\/SSP fraud that occurs after a recipient has established eligibility. Initially, the pilot would conduct four financial audit\/investigations per year in board-and-care facilities. In addition, the department would pursue other indications of fraud such as multiple Social Security numbers, unreported income and resources, and continued payments to representative payees on behalf of deceased recipients. Early Fraud Investigation Pilot Project. The budget also proposes $378,000 from the General Fund to establish seven positions for a three- year pilot project in a Los Angeles County Disability Evaluation Division (DED) branch office. The DED determines eligibility for SSI\/SSP benefits based on disabilities. The pilot project would focus on deliberate false Supplemental Security Income\/State Supplementary Program C – 105 representations of symptoms or medical evidence to qualify for or continue disability benefits. Comments and Recommendations. We note that while the budget proposes to fund these projects entirely from the General Fund, the DSS has indicated that it is also requesting that the federal government support the projects as demonstration programs. In addition, the department is working with the federal government to determine if the state has the legal authority to conduct the pilots as proposed and to establish procedures to deny eligibility to applicants pending the outcome of fraud investigations. Accordingly, we recommend that the department report to the subcommittees, during hearings on the budget, on the status of the application for federal funds and the statutory changes, if any, necessary to carry out the proposals. C – 106 Health and Social Services COUNTY ADMINISTRATION OF WELFARE PROGRAMS The budget appropriates funds for the state and federal share of the costs incurred by counties for administering the following programs: (1) Aid to Families with Dependent Children (AFDC); (2) Food Stamps; (3) Child Support Enforcement; (4) Special Adults, including emergency assistance for aged, blind, and disabled persons; (5) Refugee Cash Assistance; and (6) Adoption Assistance. The budget proposes an appropriation of $315 million from the General Fund for the state’s share of the costs that counties will incur in administering welfare programs in 1994-95. This represents a decrease of $69 million, or 18 percent, from estimated current-year expenditures. This is due to the Governor’s restructuring proposal, which would increase the county share of the nonfederal costs of county administration from 30 percent to 50 percent. We discuss the restructuring proposal in more detail in our companion volume, The 1994-95 Budget: Perspectives and Issues. COLAs for County Administration Not Consistent With Budget’s Policy in Other Programs We recommend that the amount proposed for a cost-of-living adjustment (COLA) for county administration of welfare programs be deleted, for a General Fund savings of $14.5 million, because funding COLAs for this program is inconsistent with the budget’s overall policy toward COLAs for local assistance programs. (Reduce Item 5180-141-001 by $14,500,000.) While the budget submitted by the department and approved by the Department of Finance for county administration does not indicate that a COLA is included, we found that, in fact, the budget does propose funds for a COLA. This COLA amounts to 2.4 percent annually in the current and budget years, based on the actual change in salaries and benefits in the counties from 1991-92 to 1992-93. Normally, providing funds for COLAs is a justifiable expense to recognize the effects of inflation. In this case, however, the proposal to County Administration of Welfare Programs C – 107 include a COLA for county administration of welfare programs is inconsistent with the budget’s overall policy to exclude COLAs for local assistance programs in recognition of the fiscal constraints facing both the state and local governments. At the time this analysis was prepared, no justification had been submitted to treat this program differently from others. In the absence of such justification, we recommend deletion of the COLA, for a General Fund savings of $14.5 million in 1994-95. Welfare Program Integrity Initiative The budget proposes a series of welfare fraud program changes\u2014referred to as the Welfare Program Integrity Initiative (WPI)\u2014for a General Fund savings of $29 million in 1994-95. In addition to establishing new fraud programs, and conducting additional fraud studies and pilot projects, the WPI would revise the AFDC Homeless Assistance Program. Most of the proposed changes require legislation, emergency regulations, or federal approval. To summarize, the WPI would: ! Limit eligibility for the Homeless Assistance Program to once in a lifetime, and require that all benefit payments be made by vouchers. ! Replace the loss of enhanced federal funding for fraud activities with General Fund monies to maintain existing fraud program levels. ! Reduce the county share of cost for continuing fraud activities. ! Continue expansion of the early fraud program. ! Implement a new administrative hearing process for individuals who are disqualified from the AFDC Program. ! Implement the AFIRM fingerprint system on a pilot basis to detect fraud in the AFDC Program in Los Angeles County. ! Require parents of citizen children receiving AFDC to provide verification of their identity. ! Intercept Unemployment Insurance and Disability Insurance payments to AFDC recipients who have outstanding AFDC grant overpayments due to fraud. ! Conduct additional child-only fraud incidence studies. C – 108 Health and Social Services ! Establish in San Diego County a pilot project to require attendance in school as a condition of receiving AFDC for children between ages 16 and 18. County Administration of Welfare Programs C – 109 ! Eliminate the $50 monthly child support disregard payment when AFDC grant overpayments occur because of the failure to report the receipt of child support payments. We discuss some of these proposals below. Budget Proposes to Implement the AFIRM in Los Angeles County The budget proposes $9.2 million ($4.6 million General Fund) to implement the Automated Fingerprint Image Reporting and Match System (AFIRM) on a pilot basis in Los Angeles County, for an estimated AFDC grant savings of $18.6 million ($8.9 million General Fund). The AFIRM is an automated fingerprinting system that has been implemented in Los Angeles County’s General Assistance (GA) Program. The primary objective of the AFIRM is to utilize computer imaging technology as a fraud detection tool to eliminate multiple aid fraud cases (for example, one person collecting benefits under two names). Based on the estimated savings in Los Angeles County’s GA Program, the 1993-94 Governor’s Budget proposed a demonstration project to expand the AFIRM to the Los Angeles County AFDC caseload on a pilot basis. However, the Legislature did not adopt this proposal. The 1994-95 Governor’s Budget again proposes that a demonstration of the AFIRM’s application to AFDC be conducted in Los Angeles County. Based on the results of the project in Los Angeles County’s GA Program, the department estimates that 1.5 percent of the AFDC caseload would be discontinued if the AFIRM were implemented in the county’s AFDC program. The budget proposes that the state pay the entire nonfederal share of the cost ($4.6 million General Fund) of the AFIRM pilot. Because of differences in the populations served by the GA and AFDC Programs, the results of the AFIRM project in Los Angeles County’s GA Program may not be a reliable indicator of how the project will perform in the AFDC Program. Implementing the program on a pilot basis in an AFDC setting, however, should provide the data needed to answer this question. We believe that the proposal has merit as a means of evaluating this approach on a pilot basis. C – 110 Health and Social Services Department Should Modify Approach in Conducting Proposed Fraud Studies We recommend that before undertaking two proposed studies of fraud in child-only AFDC cases, the DSS modify its approach to address certain methodological shortcomings. The budget proposes $336,000 ($168,000 General Fund) to conduct two studies on the incidence of fraud in child-only AFDC cases. Because these studies would be based on a similar study conducted by the DSS and the Orange County Social Services Agency in 1993, we reviewed the Orange County study. Orange County Fraud Study. In November 1993, the DSS released the findings of the study, entitled Child-Only Fraud Pilot Project. The study attempted to determine the cost-effectiveness of referring AFDC child- only cases for fraud investigation. Child-only cases are cases in which there may be a parent in the family, but the adult is not included for purposes of calculating the AFDC grant. These cases include citizen children of undocumented parents, children whose parents are receiving SSI\/SSP grants, and children whose caretakers are non-needy relatives. Methodological Shortcomings. Our analysis indicates that the Orange County study contained several methodological shortcomings. The major shortcoming of the Orange County study was that the sample of 500 cases unintentionally included cases that are not in the child-only category. Specifically, 123 cases, or 25 percent of the original sample, included aided adults. (The report recognized 102 such cases and we subsequently discovered an additional 21 cases.) Because of this, the sample of child- only cases was nonrandom and therefore did not derive statistically valid results. Amount of Cost Avoidance Overstated. We found that the cost avoidance calculation in the Orange County study appears to be overstated because: ! The study used an invalid measure of length of time on aid for child-only cases. ! Savings derived by avoiding future grant payments were not discounted to present value, thereby overstating the estimated cost avoidance in current dollars. ! The study counted all voluntary withdrawals (subsequent to notice of investigation for possible fraud) as savings resulting from the fraud investigation process. Some of these voluntary withdrawals, however, may have occurred in the absence of the fraud process. County Administration of Welfare Programs C – 111 Proposed New Studies. Because of these problems, we cannot draw any statistically valid inferences from the Orange County study regarding the fraud rate among all child-only cases. Nevertheless, the study implies that about one-third of the child-only cases in the sample\u2014including those with non-needy relatives or parents receiving SSI\/SSP\u2014were found to have committed fraud, defined as intentional program violations. The findings in the Orange County study, however, cannot be generalized to all child-only cases or to the entire AFDC caseload in Orange County. Accordingly, we recommend that before the DSS undertakes the proposed studies, the department modify its approach to take into account the methodological shortcomings we have described above. County Share of Fraud Program Costs Should Be Commensurate With Share of Benefits We recommend the enactment of legislation to adjust the state and county shares of costs of the AFDC fraud programs to correspond to the state and county shares of the costs of AFDC grants. This would allocate the costs of the fraud programs in a manner that is commensurate with the distribution of program benefits (grant savings) to the state and counties, and would result in a General Fund savings in administrative costs of $14.4 million in 1994-95. (Reduce Item 5180-141-001 by $14,443,000.) We further recommend that the legislation provide that funds for the two components of the AFDC fraud programs\u2014early and continuing fraud\u2014be combined into a single allocation to the counties so that counties have the flexibility to allocate the funds between the two components in the most cost-effective manner. Finally, we recommend that the department report, during budget hearings, on the cost\/benefit data it collects and the cost-effectiveness of the fraud program. The AFDC and Food Stamps fraud program is divided into two components: the Fraud Early Detection (FRED) Program, which generally operates at the application stage of the AFDC eligibility process, and the continuing fraud program, which investigates cases past the application stage. The budget proposes $73 million ($33 million General Fund, $36 million federal funds, and $4 million county funds) for the AFDC and Food Stamps fraud program in 1994-95. Under current law, the state pays 100 percent of the nonfederal share of the FRED costs and 70 percent of the nonfederal costs of the continuing fraud program. The budget proposes legislation to increase the state share C – 112 Health and Social Services of the nonfederal costs of the continuing fraud program to 85 percent in 1994-95. How Should Costs Be Shared by the State and Counties? Savings from the AFDC fraud programs are in the form of grant reductions and grant cost avoidance. Thus, any savings are, in effect, distributed among the federal, state, and county levels of government in the same ratio as their respective shares of the costs of AFDC grant expenditures. It would be appropriate, therefore, to allocate the share of fraud program costs in the same manner. To accomplish this, we recommend enactment of legislation to adjust the state and county share of the nonfederal costs of the fraud programs to equal their corresponding share of AFDC grant expenditures. Figure 23 summarizes the programs’ sharing ratios under current law, the Governor’s proposal, and our recommendation. Under our proposal, the state and counties would share equally in the costs of these fraud programs in a manner that is commensurate with how they share in the savings from the programs. Under the Governor’s proposal, however, the state pays the bulk of the costs of these fraud programs but receives significantly less of the benefit. Figure 24 illustrates\u2014using a hypothetical example\u2014how the Governor’s proposal would result in counties receiving a disproportionate share of the savings compared to their share of expenditures in the fraud program, and how our recommendation would distribute the share of savings on a more equal basis. Figure 23 AFDC and Food Stamps Fraud Program State and County Share of Nonfederal Costs 1994-95 Current Law Governor’s Proposal LAO Proposala FRED Continuing FRED Continuing FRED Continuing State 100% 70% 100% 85% 50% 50% County \u2014 30 \u2014 15 50 50 a Assumes the Governor’s state\/county restructuring proposal to increase the county share of costs for the AFDC grant program. Under current law, the LAO proposal would be 95 percent state and 5 percent county. County Administration of Welfare Programs C – 113 Figure 24 Continuing Fraud Program State\/County Distribution of Savings Hypothetical Example: $1,000 Expenditures (State and County Funds) Benefit\/Cost Ratio = 5:1 Expenditures\/Savingsa Savings per $1 Cost State County State County Governor’s proposal $850\/$2,500 $150\/$2,500 $2.94 $16.67 LAO proposal $500\/$2,500 $500\/$2,500 $5.00 $5.00 a Assumes Governor’s restructuring proposal to increase county share of AFDC grants to 50 percent of nonfederal costs. State and county savings would remain equal under LAO recommendation, regardless of how grant costs are shared. The Governor proposes to increase the county share of the nonfederal costs of AFDC grants from 5 percent to 50 percent in 1994-95. If the Governor’s proposal is enacted, our recommendation would result in increasing the county share of costs of the FRED Program from 0 to 50 percent and increasing the county share of the continuing fraud program from the proposed level of 15 percent to 50 percent, for a General Fund savings of $14.4 million in 1994-95. If the Governor’s proposal is not adopted, our recommendation would increase the county share of the FRED Program to 5 percent and reduce the county share of continuing fraud from 30 percent to 5 percent, for a net General Fund cost of $2 million in 1994-95. How Should Funds Be Allocated Between Program Components? Currently, the counties receive separate allocations for the FRED Program and continuing fraud program. According to the DSS, the FRED Program is significantly more cost-effective than the continuing fraud program. In fact, information provided by the department implies that costs exceed savings from the continuing program. This suggests that funds should be reallocated from continuing fraud to the FRED Program. Rather than attempt to determine the optimal distribution of funds between the two program components, we recommend that funding for both components be combined into a single allocation, thereby permitting each county to allocate the funds between the two components at the county’s discretion. This will enable counties to allocate funds between the two program components so as to maximize cost-effectiveness. C – 114 Health and Social Services How Can the Program Be Improved? While the department has attempted to derive cost\/benefit ratios for both the FRED Program and continuing components of the program, the department is in the process of verifying their cost\/benefit estimates. Furthermore, the department has not made county-by-county comparisons of the cost-effectiveness of the programs. Such information would be useful to the state and the counties in order to identify the factors that determine program success. Consequently, we recommend that the department report, during budget hearings, on the cost\/benefit data that it collects and the cost-effectiveness of the fraud program. Department Should Reassess Its Approach Toward Interim SAWS We withhold recommendation on the proposed 14-county interim Statewide Automated Welfare System (SAWS) project (General Fund costs of $11.6 million in 1993-94 and $15 million in 1994-95) and recommend that the DSS and the Department of Finance report, during the budget hearings, on the concerns raised in this analysis. Background. The SAWS is a major project of the DSS to establish a statewide uniform, computer-based system for administering various health and welfare programs. With an estimated development cost of approximately $800 million to be incurred over a 12-year period, the SAWS is the largest and most costly computer-based system ever undertaken by the state. The administration proposes that the SAWS be based on an automated welfare system developed in Napa County, referred to as NAPAS. The SAWS project will include all counties except Los Angeles County, which has been authorized by statute to implement its own system. The SAWS is estimated to have a net General Fund cost of $25 million over the 12-year period if the Governor’s restructuring proposal is adopted. However, if the proposal is not adopted, the SAWS would result in a net General Fund savings of $112 million over the 12-year project life. The Legislature authorized the administration to transfer funds among various appropriation items in the 1993 Budget Act for the SAWS project during the current year upon approval of a feasibility study report (FSR). The report, approved by the administration on December 28, 1993, describes for the first time the specific plan for implementing the SAWS. Interim SAWS Approach. As an initial step toward a statewide system, the DSS plans to convert 14 counties to SAWS at the Health and Welfare Data Center (HWDC), as an interim SAWS project. The data center intends to acquire the hardware, software, and consulting services on a County Administration of Welfare Programs C – 115 sole-source basis, because the Napa County system was developed to run on a specific manufacturer’s computers, using a proprietary software application owned by the same manufacturer. This interim step will allow the DSS to obtain information to refine its SAWS plan, including costs and benefits, for implementing the system statewide. The interim project is scheduled for five years at a total cost of $78 million (all funds). The budget proposes $22 million ($11.6 million General Fund) in 1993-94 and $29 million ($15 million General Fund) in 1994-95 for the interim project. Counties would participate in the interim project in accordance with a memorandum of understanding (MOU) between each county and the DSS. These MOUs would spell out how costs would be shared, and each would have to be approved by the Department of Finance prior to execution. According to the DSS cost\/benefit analysis, the interim project will result in a net General Fund cost of approximately $11.2 million. Current-Year Interim Project Activities. On January 3, 1994, the Director of Finance, pursuant to various provisions of the 1993 Budget Act, notified the Legislature of his intent to authorize an increase of $8.9 million in the HWDC’s expenditure authority for current-year interim SAWS activities. Approximately $2.9 million of this amount would be used to fund 28 new positions at the HWDC and to acquire, on a sole-source basis, a new mainframe computer and related proprietary software. (Data center staffing for this project would increase to 39 positions in 1996-97.) In addition, the proposed expenditure includes $1.5 million for a sole-source contract with a private consulting firm and the computer manufacturer for technical and consulting services, and $2 million for a sole-source contract with the University of California, Davis for training. The remainder of the funds would be used to purchase personal computing equipment for counties and to provide other services to the DSS in support of the interim SAWS project. Based on our review of the interim project, we have identified the following concerns. Interim Project May Result in a Costly, Disposable New Computer. In an October 12, 1993 letter to potential bidders, the DSS reaffirmed its commitment to open competition among vendors to provide SAWS statewide in the future and invited vendors to express their concerns if they believed that the proposed interim SAWS project would jeopardize this open competition. Several vendors responded by expressing concerns regarding the possible role of the HWDC as a competitor for the statewide SAWS. In response to this concern, the state indicated that the HWDC would not compete for any services contained in the statewide request for proposal (RFP) and that, upon transition of the 14 counties in the interim SAWS to the statewide SAWS, HWDC would have to find C – 116 Health and Social Services another use for the interim SAWS computer or dispose of it. Consequently, the administration is proposing to invest over $25 million and 39 positions to establish a new computing infrastructure for a project which results in a net General Fund cost of $11.2 million and which may be abandoned at the end of the interim project. Costs of Interim Project Can Be Reduced and Still Provide Needed Information. Based on our review, we conclude that the project scope could be reduced and still provide the DSS with the information it needs in order to implement SAWS statewide. With an estimated total cost of $78 million and net cost of over $11 million to the General Fund, the interim project, as proposed, is a very costly approach to gathering information to refine cost\/benefit estimates and test the statewide application of the interim system. A major reason for this high cost is the purchase of a new computer and associated equipment and the hiring of 39 new positions at the HWDC. The data center is incurring these costs because the NAPAS requires a type of computer that the HWDC does not have and has no experience supporting. We believe that these costs could be reduced\u2014maybe reduced substantially\u2014if the interim SAWS project involved fewer counties or if computer support were purchased from a service bureau instead of acquiring a new computer system. We believe that either one of these approaches would still allow the department to obtain the information it needs to evaluate the SAWS. Federal Funds Only Partially Secured. The budget assumes that the state will receive federal matching funds for the proposed interim SAWS project; however, at the time this analysis was prepared, the DSS had not secured federal agreement to share in the cost of converting Kern County (one of the 14 counties in the interim project) to the NAPAS. If federal approval is not obtained, the interim project will have to be reevaluated because Kern County’s welfare caseload is approximately 25 percent of the total interim caseload. Some Major Milestones Missing From the SAWS Time Line. A project of this magnitude requires a schedule that reflects certain key action dates or milestones. Although the DSS has produced various schedules pertaining to both the interim and statewide SAWS, the department has not provided a scheduled date for either the evaluation of the interim SAWS or the release of the RFP for the statewide SAWS. Each is a critical date for this project because costs and benefits are determined in part by how long it takes to accomplish the many tasks necessary to implement the project. Based on the above concerns, we withhold recommendation on the funds proposed for the interim SAWS project for 1994-95. Further, we County Administration of Welfare Programs C – 117 recommend that the DSS and the Department of Finance report, during budget hearings, on the concerns raised in this analysis. State’s Share of SAWS Development and Implementation Cost Is Too High We recommend the enactment of legislation to increase the county share of the nonfederal costs of the SAWS project to correspond to the county’s share of the benefits. This would allocate the costs of development and implementation in a manner that is commensurate with the distribution of program benefits (grant and administrative savings) to the state and counties, and would result in a General Fund savings of $6 million in 1994-95 and over $125 million from the General Fund over the 12-year life of the project. (Reduce Item 5180-001-001 by $6,024,000.) Originally, the administration assumed that the SAWS project would receive enhanced federal financial participation (75 to 90 percent depending on the program). However, after the original FSR was submitted to the Office of Information Technology for the statewide SAWS project, enhanced federal financial participation was eliminated from the project. Federal funding will now be provided at the regular sharing rate (currently 50 percent) for both the development and operational costs of the project. How Should Costs Be Shared by the State and Counties? SAWS savings result from county administrative savings and grant recoveries and avoidance of future payments in the AFDC, Food Stamps, and Medi- Cal Programs. These savings are, in effect, distributed among the federal, state, and county levels of government in the same ratio as their respective shares of the costs of administration and program expenditures. It would be appropriate, therefore, to allocate the share of the project development and implementation costs in the same manner. To accomplish this, we recommend legislation to adjust the state and county share of the nonfederal costs of SAWS development and implementation to equal their corresponding share of benefits from savings in the AFDC, Food Stamps, and Medi-Cal Programs. The 1994-95 Governor’s Budget assumes enactment of a major state\/local restructuring proposal, including changes in the state\/county sharing ratios for various welfare programs. If the Governor’s proposal is adopted, our recommendation would result in increasing the county share of the nonfederal cost of SAWS development and implementation from 0 to 46 percent (the estimated net county share of savings from the project), for a General Fund savings of $6 million in 1994-95 and over $125 million from the General Fund over the 12-year life of the project. If C – 118 Health and Social Services the Governor’s proposal is not adopted, our recommendation would increase the county share of the nonfederal cost to approximately 5 percent, for a General Fund savings of $250,000 in 1994-95. Statewide Implementation of the SAWS Should Provide for Competition We recommend that the DSS report, during budget hearings, on how its RFP to implement the statewide SAWS project will maximize the state’s opportunities to achieve an expeditious and cost-effective implementation. Before the department is able to implement the SAWS statewide, it will have to release an RFP. The purpose of this document is to describe to prospective vendors the problem to be solved, or goal to be achieved, and specify the minimum acceptable functional, technical, and contractual requirements of the project. In addition, an RFP describes evaluation criteria governing the award of the contract. The DSS approach to implementing the statewide project is based on a specific manufacturer’s computers, using a proprietary software application owned by the same manufacturer. Because of this, we have been informed by the DSS that the RFP would limit the solutions that can be submitted by vendors to three alternatives. Based on our review, we believe that one of these choices is not practical as an alternative for a competitive bid, and another has not been proven to handle the capacity demands of the statewide welfare caseload. The third alternative is to use a specific manufacturer’s hardware and software. Therefore, the current approach to the RFP may, in effect, restrict the solution to one alternative that can be proposed by vendors. A review of procurements for large computer-based projects indicates that many have been delayed significantly due to protests or lawsuits challenging the manner in which the state has conducted the procurement. By restricting the solution alternatives, the DSS may have increased the likelihood of bid protests that could delay the SAWS project significantly. Under the current approach for statewide implementation, the Legislature may never know whether the alternative selected by the DSS is the most cost-effective way to implement SAWS. The only way to obtain this assurance is through an open competition whereby vendors are allowed to propose their best solutions to the programs’ functional requirements. Therefore, we recommend that the DSS report, during the budget hearings, on how its RFP for the statewide SAWS project will County Administration of Welfare Programs C – 119 maximize the state’s opportunities to achieve an expeditious and cost- effective implementation. State Should Not Pay for Relatively High County Overhead Costs We recommend capping the amount of state funding for county administrative overhead costs for the Child Welfare Services (CWS), IHSS, AFDC, and Food Stamps Programs because the state should not pay for relatively high county overhead costs. This would result in General Fund savings of approximately $9 million in the CWS Program and an undetermined amount in the AFDC, IHSS, and Food Stamps County Administration Program. (Reduce Item 5180-151-001 by $8,950,000.) Background. The proposed expenditures for the CWS Program are based on an annual social worker cost of $92,600. This amount consists of salaries and benefits for social workers plus county overhead expenses. Overhead includes support staff costs (clerical and supervisory), travel, operating expenses, equipment, rent, contracts, and services purchased from other county departments. The $92,600 figure is based on costs reported by each county welfare department. Similarly, budgeted expenditures for county administration of the AFDC and Food Stamps Programs are based on eligibility worker salaries and county overhead in those programs. There Is a Large Variation Among the Counties in the Amount of Overhead Costs. Figure 25 shows that there is wide variation among the ten largest counties in the amount reported for overhead costs for the CWS Program in 1992-93, with overhead expressed as a percent of social worker salaries. As the figure shows, the overhead costs ranged from 51 percent in Fresno County (for every $1 spent on a social worker, 51 cents was spent on overhead costs) to 97 percent in Los Angeles County. Figure 26 shows the overhead for all medium and large counties in 1992-93. The median for these counties was 63 percent. (We have excluded the 23 smallest counties because, due to their relatively high fixed costs, it would be expected that they would incur proportionately higher overhead expenses.) An even larger variation existed among the 35 counties in overhead costs for administration of the AFDC Program in 1991-92, ranging from 70 percent to 128 percent. (The percentages are higher than in the CWS Program because eligibility worker salaries are, on average, lower than social worker salaries.) Data for 1992-93 for AFDC, IHSS, and Food Stamps administration, however, were not available at the time this analysis was prepared. C – 120 Health and Social Services Los Angeles San Diego San Bernardino Orange Contra Costa Alameda Riverside Santa Clara Sacramento Fresno 20 40 60 80 Child Welfare Services Program Overhead Ten Largest Counties 1992-93 Overhead as Percent of Social Worker Salaries 100% Figure 25 State Is Funding Relatively High County Overhead Costs. In our review of this issue, we found no justification for the high levels of overhead reported by the counties at the upper end of the scale in Figure 26. Because the state pays for 70 percent of the nonfederal share of these costs, the state bears most of the fiscal burden for relatively high county overhead. In order to prevent this, we recommend implementing a cap on the amount of county overhead that will be funded by the state, with small counties exempted. While the large variation among the counties suggests that overhead is relatively high in some counties, there is no formula that delineates an appropriate level. Given this wide variation, however, we believe that it would be reasonable to draw the line at the 80th percentile in the 35- county group\u2014that is, to expect the 6 highest counties to bring their overhead down or fund it at their own expense. This would provide for a cap on state funding of administrative overhead at the 76 percent level, or 13 percentage points above the median in the CWS Program. Implementation of this cap would result in estimated General Fund savings of $9 million in the CWS Program in 1994-95. Because data for 1992-93 were not available at the time this analysis was prepared, we do County Administration of Welfare Programs C – 121 not have an estimate of the savings for the AFDC, IHSS, and Food Stamps Programs. We will, however, report this estimate during the budget hearings if the data are available. Figure 26 Child Welfare Services Program Overheada 35 Largest Counties 1992-93 Los Angeles 97% Humboldt 62% Santa Cruz 90 Merced 61 San Luis Obispo 82 San Mateo 61 Placer 82 Ventura 61 Santa Barbara 80 Riverside 59 San Diego 77 Stanislaus 59 Monterey 76 San Joaquin 58 San Bernardino 70 Santa Clara 58 Contra Costa 68 Tulare 56 Orange 68 Sacramento 56 Solano 67 Sonoma 56 Napa 66 Yolo 55 Butte 66 Fresno 51 Alameda 66 Kings 50 Kern 65 Shasta 49 San Francisco 65 Imperial 46 Madera 63 Marin 44 El Dorado 63 a Overhead as a percent of social worker salaries. C – 122 Health and Social Services CHILD WELFARE SERVICES The Child Welfare Services (CWS) Program provides services to abused and neglected children and children in foster care and their families. The CWS Program provides: ! Immediate social worker response to allegations of child abuse and neglect. ! Ongoing services to children and their families who have been identified as victims, or potential victims, of abuse or neglect. ! Services to children in foster care who have been temporarily or permanently removed from their families because of abuse or neglect. The budget proposes expenditures of $714 million ($142 million General Fund, $445 million federal funds, $113 million county funds, and $14 million in reimbursements) for local assistance in the CWS Program in 1994-95. The proposed General Fund amount represents a decrease of $18 million, or 12 percent, from the current year. This General Fund reduction is due to the proposed redirection of federal funds from the IHSS Program to the CWS Program. Counties Should Share Costs of Programs Proposed to Continue Beyond Statutory Termination Date We recommend that the budget be amended to reflect county assumption of a share of the cost of continuing the Options for Recovery pilot project, effective January 1, 1995, because programs continued beyond the pilot stage should be funded in the same manner as other ongoing CWS programs. This would result in a General Fund savings of $555,000. (Reduce Item 5180-151-001 by $555,000.) We further recommend that the proposal to continue the specialized care augmentation in 1994-95 be amended to reflect the same county share of cost as other CWS programs because there is nothing to distinguish this program from other CWS activities. This would result in a General Fund savings of $1.3 million. (Reduce Item 5180-151-001 by $1,349,000.) Child Welfare Services C – 123 Options for Recovery Demonstration Pilot. Chapter 1385, Statutes of 1989 (SB 1173, Royce), established the Options for Recovery pilot project to promote the recruitment, support, and training of foster family homes to care for substance-exposed and HIV-positive children. Phase I of the project includes four counties\u2014Alameda, Sacramento, San Diego, and Los Angeles. Phase II of the project includes six counties\u2014Contra Costa, Butte, Glenn, Shasta, Tehama, and Siskiyou. Chapter 296, Statutes of 1993 (SB 1050, Russell), extended the pilot program for Phase I counties until June 30, 1994 and Phase II counties until August 31, 1994. The budget, however, includes funding ($3.7 million General Fund) for the program to continue for the full year in 1994-95, to be funded entirely at state expense. In addition, the department plans to propose legislation to extend the program beyond the statutory termination date. Chapter 296 requires the department to prepare a preliminary evaluation report on the effectiveness of the project by January 1, 1994, to serve as a basis for recommending the continuation of the program. At the time this analysis was prepared, the department indicated that they had completed an internal draft of the preliminary report. We expect to review the report when it becomes available and will comment on it during the budget hearings. Chapter 296 also requires the department to submit a final report to the Legislature by November 30, 1994. The department has indicated that it expects to submit the final report as scheduled. Thus, the pilot stage of the program should be completed by December 1994. Pending our review of the preliminary and final reports, we believe that it would be reasonable to continue the program in 1994-95. Because the pilot stage will be completed with submission of the final report, however, we recommend that continuation of the program beyond December 31, 1994, be based on an assumption that the costs of the program be shared by the state and counties in the same manner as other ongoing CWS programs (70 percent state\/30 percent counties). This would result in General Fund savings of $555,000 in 1994-95 (half year). Annual savings in subsequent years would be about $1.1 million. Specialized Care Augmentation. Chapter 1294, Statutes of 1989 (SB 370, Presley), authorized a General Fund augmentation for one year (1991-92) to provide incentives and assistance to families caring for foster children with specialized care needs (physical or emotional). The funds were not appropriated until 1993-94 due to the state’s fiscal constraints. The budget, however, proposes to continue the augmentation in 1994-95, in the amount of $4.5 million from the General Fund. According to the department, these funds will be used to purchase nonrecurring items, respite care, and services not available through other fund sources. These C – 124 Health and Social Services activities could result in increased recruitment and retention of foster family providers. If the specialized care augmentation is to be continued, we find no reason to distinguish it from other CWS programs with respect to the manner in which it is funded. Accordingly, we recommend that the costs of the specialized care augmentation be shared by the state and counties on the same basis as other CWS programs\u201470 percent state and 30 percent counties. This would result in General Fund savings of $1.3 million in 1994-95. Positions Should Remain on Limited-Term Rather Than Permanent Basis We recommend that 5.5 limited-term positions established to develop the Level-of-Care Assessment (LCA) instrument be continued on a limited-term (two-year), rather than permanent, basis because the workload does not justify continuation on a permanent basis. Chapter 1294, Statutes of 1989 (SB 370, Presley), as amended by Ch 714\/92 (SB 307, Royce) requires the DSS to develop and implement an LCA instrument to match the assessed needs of children in need of out-of- home care with the structure, supervision, and services offered by providers of such care. Current law does not specify a completion date for the LCA instrument. However, the law does require the department to report to the Legislature by January 1, 1995, on the progress of the project. At this time, the department indicates that they are unable to provide a date of completion for the project. In 1990-91, 5.5 positions were established on a limited-term basis to develop the LCA instrument. These positions were later extended through June 30, 1994. The budget proposes a total of $330,000 ($216,000 General Fund) to continue these 5.5 positions on a permanent basis. The department indicates that the permanent positions are needed for the ongoing workload associated with (1) the LCA project and (2) other placement-related activities mandated by recent legislation. Based on our review, we find that continuation of the 5.5 positions is needed to meet the mandates of the LCA project and other legislation, and that these positions are justified during the next two fiscal years. Beyond that, however, the extent to which the workload is ongoing is not clear. We therefore recommend continuation of the 5.5 positions on a limited-term (two-year), rather than permanent, basis. At the end of the limited term, the department could submit a proposal that more accurately assesses the need to continue the positions. Child Welfare Services C – 125 Budget Does Not Reflect Savings Anticipated From an Increase in Federal Funds We recommend a General Fund reduction of $7.7 million in the amount proposed for the Child Welfare Services Program in 1994-95 to reflect anticipated additional federal funds for the case management system. (Reduce Item 5180-001-001 by $6.1 million and Item 5180-151-001 by $1.6 million.) Chapter 1294, Statutes of 1989 (SB 370, Presley), requires the implementation of a single statewide child welfare services case management system (CMS). The primary goal of the CMS is to provide a statewide data base, case management tool, and reporting system for the program. The department anticipates statewide implementation of the CMS by 1996-97. The budget proposes $9.6 million ($8.5 General Fund and $1.1 million federal funds) for state operations to develop the CMS in 1994-95. The budget also proposes $2.7 million ($2.4 million General Fund and $300,000 federal funds) for local assistance for the ongoing costs of pilot implementation in 1994-95. The federal Omnibus Budget Reconciliation Act (OBRA) of 1993 allows states to claim 75 percent federal funding for the planning, design, development, and installation of a statewide automated child welfare system, effective for federal fiscal years 1994, 1995, and 1996. The OBRA also allows states to claim 50 percent federal funding for the ongoing operation of the statewide automated child welfare system, effective federal fiscal year 1994. The department is presently applying for the new federal funds and indicates that it will submit the required advance planning document in February. Upon approval, the state could claim the federal funds retroactive to federal fiscal year 1994, beginning October 1993. The budget, however, does not assume any savings from the anticipated increase in federal funds in the current or budget years. We estimate that claiming the additional federal funding would result in a General Fund savings of $3.7 million in 1993-94 and $7.7 million in 1994-95. Accordingly, we recommend that the budget be amended to reflect these anticipated savings. C – 126 Health and Social Services IN-HOME SUPPORTIVE SERVICES The In-Home Supportive Services (IHSS) Program provides various services to eligible aged, blind, and disabled persons who are unable to remain safely in their own homes without such assistance. While this implies that the program prevents institutionalization, eligibility for the program is not based on the individual’s risk of institutionalization. Instead, persons are eligible for IHSS if they live in their own homes \u2014or are capable of safely doing so if IHSS is provided\u2014and meet specific criteria related to eligibility for the Supplemental Security Income\/State Supplementary Program (SSI\/SSP) for the aged, blind, and disabled. The IHSS Personal Care Services Program (PCSP) includes personal care services as a federally reimbursable service under the Medicaid Program. The PCSP limits eligibility to categorically eligible Medi-Cal recipients (AFDC and SSI\/SSP recipients) who satisfy a disabling condition requirement. Personal care services include activities such as (1) assisting with the administration of medications and (2) providing needed assistance with basic personal hygiene, eating, grooming, and toileting. The budget proposes expenditures of $916 million ($555 million county funds and $361 million in reimbursements) for local assistance in the IHSS Program in 1994-95. This represents a shift of $364 million in General Fund costs to the counties, pursuant to the Governor’s restructuring proposal. Restructuring Proposal The Governor’s restructuring plan proposes to transfer full financial and policy responsibility for the IHSS Program to the counties. The PCSP component of IHSS would continue to draw funding from federal Medicaid reimbursements. For a discussion of the restructuring proposal, please see our companion volume, The 1994-95 Budget: Perspectives and Issues. In that report, we recommend that the Legislature not adopt a 100 percent county share of the nonfederal costs of the IHSS Program. Instead, we recommend giving counties a 50 percent share of the nonfederal costs of IHSS and the same share of long-term care costs in the Medi-Cal Program. Adoptions Programs C – 127 ADOPTIONS PROGRAMS Budget Does Not Assume Savings From Independent Adoptions Fee Increase We recommend a General Fund reduction of $600,000 for the Independent Adoptions Program to reflect increased fee revenues. (Reduce Item 5180-151-001 by $600,000.) Background. Under the Independent Adoptions Program, the natural parents, instead of an adoption agency, place the child directly with the adopting parents of their choice. The role of the state adoptions offices and county adoptions agencies in an independent adoption is limited to visiting the home of the adoptive parents and preparing a home study report. The court uses the home study in combination with other information to determine whether the adoption is in the best interest of the child, the natural parents, and the adoptive parents. Currently, four counties operate their own independent adoptions programs\u2014Alameda, Los Angeles, San Bernardino, and San Diego. The state provides the adoptions services in the remaining 54 counties. As budgeted, the Independent Adoptions Program is supported entirely by the General Fund in all 58 counties, although the counties may, at their discretion, provide additional local funds. Fee Increase Not Reflected in Budget. In our Analysis of the 1991-92 Budget Bill, we recommended that the fee charged to prospective adoptive parents be increased from $500 to $2,400 in order to more fully reflect the costs of the program. We noted that (1) most of the adoptions in the program involved healthy newborn infants who tend to be the easiest children to place and (2) most of the prospective parents had relatively high incomes\u2014the median being about $57,000 in 1989-90. Chapter 1158, Statutes of 1993 (SB 1152, Senate Committee on Health and Human Services), authorizes state and county programs to charge a $1,250 fee to prospective adoptive parents, with a waiver for low-income persons, beginning in 1993-94. The budget reflects an inconsistent treatment of these fee revenues. For the state-operated programs, the budget assumes that the increase in fee revenues will offset program costs. For the county-operated programs, the increased fee revenues are allocated directly to the counties, rather than C – 128 Health and Social Services deposited in the state General Fund. By not reducing program expenditures, therefore, the budget assumes that these revenues will be used by the counties either to offset county funds allocated to the program, if any, or to augment the program. The budget, however, does not indicate that its proposal is predicated on a buy-out of county expenditures or a program augmentation, and no justification for these alternatives has been submitted to the Legislature. To summarize, (1) the budget assumes that the estimated increase in fee revenues will be used to offset program expenditures for the state- operated programs in 54 counties, (2) no justification has been submitted for supplanting or augmenting county funds in the four county-operated programs, and (3) the program’s costs, in our view, should be reimbursed by fees. Consequently, we recommend that the proposed level of General Fund expenditures for the county-operated programs be reduced by $600,000, which is the amount of estimated additional revenues that these counties will receive in 1994-95 as a result of the fee increase. Findings and Recommendations C – 129 LIST OF FINDINGS AND RECOMMENDATIONS Analysis Page Health and Welfare Agency 1. Federal Funds Potentially Available. Recommend the Health and Welfare Agency report on the feasibility of obtaining additional funds, including specific options that we identify for further consideration. C-17 Office of Statewide Health Planning and Development 2. Cal-Mortgage Reserves Are Inadequate. Recommend that the Office of Statewide Health Planning and Development report on various options to reduce the financial risk to the General Fund in the Cal-Mortgage program. C-19 3. Additional Funding Needed to Train Primary Care Providers. Recommend enactment of legislation to appropriate $2 million from Proposition 99 fund reserves for the Song-Brown Family Physician Training Program to help address the shortage of primary care nurse practitioners and physician assistants. C-20 California Medical Assistance Program (Medi- Cal) 4. Department Continues Expansion of Managed Care. Under the department’s strategic plan, almost half of all Medi-Cal beneficiaries would be enrolled in a managed care arrangement by the end of 1994-95. C-31 C – 130 Health and Social Services Analysis Page 5. Managed Care Implementation Should Be Reevaluated. Recommend that the Legislature reevaluate the broad authority it has granted the department to expand managed care because we believe these efforts, as they are presently being pursued, are likely to result in additional costs to the program, rather than savings. C-35 6. Reliance on Prepaid Health Plans (PHPs) Not a Viable Cost-Containment Option. Reduce Item 4260-101-001 by $18 Million. Recommend that the Legislature reduce expenditures for PHP services because rates exceed fee-for- service equivalent costs. Recommend legislation limiting the number of beneficiaries enrolled in any single PHP within a geographic region. C-35 7. Targeting Only AFDC-Linked Beneficiaries for Managed Care Ignores Demonstrated Savings Potential. Recommend legislation requiring that managed care expansion in 13 counties include SSI\/SSP-linked beneficiaries. C-38 8. Per-Discharge Disproportionate-Share Hospital Payments Would Reduce Medi-Cal Costs. Reduce Item 4260-101-001 by $10.4 Million. Recommend legislation to implement a per-discharge re imbursement system for disproportionate-share hospital payments, and a budget reduction due to the resulting decrease in utilization of inpatient hospital services. C-39 9. Elimination of Optional Services. We find the following regarding the budget proposal: (a) it will place an additional burden on county indigent health programs, (b) the savings estimate is optimistic because federal law requires that necessary transportation services be provided, and (c) if adult dental services are not eliminated, continuation would result in General Fund costs of $201 million due to a recent court decision. Recommend that the Legislature consider eliminating services for certain medical treatments or conditions as an alternative approach if it wishes to achieve General Fund savings through rationing. C-41 Findings and Recommendations C – 131 Analysis Page 10. Budgeted Rate Increases Can Be Avoided. Reduce Item 4260-101-001 by $73 Million. Recommend legislation authorizing the California Medical Assistance Commission (CMAC) to negotiate rates for skilled nursing facility services in certain areas. Further recommend reducing budgeted expenditures for hospital inpatient and nursing facility costs because expenditures can be reduced through CMAC negotiations due to advantageous market conditions. C-44 11. Reinstate Mandatory Drug Rebates. Reduce Item 4260- 101-001 by $10 Million. Recommend legislation to reinstate mandatory drug rebates for the first half of 1994-95 to achieve savings until implementation of a proposal to manage the drug program under a contract with a pharmacy management company. C-45 Public Health 12. Low-Level Radioactive Waste Disposal Site Still Not On- Line. Recommend that the department report at budget hearings on the status of the low-level radioactive waste disposal facility project. C-48 13. Reauthorization of Proposition 99 Funding. Statutory authority for appropriating Proposition 99 funds expires June 30, 1994. The budget includes a plan for appropriating these funds in 1994-95. C-49 Managed Risk Medical Insurance Board 14. Expanding Medi-Cal, In Lieu of the Access for Infants and Mothers (AIM) Program, Would Achieve Significant Savings. Recommend that the Legislature not adopt the budget proposal to continue the AIM Program and instead expand the Medi-Cal Program to serve AIM-eligibles. This would secure federal funding for similar services and achieve General Fund savings of about $73 million in 1994-95. C-53 C – 132 Health and Social Services Analysis Page Department of Developmental Services 15. Case Management Services Augmentation Not Justified. Reduce Item 4300-101-001 by $5,073,000. Recommend a reduction of $5.1 million from the General Fund requested to augment case management services for regional centers because (a) the budget would still contain sufficient funds for case management to address the needs of developmental center clients transitioning to community living and (b) further program enrichment is not justified by the workload. C-60 16. Supplemental Services Expenditure Not Justified. Reduce Item 4260-101-001 by $2,830,000. Recommend the deletion of $2.8 million General Fund proposed for supplemental services for developmental center clients placed in regional center programs because other funding increases proposed in the budget are sufficient to provide the services needed by these clients. C-61 17. Developmental Center Caseload-Related Staffing Adjustments Not Reflected in the Budget. Reduce Item 4300-003-001 by $690,000 and Reduce Item 4260-101-001 by $5,302,000. Recommend the DDS develop and implement in 1994-95 a plan to reduce non-level-of-care staff at all DCs where such reductions are warranted by declining caseloads, for an estimated General Fund savings of $6 million. C-62 18. Quality Assurance System Plan Not Submitted. Withhold recommendation on $2.8 million from the General Fund requested to support the implementation of a statewide system, pending submission of an expenditure plan. C-63 19. Crisis Intervention Services Program Lacks Plan. Withhold recommendation on $8.1 million in total funds ($4.5 million General Fund) proposed for local crisis intervention facilities and services, pending submission of an expenditure plan. C-63 Department of Mental Health Findings and Recommendations C – 133 Analysis Page 20. Funds Proposed for Alternative Modes of Care Lack Plan. Reduce Item 4440-011-001 by $245,000. Recommend deletion of funds because the department has not justified their proposed use. C-65 21. Caseload-Related Staffing Reductions Should Be Implemented. Reduce Item 4440-011-001 by $100,000. Recommend the department implement non-level-of-care staffing reductions warranted by the caseload declines at all state hospitals. C-65 22. School-Based Prevention Program Augmentation Should Be Redirected. Reduce Item 4440-102-001 by $10 Million and Item 4440-001-001 by $330,000. Recommend (a) a reduction of $10.3 million ($10 million Proposition 98) in the Early Mental Health Initiative Program and (b) a redirection of the Proposition 98 funds to a block grant. Further recommend the DMH advise the budget subcommittees on why it awarded more grants to local projects than the base program budget could support. C-67 Employment Development Department 23. Disability Insurance Tax Rate Should Be Reduced. Recommend that the Legislature adopt Budget Bill language to reduce the disability insurance tax rate for 1995 by 0.1 percent because projected revenues exceed the amount needed for a prudent reserve. C-69 24. Administrative Staff Increase Not Justified. Reduce Item 5100-001-869 by $395,000. Recommend that (a) the Legislature reject a proposed augmentation of $395,000 in federal funds and 6.7 personnel-years for the program development section in the Job Training Partnership Division and (2) the Employment Development Department report to the subcommittees, during hearings on the budget, on a plan to reallocate these funds to direct services. C-70 C – 134 Health and Social Services Analysis Page 25. Technical Recommendation\u2014Personal Services Are Overbudgeted. Reduce Item 5100-001-184 by $31,000, Reduce Item 5100-001-588 by $702,000, Reduce Item 5100- 001-869 by $198,000, and Reduce Item 5100-001-870 by $58,000. Recommend that $989,000 be deleted from various funds because the proposed new positions are overbudgeted. C-71 Findings and Recommendations C – 135 Analysis Page Department of Social Services\u2014State Operations 26. Proposed Augmentation to Administer Welfare Reforms Is Not Fully Justified. Reduce Item 5180-001-001 by $109,000. Recommend rejection of three new positions proposed to administer provisions of legislation enacted in the current year because the duties can be performed by contract services proposed for the department and by existing positions. C-72 Aid to Families with Dependent Children (AFDC) 27. Governor Proposes Several Changes That Would Reduce Grants in the AFDC Program. These changes would result in a General Fund savings of $460 million in 1994-95. We review these proposals and comment on them. C-76 28. Governor’s Proposed Two-Year Limit on AFDC Would Reduce Grants Substantially. We discuss some of the advantages and disadvantages of the proposal. C-82 29. State Will Not Reach Federal Participation Target in the Greater Avenues for Independence (GAIN) Program. The state will lose $23 million in federal funds. We find that the federal requirement is a disincentive for states to allocate their GAIN funds in the most effective manner. C-84 30. Budget Overestimates Savings Anticipated From Reduced Dependency. The budget overstates by $2 million the General Fund savings that would result from reduced dependency on AFDC due to the GAIN Program. C-85 31. New Targeting Strategies Needed for the GAIN Program. Recommend legislation to (a) add to the limit of GAIN target groups AFDC parents who have never been married and (b) add to the list of mandatory GAIN participants AFDC parents whose youngest child is one or two years of age and who have never been married. C-85 C – 136 Health and Social Services Analysis Page 32. Two-Year Interim Evaluation of the Gain Program Shows Positive Results. The final report is due in May 1994. C-87 33. Child Support Pilot Project Likely to Result in Additional Savings. Recommend that the department report during the budget hearings on the estimated increase in collections for AFDC cases and the resulting savings to the General Fund in the budget year. C-88 34. Transitional Child Care (TCC) Program Funding Methodology Should Be Changed. Recommend that the Legislature adopt Budget Bill language to (a) require counties to spend a specified portion of their TCC Program administrative allocation on outreach efforts and (b) revise the methodology for allocating administrative funds in the program to increase participation and achieve a better measure of the need for these funds. C-89 35. Budget Does Not Assume Savings From Expansion of Family Preservation Services. Reduce General Fund Support for School Apportionments by $5 Million. Recommend that the department report during the budget hearings on plans to implement a new family preservation and family support program and how it intends to use additional federal funds. Further recommend reduction in proposed funding in the foster care program to reflect the impact of these federal funds, for a General Fund savings of $5 million in 1994-95. C-95 36. Family Preservation Program Should Be Budgeted in Child Welfare Services (CWS) Program. Reduce General Fund Support for School Apportionments by $34,907,000 and increase Item 5180-151-001 by $24,435,000. Recommend that if the Governor’s restructuring proposal is adopted, funding for the Family Preservation Program be transferred from the Foster Care Program to the CWS Program and that counties pay a share of cost consistent with other CWS programs. C-97 37. Trial Court Judges’ Training Program Should Be Funded Through Trial Court Funding Program. Reduce Item 5180- C-99 Findings and Recommendations C – 137 Analysis Page 001-001 by $229,000. Recommend deletion of funding for judges’ training program through the DSS because funding should be provided through the Trial Court Funding Program. Supplemental Security Income\/ State Supplementary Program 38. Proposal Assumes no Payment of SSP Administration Fees. The assumption that Congress will enact legislation to eliminate the fee charged to California creates a $43 million General Fund risk if federal action does not occur. C-100 39. General Fund Savings From Proposed Federal Reimbursement of Refugee Costs Are Overstated. The budget overstates the General Fund savings that could be realized from this proposal by $5.8 million. C-100 40. Budget Should Reflect Savings From Deeming Sponsor’s Income. Reduce Item 5180-111-001 by $8 Million. Recommend reducing the proposed appropriation for SSI\/SSP grants in order to account for a statutory provision that increases the length of time a sponsor’s income is considered in determining grants for immigrants, for a General Fund savings of $8 million in 1994-95. C-101 41. Restricting Eligibility of Substance Abusers Would Result in a Shift of Costs. The budget proposal to restrict the eligibility of persons receiving SSI\/SSP benefits because of drug and alcohol disabilities (a) overstates General Fund savings by $1 million, due to a technical error, and (b) would result in a shift of costs to state and local governments for health and social services provided to those who lose benefits and are not rehabilitated. C-101 42. State Should Pursue Federal Medicaid Funds for Personal Care for SSI\/SSP Recipients. Recommend that (a) the Legislature direct the DSS to seek approval to claim federal Medicaid funds for personal care services provided to C-103 C – 138 Health and Social Services Analysis Page SSI\/SSP recipients receiving nonmedical out-of-home care and (b) the department develop an estimate of the net savings and report to the subcommittees during hearings on the budget. This could result in General Fund savings in the range of $20 million annually. 43. Department Is Seeking Federal Funds to Establish Fraud Pilot Projects. Recommend that the department report to the subcommittees, during the budget hearings, on (a) the status of the application for federal funds to support the SSI\/SSP fraud pilot projects that are proposed to be supported by state funds and (b) any state and federal statutory changes necessary to implement the pilot projects. C-104 County Administration of Welfare Programs 44. COLAs for County Administration Not Consistent With Budget’s Policy in Other Programs. Reduce Item 5180-141- 001 by $14,500,000. Recommend that the amount proposed for a cost-of-living adjustment (COLA) for county administration of welfare programs be deleted, for a General Fund savings of $14.5 million, because funding COLAs for this program is inconsistent with the budget’s overall policy toward COLAs for local assistance programs. C-106 45. Department Should Modify Approach in Conducting Proposed Fraud Studies. Recommend that before undertaking two proposed studies of fraud in child-only AFDC cases, the DSS modify its approach to address the methodological shortcomings in the department’s study of fraud in Orange County. C-109 46. County Share of Fraud Program Costs Should Be Commensurate With Share of Benefits. Reduce Item 5180- 141-001 by $14,443,000. Recommend legislation to adjust the state and county shares of the nonfederal costs of the AFDC fraud programs to correspond to the state and county shares of the costs of AFDC grants. This would allocate the costs of the fraud programs in a manner that is commensurate with the distribution of program benefits to the state and counties, and would result in a General Fund C-110 Findings and Recommendations C – 139 Analysis Page savings of $14.4 million in 1994-95. Further recommend that funds for the two components of the AFDC fraud programs\u2014early and continuing fraud\u2014be combined into a single allocation so that counties can allocate the funds between the two components in the most cost-effective manner. 47. Department Should Reassess its Approach Toward Interim Statewide Automated Welfare System (SAWS). Withhold recommendation on the proposed 14-county interim SAWS project ($11.6 million in 1993-94 and $15 million in 1994-95 from the General Fund) and recommend that the DSS and the Department of Finance report, during the budget hearings, on the concerns raised in this analysis. C-113 48. State’s Share of SAWS Development and Implementation Cost Is Too High. Reduce Item 5180-001-001 by $6,024,000. Recommend enactment of legislation to increase the county share of the nonfederal costs of the SAWS project to correspond to the county’s share of the benefits. This would allocate the costs of development and implementation in a manner that is commensurate with the distribution of program benefits, for a General Fund savings of $6 million in 1994-95 and over $125 million from the General Fund over the 12-year life of the project. C-116 49. Statewide Implementation of SAWS Should Provide for Competition. Recommend that the DSS report, during budget hearings, on how its RFP to implement the statewide SAWS project will maximize the state’s opportunities to achieve an expeditious and cost-effective implementation. C-117 50. State Should Not Pay for Relatively High County Overhead Costs. Reduce Item 5180-151-001 by $8,950,000. Recommend capping the amount of state funding for administrative overhead in the Child Welfare Services (CWS), IHSS, AFDC, and Food Stamps Programs because the state should not pay for relatively high county overhead costs. This would result in General Fund savings of approximately $9 million in the CWS Program in 1994-95 C-118 C – 140 Health and Social Services Analysis Page and an undetermined amount in the AFDC, IHSS, and Food Stamps County Administration Program. Child Welfare Services 51. Counties Should Share Cost of Program Continued Beyond Pilot Stage. Reduce Item 5180-151-001 by $555,000. Recommend that counties assume a share of cost for continuing Options for Recovery project beyond the pilot stage in the same manner as other CWS programs. C-121 52. Ongoing CWS Activity Should Be Budgeted as Other CWS Programs. Reduce Item 5180-151-001 by $1,349,000. Recommend that counties pay a share of cost for proposed continuation of specialized care augmentation in the CWS Program, for a General Fund savings of $1.3 million in 1994-95. C-121 53. Positions Should Remain on Limited-Term Rather Than Permanent Basis. Recommend that 5.5 positions established to develop a Level-of-Care Assessment instrument be continued on a limited-term (two-year), rather than permanent, basis because the workload does not justify continuation on a permanent basis. C-123 54. Budget Does Not Reflect Savings Anticipated From an Increase in Federal Funds. Reduce Item 5180-001-001 by $6,100,000 and Item 5180-151-001 by $1,600,000. Recommend a reduction in General Fund support for the child welfare services case management system, in order to reflect an increase in available federal funds. C-124 Adoptions Programs 55. Budget Does Not Assume Savings From Independent Adoptions Fee Increase. Reduce Item 5180-151-001 by $600,000. Recommend a General Fund reduction of $600,000 to reflect the availability of increased fee revenues for the Independent Adoptions Program. C-126 ”

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1599): failed to open stream: HTTP request failed! HTTP\/1.1 400 Bad Request “}

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1598): failed to open stream: HTTP request failed! HTTP\/1.1 400 Bad Request “}

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1597): failed to open stream: HTTP request failed! HTTP\/1.1 400 Bad Request “}

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1596): failed to open stream: HTTP request failed! HTTP\/1.1 400 Bad Request “}

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1595): failed to open stream: HTTP request failed! HTTP\/1.1 400 Bad Request “}

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1594): failed to open stream: HTTP request failed! HTTP\/1.1 400 Bad Request “}

{“error”:”PDF Processor error: Empty attachment file. Is the file publicly available? Server error: fopen(https:\/\/www.ccwro.org\/~documents\/route%3A\/download\/1593): failed to open stream: HTTP request failed! HTTP\/1.1 400 Bad Request “}

” Item 5180 HEALTH AND WELFARE \/ 905 DEPARTMENT OF SOCIAL SERVICES SUMMARY The Department of Social Services (DSS) is the single state agency responsible for supervising the delivery of cash grants and social services to needy persons in California. Monthly grant payments are made to eligible recipients through two programs-Aid to Families with Depend- ent Children (AFDC) and the Supplemental Security Income\/State Sup- plementary Program (SSIISSP). In addition, welfare recipients, low-income individuals, and persons in need of protection may receive a number of social services such as information and referral, domestic and personal care assistance, and child and adult protective . services. The budget proposes total expenditures by the department of $8.8 billion in 1986-87. This is an increase of $424 million, or 5.0 percent, above estimated current-year expenditures. Table 1 identifies total expenditures from all funds for programs administered by DSS, for the past, current, and budget years. Table 1 Department of Social Services Expenditures and Revenues, by Program All Funds 1984-85 through 1986-87 (dollars in thousands) Program Departmental support ………………………. .. AFDC\” ………………………………………………… . SSI\/SSP b .. .. .. . . .. . .. . . . .. .. Special Adult programs ……………………… . Refugee programs ………………………………. . County Welfare Department Adminis- tration \” ……………………………………….. . Social Services programs\” ………………….. , Community Care Licensing ………………. . Totals …………………………………………… . Funding Sources General Fund ……………………………………… . Federal funds b ……………………………………. . Interstate Collection Incentive Fund .. County funds ……………………………………… . Reimbursements ………………………………… . State Children’s Trust Fund ………………. . Special Deposit Fund …………………………. . \” Includes county funds. b Includes SSI federal funds. Actual 1984-85 $185,509 3,443,17l 2,387,751 1,732 52,783 657,409 712,961 9,873 $7,451,189 $3,259,400 3,809,509 633 374,064 8,358 -1,107 332 Est. 1985-86 $226,346 3,913,851 2,667,261 1,897 55,989 685,783 829,494 1l,198 $8,391,819 Prop. 1986-87 $214,133 3,920,229 2,921,522 2,093 57,857 714,059 974,312 1l,198 $8,815,403 $3,771,497 $4,030,854 4,190,155 4,333,382 419,422 9,306 914 525 438,576 10,251 2,340 Change From 1985-86 Amount -$12,213 6,378 254,261 196 1,868 28,276 144,818 $423,584 Percent -5.4% 0.2 9.5 10.3 3.3 4.1 17.5 5.0% $259,357 6.9% 143,227 3.4 19,154 4.6 945 10.1 1,426 156.0 -525 -100.0 Table 2 shows the General Fund expenditures for cash grant and social services programs administered by DSS. The budget requests a total of $4 billion from the General Fund for these programs in 1986-87. This is an increase of $259 million, or 6.9 percent, above estimated current-year expenditures. 906 \/ HEALTH AND WELFARE DEPARTMENT OF SOCIAL SERVICES SUMMARY-Continued Table 2 Department of Social Services General Fund Expenditures 1984-85 through 1986-87 (dollars in thousands) Item 5180 Change From Actual Est. Prop.\” 1985-86 Program 1984-85 1985-86 1986-87 Amount Percent Departmental Support …………………….. $53,798 $64,266 $67,967 $3,701 5.8% AFDC ……………………………………………….. 1,591,829 1,828,902 1,833,927 5,025 0.3 SSI\/SSP ……………………………………………… 1,248,571 1,410,536 1,591,370 180,834 12.8 Specfa:J Adult programs …………………… 1,657 1,822 2,018 196 10.8 County Welfare Department Admin- istration ………………………………………. 122,627 129,181 133,848 4,667 3.6 Social Services programs …………………. 233,833 328,448 393,382 64,934 19.8 Community Care Licensing ……………. 7,085 8,342 8,342 Totals ………………………………………….. $3,259,400 $3,771,497 $4,030,854 $259,357 6.9% \” Includes proposed cost-of-livingadjustments. OVERVIEW OF ANALYST’S RECOMMENDATIONS We are recommending a net reduction of $11,233,000 from the amount proposed for expenditure from all funds. This amount consists of $7,427,000 from, the General Fund and $3,806,000 in federal funds. In addition, we are withholding recommendation on $170,622,000 in proposed expenditures, pending receipt of additional information. Our recommendations are summarized in Table 3. Table 3 Department of Social Services Summary of Legislative Analyst’s Recommendations (dollars in thousands) Recommended Fiscal Changes General Federal Program Fund Funds All Funds Departmental support …………….. ; ……….. . AFDC ………………………………………………… . -$3,367 -$3,806 -$7,173 SSI\/SSP ………………………………………………. . Special Adults …………………………………… .. Refugees ……………………………………………. .. County Administration …………………….. .. Social Services …………………………………… .. Community Care Licensing ……………… .. -4,060 Cost-of-living adjustments ……………….. .. Totals …………………………………………… . -$7,427 -$3,806 -$11,233 Recommendations Pending (All Funds) $3,661 . 34,200 2,244 119,319 11,198 $170,622 Item 5180 HEALTH AND WELFARE \/ 907 Department of Social Services DEPARTMENTAL SUPPORT Item 5180 from the General Fund and Federal Trust Fund Budget p. HW 148 Requested 1986-87 ………………………………………………………………. . Estimated 1985-86 ………………………………………………………………… . Actual 1984-85 ……………………………………………………………………… . Requested increase $3,937,000 (+5.5 percent) Total recommended reduction …………………………………………… . Recommendation pending ………………………………………………….. . 198CHS7 FUNDING BY ITEM AND SOURCE Item-Description 5180\u00b7001-001-Department of Social Services Support 5180-001-890-Department of Social Services Support Reimbursements Total Fund General Federal SUMMARY OF MAJOR ISSUES AND RECOMMENDATIONS $75,822,000 71,885,000 62,156,000 . None 2,529,000 Amount $67,804,000 (138,146,000) 8,018,000 $75,822,000 Analysis page 1. Statewide Automated Welfare System (SAWS). With- hold recommendation on $2,265,000 ($1,133,000 from the General Fund, $943,000 in federal funds, and $189,000 in reimbursements) proposed for development and im- plementation of the SA WS project, pending receipt of the 911 annual SA WS Progress Report. 2. Community Care Licensing Workload Standard. With- hold recommendation on $1,396,000 requested from the General Fund for increased licensing activities, pending re- ceipt of a revised workload standard. GENERAL PROGRAM STATEMENT 911 The Department of Social Services (DSS) administers income mainte- nance, food stamps, and social services programs. It is also responsible for (1) licensing and evaluating nonmedical community care facilities and (2) determining the medical! vocational eligibility of persons applying for benefits under the Disability Insurance program, Supplemental Security Income\/State Supplementary Program (SSI\/SSP), and Medi-Cal!medi- cally-needy program. The department is authorized 3,368.1 positions to administer these pro- grams in the current year. OVERVIEW OF THE BUDGET REQUEST The budget proposes expenditures of $75,822,000 from the General Fund and reimbursements for support of the department in 1986-87. This is an increase of $3,937,000, or 5.5 percent, above estimated current-year expenditures. The budget proposes expenditures from all funds, including reimburse- 908 \/ HEALTH AND WELFARE DEPARTMENTAL SUPPORT-Continued Item 5180 ments, of $214,133,000. This is $12,213,000, or 5.4 percent, below estimated current-year expenditures. The budget does not include additional funding for Merit Salary Adjust- ments or inflation adjustments to Operating Expenses and Equipment. We estimate that the department will have to absorb approximately $4,- 811,000 in such costs. Presumably, these costs will be financed by diverting funds budgeted for other purposes. Table 1 identifies the department’s expenditures, by program and fund- ing source, for the past, current, and budget years. Table 1 Department of Social Services Budget Summary 1984-85 through 1986-87 (dollars in thousands) Actual Est. Prop. Program 1984-85 1985-86 1986-87 AFDC-FG&U …………………………………. $16,631 $19,618 $15,921 AFDC-FC ………………………………………. 4,534 5,010 5,486 Child Support ……………………………….. 6,639 7,104 8,474 SSI\/SSP ………………………………………….. 886 1,002 1,048 Special Adult programs …………………. 248 290 303 Food Stamps …………………………………… 17,062 18,116 15,935 Refugee programs Cash Assistance ………………………….. 1,930 2,197 2,456 Social Services ……………………………. 1,439 1,293 1,211 Targeted Assistance …………………… 1,137 1,058 1,255 Child Welfare Services …………………. 2,262 2,529 2,615 County Services Block Grant.. ………. 1,343 1,415 1,492 IHSS ……………………………………………….. 2,185 2,706 2,635 Employment programs WIN ……………………………………………. 13,610 24,248 954 GAIN ………………………………………….. 1,500 1,939 Adoptions ………………………………………. 6,346 6,662 7,179 Child Abuse Prevention ……………….. 1,419 1,961 2,258 Community Care Licensing ………….. 20,939 27,401 28,081 Disability Evaluation …………………….. 80,485 96,476 108,983 Administration ……………………………….. ~ 5,760 5,908 Totals ………………………………………. $185,509 $226,346 $214,133 Funding Sources General Fund. ………………………………… $53,798 $64,266 $67,967 Federal funds …………………………………. 123,084 153,934 138,146 Reimbursements ……………………………. 8,358 7,619 8,018 Special Deposit Fund …………………….. 332 525 State Children s Trust Fund ………… (63) 2 2 Proposed General Fund Changes Change From 1985-86 Amount Percent -$3,697 -18.8% 476 9.5 1,370 19.3 46 4.6 13 4.5 -2,181 -12.0 259 H.8 -82 -6.3 197 18.6 86 3.4 77 5.4 -71 -2.6 -23,294 -96.1 439 29.3 517 7.8 297 15.1 680 2.5 12,507 13.0 148 2.6 -$12,213 -5.4% $3,701 5.8% -15,788 -10.3 399 5.2 -525 -100.0 Table 2 shows the changes in the department’s General Fund support expenditures that are proposed for 1986-87. Several of the individual changes are discussed later in this analysis. Item 5180 HEALTH AND WELFARE \/ 909 Table 2 Department of Social Services Departmental Support Proposed General Fund Changes 1986-87 (dollars in thousands) 1985-86 expenditures (revised) ……………………………………………………………………….. . Proposed Changes A. Workload adjustments 1. Expiration of limited-term positions ……………………….. ………………………….. 2. Reduction in SCO audit workload ……………………………………………………….. . 3. One-time court case costs ……………………………………………………………………. . 4. One-time attorney fees …………………………………………………………………………. . 5. One-time implementation costs Community Care Licensing Manage- ment Information system ……………………………………………………………………… . 6. Extension of office automation to district offices ………………………………. . 7. Other ……………………………………………………………………………………………………… . B. Cost adjustments …………………………………………………………………………………………. . 1. Salary and benefits ……………………………………………………………. : …………………. . 2. Retirement …………………………………………………………………………………………….. . 3. OASDI ……………………………………………………………………………………………………. . 4. Staff reclassification ………………………………………………………………………………. . 5. Disaster relief ……………………………………………………………………………………….. . 6. Other ……………………………………………………………………………………………………… . C. Program adjustments ………………………………………………………………………………….. . 1. Transfer of Work Incentive Program from support to local assistance 2. Implementation of GAIN (Ch 1025\/85) …………………………………………….. . 3. Enhancement and maintenance of Statewide Automated Welfare Sys- tems …………………………………. , …………………………………………………………………… . 4. Implementation of new Child Support outreach requirements ……….. . 5. Lower salary savings requirement ……………………………………………………… . 6. Reduction in audits backlog and contract with SCO …………………………. . 7. Increased legal support for Community Care Licensing ………………….. . 8. Implementation of Elder Abuse Prevention Pilot Projects ………………. . 9. Extension of limited-term positions in Foster Care Rate Bureau ……… . 10. Extension of Child Abuse Primary Prevention Program ………………….. . 11. Increased Community Care Licensing activities ………………………………. . 12. Community Care Licensing Management Information System Conver- sion ……………………………………………………………………………………………………….. . 1986-87 expenditures (proposed) ……………………………………………………………………. . Changes from 1985-86 Amount …………………………………………………………………………………………………………. . Percent …………………………………………………………………………………………………………. . Proposed Position Changes -$772 -122 -475 -432 -153 316 -8 1,982 334 127 228 175 4 -2,337 220 1,133 188 254 164 1,405 24 150 393 734 169 $64,266 -1,646 2,850 2,497 $67,967 $3,701 5.7% The budget requests authorization for 3,754.5 positions to staff the de- partment in 1986-87. This is a net increase of 386.4 positions, or 11.5 per- cent, over the staffing level that would otherwise be authorized in the budget for 1986-87. The net increase reflects a proposed increase of 452.9 positions and a proposed reduction of 66_5 positions_ The single . largest increase–320_9 positions-reflects the administration’s proposal to ex- pand the Disability Evaluation Division (I?ED) so that it can process the additional workload resulting from the resuinption of continuing disability reviews (CDRs) _ Most of the decrease–32.5 positions-reflects the pro- posal to reduce the department’s salary savings level by abolishing various 910 \/ HEALTH AND WELFARE DEPARTMENTAL SUPPORT-Continued Item 5180 positions throughout the department. Table 3 displays the position changes proposed for 1986-87. Table 3 Department of Social Services Departmental Support Proposed Position Changes 1986-87 Total Existing Proposed Program Positions Reductions Additions Positions AFDC-FG\/U ……………………………….. 260.6 -5.6 9.2 264.2 Employment programs ……………….. 15.5 35.0 50.5 GAIN ………………………………………… (35.0) (35.0) WIN-Demo ……………………………… (15.5) (15.5) AFDC-FC …………………………………….. 115.4 -23.2 12.9 105.1 AFDC-Child Support Enforce- ment …………………………………….. 75.2 75.2 SSI\/SSi> ………………………………………… 26.2 -0.2 26.0 Special Adult programs ……………… 2.0 -0.1 1.9 Food Stamps ……………………………….. 285.7 -2.4 7.0 290.3 Refugee programs ………………………. 87.8 -9.2 0.7 79.3 Cash Assistance ………………………… (43.3) (-0.7) (42.6) Social Services ………………………….. (24.5) (-8.5) (0.7) (16.7) Targeted Assistance …………………. (20.0) (20.0) Disability Evaluation …………………… 1,601.9 -16.1 320.9 1,906.7 In-Home Supportive Services …….. 50.0 -2.2 0.2 48.0 Child Welfare Services ……………….. 57.1 -0.4 56.7 County Services Block Grant …….. 32.1 -0.1 1.0 33.0 Adoptions …………………………………….. 142.1 -1.2 140.9 Maternity Care ……………………………. 3.7 3.7 Deaf Access …………………………………. 5.2 5.2 Child Abuse Prevention ……………… 23.0 -0.2 9.0 31.8 Community Care Licensing ………. 499.2 -5.2 50.0 544.0 Services to other agencies ………….. 85.4 -0.4 7.0 92.0 Totals ………………………………… , …. 3,368.1 -66.5 452.9 3,754.5 ANALYSIS AND RECOMMENDATIONS Net Changes Positions Percent 3.6 1.4% 35.0 225.8 35.0 100.0 -10.3 -8.9 -0.2 -0.8 -0.1 -5.0 4.6 1.6 -8.5 -9.7 -0.7 -1.6 -7.8 -31.8 304.8 19.0 -2.0 -4.2 -0.4 -0.7 0.9 2.8 -l.2 -0.8 8.8 38.3 44.8 9.0 6.6 7.7 386.4 11.5% We recommend approval of the following program changes that are not discussed elsewhere in this analysis: The transfer of $29,782,000 ($2,337,000 General Fund) from the de- partment’s support budget to the counties (Item 5180-151-001) for various employment programs. The counties would provide services through these programs either directly or through a contract with the Employment Development Department (EDD) or another contrac- tor. Currently, the DSS uses these funds to reimburse the EDD for the cost of various employment services it provides to county welfare department clients. An increase of $19,788,000 in federal funds to provide for increased workload in the DED due to the federally mandated resumption (PL 98-460) of CDRs. A net increase of $466,000 ($164,000 General Fund) to: (1) reduce the current audit backlog, (2) implement a contract with the State Con- troller’s office to perform specified audits, and (3) staff the audit resolution and application processes. Item 5180 HEALTH AND WELFARE \/ 911 A net increase of $639,000 ($254,000 General Fund) to reduce the department’s salary savings requirement by $1,284,000. An increase of $1,523,000 ($1,405,000 General Fund) for increased legal support of the Community Care Licensing program. . An increase of $2,380,000 ($1,411,000 General Fund) to implement various legislative measures, including GAIN (Ch 1025\/85), Adult Protective Services projects (Ch 1127\/85), and the Child Abuse Pri- mary Prevention program (Ch 1638\/84). An increase of $1,128,000 ($188,000 General Fund) for increased workload in the Child Support Enforcement program. An increase of $182,000 ($169,000 General Fund) to pay for staff over- time associated with the conversion of the Community Care Licens- ing Division’s Management ,Information System from a manual operation to an automated system. ‘ An increase of $273,000 ($150,000 General Fund) for continuation of six limited-term positions in the Foster Care Rate-Setting Bureau. Statewide Automated Welfare System (SAWS) We withhold recommendation on $2,265,000 ($1,133,000 from the Gen- eral Fund, $943,000 in federal funds, and $189,000 in reimbursements) requested for the SAWS project, pending receipt of the department’s annual report on the project; The budget proposes $2,265,000 ($1,133,000 General Fund, $943,000 fed- eral funds, and $189,000 in reimbursements) to support the department’s costs of developing and implementing the Statewide Automated Welfare System (SAWS) project in 1986-87. Chapter 268, Statutes of 1984, requires DSS to report to the Legislature on its progress in achieving the goals established in the SAWS project. The report is due annually in March. We withhold recommendation on the funds proposed for SAWS, pend- ing review of the annual progress report on the SAWS project. Any deci- sion concerning continued funding for this project shoula be made in light of its progress in meeting its stated objectives. Community Care licensing Activities We withhold recommendation on $1,396,000 requested from the Gen- eral Fund for support of increased activities of the Community Care Licensing Division, pending receipt of a revised workload standard. The budget proposes $1,396,000 from the General Fund in order to implement various. community care licensing requirements. These proposals involve adding staff to perform activities such as assessing penal- ties on specified facilities, collecting fines, conducting post-licensing visits, and checking criminal records. Currently, the department is in the proc- ess of revising its workload standard for community care licensing staff. Because the budget proposals were not based on an updated workload standard, we withhold recommendation on these proposals, pending re\” ceipt of a revised workload standard. Legislatively Required Reports Adoptions Performance Report. The Supplemental Report of the 1985 Budget Act required the DSS to submit a report to the Legislature, by December 1, 1985, that established specified goals for adoption agency performance during 1985-86. The report also is supposed to provide rec- ommendations regarding how the Relinquishment program’s perform- ance could be improved. At the time this analysis was prepared the report had not been submitted. 912 \/ HEALTH AND WELFARE Item 5180 DEPARTMENTAL SUPPORT-Continued IHSS Assessments and Service Awards. The Supplemental Report of the 1985 Budget Act required the DSS to submit a report to the Legisla- ture by March 1, 1986, that provides an evaluation of its efforts to (1) increase statewide uniformity in the IHSS assessment process and (2) standardize the award of service hours. The report specified that the evaluation include (1) measurable objectives and (2) an implementation plan for achieving those objectives. The department informs us that its report is in progress, and will be completed by March 1, 1986. IHSS Revised Allocation Formula. The Supplemental Report of the 1985 Budget Act required the DSS to evaluate the effect on each county’s IHSS program of the 1984-85 and 1985-86 allocations, and submit a report on its findings to the Legislature by January 1, 1986. These allocations were based on a different formula than the one used before 1984-85. The de- partment informs us that the report is complete, and that it will be submit- ted to the Legislature following the completion of a depaitmental review. IHSS Pilot Project. The Supplemental Report of the 1984 Budget Act required the DSS to submit an interim report by December 1985, based on the experience of a pilot program in Santa Cruz County. The pilot program is intended to compare the cost-effectiveness and quality of care associated with both contract and individual provider modes of ser- vice delivery. The department has submitted the required report which describes (1) the county’s experience in negotiating and awarding its contract for services, (2) the effect on some recipients of the transition to the contract mode, (3) the project’s research design, including the com- parative data that the county will collect, and (4) two project innovations, including a revised \”Equity\” program, which is a computer-assisted assess- ment system. We discuss this report further in our analysis of Item 5180- 151. Work Incentive Demonstration (WIN-Demo) Program. The Supple- mental Report of the 1985 Budget Act required the DSS to submit a report by January 1, 1986, on the transfer of responsibility for registration and referral under the WIN-Demo program from the Employment Develop- ment Department to county welfare departments. At the time this analy- sis was prepared, the department had not submitted the report to the Legislature. . County Welfare Department Performance. The Supplemental Re- port of the 1985 Budget Act required the DSS to submit a report by December 1, 1985, on its progress in implementing a system to collect data reflecting the effectiveness of counties in administering the Aid to Fami- lies with Dependent Children (AFDC) and the Food Stamps programs. The supplemental report specified a variety of performance indicators that should be included in the system, including measurements of how promptly counties process applications for aid. At the time this analysis was prepared, the department had not submitted the report to the Legis- lature. Item 5180 HEALTH AND WELFARE \/ 913 Department of Social Services AID TO FAMILIES WITH DEPENDENT CHILDREN Item 5180-101 from the General Fund and Federal Trust Fund Budget p. HW 150 Requested 1986-87 ……………………………………………………………. $1,833,927,000 a Estimated 1985-86 ……………………………………………………………. 1,828,902,000 Actual 1984-85 …………………………………………………………………… 1,591,829,000 Requested increase $5,025,000 (+0.3 percent) Total recommended reduction ………………………………. ……….. $3,367,000 Recommendation pending ……………………………………………….. $15,400,000 \” Includes $80,678,00Q in Item 5180-181-001 (c) to provide a 4.9 percent cost-of-living adjustment. 1986-87 FUNDING BY ITEM AND SOURCE I tern-Description 5180-I01-001-Payments for Children 5180-IOI-890-Payments for Children 5180-181-001 (c)-Cost-of-Living Adjustments 5180-181-890-Cost-of-Living Adjustments Fund General Federal General Federal Amount $1,753,249,000 (1,825,429,000) 80,678,000 (94,594,000) Total $1,833,927,000 SUMMARY OF MAJOR ISSUES AND RECOMMENDATIONS 1. Aid to Families with Dependent Children-Family Group (AFDC-FG) Caseload. Recommend that, prior to budget hearings, the Department of Social Services (DSS) report to the fiscal committees on its progress in incor- porating specified noneconomic factors in its May revision estimate of family group caseloads. 2. Aid to Families with Dependent Children-Foster Care (AFDC-FC) Caseload. Recommend that, prior to budget hearings, the Department of Social Services report to the fiscal committees on its progress in incorporating specified factors in its May revision estimate of foster care caseloads. 3. Foster Care Services for Handicapped Children (Ch 1274\/ 85). Recommend the Department of Finance advise the fiscal committees of the amount needed to provide foster care services to handicapped children pursuant to Ch 1274\/85. 4. Foster Parent Training Fund Transfer. Recommend the Department of Finance advise the fiscal committees on how it intends to finance the transfer of $1.8 million in General Fund monies in 1986-87 from the Foster Care Program to the Foster Parent Training Fund, as required by current law. 5. Reduced Federal Funding Due to Simon v. McMahon. Recommend that, prior to budget hearings, the Depart- ment of Social Services report to the fiscal committees on its progress in securing a waiver from the federal govern- Analysis page 920 922 924 925 925 914 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-C~ntinued ment in order to avoid a cost shift to the state and county governments for AFDC cases affected by the ruling in Simon v. McMahon. 6. Greater Avenues for Independence (GAIN) Program- 927 AFDC Grant Savings. Withhold recommendation on $36 million ($15,400,000 General Fund, $18,800,000 federal funds, and $1,800,000 county funds) in grant savings budg- eted for AFDC caseload reductions expected to result from the GAIN program, pending receipt of an up-to-date esti- mate. 7. Child Support Enforcement Program. 928 (a) Recommend that, prior to budget hearings, the de- partment provide the fiscal committees with a cost estimate for a study of various child support collection techniques. (b) Recommend adoption oflegislation establishing an al- location formula that sets incentive payments equal to a fixed percentage of collections. (c) Recommend adoption of legislation phasing in the in- clusion of non-AFDC collections as part of the base on which the incentive formula will be applied. (d) Recommend adoption of legislation retaining the cur- rent requirement that counties use child support in- centive payments to support the Child Support Enforcement Program, sunsetting this requirement on July 1, 1988, and requiring the DSS to report by December 1, 1988, on the advisability of postponing the sunset date. 8. Welfare Fraud Early Detection\/Prevention (FRED) Pro- 933 gram. Recommend adoption of Budget Bill language requiring the Department of Social Services to report to the Legislature by December 1, 1986, on the potential costs and savings of mandating the FRED program. 9. Asset Clearance Match. Reduce Item 5180-101-001 by $1,- 935 931,000 and Item 5180-101-890 by $2,173,000. Recom- mend reduction of $1,931,000 to reflect more accurate estimate of the AFDC grant savings that will result from the asset clearance match. 10. Integrated Earnings Clearance. Reduce Item 5180-101-001 936 by $1,436,000 and Item 5180-101-890 by $1,633,000. Rec- ommend reduction of $1,436,000 to reflect a more accurate estimate of the savings that will result from the integrated earnings clearance. GENERAL PROGRAM STATEMENT The Aid to Families with Dependent Children (AFDC) program pro- vides cash grants to certain families and children whose income is not adequate to provide for their basic needs. Specifically, the program pro- vides grants to needy families and children who meet any of the following criteria: AFDC-FG. Families are eligible for grants under the AFDC-Family Group (AFDC-FG) program if they have a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. Item 5180 HEALTH AND WELFARE I 915 In the current year, an average of 478,100 families each month will receive grants through the AFDC-FG program. AFDC-U. Families are eligible for grants under the AFDC-Unem- ployed Parent (AFDC-U) program if they have a child who is financially needy due to the unemployment of one or both parents. In the current year, an average of 75,810 families each month will receive grants through the AFDC-U program. . AFDC-FC. Children are eligible for grants under the AFDC-Foster Care (AFDC-FC) program if they are living with a licensed or certified foster care provider pursuant to either a court order or a voluntary agree- ment between the child’s parent(s) and a county welfare or probation department. In the current year, an average of 36,540 children each month will receive grants through the AFDC-FC program. In addition, the Adoption .Assistance program provides assistance to parents who adopt children who have special needs that make them dif- ficult to place in adoptions. OVERVIEW OF THE BUDGET REQUEST The budget proposes expenditures of $1,833,927,000 from the General Fund for AFDC cash grants in 1986-87. The amount includes $1,753,249,- 000 in Item 5180-101-001 and an additional $80,678,000 requested in Item 5180-181-001 (c) to provide a 4.9 percent cost-of-living increase in max- imum AFDC-Family Group (AFDC-FG) and AFDC-Unemployed Parent (AFDC-U) grants. (The budget does not propose to provide a cost-of- living increase in the rates paid to foster care providers.) This is an in- crease of $5,025,000, or 0.3 percent, from estimated 1985-86 expenditures. As shown in Table 1, total expenditures from all funds for AFDC cash grants are budgeted at $3,918 million in 1986-87. This is $6 million, or 0.1 percent, above estimated expenditures in the current year. . Table 1 shows the costs of AFDC programs for 1984-85 through 1986-87. Under state and federal laws, the federal government, the state, and the counties contribute 50 percent, 44.6 percent and 5.4 percent, respectively, toward the cost of grants provide to Non-Refugee AFDC recipients who are eligible under the federal Family. Group and Unemployed Parent programs, and 50 percent, 47.5 percent and 2.5 percent, respectively, toward the costs of foster care grants. The federal government’s percent- age share of total AFDC costs incurred under the Family Group and Unemployed Parent programs exceeds 50 percent because the grant costs for refugee families are 100 percent federally funded during these fami- lies’ first 36 months in the United States. The state’s share of total foster care costs exceeds 47.5 percent because the state pays 95 percent (and the counties pay 5 percent) of foster care costs which are not eligible for federal funding under federal law. For those AFDC-FG and U recipients who are not eligible for grants under federal law, the state pays 89.2 percent of the grant costs and the county pays 10.8 percent. These sharing ratios apply to the cost of grants provided under the State-Only AFDC-U program as well as to the cost of grants provided to women during their first six months of pregnancy. The AFDC-FG program accounts for $3,065 million (all funds), or 75 percent, of total estimated grant costs under the three major AFDC pro- grams (excluding Child Support Collections). The Unemployed Parent program accounts for 16 percent of the total, and the Foster Care program accounts for 9 percent. . Recipiellt Category Family groups ……………………………………. . Unemployed parent …………………………. . Foster Care ……………………………………….. . Adoption programs …………………………… . Child support incentive payments to counties ……………………………………….. . Child support collections ………………….. . Subtotals …………………………………………. . Court-ordered retroactive payments .. AFDC cash grants to refugees Time-expired I> Time-eligible ………………………………….. . Totals ………………………………………………. . Stilte 81,197,693 242,231 201,614 6,456 13,690 Table 1 Expenditures for AFDC Grants, by Category of ReCipient 1984-85 through 1986-87 (in thousands) Actual 1984-85 Estimated 1985-86 FedeTllI CouIl(r ICF\” Total State Federal CouII(r Total Proeosed 1986-87\” State Federal CouIl(r Total $1,363,094 S145,009 $2,705,796 $1,362,700 $1,529,867 $164,990 $3,057,557 $1,369,579 $1,529,782 $165,876 $3,065,257 327,369 29,331 598,931 268,807 357,471 32,544 658,822 266,300 358,075 32,255 656,610 68,277 10,610 280,501 245,321 82,869 12,912 341,102 248,894 84,156 13,101 346,151 1,120 7,576 8,239 2,162 10,401 10,262 3,491 13,753 19,753 -32,288 633 1,788 16,325 22,253 -38,272 306 14,964 23,404 – 38,368 -69,855 -73,407 -8,159 –= -151,421 -72,490 -75,133 -8,401 -156,024 -76,072 -78,885 -8,818 -163,775 SI,591,829 $1,706,206 $144,503 $633 $3,443,171 81,828,902 $1,919,489 $163,773 $3,912,164 $1,833,927 $1,921,802 $164,046 $3,917,996 (115) (131) (14) (260) (36,671) (42,041) (4,440) (83,152) (116,598) (128,357) (14,117) – (259,072) (138,147) (152,222) ($16,727) (307,096) (164,157) (180,881) (19,876) (364,914) __ (50,356) __ _ (50,356) ___ (93,943) (93,943) ___ (100,386) __ (100,386) 81,591,829 $1,706,206 $144,503 $633 $3,443,171 $1,828,902 $1,919,489 $163,77-3 $3,912,164 $1,833,927 $1,921,802 $164,046 $3,917,996 NOTE: Detail may not add to total due to rounding. \” Interstate collection incentive fund. I> Estimated expenditures-no actual data available. ,. Includes funds for a 4.9 percent cost-of-living adjustment. ~ CD … 0 G) …. …… 0 :I: \”\” trI > ~ t; i= :I: iii > \u00abIt Z =: t:I :::; :E :::I: trI t\”\” 0 ;:2 m \”V !:Xl m trI Z 0 m Z …. n :::I: i= 0 ~ m Z h 0 :::s .. 5\u00b0 c CD a. -….-(1) :3 01 …. 00 0 Item 5180 HEALTH AND WELFARE \/ 917 Proposed General Fund Budget Changes Table 2 Proposed Generai Fund Changes for AFDC Grants (dollars in thousands) Cost 1985 Budget Act ……………………………………………………………………………………….. . Adjustments to Appropriation 1. Caseload increase a. AFDC-FG arid D ………………………………………………………………………………. . $49,268 b. AFDC-FC (i) Group home placements ……………………………………………………….. . (ii) ‘Other ……………………………………………………………………………………….. . 23,969 ~ Subtotal…., ……………………………………………………………………………………………… . 2. Simoll v: McMahOll ………………………………………………………………………………. . 3. Reduced fraud detection savings …………………………………………………………. . 4. Other adjustments ………………………………………………………………………………… . Total, adjustments to appropriation ……………………………………………………. . 1985-86 Expenditures (Revised) … : …………………………………………………………… . A. Adjustments 1. Caseload increase a. AFDC-FG and D ………………. , ……………………………………………………….. . -6,323 b. AFDC-FC (i) Group home placements ………………………………………………….. . (ii) Other ………………………………………………………….. ……………………… 2,~85 1,088 c. Adoption assistance ……………………………………………………………………. . 2;023 Subtotal …………………………………………………………………………………………….. . 2. State and federal legislation a. Ch 1441\/84 (technical overpayments) ……………………………………… . b. Ch 1151\/83 (bonus child support incentive) …………………………….. . c. HR 4179 DEFRA …………………………………………………………………………. . -24 -1,844 38 SubtotaL ……………… , ………………………………………………………………………….. 0’ 3. Court cases u. Simoll v. McMaholl ……………………………………………………………………… . 6,304 b. Consolidated cases …………………….. , ……………………………………………… . -52,42;3 c. Other …………………………………………………………………………………………… . 2,410 Subtotal ….. ; ………………………………….. , ………………………………………………….. . 4. Increased grant savings due to fraud detection a. FRED …………………………………………………………………………………………… . -3,515 b. Integrated clearance ………………………………………………………………….. . -27 c. FTB match ………………………………………………………………………………….. . -1,549 Subtotal …………………………………………………………………………………………….. . 5. Grant sayings due to GAIN …………………………………………………………….. . 6. SAWS a. Central data base ……… , ………………………………………………………………. . -391 b. Automated intake ……………………………………………………………………….. . -1,170 Subtotal …………………………………………………………………………………………….. . 7. Child support collections a. Basic collections …………………………………………………………………………… . -1,872 b. Intercept systems ……………………………………………………………………….. . c. Collections from other states ……………………………………………………… . -420 -1,290 Subtotal …………………………………………………………………………………………….. . 8. Other adjustments …………………………………………………………………………… . Total, adjustments ……………………………………………………………………….. . B. Proposed Changes 1. 1986-87 cost-of-Iiving adjustments a. AFDC-FG and D (4.9%) …………………………………………………………… . C. 1986-87 Expenditures (Proposed) ……………………………………………………… . Change from 1985 Budget Act: Amount .: …. : …………………………………………………………….. ; ……………………………. . Percent ………………………………………………………………………………………………….. . Change from 1985-86 Estimated Expenditures: Amount ………………………………………………………………………………………………….. . Percent ………………………………………………………………………………………………….. . Total $1,731,609 $77,950 $12,730 $3,667 . $2,946 ($97,293) $1,828,902 -$727 -$1,830 -$48,529 -$5,091 -$15,400 -$1,561 -$3,582 $1,067 ( -$75,653) $80,678 $1,833,927 $102,318 5.9% $5,025 0.3% 918 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued\u00b7 Table 2 shows the factors resulting in the net increase of $5,025,000 in General Fund support proposed for the AFDC program in 1986-87. As the table shows, the largest cost increases projected for 1986-87 are attributa- ble to: A 4.9 percent COLA proposed for AFDC-FG and AFDC-U recipients ($80,678,000) . The increased costs resulting from the judgment against the state in the Simon v. McMahon court cases ($6,304,000). The expected increase in the foster care caseload ($3,573,000). These increases are partially offset by reductions attributable to: One-time costs associated with a group of court cases known as the \”consolidated court cases\” ($52,423,000). Grant savings resulting from implementation of the Greater Avenues for Independence (GAIN) program ($15,400,000). The expected reduction in the AFDC-FG and U caseload ($6,323,- 000). Grant savings resulting from increased welfare fraud detection and prevention activities ($5,091,000). Increased child support collections ($3,582,000). The table shows that the $5 million increase proposed for 1986-87 represents a 0.3 percent increase over the department’s estimate of General Fund expenditures in the current year. The level of expendi- tures proposed in the budget, however, is 5.9 percent above the amount appropriated by the 1985 Budget Act. The department estimates that General Fund expenditures in the current year will exceed the amount appropriated in the Budget Act by $97,293,000. This results from (1) AFDC caseloads that are 2.1 percent higher than the caseloads assumed in the 1985 Budget Act ($77,950,000)and (2) the unanticipated costs stemming from a judge- ment against the state handed down in the Simon case ($12,730,000). Eligibility, Caseloads, and Grants Table 3 lists the eligibility criteria for the AFDC and Food Stamp pro- grams (most AFDC recipients receive food stamps). Caseload Decrease. Table 4 shows that in 1986-87, the AFDC case- load is expected to decrease by 10,508 persons from the revised estimate of caseload in 1985-86. As the table shows, this reduction reflects (1) a reduction of 11,270 persons, or 3.2 percent, in the AFDC-U caseload and (2) a reduction of 80 persons, or 0.01 percent, in the AFDC-FG caseload. —-_ .. _———- Item 5180 HEALTH AND WELFARE \/ 919 Table 3 Basic Eligibility Requirements For the AFDC and Food Stamp Programs A. Categorical Requirements 1. AFDC-Family Group …….. Child with one parent absent, deceased, or physically or mentally incapacitated. 2. AFDC-Unemployed Parent ……………………………….. \”Principal Wage Earner\” unemployed. Federal eligibility available if principal wage earner is unemployed for 30 days and has recent work experience. Otherwise, family is eligible for 3 months of Emergency Assistance and State-Only AFDC. 3. AFDC-Foster Care ………… Child placed in foster care. A child removed by the court from an AFDC eligible home is eligible for federal support; the state supports court-placed children not linked to AFDC, and, for 6 months, volun- tarily placed children. 4. Food Starnps………………………. Any family or individual qualifies who meets federally determined income and resource requirements. B. Income and Resource Require- ments AFDC 1. Real and Personal Property $1,000 limit; home exempt 2. Household Goods Personal Effects ……………………………….. Exempt 3. Motor Vehicle …………………… First $1,500 of net market value exempt 4. Gross Income Limit ………….. 185 percent of AFDC minimum basic standard of need (see Table 5) 5. Allowable Income Deduc- tions …………………………………… 1. Standard work expenses ($75 full time; $50 part time) 2. Child care expenses (up to $160 per child) 3. If the family has received AFDC within past 4 months, $30 and one-third ofremain- ing income; not applied to families not previously on AFDC\” 6. Net Income Limit……………… AFDC maximum aid payment (see Table 5) Food Stumps $1,500 limit ($3,000 for household with one member aged 60 years or over) Exempt Limit of $4,500 on fair market value Limit $540 for an individual; each additional household member increases limit by $189 (family of 3 limit of $917) 1. 18 percent of earned income 2. Standard deduction ($95) 3. $134 limit on the sum of ex- cess shelter costs and de- pendent care expenses 4. Excess medical expenses (actual amount less $35) for households with member over 60 or receiving Title II disability payments Limit of $415 for individual; each additional household member adds about $145 (family of 3 limit is $705) \” Once a family qualifies for aid, during the first four months, it is entitled to the $30 and one-third earned income exemption in calculating the AFDC grant. For the remainder of its first year, the family is entitled to a $30 earned income exemption. 30–80960 920 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued Maximum Payment Levels Table 5 shows the maximum grant levels in 1985-86 for selected family sizes under the family group and unemployed parent components of the AFDC program. It also shows the maximum grant levels for 1986-87, based on the 4.9 percent COLA proposed in the budget. Table 4 Aid to Families with Dependent Children Average Number of Persons Receiving Assistance Per Month 1985-86 and 1985-87 Prograru AFDC-Faruily Group ………………………………….. . AFDC-UnemplQyed Parent ……………………….. . AFDC-Foster Care ……………………………………… . Adoptions Assistance program ……………………. . Refugees:\” Time-eligible …………………………………………… . Time-expired …………………………………………… . Totals ……………………………………………………. . 1985-86 1986-87 ElsDruated Proposed 1,276,560 1,276,480 344,790 333,520 36,540 37,000 3,014 3,396 (48,408) (151,217) 1,660,904 (49,733) (169,683) 1,650,396 Change Nuruber Percent -80 -0.01% -11,270 -3.2 460 1.3 382 12.7 (1,325) (18,466) -10,508 2.7 12.2 -0.6% \”Grants to refugees who have been in the United States less than 36 months (time-eligible) are funded entirely by the federal government. Time-expired refugees, those who have been in the United ‘States longer than 36 months, may qualify for and receive AFDC grants supported according to the normal sharing ratio. Table 5 Maximum AFDC\u00b7FG and U Grant Levels 1985-86 and 1985-87 1986-87\” Faruily Size 1985-86 Aruount Change 1 ………………………………………………………………………………….. . 2 ………………………………………………………………………………….. . 3 ………………………………………………………………………………….. . 4 ………………………………………………………………………………….. . 5 ………………………………………………………………………………….. . $288 474 587 698 796 $302 $14 497 23 616 29 732 34 835 39 \” Based on an estimated 4.9 percent increase in the California Necessities Index (CNI) during 1985. ANALYSIS AND RECOMMENDATIONS AFDC-FG Caseload Estimate Is Not Consistent With Recent Trends We recommend that, prior to budget hearings, the department advise the fiscal committees of its progress in incorporating in its May revision estimate of the AFDC-FG caseloads, changes in refugee caseload and changes in California’s marriage, divorce, and illegitimate birth rates. The budget proposes total spending of $3,065 million (including the costs of the proposed 4.9 percent COLA) in 1986-87 for cash grants to AFDC-FG recipients. This proposal assumes an average monthly AFDC- FG caseload of 478,080 cases, which represents 1,276,480 persons on aid. This is approximately the same case load anticipated for the current year. Item 5180 HEALTH AND WELFARE \/ 921 Chart 1 displays the actual AFDC-FG caseloads from 1981-82 through 1984–85, and the department’s projection of the caseload in the budget year. As the chart shows, the department assumes that tl;1e steady increase in caseload which has occurred in the recent past will level off by the beginning of 1986-87. This assumption has significant consequences for the budget totals. If the actual caseload trends observed between 1981-82 and 1984-85 continued through 1986-87, this would result in 495,000 cases per month, during 1986-87-17,000 cases, or 3.5 percent, more than the budget anticipates. This would increase 1986-87 General Fund costs above the budget estimate by $48 million. Chart 1 AFDC-FG Case loads, Actual and Projected Seasonally Adjusted . 1981-82 through 1986-87 (in thousands) Caseload 500 — Actual’ —– Projected 480 460 440 420 81-82 82-83 83-84 84-85 85-86 86-87 a Because the data shown is seasonally adjusted. caseloads for 1985-86 consist of projected, as well as actual, caseIoads. The reason why the department assumes that there will be no increase in the AFDC-FG caseload during 1986-87, despite recent trends, is that it can find no satisfactory explanation for the recent steady increases in the caseload. The department points out that these increases in caseload have occurred during a period of steadily declining unemployment and general economic recovery. Moreover, the available data indicate that changes in eligibility standards account for only a very limited portion of the caseload growth that has occurred since 1983. The department believes it would be unwise to project a simple continuation of the recent trend absent an understanding of the forces causing the trend, or some basis for believing that the trend will, in fact, continue into the budget year. We agree that the recent increases in caseloads are perplexing. While the correlation between economic conditions and AFDC-FG caseloads has 922 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued never been adequate to explain all of the fluctuations in caseloads, it is reasonable to expect that caseloads would at least remain stable in good economic times. There are, however, several noneconomic factors which may explain the recent caseload increases. For example, the number of refugees in the state has been increasing steadily. Because of language and cultural barriers, these individuals are less likely than are other potential AFDC recipients to take immediate advantage of improvements in the economy. Another noneconomic factor that could explain the recent increases in caseload is the change in household composition. A recent study published by the Department of Health and Human Services found that 45 percent of new AFDC recipients enter the program as a result of becoming di- vorced or widowed. Another 30 percent of new recipients enter the pro- gram as a result of becoming pregnant or having a child out of wedlock. Only 12 percent of new recipients enter the program due to a loss of or reduction in their earnings. The same study found that 45 percent of the recipients who leave the program do so because of a change in household composition, while 32 percent leave as a result of an increase in their earnings. Thus, changes in the marriage, divorce, or illegitimate birth rates within California could explain some of the recent increase in AFDC caseloads. Obviously, we cannot confirm that the recent caseload increases are due to either of these factors-the increase in California’s refugee population or changes in household composition. These factors, however, are worth exploring further to see if they can explain why caseloads have increased in the face of economic prosperity. We, therefore, recommend that, prior to budget hearings, the depart- ment advise the fiscal committees of its success in incorporating in its May revision estimate of AFDC-FG caseloads the following noneconomic fac- tors: (1) changes in refugee caseloads and (2) changes in California’s marriage, divorce, and illegitimate birth rates. Foster Care Caseload Estimate Is Not Consistent With Recent Trends We recommend that, prior to budget hearings, the department advise the fiscal committees on its progress in incorporating specific factors in its estimate of the foster care caseloads for the May revision. The budget proposes total spending of $346,151,000 for the AFDC-Fos- ter Care (AFDC-FC) program in 1986-87. This amount includes $248,894,- 000 from the General Fund, $84,156,000 in federal funds, and $13,101,000 in county funds. The expenditure proposal assumes that there will be an average of 37,000 children in foster care during 1986-87. This is approxi- mately the same caseload anticipated for the current year. Chart 2 shows the actual caseload for the Foster Care program from July 1982 through September 1985 as well as the department’s caseload projec- tion for the remainder of the current year and the budget year. As the chart shows, the foster care caseload grew at an average annual rate of 12 percent between July 1982 and September 1985. The depart- ment projected that the foster care caseload would increase to 37,000 children in December 1985, at which time it would level off for the next 18 months. At the time this analysis was prepared the department did not have the December caseload data. The chart also shows what the foster care caseload would be in 1986-87 Item 5180 HEALTH AND WELFARE \/ 923 if recent trends continue through 1986-87. Were this to happen, the foster care caseload would increase to approximately 43,400 cases per month by the end of the budget year. This increase would result in additional costs above the budget amount of about $59.7 million. Approximately $42.9 million of this amount would have to be financed by the General Fund. 44 Chart 1 Foster Care Case load, Actual and Projected June 1982 throu9h June 1987 (in thousands) — Actual monthly caseload a 40 —— DSS projected caseload === Continued caseload trend. 36 32 28-1 __ \/–, 24 20 1982-83 1983-84 1984-85 1985–86 a Because data for 1985-86 is seasonally adjusted, it includes actual and projected caseloads. 1986–87 The department advises that it chose to extend out the AFDC-FC case- load at the anticipated December 1985 level because it had no reason to believe that caseloads would continue to increase. While the foster care caseload may not continue to increase at the same rate as in the past, it is unlikely that it will suddenly level off. There are several factors which the department did not take into consid- eration which may affect foster care caseloads during 1986-87. For exam- ple, the department should consider the number of reports charging child abuse as well as the number of emergency assistance referrals when it projects the foster care caseloads. This is because children who are abused and neglected or are receiving emergency assistance services may eventu- ally be removed from their homes and be placed in foster care homes. To the extent that child abuse reports and emergency response referrals continue to increase, it is reasonable to expect a proportional increase in foster care caseloads. Another factor that may affect foster care caseloads is the Child Welfare Services (CWS) system. The budget proposes an additional $19 million from the General Fund in order to fully fund the state’s share of actual 924 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued county costs between 1981-82 and 1984-85. With these additional funds, counties are expected to increase CWS staffing. This is likely to change the rate of growth in foster care caseloads. With increased funding, counties may put more emphasis on the preplacement preventive services. These services are provided to children and their families while the child still resides in his or her own home, in hopes of avoiding foster care placement. If counties choose to increase these preplacement services, the rate of foster care caseload growth could slow down. On the other hand, counties may use the additional funds to increase staffing in the emergency response progam. This program provides emer- gency services to abused and neglected children. If the counties increase staffing for this function, they may respond to reports of abuse that, in the past, they have deemed to be low priority. An increase in emergency response (ER) staffing, coupled with increased reports of abuse, could result in a faster rate of growth in foster care caseloads. Another factor that may affect foster care caseloads is the extent to which probation departments place children who are under their supervi- sion in foster care. In general, probation departments supervise children who are considered delinquent. Probation departments can place these children in facilities which are funded almost 100 percent by the county or in foster care facilities for which the county’s share of cost is 5 percent. It would be important to determine if the recent increase in total foster care caseloads is attributable, at least in part, to an increase in the rate at which probation departments are placing children under their supervi- sion in foster care facilities. The department should examine these and other factors to see if they can explain the caseload increases shown in Chart 2. We recommend that, prior to budget hearings, the Department of Social Services advise the fiscal committees on its progress in incorporating the following factors in estimating the foster care caseloads for the May revision: (1) the number of child abuse reports, (2) the number of emergency assistance referrals which result in foster care placement, and (3) the number of children who are placed in foster care and supervised by probation departments. Costs of Foster Care Services for Handicapped Children We recommend that the department advise the fiscal committees how much funding is needed to meet the requirements of Ch 1274\/85. Foster care services are provided to children who have been placed out of their own homes due to the loss of parental support, because of a court order, or pursuant to an Individualized Education Plan (IEP). The pur- pose of IEPs is to ensure that children who have been determined as handicapped receive appropriate education and services. The education and services may include special education classes, various types of thera- py, or out-of-home placement in a private education institution. Current- ly, if the child is under the custody of the courts, the funds for these out-of-home placements are provided by the AFDC appropriation (Item 5180-101-001) . Chapter 1274, Statutes of 1985 (AB 882), requires that funds for these out-of-home care placements be appropriated from a separate item within the budget, starting July 1, 1986. The 1986 Budget Bill, however, does not contain the separate appropriation required by Chapter 1274. The department advises that the budget does not contain a separate Item 5180 HEALTH AND WELFARE \/ 925 appropriation for these costs because it does not have an estimate of the number of children receiving foster care payments pursuant to an IEP. In addition, the department could not estimate any potential caseload in- crease that might occur due to the provisions of Chapter 1274. The depart- ment advises us, however, that it intends to include an estimate of these costs in the May revision. It is possible that Chapter 1274 could increase foster care caseloads because under the provisions of the bill, parents no longer have to transfer custody of their children to the courts in order to place a child in foster care pursuant to an IEP. To the extent that more parents take advantage of this provision,: there will be an increase in foster care costs. Therefore, we recommend. that the department advise the Legislature how much is needed to proyide out-of-homecare for severely emotionally disturbed children pursuant to Chapter 1274. Budget Fails to Transfer Funds to the Foster Parent Training Fund We recommend that, prior to budget hearings, the Department of Fi- nance advise. the fiscal committees how it intends to finance the transfer of $1.8 million from the Foster Care program to the Foster Parent Training Fund as required by current law. Under current law, parents of children who are placed in foster care are required to pay for a portion of their children’s out-of-home care costs if they are financially able to do so. These collections are used to offset the state, county, and federal costs of the Foster Care program. State law requires that the General Fund share of child support collec- tions exceeding $3.75 million be transferred to the Foster Parent Training Fund. The Foster Parent Training Fund provides money to both foster parent training programs run by community colleges and foster youth services sponsored by local school districts. The budget estimates that the General Fund’s share of child support collections for the Foster Care program in 1986-87 will total $5.6 million. This is approximately $1.8 million over the ceiling of $3.75 million. There- fore under the provisions of current law, $1.8 million must be transferred in the budget year from DSS to the Foster Parent Training Fund, for use by community colleges and local school districts. The department, howev- er, did not take this requirement into consideration when preparing the budget for 1986-87. Thus, the transfer of these funds will cause the Foster Care program to be underfunded by $1.8 million in 1986-87. It also will cause General Fund expenditures in 1986-87 to exceed the amount shown in the budget by $1.8 million. We also note that foster care support collections in the current year will exceed the $3.75 million ceiling by about $1.6 million. This will cost the Foster Care program another $1.6 million because of the required transfer and further reduce the General Fund balance at the end of 1986-87. We recommend that, prior to budget hearings, the Department of Fi- nance advise the fiscal committees how it intends to finance the transfer of $1.8 million from the Foster Care program to the Foster Parent Train- ing Fund as required by current law in 1986-87. Budget Proposal Depends on the Federal Government \”Waiving the Unwaivable and Allowing the Unallowable\” We recommend that, prior to budget hearings~ the department advise the fiscal committees on its progress in securing the federal waivers need- ed to avoid a $46,855,000 ($40,030,000 General Fund and $6,825,000 county 926 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued funds) cost shift from the federal government to the state and counties which otherwise will occur as a result of the Simon v. McMahon case. The budget proposes $21,339,000 ($19,034,000 General Fund and $2,305,- 000 county funds) to pay the costs in 1986-87 of complying with the court’s ruling iIi the Simon v. McMahon case. In its ruling, the California Supreme Court struck down a state law which required that children with \”restrict- ed\” income be included as part of the AFDC family for purposes of cal- culating the family’s grant. (\”Restricted\” income is income that is received exclusively for the use of a particular child in an AFDC family.) The effect of the court’s order will be to give AFDC parents the option of excluding children with restricted income from the \”assistance unit\” (the assistance unit consist of the members of an AFDC household for whose needs the AFDC grant is intended). This will mean that the income of these children will not be counted as income to the family. In most cases, the exclusion of such children (and their income) will result in a higher grant to the family and, therefore, increased costs to the state and counties. The DSS estimates that the court’s decision will increase General Fund costs for grants under the AFDC program by $28.1 million in 1985-86 and by $42.0 million in 1986-87. In addition, the department estimates that the decision will increase the General Fund costs of administering the AFDC program by $1.1 million in 1985-86 and by $1.0 million in 1986-87. The department also estimates that total county costs will increase by $4.7 million in 1985-86 and $6.4 million in 1986-87. Table 6 displays the department’s estimate of costs attributable to the Simon case in 1985-86 and 1986-87. Table 6 Fiscal Effect a of Simon v. McMahon 1985-86 and 1986-87 (dollars in thousands) General Federal 1985-86 Fund Funds Increased Program Costs ……………………………… $13,093 Cost Shift ………………………………………………………. 16,055 -$18,792 Totals …………………………………………………….. $29,148 -$18,792 1986–87 Increased Program Costs ……………………………… $19,034 Cost Shift ………………………………………………………. 23,975 -$28,063 Totals …………………………………………………….. $43,009 -$28,063 County Funds Totals $1,922 $15,015 2,737 $4,659 $15,015 $2,305 $21,339 4,088 $6,393 $21,339 \”Includes administrative costs which would normally be budgeted under Item 5180-141-001-County Administration of Welfare Programs. As the table shows, the costs of the Simon case consist of the following two components: Increased program costs ($15.0 million in 1985-86 and $21.3 million in 1986-87). These are the increased grant and administrative costs as- sociated with the court’s ruling that AFDC parents be given the option of excluding children with restricted income from the assist- ance unit . Cost shift ($18.8million in 1985-86 and $28.0 million in 1986-87). The Item 5180 HEALTH AND WELFARE \/ 927 court’s decision will shift grant and administrative costs from the federal government to the state and counties. This is because under federal regulations, parents do not have the option of excluding chil- dren with restricted income from the assistance unit. As a result, the federal government will no longer fund its share of grant and adminis- trative costs for these families. Thus, the court, in effect, has created a \”state-only\” program, and as a result the state and counties will have to fund those costs formerly covered with federal money. The budget includes sufficient funds to cover the increased program costs identified in the department’s estimate. It does not, however, in- clude the funds needed to cover the state’s share of the costs which the federal government no longer will fund. The department advises that it did not budget funds to cover these costs because it is planning to seek a waiver from the federal Department of Health and Human Services (DHHS) that would allow the state to continue receiving federal financial participation for the grants to families affected by the Simon case. Specifi- cally, the department will ask DHHS to participate in that portion of the grants representing what the family would have received under the pre- Simon rules. A federal official has informed us that, in order for California to continue receiving federal financial participation for these costs, the DHHS will have to \”waive the unwaivable and allow the unallowable.\” There is a provision of federal law, however, that, in effect, permits the Secretary of Health and Human Services to do exactly that. The budget proposal as- sumes that the Secretary will exercise this broad authority to waive all relevant federal AFDC regulations and grant California’s request for a waiver for the Simon case. We do not know whether the Secretary will grant the department’s waiver request. Given the cuts in federal programs made necessary by the Gramm-Rudman amendment, it would be not just a little surprising if the DHHS voluntarily increased federal aid to California by nearly $30 million next year. In the event that the Secretary does not grant the request, the cost to the state and counties of the AFDC program in 1985-86 and 1986-87 will be $46,822,000 ($40,030,000 General Fund and $6,792,000 county funds) higher than anticipated by the budget. An increase of this magnitude would reduce the Legislature’s fiscal flexibility in putting together a budget for 1986-87. We therefore recommend that the department advise the fiscal committees, prior to budget hearings, on its progress in securing the federal waiver. The Grant Savings from GAIN Anticipated by the Budget Are Based on an Out-Dated Estimate We withhold recommendation on $36,000,000 ($15,400,000 General Fund, $18,800,000 federal funds, and $1,800,000 county funds) in savings anticipated from the Greater A venues for Independence (GAIN) pro- gram, pending receipt of an up-to-date estimate. Chapter 1025, Statutes of 1985, created the Greater Avenues for In- dependence (GAIN) program. This progam provides employment arid training services to AFDC recipients to help them to become financially self-sufficient. The AFDC budget anticipates that these services will result in grant savings totaling $36 million ($15.4 million General Fund, $18.8 million federal funds, and $1.8 million county funds) in 1986-87. We dis- cuss the department’s fiscal estimate for the GAIN program in our analysis 928 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued of the social services programs item (please see Item 5180-151-001). We note in that analysis that the department’s estimate of the program costs is out-of-date for several reasons, including the fact that the estimate assumes an implementation date of January 1, 1986. The department ad- vises that counties probably will not begin implementing the GAIN pro- gram prior to July 1, 1986. This delay will greatly reduce the savings that the program will generate in 1986-87. Therefore, we withhold recommen- dation on the savings budgeted for the AFDC program as a result of the GAIN program, pending the receipt of a more up-to-date estimate. CHILD SUPPORT ENFORCEMENT PROGRAM Review of Program Performance 1. We recommend that, prior to budget hearings, the department pro- vide the fiscal committees with an estimate of what it would cost to conduct a controlled study of the various child support enforcement strategies. 2. We recommend that the Legislature adopt legislation establishing an incentive allocation formula based on a fixed, rather than a varying, per- centage of child support collections. 3. We recommend that the Legislature adopt legislation phasing in of non-AFDC collections as part of the base on which the incentive payments will be paid. 4. We recommend that the Legislature adopt legislation retaining the current requirement that counties use child support incentive payments to support the Child Support Enforcement program, sunsetting this re- quirement on July 1, 1988, and requiring the DSS to report by January 1, 1988, on the advisability of postponing the sunset. The Child Support Enforcement program is a revenue-producing pro- gram administered by district attorneys’ offices throughout the state. Through this program, district attorneys locate absent parents, establish paternity, and obtain and enforce court-ordered child support payments. This service is available to welfare recipients and nonwelfare families. Child support payments collected on behalf of AFDC recipients are used to reduce state, county, and federal welfare costs. Collections on behalf of nonwelfare clients are distributed directly to the client. In a report on California’s child support program published in Septem- ber 1985 (LAO Report No. 85-21), we reviewed the performance of Cali- fornia’s child support program and the potential effect of recently enacted federal legislation (PL 98-378) on the program. In the report, we recom- mended legislative action to (1) conform state law to federal regulations, (2) identify the most effective enforcement strategies, and (3) improve the performance of the program. Specifically, the report contains the recommendations listed above. REVIEW OF THE WELFARE FRAUD EARLY DETECTION\/PREVENTION PROGRAM The 1983 Budget Act established the Fraud Early Detection\/Prevention (FRED) program in order to detect and prevent fraud at the time an individual applies for AFDC and\/ or food stamp benefits. The FRED pro- gram was modeled after a pilot program implemented by Orange County in early 1980. . . The 1983 Budget Act required all counties that processed a specified Item 5180 HEALTH AND WELFARE \/ 929 number of AFDC and food stamp applications to submit a report to the DSS by August 15, 1983, on their existing fraud prevention programs. Any county which determined that its existing program was not as cost-benefi- cial as the Orange County pilot project was authorized to seek funds from the department to implement a program comparable to Orange County’s. To date, 23 counties have applied for and received funds to operate a FRED program. One of these counties (San Mateo) began program opera- tion in 1983; 16 began in 1984; 2 began in 1985; and 4 (Santa Clara, Santa Cruz, Fresno, and Yuba) plan to commence operation of a FRED program in early 1986. While each county’s FRED program is unique, they all fit the basic structure envisioned in the 1983 Budget Act. Basically, the program in- volves assigning welfare fraud investigators or specially trained investiga- tive-eligiblity workers to work with countly welfare department eligiblity staff. The investigators are on-call to conduct in-depth investigations of the statements made by applicants for welfare. Eligibility workers refer cases to the fraud investigators whenever (1) the statements made by the applicant establish eligibility for welfare and (2) the intake worker has reason to believe that one or more of the statements in the application is false. For example, the intake worker might suspect the applicant had falsified his\/her application if the person indicates on the application that he\/she had no means of support during the current or preceding months. Such a response would raise doubts because it is difficult to understand how a family could survive for several months with no means of support. Intake workers in Orange County refer approximately 8 percent of all welfare applications they process to FRED investigators. When an investigatoJ;’ is assigned to a case, he or she uses standard investigative techniques to verify the facts set out in the welfare applica- tion. These techniques include interviews with the applicant in the wel- fare office, visits to the applicant’s home, and interviews with individuals who may have personal knowledge of the applicant’s situation. Investiga- tors in Orange County find that about 50 percent of the applications referred to them by intake workers result in a denial of aid or in the recipient withdrawing his\/her application. The FRED Program Has Been Successful in Those Counties that Have Implemented It In order to determine whether the FRED program has been successful in those counties where it has been implemented, we identified two im- portant indicators of the program’s performance-client protection and cost-effectiveness. Our review indicates that the program has been suc- cessful in achieving each of these goals. Client Protection. The Budget Acts of 1983, 1984, and 1985 con- tained provisions designed to protect the rights of applicants for public assistance benefits. Specifically, counties are required to provide a com- plaint form to every applicant who withdraws his or her application after a fraud referral. These forms advise the client of his\/her right to file a complaint either in person or through the mail. The DSS requires counties to retain all complaints. In 1984, 20 counties operated FRED programs. They completed more than 19,000 investigations, which resulted in 7,457 applications being de- nied or withdrawn. Of those persons whose applications were denied or withdrawn, only 11 filed complaints and 7 of these complaints were un- \\ 930 \/ HEALTH AND WELFARE AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued related to the FRED program. Item 5180 It seems highly likely that if any of the 20 counties were systematically using the program to intimidate applicants, a substantial number of the applicants who were denied aid would have lodged complaints. Moreover, the department advises that only nine clients who were denied aid as a result of the program in 1985, requested and received fair hearings. Of the nine fair hearings, three are still pending and five of the six that have been completed were decided in favor of the county. Based on the relative dearth of complaints and the counties’ success in FRED-related fair hearings, we conclude that the program has protected the rights of clients. Cost-Effectiveness. The 1984 Budget Act required the department to report to the Legislature on the performance of the FRED program, including its cost-effectiveness. This report, issued in June 1985, concludes that for every dollar the counties spend to support the FRED program, they generate between $8.20 and $18.10 in welfare savings. Our review of the department’s report identified the following flaws in the methodology which the department used to estimate the program’s benefit-to-cost ratio: The department estimated welfare cost avoidance based on the as- sumption that the average AFDC case receives aid for 24 months. This estimate was based on a sample of active cases. Based on a sample of closed cases, we estimate that the average duration of an AFDC case is approximately 17 months. The department assumed that 17 percent of the fraudulent applica- tions would have been detected by another fraud detection program once the recipient actually began receiving aid. (We believe that the use of the average time on aid to calculate program savings should account for this factor because the sample used to estimate the aver- age would include any cases that were closed as the result of a fraud investigation. ) The department did not take into account the possibility that some applicants who were denied aid as a result of the FRED program would successfully reapply at a later date (without necessarily com- mitting fraud in the process). In addition to these methodological flaws, the department’s report was based on performance data reflecting program results in 1983 and 1984- years iri which several counties’ programs were in operation for only a few months. We believe that a report on the Orange County FRED program, issued by the U.S. Department of Health and Human Services (DHHS) in Octo- ber 1985, provides a more reliable estimate of the benefit-to-cost ratio of the program. The report concludes that Orange County’s FRED program returns between $16.60 and $33.81 in savings to state, federal, and county governments for every $1.00 in operating costs. The benefits of the pro- gram range between $16.60 and $33.81, depending on (1) what the aver- age duration on aid is assumed to be and (2) the method used to estimate the costs of the program. We believe that the most reasonable combina- tion of these two assumptions is the one which results in an estimated benefit-to-cost ratio of 22.1 to 1. Regardless of which set of assumptions is used, however, it is clear that the Orange County FRED program is highly cost-effective. . ——-~-.–.-.-. Item 5180 HEALTH AND WELFARE \/ 931 We reviewed the performance of 15 of the 19 counties, excluding Or- ange County, that operated FRED programs during 1985 using a me- thodology similar to the one used to prepare the DHHS report. Table 7 displays our estimate of the program’s benefit-to-cost ratio, by county, as it applies to the AFDC program only. The table also shows the estimated benefit-to-cost ratio for each of the three levels of government involved in the program. The ratios are different because each level of government pays a different share of what it costs to administer the program and because each receives a different share of the savings that result from the program. The table clearly indicates that the program is highly cost-effec- tive. On average, the program returns $17.80 in AFDC savings to the General Fund for every $1.00 in operating costs to the General Fund. Table 7 The FRED Program Estimated Benefit-to-Cost Ratio by Funding Source 1985 Total Funds\” General Fund County Funds El Dorado ……………………………… 11.9 20.8 2.5 Glenn …………………………………….. 12.9 22.7 2.7 Mendocino……………………………… 15.8 27.8 3.4 Nevada …………………………………… 3.5 6.2 0.7 San Luis Obispo …………………….. 8.9 15.7 1.9 San Mateo ……………………………… 17.9 31.4 3.8 Santa Barbara ………………………… 43.8 76.9 9.3 Sonoma…………………………………… 45.1 79.2 9.6 Stanislaus …. …. ………. …. ……………. 14.1 24.7 3.0 Sutter …………………………………….. 24.8 43.6 5.3 Trinity…………………………………….. 3.3 5.8 0.7 Tulare …………………………………….. 36.6 64.2 7.8 Ventura …………………………………. 13.4 23.5 2.9 yolo………………………………………… 72 12.6 1.5 Weighted average …………………. 10.1 17.8 2.1 Federal Funds\” 11.9 12.9 15.8 3.5 8.9 17.9 43.8 45.1 14.1 24.8 3.3 36.6 13.4 7.2 10.1 \”The federal funds benefit-to-cost ratio is the same as the total funds ratio because the federal government pays the same percentage share of administrative costs as it pays of grant costs. Conclusion. We conclude that the FRED program has been highly cost-effective in the counties that have implemented it to date. In addi- tion, the cost savings have been achieved while protecting the rights of applicants. Why Haven’t More Counties Implemented the FRED Program? The 1983 Budget Act required that counties report to the DSS on the cost-effectiveness of their existing fraud detection programs. Most coun- ties reported that their existing fraud detection programs were at least as cost-effective as Orange County’s FRED program. Consequently, in the last three years, only 23 counties have requested additional funds to imple- ment the program. In other words, the majority of counties believe that their current fraud detection programs are as effective as the FRED program. There are several reasons to believe that non-FRED counties have un- derestimated the potential savings from implementing the FRED pro- gram: 932 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued 1. When the non-FRED counties analyzed their existing fraud pro- grams, they were not aware of the actual cost-effectiveness of the Orange County FRED program. The DHHS report was not published until late 1985-more than two years after the effective date of the 1983 Budget Act which required counties to compare their existing detection programs to Orange County’s program. Prior to the publication of the DHHS report, the cost-effectiveness of Orange County’s program had not been in- dependently verified. 2. The benefit-to-cost ratios displayed in Table 7 reflect FRED savings that have been achieved in addition to the savings generated by other fraud detection programs. In general, the counties that have imple- mented FRED programs continue to operate other fraud detection pro- grams. Our estimate of savings associated with the FRED program does not include any savings from these other detection programs. 3. Most non-FRED counties emphasize detection of fraud in estab- lished cases, rather than prevention of fraud during the initial intake of cases. Detection of fraud at intake is more effective than detection of fraud in continuing cases for two reasons: It eliminates the need to collect reimbursements from recipients who have defrauded the program. This is because, when fraud is de- tected at intake, it prevents wrongful payments. This is important because, on average, counties recoup only 55 percent of the money wrongfully paid to fraudulent recipients . It reduces criminal justice costs. It does so by reducing the num- ber of welfare fraud prosecutions. The FRED program results in prosecution for welfare fraud in 1.3 percent of the cases in which fraud is established. Other fraud detection programs lead to prosecu- tion in approximately 15 percent of the cases where fraud is estab- lished. 4. Orange County detects substantially more fraud than do the other large counties. We compared the total number of fraud cases identi- fied by Orange County through all of its fraud detection systems, including FRED, as a percentage of the county’s AFDC caseload with the same figures for the other large counties. Table 8 displays the results of this comparison. As the table shows, Orange County detected three times more fraud than did the other large counties. We believe the difference can be attributed to the Orange County FRED program. This is because (a) the Orange County FRED program accounts for the bulk of the fraud detected by the county and (b) prior to the implementation of the FRED program, Orange County actually detected more fraud through its tradi- tional detection programs than the other large counties were detecting through their programs. . For these reasons, we conclude that most of the non-FRED counties could significantly increase the effectiveness of their fraud detection pro- grams by implementing a FRED program. There are probably several reasons why the majority of counties (in- cluding most of the large counties) have not implemented a FRED pro- gram. Some counties may believe that the FRED program does not adequately protect the rights of clients. We have shown that this is not the case. Others may believe that their current programs detect fraud as effectively as the FRED program. We have shown that this is highly unlikely. Perhaps the most likely reason that counties have not imple- mented FRED is revealed by Table 7: the FRED program is much less cost-effective from a county’s perspective than it is from the state or federal government’s perspective. ——-.,-~——– — Item 5180 HEALTH AND WELFARE \/ 933 Table 8 AFDC Fraud Detected as a Percent of Total Caseload Orange County and Eleven Other Large Counties (July 1983 through December 1983) Eleven Large Counties Riverside ……………………………………………………………………………………………………………………………………… . San Diego ……………………………………………………………………………………………………………………………………. . San Bernardino …………………………………………………………………………………………………………………………… . Fresno\” ……………………………………………………………………………………………………………………………………….. . Los Angeles ………………………………………………………………………………………………………………………………… . Santa Clara\” ……………………………………………………………………………………………………………………………….. . Contra Costa ………………………………………………………………………………………………………………………………. . Alameda ……………………………………………………………………………………………………………………………………… . San Francisco …………………………………………………………………………………………………………………………….. . San Joaquin ………………………………………………………………………………………………………………………………… . Sacramento I> Average ……………………………………………………………………………………………………………………………………… . Orange County …………………………………………………………………………………………………………………………… . \” Fresno and Santa Clara County plan to implement FRED programs in early 1986. I> Sacramento County implemented a FRED program in May 1984. Percent 3.2% 3.1 2.7 2.3 2.2 1.8 1.8 1.7 1.5 1.3 1.2 2.2% 7.4% Currently, counties finance 25 percent of the FRED program’s operat- ing costs (this sharing ratio also applies to other fraud detection pro- grams). On the other hand, counties pay for only 5.4 percent of AFDC grant costs and therefore share in only 5.4 percent of any savings gener- ated by the FRED program. As a result, the effect of the program on county budgets is much less favorable than it is on the state or federal budget. As the table shows, counties, on average, save $2.10 for every $1.00 they spend on the program, while the state saves $17.80 for every dollar it spends. For some counties, the program actually results in a net cost. For these reasons, the counties’ fiscal in~entives to implement the FRED program, are relatively weak. Thus, counties-especially those with fiscal problems-may not consider the FRED program to be worth- while, since costs must be incurred at the front end in order to achieve savings later on. How Can the Legislature Encourage More Counties to Implement FRED Programs? We recommend Budget Bill language requiring DSS to (1) assess the costs\/savings of the FRED program in non-FRED counties and (2) report7 by December 17 1986 on the fiscal effects of mandating FRED on all counties. There are probably only two options available to the Legislature for increasing the counties’ use of the FRED program, other than increasing the counties’ share of AFDC costs (which would give counties a greater stake in the savings associated with the program). We discuss these op- tions below. Wait and see. The first option is simply to wait and see if more counties implement the FRED program. As the benefits associated with the program become better understood, more counties may decide to implement it. In fact, the recent decisions of Fresno and Santa Clara counties to implement FRED programs may indicate that counties are becoming increasingly aware of the advantages to be gained from the program. On the other hand, other counties seem steadfast in their belief 934 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued that their current detection programs are adequate. Thus, this option does not guarantee that all of the counties which could improve their fraud detection systems by implementing the FRED program will do so. To the extent counties which could benefit from the FRED program choose not to implement it, the state foregoes an opportunity to: (1) achieve substan- tial savings and (2) enhance the integrity of California’s welfare programs. Mandate FRED for those counties in which it would be cost-effective to do so. Under this option, the Legislature would authorize the de- partment to require counties to implement FRED programs under speci- fied circumstances. Specifically, the department would assess tpe potential benefits and costs from implementing the FRED program in individual counties, and require those counties where it would be cost- effective to implement the program. The drawback to this option is that it would create a state-mandated local program, obligating the state to pay for 100 percent of the program’s nonfederal costs. The obvious advantage of this option is that it would allow the Legislature to ensure that all counties capable of operating a cost-effective FRED program are required to do so. We have estimated the costs and savings that would be associated with the second option. The estimate assumes that all counties which currently do not operate a FRED program would be required to do so. (It is likely, however, that some counties would not be required to implement the FRED program because it would not be cost-effective for them to do so.) The estimate reflects a conservative assessment of the savings that would result from implementing FRED programs in counties where a program does not currently exist. This is because (1) it is based on the benefit-to- cost ratio of the current FRED counties other than Orange (Orange County’s program is more cost-effective than the average FRED pro- gram) and (2) the savings used in the estimate include only grant savings; we did not include in our calculations savings in AFDC administrative costs, food stamp costs, or criminal justice system costs. The estimate divides costs into two categories: (1) the state’s 50 percent share of program costs in those counties that do not currently operate a FRED program (the federal government would pay for the other 50 percent of the program’s costs) and (2) an additional 25 percent share of FRED program costs in counties that already operate the program. (The state currently pays 25 percent of the costs in these counties, but because the program would be mandated, rather than voluntary, the state would have to pick up the current county share of costs.) Table 9 displays our estimates of the costs and savings to be gained from mandating the FRED program statewide. Table 9 Estimated Costs and Savings to the State of Mandating Counties to Implement the FRED Program Net Fiscal Costs Savings Effect Counties that already operate FRED programs ………………………………………… $558,000 $558,000 Counties that do not currently operate FRED programs ……………………………… 7,706,000 -$68,651,000 -$60,945,000 Totals ……………………………………………… $8,264,000 -$68,651,000 -$60,387,000 Savings-to- Cost Ratio 8.9 to 1 \” 8.3 to 1 \”The General Fund benefit-to-cost ratio displayed here is one-half of the benefit-to-cost ratio displayed in Table 7. This is because, under this option, the General Fund would support 50 percent of program costs, instead of the 25 percent share currently paid in the counties listed in Table 7. Item 5180 HEALTH AND WELFARE \/ 935 The table shows that mandating FRED on counties in which it would be cost-effective to do so could result in a substantial savings to the state. Given the track record of the FRED program in preventing fraud while protecting client rights, we see no reason why the program should not be mandated in counties where the DSS believes it would be cost-effective. Therefore, we recommend that the Legislature adopt the following Budget Bill language, directing the department to (1) assess the potential costs and savings of the FRED program in counties that currently do not operate the program and (2) report to the Legislature by December 1, 1986, on the potential costs and savings in 1987-88 and future years, of\u00b7 requiring counties to implement the FRED program where it would be cost-effective to the state: \”The DSS shall assess the potential costs and savings that would result from implementation of FRED programs in counties that do not cur- rently operate such programs. The DSS shall, by December 1, 1986, submit a report to the Legislature providing its detailed estimates of these costs, on a county-by-county basis, for 1987-88 and subsequent years. In preparing its report, the department shall consider the estimat- ing methodology used in preparing federal report # 18-P-00241-9-01. The department’s report shall also provide an estimate of the increased costs to the state that would result from mandating the FRED program on counties that currently operate it on a voluntary basis.\” TECHNICAL BUDGETING ISSUES Savings From Asset Clearance Match Underbudgeted We rec()mmend a reduction of $4,337,000 ($1,931,000 General Fund, $2,173,000 federal funds, and $233,000 county funds) to reflect a more accurate estimate of the savings that will result from the asset clearance match program in 1986-87. The budget anticipates that the asset clearance match program will result in savings of $8,674,000 ($3,861,000 General Fund, $4,346,000 federal funds, and $467,000 county funds) in 1986-87. This program identifies welfare recipients who have bank accounts that accrue interest of more than $30 a year. Once these recipients are identified, county welfare departments determine whether the recipients have correctly reported these assets to their caseworkers. If these assets have resulted in the recipi- ent receiving more money than he or she was entitled to receive, the county welfare department attempts to recoup the overpayment. The department’s estimate of the savings that will be generated by the asset clearance match in 1986-87 assumes that each investigator can com- plete 16 cases per month. Based on data provided by the department, we estimate that investigators currently process 24 cases per month. The 16 cases per month figure used by the department corresponds to the un- weighted average number of cases per investigator in large, medium, small, and very small counties. Our estimate of 24 cases per month reflects the weighted average for these four groups. . If the department’s estimate is adjusted to reflect the weighted average number of cases per investigator, the savings estimate increases by 50 percent. Specifically, we estimate that the asset clearance match program will generate savings of $13,012,000 ($5,792,000 General Fund, $6,519,000 936 \/ HEALTH AND WELFARE Item 5180 AID TO FAMILIES WITH DEPENDENT CHILDREN-Continued federal funds, and $701,000 county funds). We therefore recommend a reduction of $4,337,000 ($1,931,000 General Fund, $2,173,000 federal funds, and $233,000 county funds) to reflect a more accurate estimate of the increased savings that will result from the asset clearance match in 1986- 87. Savings From The Integrated Earnings Clearance Program Are Underbudgeted We recommend a reduction of $3,243,000 ($1,436,000 General Fund, $1,633,000 federal funds, and $174,000 county funds) to reflect a more accurate estimate of the AFDC grant savings that can be expected to result from the Integrated Earnings Clearance program in 1986-87. The budget anticipates savings to the AFDC lrogram of $1,321,000 ($585,000 General Fund, $665,000 federal funds, an $71,000 county funds) due to increased activity in the Integrated Earnings Clearance (1EC) program. The IEC program is a welfare fraud detection program which identifies recipients who have\u00b7 income that they do not report to their caseworkers. The program identifies these individuals by matching wel- fare records against the records of other governmental agencies such as the Franchise Tax Board, the Social Security Administration, and the In- ternal Revenue Service. These records are matched once every quarter. The department’s estimate of the savings that will result from the IEC program in 1986-87 is based, in part, on the assumption that 80 percent of the individuals who are identified by the program as having failed to report income in each quarter were also identified by the program in the previous quarter. Based on data provided by the department, we estimate that only 30 percent of the individuals identified each quarter have been previously identified. If the department’s estimate is adjusted using the 30 percent estimate, savings from the program grow by $3,243,000 ($1,436,000 General Fund, $1,633,000 federal funds, and $174,000 county funds). Therefore, we recommend a reduction of $3,243,000 ($1,436,000 General Fund, $1,633,000 federal funds, and $174,000 county funds) to reflect a more accurate estimate -of the AFDC grant savings that can be expected to result from the IEC program in 1986-87. \\ Item 5180 HEALTH AND WELFARE \/ 937 Department of Social Services STATE SUPPLEMENTARY PROGRAM FOR THE AGED, BLIND, AND DISABLED Item 5180-111 from the General Fund and Federal Trust Fund Budget p. HW 152 Requested 1986-87 …………………………………………………………. . Estimated 1985-86 ….. , ……………………………………………………. . Actual 1984-85 ………………………………………………………………… . $1,591,370,000 \” 1,410,536,000 1,248,571,000 Requested increase $180,834,000 (+ 12.8 percent) Total recommended reduction ……………………………………… . None a This amount includes $104,732,000 proposed in Item 5180-181-001 (a) for cost-of-living increases. 1986-87 FUNDING BY ITEM AND SOURCE Item-Description 5180-111-001-Payments to aged, blind, and dis- abled Fund General Amount $1,486,638,000 5180-111-890-Payments to aged, blind, and dis- abled 5180-181-001 (a)-Payments to aged, blind, and disabled COLA Federal General (8,043,000) 104,732,000 5180-181-890-Payments to aged, blind, and dis- abled COLA, refugees Federal (226,000) Total $1,591,370,000 SUMMARY OF MAJOR ISSUES AND RECOMMENDATIONS 1. Caseload Estimates. Recommend that the Department of Finance reconcile the discrepancy between the aged caseload estimates of the Departments of Social Services and Health Services. 2. Continuing Disability Reviews. Recommend that the Legislature adopt supplemental report language directing the department to reconcile any discrepancy between its estimate of savings due to the resumption of continuing disability reviews (CDRs), and the savings actually realized as a result of implementing the new CDR regulations. 3. State Monitoring of Federal Administration. Recom- mend that the Legislature adopt supplemental report lan- guage directing the department to outline its plan for monitoring the quality of federal administration of the Sup- plemental Security Income\/State Supplementary Program. GENERAL PROGRAM STATEMENT Analysis page 942 943 945 The Supplemental Security Income\/State Supplementary Program (SSI\/SSP) provides cash assistance to eligible aged, blind, and disabled persons. A person may be eligible for the SSI\/SSP program if he\/she is elderly, blind, or disabled and meets the income and resource criteria established by the federal government. The federal government pays the cost of the SSI grant. California has 938 \/ HEALTH AND WELFARE Item 5180 STATE SUPPLEMENTARY PROGRAM FOR THE AGED, BLIND, AND DISABLED -Continued chosen to supplement the federal payment by providing an SSP grant. The SSP grant is funded entirely from the state’s General Fund. In California, the SSI\/SSP program is administered by the federal government through local Social Security Administration (SSA) offices. During the current year, an estimated 679,896 persons will receive as- sistance each month under this program. OVERVIEW OF THE BUDGET REQUEST The budget proposes an appropriation of $1,591,370,000 from the Gen- eral Fund for the state’s share of the SSI\/SSP program in 1986-87. This is an increase of $180,834,000, or 13 percent, above estimated expenditures in the current year. The budget also assumes that federal expenditures for the SSI\/SSP program will be $1,322,109,000. This is an increase of $72,941,- 000, or 5.8 percent, above estimated federal expenditures in the current year. The budget estimates that combined state and federal expenditures for the SSI\/SSP program in 1986-87 will be $2,913,479,000, which is an increase of $253,775,000, or 9.5 percent, above estimated current-year ex- penditures. Table 1 shows SSI\/SSP expenditures, by category of recipient and by funding source, for the years 1984-85 through 1986-87. Table 1 SSI\/SSP Expenditures 1984-85 through 1986-87 (dollars in thousands) Clltegory of Recipiellt Aged ……………………………………………………….. . Blind ………………………………………………………. .. Disabled ………………………………………………… . Totals ……………………………………………… .. Funding Source Gelleml FUlld ………………………………………. .. Federlll fUllds b …………………………………….. .. Actual 1984-85 $751,845 80,174 1,549,426 $2,381,445 $1,248,571 1,132,874 \” Includes 4.9 percent COLA. h Includes federal funds to support SSP costs for refugees. Est. 1985-86 $841,613 90,353 1,727,738 $2,659,704 $1,410,536 1,249,168 Percellt Chllllge Prop. From 1986-87\” 1985-86 $920,020 9.3% 98,812 9.4 1,894,647 9.7 $2,913,479 9.5% $1,591,370 12.8% 1,322,109 5.8% Table 2 shows the budget adjustments that account for the increase in SSI\/SSP expenditures proposed for 1986-87. The increase in General Fund costs can be attributed to the following significant changes proposed for the budget year: A $104.7 million increase needed to provide a 4.9 percent cost-of- living adjustment (COLA) for grants, beginning January 1, 1987. A $74.8 million increase which reflects the effect of (1) the full-year cost in 1986-87 of the 5.7 percent COLA provided for SSI\/SSP grants on January 1, 1986, and (2) the increase in recipient’s unearned in- come (as a result of the 3.1 percent COLA provided for social security benefits on January 1, 1986). A $33.9 million decrease made possible by increased federal funds that Item 5180 HEALTH AND WELFARE \/ 939 are expected to be available for a COLA to SSI grants, beginning January 1, 1987. A $45.3 million increase needed to fund an estimated 2.7 percent increase in caseload. A $15.5 million decrease reflecting an anticipated increase in recipi- ent’s unearned income (primarily as a result of the estimated 3.5 percent COLA provided for social security benefits on January 1, 1987), which reduces grant costs. A $14 million increase due to the cost of errors made by the federal government in administering the SSI\/SSP program in 1985-86 which the federal government will no longer finance. Table 2 SSI\/SSP Proposed Budget Changes 1986-87 (dollars in thousands) 1985-86 expenditures (revised) ………………………………… . Proposed changes: 1. Basic caseload increases ……………………………………….. . 2. Cost-of-Iiving adjustments a. Proposed 4.9 percent grant increase (1\/87) ….. . b. Full-year cost of 1\/86 grant increase ………………. . c. Estimated federal SSI increase (1\/87) …………….. . d. Estimated social security benefit increase (1\/87) Subtotals …………………………………………………………… . 3. Program adjustments a. Decreased federal reimbursement for errors … . b. Resumption of disability reviews ……………………. . c. $10 state supplement (Ch 1161\/85) ………………… . d. Court cases ……………………………………………………….. . e. All others …………………………………………………………… . Subtotals …………………………………………………………… . 1986-87 expenditures (proposed) …………………………….. . Change from 1985-86: Amount ………………………………………………………………….. . Percent.. ………………………………………………………………….. . General Fund $1,410,536 45,281 104,732 74,815 -33,943 -15,480 ($175,405) $14,000 -7,400 1,167 -1,852 -486 ($5,429) $1,591,370 $180,834 12.8% Federal Funds\” $1,249,168 48,531 226 22,405 32,949 -9,630 ($94,481) -$14,000 -7,900 o -126 487 (-$21,539) $1,322,109 $72,941 5.8% Total\” $2,659,704 93,812 104,958 97\/lfl1J 994 -25,110 ($271,874) $0 -15,300 1,167 -1,978 o (-$16,1ll) $2,913,479 $253,775 9.5% a Includes federal funds of $7,557,000 in 1985-86 and $8,043,000 in 1986-87 to support SSP costs for refugees. ANALYSIS AND RECOMMENDATIONS Eligibility Requirements The Social Security Administration (SSA) administers the SSI program. In addition, the SSA will administer a state’s SSP program if it is requested to do so by the state. When the SSA administers a state’s SSP program, as it does in California, federal eligibility requirements are used to determine an applicant’s eligibility for both the SSI and SSP programs. To be eligible for the SSI\/SSP program, individuals must fall into one of three categories-aged, blind, or disabled. In addition, their income and resources cannot exceed certain specified limits. Table 3 summarizes the eligibility requirements for the SSI\/SSP program. 940 \/ HEALTH AND WELFARE Item 5180 STATE SUPPLEMENTARY PROGRAM FOR THE AGED, BLIND, AND DISABLED -Continued A. Categorical Requirements Category 1. Aged 2. Blind 3. Disabled B. Income and Resource Limits Type 1. Home 2. Personal and real property Table 3 SSI\/SSP Basic Eligibility Requirements Criteria a. 65 years of age or older. a. Vision no better than 20\/200; limited visual field of 20 degrees or less with the best corrective eyeglasses. a. A physical or mental impairment which precludes \”substantial gainful employment\” and is expected to last at least 12 months or result in death. Limit Entire value exempt. 3. Household goods\/personal effects $1,700 for individual, $2,550 for couple. $2,000 equity value. 4. Life insurance policies 5. Burial plots or spaces 6. Motor vehicle 7. General income exclusion 8. Earned income exclusion a. All categories b. Blind and disabled 9. Income limit $1,500 face value. $1,500 per person. Total exclusion, or exclusion to $4,500 of market value. 2nd automobile-no exclusion. $20\/month general exclusion. a. First $65\/month of earned income plus one-half of remaining earned income. a. Any income used toward gaining self-sufficiency. Maximum SSl\/SSP grant. (see Table 5). The Deficit Reduction Act of 1984 (DEFRA) increased the limit on personal and real property that an SSI \/ SSP recipient may own and still retain eligibility for benefits. The limit will increase by $lOO for individuals and $150 for couples for each year for five years, beginning January 1, 1985. Thus, as a result of this provision, the resource limits will increase to $2,000 and $3,000, respectively, by 1989. Otherwise, the eligibility requirements for the SSI\/SSP program are essentially unchanged from last year. Status of the Current-Year Budget The department’s latest estimate of General Fund costs for the SSI\/SSP program in 1985-86 is $1,4lO,536,000. This is $20,213,000, or l.5 percent, above the amount appropriated in the 1985 Budget Act. The major factors that account for the increase are as follows: Costs have increased by $6.9 million because the amount provided by the federal government to reimburse the state for errors it made in administering the SSI\/SSP program was less than expected. Costs have increased by $6 million because the amount of federal funds provided for COLAs to SSI\/SSP grant recipients and the in- crease in social security benefits in 1985 were less than anticipated. The budget assumed an increase of 3.5 percent for both the SSI grant and social security benefits; the actual increase on January 1, 1986, was 3.1 percent. Costs have increased by $4.4 million because the moratorium on disa- bility reviews was extended from March 1985 through January 1986. Costs have increased by $4.2 million due to a 0.5 percent increase in caseload. Item 5180 HEALTH AND WELFARE \/ 941 Grant Levels and Cost-of-Living Adjustments The maximum grant amount received by an SSI\/SSP recipient varies according to the recipient’s eligibility category. For example, in 1986 an aged or disabled individual can receive up to $533 per month, while a blind individual can receive up to $597. In addition to categorical differences, grant levels vary according to the recipient’s living situation. The majority of SSI\/ SSP recipients reside in independent living arrangements. Other recipients reside in (1) independent living arrangements without cooking facilities, (2) the household of another person, or (3) nonmedical board and care facilities. The grants provided to these individuals differ from the grants received by individuals in independent living arrangements. Table 4 shows the maximum grant levels for the major recipient catego- ries in 1985 and 1986, as well as what the grant levels will be in 1987 if the 4.9 percent increase proposed in the budget is approved. Table 4 SSI\/SSP Maximum Monthly Grant Levels Calendar Years 1985 through 1987 Governor’s Budget\” Category of Recipient 1985 1986 1987 Aged or disabled: Individual: Total grant ………………………………………. 504 533 559 SSI ……………………………………………….. 325 336 347 SSp: ………………………………………………. 179 197 212 Couple: Total gran t ………………………………………. 936 989 1,037 SSI ……………………………………………….. 488 504 521 SSP ……………………………………………….. 448 485 516 Blind: Individual: Total grant ………………………………………. 565 597 626 SSI ……………………………………………….. 325 336 347 SSP ……………………………………………….. 240 261 279 Couple: Total grant ………………………………………. 1,099 1,162 1,219 SS! ……………………………………………….. 488 505 521 SSP.; ……………………………………………… 611 657 698 \” Assumes a 3.5 percent increase in SSI grants, effective January 1, 1987. Change From 1986 to 1987 Amount Percent 26 4.9% 11 3.3 15 7.6 4B 4.9 17 3.4 31 6.4 29 4.9 11 3.3 18 6.9 57 4.9 16 3.2 41 6.2 Federal Requirements. The Social Security Act Amendments of 1983 require California to maintain its SSP grants at or above the July 1983 level. This means that, for aged or disabled individuals-who represent the largest groups of recipients-the state must provide at least $157 per month in addition to the SSI grant provided by the federal government. As Table 4 shows, the SSP grant levels proposed in the budget exceed those required by federal law. State Requirements. Existing state law requires that the total SSII SSP payment levels be adjusted, effective January 1, 1987, based on the change in the California Necessities Index (CNI) during calendar year 1985. The Commission on State Finance is required to calculate the eNI and will announce the actual change in the CNI for calendar year 1985 942 \/ HEALTH AND WELFARE Item 5180 STATE SUPPLEMENTARY PROGRAM FOR THE AGED, BLIND, AND DISABLED -Continued during March 1986. The commission’s calculation, therefore, will be avail- able for use in calculating the actual grant adjustments required by cur- rent law, prior to when the Legislature completes action on the budget. Budget Proposal. The budget proposes to provide the cost-of-living increase required by state law. Based on a Department of Finance esti- mate of the change in the CNI during 1985, the budget proposes a 4.9 percent increase in the maximum grants at a cost of $104,732,000 to the General Fund. Table 4 shows the effect of a 4.9 percent increase to the grant levels for various recipient categories. Caseload Estimates Need to be Reconciled We recommend that the Department oE Finance (1) reconcile the dis- crepancy between the aged caseload estimates oE the Departments oE Health Services (DHS) and Social Services (DSS) and (2) report to the Eiscal committees, prior to budget hearings, regarding any changes that are warranted in the amounts proposed under this item and under the Medi- Cal program item (Item 4~60-101-001). The budget proposes General Fund expenditures of $1,403 million to fund the SSI\/SSP caseload in 1986–87. This is an increase of $45.3 million, or 3.3 percent, above estimated current-year expenditures and is due to caseload growth. The department estimates that the total SSI \/ SSP case- load will grow by 2.7 percent between 1985-86 and 1986–87, as shown in Table 5. The SSI\/SSP caseload is comprised of aged, disabled, and blind recipients. The aged population is 39 percent of the total caseload, and the department estimates that the aged case load will grow by 1.8 percent between the current year and 1986-87. For the most part, the aged caseloads for the Medi-Cal program (exclud- ing the medically needy only), and for SSI\/SSP consist of the same in- dividuals. It is not possible, therefore, for one caseload to increase at the same time that the other is decreasing. Despite this fact, DSS and DHS have developed conflicting estimates of the aged SSI\/SSP caseload for 1986-87. While DSS projects that this caseload will increase by 1.8 percent between the current and budget years, DHS projects that the aged popu- lation receiving medical assistance will decrease by 1.2 percent during this period. Thus, the caseload projections of DSS and DHS are inconsistent with one another. It is difficult to understand how a difference of this magnitude-3 percentage points-could have occurred in a budget that, presumably, was carefully reviewed by both the Health and Welfare Agency and the Department of Finance. Eligibility Ciltegory Aged …………………………………………… . Blind ………………………………………….. .. Disabled ……………………….. .-…………… . Totals …………………………………. .. Table 5 SSI\/SSP Average Monthly Caseload 19~5 through 1986-87 Actual Est. 1984-85 1985-86 264,283 18,804 379,800 662,887 266,646 19,446 393,804 679,896 Prop. 1986-87 271,500 20,067 406,542 698,109 Percent Change From 1985-86 1.8% 3.2 3.2 2.7%\” \”The Department of Health Services projects a 1.2 percent decrease in the aged population receiving Medi-Cal between 1985-86 and 1986-87. Item 5180 HEALTH AND WELFARE \/ 943 We are concerned about this inconsistency because it casts doubt on the validity of the administration’s estimate of the costs of both the SSI\/SSP program and the Medi-Cal program. To the extent that there are more aged SSI\/SSP recipients in the Medi-Cal program than is reflected in the DHS caseload estimate, the cost of the Medi-Cal program will be more than the amount currently budgeted in the Medi-Cal item (4260-101-001). We have no basis for determining which department’s estimate of case- load is most reasonable. Consequently we cannot advise the Legislature whether the amount of funds proposed to fund the caseload increase in the SSI\/SSP program is correct. We can only note that the budget asks the Legislature to appropriate money for two major budget items based on two contradictory estimates of the same caseload. We therefore recom- mend that the Department of Finance reconcile this discrepancy between the two department’s caseload estimates and advise the fiscal committees, prior to budget hearings, of any changes that are warranted in (1) the amounts proposed under this item for the SSI\/SSP program and (2) the amounts proposed for the Medi-Cal program (Item 4260-101-001). Savings Estimate from Continuing Disability Reviews May Be Overstated We recommend that the Legislature adopt supplemental report lan- guage which requires the Department of Social Services (DSS) to submit a report by December 1, 1986, that reconciles its estimate of savings due to the resumption of continuing disability reviews (CDRs) with the sav- ings actually realized. In 1980, Congress enacted amendments to the social security Act (P.L. 96-265) which expanded the requirement for periodic reviews of both disabled social security and SSI\/ SSP recipients, in order to determine their continued eligibility for benefits (referred to as \”Continuing Disability Reviews\” (CDRs). These reviews resulted in thousands of appeals to the federal courts by individuals whose grants were reduced or terminated, threats by federal courts to serve contempt of court citations on the Secre- tary of Health and Human Services (HHS) for refusing to pay benefits when ordered, and the decision of several states not to follow federal CDR regulations. As a result, on April 1, 1984, the Secretary of HHS imposed a moratorium on the CDR process, pending further legislative action. Con- gress established new standards for disability reviews in the Social Security Disability Benefits Reform Act of 1984 (P.L.98-460). Based on thislegisla- tion, HHS prepared new CDR regulations which became effective De- cember 6, 1985. The most significant change in the regulations brought about by P.L.98- 460 was the addition of a \”medical improvement standard.\” Under the oJd regulations a recipient could be terminated from aid even though his\/her physical or mental condition was unchanged. Under the new regulations a recipient can only be terminated from aid based on proof of improve- ment in his\/her medical condition. In addition, the new regulations make other changes such as requiring more extensive documentation of recipi- ents’ medical condition. The department estimates that resumption of the CDRs will result in savings to the General Fund because these reviews will identify some current SSI\/SSP recipients as ineligible for assistance. The department estimates that the General Fund savings from discontinuing benefits to these persons will total $700,000 in 1985-86, and $8.1 million in 198~7. 944 \/ HEALTH AND WELFARE Item 5180 STATE SUPPLEMENTARY PROGRAM FOR THE AGED, BLIND, AND DISABLED -Continued We have reviewed the basis for the department’s estimate, and we have identified a number of factors which could cause the savings from CDRs to be either higher or lower than what the budget anticipates. Specifically, we find that: The SSIISSP cases which are determined to be ineligible for aid will not be discontinued from assistance immediately, thereby reducing the estimate of savings. The department assumes that savings will start to accrue on March 1, 1986, as an average of 360 recipients per month are terminated from aid. This estimate fails to consider that recipients will receive two additional months of benefits following the receipt of a termination notice. Therefore, in the current year, costs will continue to occui’ for two months beyond the month that an individual receives a notice of termination. We estimate that this will reduce the current-year savings by $474,000. If the department is unable to make up for this loss by processing additional cases in 1986- 87, savings for the budget year will be $914,000 lower than estimated by the department. (This is because savings for 1986-87 are cumula- tive, based on. savings in the current year.) The department’s estimate fails to take into account appeals by in- dividuals who have been notified that they are no longer eligible for aid. Individuals who appeal a termination notice can continue to receive benefits during the appeals process, thereby reducing the savings still further.While it is difficult to estimate the number of appeals, it is important to note that prior to the moratorium on CDRs, there was a very high rate of successful appeals. In general, the ap- peals process takes approximately two-to-eight months to complete. If the appeal results in a reversal of the termination, the recipient will continue to receive benefits until the next review of his\/her case. There is some uncertainty as to how many individuals will be found ineligible for aid under the new \”medical improvement\” standard. The department estimates that an average of 20 percent of the cases reviewed will be terminated from aid. The SSA indicates, however, that between 17jercent and 21 percent of cases reviewed will be dropped from ai . The department based its estimate on its experi\” ence in performing CDRs prior to the moratorium. During this peri- od, the department was determining eligibility based on a decision in a court case which imposed a standard similar to the new \”medical improvement\” standard. The new regulations, however, are more detailed than the court standard, and include other changes in addi- tion to the \”medical improvement\” standard. If the department ter- minates from aid fewer than 20 percent of those subject to the CDRs, savings will be lower than projected. On the other hand, if more than 20 percent of the cases are terminated from aid, the savings will be higher than estimated. The number of cases which will be reviewed in the current year probably will be lower than the number estimated in the budget, thereby reducing the savings in the current year. This is primarily because the department will not hire the staff necessary to perform the CDRs until February, but it assumes that the full workload of CDRs will be performed beginning March 1, 1986. Although the de- partment is requiring experienced staff to work overtime to help with Item 5180 HEALTH AND WELFARE \/ 945 the reviews, it is unlikely that the department will be able to handle the projected workload immediately because (1) the new staffre- quires one year of training and work experience before becoming fully productive and (2) the overtime may be insufficient to cover both the incoming CD Rs and the regular workload. If the department processes fewer cases than it estimates, then the savings will be lower than it projects. Because of these uncertainties it is difficult to assess the accuracy of the department’s savings estimate. Accordingly, we recommend that the Legislature adopt supplemental report language requiring the depart- ment to submit a report to the Legislature by December 1, 1986, that reconciles its estimate of savings due to the resumption of CDRs with actual savings achieved. The following language is consistent with this recommendation: \”The Department of Social Services shall submit a report by December 1, 1986, that reconciles its estimate of savings due to the resumption of CDRs with its actual experience in implementing the new CDR regula- tions.\” State Monitoring of Federal Administration We recommend that the Legislature adopt supplemental report lan- guage requiring the department to (1) review the findings of the State Controller’s audit of the SS\/ISSP program and (2) submit a report by September 1~ 198~ that outlines the state’s contract proposal regarding the federal quality assurance system. The Social Security Administration (SSA) administers the SSI\/SSP pro- gram in California pursuant to a contract between the federal and state government. Under the provisions of the contract, the federal govern- ment is responsible for a number of activities, one of which is monitoring the accuracy with which it administers the program. The federal govern- ment monitors its administration of the program based on quality assur~ ance (QA) reviews. The state relies primarily on the findings from the federal QA system in order to monitor federal administration of the program. In addition, the state performs audits to monitor federal administration of the program. The contract between the state and federal government specifies the conditions under which these audits are performed and describes the federal QA system. The department currently is negotiating a new contract with theSSA. The department indicates that it has two major concerns with the new contract proposed by SSA. The proposed contract: Deletes a description of the federal QA system. Limits the effectiveness of state audits. Federal QA System Changes. Prior to 1985-86, as part of its QA sys- tem, the federal government reviewed a sample ofSSIISSP cases in order to identify erroneous payments to recipients. Subsequent to this review, the state examined a portion of the federal sample to test the accuracy of the federal review. The findings from these two reviews were combined to produce an error rate. The error rate was the basis for reimbursing the state for erroneous payments made by SSA to SSIISSP recipients. On October 1, 1984, however, the SSA eliminated federal reimburse- ment for erroneous payments. As a result, the state eliminated the staff which had reviewed the federal sample. The department explained that 946 \/ HEALTH AND WELFARE Item 5180 STATE SUPPLEMENTARY PROGRAM FOR THE AGED, BLIND, AND DISABLED -Continued since the federal government was no longer going to reimburse states for erroneous payments, the state would have limited ability to influence the quality of the QA reviews. It indicated, however, that the risk of inaccu- rate QA reviews and misspent program funds could increase. The state relies primarily on the federal QA system to monitor federal program administration. The department informs us that the contract proposed by the federal government does not describe the QA system. As a result, the department does not know what type of system SSA is plan- ning to operate in the future. Because the description of the QA system was left out of the new contract proposal, several states, including Califor- nia, New York, Michigan, and Nevada, have refused to sign the contract. The department plans to propose that the contract include a description of the QA system that will protect the state’s interest in accurate program administration. The department, however, has not yet decided what kind of QA system it will propose to the federal government. State Audits of Federal Administration. In addition to the federal QA system, the state continues to periodically audit federal administration of the program. In 1983, the Department of Finance (DO F) , and the State Controller’s office performed the last major state audit of the program. As a result of that audit, DOF estimated that SSA owed the state approxi- mately $30 million due to erroneous payments to recipients. In addition, the state recommended that SSA correct several administrative deficien- cies. The SSA agreed with most of the state’s recommendations, but it did not agree that it owed the state $30 million. Currently, the SSA is reviewing the state’s claim. Neither the old contract, nor the proposed contract provide a definite time period for resolution of claims identified in state audits. The depart- ment informs us that it intends to propose a one-year period for resolution of these claims. In addition, the new contract deletes the provision that state audit results may be used by the state to recommend improvements in the federal government’s QA process. This effectively eliminates state oversite of the federal QA process. State Controller’s Report. A planned State Controller’s audit report will provide the department with some of the information it needs in order to develop a contract proposal which protects the state’s interest in accurate federal administration of this program. The State Controller’s office advises us that the three-part audit will: Review SSA’s current QA system and SSA’s plans to modify it, Review SSA’s procedures for verifying the $30 million identified in the 1983 audit and follow-up on other recommendations made in the 1983 audit and Review regional and district offices’ administration of the program in 1981-82, 1982-83, and 1983-84. The State Controller’s office informs us that it will complete the first two parts of the audit by July 1986, and the third part later in 1986-87. The first two parts of the audit report will identify weaknesses in both the current QA system, and any planned changes. The department can use that infor- mation to develop a contract proposal for a more effective QA system. If the state’s proposal succeeds, it will allow the state to: Item 5180 HEALTH AND WELFARE \/ 947 Identify administrative errors as a result of both the QA system and state audits, and Require the federal government to reimburse the state for some of those errors. Accordingly, we recommend that the Legislature adopt supplemental language requiring the department to (1) review the findings of the State Controller’s audit report on the SSI!SSP and (2) submit a report by Sep- tember 1, 1986, that outlines the state’s contract proposal regarding the federal QA system. The following language is consistent with this recommendation: \”The Department of Social Services shall (1) review the findings of the State Controller’s audit report of the SSI!SSP and (2) submit a report by September 1, 1986, that provides the state’s proposal for the contract with the federal government regarding the federal quality assurance system.\” Department of Social Services SPECIAL ADULT PROGRAMS Item 5180-121 from the General Fund and the Federal Trust Fund Budget p. HW 153 Requested 1986-87 ………………………………………………………………. . Estimated 1985-86 ………………………………………………………………… . Actual 1984-85 ……………………………………………………………………… . Requested increase $196,000 (+10.8 percent) Total recommended reduction …………………………………………… . 1986-87 FUNDING BY ITEM AND SOURCE Item-Description 5180-121-001-Special Adult Programs 5180-121-890-Special Adult Programs GENERAL PROGRAM STATEMENT Fund General Federal $2,018,000 1,822,000 1,657,000 None Amount $2,018,000 (75,000) The Special Adult programs consist of three distinct program elements designed to fund the emergency and special needs of Supplemental Secu- rity Income\/State Supplementary Program (SSI!SSP) recipients. These elements are the (1) Special Circumstances program, which provides financial assistance for emergency needs, (2) Special Benefits program, which provides a monthly food allowance for guide dogs belonging to blind SSI!SSP recipients, and (3) Temporary Assistance for Repatriated Americans program, which provides assistance to needy U.S. citizens re- turning from foreign countries. 948 \/ HEALTH AND WELFARE Item 5180 SPECIAL ADULT PROGRAMS-Continued OVERVIEW OF THE BUDGET REQUEST The budget proposes a General Fund appropriation of $2,018,000 for the Special Adult programs in 1986-87. This is $196,000, or 11 percent, more than estimated General Furld expenditures for this program in the current year. This increase results primarily from projected caseload growth in the Special Circumstances program. The Department of Social Services (DSS) anticipates that the caseload for the Special Circumstances pro- gram will increase because the potential applicant pool-SSI\/SSP recipi- ents-is growing at an accelerating rate. The budget also proposes $75,000 in federal funds to provide cash assist- ance to repatriated Americans. This is the same amount that will be spent in the current year. ANALYSIS AND RECOMMENDATIONS We recommend approval. The 1985 Budget Act required DSS to limit state reimbursement for an individual county’s administrative costs under the Special Circumstances program to 100 percent of the county’s total benefit expenditures, or actual administrative costs, whichever was less. The department estimates that total administrative costs for this program in 1986-87 will not exceed 100 percent of benefit expenditures. Furthermore, the department indi- cates that it will restrict each county’s administrative costs to 100 percent of benefit expenditures. Department of Social Services REFUGEE CASH ASSISTANCE PROGRAMS Item 5180-131 from the Federal Trust Fund Budget p. HW 155 Requested 1986-87 ……………………………………………………………….. $57,857,000\” Estimated 1985-86…………………………………………………………………. 55,989,000 Actual 1984-85 ………………………………………………………………………. 52,783,000 Requested increase $1,868,000 (+3.3 percent) Total recommended reduction ……………………………………………. None \”Includes $1,553,000 proposed in Item 5180-181-890 for a 4.9 percent cost-of-living increase. 1986-87 FUNDING BY ITEM AND SOURCE Item-Description 5180-131-866–Refugee programs, local assistance 5180-181-866{c)-Refugee programs, local assist- ance Total Fund Federal Federal Amount $56,304,000 1,553,000 $57,857,000 Item 5180 HEALTH AND WELFARE \/ 949 SUMMARY OF MAJOR ISSUES AND RECOMM’:NDATIONS 1. Refugee Caseload Estimates. Recommend that prior to budget hearings the Department of Finance reconcile the conflict in caseload estimates and advise the Legislature of any changes that are warranted in the funds proposed. GENERAL PROGRAM STATEMENT Analysis page 949 This item appropriates the federal funds that pay for the costs of cash grants and medical assistance provided to refugees who are eligible for assistance and who have been in this country for less than 36 months. These individuals are referred to as \”time-eligible\” refugees. Refugees who have been in this country for more than 36 months, and who meet applicable eligibility tests, receive assistance under the Aid to Families with Dependent Children (AFDC), Supplemental Security Income\/State Supplementary Program (SSIISSP), Medi-Cal, and county general assist- ance programs. ANALYSIS AND RECOMMENDATIONS Refugee Caseload Estimates We recommend that the Department of Finance (1) reconcile the dis- crepancy between the refugee caseload estimates of the Departments of Health Services (DHS) and Social Services (DSS) and (2) report to the fiscal committees prior to budg~t hearings any changes that are warranted in the amounts proposed under this item and under the Medi-Cal program item (Item 4260-101-001). The budget proposes expenditures of $57,857,000 in federal funds for cash and medical assistance provided through Refugee Cash Assistance programs to refugees and entrants in 1986–87. This is an increase of $1,868,- 000, or 3 percent, above estimated current-year expenditures for this pro- gram. The $1,868,000 increase reflects three principal changes: (1) a $1,553,000 increase proposed in Item 5180-181-866 for a 4.9 percent cost-of-living adjustment to cash grant amounts provided to refugees, (2) an $825,000 increase to cover the costs of a 2.7 percent increase in caseload projected by the DSS for its cash assistance program, and (3) a reduction of $510,000 in the projected costs of providing medical services to refugees that is primarily due to a 3.6 percent reduction in caseload projected by the DHS. For the most part, the same individuals make up the caseloads for refugee cash assistance and medical assistance. It is not possible, therefore, for one program’s caseload to increase while the case load for the other is decreasing. Thus, the DSS’s and DRS’s caseload projections are inconsist- ent with one another. It is difficult to understand how a difference of this magnitude-6.3 percentage points-could have occurred in a budget that, presumably, was carefully reviewed by both the Health and Welfare Agency and the Department of Finance. Not only does this inconsistency cast doubt on the administration’s ex- penditure estimate for this item; it also brings into question the adminis- tration’s estimate of General Fund costs under the Medi-Cal program. This is because the General Fund cost estimates for the Medi-Cal program depend, in part, on the amount of federal funds ava.ilable to reimburse the DHS for medical assistance provided to time-eligible refugees. To the 950 \/ HEALTH AND WELFARE Item 5180 REFUGEE CASH ASSISTANCE PROGRAMS-Continued extent that the number of time-eligible refugees turns out to be more in line with DSS’s caseload projections, the amount of federal funds available to offset the General Fund costs of Medi-Cal services for refugees will exceed the amount budgeted in this item. If this happens, the amount needed from the General Fund to pay costs under the Medi-Cal prograin will be less than the amount proposed in the Medi-Cal item (Item 4260- 101-001). We have no basis for determining which department’s estimate of case- load is the most reasonable. Consequently, we cannot advise the Legisla- ture whether the amount of federal funds proposed for refugee cash and medical assistance under this item is correct. We can only note that the budget asks the Legislature to appropriate money for two major budget items based on two contradictory estimates of the same caseload. We therefore recommend that the Department of Finance reconcile the dis- crepancy between the two department’s caseload estimates and advise the fiscal committees, prior to budget hearings, of any changes that are warranted in (1) the amounts proposed under this item for refugee cash and medical assistance and (2) the amount needed from the General Fund for the Medi-Cal program item (Item 4260-101-001). Department of Social Services COUNTY ADMINISTRATION OF WELFARE PROGRAMS Item 5180-141 from the General Fund and Federal Trust Fund Budget p. HW 154 Requested 1986-87 ……………………………………………………………….. $133,848,000 Estimated 1985-86…………………………………………………………………. 129,181,000 Actual 1984-85 ………………………………………………………………………. 122,627,000 Requested increase $4,667,000 (+3.6 percent) Total recommended reduction …………………………………………… . Recommendation pending ………………………………………………….. . 198\u00a3Hl7 FUNDING BY ITEM AND SOURCE None 999,000 Item-Description 5180-141-001-County Administration 5180-141-890-County Administration Fund General Federal Amount $133,848,000 (394,294,000) SUMMARY OF MAJOR ISSUES AND RECOMMENDATIONS 1. Productivity Targets. Recommend that the Legislature adopt Budget Bill language requiring the Departments of Social Services (DSS) and Health Services, in conjunction with the County Welfare Director’s Association, to establish productivity standards for the AFDC, Food Stamps’ and Medi-Cal programs based on a \”model\” county methodolo- gy. AnalYSis page 955 Item 5180 HEALTH AND WELFARE \/ 951 2. Overpayment Collections Report. Recommend that the 958 Legislature adopt Budget Bill language allocating $122,000 from the General Fund to counties to cover their costs of preparing an overpayment collection report, only after the Director of Finance has certified that the DSS has taken appropriate action to ensure that the counties will report accurately and on a timely basis. 3. Statewide Automated Welfare System (SAWS). With- 959 hold recommendation on $2,244,000 ($999,000 General Fund and $1,245,000 federal funds) proposed for the SAWS project, pending receipt of the annual SAWS progress re- port. GENERAL PROGRAM STATEMENT This item contains the General Fund appropriation for the state’s share of costs incurred by the counties in administering (1) the Aid to Families with Dependent Children (AFDC) program, (2) the Food Stamp pro- gram, and (3) special benefits for aged, blind, and disabled recipients. It also funds costs of training county eligibility and non service staff. In addi- tion, this item identifies the federal and county costs of administering child support enforcement and cash assistance programs for refugees. OVERVIEW OF THE BUDGET REQUEST The budget proposes an appropriation of $133,848,000 from the General Fund as the state’s share of the costs that counties will incur in administer- ing welfare programs during 1986-87. This is an increase of $4,667,000, or 3.6 percent, over estimated current-year General Fund expenditures for this purpose. The $~33.8 million includes $6,106,000 to fund the increased General Fund costs resulting from the estimated 4.8 percent cost-of-living adjustment (COLA) granted by the counties to their employees during 1985-86. In accordance with the policy established by the Legislature in recent budget acts, during 1986-87 counties will pay for any COLAs that they grant their employees in the budget year using county and federal funds. The state will fund its share of these costs starting in 1987-88. The budget proposes total expenditures of $714,059,000 for county ad- ministration of welfare programs during 1986-87, as shown in Table 1. This is an increase of $28,226,000, or 4 percent, over estimated current-year expenditures. Proposed General Fund Changes Table 2 displays the adjustments to General Fund expenditures for cou~ty administration proposed for 1986-87. The net increase of $4,667,- 000, III large part, reflects the $6,106,000 needed to fund the estimated 4.8 percent retroactive COLA, partially offset by the elimination of one-time administrative costs in 1985-86 associated with a variety of court cases ($2,523,000) . 31-80960 Table 1 Expenditures for County Welfare Department Administration 1984–85 through 1981H17 (in thousands) Actllul1984-85 Estimuted 198~6 Pro\/losed 1986-87 Progrum Stute Federul COlln(I’ Totul Stute Federul COllnty Totul Stute Fedeml COllnty AFDC administration ……………. $95,536 $207,823 $108,786 $412,145 $99,942 $212,968 $109,418 $422,328 $102,807 $224,372 $114,749 Nonassistance Food Stamps …. 23,257 57,098 27,329 107,684 25,012 60,837 27,859 113,708 26,854 66,982 29,617 Child Support Enforcement …. 92,119 30,723 122,842 92,542 39,661 132,203 92,542 39,661 a. Welfare ………………………….. (68,703) (22,917) (91,620) (68,696) (29,442) (98,138) (68,696) (29,442) b. :..;onwelfare …………………….. (23,416) (7,806) (32,222) (23,846) (fO,219) (34,065) (23,846) (10,219) Special Adult programs ………… 2,295 52 2,347 2,494 60 2,554 2,555 109 Refugee cash assistance ………… 5,774 5,774 7,028 7,028 6,850 Staff development …………………. 1,524 3,333 1,738 6,595 1,611 3,538 1,781 6,930 1,611 3,538 1,781 Adoption assistance ……………….. 15 7 22 22 10 32 21 10 — — — — — Subtotals ……………………………… $122,627. $366,154 $168,628 $657,409 $129,081 $376,923 $178,779 $684,783 $133,848 $394,294 $185,917 Local mandates …………………….. (291) (-291) (291) (-291) Employment programs\” ………. 100 900 1,000 Totals. ………………………………….. $122,627 $366,154 $168;628 $657,409 $129,181 $377,823 -. $178,779 $685,783 $133,848 _$394,294 $185,917 \”Funds to-support employment programs in 1986-87 are budgeted under Items 5180-151-001 and 5180-151-890, social services programs. TotuJ. $441,928 123,453 132,203 (98,138) (34,065) 2,664 6,850 1,781 31 _ $714,059 $714,059 n o c z …. ~ \u00bb CI ~ z 5 ;;a- ~ o z o ‘TI :e m …. ‘TI \u00bb ;;a m .\” ;;a o Ci) ;;a \u00bb ~ ~ o ~ .. :i\” c CD A. CD U’I N ……. :I: tI:: > tl :I: > Z o ~ tIl r’ >r: > ~ tIl …… ….. (1) 8 Cil …- ~ Item 5180 HEALTH AND WELFARE \/ 953 Table 2 County Administration of Welfare Programs General Fund Changes Proposed for 198&-37 (dollars in thousands) Cost 1985-86 Expenditures (Revised) ……………………………………………………………. .. A. Adjustments to Ongoing Costs 1. AFDC Administration a. Basic Costs …………………………………………………………………………………. .. $668 b. Court Cases ………………………………………………………………………………. . -2,523 c. Fraud Detection Savings ………………………………………………………….. .. -186 d. Employment Programs Transfer ……………………………………………. .. -201 e. Other ………………………………………………………………………………………… .. 75 Subtotal ……………………………………………………………………………………. . 2. Nonassistance Food Stamps a. Basic Costs ………………………………………………………………………………….. . 56 b. Other …………………………………………………………………………………………. . -33 Subtotal …………………………………………………………………………………… .. 3. Other Programs ……………………………………………………………………………. .. B. New Costs 1. SAWS a. AFDC ………………………………………………………………………………………… .. 169 b. Nonassistance Food Stamps …………………………………………………….. .. 576 Subtotal ……………………………………………………………………………………. . 2. Retroactive COLA (4.8%) \” a. AFDC ………………………………………………………………………………………… .. 4,863 b. Nonassistance Food Stamps …………………………………………………….. .. ~ Subtotal ……………………………………………………………………………………. . 1986-87 Expenditures (Proposed) ………………………………………………………… .. Change from 1985-86: Amount ………………………………………………………………………………………….. .. Percent …………………………………………………………………………………………… . Total $129,181 -$2,167 $23 -$40 $745 $6,106 $133,848 $4,667 3.6% a This reflects the 1986-87 General Fund costs of the estimated 4.8 percent cost\u00b7of-Iiving increase granted by counties to their employees in 1985–86. COST CONTROL MEASURES IN COUNTY ADMINISTRATION The Department of Social Services (DSS) allocates funds to counties for the administration of welfare programs using a formula that considers a number of factors, including (1) caseload, (2) productivity targets for eligibility workers, (3) the existing salary structure in each county, (4) allowable cost-of-living increases, and (5) allocated support (overhead) costs. One of the primary objectives of this formula is to control the growth in state-funded county costs for administering welfare programs. The department calculates the county’s allocation of funds for adminis- trative costs in the following way. First, it determines the productivity targets (the number of cases to be handled by an eligibility worker) and supervisory ratios for the county. The cost control plan requires counties to meet the average of the productivity standards achieved by counties having a similar caseload during a specific base year, or their own perform- ance during the base year if it was above average. Second, the department determines the allowable salary costs per worker. Third, the department calculates total administration costs by multiplying the DSS May estimates of caseloads in AFDC and food stamps by the average cost per case, which is derived from the productivity target and average salary costs. Several other adjustments are made in order to fund overhead costs, fraud investi- gation activities, and other special items. 954 \/ HEALTH AND WELFARE Item 5180 COUNTY ADMINISTRATION OF WELFARE PROGRAMS-Continued The state’s share of these costs is approximately 25 percent of the total. The counties are notified of their allocation early in the budget year. The amount actually paid to a county is determined by adjusting the allocation for actual caseload during the year. Current Productivity Targets The cost control plan specifies productivity targets that provide a basis for limiting allocations to counties. Currently, the base years used to set these targets are 1980-81 for AFDC administration and 1979~0 for Food Stamp administration. Proposed Evaluation of Cost Control System The 1985 Budget Act required the DSS and the Department of Health Services (DHS) to submit to the Chairman of the Joint Legislative Budget Committee (JLBC) , by October 1, 1985, a plan for conducting a study of the eligibility determination process under the AFDC, Food Stamps, and Medi-Cal programs. The Budget Act specified that the study should be designed to determine the appropriate productivity targets for these pro- grams. It also prohibited the DSS from changing the productivity targets for the AFDC and Food Stamps programs until the study is completed. The Budget Act, however, required the DHS to update the base year used to set Medi-Cal productivity targets for 1986-87. (We discuss the Medi-Cal target update in our analysis of Item 4260-lO6-001). The departments submitted their study plan to the JLBC in January 1986. The plan calls for reviewing three aspects of the current cost control plan over a period of at least two to three years. Specifically, the plan sets out the following schedule for the study. Alternative Approaches to Grouping Counties According to Caseload Size. Under the proposed plan, the two departments and the County Welfare Director’s Association would review the current method used to group counties based on caseload size and set average productivity targets for each group. Currently, the counties are grouped into four categories based on caseload size for the purposes of setting productivity targets. The proposed study would consider such alternatives as groupings based on level of automation and geography. The department believes it can com- plete this portion of the study during 1986-87, using available resources. Alternative Approaches to Budgeting Support Costs. This part of the study would consider changes to the way the department budgets for support (\”overhead\”) costs. Currently, DSS reviews, on a case-by-case baSis, county requests to increase their total support costs. Overhead costs are allocated to each program based on the ratio of each program’s line- worker costs to total line-worker costs within the welfare department. The proposed study would consider such alternatives as using targets for coun- ties’ support-to-line staff ratios and direct billing of some support costs. The department believes it can complete this portion of the study during 1986-87, using available resources. Evaluation of Current Productivity Targets. The two departments propose a two-step approach to evaluating the productivity targets. The first step would be to contract with an independent contractor, to provide (1) a list of the methodologies that could be used to evaluate the targets and (2) the costs, benefits, and time frames associated with each me- thodology. The second step would be to select one of the methodologies identified in the preliminary study and to conduct the actual productivity target study. The departments advise that the contract for the preliminary Item 5180 HEALTH AND WELFARE \/ 955 study would cost $50,000 and that the study could be completed by April 1987. (The DSS proposes to absorb the costs of the contract within the amounts budgeted for 1986-87.) The costs and time frames for the actual study of the targets would depend on the methodology selected. We believe that the department’s proposal to study the way counties are grouped for the purpose of setting productivity targets and to consider alternative ways of budgeting for overhead costs could improve the cur- rent cost control plan. This would be true to the extent that these studies identify ways of making the plan more reflective of the actual costs that counties incur to administer welfare programs. Moreover, these studies could be completed on a timely basis. Therefore, we recommend that the Legislature approve these elements of the department’s proposal. Proposed Evaluation of Productivity Targets Would Unnecessarily Delay Needed Improvements to System We have two major concerns regarding the department’s proposal for evaluating the current productivity targets. First, the scope and cost of the evaluation are unknown. Both would depend on the results of the me- thodology study to be completed by an independent contractor. Second, it is unlikely that the evaluation itself would be completed in time to use the results in budgeting for the 1987-88 fiscal year. In fact, the DSS advises that, depending on the methodology selected, the evaluation could take several years to complete. It is important that the evaluation be completed as soon as possible for two reasons: Potential Savings. The Budget Act prohibits any change in pro- ductivity targets until after the study has been completed. This means that under the department’s plan, it could be several years before the targets are adjusted. As we have noted above, the targets for AFDC are based on actual performance in 1980-81, and the targets for Food Stamps are based on performance in 1979-80. In recent years, there have been major changes in the complexity of the cases that counties process and in the extent to which counties rely on computers to perform major components of the eligibility determination and bene- fit issuance process. To the extent that county productivity has im- proved as a result of these, or other changes, updating the targets could result in major savings to the state . SA WS. If the Statewide Automated Welfare System (SAWS) project meets its schedule for enhancing counties’ computer systems, it will have a major impact on county productivity during the next several years. For example, the automated eligibility determination component of SAWS, if it is implemented according to the current schedule, could dramatically increase productivity in the next few years. Should this occur, the department’s proposed evaluation of the current productivity targets might well be out-of-date before it is even published. We believe that the two departments could evaluate the current pro- ductivity targets during 1986-87, by using a methodology described in the 1985 Budget Act. Improvements in Productivity Targets are Possible, Within Reasonable Timeframes We recommend that the Legislature adopt Budget Bill language direct- ing the DSS and the DHS, in conjunction with the County Welfare Direc- 956 \/ HEALTH AND WELFARE Item 5180 COUNTY ADMINISTRATION OF WELFARE PROGRAMS-Continued tor’s Association, to use a \”model\” county methodology to evaluate the current productivity targets for the AFDC, Food Stamps, and Medi-Cal programs. We further recommend that the departments report to the Chairman of the Joint Legislative Budget Committee, by December 1, 1986, on their progress in using this methodology to establish productivity targets for 1987-88. The 1985 Budget Act required that any methodology for evaluating the productivity targets address the effect of the targets on program perform- ance. (The Budget Act stated that program performance should be meas- ured by the rates of overpayment and underpayment of program benefits and the waiting times and processing delays experienced by clients.) In our view, the effect of the targets on program performance is the critical, perhaps the only issue to consider when setting the targets. We believe that the \”correct\” target for any county is that target which is consistent with the sound operation of the program. Obviously, the Legislature wants to provide counties with adequate resources to operate welfare programs with minimal errors in the amounts paid for benefits and with minimal delays for the recipients. On the other hand, we know of no reason that the Legislature would want to pay counties any more to operate the programs than they need in order to do a good job. Given this objective, the issue facing the Legislature with respect to the current productivity targets is technical-how should the department identify the highest productivity standard that is consistent with the sound operation of welfare programs? Table 3 Productivity, Error Rates, and Processing Delays for the Twelve Largest Counties 1984-85 Eligibility Worker Cilseloads a Alameda …………………………………………………………………………………. 105.8 Contra Costa ………………………………………………………………………….. 85.5 Fresno …………………………………………………………………………………….. 123.8 Los Angeles ……………………………………………………………………………. 110.4 Orange…………………………………………………………………………………….. 80.8 Riverside …………………………………………………………………………………. 102.8 Sacramento……………………………………………………………………………… 93.5 San Bernadino ………………………………………………………………………… 95:7 San Diego ……………………………………………………………………………….. 91.4 San Francisco………………………………………………………………………….. 98.7 San J oaquin……………………………………………………………………………… 113.9 Santa Clara ……………………………………………………………………………… 89.0 Twelve county average…………………………………………………… 99.3 Average of the three \”model\”‘ counties ………………………… 109.0 Error Percent of Cases Rlltes hOver 45 Days <\" 3.6% 13.0% 2.3 4.9 2.4 8.2 2.4 0.5 2.6 2.8 2.2 0.8 2.5 0.0 2.2 0.4 3.7 4.7 5.4 0.2 1.1 1.0 1.5 11.0 2.6% 1.9% 0.4% 0.8% a Figures reflect the weighted average number of intake and continuing cases processed by AFDC eligibility workers and first-line supervisors during 1984-85. h Figures reflect the simple average of the percentage of benefit overpayments in the April 1984 through September 1984, and October 1984 through March 1985, quality control samples. Underpayment errors were not available on a county-by-county basis at the time this analysis was prepared. ,. Figures reflect the simple average of the percentages of cases that were not processed within 45 days during the March 1984 and June 1984 quarters. --- -- ._ .. _- _. --.-- Item 5180 HEALTH AND WELFARE \/ 957 The Budget Act language which requires the evaluation suggests a way to do this. Specifically, it suggests that one option available for evaluating the productivity targets is to use a peer grouping approach in which counties with exceptionally high error rates or long processing delays are excluded from the sample used to establish the targets. We analyzed the AFDC eligibilty worker caseloads, error rates, and processing delays of the state's 12 largest caseload counties during 1984-85 (the most recent period for which this data was available) . Table 3 displays the data used in this analysis. As the table shows, 3 of the 12 counties-Los Angeles, Riverside, and San Joaquin-combined high productivity with exemplary program performance. The average productivity of these three \"model\" counties is 109.0 cases per worker, which is about 10 percent higher than the average for the remaining counties. We refer to these counties as \"model\" counties be- cause they represent the ideal combination of high productivity and solid program performance. Their productivity, therefore, could be used as a standard for the other large counties. It is noteworthy that the average productivity of the 12 large counties in 1980-81 (the base year used for the current productivity targets) was 92.6 cases per worker. Thus a target of 109 cases per worker would represent a 17.7 percent increase over the current target. Before requiring the other nine large counties to move toward this level of pro