Legislative Analyst Office Reports on AFDC & CalWORKs State Budgets

Document SFY 2023-24 Budget CalWORKs

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pdf SFY 2023-2024 Disproportionalities in CWS

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SFY 2023-2024 – Disproportionalities-in-CWS.pdf

pdf SFY 2023-2024 Child Support Program Proposals

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SFY 2023-2024 Child-Support-Program-Proposals.pdf

pdf SFY 2023-2024 Child Care Proposals

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SFY 2023-2024 Child-Care-Proposals.pdf

pdf SFY 2023-2024 Child Care Preschool Overview

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pdf SFY 2023-2024 CalWORKS Demographic Take Up Rates

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SFY 2023-2024 CalWORKS-Demographic-Take-Up-Rates.pdf

pdf SFY 2023 CalWORKS Demographic Take Up Rates

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pdf SFY 2021-2022 Nutrition Programs

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SFY 2021-2022 Nutrition-Programs.pdf

pdf SFY 2021-2022 Nutrition Access Programs

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SFY 2021-2022 Nutrition-Access-Programs.pdf

pdf SFY 2021-2022 CalWORKs Proposals

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SFY 2021-2022-CalWORKs-Proposals.pdf

pdf SFY 2021-2022 CalWORKs Outlook

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SFY 2021-2022 CalWORKs-Outlook.pdf

pdf SFY 2021-2022 Analysis Child Welfare Proposals

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SFY 2021-2022 Analysis-Child-Welfare-Proposals-021121.pdf

pdf SFY 2020-2021 May Revision Human Services Proposals

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SFY 2020-2021 May-Revision-Human-Services-Proposals.pdf

Document SFY 2020-2021 Estimating the CalWORKs Take Up Rate

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SFY 2020-2021 -Estimating the CalWORKs Take-Up Rate.docx

pdf SFY 2020-2021 DSS Budget

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SFY 2020-2021 DSS Budget.pdf

pdf SFY 2020-2021 CDSS Budget

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SFY 2020-2021 CDSS Budget.pdf

pdf SFY 2019-2020 California’s Homelessness Challenges in Context

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SFY 2019-2020 California’s-Homelessness-Challenges-in-Context.pdf

pdf 2021-22 Budget SSI SSP Programs

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2021-22 Budget-SSI-SSP-Programs.pdf

pdf 2021-22 Budget IHSS

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2021-22 Budget-IHSS (1).pdf

pdf 2021-22 Budget DCSS

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2021-22 Budget-DCSS.pdf

pdf 2021-2022 CalWORKs Outlook

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2021-2022 CalWORKs-Outlook.pdf

pdf 2019-2020 Department of Social Sevices Budget – LAO Report

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2019-2020 Department of Social Sevices Budget – LAO Report.pdf

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pdf 2018-2019 CalWORKs/CalFresh/Food Stamps/IHSS/SSI-SSP Budget LAO Analysis

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2018-19-HHS-Analysis-021618.pdf

” 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 ”

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” 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) ”

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2016-2017 CalWORKs Budget LAO.pdf

” 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]

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” 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 ”

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” 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 ”

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” 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 enrol