CSA
Summary
Read the report at California State Auditor ↗
Implementation of
State Auditor’s
Recommendations
Audits Released in January 2002
Through December 2003
Special Report to
Assembly and Senate
Standing/Policy Committees
February 2004
Report No. 2004-406
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February 25, 2004 2004-406
The Governor of California
Members of the Legislature
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
The Bureau of State Audits presents its special report for the legislative standing/policy committees,
which summarizes audits and investigations we issued during the previous two years. The report includes
the major findings and recommendations, along with the corrective actions auditees reportedly have
taken to implement our recommendations. This special report also includes an appendix that compiles
recommendations that warrant legislative consideration and an appendix that summarizes monetary
benefits auditees could realize if they implement our recommendations.
This information is also available in nine special reports specifically tailored for each Assembly and Senate
budget subcommittee. These nine special reports are available on our Web site at www.bsa.ca.gov/bsa/
reports/subcom2004-budget.html. Finally, we notify auditees of the release of these special reports.
Our audit efforts bring the greatest returns when the auditee acts upon our findings and recommendations.
This report is one vehicle to ensure that the State’s policy makers and managers are aware of the status of
corrective action agencies and departments report they have taken. Further, we believe the State’s budget
process is a good opportunity for the Legislature to explore these issues and, to the extent necessary,
reinforce the need for corrective action.
Respectfully Submitted,
ELAINE M. HOWLE
State Auditor
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TABLE OF CONTENTS
General Policy Areas of the
Assembly and Senate
Introduction 1
Aging and Long-Term Care
Report Number 2002-120, California Veterans Board:
Without a Clear Understanding of the Extent of Its Authority,
the Board Has Not Created Sufficient Policies Nor Provided
Effective Oversight to the Department of Veterans Affairs 3
Agriculture and Water Resources
Report Number 2000-016, Water Replenishment District
of Southern California: Although the District Has Eliminated
Excessive Water Rates, It Has Depleted Its Reserve Funds and
Needs to Further Improve Its Administrative Practices 9
Report Number 2001-017, Department of Industrial
Relations: Its Process for Verifying the Status of Licenses
Issued to Farm Labor Contractors Is Operational but
Needs Some Improvement 25
Report Number 2002-009, California Energy Markets:
The State’s Position Has Improved, Due to Efforts by
the Department of Water Resources and Other Factors,
but Cost Issues and Legal Challenges Continue 29
Report Number 2003-102, Water Quality Control Boards:
Could Improve Their Administration of Water Quality
Improvement Projects Funded by Enforcement Actions 39
Appropriations
Report Number 2001-117, Superior Courts: The Courts
Are Moving Toward a More Unified Administration; However,
Diverse Service, Collection, and Accounting Systems Impede
the Accurate Estimation and Equitable Distribution of
Undesignated Fee Revenue 45
Report Number 2001-110, Vacant Positions: Departments
Have Circumvented the Abolishment of Vacant Positions, and
the State Needs to Continue Its Efforts to Control Vacancies 49
Report Number 2002-124, Franchise Tax Board: Its
Performance Measures Are Insufficient to Justify Requests
for New Audit or Collection Program Staff 57
Report Number 2002-123.2, Federal Funds: The State
of California Takes Advantage of Available Federal Grants,
but Budget Constraints and Other Issues Keep It From
Maximizing This Resource 67
Report Number 2003-106, State Mandates: The High
Level of Questionable Costs Claimed Highlights the Need
for Structural Reforms of the Process 75
Report Number 2003-107, California Department of
Education: The Extensive Number and Breadth of
Categorical Programs Challenges the State’s Ability
to Reform and Oversee Them 85
Business and Professions and Governmental Organization
Report Number 2001-111.2, California National Guard:
To Better Respond to State Emergencies and Disasters, It
Can Improve Its Aviation Maintenance and Its Processes
of Preparing for and Assessing State Missions 99
Report Number 2001-128, Enterprise Licensing
Agreement: The State Failed to Exercise Due Diligence
When Contracting With Oracle, Potentially Costing
Taxpayers Millions of Dollars 107
Report Number I2002-1, Contractors State License
Board: Investigations of Improper Activities by State Employees
(Allegation I2000-753) 115
Report Number 2002-107, Office of Criminal Justice
Planning: Experiences Problems in Program Administration,
and Alternative Administrative Structures for the Domestic
Violence Program Might Improve Program Delivery 119
Report Number 2002-108, Department of General
Services: Certain Units Can Do More to Ensure That Client
Fees Are Reasonable and Fair 131
Report Number 2002-110, California State University:
Its Common Management System Has Higher Than Reported
Costs, Less Than Optimal Functionality, and Questionable
Procurement and Conflict-of-Interest Practices 137
Report Number 2002-112, Statewide Procurement
Practices: Proposed Reforms Should Help Safeguard
State Resources, but the Potential for Misuse Remains 153
Report Number I2003-1, Health and Human Services
Agency Data Center: Investigations of Improper Activities
by State Employees (Allegation I2002-652) 167
Report Number 2002-122, State Controller’s Office: Does
Not Always Ensure the Safekeeping, Prompt Distribution, and
Collection of Unclaimed Property 169
Report Number 2002-113, Governor’s Office of Emergency
Services: Its Oversight of the State’s Emergency Plans and
Procedures Needs Improvement While Its Future Ability to
Respond to Emergencies May Be Hampered by Aging
Equipment and Funding Concerns 181
Report Number 2002-117, Terrorism Readiness:
The Office of Homeland Security, Governor’s Office of
Emergency Services, and California National Guard
Need to Improve Their Readiness to Address Terrorism 189
Report Number 2003-105, California Law Enforcement
and Correctional Agencies: With Increased Efforts, They
Could Improve the Accuracy and Completeness of Public
Information on Sex Offenders 197
Report Number I2003-2, University of California,
San Francisco: Investigations of Improper Activities by
State Employees (Allegation I2000-715) 207
Education
Report Number 2001-120, School Bus Safety II:
State Law Intended to Make School Bus Transportation
Safer Is Costing More Than Expected 211
Report Number 2001-124, Los Angeles Unified School
District: Outdated, Scarce Textbooks at Some Schools Appear
to Have a Lesser Effect on Academic Performance Than Other
Factors, but the District Should Improve Its Management of
Textbook Purchasing and Inventory 217
Report Number 2001-130, University of California: Its
Partnership Agreement Could Be Improved to Increase Its
Accountability for State Funding 229
Report Number 2002-104, California’s Charter Schools:
Oversight at All Levels Could Be Stronger to Ensure Charter
Schools’ Accountability 237
Report Number 2002-110, California State University: Its
Common Management System Has Higher Than Reported Costs,
Less Than Optimal Functionality, and Questionable Procurement
and Conflict-of-Interest Practices (see summary on page 137)
Report Number 2003-107, California Department of
Education: The Extensive Number and Breadth of
Categorical Programs Challenges the State’s Ability
to Reform and Oversee Them (see summary on page 85)
Report Number 2002-032, California’s Education
Institutions: A Lack of Guidance Results in Their Inaccurate
or Inconsistent Reporting of Campus Crime Statistics 251
Energy, Utilities, and Communications
Report Number 2001-123, Deaf and Disabled
Telecommunications Program: Insufficient Monitoring of
Surcharge Revenues Combined With Imprudent Use of Public
Funds Leave Less Money Available for Program Services 257
Report Number 2002-009, California Energy Markets: The
State’s Position Has Improved Due to Efforts by the Department
of Water Resources and Other Factors, but Cost Issues and
Legal Challenges Continue (see summary on page 29)
Report Number 2003-103, California Public Utilities
Commission: State Law and Regulations Establish Firm
Deadlines for Only a Small Number of Its Proceedings 267
Environmental Safety and Quality and Toxic Materials
Report Number 2002-121, California Environmental
Protection Agency: Insufficient Data Exists on the Number
of Abandoned, Idled, or Underused Contaminated Properties,
and Liability Concerns and Funding Constraints Can Impede
Their Cleanup and Redevelopment 275
Report Number 2003-113, California Integrated Waste
Management Board: Its New Regulations Establish Rules for
Oversight of Construction and Demolition Debris Sites, but Good
Communication and Enforcement Are Also Needed to Help
Prevent Threats to Public Health and Safety 279
Report Number 2003-102, Water Quality Control Boards:
Could Improve Their Administration of Water Quality
Improvement Projects Funded by Enforcement Actions
(see summary on page 39)
Health and Human Services
Report Number 2001-012, State of California: Its Containment
of Drug Costs and Management of Medications for Adult
Inmates Continue to Require Significant Improvements 289
Report Number 2001-129, Department of Health Services:
It Needs to Significantly Improve Its Management of the
Medi-Cal Provider Enrollment Process 297
Report Number 2001-126, Department of Managed Health
Care: Assessments for Specialized and Full-Service HMOs Do
Not Reflect Its Workload and Have Disparate Financial Impacts 305
Report Number 2001-123, Deaf and Disabled
Telecommunications Program: Insufficient Monitoring of
Surcharge Revenues Combined With Imprudent Use of Public
Funds Leave Less Money Available for Program Services
(see summary on page 257)
Report Number 2002-031, Department of Rehabilitation:
Its Delay in Correcting Known Weaknesses Has Limited the
Success of the Business Enterprise Program for the Blind 309
Report Number 2002-107, Office of Criminal Justice Planning:
Experiences Problems in Program Administration, and Alternative
Administrative Structures for the Domestic Violence Program Might
Improve Program Delivery (see summary on page 119)
Report Number 2002-109, Department of Health Services: It
Needs to Better Control the Pricing of Durable Medical Equipment
and Medical Supplies and More Carefully Consider Its Plans to
Reduce Expenditures on These Items 317
Report Number 2001-015, Statewide Fingerprint Imaging
System: The State Must Weigh Factors Other Than Need and
Cost-Effectiveness When Determining Future Funding for
the System 325
Report Number 2002-118, Department of Health Services:
Its Efforts to Further Reduce Prescription Drug Costs Have Been
Hindered by Its Inability to Hire More Pharmacists and Its Lack
of Aggressiveness in Pursuing Available Cost-Saving Measures 335
Report Number 2002-114, Department of Social Services:
Continuing Weaknesses in the Department’s Community Care
Licensing Programs May Put the Health and Safety of Vulnerable
Clients at Risk 355
Report Number 2003-113, California Integrated Waste
Management Board: Its New Regulations Establish Rules for
Oversight of Construction and Demolition Debris Sites, but Good
Communication and Enforcement Are Also Needed to Help Prevent
Threats to Public Health and Safety (see summary on page 279)
Report Number 2003-112, Department of Health Services:
It Needs to Better Plan and Coordinate Its Medi-Cal
Antifraud Activities 369
Information Technology
Report Number 2001-128, Enterprise Licensing Agreement:
The State Failed to Exercise Due Diligence When Contracting
With Oracle, Potentially Costing Taxpayers Millions of Dollars
(see summary on page 107)
Report Number 2002-110, California State University: Its
Common Management System Has Higher Than Reported Costs,
Less Than Optimal Functionality, and Questionable Procurement
and Conflict-of-Interest Practices (see summary on page 137)
Insurance
Report Number 2001-126, Department of Managed Health
Care: Assessments for Specialized and Full-Service HMOs Do
Not Reflect Its Workload and Have Disparate Financial Impacts
(see summary on page 305)
Report Number 2002-120, California Veterans Board: Without
a Clear Understanding of the Extent of Its Authority, the Board Has
Not Created Sufficient Policies Nor Provided Effective Oversight to the
Department of Veterans Affairs (see summary on page 3)
Jobs, Economic Development, and the Economy
Report Number 2002-031, Department of Rehabilitation:
Its Delay in Correcting Known Weaknesses Has Limited the
Success of the Business Enterprise Program for the Blind
(see summary on page 309)
Report Number 2002-009, California Energy Markets: The
State’s Position Has Improved, Due to Efforts by the Department
of Water Resources and Other Factors, but Costs Issue and Legal
Challenges Continue (see summary on page 29)
Report Number 2003-108.1, California’s Workers’
Compensation Program: The Medical Payment System
Does Not Adequately Control the Costs to Employers to Treat
Injured Workers or Allow for Adequate Monitoring of System
Costs and Patient Care 383
Judiciary
Report Number 2001-117, Superior Courts: The Courts
Are Moving Toward a More Unified Administration; However,
Diverse Service, Collection, and Accounting Systems Impede
the Accurate Estimation and Equitable Distribution of
Undesignated Fee Revenue (see summary on page 45)
Report Number 2002-030, State Bar of California:
Although It Reasonably Sets and Manages Mandatory
Fees, It Faces Potential Deficits in the Future and Needs to
More Strictly Enforce Disciplinary Policies and Procedures 395
Labor, Employment, and Industrial Relations
Report Number 2001-017, Department of Industrial
Relations: Its Process for Verifying the Status of Licenses
Issued to Farm Labor Contractors Is Operational but Needs
Some Improvement (see summary on page 25)
Report Number 2002-114, Department of Social Services:
Continuing Weaknesses in the Department’s Community Care
Licensing Programs May Put the Health and Safety of Vulnerable
Clients at Risk (see summary on page 355)
Report Number 2003-108.1, California’s Workers’
Compensation Program: The Medical Payment System Does
Not Adequately Control the Costs to Employers to Treat Injured
Workers or Allow for Adequate Monitoring of System Costs and
Patient Care (see summary on page 383)
Local Government
Report Number 2001-120, School Bus Safety II: State Law
Intended to Make School Bus Transportation Safer Is Costing
More Than Expected (see summary on page 211)
Report Number 2001-116, San Diego Unified Port District:
It Should Change Certain Practices to Better Protect the
Public’s Interest in Port-Managed Resources 401
Report Number 2000-016, Water Replenishment District
of Southern California: Although the District Has Eliminated
Excessive Water Rates, It Has Depleted Its Reserve Funds and
Needs to Further Improve Its Administrative Practices
(see summary on page 9)
Report Number 2001-124, Los Angeles Unified School
District: Outdated, Scarce Textbooks at Some Schools Appear to
Have a Lesser Effect on Academic Performance Than Other Factors,
but the District Should Improve Its Management of Textbook
Purchasing and Inventory (see summary on page 217)
Report Number 2001-125, Red Light Camera Programs:
Although They Have Contributed to a Reduction in Accidents,
Operational Weaknesses Exist at the Local Level 407
Report Number 2003-106, State Mandates: The High Level
of Questionable Costs Claimed Highlights the Need for Structural
Reforms of the Process (see summary on page 75)
Report Number 2003-107, California Department of
Education: The Extensive Number and Breadth of Categorical
Programs Challenges the State’s Ability to Reform and Oversee
Them (see summary on page 85)
Report Number 2002-116, Los Angeles County
Metropolitan Transportation Authority: It Is Too Early to
Predict Service Sector Success, but Opportunities for Improved
Analysis and Communication Exist 419
Privacy and Public Safety
Report Number 2001-125, Red Light Camera Programs:
Although They Have Contributed to a Reduction in Accidents,
Operational Weaknesses Exist at the Local Level
(see summary on page 407)
Report Number 2002-101, California Department of
Corrections: A Shortage of Correctional Officers, Along With
Costly Labor Agreement Provisions, Raises Both Fiscal and Safety
Concerns and Limits Management’s Control 425
Report Number 2003-105, California Law Enforcement
and Correctional Agencies: With Increased Efforts, They Could
Improve the Accuracy and Completeness of Public Information on
Sex Offenders (see summary on page 197)
Public Employees, Retirement and Social Security
Report Number 2001-110, Vacant Positions: Departments
Have Circumvented the Abolishment of Vacant Positions, and
the State Needs to Continue Its Efforts to Control Vacancies
(see summary on page 49)
Report Number 2002-101, California Department of
Corrections: A Shortage of Correctional Officers, Along With Costly
Labor Agreement Provisions, Raises Both Fiscal and Safety Concerns
and Limits Management’s Control (see summary on page 425)
Report Number I2002-2, Governor’s Office of Emergency
Services: Investigations of Improper Activities by State Employees
(Allegation I2000-607) 431
Report Number I2003-1, Department of Industrial
Relations: Investigations of Improper Activities by State
Employees (Allegation I2002-605) 435
Report Number I2003-1, Health and Human Services
Agency Data Center: Investigations of Improper Activities
by State Employees (Allegation I2002-652) (see summary
on page 167)
Report Number I2003-1, Department of Developmental
Services, Porterville Developmental Center: Investigations
of Improper Activities by State Employees
(Allegation I2002-952) 439
Report Number I2003-1, Department of Fish and Game:
Investigations of Improper Activities by State Employees
(Allegations I2002-636, 725, and 947) 441
Report Number I2003-2, California Unemployment
Insurance Appeals Board: Investigations of Improper
Activities by State Employees (Allegation I2002-661) 445
Report Number I2003-2, Department of Transportation:
Investigations of Improper Activities by State Employees
(Allegation I2002-700) 449
Report Number I2003-2, Public Utilities Commission:
Investigations of Improper Activities by State Employees
(Allegation I2002-753) 451
Revenue and Taxation
Report Number 2002-124, Franchise Tax Board: Its
Performance Measures Are Insufficient to Justify Requests for New
Audit or Collection Program Staff (see summary on page 57)
Report Number 2002-122, State Controller’s Office: Does
Not Always Ensure the Safekeeping, Prompt Distribution, and
Collection of Unclaimed Property (see summary on page 169)
Report Number 2002-126, California Department of
Transportation: Low Cash Balances Threaten the Department’s
Ability to Promptly Deliver Planned Transportation Projects 455
Transportation
Report Number 2001-125, Red Light Camera Programs:
Although They Have Contributed to a Reduction in Accidents,
Operational Weaknesses Exist at the Local Level (see summary
on page 407)
Report Number 2002-103, California Department of
Transportation: It Manages the State Highway Operation and
Protection Program Adequately, but it Can Make Improvements 459
Report Number 2002-126, California Department of
Transportation: Low Cash Balances Threaten the Department’s
Ability to Promptly Deliver Planned Transportation Projects
(see summary on page 455)
Report Number 2002-116, Los Angeles County
Metropolitan Transportation Authority: It Is Too Early to
Predict Service Sector Success, but Opportunities for Improved
Analysis and Communication Exist (see summary on page 419)
Veterans Affairs
Report Number 2001-127, Disabled Veteran Business
Enterprise Program: Few Departments That Award Contracts
Have Met the Potentially Unreasonable Participation Goal, and
Weak Implementation of the Program Further Hampers Success 463
Report Number I2002-2, Veterans Home of California,
Yountville: Investigations of Improper Activities by State
Employees (Allegation I2000-876) 473
Report Number 2002-120, California Veterans Board:
Without a Clear Understanding of the Extent of Its Authority,
the Board Has Not Created Sufficient Policies Nor Provided
Effective Oversight to the Department of Veterans Affairs
(see summary on page 3)
Appendix A
Summary of Recommendations for Legislative Consideration
by Policy Area 475
Appendix B
Summary of Monetary Benefits Identified In Audit Reports
Released From July 1, 2001, Through December 31, 2003 483
Index
State and Local Entities With Recommendations From
Audits Included In This Special Report 487
INTRODUCTION
This report summarizes the major findings and
recommendations from audit and investigative reports
we issued from January 2002 through December 2003.
The purpose of this report is to identify what actions, if any,
these auditees have taken in response to our findings and
recommendations. We have placed this symbol Ü in the left-hand
margin of the auditee action to identify areas of concern or
issues that we believe an auditee has not adequately addressed.
Policy areas that generally correspond to the Assembly and
Senate standing committees organize this report. Under each
policy area we have included audit report summaries that relate
to an area’s jurisdiction. Because an audit may involve more than
one issue or because it may cross the jurisdictions of more
than one standing committee, an audit report summary could
be included in more than one policy area. For example, if we
audited a computer system at a university, the audit report
summary may be listed under two policy areas–Education and
Information Technology.
In Appendix A, we have compiled the recommendations we
directed to the Legislature. In Appendix B, we summarized
monetary benefits such as cost recoveries, cost savings, or
increased revenues that we estimate auditees could realize if they
implement our recommendations. For example, in our July 2002
report (2002-101) we estimated that the California Department
of Corrections could save $58 million if it reduces overtime
costs by filling unmet correctional officer needs. We have also
included an index referring to each entity that responded or
should have responded to audits included in this report.
For this report, we have relied upon periodic written responses
prepared by auditees to determine whether corrective action has
been taken. The Bureau of State Audits’ (bureau) policy requests
that auditees provide a written response to the audit findings
and recommendations before the audit report is initially issued
publicly. As a follow-up, we request the auditee to respond at
least three times subsequently: at 60 days, six months, and
one year after the public release of the audit report. However, we
may request an auditee provide a response beyond one year or
initiate a follow-up audit if deemed necessary.
California State Auditor Report 2004-406 1
We report all instances of substantiated improper governmental
activities resulting from our investigative activities to the
cognizant state department for corrective action. These
departments are required to report the status of their corrective
actions every 30 days until all such actions are complete.
Unless otherwise noted, we have not performed any type of
review or validation of the corrective actions reported by the
auditees. All corrective actions noted in this report were based
on responses received by our office as of February 2, 2004.
To obtain copies of the complete audit and investigative reports,
access the bureau’s Web site at www.bsa.ca.gov/bsa/ or contact
the bureau at (916) 445-0255 or TTY (916) 445-0033.
2 California State Auditor Report 2004-406
CALIFORNIA VETERANS BOARD
Without a Clear Understanding of the
Extent of Its Authority, the Board Has Not
Created Sufficient Policies Nor Provided
Effective Oversight to the Department of
Veterans Affairs
REPORT NUMBER 2002-120, JUNE 2003
Audit Highlights . . .
California Veterans Board’s response as of January 2004 and
Our review of the California the Department of Veterans Affairs’ response as of February 2004
Veterans Board (board)
revealed that: The Joint Legislative Audit Committee (audit committee)
þ The board has not requested that we review the California Veterans Board’s
established itself as an (board) oversight of the Department of Veterans Affairs
effective policy-maker for
(department). Specifically, the audit committee was concerned
the Department of Veterans
that the board may not always exercise independent oversight
Affairs (department).
and guidance of the department in a manner that would further
þ The board lacks the the department’s mission and goals. Additionally, the audit
independent counsel to
committee wanted to know the effectiveness of corrective
minimize the legal risks
of its policy-making and actions the department has taken on our recommendations from
appeals actions. previous audits.
þ The board’s appeal
process needs to ensure
Finding #1: The board is not an effective policy-maker for
that veterans’ appeals
the department.
are handled consistently
and appropriately.
Although state law gives the board considerable policy-making
þ The board’s effectiveness authority over the department, the board of seven volunteers
is hindered by its has established itself as an ineffective policy-maker, unable to
reduced membership
strengthen weaknesses in the department’s administration of
and lack of training on
veterans’ programs that the Bureau of State Audits (bureau) has
its responsibilities.
reported over the past three years. As an example of the board’s
Although the department has
inability to effect strong policy, only half of its 32 policies
implemented eight of the
provide direction for departmental operations. Further, although
14 recommendations that were
reviewed from our previous the bureau and other oversight agencies have identified a
audits, it has not given number of problems within the department, the board has no
sufficient attention to a key
clearly defined policies to guide and monitor the department’s
recommendation regarding
the long-term viability of the corrective actions. The board has also not used the services of
Cal-Vet program. the inspector general for veterans affairs (inspector general) to
review the department’s operations in areas where board policy
could improve the department’s delivery of services to veterans.
California State Auditor Report 2004-406 3
We recommended that the board assert its policy-making
authority by actively identifying areas of the department’s
operations that it feels need guidance or direction and
developing meaningful policies that provide the department
with the guiding principles necessary to complete its mission.
Using the issues raised in our previous audits and by the
inspector general would be a good start for the development of
specific policies.
We also recommended that the board monitor the department’s
corrective actions on external audits by establishing a policy
requiring the department to regularly report its progress in
implementing corrective actions and when needed, create
policies to guide the department’s corrective actions.
Board Action: Partial corrective action taken.
The board states that it is currently developing a board
training manual and researching training programs that will
encompass policy-making guidelines. The board believes that
these training efforts, along with the assistance of independent
counsel, will allow it to develop meaningful policies to provide
the department with guiding principles. In addition, the board
realizes that the corrective actions from external audits will
provide direction for the department’s goals and objectives. The
Ü
board has been working with the department to obtain funding
for independent counsel. However, on February 2, 2004,
the interim secretary for veterans’ affairs declined the
board’s request for independent counsel, indicating to
the board that balanced against the difficult fiscal challenges
that all Californians now face, it is his position that the
department’s attorneys are providing legal advice, counsel on
appeals, and aid to the board in a legally acceptable manner
consistent with the law and free of conflicts.
Finding #2: The board has no independent counsel to
provide legal advice on its responsibilities.
Despite the board’s important responsibilities for making
policy and ruling on veterans’ appeals of services that
the department has denied, the board does not have an
independent counsel it requires to minimize the legal risks
of its actions. Instead, the board relies on the department’s
legal staff for advice. Although they are probably
knowledgeable on these laws, the department’s legal staff
are not the appropriate advisors for the board on policies
4 California State Auditor Report 2004-406 California State Auditor Report 2004-406 5
under consideration because the board’s policies govern the
department. Further, the board’s rulings on veterans’ appeals
should have an independent and fair consideration of the
department’s actions and the veterans’ rights to services.
Currently, the board must rely on the department’s legal staff
for advice on appeals, a practice that introduces questions of
fairness and impartiality on appeal decisions.
We recommended that to improve the board’s ability to
independently make decisions on policies and appeals, and
to reduce the legal risk created by its present practices, the
board should establish a policy to obtain the services of an
independent counsel to assist with its policy-making and
appeal responsibilities.
Board Action: Partial corrective action taken.
The board indicates that it passed a policy citing the need
for independent counsel on July 18, 2003, and that as of
January 2004 a retired attorney sits on its select committee
Ü
on policies and procedures. However, as noted previously, on
February 2, 2004, the interim secretary for veterans’ affairs
declined the board’s request for independent counsel.
Finding #3: The board lacks formal written procedures for
conducting appeals in a fair and consistent manner.
Despite the board’s existence since 1946, it has no formal
written procedures outlining or detailing instructions for
processing appeals at an operational level. Further, the
board does not have a clear understanding of the type of
appeal procedures it should follow, which could result in the
board conducting a more formal hearing on an appeal than
is warranted or not giving veterans an adequate degree of
protection. Without a set of formalized procedures, the board
cannot ensure that its members have the same understanding
of how to conduct appeals, nor can it be certain that members’
actions are consistent. However, to give veterans the fair
treatment they deserve and expect, and to avoid legal risks, the
board must be able to process all veterans’ appeals consistently
and professionally. In addition, the board relies upon the
department’s chief counsel to preside over formal hearings on
appeals. However, as a member of the department’s management
team and potentially a participant in the decisions to deny
services, the chief counsel is not in a position to act in an
unbiased manner.
4 California State Auditor Report 2004-406 California State Auditor Report 2004-406 5
To ensure that the board consistently and fairly reviews
veterans’ appeals of services that the department has denied, we
recommended that the board should create a policy establishing
formal written procedures for conducting appeals. In addition,
to ensure that every veteran’s appeal is heard in the proper
forum, the board should acquire the expertise to determine
the appropriate type of hearing for each appeal. In addition, to
avoid the appearance of bias in its appeal decisions, the board
should discontinue having the department’s chief counsel
preside over formal hearings.
Board Action: Partial corrective action taken.
The board states that it is currently developing a training
manual that will include specific steps for reviewing and
conducting appeals. Further, to avoid the appearance of
partiality in the appeal process, the board was working
with the department to obtain the services of independent
Ü
counsel. However, as noted previously, on February 2, 2004,
the interim secretary for veterans’ affairs declined the board’s
request for independent counsel.
Finding #4: With a reduced membership, the board may lack
the expertise the Legislature intended and may be unable to
hold meetings.
The board’s effectiveness has been hindered over the past
few years because is has rarely comprised the seven members
authorized by the Military and Veterans Code. The governor
appoints board members and five board members must
have expertise in a particular area required by law. Without
these expert members, the board might be limited in its
understanding of departmental issues and veterans’ appeals.
Additionally, its reduced membership could prevent it from
meeting the quorum of four required by board policy to
conduct business.
To assist the governor in promptly appointing members to fill
both the current and future vacancies, we recommended that
the board proactively identify possible board members when
vacancies occur.
6 California State Auditor Report 2004-406 California State Auditor Report 2004-406 7
Board Action: Pending.
The board states that there are three vacancies on the board
as of January 15, 2004 and it is waiting for the Governor to
appoint new members. It currently receives calls from veterans
interested in joining the board, and redirects those veterans to
the Governor’s appointment office.
Finding #5: To be an effective oversight and policy-making
body, the board needs to adequately train its members.
Contributing to the board’s deficiencies as a policy-making
and oversight body is the fact that members receive no formal
training regarding the laws and regulations controlling veterans’
affairs; board policies, duties, and authority, including how to
conduct appeals; departmental operations; state laws regarding
open meetings; and state laws regarding the privacy of medical
information. Insufficient training may have caused the board
to violate state open-meeting laws and possibly resulted in two
instances of the board discussing veterans’ confidential medical
records in public board sessions.
To enable board members to perform their oversight functions
effectively, we recommended that the board provide ongoing
training to its members in topics related to their responsibilities.
Board Action: Partial corrective action taken.
The board states that it is currently developing a training
manual that will include areas on policy making, duties and
authority, the appeal process, department operations, state
laws regarding open meetings, and state laws regarding
the privacy of medical information. However, at this time the
board can only send board members to ethics training due to
budget constraints.
Finding #6: Despite implementing many recommendations we
made in previous audits, the department has not sufficiently
addressed an important issue for the Cal-Vet program.
The board’s weak policy-making deprives a problem-prone
department of needed assistance in improving on weaknesses
documented in reviews by the bureau and other oversight agencies.
6 California State Auditor Report 2004-406 California State Auditor Report 2004-406 7
Our follow-up on recommendations we made to the department in
two previous audits revealed that the department has implemented
eight of the 14 recommendations we could reasonably expect the
board to address. However, the department has not given sufficient
attention to a key recommendation regarding the long-term
viability of the Cal-Vet program, the department’s loan program
that helps veterans purchase farms or homes. As mentioned in
our previous audits, unless there is a change in federal tax laws,
fewer and fewer veterans will benefit from the Cal-Vet program
because federal tax restrictions have limited eligibility for loans
backed by the bonds that supply the majority of the program’s
funding. Despite two previous unsuccessful efforts, the department
is attempting to change federal tax laws to make more veterans
eligible for the Cal-Vet program. However, the department
has not performed sufficient contingency planning for the
potential reduction in the Cal-Vet program’s funding should its
efforts fail again.
To ensure effective and efficient operations, the department
should continue to address the recommendation of our prior
audits, especially the recommendations regarding the long-term
viability of the Cal-Vet program.
Department Action: Pending.
Although we anticipated that the department would respond
to this finding, the board submitted a response to us. The
board indicates that it will continue to address the bureau’s
concerns regarding the Cal-Vet program once it obtains
independent counsel.
8 California State Auditor Report 2004-406
WATER REPLENISHMENT DISTRICT OF
SOUTHERN CALIFORNIA
Although the District Has Eliminated
Excessive Water Rates, It Has Depleted
Its Reserve Funds and Needs to Further
Improve Its Administrative Practices
REPORT NUMBER 2000-016, MAY 2002
Water Replenishment District of Southern California’s
response as of October 2003
The Water Replenishment District of Southern California
(district) was established in 1959 to counteract the effects
Audit Highlights . . . of overpumping the groundwater in the West Coast and
Central basins (basins). The California Water Code (water code)
Although the Water grants the district broad powers to do what is necessary to replenish
Replenishment District of
and maintain the integrity of the basins. In December 1999 the
Southern California (district)
Bureau of State Audits (bureau) issued a report concluding that
has lowered its accumulated
reserve funds and assessment the district’s poor management had led to its charging those who
rate, it lacks a long-term pump groundwater an excessively high replenishment assessment
vision of its financing needs.
(assessment rate). Because that report raised significant issues, the
In addition, the district lacks
adequate planning for its Legislature amended the water code to ensure that the district
capital improvement projects implemented the bureau’s recommendations. The amendments
and adequate accounting
also required the bureau to perform this follow-up audit of the
and administrative controls
district’s operations and management.
over its operating expenses.
Specifically, our review
revealed that the district:
Finding #1: The district has significantly reduced its reserve
þ Lowered its reserve funds and stored groundwater quantities have declined.
funds from $67 million
in 1998 to a projected One of the bureau’s 1999 recommendations was that the district
balance of $6 million at
should reduce its reserve funds, which totaled $67 million
June 30, 2002, without
in 1998. The district responded by lowering its reserve funds
establishing a minimum
level of funds necessary to to a projected balance of slightly more than $6 million by
meet its responsibilities. June 30, 2002. We believe that this significant depletion may
pose a threat to the district’s ability to maintain the current
þ Has not identified an
optimum quantity of quantity of groundwater in the basins. The district uses its
groundwater to be stored reserve funds to ensure an adequate supply of groundwater, to
in the basins, although
stabilize its assessment rate, and to develop capital improvement
groundwater has dropped
projects that increase the reliable supply of clean groundwater in
by 110,000 acre-feet.
the basins. In spite of the current low level of reserve funds, the
continued on next page
district has not established a minimum level of funds necessary
for it to meet its responsibilities.
California State Auditor Report 2004-406 9
þ Does not adequately The district’s ability to build the reserves to pay for these needs
explain its calculation of may be complicated by legal constraints. Beginning in fiscal
the assessment rate.
year 2000–01, the water code limited the district’s reserve fund
þ Spent $19.9 million on balance to $10 million, an amount that the district may adjust
capital improvement in subsequent years to reflect changes in the annual cost of the
projects in the last two fiscal
district’s water purchases. In addition, the water code states that
years and has appropriated
the district must earmark at least 80 percent of its reserves for
$12 million more, even
though it does not have water purchases, leaving the remainder for all other purposes.
current strategic and capital Because the district has not analyzed its other needs for reserve
improvement plans.
funds, however, it cannot state definitively that the 20 percent
þ Invested in projects allowed for these needs is not enough.
without understanding
their full costs or ensuring
Compounding the situation, the quantity of groundwater stored
that it would receive the
in the basins has declined by more than 110,000 acre-feet between
benefits it anticipated.
October 1998 and September 2001, eroding about 30 percent
þ Paid for services not of the progress made in replenishing the basins since water
covered under contracts
year 1961–62. The district has not established an optimum
and has not enforced all
the terms of its contracts. quantity for groundwater it should store or a minimum quantity
it needs to assure an adequate supply of water to the basins’
þ Lacks written purchasing
users. Without establishing targeted groundwater quantities, the
procedures and has not
district cannot fully justify its water purchase expenditures.
adequately enforced its
existing policies.
To ensure that it has sufficient funds to meet its statutory
responsibilities, the district should adopt a policy on a minimum
reserve fund balance. That policy should specify the amount
of reserves it requires to meet all of its necessary expenses,
including those associated with its operations, the stabilization
of its assessment rate, its ability to respond promptly to
contamination issues, and its ability to repair and replace its
facilities and equipment. If the district determines that it needs
more reserve funds than the water code currently permits, it
should consider seeking legislative approval for an increase in
the allowed level.
To ensure an adequate supply of water for the basins’ users,
we also recommended that the district establish an optimum
quantity for stored groundwater that can serve as a target for its
water purchases. It should also establish a minimum quantity
below which it should not allow the basins to fall.
10 California State Auditor Report 2004-406 California State Auditor Report 2004-406 11
District Action: Corrective action taken.
The district states that its board of directors (board) adopted
a new reserve policy on March 17, 2003. The new reserve
policy will be the basis for seeking legislative approval of
statutory changes to the water code that will allow the
district to accumulate a larger reserve than the current
$10 million limit. In addition, the district states that it
has identified, and the board has adopted, optimum and
minimum water quantities for stored groundwater.
Finding #2: Several factors have contributed to the depletion
of the district’s reserve funds.
Since fiscal year 1997–98 the district has depleted its reserve
fund balance through a combination of lowered assessment
rates, increased water replenishment purchases, capital
improvement expenditures, and grants to ratepayers, totaling
$30 million, through its Clean Water Grant program. However,
the district’s past decisions indicate that it lacks a long-term
vision for its finances, which has led to poor management of its
reserve funds and of the assessment rate it charges ratepayers.
After years of increases in its assessment rate, resulting in a
historical high of $162 per acre-foot in the mid-1990s, the
district lowered its rates beginning in fiscal year 1997–98. By
fiscal year 2000–01, the district charged $112 per acre-foot, a rate
that it continued in fiscal year 2001–02 even though its annual
Engineering Survey and Report (engineering report) and budget
efforts indicated that it should have charged the maximum
allowable rate of $116 per acre-foot.
Under current statutory restrictions the district can only
charge $117 per acre-foot in fiscal year 2002–03. In its draft
2002 engineering report, the district estimates that water
replenishment costs alone will account for $112 of the $117
proposed rate. This leaves only $5 per acre-foot for the district’s
other expenditures, which for fiscal year 2002–03 the district
estimates to be $37 per acre-foot. The district’s proposed budget
for fiscal year 2002–03 indicates that if it adopts this assessment
rate, it must make cuts in either water purchases or capital
improvement project spending in order to balance its budget
and provide for a minimum level of reserve funds.
10 California State Auditor Report 2004-406 California State Auditor Report 2004-406 11
The district cannot immediately recover financially from its past
decisions. Currently, the water code limits the district to raising
its rate by the local consumer price index (CPI) plus 1 percent,
with a maximum 5 percent increase above the previous year’s
assessment. However, the CPI may not be the most appropriate
index by which to restrict assessment rate increases since it is
reflective of consumer inflation, not necessarily of increases to
the district in its cost of water purchases. This limitation is set
to expire on December 31, 2002, although the Legislature may
choose to extend that restriction.
Complicating the district’s finances, current law prohibits the
district from incurring debt to pay for capital improvement
projects. Under the district’s interpretation, in addition to
prohibiting the district from selling bonds, this provision also
prevents the district from incurring debt to take advantage
of state-operated programs to assist in groundwater recharge
and storage projects. This provision of the law also expires on
December 31, 2002, unless the Legislature extends it.
We recommended that the district’s board set the annual
replenishment assessment at a rate that will support the district’s
planned activities and ensure that it maintains the level of
reserve funds it needs to meet its statutory responsibilities.
Furthermore, if restrictions on increasing assessment rates are
extended past December 31, 2002, the district should consider
seeking legislative approval of statutory changes that will
increase its flexibility to raise funds for its operations, capital
improvement projects, and reserves.
District Action: Partial corrective action taken.
Although the district states that it will determine the
assessment rate that is required to maintain an adequate
reserve balance, for its fiscal year 2003–04 budget the
district’s board did not adopt an assessment rate that
attempts to achieve an adequate reserve of funds, within
the limits of the law. The board adopted a reserve policy
to accumulate and set aside about $20 million, but the
law currently limits the district to a $10 million reserve.
However, in spite of the new policy on adequate cash
reserves, for its fiscal year 2003–04 budget the district’s
board adopted an annual assessment rate that will allow
the district’s reserve funds to fall to a projected $5 million—
below the $6 million projected balance for June 30, 2003,
we cite in our report.
12 California State Auditor Report 2004-406 California State Auditor Report 2004-406 13
Legislative Action: Legislation passed.
Assembly Bill 1163 (Chapter 941, Statutes of 2002) was
enacted in September 2002 to delete the prohibition on the
district to incur debt. The restrictions from prior legislation
regarding limits on annual increases in the district’s
assessment rate expired on December 31, 2002. This bill
also includes a provision that requires the state auditor to
perform an audit of the district’s operations and management
and an evaluation of the extent to which the district has
complied with recommendations the state auditor reported
in May 2002. The state auditor shall submit its audit report
to the Legislature no later than June 30, 2004, and the cost of
the audit shall be reimbursed by the district’s ratepayers.
Finding #3: Due to shortcomings in the district’s budget
process, its spending needs do not tie to its assessment rate.
The amount the district determines it must collect from the
replenishment assessment is driven in part by the costs it
budgets for capital improvement projects and other programs.
However, in reviewing the district’s fiscal year 2001–02 budget,
we found that the district’s staff have been inconsistent about
including supporting information, their preparation of certain
elements of the budget has been inaccurate, and they have
allocated shared administrative costs inappropriately. The
district has not exercised strong managerial oversight over its
budgeting process, nor has it provided the staff who prepare the
budget with sufficient, documented direction.
In addition to weaknesses in preparing its spending plan, the
district does not tie its affirmed spending needs to the assessment
it levies on ratepayers who pump groundwater from the basins.
Moreover, the data contained in the annual engineering reports
that the district prepares to meet certain requirements of the
water code and identify water replenishment needs does not
clearly explain the amount of water the district determines it
must purchase. As a result, ratepayers have criticized the district
over the validity of its budgeted expenses and the need for the
assessment rate it charges.
We recommended that the district implement comprehensive
written procedures for preparing its annual budget. These should
provide staff who prepare the budget with adequate direction in
meeting the standards that the district’s management and directors
develop for supporting information, overhead allocation, proper
classification of expense items, and document retention.
12 California State Auditor Report 2004-406 California State Auditor Report 2004-406 13
To allow for a thorough public discussion of the district’s proposed
assessment rate, district staff should tie the district’s spending
plan to its calculation of the rate. The district should distribute
this presentation to the board for public hearings and should
distribute to attendees a presentation that includes, at a
minimum, adequate data to support the proposed rate. This data
should be drawn from the district’s engineering report, proposed
budget, and capital improvement plan.
District Action: Corrective action taken.
The district states that its controller has already issued
preliminary policies and procedures and assumed responsibility
for maintaining a central budget file. The controller is also
responsible for the continued implementation of written
policies and procedures over budget preparations. The district
reports that it prepared its fiscal year 2002–03 budget using an
administratively feasible method for allocating overhead to
projects and programs, and for identifying replenishment and
clean water program and project costs. Additional guidelines
for using historical cost information, providing reasonable
information for budget items, and classifying capital and
noncapital expenses were developed during the fiscal year
2003–04 budget process.
Finding #4: The district lacks updated strategic and capital
improvement plans.
The district does not have current strategic and capital improvement
plans that identify and prioritize the implementation of its capital
improvement projects. Without such plans, the district cannot
be certain that it identifies and implements the projects with
the greatest impact on the supply of safe water in the basins. In
addition, these plans can be important for giving the district’s
taxpayers a clear view of the long-term direction of the district
and a better understanding of its ongoing needs for revenue
to fund capital improvement projects. The district is creating a
strategic plan to replace the plan it prepared in 1998. Although
its ability to begin new projects is limited by its low reserve
funds and legal restrictions that prohibit it from incurring debt,
the district has spent $19.9 million on capital improvement
projects in the past two fiscal years and has earmarked
another $12 million for current projects. Moreover, the legal
constraints are scheduled to expire on December 31, 2002,
unless the Legislature extends them. Current strategic and capital
improvement plans are therefore crucial to the district’s ability
14 California State Auditor Report 2004-406 California State Auditor Report 2004-406 15
to effectively and efficiently meet its statutory responsibilities.
We believe that the most effective process for developing these
plans would include the participation of those whom the district’s
programs and projects most affect, the district’s ratepayers.
We recommended that the district continue to create an updated
strategic plan and capital improvement plan to identify the
programs and capital improvement projects that will aid it in
fulfilling its mission. These plans will be most beneficial to the
basins the district serves if the district incorporates the following
activities into their development:
• Assess all activities it performs and their priority to the
district’s role versus the activities and roles of other water
agencies in the region.
• Ensure that the plans clearly identify which projects
are ongoing and prioritize the proposals in the order of
importance to meeting the district’s statutory requirements.
• Share with ratepayers the appropriate level of information
on proposed programs and projects, including cost and
benefit estimates.
• Periodically update its strategic and capital improvement
plans to ensure that it bases decisions for future projects on
appropriate and current information.
District Action: Corrective action taken.
The district reports that its board adopted a revised strategic
plan on September 3, 2003. In addition, the district states it
has developed a draft capital improvement plan, including
projects and programs that are clearly identified as new or
ongoing. The district anticipates the capital improvement
plan will be ready for board adoption by the end of 2003.
The district also states it will develop a policy for periodically
updating strategic and capital improvement plans.
Legislative Action: Legislation passed.
Assembly Bill 1163 (Chapter 941, Statutes of 2002) was
enacted in September 2002 to require the district to develop
and update a five-year capital improvement program using
input from a technical advisory committee made up of
water professionals appointed by the Central Basin Water
Association and the West Basin Water Association (technical
advisory committee).
14 California State Auditor Report 2004-406 California State Auditor Report 2004-406 15
Finding #5: The district has failed to identify and resolve risks
in proposed capital improvement projects.
Despite the fact that over the past two fiscal years it has spent
$19.9 million on capital improvements, the district lacks a
standard process for identifying and resolving the risks attached
to potential projects and for evaluating the projects’ costs and
benefits. As a result, the costs of some projects are likely to
exceed the district’s estimates, and it may not gain the benefits
it expected. For instance, the district invested $10.3 million in
the Goldsworthy Desalter facility (desalter) to remove saltwater
contamination from the West Coast Basin without seeking
clarification as to whether it would need legal rights to pump
the saltwater from the basin. When the district sought this
clarification, the court determined the level of salinity of the
extracted water necessary to exempt the district from obtaining
legal pumping rights to be higher than the district had planned
when it built the desalter. If the water pumped by the district does
not reach that level of salinity, the district’s operating costs will
increase or it may have to invest up to an additional $2.3 million
to qualify the desalter for a subsidy of its operating costs.
In addition, the district started construction in October 2001
on the Alamitos Barrier Recycled Water Project (Alamitos Barrier
project), which the district estimates will cost $11.7 million,
even though it has yet to resolve a critical issue that may keep
it from operating. It has not yet reached final settlement with
Los Angeles County (county) on an agreement to compensate
a third party affected by the project, even though the district
first identified the need to resolve this condition as early as
1997. The Alamitos Barrier project is scheduled for completion
in November 2002, but without a resolution to this issue, the
district will not be able to begin operating the facility.
In our December 1999 audit report, we recommended that
the district standardize its process for preparing cost-benefit
analyses for the capital improvement projects it considers for
development. However, the district has not yet implemented
such a policy. In a cost-benefit analysis, the district should
define and evaluate the costs and perceived benefits of a
proposed project and alternative projects, thus allowing it to
make reasonable, informed decisions and to choose between
different strategies. Further, the district should follow a
consistent approach in preparing its analyses in order to
avoid skewing the results in favor of projects it wants to do.
Although the district states that it regularly conducts financial
evaluations of its capital improvement projects, it does not have
16 California State Auditor Report 2004-406 California State Auditor Report 2004-406 17
documented procedures for its staff to follow in performing
cost-benefit analyses. The lack of a standard policy may result
in inconsistent or poor analyses, which in turn may cause the
district to forgo beneficial projects or spend its limited funds
on less-desirable alternatives.
The district should establish a standardized approach to
evaluating and selecting capital improvement projects. At
a minimum, the approach should include the appropriate
steps to identify legal, technical, and financial risks of
proposed projects. Also, the district should implement a cost-
benefit analysis methodology that (1) defines standards and
assumptions to use when evaluating replenishment projects
and (2) offers a process for weighing alternative solutions to
contaminant mitigation issues.
Moreover, the district should quickly define potential
resolutions to the water rights issue involving the desalter
and implement the most suitable solution to put the
desalter to work permanently removing saltwater from the
West Coast Basin. In addition, the district should promptly
come to agreement with the county to resolve the third-
party compensation issue that could potentially prevent the
operation of the Alamitos Barrier project.
District Action: Partial corrective action taken.
The district states that district managers will identify
capital projects necessary to meet the goals of the plan.
In cooperation with the technical advisory committee, it
will develop a standardized approach to identify the legal,
technical, and financial risks of proposed capital projects.
Once the district has identified the cost and benefits of
proposed projects, it will seek recommendations from the
technical advisory committee and board approval to move
forward with a particular project. Based upon the evaluation
of projects using these criteria and board approval, the district
will develop implementation schedules based on the priority
of cost-effective projects, cooperative opportunities, and
available funding. In addition, the district reported that it had
received from the court an extension of time for its desalter
to reach the chloride levels required in the operating criteria.
In November 2002, the desalter reached those levels. Finally,
the district and the county have finalized the resolution to the
issue related to the Los Alamitos Barrier project.
16 California State Auditor Report 2004-406 California State Auditor Report 2004-406 17
Finding #6: The district has not managed all of its
contracts effectively.
The district has not always signed contracts prior to receiving
and paying for professional services and has at times paid for
services that are not included in the scope of its contracts. For
example, the district paid one of its general counsels almost
$112,000 during 2001 for the services of a public relations
firm, even though the general counsel’s contract did not
include public relations in its scope or authorize the hiring
of subcontractors.
Also, the district’s current contracts with three legislative
advocacy firms and three law firms do not specify the duration
of the agreements. The district entered into most of these
contracts between 1998 and 2000, although one dates to
1989. For the six firms combined, the district paid more than
$1.4 million in 2001. Although the district correctly points out
that it signed the contracts prior to the current requirement
that all contracts contain duration, we believe the current
requirement reflects sound business practice for all contracts.
Moreover, the district did not enforce the terms of one of
its contracts on which it paid a fixed amount of $21,500 per
month, and district staff did not follow the board’s policy or
instructions when signing another contract for which it paid
$25,000 in 2001. The district has also entered into agreements
with legal, legislative advocacy, and public relations firms for
fixed monthly fees of up to $10,000 per month, but it could
not provide evidence that it regularly reviews its needs for these
services. As a result, it may be paying for unneeded services or
overpaying for the value it receives. Finally, the district does not
maintain an adequate file of its contracts. In two instances we
found that the district maintained duplicate contracts for legal
and legislative advocacy services.
In spite of the lingering weaknesses in the district’s management
of its contracts, some provisions imposed by the water code
and the district’s Administrative Code (district code) appear too
restrictive. In response to our December 1999 audit report, one
requirement the Legislature placed on the district’s contracting
practices requires that the board president and secretary sign
all contracts and other documents that the district enters into.
Although this requirement allows the district’s board complete
oversight of contracting practices, it has the potential of being
administratively burdensome for contracts below certain dollar
thresholds. Similarly, the district enhanced the contracting
18 California State Auditor Report 2004-406 California State Auditor Report 2004-406 19
provisions in its policies by adopting certain portions of the
California Public Contract Code into the district code. However,
one of the provisions in the district code places burdensome
restrictions on the district’s contracting practices by requiring
a formal written process for requesting proposals for most
contracts and requires board approval of all contract solicitations
for professional services, regardless of dollar amount.
To ensure that it maintains the proper level of control over the
services it receives from various consultants, we recommended
that the district improve its contract management procedures by
taking the following steps:
• Develop scope-of-services provisions for its contracts that
clearly define the tasks it requires from contractors and
provide the district with clear criteria for evaluating the
contractors’ performance.
• Ensure that the district and professional services contractors
sign a written agreement.
• Specify duration that identifies a starting point and ending
point in all contracts.
• Ensure that it enters into contracts that are consistent with
the board’s directions and that contracts are signed only by
those authorized to do so.
• Separate contracts into active and inactive files to facilitate
easier identification of the contracts under which it may
have obligations.
We also recommended that the district renegotiate existing
contracts so that they are consistent with current minimum
standards that the Legislature mandates, which require scope-of-
service, duration, and payment terms.
To ensure that it receives all of the services and products that its
contracts specify, the district should assign staff of appropriate
levels to monitor the contractors’ performance. Moreover, the
district should implement procedures to periodically evaluate
any contracts that require fixed monthly fees to ensure that it
receives services in keeping with the fees it pays.
Finally, we recommended that the district consider seeking
legislative changes to the water code to allow the board to
delegate the authority to sign contracts and amend the district
code to allow more efficiency in procuring goods and services.
18 California State Auditor Report 2004-406 California State Auditor Report 2004-406 19
District Action: Corrective action taken.
The district states that it has taken steps to strengthen its
contract management policies and procedures, including
assigning management staff to serve as contract managers,
reviewing current contracts to ensure they comply with
applicable legislative mandates, and implementing annual
quality reviews of services before renewing any contracts.
Finding #7: Despite amendments to its policies, the district
could further improve its controls over purchases and travel
reimbursements.
Although it has improved its procurement policies, the district
could further improve its controls over purchases of goods
and services, as well as reimbursements to staff, consultants,
and board members for travel costs. At the time of our audit,
the district lacked written accounting procedures to govern
cash disbursements and purchasing. This lack of standardized
procedures has led to inconsistent practices and insufficient
managerial control over purchase and payment approvals—in
fact, at the time of our review, the district had no formal
requirement that managers preapprove purchases. Although
many of these payments are small compared to the district’s
overall spending, the lack of adequate controls can promote
a culture that is contrary to the stewardship imposed on the
district as a public agency.
Further, the district has not always ensured that the costs its
directors incur for conferences and travel are reasonable and
necessary, as the district code requires. Consequently, the district
may not be benefiting from all of the conference and travel costs
it reimburses. For example, it reimbursed two of its directors a
total of more than $7,700 for travel and conferences without
documentation of the reasonableness of their expenses and the
benefit of the trips to the district.
In addition, the district has not adequately controlled
reimbursements to managers, directors, and consultants for
travel and meal expenses. The district’s policy states that
employees can be reimbursed for travel and meal expenses,
within defined dollar limits, only outside a defined local area,
and requests for expense reimbursement must be submitted
within 90 days. However, we found that the district reimbursed
its interim general manager $915 for local meals purchased over
20 California State Auditor Report 2004-406 California State Auditor Report 2004-406 21
a nine-month period, reimbursed one director for meal expenses in
excess of the established limits, and reimbursed consultants nearly
$3,000 without obtaining the business purpose of the expenses.
We recommended that to better control its administrative
costs, the district should continue its development and
implementation of written accounting procedures. It should
ensure that these procedures require that only authorized staff
approve purchases of goods and services and approve payments
to vendors or consultants, and staff maintain documents that
demonstrate efforts to ensure that the district receives value for
purchases that do not require formal bidding.
Before approving reimbursement for travel or conference costs
for its members, the district’s board should ensure that travel or
conference costs will benefit the district’s public purpose.
We also recommended that the district adopt a policy that holds
contractors to the same expense reimbursement guidelines as
district staff.
District Action: Partial corrective action taken.
The district reports that its controller is responsible for the
continued development and implementation of written
accounting procedures. A copy of the district’s draft
Accounting Procedures Manual was distributed to the
district’s Finance Committee in September 2003 for review
and comment.
Finding #8: The district’s administrative code could provide
better guidance on procurement.
The district’s policies continue to omit some critical elements
of contracting practices that we identified in our previous
report. Specifically, the district code does not prohibit staff from
writing requests for proposals that effectively limit bidding
to one bidder or altering requirements that could affect the
evaluation of the bids after the district issues final requests for
proposals. In addition, the district code broadly exempts certain
contracts, such as those for retaining expert witnesses to provide
consulting or testimony, from its procurement policy.
In addition, the district code is silent on the board’s position
as to which types of expenditures promote the district’s public
purpose. During 2001 the district spent more than $500 for
20 California State Auditor Report 2004-406 California State Auditor Report 2004-406 21
flowers for employees, directors, and nonemployees; it also
spent almost $3,500 for its annual holiday party. However,
we did not find a district policy that establishes a reasonable
basis for its position that these expenses support the district’s
public purpose, and as a result, we believe that these payments
are gratuities and thus a gift of public funds. The district also
paid $2,000 to co-sponsor a dinner at the National League of
Cities annual conference in Boston, Massachusetts. The district
justified the cost by stating that many Los Angeles-area cities
had representatives at the event, but otherwise it could not
demonstrate how the expense furthered its public purpose,
nor could it provide evidence that the board considered the
necessity and reasonableness of the expense before approving it.
Finally, as we noted in our previous report, the district code
does not provide adequate guidance in its travel reimbursement
policies, rather, it requires only that the lodging be moderate
and necessary. In the absence of adequate policies and
procedures, the district paid room charges of up to $280 per
night for hotel stays in Sacramento, where less expensive
lodging is widely available.
We recommended that the district amend the district code to
provide the following:
• Requests for proposals that do not effectively eliminate
bidders. In addition, it should prohibit altering material
factors that could affect the evaluation of bids after it has
issued final requests for proposals.
• Better guidance to district staff on allowable and unallowable
expenses. Specifically, the board should adopt a policy
regarding the types of expenses it believes promote the public
purpose of the district.
• Better guidance for reimbursable lodging expenses, including
dollar thresholds and a process for justifying charges in excess
of those thresholds.
District Action: Corrective action taken.
The district reports that it has amended its administrative
code to ensure that it meets our recommendation regarding
requests for proposals, allowable and unallowable expenses,
and guidance for reimbursable lodging expenses.
22 California State Auditor Report 2004-406 California State Auditor Report 2004-406 23
Finding #9: The district has not fully complied with
mandated reporting requirements.
Amendments to the water code require that, effective
January 1, 2001, the district present estimates of the costs to
complete and the funding sources for its capital improvement
projects in its annual audited financial statements and that it
also include a report from its independent auditor evaluating
the propriety of its operating expenses. However, the district
included an incorrect list of capital improvement projects in its
audited financial statements and overstated their estimated costs
by $3.6 million. In addition, the district did not include the
required report on the propriety of its operating expenses.
Although the water code limits the amount of reserve funds
the district may accumulate, it does not require the district
to disclose its compliance with this provision in its audited
financial statements. In its June 30, 2001, financial statements,
the district voluntarily included a calculation intended to show
that it complied with the water code’s restrictions. However, the
district erred in its calculation and understated its accumulated
reserve funds at June 30, 2001, by $4 million. Although it
exceeded the water code’s limitation of $10 million in reserve
funds for fiscal year 2000–01, the district has properly applied
the excess to capital improvement projects and water purchases
in its fiscal year 2001–02 budget.
We recommended that to provide reliable information on its
operations as the Legislature intended, the district take the
necessary steps to ensure that it complies with the reporting
requirements of the water code. It should include in its audited
financial statements an accurate and complete list of its capital
improvement projects and their funding sources as well as a
report on the propriety of the district’s operating expenses. In
addition, the district should ensure that it accurately calculates
any disclosure of reserve funds it includes in its audited financial
statements.
District Action: Corrective action taken.
The district submitted audited financial statements for the
fiscal year ended June 30, 2002, that include the reporting
requirements of the Water Code.
22 California State Auditor Report 2004-406 California State Auditor Report 2004-406 23
24 California State Auditor Report 2004-406
DEPARTMENT OF INDUSTRIAL RELATIONS
Its Process for Verifying the Status of
Licenses Issued to Farm Labor Contractors Is
Operational but Needs Some Improvement
REPORT NUMBER 2001-017, SEPTEMBER 2002
Department of Industrial Relations’ response as of
October 2003
Chapter 157, Statutes of 2001, amended Section 1695.7(e)
of the Labor Code, and required the labor commissioner
in the Department of Industrial Relations (department)
Audit Highlights . . . to establish a unit for verifying the status of farm labor contractors’
licenses by July 1, 2002. According to the amended code,
Our review of whether the
agricultural growers and farm labor contractors that subcontract
Department of Industrial
work must verify that a farm labor contractor is properly
Relations (department) has
established a process for licensed. The Bureau of State Audits was required to certify
verifying the status of state that the department’s unit responsible for these verifications is
licenses issued to farm labor
operational. Based on our review, we found the following:
contractors revealed that:
þ The department’s process
for verifying the status of Finding #1: Although the department’s license verification
farm labor contractors’ process is operational, the unit manager should exercise
licenses has been opera-
more oversight.
tional since July 1, 2002.
The department’s new verification process is sufficient to
þ Agricultural growers, farm
certify the status of a farm labor contractor’s license within
labor contractors, and
others can request license one business day of receiving a request, provided employees
verifications through the follow established procedures. The unit manager oversees the
department’s Web site
verification process and has significant review capability over
or by electronic mail,
requests received and responded to electronically—the most
telephone, or facsimile.
common submission and delivery method. However, the unit
þ More oversight is needed manager is less able to monitor requests and responses to
of the department’s license
requests that are not electronic, such as requests received over
verification process,
especially in these early the telephone or fax, or responses sent by fax or mail. Although
stages of implementation. the five employees assigned to the verification function are
required to maintain folders containing documentation of fax
and telephone requests and evidence of the corresponding
responses, the unit manager had not had a chance to review
these files at the time of our testing. Consequently, the unit
manager has less assurance that telephone and fax requests as
well as mail and fax responses are processed appropriately.
California State Auditor Report 2004-406 25
In addition, the unit does not accurately compile statistics
concerning the number and types of verification requests received.
The unit needs to have accurate information concerning its
workload so it can assign an appropriate amount of resources to
this function.
To ensure that the department is complying with the requirement
that it respond to requests for verification of farm labor contractor
licenses within one business day, we recommended that the unit
manager exercise more oversight. For example, the unit manager
could develop a log for employees to record the date, time, and
medium (online, fax, e-mail, or telephone) by which a request
is received; the date and time that the employee transmits the
verification; and the method by which he or she transmitted the
verification (e-mail, fax, or mail). The unit manager could then
review the logs to ensure that a response was recorded for every
request. The unit manager could also compare the number of
requests received to the number of unique verification numbers
issued. The logs would also provide statistical information on the
unit’s workload.
Department Action: Partial corrective action taken.
The department reports that the unit manager reviews
all incoming e-mail and fax requests daily to ensure that
responses have been made. The department asserts that it
Ü has responded to all requests received in a timely manner.
However, the department’s response does not explain how it
ensures that telephone requests are processed appropriately.
Finally, the department reports that it has kept statistics that
reflect the number of requests and the method by which
Ü
they are received. However, the department’s response does
not address our finding that these statistics are inaccurate.
Finding #2: The department has not established dedicated
telephone and fax lines for license verification requests.
The department has not established a dedicated telephone
line for license verification requests. Consequently, unit
employees who are not trained to perform verifications of
farm labor contractors’ licenses occasionally answer incoming
telephone calls and attempt to gather relevant information
from the requestor. This practice increases the chance of
26 California State Auditor Report 2004-406 California State Auditor Report 2004-406 27
miscommunication between the requestor and the unit employee
working on the verification. Similarly, the department does not
have a fax machine dedicated to license verification requests.
Rather, faxed requests are received in a general work area by a
fax machine used by the entire unit. The lack of a dedicated
fax machine increases the risk of misplacing a faxed license
verification request.
To reduce the possibility that a request for verification is lost
or incorrectly handled, we recommended that the department
consider obtaining dedicated telephone and fax lines and a fax
machine for this function.
Department Action: Corrective action taken.
The department reports that it received 369 requests for
verification of licenses via fax in the first 12 months of
operation. The department does not believe it is necessary to
have a fax machine dedicated to license verification requests.
Additionally, the department reports that it received
568 license verification requests over the telephone in the
first 12 months. The department does not believe that it is
necessary to incur the costs of installing a telephone line
dedicated to this function.
Finding #3: The department does not accept telephone
requests on all state business days.
Although the license verification Web site indicates that requests
can be submitted by calling the Fresno or San Francisco office,
neither office accepts telephone requests on Thursdays, and
the San Francisco office does not accept telephone requests on
Tuesdays as well.
To be more responsive to its customers, we recommended that
the department consider taking telephone requests for license
verification on all state business days.
Department Action: Corrective action taken.
The department reports that it now accepts telephone
requests for license verifications on all state business days.
26 California State Auditor Report 2004-406 California State Auditor Report 2004-406 27
28 California State Auditor Report 2004-406
CALIFORNIA ENERGY MARKETS
The State’s Position Has Improved, Due
to Efforts by the Department of Water
Resources and Other Factors, but Cost
Issues and Legal Challenges Continue
Audit Highlights . . . REPORT NUMBER 2002-009 APRIL 2003
Department of Water Resources’ response as of November 2003
The Department of Water
Resources (department)
has renegotiated 23 power The California Water Code, Section 80270, requires the
contracts with 14 suppliers to
Bureau of State Audits to conduct two financial and
improve the energy delivery,
financial, and legal aspects of performance audits of the Department of Water Resources’
these contracts. In addition, (department) implementation of the power-purchasing
the investor-owned utilities
program: the first due by December 31, 2001, and the second
are once again responsible for
due by March 31, 2003. We completed the first required audit
purchasing the net short.
on December 20, 2001, and this audit fulfills the requirement
þ The portfolio better fits for the second audit report. In this audit, we follow up on the
California’s power needs
department’s actions with respect to the recommendations from
due to changes in energy
products and a reduction our 2001 audit. To assist us in forming our conclusions related
of forecasted demand. to the economic issues involved, we retained the services of an
energy economics firm to perform various analyses.
þ Reported contract cost
reductions were estimated
at $5.5 billion on a
Finding #1: With renegotiated contracts and a reduction
nominal basis and based
on assumptions at the in forecasted demand, the contracted electricity portfolio
time of the renegotiations. better matches California’s needs and better tracks changes
þ Based on March 2003 in fuel costs.
market assumptions,
The department has renegotiated the terms and conditions of
replacement power costs,
23 long-term power contracts with 14 suppliers, representing
and discounting to present
value, the department over one-half of the total value of the portfolio. These renegotiated
consultant currently contracts contribute to the improved fit of the portfolio to the
estimates ratepayer
State’s forecasted demand by converting significant amounts
savings as $580 million.
of nondispatchable power—power that the department
þ The legal terms and was obligated to purchase regardless of the need—to power
conditions of the
deliveries the department can use when needed. In addition,
restructured contracts
the renegotiated portfolio increases power deliveries in
significantly improved
reliability, but the Northern California in 2002 and 2003 to meet demand. Further,
department remains the department was able to shift some deliveries of power from
restricted in its ability to
Southern to Northern California, which reduced the amount of
assign contracts.
surplus power projected in Southern California. The department
continued on next page also renegotiated for more capacity tied to tolling agreements—
California State Auditor Report 2004-406 29
þ Even though the investor- cost management arrangements that allow the department
owned utilities have either to purchase the fuel needed for the power facilities under
resumed purchasing the
contract or to tie the fuel cost to the current cost of natural
net short, the department
gas. However, most of the improvement in the fit of the power
retains substantial
responsibilities related to supply to the demand has resulted from significant changes in
the long-term contracts. the demand forecast rather than from significant improvements
in the power contracts. These forecast changes include
reductions in the demand for power from the investor-owned
utilities for a variety of reasons, including the ability of certain
electricity customers to buy electricity from alternate suppliers.
We recommended that the department persistently and
aggressively manage the long-term contracts to capture
opportunities to improve the overall supply portfolio
including opportunities to further improve the match of
power deliveries from the contracts to California’s power needs.
Department Action: Partial corrective action taken.
Since the April 2003 release of our audit, the department
indicates it has renegotiated three power contracts
and continues to seek opportunities to renegotiate
other contracts. The department indicates that the
renegotiated contracts have improved the match of power
deliveries to the State’s needs by reducing the amount of
nondispatchable power deliveries.
Finding #2: While the renegotiation efforts will provide some
savings to ratepayers, the department’s portfolio still remains
above market prices.
Throughout the energy crisis, the department and the governor’s
office reported both the contract costs and the savings in terms
of the contract payments to suppliers. Thus, they reported that
the estimated reductions in contract costs from the restructuring
of the contracts totaled approximately $5.5 billion, which
represents approximately 13 percent of the total original
contract costs of $42.9 billion. These contract cost reductions
were based on information available at the time of the
renegotiations and were calculated using a negotiation model
that the department used when evaluating the effect of different
renegotiation options on the reduction in contract costs.
While this savings estimate reasonably reflects reductions in the
nominal cost of the contract portfolio to the department, an
alternative analysis would estimate the savings to the utilities’
30 California State Auditor Report 2004-406 California State Auditor Report 2004-406 31
customers. With consideration of the replacement power costs
and using the department’s revenue requirement model, a
department consultant estimated in March 2003 that the net
savings to ratepayers in nominal terms is $1.5 billion. Also,
because these savings will occur over the next 20 years, the
department consultant estimated that the net present value
of the future stream of savings to ratepayers is $580 million.
These March 2003 estimates of customer savings are a function
of economic, market, and dispatch assumptions used by the
department consultant in its modeling and would change if
those assumptions changed. Also, the department indicates that
its revenue requirement model is not designed to value nonprice
benefits resulting from the renegotiation efforts, such as the
improved availability and reliability provisions in the contracts.
Further, most of these contract cost reductions will result
not from reducing the price per megawatt-hour of the power
purchased but rather from shortening the length of the contracts
or reducing the amount of power to be delivered. However,
this reduction of contract length contributed to a department
objective to shorten the time that it would have financial or
legal responsibility for the contracts and, in the process, permit
the utilities to procure energy themselves to meet the additional
uncovered net short.
According to the department, the March 2003 estimate of
savings to the consumer from the renegotiated contracts as
of December 31, 2002, using its revenue requirement model,
was made only at our request, and the department would
not otherwise have made this calculation. In addition, the
amounts are from its consultant’s draft report, and had not
gone through the department’s ordinary standards of review.
However, this is the only estimate the department provided to us
of the savings to the consumer from the renegotiated portfolio as
of December 31, 2002. Further, we observed that these forecasts
are consistent with the forecasts prepared by the department
consultant in establishing the department’s revenue requirements
and were also used in support of the revenue bonds that the
department issued in October and November 2002.
We recommended that the department persistently and
aggressively manage the long-term contracts to capture
opportunities to improve the overall supply portfolio,
including opportunities to achieve additional cost savings.
30 California State Auditor Report 2004-406 California State Auditor Report 2004-406 31
Department Action: Partial corrective action taken.
Since the April 2003 release of our audit, the department
indicates it has renegotiated three power contracts and
continues to seek opportunities to renegotiate other
contracts. The three renegotiated contracts have reduced
contract costs by approximately $1 billion, in nominal
terms. However, when considering the savings to consumers
by taking into account the cost to replace the power that
was eliminated through contract renegotiations, and by
considering that the savings occur over time, the net present
value (at 9 percent) of the total savings to customers
is $322 million. The customer savings varies between
approximately $24 million to $74 million from year to year
through 2011, but we estimated the savings at approximately
$29 million for 2003. The department’s consultant calculated
the total contract reductions and customer savings using
market conditions at the time the three contracts were
renegotiated, which is consistent with the methodology used
in our audit report.
Finding #3: The renegotiated contracts improve the reliability
and flexibility of the department’s energy portfolio, but
challenges remain.
Our review of the legal terms and conditions of the restructured
contracts indicates that the renegotiations have generally
resulted in improved terms over those in the original contracts.
For example, we found that the restructured contracts have
much stronger guarantees that the sellers will deliver the power
promised under the contracts and build the new generation
facilities promised in the contracts. As a result, the renegotiated
contracts better meet the reliable energy goals of Assembly
Bill 1 of the 2001–02 First Extraordinary Session (AB 1X)
and thus better ensure the availability of electricity to satisfy
consumer demand. These improvements are accomplished
through stronger terms and conditions, such as termination
rights for the State and penalty provisions when sellers fail to
deliver energy or construct new generation facilities as promised
under the contract. Changes in the type of energy products
purchased under the contracts also increase the reliability of
the department’s contract portfolio. Both the stronger terms
and conditions, and the product changes are likely to provide
economic benefits to ratepayers. Another benefit from the
renegotiations is that the State has entered into settlement
32 California State Auditor Report 2004-406 California State Auditor Report 2004-406 33
agreements with suppliers. In most of these settlements, the
suppliers agreed to cooperate with the attorney general’s energy
investigation and to make financial settlements to the State.
While the restructured contracts are better from a legal standpoint,
significant risks remain for the department, particularly in the
contracts that the State has not renegotiated. An area of continuing
concern is the restrictions on the department’s ability to assign
the contracts to other parties, particularly to the investor-owned
utilities. The investor-owned utilities have resumed purchasing
the net short and have also assumed the day-to-day management
and operation of the contract portfolio. However, the department
remains legally and financially responsible for the contracts, until
either the investor-owned utilities meet certain credit standards or
suppliers decide to release the department from this obligation. As
a result, the department continues to have significant ongoing legal
and technical responsibilities for the management of the long-term
contracts and could retain those responsibilities for the remaining
life of the contracts.
We recommended that the department persistently and
aggressively manage the long-term contracts to capture
opportunities to improve the overall supply portfolio,
including opportunities to improve the terms and conditions of
contracts that have not yet been renegotiated. In regard to its
continuing responsibility to manage the long-term contracts,
the department should monitor the performance of power
suppliers relative to their contractual obligations and promptly
address and resolve any supplier deviations from contractual
obligations. We also recommended that the department review
the appropriateness of the investor-owned utilities’ proposed
annual gas supply plans for contracts with tolling agreements.
Department Action: Partial corrective action taken.
Since the April 2003 release of our audit, the department
indicates it has renegotiated three power contracts and
continues to seek opportunities to renegotiate other
contracts. The department reports that three contracts have
improved terms and conditions. For example, one contract
now includes anti-market gaming provisions and allows the
department to assign it to a creditworthy investor-owned
utility. Another contract also includes a settlement of claims
with the attorney general and other parties, which the
department indicates is valued at approximately $1.5 billion.
32 California State Auditor Report 2004-406 California State Auditor Report 2004-406 33
To ensure that the investor-owned utilities exercise due care
in the handling of the contracts, the department indicates
that its staff and consultants conduct weekly internal
coordination meetings as well as weekly conference calls
with the investor-owned utilities. Further, the department
and the investor-owned utilities work together to review the
gas supply plans related to each of the gas tolling contracts.
Additionally, for those contracts that are tied to new power
plant construction, the department indicates that its staff
and consultants witnessed 32 performance demonstration
tests, which are designed to ensure compliance with contract
terms either before a power plant begins commercial
operation or as an annual performance test of an existing
power plant. Finally, the department states that staff
periodically visits construction sites for new power plants to
ensure that the progress is consistent with the contract.
Finding #4: Sales of surplus power have not significantly
affected the cost of the power-purchasing program.
In our December 2001 audit, we indicated that in future years
the department’s long-term contracts would likely require it to
purchase more power than would be needed during some hours.
Those quantities would be expected to be sold as surplus and
thus have the potential to increase the overall cost of power. In
2002 the department did sell surplus power, but these sales were
not significant in proportion to its total purchases. Further, our
consultant advises us that the costs from the sales do not appear
unreasonable. Although the department’s renegotiation efforts
have reduced the potential for surplus power sales in future
years, it is still likely that significant sales will occur, particularly
in the years 2003 through 2005.
To monitor the efforts of investor-owned utilities to limit power
sales, the department should routinely collect and analyze data
(including settlement data from the California Independent
System Operator) on power sales by the investor-owned utilities.
Department Action: Corrective action taken.
The department indicates that it negotiated with the
investor-owned utilities and the California Independent
System Operator to receive the information needed to allow
it to appropriately monitor sales of surplus energy.
34 California State Auditor Report 2004-406 California State Auditor Report 2004-406 35
Finding #5: The department was not able to achieve
coordinated dispatch of power supplies that could reduce costs.
The department was not able to achieve a coordinated dispatch
of power supplies between the contract portfolio and the
investor-owned utilities’ generating facilities so as to minimize
costs to ratepayers. The electric power that the retail customers
of the investor-owned utilities purchase is obtained from a
variety of sources, each with a different cost per unit of power
delivered during different times of the day and week. As such,
there is an opportunity each day to optimize this mix of
sources to provide power at the lowest possible cost. However,
the department has been unable to implement a coordinated
dispatch of power sources with the investor-owned utilities. It
attributes this inability, to some degree, to the investor-owned
utilities’ failure to share with the department information about
the availability of their generating facilities and the terms of
their third-party contracts, as well as to fluctuations in demand
forecasts by the investor-owned utilities that make minimizing
purchase costs more difficult.
Recognizing the California Public Utilities Commission’s (CPUC)
established role in overseeing the dispatch decisions of the
investor-owned utilities, the department should routinely monitor
resource scheduling and other data provided by each utility to
ensure that dispatch decisions are consistent with established
operating protocols and its fiduciary responsibility to bondholders.
Department Action: Corrective action taken.
The department indicates that it currently receives all
dispatch information on a daily basis. This information
allows the department to compare actual dispatch of
contract energy with projected dispatches and to determine
whether there will be any significant deviations to the
department’s cash flow as a result of the investor-owned
utilities’ dispatch decisions.
Finding #6: The department will continue to face cost and
legal challenges.
Substantial work remains to be done by others to restore
California’s electric markets to full health and to manage the
power portfolio assembled by the department during its two-
year tenure as power buyer for the State. Issues involving the
creditworthiness of the investor-owned utilities must be resolved,
plans must be made for the long-term governance of the utilities’
34 California State Auditor Report 2004-406 California State Auditor Report 2004-406 35
power-procurement practices, and changes are needed in the
power market structure to assure that the markets are effective
and well monitored. Although California’s power supply situation
has improved over the past two years, accounting and credit
issues have affected many companies in the power supply
industry, raising questions regarding the further development of
new supplies. Furthermore, substantial outstanding investigations
and litigation associated with the power crisis are still unresolved.
In addition to marketwide issues, the department’s ongoing
stewardship of the Electric Power Fund and the contract portfolio
will be an important component of the State’s power supply for
years to come. The contract portfolio is likely to remain under
department management for much of the next decade and will
require continued vigilance to mitigate the potentially high costs
of those contracts. Attendant upon those responsibilities will be
the need for the department to manage its operating partnerships
with the utilities to schedule and deliver the power and to procure
fuel. In addition, the department will be responsible for the
administration of bonds issued to finance the cost of the AB 1X
power program. These remaining responsibilities carry substantial
ongoing obligations to manage costs and risks and will require a
sustained professional organization at the department to properly
protect the State’s interests.
We recommended that the department be alert for situations in
which the credit standing of the investor-owned utilities may
adversely affect the department’s costs. Further, the department
needs to maintain the capability to analyze conditions in
electricity and gas markets. The department should also use
the servicing agreements with the investor-owned utilities to
monitor dispatch statements from the investor-owned utilities
relative to their accounting statements to the department.
Finally, to fulfill its responsibilities for servicing the revenue
bonds, the department should prepare revenue requirements
filings for the CPUC and advise the CPUC when its regulatory
oversight of the investor-owned utilities intersects with the
department’s responsibilities under the revenue bonds; act
to mitigate risks, such as CPUC ratemaking practices, that
may adversely affect bondholders; and perform financial and
accounting activities necessary to support its obligations under
the revenue bonds.
36 California State Auditor Report 2004-406 California State Auditor Report 2004-406 37
Department Action: Partial corrective action taken.
The department reports a variety of actions to address
our recommendations. In regards to the credit standing
of investor-owned utilities, the department notes that
because gas suppliers are unwilling to extend sufficient
credit to the investor-owned utilities, the department is
the principal counterparty for all fuel purchasing, storage,
transportation, and hedging contracts. Concerning the
need to maintain capabilities to analyze conditions in the
electricity and gas markets, the department subscribes to
various gas and power market information services, which
it uses to analyze the reasonableness of the investor-
owned utilities’ actions. Additionally, the department
actively follows and monitors CPUC proceedings that
may impact or change the operating agreements with
the investor-owned utilities and that might be adverse
to the department or its responsibilities under AB 1X.
When such issues are identified, the department files
memoranda or comments in these proceedings to
preserve its rights and explain its position to the CPUC.
Further, the department believes the implementation of
several automated tools has allowed it to make progress in
monitoring dispatch statements from the investor-owned
utilities, but it indicates that some problem areas need
further attention. Finally, the department indicates that it
continues to prepare the annual revenue requirement for
the CPUC and to perform the financial and accounting
activities to support the department’s obligations under
the revenue bonds.
36 California State Auditor Report 2004-406 California State Auditor Report 2004-406 37
38 California State Auditor Report 2004-406
WATER QUALITY CONTROL BOARDS
Could Improve Their Administration of
Water Quality Improvement Projects
Funded by Enforcement Actions
Audit Highlights . . . REPORT NUMBER 2003-102, DECEMBER 2003
Our review of the State Water
California Environmental Protection Agency response as of
Resources Control Board’s
(state board) and Regional December 2003
Water Quality Control Boards’
The Joint Legislative Audit Committee (audit committee)
(regional boards) collection
of fines and subsequent asked the Bureau of State Audits (bureau) to provide
expenditure of those funds information to the Legislature and others to clarify
under the Porter-Cologne
how money designated to improve the State’s water quality
Water Quality Control Act
(State water quality act) is distributed throughout the State. Specifically, the audit
revealed the following: committee wanted the bureau to provide information related
to the State Water Resources Control Board (state board) and
þ As allowed by law,
a sample of Regional Water Quality Control Boards (regional
there is no correlation
between the amount of boards), including how they assess and collect fines, whether
fines collected by a given they spend the fines in accordance with the Porter-Cologne
regional board and the
Water Quality Control Act (State water quality act), and whether
amount the regional
board receives from the they spend the money they collect in or near the areas from
state board for water which they collect it. The state board reports to the California
quality projects.
Environmental Protection Agency (Cal EPA), which was created
þ From fiscal years 1998–99 in 1991. The audit committee also asked us to identify any
through 2002–03, the new funds available in the state board’s operating budget and
regional boards collected examine the ways those funds have been used. Additionally, the
about $26 million in
audit committee wanted to know the number and amount of
fines and the state board
committed $24.9 million fines the regional boards collected, the public or private entities
for water quality projects or individuals who violate the State water quality act (polluters)
throughout the State.
most commonly, and the changes in the amount of fines
þ The state board received assessed and collected over the last five years.
almost $21 million from a
legal settlement between As allowed by law, there is no correlation between the amount
the State and Atlantic
of the fines collected by a given regional board and the amount
Richfield Company and
Prestige Stations, Inc., and the regional board receives from the state board. When
shortly after committed allocating funds to regional boards, the state board attempts to
$19.2 million of those
determine how best to use available funds to meet the State’s
funds for water quality
most urgent water quality needs. It appears reasonable that the
projects throughout the
State. state board would base its fund commitments not on where
fines are generated but what represents the highest and best use
continued on next page
California State Auditor Report 2004-406 39
þ Despite appearing to of those funds. From fiscal years 1998–99 through 2002–03, the
focus on the main goal of regional boards collected about $26 million in Administrative
ensuring that public and
Civil Liabilities (ACL) and either spent or committed to spend
private entities comply
$24.9 million in water quality improvement projects.
with the State water
quality act, regional
boards sometimes fail
to follow through on Finding #1: Regional boards can retain some benefits from
enforcement actions. their enforcement actions by approving supplemental
environmental projects.
Although the regional boards do not keep the money associated
with the ACLs they impose locally, they can recover at least a
portion of the money or otherwise retain the benefits of their
enforcement actions. First, a regional board can endorse a water
quality improvement project within its region and forward it
for approval to the state board, which then can allocate funds
to projects it considers worthy. However, not all regional boards
take advantage of this option, and they may miss opportunities
to realize some benefits from their enforcement actions.
Second, regional boards might benefit from their enforcement
actions, in accordance with state board procedures, by seeking
partial reimbursement for staff costs they incurred in enforcing
the State water quality act. However, over the last five fiscal
years, only five of the nine regional boards used this option to
submit a total of roughly $670,000 in claims. Also, the state
board could do a better job of clearly communicating how and
when regional boards may submit claims and how they can use
those funds once they receive reimbursement.
Third, a regional board can retain the benefits of some of the
ACLs it assesses within its region by allowing a polluter to
perform or fund a supplemental environmental project (SEP) in
lieu of paying a portion of an ACL. Of the four regional boards
we visited, one retained benefits in lieu of almost $3.5 million
and another retained benefits in lieu of more than $2.2 million
of the ACLs they assessed in their respective regions. The four
regions we visited retained more than $6.5 million total for SEPs.
We recommended the state board encourage and assist the
regional boards in taking the following steps to ensure that the
regional boards receive all the funding they are entitled to under
the State water quality act:
• Identify any needed water quality improvement projects in
their regions and submit the appropriate funding requests to
the state board.
40 California State Auditor Report 2004-406 California State Auditor Report 2004-406 41
• Collect and compile staff costs associated with enforcing the
State water quality act and submit periodic claims for these
costs from the account, as the State water quality act allows.
• Evaluate strategies that other regional boards use to maximize
water improvement activities in their respective regions.
We also recommended the state board take steps to
communicate the intent of the practice to reimburse regional
boards for staff costs and the proper way to claim and use
such funds to ensure that regional boards are aware of and
understand how to use and subsequently spend those funds.
State Board Action: None.
Cal EPA stated that the state board would attempt to
implement the recommendations.
Finding #2: Regional boards do not always ensure that
polluters complete supplemental environmental projects or
pay fines.
Despite appearing to focus on the main goal of ensuring
that public and private entities comply with the State water
quality act, regional boards sometimes fail to follow through
on enforcement actions. For example, the Santa Ana and
San Francisco Bay regional boards often approved SEPs for their
enforcement actions but did not always ensure that the SEPs
were completed. Further, all four regional boards we visited had,
as state board policy allowed, suspended portions of or entire
ACLs for polluters that agreed to clean up the pollution or to
stop violations. However, the San Francisco Bay regional board
did not always follow up to determine that polluters either came
into compliance with the State water quality act in accordance
with the ACL suspension agreements or paid the ACLs.
Additionally, although all the regional boards appear to collect
the mandatory minimum penalties (MMPs) that they initially
assessed against polluters, the San Francisco Bay and Santa Ana
regional boards could assess fines more promptly when polluters
continue to commit violations subject to MMPs. Regional boards
that do not assess and collect fines appropriately and ensure
completion of SEPs limit their ability to protect the public
40 California State Auditor Report 2004-406 California State Auditor Report 2004-406 41
health and the environment and do not ensure that violators of
the State water quality act do not gain a competitive advantage
over those that comply with it.
We recommended the state board require the regional boards
to monitor and report on the progress and completion of these
projects to ensure that the state water system receives the
maximum benefit from SEPs the regional boards approve.
We also recommended the state board require the regional
boards to promptly issue and collect all ACLs to ensure that the
regional boards effectively use enforcement actions to discourage
violations of the State water quality act.
State Board Action. None.
Cal EPA stated that the state board would attempt to
implement the recommendations.
Finding #3: Because the state board does not always obtain
adequate information on all water quality project proposals,
it cannot ensure that it funds the most meritorious projects.
The state board’s Division of Financial Assistance (division) does
not consistently obtain written information regarding proposed
water quality improvement projects before submitting them to
the state board for review. One reason it has not consistently
obtained the information is inadequate direction from the state
board. Specifically, we found that in fiscal year 2002–03, for
20 water quality projects costing $17.9 million (64 percent of
the $27.9 million funded that required state board approval),
although the division followed procedures it has informally
established for reviewing water quality projects, it did not follow
these procedures in two cases, failing to obtain documentation
on two projects worth a total of $10 million from funds the
state board received from a legal settlement. By not gathering
all the necessary written information, it is not clear whether
the division analyzed the merits of the two projects before
submitting them for the state board to consider along with other
water quality projects; thus, the state board could not make a
fully informed decision regarding which water quality projects
were the best use of funds. One factor limiting the division’s
ability to evaluate and analyze requests for water quality projects
is that the state board has not formally adopted a policy to
guide the division in fulfilling this responsibility. Instead, the
42 California State Auditor Report 2004-406 California State Auditor Report 2004-406 43
division has its own set of informal procedures that, lacking
the authority of the state board behind them, the division is
under no obligation to follow.
We recommended the members of the state board establish and
approve a policy to guide division staff in processing project
requests to ensure that division staff consistently review funding
requests for water quality improvement projects. Further, to
ensure that the state board has the information necessary
to decide which of these water quality projects to fund, the
division should follow the established policy in all instances.
State Board Action. None.
Cal EPA stated that the state board would attempt to
implement the recommendations.
42 California State Auditor Report 2004-406 California State Auditor Report 2004-406 43
44 California State Auditor Report 2004-406
SUPERIOR COURTS
The Courts Are Moving Toward a More
Unified Administration; However, Diverse
Service, Collection, and Accounting Systems
Impede the Accurate Estimation and Equitable
Distribution of Undesignated Fee Revenue
REPORT NUMBER 2001-117, FEBRUARY 2002
Administrative Office of the Court’s response as of
Audit Highlights . . . March 2003
The Joint Legislative Audit Committee requested that the
Our review of certain court-
related fees and the fiscal Bureau of State Audits review a sample of superior courts
and administrative oversight to determine how much revenue is generated by fees not
of superior court operations
designated by the Lockyer-Isenberg Trial Court Funding Act of
found that:
1997 (funding act), which entities collect these revenues, and
þ The Lockyer-Isenberg Trial how the courts distribute them.
Court Funding Act of 1997
addressed the disposition
of some fees, but did not
Finding #1: The working group inappropriately categorized
specify who would receive
certain fees as undesignated.
others, referred to as
undesignated fees.
Although the funding act addressed the disposition of many
þ Due to the decentralized court-related fees, it did not specify who should receive others,
nature of the superior referred to as undesignated fees. To address this issue, a working
courts’ accounting and
group, comprised of representatives from selected courts and
collection processes,
counties, was formed to recommend to the Legislature how
it is prohibitively
complex to determine to distribute these fees. The working group identified many
the precise amount of fees and placed them in one of four categories. The first three
revenue generated by
categories recommended a particular distribution; however,
undesignated fees.
the fourth category represented all those fees for which a
þ We estimated that the recommendation could not be made. Our review of these fees
largest division in each
found that some were in fact designated.
of the three largest
superior courts together
generated $17.4 million in To ensure that all undesignated fees are properly identified and
undesignated fee revenue distributed, we recommended that the Administrative Office of
during fiscal year 2000–01,
the Courts (AOC) review and correct the working group’s list of
most of which was
distributed to the counties these fees.
in accordance with locally
negotiated agreements.
continued on next page
California State Auditor Report 2004-406 45
þ Several issues must be
AOC Action: Corrective action taken.
resolved before the State
can implement a consistent According to the AOC, the working group’s listing of
and equitable distribution
undesignated fees has been reviewed and corrected.
of undesignated fee revenue.
þ The Administrative Office of
the Courts has initiated a
Finding #2: The California Constitution mandates that the
wide-reaching management
entity incurring the cost in providing a service must retain
system for superior court
resources; however, such the fees.
actions will not ease efforts
to determine how much The California Constitution imposes the restriction that
revenue undesignated any revenue generated by certain undesignated fees must be
fees generate.
distributed to the entity that incurs the cost of providing the
service. This restriction does not apply to all governmental
charges, including fines or penalties; however, it does apply to
fees. Before a statewide designation could be assigned for any
given fee, all 58 counties would have to fund the delivery of
services in the same way. Therefore, when the State considers
imposing a statewide designation for a particular fee it must
first consider whether it is a court or county that provides
the service, which we found varies from one jurisdiction to
another. Currently, the superior courts and counties have made
stipulations in their local agreements for the distribution of
undesignated fee revenue.
Once the working group’s listing of undesignated fees has been
reviewed and corrected, we recommended that the AOC:
• Direct each superior court to identify the entity in its
jurisdiction that incurs the cost of providing the service
related to each undesignated fee on the list.
• Direct the superior courts to ensure that, in their agreements
with their respective counties, the courts distribute each of
these fees to the entity incurring the cost.
• Seek legislation designating the distribution of charges other
than fees, such as penalties and fines.
AOC Action: Partial corrective action taken.
According to the AOC, it has surveyed each superior court
regarding who incurs the cost, provides the service, and
retains each undesignated fee. The AOC also stated that
it has proposed language concerning the appropriate
distribution of undesignated fees to be included in the local
agreement between each superior court and its respective
46 California State Auditor Report 2004-406 California State Auditor Report 2004-406 47
county when the agreement is renewed. The AOC also stated
that it has proposed legislation to clarify the disposition of
undesignated fees, fines, and penalties where currently no
statutory reference provides for their distribution and use.
46 California State Auditor Report 2004-406 California State Auditor Report 2004-406 47
48 California State Auditor Report 2004-406
VACANT POSITIONS
Departments Have Circumvented the
Abolishment of Vacant Positions, and
the State Needs to Continue Its Efforts to
Control Vacancies
REPORT NUMBER 2001-110, MARCH 2002
Department of Finance’s response as of May 2003, State
Audit Highlights . . . Controller’s Office response as of March 2003, and
Department of Mental Health’s response as of November 2002
Our review of vacant positions
in the State disclosed that:
The Joint Legislative Audit Committee requested the Bureau of
þ Although the Legislature State Audits review vacant positions in the State and the uses
amended state law
of funding associated with the positions. Our review found
to shorten the period
a position can be that, although the Legislature amended state law to shorten the
vacant before it is to period a position can be vacant before it is abolished, the law’s
be abolished, the law’s
effectiveness is hindered by the efforts of state departments to
effectiveness is hindered
preserve positions. Additionally, the departments we reviewed
by departments’ efforts to
preserve positions. used the funding from vacant positions to carry out their
programs, in part, because certain costs have not been fully
þ The five departments we
funded. Finally, the Department of Finance (Finance) performed
visited misused certain
personnel transactions two reviews and plans to continue monitoring vacant positions
to circumvent the during the next two years, but has not established an ongoing
abolishment of
monitoring program. Specifically, we found that:
vacant positions.
þ Changes in state law have
Finding #1: The five departments we visited misused certain
not completely addressed
the reasons departments personnel transactions to circumvent the abolishment of
have lengthy vacancy vacant positions.
periods in some positions.
The policies and procedures related to “120” transactions, which are
þ The Department of
intended to legitimately move existing employees between positions,
Finance performed two
allow flexibility, require little documentation substantiating the
reviews and plans to
continue monitoring need for the transactions, and are not closely monitored. Although
vacant positions during the State’s policies do not specifically preclude departments from
the next two years, but has
performing these transactions to avoid having positions abolished,
not established an ongoing
monitoring program. circumventing state law is not a reasonable use of this form of
transaction. Nevertheless, our review of transactions at the five
þ A method to provide the
departments for a two-year period revealed that they initiated at least
Legislature with an up-to-
440 (89 percent) of 495 transactions to avoid the abolishment of
date yet reliable count of
vacancies still does not exist. vacant positions. However, our findings should not be interpreted to
mean that departments throughout the State performed 89 percent
California State Auditor Report 2004-406 49
of “120” transactions to preserve vacant positions, as we
selected some transactions to review because the patterns of
use appeared questionable.
Our analysis of “607” transactions at these same five departments
revealed that they are also sometimes being misused, though
not nearly as often as “120” transactions. Properly used,
“607” transactions propose new positions, delete positions, or
reclassify positions. However, the departments performed, on
average, at least 22 percent of the transactions we analyzed to
preserve positions. More controls exist for “607” transactions
than for “120” transactions, but the State requires little external
accountability for “607” transactions. As we found with
“120” transactions, state policies do not specifically preclude
the use of “607” transactions to preserve existing positions.
However, circumventing state law is not a reasonable use for
the transactions.
We recommended that Finance issue an explicit policy to prohibit
the use of “120” and “607” transactions to preserve vacant
positions from abolishment. Additionally, we recommended that
the State Controller’s Office (SCO) issue guidance to departments
on processing these transactions consistent with the policy
issued by Finance. Further, the SCO should periodically provide
to Finance reports of such transactions. Finance should analyze
the reports to identify potential misuses of the transactions and
follow up with departments as appropriate. Departments should
discontinue their practice of using “120” and “607” transactions
to circumvent the abolishment of vacant positions.
Legislative, Finance, and SCO Action: Legislation passed and
corrective action taken.
In September 2002 the governor approved Chapter 1124,
Statutes of 2002, which amended Government Code,
Section 12439, to prohibit departments from performing
personnel transactions to circumvent the abolishment
of vacant positions. As a result, Finance did not issue an
explicit policy to prohibit the use of “120” and “607”
transactions to preserve vacant positions from abolishment.
In December 2002 the SCO issued guidance to departments
on processing the transactions consistent with the amended
statute. Further, the SCO provided reports of “120” transactions
to Finance in November 2002 and March 2003, respectively,
for Finance’s analysis and review. The SCO plans to provide
reports of “607” transactions to Finance in fiscal year 2003–04.
50 California State Auditor Report 2004-406 California State Auditor Report 2004-406 51
Finally, the five departments we visited reported to us they have
taken actions to discontinue or minimize the use of “120” and
“607” transactions to circumvent state law and, thus, ensure
that the transactions are used for appropriate reasons.
Finding #2: Despite changes, state law allows some positions
to remain vacant almost a year.
After the Legislature became concerned about the number of
vacant positions in state government, it amended Government
Code, Section 12439, in July 2000 to reduce to six months the
period of vacancy before the SCO abolishes vacant positions.
However, the amended law stipulates that the six months
must occur in the same fiscal year. This allows positions that
become vacant after January 1 to stay vacant for almost a year
before being abolished. Based on current law, the SCO’s system
tracks the vacancies until June 30 and then starts recounting
the six consecutive monthly pay periods on July 1. Thus,
some positions could be preserved from abolishment as long
as the SCO issued a payment for only two days, January 2
and December 31. Finance reported in January 2002 it plans
to examine the feasibility of amending state law to allow
the vacancy period to cross fiscal years. However, as Finance
also reported, the SCO’s 30-year-old position control system
requires significant changes to track vacancies without regard
to fiscal year. Finance plans to evaluate the potential cost to
modify the SCO’s system. Finance stated that if the cost is feasible,
it will address the funding in spring 2002.
We recommended that Finance, in conjunction with the SCO,
continue with its current plans to examine the costs associated
with modifying the SCO’s position control system to track
vacancies across fiscal years. If Finance determines that
the necessary system changes are feasible, it should seek to
amend Government Code, Section 12439, to require that the six
consecutive monthly pay periods for which a position is vacant
before abolishment be considered without regard to fiscal year.
Legislative and SCO Action: Legislation passed and corrective
action taken.
Chapter 1124, Statutes of 2002, amended state law to allow the
six consecutive monthly pay periods to occur within one fiscal
year or between two consecutive fiscal years. As a result, the SCO
has made the necessary changes to its position control system
and planned to implement the changes no later than June 2003.
50 California State Auditor Report 2004-406 California State Auditor Report 2004-406 51
Finding #3: The amended law has not resolved some of the
underlying causes of vacancies.
Changes in state law have not resolved some of the reasons
departments have positions with lengthy periods of vacancy.
The law currently provides departments with only one
circumstance to retain vacant positions and two circumstances
to reestablish vacant positions. In particular, the hard-to-fill
designation has not entirely solved the problem of departments’
inability to fill some vacant positions. Additionally, departments
stated that lengthy examination and hiring processes hinder
their ability to fill positions within six months. Further,
departments may maintain some vacant positions to absorb
other costs not fully funded.
We recommended that Finance continue to work with departments
and other oversight agencies to fully identify and address the issues
that lead to positions being vacant for lengthy periods. Finance
should then consider seeking statutory changes that provide it with
the authority to approve the reestablishment of vacant positions
in additional circumstances, including when delays in hiring and
examination processes extend the time it takes to fill positions.
Legislative Action: Legislation passed and corrective
action taken.
Chapter 1124, Statutes of 2002, amended Government Code,
Section 12439, to provide Finance with the authority to
approve the reestablishment of vacant positions when certain
conditions existed during all or part of the six consecutive
monthly pay periods. The conditions include when a hiring
freeze is in effect, when a department has been unable to fill
positions despite its diligent attempts, and when positions
are determined to be hard-to-fill. Additionally, the amended
statute authorizes the SCO to reestablish vacant positions when
department directors certify that specific circumstances existed
in the six consecutive months.
Finding #4: The SCO’s system for identifying positions to be
abolished cannot track a position reclassified more than once
during the fiscal year and does not have the capability to account
for “120” transactions performed to circumvent abolishment.
The tracking system the SCO uses is supposed to follow a
position through subsequent reclassifications. Thus, if the
combined vacancy period before and after the reclassification
52 California State Auditor Report 2004-406 California State Auditor Report 2004-406 53
is more than six consecutive pay periods, the SCO flags the
reclassified position for potential abolishment. However, the
SCO’s system for identifying positions to be abolished has two
significant limitations. First, it cannot track a position that is
reclassified more than once during the fiscal year. This causes
the SCO to have to manually research transactions, which
increases the risk that transactions may be missed. Second, the
system does not have the capability to account for the use of
“120” transactions performed to circumvent the abolishment
of vacant positions. Our review found that departments use
“120” transactions extensively to preserve vacant positions, thus
increasing the likelihood of the tracking system missing vacant
positions that should be abolished.
We recommended that the SCO consider the feasibility of
modifying its system for identifying positions to be abolished
so it can track them through more than one reclassification.
Additionally, as we discussed in Finding #1, we recommended
that the SCO periodically provide to Finance reports of “120”
transactions so that Finance can identify potential misuses of
the transactions and follow up with departments as appropriate.
SCO Action: Corrective action taken.
The SCO stated it has completed modifications to its system
to track five different position changes. In addition, it has
twice provided to Finance reports of “120” transactions for
Finance’s analysis of potential misuses of the transactions.
Finding #5: The Department of Mental Health did not adhere
to the established controls requiring it to seek external
approval for certain “607” transactions.
The Department of Mental Health (Mental Health) did not
submit two transactions to Finance, even though they involved
reclassifications to positions above the minimum salary level
required for Finance’s approval. Mental Health believed one
of these transactions did not need Finance’s approval because
it downgraded a position and the related salary. Nonetheless,
Finance staff stated that both transactions needed its approval.
We recommended that Mental Health ensure that it submits for
Finance’s required approval all “607” transactions that involve
a reclassification to positions above the specified minimum
salary level.
52 California State Auditor Report 2004-406 California State Auditor Report 2004-406 53
Mental Health Action: Corrective action taken.
Mental Health stated it has submitted for Finance’s review
and approval the reclassifications involving positions above
the specified minimum salary level.
Finding #6: Despite Finance’s recent scrutiny of vacant
positions, ongoing monitoring is needed.
Finance performed two reviews to address the Legislature’s
concerns about the number of vacant positions. The reviews
recommended that certain departments eliminate or redirect
4,236 positions beginning in fiscal year 2000–01. Additionally,
Finance recommended in its first report that the funding
from the positions be reallocated to the departments for other
program uses. In its second report, Finance did not identify
the total amount of funding to be eliminated or reallocated. In
January 2002, Finance stated that it plans to conduct further
reviews in 2002 and 2003. However, no ongoing monitoring
program has been established. Without a regular process to
monitor vacant positions, data may not be available to enable
the State’s decision makers, including the Legislature, to make
informed decisions.
To ensure that the State continues to monitor vacant positions
and the associated funding, we recommended that Finance
direct departments to track and annually report the uses
of such funding. Additionally, Finance should continue to
analyze the departments’ vacant positions and uses of funds,
recommend to what extent departments should eliminate
vacant positions, and either eliminate or redirect the funding for
the positions. Further, it should periodically report its findings
to the Legislature to ensure that the information is available for
informed decision making.
Finance Action: Corrective action taken.
Finance stated that the Budget Act of 2002, Section 31.60,
directed it to abolish at least 6,000 positions from all
positions in state government that were vacant on
June 30, 2002. The section also authorized Finance to
eliminate at least $300 million related to the abolished
positions. The section further required Finance to report to
the Legislature on the specific positions abolished. Finance
reported in November 2002 that it abolished 6,129 positions
and $300.4 million. However, our review of Finance’s report
54 California State Auditor Report 2004-406 California State Auditor Report 2004-406 55
revealed that it included 560 public safety positions,
representing $23.5 million in cost savings, that Section 31.60
excluded from abolishment. Additionally, we found errors
that understated the abolished positions by 39 and cost savings
by $6.7 million. Moreover, we could not determine whether
the positions Finance abolished included any that had been
eliminated by other provisions of law. Chapter 1023, Statutes
of 2002, also directs Finance to abolish at least 1,000 vacant
positions by June 30, 2004, and to report to the Legislature
on the specific positions abolished.
Finding #7: Actual funding needs may be obscured because
departments use funding from excess vacant positions to
carry out their programs, in part, because certain costs have
not been fully funded.
Our review at five departments found that they spent the funds
budgeted from excess vacant positions for the higher costs of
their filled positions, overtime, personal services contracts,
and operating expenses. For example, the five departments in
total spent the majority of their funding from excess vacant
positions on the higher cost of filled positions, in part because
of their efforts to hire in hard-to-fill classifications included
such expenses as hiring above the minimum salary level
and pay differentials. The departments told us, and Finance
acknowledges, that the State typically has not augmented
department budgets for increases in the cost of filled positions.
Because certain program costs have not been fully funded,
departments sometimes use funding from excess vacant
positions to bridge the gap between their actual costs and their
present funding levels.
To ensure that budgets represent a true picture of how departments
manage their programs, we recommended that Finance continue
to assess if common uses of funds resulting from vacant positions
represent unfunded costs that should be reevaluated and
specifically funded.
Finance Action: Corrective action taken.
Finance stated that the Budget Act of 2002, Section 31.70,
authorized it to reinstate up to one-half the funding
reduced by Section 31.60 for fiscal year 2002–03
appropriations to ensure that departments have sufficient
levels of funding. As of April 1, 2003, Finance approved the
reinstatement of $37.4 million in funding.
54 California State Auditor Report 2004-406 California State Auditor Report 2004-406 55
Finding #8: A method to provide reliable, up-to-date information
about the number of vacant positions does not exist.
Legislators have expressed concerns because current point-in-
time information on vacant positions from the SCO appears
to show a substantially higher number of vacancies than
those presented by Finance. The vacancy number that Finance
presented is derived from past year actual information from
other SCO reports. However, this number is generally not
available until about five to six months after the end of the
fiscal year. The SCO and Finance worked together to calculate a
reliable, up-to-date number of vacancies as of June 30, 2001. Their
efforts were beneficial as they provided a better understanding of
the differences in the various data used by the entities. However,
the efforts resulted in an estimate of vacancies that proved to
be inaccurate.
To ensure that the State’s decision makers have an accurate
picture of the number of vacancies during the fiscal year, we
recommended that Finance and the SCO, in consultation with
the Legislature, work together on a method to calculate an up-
to-date and reliable number of vacant positions statewide.
Ü
Finance Action: None.
Finance stated that, because of the state hiring freeze and
the reductions of positions over the next several months,
it would not be possible for it and the SCO to develop a
method to provide up-to-date and reliable calculations of
vacant positions.
56 California State Auditor Report 2004-406
FRANCHISE TAX BOARD
Its Performance Measures Are Insufficient
to Justify Requests for New Audit or
Collection Program Staff
REPORT NUMBER 2002-124, MAY 2003
Audit Highlights . . . Franchise Tax Board Response from State and Consumer
Services Agency as of November 2003
Our review of the Franchise
Tax Board’s (board) audit and Ap rimary revenue-generating agency for the State, the
collection activities revealed Franchise Tax Board (board) processes individual and
the following:
corporation tax returns, audits certain tax returns for
þ The board does not errors, and collects delinquent taxes. Between fiscal years
always describe the 1990–91 and 2001–02, the board provided an average of
differing cost components
$31 billion in annual tax revenues to the State, over 60 percent
of its various performance
of the State’s General Fund. Although many taxes are self-
measures, potentially
leading to confusion assessed by individuals and companies, the board’s audit
about program results. program reviews the accuracy of tax returns, assessing
þ Between fiscal years additional taxes when appropriate. In turn, the collection
1998–99 and 2001–02, program pursues delinquent taxpayers identified through the
recently acquired audit board’s various assessment activities.
staff returned $2.71 in
assessments for each $1
The Joint Legislative Audit Committee requested that we review
of cost.
the board’s audit and collection programs, identifying recently
þ Because of limitations
acquired audit and collection program positions, assessing the
in board data, we could
board’s calculation of the costs and benefits of these positions,
not isolate the return
on 175 new collection and determining whether the board uses these positions as
program positions. the Legislature intended. We were also asked to review the
board’s methodology for calculating the costs and benefits of
þ The board’s process
for assessing the its audit and collection programs. Finally, we were asked to
incremental benefit of determine whether a point of diminishing returns exists
recently acquired audit
where additional audit and collection program positions do
and collection program
not generate a $1 to $5 cost-benefit ratio (CBR) and, if so,
positions is flawed.
to determine the board’s actions to shift those positions to
þ The board allows some other activities. We found that:
collection program
positions to remain
unfilled in order to pay for
other expenses.
California State Auditor Report 2004-406 57
Finding #1: The board uses a variety of performance
measures and does not always describe their differences in
public documents.
The board uses a variety of measurements to gauge audit and
collection program performance and to assign workloads to
staff. Most of these measurements take into account some of the
costs and related benefits for program activities, but the various
measurements may include differing calculations of costs, which
the board does not always fully describe in public documents.
As a result, misunderstandings of the board’s performance may
arise. Ideally, a performance measure should compare all the
benefits of a program with all the costs of producing them.
However, when the board’s budget documents project a return
of at least $5 in benefits, whether assessments or revenues, for
each $1 of cost for new positions, the projected return does not
reflect allocated costs for departmental overhead, such as rent
and utilities, and the understated costs are not disclosed. In
contrast, the historical measures reported in the board’s annual
operations reports are calculated using full costs.
The board’s performance measures for its audit and collection
programs also suffer from a partial overlap in claimed benefits,
another potential source of confusion about returns on costs.
After 120 days, tax assessments the audit program claims as
benefits become the collection program’s accounts receivable,
which, if collected, are also counted as benefits of the
collection program.
To more completely and clearly reveal its programs’ costs
and benefits, the board should consider using the complete
measurement of the audit program’s performance that we
have described in our report. This measurement compares all
the benefits—the total revenues that result over time from the
auditors’ assessments of additional taxes—with the total costs to
produce them, including the costs of collection. If it determines
that its current information system cannot produce the data
necessary for such a measurement, the board should consider
the needs of a complete measurement when it upgrades or
changes its current information system.
If the board decides not to use the complete measurement and
continues to use separate performance measurements for the
audit and collection programs, in budget change documents and
other reports given to external decision makers, it should:
58 California State Auditor Report 2004-406 California State Auditor Report 2004-406 59
• Explicitly disclose the elements not included in the cost
components of various performance measures used to assess the
audit and collection programs and the effect of their absence.
• Disclose the overlap in benefits claimed by its audit and
collection programs.
Board Action: Partial corrective action taken.
The board reports that it has developed and deployed an
enterprise Activity Based Costing (ABC) tool, which provides
information on the costs to perform various processes and
business activities. The ABC model includes both direct and
indirect processes and activities, which contribute toward
the board’s programs, including programs that provide
revenue to the state. The ABC model enables the board to
calculate the “cost” element of the CBR, but additional
work is required to link the cost of the work to the
revenue generated.
The board reports that its Activity Based Revenue (ABR)
effort will link the cost of work to the revenue generated
by adding “revenue streams” as work products. By adding
the revenue stream costs to ABC, the board will be able to
more completely measure program performance—that is,
total cost and total benefit for programs such as audit and
filing enforcement.
The board states that its ABR effort will initially use
existing fiscal year 2002–03 cost and revenue stream
data, and will produce test performance measures by
Spring 2004. The board will evaluate the test performance
measures and make recommendations for improvements
for fiscal year 2003–04 data collection. Additionally,
through its ABR effort, the board is evaluating the
ability of its current information systems to produce
the data required for a complete measurement, and
will make recommendations for future consideration.
The board states that the test performance measures and
recommendations will be complete by June 2004.
Finally, the board reports that it has begun to provide
clarification to performance measures reported to external
decision makers. It states that recent documents provided
to the Department of Finance (Finance) and the Legislative
Analyst’s Office (LAO) have both footnoted the measurement
type and clarified its discount status. The board plans to
continue this practice in future communications.
58 California State Auditor Report 2004-406 California State Auditor Report 2004-406 59
Finding #2: Prospective cost-benefit ratios for individual
audit types do not reflect historical performance.
The board’s historical performance measure of returns on
its audit program includes the full effect of indirect costs,
including departmental overhead, but the prospective
CBRs for individual audit types do not. Thus, when full
departmental overhead costs are taken into account, certain
prospective CBRs drop below the anticipated return of $5 in
assessments generated for every $1 of cost.
When we deflated the board’s projected returns by actual
departmental overhead costs, we found that had the board
included full departmental overhead costs, the total actual
return in assessments would closely resemble the board’s
projections. However, when we examined individual audit types,
the variance was much greater, and the workplan projections
failed to mirror historical returns. For example, the average
assessment per $1 invested in personal income tax desk audits
over the period was $3.87, whereas the board estimated that
they would return $6.36. Even after deflating the workplan
projections by departmental overhead costs, actual assessments
per dollar of cost were still $1.75 less than originally projected.
The board believes that these differences generally arise
from adjustments the audit program makes to historical data
ultimately reported in operations reports. According to the
board, the adjustments are made to correct misallocated charges
and miscoded revenue and to better match costs to benefits. If
the audit program corrects errors in the financial reporting
system when it recalculates the basis for projections, we
would expect that the board would use the corrected data
in the operations reports, which it publishes after it prepares
the workplans.
If the board believes that information it publishes in its
operations reports is not accurate, even though it is based on the
board’s financial accounting system, the board should:
• Ensure that its financial accounting system reports accurate
information, and
• Correct data it believes to be inaccurate before it publishes the
information in its operations reports.
60 California State Auditor Report 2004-406 California State Auditor Report 2004-406 61
To track the accuracy over time of its calculations of the
prospective CBRs for individual audit workload types, the board
should compare these prospective CBRs against actual returns
annually. The board should make the results available to Finance
and the LAO and should also include them in the board’s annual
report to the Legislature on the results of its audit and collection
activities. If the board believes this information is confidential,
it can cloak the identity of the individual audit workloads in its
annual report to the Legislature. Moreover, the board should
use the results of the comparison in future calculations of
prospective CBRs.
Board Action: Corrective action taken.
The board states that it is reviewing its methods of gathering
data used in its operations reports and is reviewing actual
costs and revenue reported. According to the board, progress
has been made in changing the methods of assigning
support costs for many sections beginning with fiscal year
2003–04. The board states that it is also continuing to look at
the methods used to compile the operations reports.
The board further reports that it is compiling the
information necessary to compare prospective CBRs
against actual returns for its current workplan process and
will include this information in its annual report to the
Legislature. The board plans to use this information as one
of several factors in its calculations of projected CBRs.
Finding #3: The board’s budget change documents do not
show how new audit positions have met projected results.
Although the board’s current resource request format for new
audit positions provides decision makers with more detail
regarding audit workloads than the board typically provided
prior to our 1999 report titled Franchise Tax Board: Its Revenue
From Audits Has Increased, but the Increase Did Not Result From
Additional Time Spent Performing Audits, its current format is still
insufficient to demonstrate both the workload types to which
the board intends to assign new staff and the historical return
on those workloads. In addition, historical actual returns on the
specific workloads are not measured against the projections used
to justify the staff increases.
While the board’s resource request format does include many
of the features we previously recommended, it does not detail
historical and projected hours and assessments by audit type as
60 California State Auditor Report 2004-406 California State Auditor Report 2004-406 61
we had suggested. Rather, the board summarizes all desk, field,
and Internal Revenue Service follow-up audit activity into a
single category, which obscures the very different returns on
each of the personal income tax and corporation tax audit types.
Without this information, decision makers are left without an
accurate tool against which to measure whether the board’s
staffing increases return their projected assessments.
To provide useful information to decision makers when requesting
additional audit positions, the board should use a format, shown
in our 2003 report, that details the types of activities new auditors
will perform as well as the projected assessments and historical
assessments resulting from these activities. Additionally, the board
should revise its supporting audit workplan to include the actual
returns of each of the specific workload types for the most recently
completed fiscal year.
Board Action: Pending.
The board states that before making any changes to its
resource request format and supporting audit workplan it
must first discuss them with the users of these documents.
The board reports that due to the recent budget situation
and the change in administration, discussions with the
users of these reports have been delayed. According to
the board, its budget director is scheduled to meet with
Finance in November 2003 to discuss our suggested changes
to these documents.
Finding #4: The incremental benefit of new audit positions
was originally negative but has increased recently and
measuring the incremental benefit of additional collection
program staff proves elusive.
Although sufficiently demonstrating the overall cost-
effectiveness of its audit and collection programs, the board’s
process for assessing the incremental benefit of recently acquired
audit and collection program positions is flawed. The board uses
an inadequate methodology to determine whether increases in
audit assessments or collection program revenues resulted from
additional positions. Rather than using an incremental approach
to isolate assessment or revenue pools likely to have been
affected by additional audit or collection program positions, the
board compares its total projected audit assessments against its total
actual audit assessments and its total projected collection program
revenue against its total actual collection program revenue.
62 California State Auditor Report 2004-406 California State Auditor Report 2004-406 63
To determine the incremental benefit of the 340 net new audit
positions between fiscal years 1992–93 and 2001–02, we isolated
their budgeted costs and the actual assessments associated with
the audits to which the board would have likely assigned the
new staff. We found that the new audit positions generated
average assessments of only $0.79 for every $1 of cost. It is
important to note that the return on the additional positions
shows improvement over more recent fiscal years. Between
fiscal years 1998–99 and 2001–02, the new positions produced
average assessments of $2.71 for every $1 of cost. Changes in the
economy probably affected the return on these audit positions,
but a significant cause of the low return is that despite having
additional staff, the board did not increase the number of hours
staff spent performing audits. The collection program received
175 positions between fiscal years 1998–99 and 2001–02,
promising increased revenue of $179 million over that period.
However, because of limitations in board data, we could not
determine the return on the collection program positions.
See the recommendation under finding #3 above for addressing
the measurement of the effectiveness of additional audit
positions. To better measure the effectiveness of its additional
collection positions, the board should develop a methodology
for determining the incremental return of new collection
program positions received in any given year. This type of
analysis should isolate changes over a base year in revenue pools
that are affected by the new positions and compare the resulting
revenue against all costs resulting from the new positions.
Board Action: Partial corrective action taken.
The board reports that it is well on its way towards
completing the design of a more refined methodology for
measuring the effectiveness of manual collection efforts.
The board states that it has established a consensus across
the collection program as to the definition of “proactive,”
“reactive,” and “automated” collection activities. The board
reports that it has also created a conceptual framework
for measuring inputs in terms of time expended by direct
collection and support staff and matching the results in
terms of dollars collected. This new framework will allow the
establishment of a base year and comparison of results from
year to year. The board reports that it has populated this
model, run preliminary tests, and is currently evaluating the
62 California State Auditor Report 2004-406 California State Auditor Report 2004-406 63
results of those tests. Although the board plans to implement
the new methodology in January 2004, it concedes that this
target date may slip partially because of budget cuts.
Finding #5: The board’s justification for new collection
program positions does not reflect its current process for
assigning work.
Unlike the audit program, which both justifies new positions
and assigns work based on a workplan process that prioritizes
work according to a CBR, the collection program currently
uses a similar workplan process only to justify its increases in
collection program positions. In actually assigning work, the
board relies on the recently implemented Accounts Receivable
Collection System (ARCS) to rank accounts according to various
risk and yield factors that predict the likelihood of collection
as well as the ultimate amount the system expects to collect.
According to the director of the board’s special programs
bureau, now that the collection program has nearly two years of
collecting experience using ARCS, analysis is under way to use
data from the system to justify future staffing needs.
To more accurately represent how it actually allocates
resources, the collection program should continue to develop
a methodology based on ARCS for justifying future collection
program positions. The revised process should include all
relevant costs, including an allocation for departmental
overhead, in addition to the ARCS’ risk and yield factors. The
estimated expenditures and projected revenues related to
each new staffing request should be easy to compare against
actual results.
Board Action: Partial corrective action taken.
The board reports that the workload tracking and revenue
assignment methodology discussed above will complement
the process used to project potential revenue from new
collection positions that may be added in the future. The
board expects to have this new reporting methodology in
place by January 2004.
64 California State Auditor Report 2004-406 California State Auditor Report 2004-406 65
Finding #6: The board leaves some approved collection
program positions unfilled.
The board is not using all of its funding for collection program
salaries to actually fill authorized positions, but is instead using
some funding for other costs. Periodically, the board rewards
employees for meritorious performance through pay increases,
or merit salary adjustments (MSA), above the initial salary
funding for their positions. Before fiscal year 1999–2000, the
board received budget augmentations to fund its MSAs, but
beginning in fiscal year 1999–2000, the board’s MSA funding
ended. The difference between the total hours collection
program staff worked and the total budgeted hours for the
collection program increased by 5 percent shortly after the board
lost its separate funding for MSAs.
Since the loss of separate MSA funding, the board has required
each branch to achieve savings to pay for the branch employees’
MSAs, allowing them to realize the savings from unfilled
positions. The board believes state departments must leave
positions vacant or they will overspend their salaries and wage
budgets. However, Government Code Section 12439 requires
that positions that are continuously vacant for six months
be eliminated and Finance recently began eliminating those
positions in state departments.
For the board to be consistent with the intent of budget control
language and Finance, it should not, as a long-term strategy,
leave collection program positions unfilled beyond the normal
time it takes to fill a position.
Board Action: Corrective action taken.
The board reports that Finance removed all vacancies in
existence on June 30, 2003, but has since returned some of the
positions. According to the board, a small number of vacancies
currently exist, but it states that virtually every vacancy in the
collection program will be filled by the end of December 2003.
The board also states that it will fill any future vacancies at the
earliest opportunity. Finally, the board states that any future
funding requests for additional positions will be based on a
realistic estimate of appointment dates for the new employees.
64 California State Auditor Report 2004-406 California State Auditor Report 2004-406 65
66 California State Auditor Report 2004-406
FEDERAL FUNDS
The State of California Takes Advantage
of Available Federal Grants, but Budget
Constraints and Other Issues Keep It
From Maximizing This Resource
REPORT NUMBER 2002-123.2, AUGUST 2003
Departments of Finance and Health Services responses as of
Audit Highlights . . . October 2003
Our review of federal grant The Joint Legislative Audit Committee (audit committee)
funding received by California requested that the Bureau of State Audits determine
found that:
whether California is maximizing the amount of federal
þ California’s share of funds it is entitled to receive for appropriation through the
nationwide grant funding, Budget Act. Specifically, we were asked to examine the policies,
at 11.8 percent, was
procedures, and practices state agencies use to identify and apply
only slightly below its
for federal funds. We also were asked to determine if the State is
12 percent share of the
U.S. population. applying for and receiving the federal program funds for which it is
eligible, and to identify programmatic changes to state-administered
þ Factors beyond the
programs that could result in the receipt of additional federal funds.
State’s control, such as
demographics, explain Finally, the audit committee asked us to examine whether the State
much of California’s is collecting all applicable federal funds or is forgoing or forfeiting
relatively low share of
federal funds for which it is eligible. Specifically, we found:
10 large grants.
þ Grant formulas using out-
Finding #1: California’s share of federal grants falls short of
of-date statistics reduced
California’s award share its population share, due in part to the State’s demographics
for another six grants. and federal grant formulas.
þ In a few cases, California California’s share of total federal grants awarded during fiscal year
policies limit federal
2001–02 was 11.8 percent, or $42.7 billion. This share is slightly
funding, but the effect
below California’s 12 percent share of the nation’s population
on program participants
may outweigh funding (population share). For 36 of 86 grants accounting for 90 percent
considerations. of total nationwide federal grant awards in fiscal year 2001–02,
þ California could increase California’s share was $5.3 billion less than an allocation based on
its federal funding in some population share alone. Grants for which California’s share falls
cases, but would have to below its population share include ones in which demographics
spend more state funds to
work against California, and formula grants that provide minimum
do so.
funding levels to states or use out-of-date statistics. With regard
continued on next page to state efforts to gain federal funding, we found that state
California State Auditor Report 2004-406 67
þ In some instances, departments appear to use reasonable processes to identify new
California has lost or expanded funding from federal grants and do not miss grant
federal funds because of
opportunities because of a lack of awareness.
its noncompliance with
program guidelines or by
not using funds while they Of the 36 grants for which the State’s share fell below its
are available. total population share, 10 are due to California’s low share
of a particular demographic group. For example, California
þ The statewide hiring freeze
received relatively little of the federal funds awarded to rural
and a pending 10 percent
cut in personnel costs may communities for water and waste disposal systems in fiscal year
further limit federal funds 2001–02 because its rural population is low in relation to the
for staff.
rest of the nation. In addition, California is the country’s sixth
youngest state, so it received less than its total population share
of grants to serve the elderly.
Funding formulas that do not allocate funds based on
populations in need result in a lower percentage of grant
funding for populous states such as California. Some grants
are awarded based on old statistical data that no longer reflect
the distribution of populations in need. For example, much
of a grant for maternal and child health services is distributed
according to states’ 1983 share for earlier programs, for which
California’s share was 5.8 percent. If the entire grant were based
on more current statistics, California’s award for fiscal year
2001–02 would be $23.6 million higher. Other grants provide
minimum funding to states without regard to need; the State
Homeland Security grant, for example, distributes more than
40 percent of its funds to states on an equal basis, with the
rest matching population share. For this grant, the average per
resident share for California will be $4.75, far less than the
$7.14 average per U.S. resident.
We recommended that as federal grants are brought up for
reauthorization, the Legislature, in conjunction with the
California congressional delegation, may wish to petition
Congress to revise grant formulas that use out-of-date statistics
to determine the share of grants awarded to the states.
Legislative Action: Legislation passed.
In September 2003, the Legislature passed an Assembly Joint
Resolution requesting that the California congressional
delegation use the opportunities provided by this year’s
reauthorization of several federal formula grant programs to
attempt to relieve the disparity between the amount of taxes
California pays to the federal government and the amount
the State receives in return in the form of federal formula
grants and other federal expenditures.
68 California State Auditor Report 2004-406 California State Auditor Report 2004-406 69
Finding #2: State and local policies have limited California’s
share of federal funds in a few cases.
State and local policies limit California’s share of federal funds
for three programs. For the Special Education–Grants to States
(Special Education) grant, California’s share is less than would
be expected based on its number of children because of the local
approach to deeming children eligible for special education
services. California’s federal funding for the In-Home Supportive
Services program is also low because of a state program that pays
legally responsible relatives to be caregivers, a type of activity
that is ineligible for federal reimbursement. Another agency has
proposed changing the Access for Infants and Mothers and State
Children’s Health Insurance (Children’s Insurance) programs to
increase federal grant funding. These policies have affected the
State’s ability to maximize the receipt of federal funds. However,
we did not review the effects on stakeholders that a change in
government policies for these programs would entail, effects
that may outweigh funding considerations.
The State’s Residual In-Home Supportive Services program,
funded solely from state and county sources, has likely reduced
the participation of some eligible recipients in the federally
supported Personal Care Services program. Both programs
provide various services to eligible aged, blind, and disabled
persons who are unable to remain safely at home without this
type of assistance. The Residual In-Home Supportive Services
program provides additional services and serves recipients who
are not eligible for the federal program. In addition, the State’s
program allows legally responsible relatives to be caregivers to
recipients. Legally responsible relatives include spouses and
parents who have a legal obligation to meet the personal care
needs of their family members. The federal program, in contrast,
does not allow payments to such caregivers.
The Department of Health Services (Health Services), in
conjunction with the Department of Social Services, may be
able to apply for a waiver under the Medical Assistance program,
called Medi-Cal in California. This recently developed waiver
program, called Independence Plus, may allow states to claim
federal reimbursement for a portion of the expenditures for
caregiver services provided by family members. The departments
estimate that the State may be able to save $133 million of costs
currently borne by the State’s Residual In-Home Supportive
Services program if this waiver is pursued. They indicated that
they are jointly exploring the feasibility of this waiver.
68 California State Auditor Report 2004-406 California State Auditor Report 2004-406 69
We recommended that Health Services continue to work with
the Department of Social Services to determine the feasibility
of pursuing an Independence Plus waiver that may allow
the State to claim federal reimbursement for a portion of
the expenditures for caregiver services provided by legally
responsible family members to participants in the In-Home
Supportive Services program.
Ü Health Services’ Action: Pending.
Health Services says that due to the state budget crisis and
lack of available staff to develop the new Independence
Plus waiver, it has suspended efforts in this area. When
it obtains additional resources to work on the waiver, it
says it will resume working with the Department of Social
Services to obtain federal approval.
Finding #3: California is not obtaining the maximum funding
available from some federal grants, but to do so generally
would require more state spending.
The State has lost some federal dollars because departments were
unable to obtain the matching state dollars required by federal
programs. For example, a Health Services program to recognize
high-quality skilled nursing facilities would have received more
federal grant money had state matching funds been available.
For fiscal years 2001–02 and 2002–03, the federal government
agreed to provide as much as $16 million for the program. In
fact, however, Health Services received only $4 million in state
funding for this program during fiscal year 2001–02, and it
received no state funding for the program in fiscal year 2002–03
because of cuts in General Fund spending. Consequently, the
State received $12 million less in federal funding than it would
have if it had spent the originally planned state match.
In addition, a reduction in state funding for several
transportation-related funds may lead to the loss of federal
funding for local projects. For example, the Los Angeles County
Metropolitan Transportation Authority reported that if it
could not replace traffic fund contributions, it risked losing
$490 million in federal funds for one project. In April 2003,
it requested that this project replace other projects already
earmarked for funding by another state transportation fund in
order to secure the federal funding. The use of state matching
dollars to maximize federal funds must, however, be balanced
against the State’s other priorities.
70 California State Auditor Report 2004-406 California State Auditor Report 2004-406 71
We recommended that the Legislature may wish to ask
departments to provide information related to the impact of
federal program funding when it considers cuts in General
Fund appropriations.
Legislative Action: Unknown.
Finding #4: The State has lost and may continue to lose
some federal funds because of an inability to obligate funds,
federal sanctions, and budget constraints.
Over the last three fiscal years, agencies sometimes lost federal
funds by failing to obligate funds within the grants’ period
of availability. In addition, noncompliance with program
guidelines in four instances resulted in funding losses of more
than $758 million, mostly related to the lack of a statewide
child support automation system. Finally, the statewide hiring
freeze sometimes keeps agencies from spending available federal
funding on grants staff, and a pending budget cut of 10 percent
in personnel costs may further limit spending of federal funds.
Period of Availability
The most significant loss of federal funds resulting from a failure
to obligate funds within a grant’s period of availability relates to
the Children’s Insurance program grant, which is administered
by the Managed Risk Medical Insurance Board (board).
According to the board, over the last three years the State has
forgone as much as $1.45 billion in available federal funding
because of a slow start-up and limited state matching funds.
As a state initiating a new program, California’s need to enroll
clients led to a slow start-up of the Children’s Insurance program
and a resulting loss of federal funds, which primarily match a
state’s spending on insurance coverage for enrollees. According
to a report by San Diego State University, administrative start-
up costs made up a high proportion of total costs for states
with new Children’s Insurance programs, but the federal
Children’s Insurance program limits federal funding for these
costs to 10 percent of total program costs. Thus, states with new
programs had to bear most of the costs for outreach and other
administrative expenditures during this phase.
California has not had enough qualified program expenditures
to use its total annual allocations each year, but expenditures
have been rising steadily. According to estimates by the board,
reimbursable program expenditures will approximate its annual
70 California State Auditor Report 2004-406 California State Auditor Report 2004-406 71
allocations in the next few years. Thus, the board estimates that
unspent grant funds that carry over from year to year, though
still large, will decline, and reversions to the federal government
will stop after October 2003.
Program Noncompliance
Noncompliance with program guidelines in four instances
resulted in funding losses of more than $758 million, mostly
related to the lack of a statewide child support automation
system. Since 1999, California has paid federal penalties for
failing to implement a statewide child support automation
system. Through July 2003, the total amount of federal
penalties paid by the State amounted to nearly $562 million.
The estimated penalty payment for fiscal year 2003–04 is
$207 million.
As a step toward eliminating the penalties, the Legislature
enacted Chapter 479, Statutes of 1999, providing guidelines for
procuring, developing, implementing, and maintaining a single,
statewide system to support all 58 counties and comply with all
federal certification requirements. In June 2003, the Department
of Child Support Services and the Franchise Tax Board, which is
managing the project, submitted a proposal to the Legislature
to enter into a contract with an information technology
company to begin the first phase of project development in
July 2003, with implementation in the 58 counties completed by
September 2008. The total 10-year project cost is $1.3 billion, of
which $801 million is for the contract. The federal government
has conditionally approved the project, which is estimated to be
eligible for 66 percent federal funding.
Hiring Freeze and Proposed 10 Percent Staff Reduction
In order to address the State’s significant decline in revenues,
Governor Gray Davis has undertaken several initiatives to
reduce spending on personnel. These include a hiring freeze in
effect since October 2001 and a 10 percent reduction in staffing
proposed in April 2003. The hiring freeze already has had a
negative effect on some federal programs, and the 10 percent
reduction may affect them as well. After the October 2001
executive order, the Department of Finance (Finance) directed
agencies, departments, and other state entities to enforce the
hiring freeze. It also established a process for exempting some
positions. The process includes explaining why a particular
72 California State Auditor Report 2004-406 California State Auditor Report 2004-406 73
position should be exempted and what the effect of not
granting an exemption would be. Departments and their
oversight agencies must approve the exemptions and then
forward them to Finance for approval.
In response to our audit survey, staff at two departments said
the hiring freeze and an inability to obtain exemptions had
affected their federal programs negatively. In September 2002,
the U.S. Centers for Disease Control and Prevention (CDC)
wrote to Health Services noting vacant positions within the
State’s National Cancer Prevention and Control program
and difficulties in filling vacancies due to the state-imposed
hiring freeze as a major weakness. In a December 2002 letter
of response to the CDC, Health Services indicated that it had
filled some vacant positions, and in March 2003 Health Services
sent exception requests for five federally funded positions
to Finance, four of which Finance denied. As of June 2003,
Health Services said that the CDC planned to reduce its grant
for the 12 months ending June 30, 2004, to $8.4 million
from the $10.6 million awarded for the nine months ending
June 30, 2003. Health Services said an important element
in the CDC’s reduction was Health Services’ inability to fill
vacant federally funded positions.
Similarly, the U.S. Department of Agriculture (USDA) informed
the Department of Education’s (Education) Nutrition Services
Division in September 2002 that through a management
evaluation it had identified corrective actions in several areas
where a lack or shortage of staff contributed to findings. It
was concerned about staffing shortages in a unit responsible
for conducting reviews and providing technical assistance to
sponsoring institutions participating in the child nutrition
programs. It warned that the USDA may withhold some or all
of the federal funds allocated to Education if it determines that
Education is seriously deficient in the administration of any
program for which state administrative funds are provided. In
May 2003, the State Superintendent of Public Instruction wrote
to the Governor’s Office asking for approval of a blanket freeze
exemption allowing Education to fill all division vacancies,
reestablish 12 division positions eliminated during the fiscal year
2002–03 reduction of positions, and exempt the division from a
proposed 10 percent reduction in staff.
We recommended that Finance ensure that it considers the loss
of federal funding before implementing personnel reductions
related to departments’ 10 percent reduction plans.
72 California State Auditor Report 2004-406 California State Auditor Report 2004-406 73
Finance Action: Partial corrective action taken.
Control Section 4.10 of the 2003 Budget Act, approved by
Governor Gray Davis in August 2003, requires the Director
of Finance to reduce departments’ budgets by almost
$1.1 billion and abolish 16,000 positions. Finance states that
it specifically omitted any federal funds from its August 2003
notice to the Legislature identifying the appropriations to be
reduced in accordance with this section. It did this so that
departments would not be required to reduce federal fund
appropriations without full consideration of the effects.
74 California State Auditor Report 2004-406
STATE MANDATES
The High Level of Questionable Costs
Claimed Highlights the Need for
Structural Reforms of the Process
Audit Highlights . . .
Our review of the Peace
Officers Procedural Bill of
Rights (peace officer rights) REPORT NUMBER 2003-106, OCTOBER 2003
and the animal adoption
mandates found that:
Commission on State Mandates’ and State Controller’s Office‘s
þ The costs for both responses as of December 20031
mandates are significantly
The Joint Legislative Audit Committee asked the Bureau of
higher than what the
Legislature expected. State Audits to review California’s state mandate process
and local entity claims submitted under the Peace Officers
þ The local entities we
Procedural Bill of Rights (peace officer rights) and animal adoption
reviewed claimed costs
mandates. Our review found that the costs for both mandates are
under the peace officer
rights mandate for significantly higher than what the Legislature initially expected.
activities that far In addition, we found that the local entities we reviewed claimed
exceed the Commission
costs under the peace officer rights mandate for activities that far
on State Mandates’
(Commission) intent. exceeded the Commission on State Mandates’ (Commission) intent.
Further, claimants under both mandates lacked adequate supporting
þ The local entities we
documentation and made errors in calculating costs claimed.
reviewed lacked adequate
supporting documentation
for most of the costs The problems we identified highlight the need for some structural
claimed under the peace reforms of the mandate process. Specifically, the mandate process
officer rights mandate and
does not afford the State Controller’s Office (Controller) the
some of the costs claimed
under the animal adoption opportunity to perform a field review of the first set of claims
mandate. for new mandates early enough to identify potential claiming
problems. In addition, the Commission could improve its
þ Structural reforms are
reporting of statewide cost estimates to the Legislature by disclosing
needed to afford the State
Controller’s Office an limitations and assumptions related to the claims data it uses to
opportunity to perform develop the estimates. Finally, Commission staff have indicated that
a field review of initial
the Commission will not be able to meet the statutory deadlines
claims for new mandates
early enough to identify related to the mandate process for the foreseeable future due to an
potential problems. increase in caseload and cutbacks in staffing. Specifically, we found:
þ Commission staff have
indicated that the
Finding #1: Local entities claimed reimbursement for
Commission will not be
questionable activities under the peace officer rights mandate.
able to meet the statutory
deadlines related to the
We question a large portion of the costs claimed by four local
mandate process for the
foreseeable future due to entities that received $31 million of the $50 million paid under
an increase in caseload the peace officer rights mandate, and we are concerned that
and a decrease in staffing.
1City of Los Angeles, San Francisco, San Jose, Los Angeles County, and San Diego County
responses as of January 2004.
California State Auditor Report 2004-406 75
the State already may have paid more than some local entities
are entitled to receive. In particular, we question $16.2 million
of the $19.1 million in direct costs that four local entities
claimed under the peace officer rights mandate for fiscal year
2001–02 because they included activities that far exceed the
Commission’s intent. Although we noted limited circumstances
in which the Commission’s guidance could have been
enhanced, the primary factor contributing to this condition
was that local entities and their consultants broadly interpreted
the Commission’s guidance to claim reimbursement for large
portions of their disciplinary processes, which the Commission
clearly did not intend. We also noted that the local entities we
reviewed did not appear to look at the statement of decision or
the formal administrative record surrounding the adoption of
the statement of decision for guidance when they developed
their claims.
We recommended that, to ensure local entities have prepared
reimbursement claims for the peace officer rights mandate that
are consistent with the Commission’s intent, the Controller audit
the claims already paid, paying particular attention to the types
of problems described in our report. If deemed appropriate based
on the results of its audit, the Controller should request that the
Commission amend the parameters and guidelines to address any
concerns identified, amend its claiming instructions, and require
local entities to adjust claims already filed. The Controller should
seek any statutory changes needed to accomplish the identified
amendments and to ensure that such amendments can be
applied retroactively.
We also recommended that, to assist local entities in preparing
mandate reimbursement claims, the Commission include
language in its parameters and guidelines to notify claimants
and the relevant state entities that the statement of decision is
legally binding on all parties and provides the legal and factual
basis for the parameters and guidelines; it also should point out
that the support for such legal and factual findings is found in
the administrative record of the test claim.
Further, we recommended that all local entities that have
filed, or plan to file, claims for reimbursement under the peace
officer rights mandate consider carefully the issues raised
in our report to ensure that they submit claims that are for
reimbursable activities. Additionally, they should refile claims
when appropriate. Finally, if local entities identify activities
76 California State Auditor Report 2004-406 California State Auditor Report 2004-406 77
they believe are reimbursable but are not in the parameters and
guidelines, they should request that the Commission consider
amending the parameters and guidelines to include them.
Controller Action: Partial corrective action taken.
The Controller reports that it has developed an audit
program and initiated audits of the peace officer rights
claims. In addition, the Controller indicates that it has met
with Commission staff regarding a legislative proposal to
allow retroactive claiming when amendments are made to
reduce existing parameters and guidelines.
Commission Action: Corrective action taken.
Commission staff report that they have developed language
to implement our recommendation for inclusion in all new
parameters and guidelines adopted on or after December 3, 2003.
Local Entities Action: Pending.
The city of Los Angeles reports that it is working with its
consultant and the Controller to clarify what activities are
subject to reimbursement. It will then take appropriate action
based on that information. Los Angeles County reports that it
is revising its fiscal year 2002–03 peace officer rights claim in
light of our audit findings and the Controller’s draft claiming
instructions for conducting time studies. However, its 60-day
response did not address revisions to claims it submitted
for earlier years. The city and county of San Francisco
(San Francisco) disagrees with our findings related to the
peace officer rights mandate and believes that the activities
it claimed are allowable because it considers them to be an
integral part of investigation activities related to the peace
officer rights process and reasonable and necessary to protect
its peace officers’ rights in these cases. Finally, although the
Ü city of Stockton (Stockton) indicated in its initial response to
our report that it generally agrees with our recommendations
and plans to file amended claims, it did not provide us a
60-day response to update its status.
Finding #2: In varying degrees, claimants under the peace officer
rights and animal adoption mandates lacked adequate support
for their costs and inaccurately calculated claimed costs.
We question $18.5 million of the $19.1 million in direct costs
that four local entities claimed under the peace officer rights
mandate because of inadequate supporting documentation.
76 California State Auditor Report 2004-406 California State Auditor Report 2004-406 77
The local entities based the amount of time they claimed on
interviews and informal estimates developed after the related
activities were performed instead of recording the actual staff
time spent on reimbursable activities or developing an estimate
based on an acceptable time study.
Additionally, we noted several errors in calculations of costs
claimed under the peace officer rights mandate. Although we
generally focused on fiscal year 2001–02 claims, the largest
error we noted was in the fiscal year 2000–01 claim of one local
entity. It overstated indirect costs by about $3.7 million because
it used an inflated rate and applied the rate to the wrong set of
costs in determining the amount it claimed. We noted two other
errors related to fiscal year 2001–02 claims involving employee
salary calculations and claiming costs for processing cases
that included those of civilian employees, resulting in a total
overstatement of $377,000.
We also found problems with the animal adoption claims. The
four local entities we reviewed could not adequately support
$979,000 of the $5.4 million they claimed for fiscal year
2001–02. In some instances, this lack of support related to the
amount of staff time spent on activities. In another instance,
a local entity could not adequately separate the reimbursable
and nonreimbursable costs it incurred under a contract with
a nonprofit organization that provided shelter and medical
services for the city’s animals.
In addition, we noted numerous errors in calculations the four
local entities performed to determine the costs they claimed
under the animal adoption mandate for fiscal year 2001–02.
Although these errors caused both understatements and
overstatements, the four claims were overstated by a net total
of about $675,000. Several errors resulted from using the wrong
numbers in various calculations involving animal census data.
We recommended that the Controller issue guidance on what
constitutes an acceptable time study for estimating the amount
of time employees spend on reimbursable activities and under
what circumstances local entities can use time studies.
We also recommended that all local entities that have filed, or plan
to file, claims for reimbursement under the peace officer rights or
animal adoption mandate consider carefully the issues raised in
our report to ensure that they submit claims that are supported
properly. Additionally, they should refile claims when appropriate.
78 California State Auditor Report 2004-406 California State Auditor Report 2004-406 79
Controller Action: Partial corrective action taken.
The Controller indicates that it has been meeting with
representatives of local governments and local government
organizations to review proposed time study guidelines.
Local Entities Action: Partial corrective action taken.
Five of the six local entities we reviewed provided us a 60-day
response generally indicating that they had taken some
action to correct errors and develop better documentation to
support their claims. In particular, the cities of Los Angeles
and San Jose and San Diego County indicated that they
either have or plan to submit revised animal adoption claims
for fiscal year 2001–02. In addition, the city of Los Angeles
indicates that it corrected some errors in its peace officer
rights claiming process, and San Francisco reports that it is
working on developing and enhancing support for its peace
officer rights claim. Further, Los Angeles County reports
that it is revising its fiscal year 2002–03 peace officer rights
claim in light of our audit findings and the Controller’s draft
claiming instructions for conducting time studies. However,
none of the 60-day responses mentioned whether or not the
entities plan to submit revised peace officer rights claims for
fiscal year 2001–02. Finally, although Stockton indicated in
its initial response to our report that it generally agrees with
our recommendations and plans to file amended claims, it
did not provide us a 60-day response to update its status.
Finding #3: The Commission’s animal adoption guidance
does not adequately require claimants to isolate
reimbursable costs for acquiring space and its definition of
average daily census could be clearer.
Although the guidance related to the animal adoption mandate
generally is adequate, the Commission’s formula for determining
the reimbursable amount of the costs of new facilities does not
isolate how much of a claimant’s construction costs relate to
holding animals for a longer period of time. The two local entities
we audited that claimed costs for acquiring space in fiscal year
2001–02 used the current formula appropriately to prorate their
construction costs. However, one of them needed space beyond
that created by the mandate; as a result, the costs it claimed
probably are higher than needed to comply with the mandate.
In addition, we found that one local entity understated its
annual census of dogs and cats by including only strays in the
figure, instead of including all dogs and cats. The entity made
78 California State Auditor Report 2004-406 California State Auditor Report 2004-406 79
this mistake because it used a definition from an earlier section
of the parameters and guidelines that limited the census number
to strays. Although the parameters and guidelines could have
been clearer by including a separate definition in the care of
dogs and cats section of the guidance, we believe the context
makes it clear that the total costs for all dogs and cats must
be divided by a census figure including all dogs and cats to
compute an accurate daily cost per dog or cat.
We recommended that the Legislature direct the Commission
to amend the parameters and guidelines of the animal
adoption mandate to correct the formula for determining the
reimbursable portion of acquiring additional shelter space. If
the Commission amends these parameters and guidelines, the
Controller should amend its claiming instructions accordingly
and require local entities to amend claims already filed.
In addition, we recommended that the Controller amend the
claiming instructions or seek an amendment to the parameters
and guidelines to emphasize that average daily census must
be based on all animals housed to calculate reimbursable
costs properly under the care and maintenance section of the
parameters and guidelines.
Legislative Action: Legislation proposed.
The Legislature has introduced Assembly Bill 533, which
would direct the Commission to amend the parameters and
guidelines of the animal adoption mandate to correct the
problem we identified. As of January 2004, the bill was being
discussed in assembly committees.
Controller Action: Pending.
Although the Controller indicates in its 60-day response
that it has met with Commission staff and Joint Legislative
Audit Committee (JLAC) staff regarding legislative proposals
to address our recommendations, the response did not
specifically address our recommendation related to care and
maintenance costs under the animal adoption mandate.
80 California State Auditor Report 2004-406 California State Auditor Report 2004-406 81
Finding #4: Structural reforms are needed to identify
mandate costs more accurately and to ensure that claims
reimbursement guidance is consistent with legislative and
commission intent.
The problems we identified related to claims filed under the
peace officer rights and animal adoption mandates highlight the
need for some structural reforms of the mandate process. For
example, it is difficult to gauge the clarity of the Commission’s
guidance and the accuracy of costs claimed for new mandates
until claims are subjected to some level of field review.
However, the mandate process does not afford the Controller
an opportunity to perform a field review of the claims for new
mandates early enough to identify potential claiming problems.
Also, inherent limitations in the process the Commission uses
to develop statewide cost estimates for new mandates result in
underestimates of mandate costs. Even though Commission
staff base statewide cost estimates for mandates on the initial
claims local entities submit to the Controller, these entities
are allowed to submit late or amended claims long after the
Commission adopts its estimate. The Commission could disclose
this limitation in the statewide cost estimates it reports to the
Legislature by stating what assumptions were made regarding
the claims data. In addition, Commission staff did not adjust for
some anomalies in the claims data they used to develop the cost
estimate for the animal adoption mandate that resulted in an
even lower estimate.
We recommended that the Controller perform a field review
of initial reimbursement claims for selected new mandates
to identify potential claiming errors and to ensure that costs
claimed are consistent with legislative and Commission intent.
In addition, the Commission should work with the Controller,
other affected state agencies, and interested parties to implement
appropriate changes to the regulations governing the mandate
process, allowing the Controller sufficient time to perform these
field reviews and identify any inappropriate claiming as well as
to suggest any needed changes to the parameters and guidelines
before the development of the statewide cost estimate and the
payment of claims. If the Commission and the Controller find
they cannot accomplish these changes through the regulatory
process, they should seek appropriate statutory changes.
80 California State Auditor Report 2004-406 California State Auditor Report 2004-406 81
We also recommended that Commission staff analyze more
carefully the completeness of the initial claims data used to
develop statewide cost estimates and adjust the estimates
accordingly. Additionally, the Commission should disclose the
incomplete nature of the initial claims data when reporting to
the Legislature.
Controller Action: Pending.
The Controller reports that it has met with Commission
staff regarding a legislative proposal to change the
statewide cost estimate process and make other structural
reforms. The Controller also indicates that it has met with
JLAC staff on proposed legislation for implementing several
of our recommendations.
Commission Action: Partial corrective action taken.
Commission staff indicate that they have met with the
Controller and plan to meet with other state agencies
and interested parties to discuss implementation of our
recommendations. In addition, staff report that they will
seek regulatory or statutory changes as necessary based on
these discussions. Further, Commission staff indicate that
they have developed additional assumptions and revised the
method for projecting future-year costs and for reporting
statewide cost estimates to the Legislature.
Finding #5: Commission staff assert that lack of staffing will
continue to affect the Commission’s ability to meet statutory
deadlines related to the mandate process.
Commission staff indicated that the Commission has developed
a significant caseload and has experienced cutbacks in staffing
because of the State’s fiscal problems. As a result, staff state that
the Commission will not be able to meet the statutory deadlines
related to the mandate process for the foreseeable future. This
will cause further delays in the mandate process in general,
including determination of the potential cost of new mandates.
We recommended that the Commission continue to assess its
caseload and work with the Department of Finance and the
Legislature to obtain sufficient staffing to ensure that it is able to
meet its statutory deadlines in the future.
82 California State Auditor Report 2004-406 California State Auditor Report 2004-406 83
Commission Action: Corrective action taken.
Commission staff report that, on an ongoing basis, they
will submit budget change proposals to the Department
of Finance for additional resources that support the
Commission’s caseload. In addition, staff will report caseload
status to the Commission at each hearing and to relevant
legislative committees upon request.
82 California State Auditor Report 2004-406 California State Auditor Report 2004-406 83
84 California State Auditor Report 2004-406
CALIFORNIA DEPARTMENT OF
EDUCATION
The Extensive Number and Breadth of
Categorical Programs Challenges the State’s
Ability to Reform and Oversee Them
REPORT NUMBER 2003-107, NOVEMBER 2003
Audit Highlights . . .
California Department of Education response as of January 2004
Our review of the State’s
The Joint Legislative Audit Committee directed the Bureau
process for identifying,
assessing, and overseeing of State Audits (bureau) to review the State’s process
education-related categorical for identifying, assessing, and overseeing categorical
programs concludes that:
programs. Our report concluded that the extensive number and
þ The California breadth of categorical programs challenges the State’s ability
Department of Education to reform and oversee them. For purposes of our audit, we
(CDE) did not take
defined “categorical funding” broadly so that we could identify
sufficient steps to
allocations made by the California Department of Education
implement a pilot project
aimed at reforming (CDE) and the State Controller’s Office (SCO) for programs
categorical programs. providing funding over and above the basic funding provided
þ CDE’s allocation of to local education agencies (LEAs), typically referred to as
categorical program revenue limit funding. Categorical funding is far-reaching.
funding needs For fiscal year 2001–02, CDE and the SCO disbursed roughly
improvement. Specifically,
$17 billion to various recipients for 113 categorical programs. In
for three of the 12
addition, for five of these categorical programs, the State delayed
categorical programs
reviewed, CDE may not CDE’s authority to allocate funding totaling $867 million until
have accurately calculated fiscal year 2002–03. We reported the following issues:
allocation amounts in
accordance with state law.
þ CDE has yet to implement Finding #1: CDE could not demonstrate sufficient efforts
fully the Bureau of to implement a pilot project giving flexibility to categorical
State Audits’ previous program funding.
recommendations aimed
at strengthening its Chapter 369, Statutes of 2000, enacted in September 2000,
oversight methods. required CDE to establish the Pilot Project for Categorical
þ For a few categorical Education Program Flexibility (pilot project). Participating
programs, such as school districts would have flexibility in spending categorical
the Lottery Education funds among 24 programs within three clusters: (1) school
Fund program, CDE
improvement and staff development, (2) alternative and
does nothing to review
compensatory education, and (3) school district improvement.
recipient’s compliance
with applicable Only five school districts actually applied to participate in
requirements. the pilot. However, CDE did not take sufficient steps to fully
implement the project, failing to follow recommendations of the
California State Auditor Report 2004-406 85
project’s advisory group and of state law. Having abandoned the
pilot project, the State has lost valuable information to guide its
reform of categorical programming.
To implement the pilot project as state law requires, we
recommended that CDE provide direction to those school
districts currently participating in the pilot project on how
to capture and report information necessary to determine
their pupils’ academic progress. We also recommended that
CDE report to the governor and the Legislature on the pilot
project’s status. Finally, we recommended that CDE survey
nonparticipating school districts to assess their level of interest
in the pilot project. If the survey results indicate a high level
of interest, CDE should distribute its streamlined application
packet to school districts. However, if the survey results indicate
a low level of interest, CDE should consider seeking legislation
to eliminate the provisions of Chapter 369, Statutes of 2000.
CDE Action: Pending.
CDE stated that it contacted each of the five districts that
participated in the original pilot project. CDE sent a survey
asking each district to summarize its activities, experiences,
and recommendations concerning the pilot project. CDE
stated that as of January 2004 it had received a completed
survey from one district. Further, CDE stated that once all five
districts respond to the survey, it will summarize the survey
results and include them in a report to the governor and
the Legislature. CDE also stated that it would include in the
report the results from state assessments to determine whether
the students in the participating districts benefited from the
funding flexibility. Also, the rates of improvement in student
test scores for the periods before and after the pilot project’s
implementation would be compared, along with additional
analyses. Finally, CDE stated that it will develop and distribute
a survey to nonparticipating school districts. Distribution
options include incorporating questions into the categorical
program application process, sending surveys to school
districts, conducting a survey via the Internet, and conducting
telephone surveys of school districts.
86 California State Auditor Report 2004-406 California State Auditor Report 2004-406 87
Finding #2: The State can learn from the federal
government’s previous attempts to implement block grants.
The U.S. Congress has demonstrated a strong interest in
consolidating narrowly defined categorical grant programs for
specific purposes into block grants for broader purposes. In the
Omnibus Budget Reconciliation Act of 1981, Congress created
nine block grants from about 50 of the 534 categorical programs
in effect at that time. When Congress requested a report on
federal block grant programs, the U.S. General Accounting Office
(GAO) identified lessons learned from implementing federal
block grant programs—lessons the State should consider in any
categorical reform efforts it undertakes.
Across government services, the GAO has recommended a shift
in focus of federal management and accountability toward
program results and outcomes, with less emphasis on inputs and
rigid adherence to rules. This focus on outcomes is particularly
appropriate for block grants, given their emphasis on providing
states the flexibility to determine the specific problems they
want to address and the strategies they plan to employ.
The GAO also suggested that funding allocations based on
formulas that target funds most effectively consider the
following three variables: (1) state or local need, (2) differences
among states in the costs of providing services, and (3) state
or local ability to contribute to program costs. To the extent
possible, equitable allocation formulas should rely on current
and accurate data that measure need and ability to contribute.
We recommended that when the Legislature considers future
reform proposals calling for the consolidation of categorical
programs into block grants, it should ensure that proposals
contain: accountability provisions that include a focus toward
program results and outcomes; and allocation methods that
reflect the recipient’s need, ability to contribute to program
costs, and cost of providing services.
Legislative Action: Unknown.
We are unaware of any legislative action implementing
this recommendation.
86 California State Auditor Report 2004-406 California State Auditor Report 2004-406 87
Finding #3: Efforts to reform categorical programs should also
consider the impact of constitutional and legal requirements.
Our legal counsel observes that federal law, federal and state
constitutional principles, and court decisions may affect certain
categorical programs. Thus, any decision to create block grants
must consider any legal restraints on consolidating programs.
For example, the State receives federal money under numerous
federal programs. Federal law generally restricts states to using
those funds for the purposes of the federal programs; and under
some federal programs, each state must provide matching
funds as a condition of receiving federal money. Consequently,
reform efforts in California should carefully consider whether
categorical programs involving federal funds are appropriate
candidates for consolidation into block grants and whether
moving state funds that support those federal programs into
block grants would affect the State’s eligibility for federal funds.
Reformers should also consider the impact of state constitutional
principles on proposed block grants. The two landmark decisions
of Serrano v. Priest required the State to remedy disparities in per-
pupil spending between school districts but excluded spending
on categorical programs for special needs from the requirement
that funding be roughly equal across districts. In Butt v. State of
California, the California Supreme Court held that the California
Constitution makes public education a uniquely fundamental
concern of the State and prohibits the maintenance and
operation of the public school system in a way that denies basic
educational equality to students of particular districts. Further,
the court held that the State bears the ultimate responsibility to
ensure that the public school system provides basic equality of
educational opportunity. Therefore, any reform efforts should
include mechanisms by which the State can ensure that block
grants are distributed, administered, and overseen in a manner
that fulfills this constitutional obligation.
Moreover, funding for categorical programs created by an
initiative measure approved by the voters, such as the California
Lottery Act of 1984, may be used only for the purposes that
voters approved. For example, the California Lottery Act limits
the use of funds to the education of students and expressly
prohibits lottery funds from being spent for acquisition of
real property, construction of facilities, financing of research,
or any other noninstructional purpose. Under the California
Constitution, the voters must approve any changes to the
88 California State Auditor Report 2004-406 California State Auditor Report 2004-406 89
purposes for which those funds may be spent. Thus, if money
from the Lottery Education Fund is consolidated into block
grants, either the State must continue to spend it for the
purposes specified in the act or reformers must obtain the voters’
approval to expand or change those purposes.
In other instances, court decisions affect specific categorical
programs. For example, the California Supreme Court, in
Crawford v. Board of Education, held that school boards have an
obligation under the California Constitution to take reasonably
feasible steps, in addition to desegregation obligations under
federal law, to alleviate racial segregation in public schools.
Thus, school districts will be required to continue to fund that
constitutional obligation from some revenue source.
We recommended that when the Legislature considers future
reform proposals calling for the consolidation of categorical
programs into block grants, it should determine whether
categorical programs involving federal programs are appropriate
candidates for consolidation. Further, the Legislature should
consider whether the reform proposal (1) is consistent with any
legal restrictions that may apply to any particular funds and the
State’s constitutional obligation to provide equal educational
opportunities within the public school system and (2) includes
mechanisms by which the State can monitor and ensure that
it meets those obligations. Finally, the Legislature should
determine whether state or federal court decisions govern the
funding of particular programs and ensure that block grant
proposals continue to meet those mandates.
Legislative Action: Unknown.
We are unaware of any legislative action implementing
these recommendations.
Finding #4: Inconsistencies or errors exist in CDE’s calculations
for four categorical programs.
The Targeted Instructional Improvement Grant (TIIG) program
combines funding to certain LEAs for their court-ordered
desegregation and voluntary integration programs. LEAs
include school districts, charter schools; county offices of
education; special education local plan areas; regional
occupational centers or programs; the State’s three diagnostic
centers; and in a few instances, joint powers authorities.
88 California State Auditor Report 2004-406 California State Auditor Report 2004-406 89
To calculate recipients’ allocations, state law requires CDE to
use both the LEA’s actual average daily attendance (ADA) as
reported on the apportionment for the period covering July
through April and its total ADA. But state law does not define
the term “total” ADA. CDE did not include the adult education
ADA when calculating the fiscal year 2001–02 allocations for
TIIG. Because state law does not define “total” ADA, it is unclear
whether CDE’s exclusion of adult ADA is appropriate. Our
recalculation, including adult education ADA, of the allocations
for three of the five LEAs tested found that Los Angeles Unified,
San Bernardino City Unified, and Fresno Unified would have
been increased by $3.9 million, almost $36,000, and $29,000,
respectively. This exclusion of adult ADA had no effect on the
other two districts because one did not have adult ADA data and
the other received the minimum amount set by state law.
We recommended that if the Legislature concurs with CDE’s
exclusion of adult ADA when making allocations for the TIIG
program, it should enact language to clarify its definition of
“total” ADA.
Legislative Action: Unknown.
We are unaware of any legislative action implementing
this recommendation.
The California Public School Library Act program provides funds
for resources such as books, periodicals, computer software,
CD-ROMs, and equipment enabling school library and on-line
access. State law requires CDE to calculate allocations by using
regular ADA reported for the period covering July through April
of the prior fiscal year. However, state law does not specifically
define the term “regular” ADA. In the absence of a definition,
CDE defines “regular” ADA for this program as the regular
elementary and high school ADA. CDE uses a different definition
when calculating the apportionment for the period covering July
through December. Specifically, staff responsible for this task
define regular ADA as regular elementary and high school ADA
plus extended-year ADA. Applying CDE’s different definitions
of regular ADA to our recalculation of the allocations for six
LEAs results in different allocation amounts for some districts.
For example, using the definition CDE applies to the principal
apportionment, our recalculation of the allocations for certain
LEAs under the California Public School Library Act program
results in $30,000 more for one LEA and $665 less for another.
90 California State Auditor Report 2004-406 California State Auditor Report 2004-406 91
We recommended that if the Legislature desires CDE to
properly calculate allocations the way the Legislature
intends, it should define “regular” ADA for the California
Public School Library Act program.
Legislative Action: Unknown.
We are unaware of any legislative action implementing
this recommendation.
The School Improvement Programs funds school site councils’
plans to improve instruction, services, and school environment.
CDE’s allocation method appears inconsistent with a literal
reading of the statutory allocation formula found in state law.
Currently, the School Improvement Programs are sunsetted by
other provisions of state law, yet the Legislature continued to
fund it in the annual budget act. Our legal counsel has advised
us that CDE is required to comply generally with the purposes of
the program and to continue allocating funds under the sunset
statutory allocation formula.
State law specifies how CDE is to determine whether schools
with Kindergarten through grade six (K-6) should receive a cost-
of-living adjustment (COLA). Our review of CDE’s calculation
found that CDE has been multiplying the predetermined rate
of $106 by the annual COLA percentage instead of the same
percentage increase made in base revenue limits for unified
school districts with more than 1,500 ADA. The Legislature’s
intent in enacting Education Code, Section 52048(a) (b), was to
simplify and equalize the funding system for schools with K-6.
Because CDE could not provide us with the percentage increase
data for the unified school districts for fiscal years 1985–86
through 2000–01, we are unable to compute the overall
effect that this apparent inconsistency has on meeting the
Legislature’s intent.
We recommended that if the Legislature continues to fund
the School Improvement Programs in the annual budget and
intends that CDE make adjustments to equalize the funding for
schools with K-6 using the same percentage increase made in
base revenue limits for unified school districts with more than
1,500 ADA, it should enact language that provides CDE with
specific instructions on how to compute the percentage increase.
90 California State Auditor Report 2004-406 California State Auditor Report 2004-406 91
Legislative Action: Unknown.
We are unaware of any legislative action implementing
this recommendation.
The Miller-Unruh Basic Reading Act program (Miller-Unruh)
provides a school district an allowance for the salary of reading
specialists, computed by multiplying the number of reading
specialists the district employs by the statewide average salary
for such a position. Districts must use their funds to pay for
any difference between the allowance and the teachers’ actual
salaries. On June 30, 1987, Miller-Unruh was sunsetted by
provisions of state law, yet the Legislature continued to fund it
in the annual budget act.
State law allows CDE to adopt an allocation method but has
requirements for prioritizing new Miller-Unruh funds. In
calculating the number of reading specialists to allocate to
applicants, CDE did not follow a 1999 state law requiring
the use of Academic Performance Index (API) data to define
underperforming schools and did not follow the requirement
of the 2001 Budget Act to consider the financial ability of
those districts with the lowest base revenue limit amounts.
Instead, CDE relied only on factors such as mean reading scores
below 565 on the Stanford 9 tests, the number of previously
authorized reading specialists, and the number of elementary
schools within a district. Moreover, although CDE calculated
its fiscal year 2002–03 allocation using applicants’ base revenue
limit amounts, it still did not use their API data. As a result, for
fiscal years 2001–02 and 2002–03, those school districts with
underperforming schools or the lowest base revenue limits
may not have received first priority for the reading specialist
positions. The State did not appropriate funds for Miller-Unruh
for fiscal year 2003–04.
CDE also failed to adhere to state law regarding the reallocation
of unused reading specialist positions. For fiscal year 2001–02,
LEAs reported to CDE that they did not use 66 Miller-Unruh
reading specialist positions. However, in fiscal year 2002–03,
CDE did not reallocate 54 of these unused positions, allowing
28 LEAs to retain them. Further, CDE’s billing data for fiscal year
2001–02 indicates that eight of the 28 LEAs that did not even
participate in Miller-Unruh continued to receive allocations in
fiscal year 2002–03 for 9.5 positions. Because CDE did not follow
state law to reallocate unused reading specialist positions, some
districts that could have used the specialists went without them.
92 California State Auditor Report 2004-406 California State Auditor Report 2004-406 93
We recommended that if the Legislature continues to fund the
Miller-Unruh Basic Reading Act program in the annual budget, it
should ensure that CDE allocates Miller-Unruh reading specialist
positions in a manner that gives first priority to school districts
with underperforming schools and the lowest base revenue
limits. Further, it should ensure that CDE reallocates unused
positions in the following fiscal year.
Legislative Action: Unknown.
We are unaware of any legislative action implementing
these recommendations.
Finding #5: CDE has yet to implement fully the bureau’s
previous recommendations aimed at strengthening its
oversight methods.
CDE’s oversight methods are similar to those it had in place
when the bureau conducted its last audit of CDE’s monitoring
efforts. In January 2000 the bureau issued a report titled
Department of Education: Its Monitoring Efforts Give Limited
Assurance That It Properly Administers State and Federal
Programs. The bureau found that CDE staff did not review
fund recipients based on their risk for noncompliance, did
not routinely use performance measures to assess quality
and effectiveness, did not conduct the number of required
program reviews, and did little to ensure that organizations
took corrective actions or faced sanctions when CDE discovered
deficiencies. The bureau recommended that CDE make several
changes in its oversight of state and federal programs, for
example, establish performance measures, direct staff to adhere
to audit and review cycles, monitor LEAs’ corrective action, and
enforce fiscal and administrative penalties as needed. Yet CDE
has not taken action on some of the bureau’s recommendations,
citing budget cuts as the cause. Consequently, CDE lacks
assurance that recipients are properly spending the funds that
these categorical programs provided.
We asked CDE to provide us with its current progress
and planned action for implementing 15 of the bureau’s
recommendations from the January 2000 report. According to
CDE, it fully implemented eight recommendations, partially
implemented three, and is evaluating and reconsidering the
remaining four. Our review of CDE’s efforts showed that it did
not always identify current progress and planned actions for
all of its monitoring divisions and did not always specifically
92 California State Auditor Report 2004-406 California State Auditor Report 2004-406 93
address its implementation of the bureau’s recommendations.
For example, in our prior report the bureau recommended that
CDE modify its underlying philosophy for administering state
and federal programs to restore its accountability for monitoring
entities receiving federal funds. However, even though in
September 2003 CDE stated that it will revise the coordinated
compliance review (CCR) monitoring process for fiscal year
2004–05, it is silent as to how it will modify its underlying
philosophy for other monitoring divisions administering state
and federal programs. In addition, the bureau recommended
that CDE prepare a department-wide monitoring plan that
includes, at a minimum, various elements such as monitoring
goals and identifying mandated monitoring requirements. In
its one-year response to our January 2000 report, CDE stated
that it convened an external advisory committee to discuss
the redesign of its monitoring and accountability system.
However, CDE does not describe the results of the committee
meeting in its September 2003 discussion on current progress
and does not address how it has prepared a department-wide
monitoring plan. The bureau also recommended that CDE direct
all program reviewers to adequately document the monitoring
procedures performed during site visits. CDE told us that it plans
to develop a checklist for every program compliance area in the
CCR process; reviewers will check “yes” or “no” to demonstrate
whether they have reviewed the required documentation.
However, because the proposed checklist will not require CCR
reviewers to document exactly what they examine during site
visits, the checklist may hinder a supervisor’s ability to ensure
that the CCR reviewer examined all required items. Finally,
the bureau recommended that CDE establish a monitoring
committee composed of various representatives such as
executive management, audits division, CCR reviewers, and
individual program reviewers. In its September 2003 discussion
of its planned action for implementing the recommendation,
CDE does not state whether it will establish a monitoring
committee. Rather, CDE states that the CCR reviewers meet
with CDE program staff to refocus the CCR monitoring process
and that its Audits and Investigations Unit periodically meets
with and distributes reports to the Nutrition Services and Child
Development divisions as well as the Adult Education Office to
discuss their monitoring efforts.
We recommended that CDE continue to implement the bureau’s
January 2000 recommendations aimed at strengthening
CDE’s oversight.
94 California State Auditor Report 2004-406 California State Auditor Report 2004-406 95
CDE Action: Pending.
CDE stated that ongoing budget deliberations are likely to
have a substantial effect on categorical programs. As such,
CDE will address the bureau’s recommendations accordingly
and consider programmatic changes as necessary. Further,
CDE will consider the resources needed to address changes in
monitoring requirements.
Regarding CCRs, CDE stated that its CCR Management
Unit will implement a process to follow-up with LEAs not
submitting proposed resolution of findings by the required
45-day timeframe. CDE states that its program consultants
will contact those LEAs that have not submitted their
proposed resolutions to determine the reason for delay and
to provide technical assistance if needed.
Finding #6: CDE provides no assurance that funds are spent
properly for two categorical programs totaling $1.8 billion.
For the TIIG program and the Lottery Education Fund, CDE
provides no assurance that funds are spent properly. CDE stated
that discussions with legislative staff led it to believe that TIIG
was purposely kept ambiguous to allow previous participants
greater flexibility in spending funds and using the funds to
embark on new programmatic areas. Thus, in February 2002
CDE informed county and district superintendents of schools
and district business officials that there would be no application
process, claim audit, reporting requirements, or program
plans for TIIG. Further, CDE points out that the second
priority of TIIG—to provide instructional improvement for
the “lowest-achieving pupils in the district”—would be almost
impossible to monitor because state law does not define this
term. CDE believes that legislative staff are fully aware that
there is little reason for oversight given such broad terms.
CDE also points out that the Legislature did not intend to
establish fiscal oversight because the new law deletes previous
audit requirements. Specifically, previous state law for the
desegregation programs under court mandate required LEAs to
submit a claim for reimbursement to the SCO for the costs of the
program. The claims were subject to the audit and approval of
the SCO prior to payment to ensure that the LEA was complying
with state law. However, current state law creating TIIG makes
no mention of SCO or CDE oversight.
94 California State Auditor Report 2004-406 California State Auditor Report 2004-406 95
We recommended that if the Legislature intends CDE to provide
oversight for TIIG, it should enact language specifically requiring
CDE to do so. It should also enact language to define the term
“lowest-achieving pupils in the district.”
Legislative Action: Unknown.
We are unaware of any legislative action implementing
these recommendations.
The California Lottery Act of 1984 limits the use of lottery
funds to the education of students and expressly prohibits
lottery funds from being spent for acquisition of real property,
construction of facilities, financing of research, or any other
noninstructional purpose. Under the California Constitution,
the voters must approve any changes to the purposes for which
lottery funds may be spent. For example, Proposition 20 restricts
a small portion of the lottery funds for the purchase of
instructional materials.
Control Section 24.60(b) of the 2001 Budget Act requires CDE
to conduct a survey of a representative sample of 100 LEAs to
determine patterns of use of lottery funds in those agencies and
report the survey results to the Legislature and the governor.
Yet CDE merely collects and reports the expenditure data and
does not review expenditures to ensure that LEAs did not
spend them for the acquisition of real property, construction of
facilities, financing or research, or any other noninstructional
purpose. According to CDE, it plans to propose changes to
the Standards and Procedures for Audits of California K-12 Local
Education Agencies (K-12 Audit Guide), which the SCO issues
to assist certified public accountants and public accountants to
determine whether these funds were being spent in compliance
with the law. Nevertheless, these efforts will not be sufficient to
ensure that lottery funds are not spent on acquisitions that state
law expressly prohibits.
We recommended that CDE continue its plan to propose
changes to the K-12 Audit Guide to determine whether
Proposition 20 funds are being spent in compliance with state
law. Additionally, it should propose a similar change to the
K-12 Audit Guide to ensure that funds are not being spent for the
acquisition of real property, construction of facilities, financing
of research, or any other noninstructional purpose.
96 California State Auditor Report 2004-406 California State Auditor Report 2004-406 97
CDE Action: Pending.
CDE stated that on November 4, 2003, the SCO’s Audit
Committee agreed to revise the K-12 Audit Guide to include
CDE’s proposed steps for determining whether Proposition 20
funds are being spent in compliance with state law. CDE also
stated that the proposed K-12 Audit Guide will be sent to the
Education Audit Appeals Panel for adoption into regulations.
Further, CDE stated that it proposed a change to the K-12
Audit Guide to determine whether lottery funds are being
spent for the acquisition of real property, construction of
Ü
facilities, or financing of research. However, CDE states
that it will not propose audit procedures to determine
whether lottery funds are being spent for “non-instructional
purposes” unless the term is defined in statute.
96 California State Auditor Report 2004-406 California State Auditor Report 2004-406 97
98 California State Auditor Report 2004-406
CALIFORNIA NATIONAL GUARD
To Better Respond to State Emergencies
and Disasters, It Can Improve Its Aviation
Maintenance and Its Processes of
Preparing for and Assessing State Missions
REPORT NUMBER 2001-111.2, FEBRUARY 2002
Audit Highlights . . .
California National Guard’s response as of February 2003
The California National
The Joint Legislative Audit Committee requested that the
Guard (Guard) can improve
its aviation maintenance and Bureau of State Audits review the California National
its process to prepare for and Guard’s (Guard) readiness to respond to a natural disaster,
assess state missions:
civil disturbance, armed conflict, or other emergency. However,
þ The Army Guard’s ability many of the Unit Status Report (USR) records on federal
to perform state missions readiness are not available, being classified by the U.S. Army.
may be compromised by
Similarly, the U.S. Air Force has determined that all its Status
a shortage of qualified
of Resources and Training System readiness data are classified.
aircraft mechanics
and delays in receiving Consequently, we are unable to report on the Army Guard’s
helicopter parts. or Air Guard’s overall readiness ratings for their personnel,
þ The Army Guard does equipment on hand, equipment condition, and training.
not ensure that personnel Therefore, we focused much of our audit on the missions the
readiness reports exclude Guard performs at the State’s request. We especially considered
ineligible troops; however,
the three Army Guard units most frequently called up and
because the Office of
how the percentages of grounded helicopters might affect their
Emergency Services
typically does not request ability to assist in state emergencies. We also looked at how
full troop strength, the personnel readiness, as reported in the USRs, might affect use of
Army Guard’s personnel
the Army Guard for federal wartime duty.
readiness has no bearing
on its ability to assist
the State.
Finding #1: A lack of staff formally trained in helicopter
þ The Guard needs to make maintenance and delays in receiving helicopter parts may
certain that personnel
contribute to low numbers of operational aircraft.
in its Joint Operations
Center who coordinate U.S. Army regulations instruct the Army Guard commanders
the Guard’s state
to attain aircraft readiness goals by effectively managing
mission response receive
requisite training. maintenance and part supplies. However, data reported
in the monthly Bridge Commanders’ Statements do not
þ The Guard does not
identify reasons for delays in the helicopters receiving either
annually review and
maintenance or parts—specifically, whether delays are caused by
update its various
emergency plans nor personnel levels or some other factor. In their USRs submitted
ensure that it implements between January 2000 and July 2001, two of the three units we
recommendations from
studied reported shortages of qualified aircraft mechanics. Our
past mission assessments.
review of the units’ manning reports—which identify all the
California State Auditor Report 2004-406 99
units’ personnel and their assigned duties and formal training—
showed that 50 percent of two units’ maintenance staff were not
formally trained in maintenance of UH-60 helicopters. It seems
reasonable to conclude that the low numbers of operational
aircraft are influenced by a lack of trained aircraft mechanics.
Generally, the U.S. Army trains the Guard’s aircraft maintenance
mechanics but cannot accommodate all new Guard recruits in
the training courses. Therefore, the Army Guard must recruit
aircraft mechanics with maintenance training on other types of
helicopters and provide transition training to do maintenance
on its UH-60s or CH-47s. However, these mechanics may
not be able to work without supervision or sign off on major
maintenance items. Further, because of increased time spent
training and supervising personnel without formal training,
the Army Guard’s qualified staff may have fewer hours to spend
meeting maintenance demands.
In addition, the Army Guard indicated that a lack of replacement
parts is a barrier to keeping its helicopters operational. The Army
Guard attributes this to the U.S. Army’s choice to not use its
resources for the requisite amount of aircraft replacement parts.
As a result, there are simply not enough parts in inventory to
meet demand.
To help improve its percentage of operational aircraft, the Guard
should improve its data tracking and collection to determine
why helicopters are not operational, then take appropriate steps
to correct the identified deficiencies. In addition, the Guard
should reassess the feasibility of distance learning opportunities
for its maintenance personnel, including those previously
coordinated with the U.S. Army, until the U.S. Army makes more
training slots available for new recruits.
Guard Action: Partial corrective action taken.
The Guard reports that it has taken certain actions such as
forming an aviation readiness council; having its aviation
directorate closely monitor monthly aircraft readiness
reports to allocate resources to non-operational aircraft; and
implementing a program for quick assessment of aircraft
readiness, focusing on non-mission capable aircraft, their
available date, and critical problems. In addition, the Guard
told us that the U.S. Army is improving the availability of
aircraft parts to help improve the Guard’s readiness. With
regard to distance learning, the Guard noted that the
100 California State Auditor Report 2004-406 California State Auditor Report 2004-406 101
necessary hardware is already available in various Guard
locations and it will pursue the acquisition of distance
courses when the National Guard Bureau develops them.
Finding #2: The Army Guard’s use of full-time maintenance
personnel to fight wildfires delays helicopter maintenance.
The Guard’s practice of using its full-time helicopter maintenance
staff as crew to drop water on California wildfires delays
maintenance and contributes to the lack of operational helicopters.
For example, in 2000, the Army Guard flew its helicopters on
13 separate fire-fighting missions between July 26 and September 5
and dropped at least 2.4 million gallons of water. We analyzed the
Guard’s pay records, and found that full-time maintenance facility
staff from two units contributed about 65 percent of their unit’s
total man-days during the 2000 fire season.
The Guard should determine how frequently it uses its full-time
flight facility personnel in fire-fighting missions and set a
standard that will not negatively affect the Army Guard’s ability
to meet helicopter maintenance demands.
Guard Action: Corrective action taken.
The Guard reports that it completed an analysis of its 2000 fire
fighting season payroll records for various flight personnel. The
Guard stated that its data show that part-time guard personnel
are engaged in its fire fighting efforts. The Guard said it has
established a standard that will keep the percentage of full-time
and part-time fire fighting personnel commensurate with the
percentage of these same personnel at its aviation facilities.
Finding #3: Weaknesses in the Army Guard’s process
for reporting personnel could result in overstated
personnel readiness.
Contrasted with the aviation capability for state missions, the
Army Guard’s personnel readiness affects only the federal need
for troops. In a quarterly USR, each Army Guard unit reports its
personnel status by comparing available strength levels, or staffing,
against wartime requirements. However, the Army Guard lacks
an effective process to ensure that a unit includes only eligible
soldiers in its strength levels. For example, the three Army Guard
units we reviewed erroneously included at least 21 soldiers in their
100 California State Auditor Report 2004-406 California State Auditor Report 2004-406 101
combined USRs. Therefore, these units may have overstated their
personnel strength levels, or P-levels, making it appear as though
they are more ready for war or other federal duties than they are.
To validate the accuracy of USR data, we expected the Army
Guard’s headquarters would have a process that includes at least a
comparison of soldiers pending discharge and inactive soldiers to
those reported in the units’ USRs and a review of soldiers listed
in the “nonvalidate pay report” it receives from the National
Guard Bureau (NGB)—a report that identifies part-time soldiers
who have not received pay for 90 consecutive days. Because the
personnel office maintains such data, it could use these records
to ensure that units accurately compute their P-levels. However,
the personnel office does not validate the accuracy of USR
personnel data for all units, so the Army Guard’s headquarters
cannot ensure that units are preparing their P-levels accurately.
According to the director of the personnel office, headquarters
does not instruct the units, such as those in the 40th Infantry
Division (40th ID) to work with the personnel office during the
USR process. Consequently, the Army Guard’s headquarters is
relying solely on the 40th ID to accurately compute its P-levels.
The 40th ID represents 52 percent of the total units the Army
Guard reports to the U.S. Army and 74 percent of the Army
Guard’s personnel.
To strengthen its process for personnel reporting in the USR, the
Army Guard should do the following:
• Instruct the 40th ID and the personnel office to work together
during the USR process to ensure that units in the 40th ID
report accurate personnel data.
• Train appropriate staff on how to complete the USR.
• Strengthen its USR validation procedures to ensure that units
adhere to U.S. Army regulations when they report USR data.
Guard Action: Corrective action taken.
The Guard stated that is has, on two separate occasions,
instructed both the 40th ID and 49th CSC, that the
personnel office would validate key personnel data. In
addition, in April and July 2002, the Guard trained its
field command personnel on the proper procedures for
completing the USR—emphasizing the problems and
submission standards for non-deployable personnel. The
102 California State Auditor Report 2004-406 California State Auditor Report 2004-406 103
Guard also reported that during its April and July 2002 USR
data collection and preparation, it reviewed the accuracy of
personnel data using seven different personnel reports.
Finding #4: Flaws in the personnel office’s database prevent
the Guard from detecting all discharged soldiers units report
on their USRs.
Even if the personnel office performed a more thorough review,
its database contains flaws that prevent it from detecting all
discharged soldiers on the USR. In our attempt to calculate the
average time it takes the personnel office to process discharges,
the Guard gave us two lists that we found to contain inaccurate
data. First, the personnel office gave us a list of soldiers from
our selected units processed for discharge in 2001. However,
the Guard later informed us that six soldiers on the list were
still active members of the Army Guard. Because of the errors
we identified, we requested and the personnel office sent us
another list. However, again we found incorrect information
for some soldiers on the list, such as the Guard’s officers and
warrant officers. Until it corrects serious database deficiencies,
the personnel office will not be able to detect all discharges that
units report on their USRs.
The Army Guard should correct deficiencies in its discharge
database and continually update this database to make sure that
it reflects soldiers who have actually been discharged.
Guard Action: Corrective action taken.
The Guard told us that it is no longer using a secondary
personnel database, which contained errors to generate its
reports. It claims that the primary personnel database at its
headquarters is free from deficiencies and inaccuracies
and it uses this database to generate reports showing
discharged soldiers.
Finding #5: Weaknesses in the Joint Operations Center’s
procedures may limit its ability to provide the most effective
state mission response.
As part of Plans, Operations, and Security located at the Guard’s
state headquarters, the operations center manages the Guard’s
state missions. The operations center provides in-house staff
training on its operating procedures and a brief overview
102 California State Auditor Report 2004-406 California State Auditor Report 2004-406 103
of the Response Information Management System, an
Internet-based system used by local and state agencies to
manage the State’s response to disasters and emergencies.
However, the operations center does not track who has attended
its in-house training or require its staff to complete other
disaster preparedness training. Further, the operations center’s
premission monitoring of potential and ongoing disasters,
which allows the Guard to anticipate the general requirements
of potential state missions, is not included in its Standard
Operating Procedures manual (SOP manual). Because the
operations center cannot ensure that all appropriate personnel
have received training or are aware of standard premission
activities, staff may work less efficiently and be less prepared to
act during emergencies.
The Guard should do the following:
• Develop a system to continually identify requisite training for
its operations center staff.
• Ensure that staff receive the requisite training in military
support to civil authorities, thereby improving staff response
to state missions.
• Establish and maintain a system to track the training activities
that operations center staff attend.
• Include premission activities in the operations center’s
SOP manual.
Guard Action: Corrective action taken.
The Guard reported that Plans and Operations has developed
a training chart, which is used to identify and track requisite
training for staff. In addition, the director of Plans and
Operations is producing a monthly newsletter to help keep
staff abreast of current operations, including available
training. Finally, the Guard noted that it added premission
activities to its SOP manual in March 2002.
Finding #6: The Guard lacks a process to annually review and
update its emergency plans.
The Guard’s emergency plans guide its response to disasters
such as fires, floods, and earthquakes. Although the NGB
requires the Guard to review and update these plans annually by
104 California State Auditor Report 2004-406 California State Auditor Report 2004-406 105
September 30, the Guard does not have a process to ensure that
this takes place. In fact, the Guard revised only 3 of its 13 plans
in calendar year 2001. The director of Plans, Operations, and
Security points to high staff turnover and vacancies as reasons
for the delays. Without ensuring the revisions are completed,
however, the Guard cannot guarantee that its plans contain
up-to-date and effective responses to disasters.
The Guard should develop and implement a system to review and
update its state emergency plans annually, as the NGB requires. In
addition, the Guard should review all its state emergency plans by
June 30, 2002.
Guard Action: Corrective action taken.
The Guard reported that it has developed a system showing
the month and year it reviews and/or updates a plan and
when it forwards the plan to the NGB. Moreover, the Guard
told us that it reviewed all its state emergency plans and
made any necessary changes as of July 2002. Further,
the Guard states that it prepared and published a multi-
hazard plan including annexes addressing specific hazards
comparable to the plans used by the Governor’s Office of
Emergency Services.
Finding #7: The Guard does not have a process to implement
recommendations from assessment reports.
We reviewed After Action Reports (AARs) relating to various
types of large-scale state emergencies, such as the 1992
Los Angeles riots, the 1994 Northridge earthquake, and various
flood and wildfire seasons. After completing each mission,
the operations center performed a formal assessment of the
Guard’s performance and typically identified problems and
made recommendations on how the Guard could improve its
state mission response. Specifically, the AARs for three missions
between 1996 and 1998 indicate that at the start of each mission,
the Guard should work with the Office of Emergency Services to
negotiate an exit strategy that includes clearly defined criteria
for extracting the Guard from a mission. NGB regulations require
the Guard to terminate its military support to civil authorities
as soon as possible after civil authorities can handle the
emergency. Without establishing an exit strategy at the start of
each mission, the Guard’s crews could remain active longer than
necessary, performing tasks that other entities could be doing.
104 California State Auditor Report 2004-406 California State Auditor Report 2004-406 105
Also, in three AARs submitted between 1993 and 1997, we
identified a recurring problem with the Guard’s ability to easily
track and update the status of critical equipment. However, the
Guard did not implement corrective action until early 2001,
nearly eight years after it first identified the problem, when the
operations center developed a list of the equipment used in
state missions and began tracking that equipment’s availability
through monthly reports other Guard directorates prepared.
Because the Guard has no formal process to address previous
problems encountered during its missions, it cannot promptly
implement corrective action on AAR recommendations. The
Guard acknowledges it lacks an adequate system to benefit from
the previous missions’ lessons. It is currently conducting a study,
expected to be ready by June 2002, to identify better tracking
systems for all its actions and activities, including this area.
The Guard should update the operations center’s SOP manual
to ensure that staff establish an exit strategy at the start of each
mission. In addition, the Guard should establish a process to
track and implement corrective action as appropriate on AAR
recommendations, ensuring quick action to correct previous
mistakes. Finally, the Guard should make sure that it completes
its study by June 2002 so that it can identify better tracking
systems for all of its actions and activities.
Guard Action: Corrective action taken.
The Guard commented that it updated its SOP manual to
include establishing an exit strategy at the start of each
mission. The Guard stated that it plans to carry out its exit
strategies by coordinating with the Office of Emergency
Services and monitoring daily situation reports during
state emergencies. The Guard stated that it also updated its
SOP manual to require tracking of AAR recommendations.
Finally, the Guard reported that it completed its management
study in June 2002, and as of March 2003, it had purchased
a computerized tracking system. The Guard expects the system
to be in place and fully integrated by July 2003.
106 California State Auditor Report 2004-406
ENTERPRISE LICENSING AGREEMENT
The State Failed to Exercise Due Diligence
When Contracting With Oracle, Potentially
Costing Taxpayers Millions of Dollars
REPORT NUMBER 2001-128, APRIL 2002
Audit Highlights . . . Department of General Services and Department of Finance’s
responses as of April 20031
On May 31, 2001, the
State entered into a six- The Joint Legislative Audit Committee (audit committee)
year enterprise licensing
requested the Bureau of State Audits (bureau) to examine
agreement (ELA), a contract
the State’s contracting practices in entering into the
worth almost $95 million,
to authorize up to 270,000 enterprise licensing agreement (ELA) with Oracle. Specifically,
state employees to use Oracle the bureau was asked to review the sole-source justification for
database software and to
the ELA and the roles of the Department of General Services
provide maintenance support.
(General Services), the Department of Information Technology
Our audit of this acquisition (DOIT), and the Department of Finance (Finance) in developing
revealed the following:
and executing the ELA. We were also asked to review the terms
þ By broadly licensing of the agreement and determine whether they were in the best
software, a buyer that has interests of the State and assess the methods used to justify the
many users, such as the
technical and business need for the ELA.
State, can achieve significant
volume discounts.
Further, we were asked to identify the fixed and variable costs
þ The State proceeded with
of the ELA, the funding sources that will pay for it, and the
the ELA even though a
reasonableness of the projected savings from the ELA. Lastly, the
survey of departments
disclosed limited demand audit committee requested we obtain a legal opinion on whether
for Oracle products. the contract is null and void if it was executed in violation of
state law.
þ The departments of
General Services,
Information Technology,
and Finance approved the Finding #1: Surveys conducted by DOIT and Finance
ELA without validating indicated a limited need for Oracle database licenses.
Logicon’s cost savings
projections; unfortunately, The three departments involved in the ELA—DOIT, General
these projections proved to Services, and Finance failed to conduct a comprehensive analysis
be significantly overstated.
to gauge or confirm the level of statewide interest in the ELA.
þ Logicon apparently However, at least two months before the ELA was executed,
stands to receive more DOIT ignored preliminary survey data that strongly suggested
than $28 million as a
most departments had no immediate need for Oracle database
result of the ELA.
licenses. Specifically, of the 127 surveys it sent to state entities,
continued on next page
1The Department of Information Technology was sunset on July 1, 2002.
California State Auditor Report 2004-406 107
þ Nearly 10 months after DOIT received only 21 responses, five of which indicated a
the ELA was approved, possible interest in purchasing any additional Oracle products
no state departments had
under a consolidated agreement in the near future.
acquired the new licenses,
which may be due to the
fact that General Services In November 2001, five months after the ELA was approved,
had not issued instructions Finance sent out another survey to assess the need for Oracle
to departments on how to
database licensure and to establish a basis for allocating the
do so.
cost of the ELA. This survey explicitly required all departments
þ General Services used to respond. Preliminary survey results indicated that for the
an inexperienced
12 state departments with the largest number of authorized
negotiating team and
positions, 11 use Oracle database products to some extent.
limited the involvement
of legal counsel in the However, while the ELA will cover up to 270,000 users—more
ELA contract. As a result, than the total number of state employees—according to the
many contract terms
survey, 113,000 of the authorized positions at just these 11 state
and conditions necessary
to protect the State are departments will not use the Oracle database software.
vague or missing.
Finance administered the survey as a preliminary step to
þ Our legal consultant has
appropriately allocate the ELA’s cost among the various departments,
advised us that a court
might conclude that and the information obtained on current and planned use of the
the ELA contract with Oracle enterprise database licensure was to be used to develop a
Oracle is not enforceable
cost allocation model. However, as of April 2002, 10 months after
as a valid state contract
because it may not fall the ELA was approved, the analysis of the survey was incomplete.
within an exception to Furthermore, state departments have not been informed of how to
the State’s competitive
acquire the database licenses using the ELA. Thus, it is not surprising
bidding requirements.
that no state department had acquired new licenses under the ELA as
of the end of March 2002.
Finance’s survey was to provide necessary information about
whether state departments have purchased any Oracle database
licenses or entered into any maintenance contracts since the ELA
was signed. The absence of an allocation model along with the
lack of any specific pricing information or ordering instructions
informing departments how to purchase the database licenses
through the agreement may further reduce any cost savings
or utility from the ELA. In reviewing the preliminary results of
the November 2001 survey, we identified 12 state departments
that have entered into their own maintenance contracts with
Oracle—totaling $1.1 million for products covered by the ELA—
since it was signed on May 31, 2001.
In order to take full advantage of the Oracle ELA, we recommended
that Finance complete its survey and develop a method to
allocate the ELA’s cost to departments.
108 California State Auditor Report 2004-406 California State Auditor Report 2004-406 109
Finance Action: None.
Finance has elected not to complete its survey since the ELA
was rescinded in July 2002.
Finding #2: DOIT and Finance did not adequately evaluate
the ELA proposal’s merits.
The State negotiated and ultimately approved the ELA proposal
without sufficient technical guidance, assessment of need,
or verification of projected benefits. According to officials at
DOIT, General Services, and Finance, the State had never before
considered a statewide software purchase, nor did it have any
specific guidance in identifying the extent of the need for
the software and in negotiating the key provisions to include
in the contract. In fact, DOIT had looked at the concept of
statewide software licensing as early as June 2000, when it hired
Logicon Inc. (Logicon) to research and present information on
enterprise licensing. Nevertheless, DOIT and Finance routinely
evaluate IT proposals, including those involving software
purchases. Although both possessed the expertise needed to
evaluate aspects of the ELA proposal—DOIT the need to license
270,000 users and Finance the cost projections—neither did so,
citing a lack of suitable procedures and inadequate time. To its
credit, Finance’s Technology Investment Review Unit (TIRU)
identified specific concerns with the ELA proposal, and on
May 10, 2001, communicated these concerns to the directors of
Finance and DOIT. It also recommended that the proposal be
postponed until the following year, giving the State a chance
to develop appropriate policy. However, TIRU’s concerns
and recommendation were not heeded. As a result, the State
committed almost $95 million without knowing whether the
costs and benefits of the ELA were justified.
Before pursuing any future enterprise agreements, we
recommended the State take the following actions:
• DOIT, Finance, and General Services should seek legislation
establishing the authority to enter into an ELA that protects
the State’s interests and clarifies each department’s respective
role and responsibility in the process.
• Finance should notify the Legislature at least 30 days in
advance of any state department executing any future ELA.
108 California State Auditor Report 2004-406 California State Auditor Report 2004-406 109
• DOIT should continue its efforts to create a statewide
IT inventory, including software.
Finance, General Services, and DOIT Action: Partial corrective
action taken.
Finance, General Services, and DOIT developed a draft process
for statewide software licenses that defined specific roles
and responsibilities for the three departments and addressed
analytical and approval procedures. However, because of the
closing of DOIT and the adoption of Section 11.10 of the
Budget Act of 2002, the process was not formally approved.
As proposed by the governor, Section 11.10 of the Budget
Act of 2002 was adopted and will fulfill some of the
recommendations. Specifically, Section 11.10 requires
a 30-day legislative notification before any department
can enter into a statewide software license agreement of
$1 million or more, regardless of future costs or savings.
Additionally, the agreement must be reviewed by Finance.
This section also states that any department considering
entering into such an agreement is required to submit to
Finance a business plan with specific components, including
an analysis of base and current usage of the license, rationale
for statewide license versus an alternative type of agreement,
cost-benefit analysis, and funding plan.
DOIT ceased to exist on July 1, 2002, thereby ending its
efforts to create a statewide IT inventory. Currently, no other
state department has been assigned the responsibility to
continue these efforts.
Finding #3: The Oracle ELA could cost the State added
millions in taxpayer resources.
The Oracle ELA could cost the State $41 million more in database
license and maintenance support than what the two would have
cost in the absence of the contract. This is because the State did
not validate the projections of costs and savings prepared by
Logicon, who, acting in an undisclosed capacity as an Oracle
reseller or licensing agent, would benefit significantly from the
contract. Logicon, whose only role according to the contract
was as the designated lender, and who apparently stood to make
more than $28 million as a result of the ELA, developed the
business case analysis General Services used to justify the State’s
decision to contract with Oracle. However, Logicon’s analysis,
which projected a savings to the State of $111 million over
110 California State Auditor Report 2004-406 California State Auditor Report 2004-406 111
10 years, was seriously flawed. Specifically, it was based on costs
that should have been excluded because they were outside the
ELA’s coverage or did not follow the analysis’ stated methodology.
Further, Logicon’s calculations contained numerous errors and
many of its assumptions were questionable.
To ensure that future enterprise agreements meet the State’s
best interests, we recommended DOIT and Finance develop
policies and procedures on how to evaluate future ELAs. To be
effective, one state department needs to take responsibility for
developing and justifying the ELA proposal.
Finance, General Services, and DOIT Action: Corrective
action taken.
Finance, General Services, and DOIT developed a draft process
for statewide software licenses that defined specific roles
and responsibilities for the three departments and addressed
analytical and approval procedures. However, because of the
closing of DOIT and the adoption of Section 11.10 of the
Budget Act of 2002, the process was not formally approved.
Further, information technology experts have informed
Finance and General Services that ELAs are not generally
considered a best practice, especially with state governments.
These experts state that such an environment is better suited
to a volume purchase agreement (VPA). According to Finance,
in the event that a VPA is being considered, General Services
has agreed to take lead responsibility.
Finding #4: The State did little to protect itself against risks
associated with the contract.
The State rushed into the Oracle ELA without negotiating strong
provisions to guard against the risks inherent in long-term
software contracts. The term of these types of contracts generally
ranges between three to five years, partly because of the rapidly
changing nature of the software industry. However, the State’s
contract with Oracle was for six years with a maintenance
option for four more years. Our technical consultant observed
that by entering into such a large long-term contract, the State
increased risks such as the following:
• The vendor going out of business, being purchased, or
otherwise becoming unable to perform.
• Technology changes that leave the State with a prepaid, long-
term contract for a product that has diminishing value.
110 California State Auditor Report 2004-406 California State Auditor Report 2004-406 111
• Future software upgrades that are not supported under
the contract.
• Lack of funding to make all future payments required under
the contract.
• Demand for the software licenses not meeting expectations.
To protect against such risks, buyers normally try to negotiate
mitigating safeguards as part of the terms and conditions
of a contract. For example, a buyer would normally want to
ensure that contract terms clearly define the support level the
vendor will provide, including how upgrades and subsequent
versions of the software will be furnished at no additional cost.
Unfortunately, the State’s hastily negotiated contract with Oracle
lacked adequate provisions to minimize these risks.
The increased risks associated with this long-term contract
largely occurred because General Services failed to properly
prepare for contract negotiations with Oracle. For example,
General Services did not include on its negotiating team anyone
with expertise in the area of software licensing agreements or
anyone with an in-depth knowledge of Oracle’s past business
practices. Moreover, General Services’ legal counsel’s role in the
negotiations was limited to a few hours review of the contract’s
terms and conditions occurring the day before and the day it
was signed. Consequently, the contract does not adequately
protect the State’s interests.
We recommended that, before negotiating any future enterprise
licensing agreements, General Services should assemble a
negotiating team that possesses all the types of expertise
necessary to protect the State’s interests. Further, if deemed
enforceable, General Services should renegotiate the contract to
ensure it includes adequate protections for the State. We also
recommended that the Legislature should consider requiring
all IT contracts over a specified dollar amount to receive a legal
review by General Services.
General Services’ Action: Partial corrective action taken.
On July 23, 2002, the ELA for Oracle database licenses and
maintenance support was rescinded. However, General
Services stated that it would ensure sufficient resources and
expertise are assigned to any future ELA proposals. If deemed
necessary, this will include the use of an independent third
party to review each proposed agreement. Additionally,
112 California State Auditor Report 2004-406 California State Auditor Report 2004-406 113
General Services is working on developing and delivering a
comprehensive training and certification program for state
contracting and purchasing officials.
In support of recommendations made on August 30, 2002,
by the Governor’s Task Force (task force) on Contracting
and Procurement Review, an assessment was performed to
determine the knowledge, skills, and abilities needed by
acquisition professionals. This information was used to
determine course content for a comprehensive training and
certification program for state contracting and purchasing
officials. General Services specifically identified the urgency for
targeting training in the complex area of IT contracting.
General Services has developed a new contract and
procurement review process whereby state departments
doing high-risk procurements undergo an assessment
review during the early stages of the contracting process. At
that time, General Services determines if a contract needs
developmental support, technical support, and/or legal
support. General Services ensures that the type of review
received is appropriate for the risk involved.
Legislative Action: None.
We are unaware of any legislative action implementing
this recommendation.
Finding #5: The State’s contract with Oracle may not
be enforceable.
Our legal consultant has advised us that a court might find
the ELA is not enforceable as a valid state contract because
it may not fall within an exception to competitive bidding
requirements. However, further analysis is required to
understand the impact of a finding that the Oracle contract is
unenforceable. For example, our legal consultant cautioned that
even if a court found that the ELA contract is void for failure
to comply with competitive bidding requirements, additional
questions are raised by the financing arrangements for the
$52.3 million dollar loan under which Logicon assigned its
rights to Koch Financial Corporation (Koch Financial). Because
Koch Financial apparently acted in good faith and the State
has received the full consideration for the loan—the enterprise
license and one year of maintenance support—under the
financing provisions, Koch Financial is likely to assert that the
112 California State Auditor Report 2004-406 California State Auditor Report 2004-406 113
State is obligated to repay the loan. Also, the State has agreed
to stop using the ELA’s enterprise database licensure if the
Legislature does not appropriate funds for the loan payments
or the State does not otherwise make payment and the ELA
contract is terminated. More importantly, under the ELA
contract the State also agreed not to replace the Oracle license
with substantially similar database licenses for one year from the
termination date.
Logicon’s role, actions, and compensation from the ELA also
raise troubling questions about the validity of the ELA contract.
Specifically, the amount of compensation Logicon has or will
continue to receive—more than $28 million—for its undisclosed
role in the ELA is too much to be merely compensation for being
a lender and for the limited support services it will provide.
Finally, Logicon’s erroneous savings projections may make the
contract voidable. We arrived at vastly different numbers in
reviewing the data that supports the costs and projections that
Logicon presented to the State. For example, although Logicon
projected that the State would save as much as $16 million
during the first six years of the contract, using Logicon’s data
and assumptions, we project that the State could spend as much
as $41 million more than it would have without the ELA.
For these reasons, we recommended that General Services
should continue to study the ELA contract’s validity in light of
the wide disparities we identified in Logicon’s projections of
costs and savings and consult with the Office of the Attorney
General (attorney general) on how to protect the State’s best
interests. General Services should also work with the attorney
general in further analyzing the ELA contract; all amendments,
including any and all documents pertaining to side agreements
between Oracle and Logicon; and the laws and policies relating
to the ELA, including the potential legal issues that this audit
has identified.
General Services’ Action: Corrective action taken.
As previously discussed, on July 23, 2002, the ELA with
Oracle for database licenses and maintenance services was
rescinded. General Services notified state departments of the
rescission through the issuance of a management memo.
114 California State Auditor Report 2004-406
CONTRACTORS STATE LICENSE BOARD
Investigations of Improper Activities by
State Employees, July 2001 Through
February 2002
ALLEGATION I2000-753 (REPORT I2002-1), JUNE 2002
State and Consumer Services Agency’s response as of
March 20021
Along with the Department of Consumer Affairs
(Consumer Affairs), which oversees the Contractors State
License Board (CSLB), we investigated and substantiated
Investigative Highlights . . . allegations that an executive at the CSLB engaged in activities
that were incompatible with his state position when he
A Contractors State License
accepted payment from a non-state entity for serving on an
Board (CSLB) executive engaged
advisory panel as part of his state duties. The same executive
in the following improper
governmental activities: circumvented civil service hiring policies, did not disclose
pertinent facts about a collision he had in a state vehicle, and
þ Accepted $4,000 from
made inconsistent statements to internal affairs investigators.
a non-state entity for
performing duties related Specifically, we found:
to his state function.
þ Circumvented civil service Finding #1: The executive engaged in incompatible activities.
hiring practices by directing
a CSLB contractor to pay In violation of state law, the executive accepted $4,000 from
an employee to work for a non-state entity for serving on an advisory panel that was
the CSLB.
related to his state duties. The non-state entity selected the
CSLB: executive to be a member of its consumer advisory panel
(advisory panel). The CSLB members were aware of and
þ Made an emergency and
condoned the executive’s participation in the advisory panel.2
subsequent permanent
appointment of an In addition, the executive told us that both he and the board
employee that were illegal. members believed his participation was congruent with his
duties at the CSLB.
þ Made other questionable
or improper appointments
of additional employees.
1Since we report the results of our investigative audits only twice a year, we may receive
the status of an auditee’s corrective action prior to a report being issued. However, the
auditee should report to us monthly until its corrective action has been implemented.
As of January 2003, this is the date of the auditee’s latest response.
2The CSLB has a 15-member board, appointed by the governor and the Legislature. The
board appoints the CSLB executive officer and directs administrative policy.
California State Auditor Report 2004-406 115
After the non-state entity selected the executive to be part of the
advisory panel for a two-year term, the executive participated
in 14 separate events—10 meetings, 2 facility tours, a breakfast
social, and a reception. The non-state entity paid the executive
a total stipend of $4,000, or $400 for each of the 10 meetings he
attended. The executive’s two-year term on the advisory panel
ended in December 2000.3 The executive violated state law by
accepting payment from an entity other than the State for the
performance of his state duties.
Finding #2: The executive intentionally circumvented civil
service hiring practices.
Consumer Affairs concluded that the executive created a situation
that would have allowed a CSLB contractor to “launder state
contract funds.” The executive did this by directing a contractor
to pay an employee, employee A, to work for the CSLB during
November and December 1997, rather than following standard
civil service procedures for the position. However, although
Consumer Affairs concluded that the executive created this
situation, it appears the laundering of state contract funds did not
occur, because the contractor told us the CSLB did not reimburse
it for the amounts it paid employee A.
Finding #3: The CSLB made illegal emergency and
permanent appointments of employee A.
Although the contractor paid employee A only for work during
November and December 1997, employee A continued to perform
work for the CSLB during 1998 and 1999 under emergency
and permanent appointments that the State Personnel Board
(personnel board) ultimately determined to be illegal.
On February 2, 1998, the CSLB sent a memorandum to Consumer
Affairs requesting that it make an emergency appointment of
employee A to a Career Executive Assignment (CEA) position,
retroactive to January 1, 1998.4 According to the personnel board,
3 The executive left the CSLB and began working for another state agency effective
August 14, 2000. According to a board member, since the last advisory panel meeting
of the executive’s two-year term would be in October, they wanted him to complete
his service.
4 State law defines a Career Executive Assignment as an appointment to a high
administrative and policy-influencing position within the state civil service in which the
incumbent’s primary responsibility is the managing of a major function or the rendering
of management advice to top-level administrative authority.
116 California State Auditor Report 2004-406 California State Auditor Report 2004-406 117
Consumer Affairs approved the appointment, though its reason
for doing so is unclear. Clearly, the employee already had been
working for the CSLB without any formal agreement or approval.
State law allows departments to make emergency appointments
under certain circumstances, including preventing the
stoppage of public business when an actual emergency arises.
According to the personnel board, emergency appointments
provide flexibility for responding to staffing needs that are so
urgent, unusual, or short term that they cannot reasonably
be met through other civil service appointment procedures.
In March 1999, the personnel board concluded that there was
nothing unusual or of an emergency nature that required the
filling of a CEA position with an emergency appointment.
In fact, it found that the record reflected that the CSLB was
deliberately avoiding the competitive employment process.
On March 23, 1998, the CSLB announced an examination for the
permanent CEA position. Nine candidates, including employee A,
applied for the position. The CSLB reported that on April 1, 1998,
a two-person evaluation panel that included the executive
screened the applications based on detailed rating criteria. No
interviews were held. The CSLB permanently appointed employee
A to the position on the same day as the evaluation. The
personnel board determined that the permanent appointment
was illegal because the position never was established through
the required process; preselection of employee A was evident;
and the examination was a spurious process intended to give the
appearance of a competitive examination.
The personnel board canceled employee A’s illegal appointments,
both the emergency and permanent appointment. Employee A,
with the support of the CSLB, appealed the decision, and the
personnel board ultimately overturned the cancellation of the
emergency appointment because more than one year had passed
between the appointment and the personnel board’s attempt to
cancel it. State law permits the personnel board to declare an
appointment void from the beginning if such action is taken
within one year after the appointment when an appointment
was made and accepted in good faith but was unlawful. The
cancellation of the permanent appointment was not overturned.
Because it found no evidence that employee A had acted in
other than good faith when he accepted the appointments, the
personnel board allowed employee A to retain the $75,485 in
compensation he earned from January 1998 through March 1999.
116 California State Auditor Report 2004-406 California State Auditor Report 2004-406 117
Finding #4: The CSLB made other questionable or
improper appointments.
On April 13, 1999, the personnel board notified the CSLB
that, in light of its recent findings regarding the processes the
CSLB used to select and appoint individuals for CEA positions,
it was revoking the CSLB’s authority to conduct examinations
for these assignments. State law gives the personnel board’s
executive officer the authority to delegate selection activities to
an appointing power. When the personnel board has substantial
concerns regarding a department’s capability in this regard, it
can require that it preapprove or be involved with all aspects of
the examination process.
Agency Action: Pending.
The State and Consumer Services Agency (agency), which
oversees Consumer Affairs, plans to provide briefings to
key departmental managers on compliance with ethical
standards and to determine other appropriate actions
that could be taken to prevent a recurrence of this type of
behavior. In addition, the agency secretary has asked for a
review to determine whether further actions should be taken
against the subject employee, even though the employee has
retired from state service.
118 California State Auditor Report 2004-406
OFFICE OF CRIMINAL JUSTICE PLANNING
Experiences Problems in Program
Administration, and Alternative
Administrative Structures for the
Domestic Violence Program Might
Improve Program Delivery
REPORT NUMBER 2002-107, OCTOBER 2002
Audit Highlights . . .
Office of Criminal Justice Planning and Department of Health
The Office of Criminal Justice Services’ responses as of November 2003
Planning (OCJP) has not
fulfilled all of its responsibilities The Joint Legislative Audit Committee (audit committee)
in administering state and requested an audit of Office of Criminal Justice Planning’s
federal grants, including the
(OCJP) administration of its grant programs in general
domestic violence program.
and of its and the Department of Health Services’ (DHS)
Specifically, OCJP:
administration of their respective domestic violence programs
þ Has not adopted guidelines
in particular. The audit committee also asked us to identify
to determine the extent
alternatives to the current administrative structures for the
it weighs grant recipients
past performance when domestic violence programs. We reported the following findings:
awarding funds.
þ Does not always provide Finding #1: Weaknesses in OCJP’s process for awarding
grant applicants the
grants may result in the appearance that its awards are
necessary information
or time to challenge its arbitrary or unfair.
award decisions.
OCJP has not adopted guidelines weighing grant recipients’
þ Missed opportunities past performance when awarding funds, nor is its review
to seek guidance an process systematic enough to identify grant recipients with poor
advisory committee
past performance. Moreover, OCJP does not always provide
could provide regarding
program administration. unsuccessful grant applicants the necessary information or time
to challenge its award decisions, and it has missed opportunities
þ Has not consistently
to seek the guidance an advisory committee could provide
monitored grant recipients.
regarding certain decisions that affect program administration.
þ Spent $2.1 million during
the last three years on
To ensure its application process is perceived as fair and impartial,
program evaluations of
we recommended that OCJP take the following steps:
uneven quality, content
and usefulness.
• Create guidelines and criteria to determine when an applicant’s
continued on next page
past performance issues rise to the level that OCJP will consider
those issues when deciding whether or not to continue the
applicant’s funding.
California State Auditor Report 2004-406 119
Our review of the domestic • Conduct a periodic uniform review of all applicants with regard
violence programs administered to past performance issues that includes applying weighting
by OCJP and the Department
factors that indicate the relative importance of each such issue
of Health Services (DHS)
revealed that: as it relates to future funding.
þ OCJP decided not to correct • Promptly inform grant recipients when their past performances
an inconsistency in its
are jeopardizing their chances for future funding.
2001 request for proposals,
which resulted in fewer
shelters receiving funding. • Properly document the rationale not to fund grant recipients
and clearly state in the rejection letters sent to the applicants
þ DHS has not established
the reasons that they were denied funding.
guidelines as to how
past performance will
be considered when • Change the process for the filing of appeals so that an
awarding grants. applicant has 10 to 14 calendar days, depending on the type
of grant award, from the registered receipt of the notification
þ OCJP and DHS award the
majority of their domestic letter in which to justify and file an appeal.
violence funds to shelters
for the provision of
To improve outreach to its grant recipients and comply with
similar services.
legislation that is soon to take effect, we recommended that
þ OCJP’s and DHS’s OCJP create an advisory committee for the domestic violence
activities for awarding program that could provide guidance on key program decisions.
grants and providing
oversight of recipients
sometimes overlap.
OCJP Action: Partial corrective action taken.
According to the 2003–04 Budget Act, OCJP will be eliminated
effective January 1, 2004, and its grant programs will be
transferred to other state agencies. Prior to its closure, OCJP
stated that it had created a formal written policy to use when
considering the past performance of an applicant as a factor
in its funding decisions and that the new policy will be used
for those applying for competitive funding under OCJP’s next
request for proposal. However, we reviewed the new policy
and, while we believe it is a good first step, it is still too vague
and subject to varying interpretation.
In order to address the possible view that the current appeals
guidelines are overly strict in terms of the time allowed to file
an appeal and that the denial notice is too limited concerning
the reasons for the denial, OCJP has revised its appeals
guidelines. The guidelines were reviewed and approved by
an independent council that hears such appeals at the end
of July 2003. The new guidelines, which were implemented
August 1, 2003, permit more time to appeal and provide more
information to those applicants that are denied.
120 California State Auditor Report 2004-406 California State Auditor Report 2004-406 121
Finally, OCJP stated it would work with the agency that will
be administering the domestic violence program beginning
in 2004—the Office of Emergency Services—to establish a
Domestic Violence Advisory Committee that will provide
insight and guidance in administering the domestic
violence program.
Finding #2: OCJP does not provide consistent and prompt
oversight of grant recipients.
Although OCJP conducts a variety of oversight activities, its
efforts lack consistency and timeliness. It has not visited grant
recipients as planned and has not considered prioritizing
its visits to first monitor recipients with the highest risk of
problems. It has also been inconsistent in following up on its
grant recipients’ submission of required reports, and it has not
always reviewed required reports promptly and consistently. In
addition, it has spent nearly $23,000 per year to review audit
reports that another state agency also reviews. Finally, it has not
always conducted sufficient follow-up on reports once it notified
grant recipients of performance problems.
We recommended that OCJP take several actions to improve its
oversight of grant recipients, including:
• Ensure prompt site visits of newly funded grant recipients.
• Establish a risk-based process for identifying the grant recipients
it should visit first when it conducts monitoring visits.
• Develop written guidelines to determine when and how staff
should follow up on late progress reports and ensure that
existing guidelines are followed regarding the prompt follow
up on late audit reports.
• Ensure that it reviews audit reports within six months of receipt
in order to comply with federal guidelines and promptly
follow up on audit findings until they are resolved.
• Revise its process for reviewing the audit reports for
municipalities to eliminate duplicating the State Controller’s
Office’s (SCO) efforts.
• Establish written guidelines to address how staff should follow
up on problems identified in progress reports or during site
visits to ensure they are resolved.
120 California State Auditor Report 2004-406 California State Auditor Report 2004-406 121
• Require that its monitors review grant recipients’ corrective
action plans to ensure problems identified during monitoring
visits have been appropriately addressed through problem-
specific narratives.
OCJP Action: Partial corrective action taken.
According to the 2003–04 Budget Act, OCJP will be eliminated
effective January 1, 2004, and its grant programs will be
transferred to other state agencies. Prior to its closure, OCJP
stated that it has a goal of conducting one technical site visit
for a new grant recipient within the first six months of the
grant period and one monitoring visit within the three-year
grant period. Therefore, at a minimum, every grant recipient
should receive a visit at least once every three years. OCJP also
stated it was continuing to implement its plan to prioritize
monitoring visits based on identified problems, the length of
time since the last visit, and the dollar value of the project.
Once its grant programs are transferred to other agencies,
OCJP stated it would work with the receiving agencies to
ensure a smooth transition of the monitoring function.
OCJP stated that it has made significant progress in reducing
its backlog of pending reviews of grantee audit reports. For
example, OCJP reports it has reviewed 235 audit reports as
of October 2003, and anticipates it will complete reviews
of 269 more before it ceases operations at the end of the
year, and will work with the agencies taking over its grant
programs so that work continues on reducing the backlog.
Finally, OCJP stated it intends to provide the written
guidelines for its grant programs to those agencies slated to
administer them once they are transitioned and will also
help those agencies develop procedures for following up on
problems identified in grantee progress reports, technical or
monitoring site visits, or other sources such as audit reports.
Finding #3: OCJP has not properly planned its evaluations or
managed its evaluation contracts.
During the last three years, OCJP’s evaluation branch spent
$2.1 million on activities that culminated in evaluations of
uneven quality, content, and usefulness. The branch lacks a
process that would help it determine what programs would
profit most from evaluations, how detailed evaluations should
be, what criteria evaluations must satisfy, and, until recently,
how to ensure they contain workable recommendations. The
branch has been lax in management of its contracts; as a result,
122 California State Auditor Report 2004-406 California State Auditor Report 2004-406 123
it did not include measurable deliverables in one contract and
failed to ensure that it received the deliverables contained in
others. It also circumvented competitive bidding rules in entering
an agreement with a University of California extension school.
To improve its evaluations branch, we recommended that OCJP:
• Develop a planning process to determine what programs
would profit most from evaluations, how rigorous
evaluations should be, and that it follow its new process
for discussing the relevance and feasibility of proposed
recommendations to improve their chances
for implementation.
• Develop general criteria establishing what evaluations
should accomplish.
• Include measurable deliverables and timelines in its contracts
with evaluators and hold evaluators to their contracts.
• Withhold payments to contractors whenever they do not
provide established deliverables or when the deliverables are
not of the quality expected.
• Ensure that interagency agreements with university campuses
comply with state guidelines regarding competitive bidding.
OCJP Action: Partial corrective action taken.
According to the 2003–04 Budget Act, OCJP will be
eliminated effective January 1, 2004, and its grant programs
will be transferred to other state agencies. Prior to its closure,
OCJP stated that significant efforts have been make to
identify and prioritize those evaluations that are mandated,
and it is working to ensure that evaluation criteria and
requirements are met. A new interim chief was assigned
to oversee evaluation activities and has since issued five
evaluation reports with plans to issue one more before OCJP
ceases operations at the end of the year.
Finding #4: OCJP’s allocation of indirect and personnel
costs may have resulted in some programs paying for the
administration of others.
OCJP’s method for assigning indirect and personnel costs to the
various programs it administers may result in some programs
paying the administrative costs for others. Its allocation of indirect
costs has been inconsistent, and it has not kept adequate records of
122 California State Auditor Report 2004-406 California State Auditor Report 2004-406 123
its allocation decisions to demonstrate that they were appropriate.
OCJP has also failed to require its employees to record their
activities when working on multiple programs as required by
federal grant guidelines.
We recommended that OCJP ensure that it equitably allocates all
indirect costs to the appropriate units and maintains sufficient
documentation to support the basis for its cost allocation. OCJP
also should establish an adequate time-reporting system that uses
activity reports or certifications, as appropriate, to document the
total activity for each employee and then use such reports or
certifications as the basis for allocating personnel costs.
OCJP Action: Corrective action taken.
According to the 2003–04 Budget Act, OCJP will be eliminated
effective January 1, 2004, and its grant programs will be
transferred to other state agencies. Prior to its closure, OCJP
stated that it had designed a functional timesheet modeled
after those used by other state agencies, trained its staff on
its use, and fully implemented the timekeeping system as
of May 2003. The timesheets better ensure that costs are
accurately recorded in the accounting system.
Finding #5: OCJP’s decision not to correct an inconsistency in
its request for proposals resulted in fewer domestic violence
shelters receiving funding.
OCJP funded almost three fewer domestic violence shelters
than it could have in fiscal year 2001–02 because it chose not to
correct an inconsistency in the 2001 request for proposals for its
domestic violence grant. This decision resulted in a reduction
of nearly $450,000 a year of funds available for shelters. The
error occurred during the development of its request for
proposals, when program staff set the minimum amount that
a small shelter would receive at $185,000 a year, even though
an adjoining table within the proposal stated that $185,000
was the maximum amount that a small shelter could receive.
The minimum amount was over $30,000 more for some small
shelters than the minimum OCJP had previously awarded.
OCJP could provide no documentation of the decision-making
process it used to arrive at the $185,000 funding minimum,
such as written input from the shelters stating that the previous
minimum amount was insufficient. Furthermore, OCJP provided
124 California State Auditor Report 2004-406 California State Auditor Report 2004-406 125
no indication that it had considered the consequences that
raising the minimum funding amount of some shelters by as
much as $30,000 would produce.
So that it can support and defend future funding decisions affecting
the domestic violence program, we recommended that OCJP
document and retain the reasons for changing funding levels.
OCJP Action: Pending.
According to the 2003–04 Budget Act, OCJP will be
eliminated effective January 1, 2004, and its grant programs
will be transferred to other state agencies. Prior to its closure,
OCJP stated that Senate Bill 1895 provided the authority
to create an advisory council effective January 1, 2003,
that could recommend specific future funding levels for
all shelters in OCJP’s domestic violence program. Further,
OCJP stated it would work with the agency that will be
administering the domestic violence program beginning
in 2004—the Office of Emergency Services—to establish a
Domestic Violence Advisory Committee that can provide
such insight and guidance.
Finding #6: DHS has not considered past performance or been
able to use its advisory committee when awarding grants.
DHS has not adopted guidelines or criteria to establish when a
grant recipient’s past performance has been sufficiently poor to
prevent it from being awarded funds during the next grant cycle,
nor has it established a systematic review process to identify
grant recipients with poor past performance. Further, forces
outside of its control precluded DHS from seeking counsel from
a domestic violence advisory committee as required by state law.
We recommended that DHS develop guidelines and criteria to
determine when a grantee’s past performance warrants denying it
funding in the next grant cycle, which would include performing
a periodic uniform review of all grant recipients’ past performance.
Also, now that enough appointments have been made to the
advisory council to create a quorum, DHS should meet frequently
with the council to seek its input as required by law.
124 California State Auditor Report 2004-406 California State Auditor Report 2004-406 125
DHS Action: Partial corrective action taken.
DHS stated that it has begun to meet regularly with the
domestic violence advisory council and will request that the
council consider whether it should use the past performance
of grant recipients in preparation for awarding funds in
future Request for Applications (RFA). If past performance
is to be used in determining grant awards, DHS will develop
specific criteria.
Finding #7: DHS has not fully met its responsibility to oversee
grant recipients.
DHS does not have a process to conduct state-mandated site
visits of its grant recipients. Moreover, it has not considered
prioritizing its visits to first monitor those with the highest risk
of problems. It has also been inconsistent in following up on its
grant recipients’ late submission of required reports, and it has
not always reviewed required reports promptly and consistently.
To ensure better oversight of its shelters, we recommended that DHS:
• More efficiently use its resources when complying with state
law mandating technical site visits to all its shelters by
establishing a risk-based process for identifying which shelters
it should visit first.
• Develop a structured process for staff to use to follow
up on late progress reports. This process should include
documenting follow-up efforts.
• Ensure that staff follow existing guidelines regarding the
prompt follow-up of late audit reports.
• Ensure that it reviews all submitted progress reports promptly.
DHS Action: Corrective action taken.
DHS stated that it has put a system in place to ensure that
timely review and follow up of progress reports occurs
and that the system includes a status log that lists all the
deliverables required from the shelters, including progress
reports. The status log contains a “notes” column to record
staff follow-up efforts regarding late reports, and all written
communication or e-mail contacts with the shelters will be
maintained in the working file.
126 California State Auditor Report 2004-406 California State Auditor Report 2004-406 127
In addition, DHS stated that it had developed and maintains
an audit-tracking log to monitor the receipt of audit reports,
and has developed guidelines to ensure that audit reports are
received on time. Finally, DHS stated that it is on schedule
to complete at least one site visit to each shelter within the
current grant cycle as required by law.
Finding #8: OCJP and DHS require separate grant
applications for similar activities.
OCJP and DHS conduct separate grant application processes. As a
result, shelters must submit separate applications describing how
they will use each program’s funds, although the applications and
the services themselves are similar.
To reduce the administrative burden for the shelters, we
recommended that OCJP and DHS coordinate the development
of the application processes for their shelter-based programs and
identify areas common to both where they could share information
or agree to request the information in a similar format.
OCJP’s and DHS’s Actions: Pending.
According to the 2003–04 Budget Act, OCJP will be
eliminated effective January 1, 2004, and its domestic
violence programs will be transferred to the Office of
Emergency Services. DHS stated it would continue its efforts
to coordinate the application process for the shelter-based
program with this new administering agency.
Finding #9: OCJP and DHS perform some of the same
oversight activities.
OCJP and DHS require shelters to submit periodic progress reports
containing similar information, except that each requires the
information for a different time period. Furthermore, as a result
of a new legislative requirement, DHS will perform site visits to
shelters to assess their activities and provide technical assistance,
even though OCJP already conducts such visits.
To avoid duplicate oversight activities, we recommended
that OCJP and DHS consider the following changes to their
administrative activities and requirements:
• Align the reporting periods for their progress reports so that
shelters do not have to recalculate and summarize the same
data for different periods.
126 California State Auditor Report 2004-406 California State Auditor Report 2004-406 127
• Coordinate technical site visits, monitoring site visits, and
audits that they schedule for the same shelters.
• Establish procedures for formally communicating on a regular
basis with each other their ideas, concerns, or challenges
regarding the shelters.
OCJP’s and DHS’s Actions: Pending.
According to the 2003–04 Budget Act, OCJP will be eliminated
effective January 1, 2004, and its domestic violence programs
will be transferred to the Office of Emergency Services.
DHS stated it would continue its efforts to coordinate the
oversight process for the shelter-based program with this new
administering agency to avoid duplication.
Finding #10: Greater cooperation or consolidation between
OCJP’s and DHS’s programs could increase efficiency.
Because of the similarity of OCJP’s and DHS’s programs and the
overlap between their application and oversight activities, adopting
an alternative administrative structure could improve the efficiency
of the State’s approach to funding domestic violence services.
To improve the efficiency of the State’s domestic violence programs
and reduce overlap of OCJP’s and DHS’s administrative activities,
we recommended OCJP and DHS, along with the Legislature,
should consider implementing one of the following alternatives:
• Increase coordination between the departments.
• Develop a joint grant application for the two departments’
shelter-based programs.
• Combine the two shelter-based programs at one department.
• Completely consolidate all OCJP’s and DHS’s domestic
violence programs.
128 California State Auditor Report 2004-406 California State Auditor Report 2004-406 129
OCJP’s and DHS’s Actions: Pending.
According to the 2003–04 Budget Act, OCJP will be
eliminated effective January 1, 2004, and its domestic
violence programs will be transferred to the Office of
Emergency Services. DHS stated it would continue its efforts
to coordinate the process for administering the shelter-based
program with this new agency to avoid duplication.
Legislative Action: Unknown.
We are not aware of any legislative action with regard to this
recommendation.
128 California State Auditor Report 2004-406 California State Auditor Report 2004-406 129
130 California State Auditor Report 2004-406
DEPARTMENT OF GENERAL SERVICES
Certain Units Can Do More to Ensure That
Client Fees Are Reasonable and Fair
REPORT NUMBER 2002-108, DECEMBER 2002
Department of General Services’ response as of December 2003
Audit Highlights . . . The Joint Legislative Audit Committee (audit committee)
requested the audit after hearing concerns from
We found that certain units the Legislative Analyst’s Office (LAO) regarding the
within the Department of
appropriateness of the Department of General Services’
General Services (General
(General Services) capital outlay project management fees.
Services) often missed their
estimates of project fees We evaluated General Services’ estimates of fees it charges
charged to client departments departments for capital outlay and telecommunications projects—
by more than 20 percent. These
which generated three-quarters of General Services’ project
units, which are within General
Services’ Real Estate Services management fees during fiscal year 2001–02—and concluded that
and Telecommunications improvements can be made. Specifically, we found:
divisions, could improve the
accuracy of their estimates by
more consistently employing Finding #1: Some units do not always follow best practices or
the following best practices:
their own procedures when estimating project costs and fees.
þ Document how estimates
Although units within General Services’ Real Estate Services
are calculated.
Division (Real Estate Services) and Office of Public Safety
þ Ensure the review and Radio Services (Radio Services) do well with certain aspects of
approval of estimates.
estimating costs and fees for capital outlay and radio equipment
þ Use multiple estimating installation projects, they do not always follow the best practices
approaches—along we identified or their own procedures. Specifically, staff were
with historical data—to
unable to provide us with documentation to demonstrate how
validate estimates.
the estimators derived the estimated cost for all line items for
þ Evaluate estimates on eight of the 10 projects we reviewed. In addition, Radio Services
completed projects. could not always demonstrate that its project estimates received
either client or supervisory approval. The lack of client approval
Further, we found that certain
units could more accurately for two projects may lead to Radio Services absorbing $93,000
prepare and report cost of the projects’ costs. Moreover, these units are not consistently
data that General Services’
using multiple cost estimating approaches—along with historical
management uses to decide
on hourly rates. Finally, the data—when preparing estimates and are not conducting end-
Office of Public Safety Radio of-project reviews to evaluate the success of their estimates. We
Services needs to improve its
also found that Radio Services had not compared actual results
billing practices.
to the estimates it generated using an estimating tool. As a result
of these deficiencies, General Services cannot ensure that fees
charged to client departments for these services are reasonable
and fair. Further, the significant variances we found in project
California State Auditor Report 2004-406 131
estimates and line item estimates—many exceeding actual costs
by more than 20 percent—further support the need to follow
best practices when estimating fees.
To ensure that its estimates of project costs and fees are accurate
and defensible and to improve the reliability of its process for
estimating project costs, we recommended that General Services
employ the following best practices:
• Adopt and follow a procedure to thoroughly document
assumptions used in creating project estimates.
• Document evidence of supervisory and client review and
approval and, if needed, develop a process for expedited client
approval when clients of Radio Services insist that projects
start immediately.
• Conduct evaluations at the end of each major project.
• Develop a historical database of completed projects and use
the database to provide support for future estimated project
costs for all major projects.
• Use multiple cost-estimating approaches for all significant line
item estimates of major projects.
• Periodically review the performance of its cost-estimating tools
against actual results and update the tools when necessary.
General Services’ Action: Partial corrective action taken.
General Services agrees with the elements of best practices
identified in our report and is striving to implement
processes that include those practices. Specifically, General
Services states that both Real Estate Services and Radio
Services now require staff to document assumptions used to
prepare fee and project estimates, along with the supervisory
approval of these estimates. However, Radio Services
continues to begin work on telecommunications projects
before clients approve the costs, but does require that clients
put their requests to start work on projects without approved
costs in writing. While Real Estate Services indicates it has
taken steps to better evaluate the estimates for completion
projects, Radio Services believes that it is unable to perform
in-depth post-evaluations of all major telecommunications
132 California State Auditor Report 2004-406 California State Auditor Report 2004-406 133
projects until it implements a new system known as the
Automated Enterprise Support and Oversight Product
system. This system will integrate Radio Services’ existing
automated and manual systems to allow for better
management of its business practices. Because Radio Services
does not expect to award a contract to develop this system
until January 2004, it modified existing systems to include
more relevant budget and cost information for staff to use
when making estimates. Finally, General Services states that
as more historical cost information becomes available, both
Real Estate Services and Radio Services will be able to use
additional cost estimating approaches.
Finding #2: Reports used to determine client hourly rates do
not always reflect actual costs and Fiscal Services does not
always allocate its overhead fairly.
Although General Services’ process for developing the hourly
rates of staff—which are the basis of many fee estimates—
appears reasonable, it can improve the accuracy of a report that
management uses to decide on the hourly rates. Units that provide
services—with the assistance of General Services’ Office of Fiscal
Services (Fiscal Services)—provide management a report to allow
it to make the decisions on hourly rates. The report recommends
hourly rates for each type of service and is designed to include
the at-cost rate for each service, which is calculated by dividing
projected costs by the projected billable hours. However, we
found that Radio Services’ staff made $10.2 million in arbitrary
or unsupported adjustments, such as shifting costs between
units when calculating its at-cost rate. In addition, Fiscal Services
allocated its overhead—which amounted to $7.6 million for
fiscal year 2001–02—to units based partly on the units’ ability
to absorb the costs rather than on actual services provided.
Although some of these adjustments may be justified, staff told
us that some of the adjustments were made to achieve hourly
rates similar to the prior-year rates. This preliminary “leveling”
process distorts the picture that management sees when making
rate decisions, and may lead to setting rates inappropriate to
recover actual unit costs. In addition, some adjustments cause
other units within General Services to shoulder more than their
fair share of costs.
To ensure that the reports General Services uses in setting
hourly rates reflect the true projected cost for each unit,
we recommended that it require units to include in their
132 California State Auditor Report 2004-406 California State Auditor Report 2004-406 133
cost-recovery proposals the actual, unadjusted, at-cost
hourly rate and clearly document the existence of and retain
support for any adjustments designed to achieve a desired
or recommended hourly rate. Also, to improve its method of
allocating overhead and to make the process more objective,
Fiscal Services should consider using another method to allocate
its overhead costs to other units, such as using an average of two
or three years’ actual costs per unit.
General Services’ Action: Corrective action taken.
General Services stated that as a part of its annual financial
plan process, its executive management team will be
provided at-cost rates as well as various other rate scenarios
that will impact an operating unit’s ability to be financially
solvent and avoid rate volatility. In addition, Radio Services
now requires that staff retain all documents and data to
support adjustments to hourly rate calculations. Finally,
Fiscal Services has revised its method of allocating its
overheard costs to other General Services’ units to be based
on the average actual cost of services provided to each unit
from the most recent three fiscal years.
Finding #3: Radio Services can improve its methods for
assessing consulting fees related to system services and can
improve its billing practices.
In addition to installing and maintaining telecommunications
equipment, Radio Services provides consulting services such
as preparing cost studies, developing reports, attending client
meetings, and common services such as Federal Communication
Commission (FCC) license renewals, representing the State
before the FCC, and developing equipment specifications.
However, we could not determine whether the consulting
fees that Radio Services charges to client departments were
reasonable and fair because of weaknesses in its cost accounting
system. Further, we also found that Radio Services does not
review for errors in invoices before they are sent to departments
but instead it relies upon departments to detect billing errors. In
one instance, the lack of review resulted in an under billing of
$126,000 to a department. Compounding the problem is that
Radio Services’ invoices generally contain insufficient detail to
allow departments to detect billing errors.
134 California State Auditor Report 2004-406 California State Auditor Report 2004-406 135
To improve the reliability and accuracy of its client fees, we
recommended that Radio Services improve its cost accounting
system so that it can ensure billings to client departments are
reasonable and fair. In addition, we recommended that Radio
Services review the accuracy of all invoices and continue its
efforts to provide its clients with an adequate amount of invoice
detail for them to review the accuracy of charges.
Radio Services’ Action: Partial corrective action taken.
Radio Services reports that it has improved the controls
over how staff charges time to client departments and
strengthened the procedures for reviewing client invoices.
In addition, for departments that request to be billed an
annual fixed amount for services, Radio Services now
bases these invoices on a three-year average of past costs
to provide these services. However, Radio Services believes
that it cannot provide client departments additional
invoice detail to review the accuracy of charges until after
it implements the Automated Enterprise Support and
Oversight Product system. As mentioned previously, Radio
Services does not expect to award a contract to develop this
system until January 2004.
134 California State Auditor Report 2004-406 California State Auditor Report 2004-406 135
136 California State Auditor Report 2004-406
CALIFORNIA STATE UNIVERSITY
Its Common Management System
Has Higher Than Reported Costs,
Less Than Optimal Functionality, and
Questionable Procurement and Conflict-
of-Interest Practices
REPORT NUMBER 2002-110, MARCH 2003
California State University response as of September 2003
The Joint Legislative Audit Committee (audit committee)
Audit Highlights . . . requested that the Bureau of State Audits review the
California State University’s (university) Common
Our review of the California
Management System (CMS) project. Specifically, the audit
State University’s (university)
Common Management System committee asked that we identify the initial cost estimates
(CMS) revealed the following: and current projected costs for CMS including integration
costs, consultant costs, data center costs, and the university’s
þ The university did not
establish a business case for funding sources for these related expenditures. Additionally,
CMS to define its intended the audit committee asked us to identify the university’s
benefits and associated
needs, benefits, and return on investment from CMS and its
costs and ensure that the
supporting data center. The audit committee also asked us to
expenditure of university
resources is worthwhile. review the university’s management and oversight for CMS
and its supporting data center, the university’s process to
þ The university’s previous
select the software, hardware, and consultants contributing
cost projections
understated the full costs to the CMS project, and how implementation has affected
of CMS over its now growth in employee positions and workload. The audit found
nine-year project period;
the following:
these costs—including an
estimated $269 million
for maintenance and
operations—are now Finding #1: The university did not develop a business case
expected to total for CMS.
$662 million.
The university did not establish a business case for CMS by
þ Problems exist that
preparing a feasibility study report that evaluated the need for
cast doubt on whether
and the costs and benefits of this new administrative computer
CMS will achieve all the
objectives intended, nor system. Without such a feasibility study, the university lacks
offer what could have persuasive answers to the Legislature’s questions about its use of
been achieved from a
state resources for CMS and its supporting data center.
systemwide project.
continued on next page The Public Contract Code requires state agencies to follow the
State Administrative Manual (SAM) when acquiring information
technology (IT) goods and services. To ensure compliance with
the code’s intent, the SAM procedures include a need and
California State Auditor Report 2004-406 137
þ Although the university cost-benefit analysis. According to SAM, a feasibility study “must
followed recommended establish the business case for the investment of state resources
procurement practices to
in [an IT] project by setting out the reasons for undertaking
acquire data center services,
its procurements for the project and analyzing its cost and benefits.” However,
software and consultants under Public Contract Code Section 12100.5, the university
on the project raise
is exempt from certain state oversight and approval of its IT
questions about the fairness
procurements. The university believes the Public Contract Code
and competitiveness of the
university’s practices. further exempts it from following SAM regarding feasibility
study reports, although the statute requires the university to
þ The university did not
adopt policies and procedures that further the legislative policy
do enough to prevent or
detect apparent conflicts expressed in the code.
of interest on CMS-related
procurements.
Regardless of the applicability of SAM feasibility study
procedures to its own practices, the university would have
been in a stronger position to answer legislative and public
questions concerning the need for CMS if it had performed
a need and cost-benefit analysis consistent with SAM. Had
the university conducted a feasibility study that mirrored
the SAM requirements, it would have maintained sufficient
documentation to support the project’s intent, justification,
nature, and scope. Additionally, performing such a feasibility
study would have provided the university with an opportunity
to quantify the increased business process efficiencies expected
from CMS. Although the university has given various reasons
for pursuing a systemwide implementation of CMS, individually
and collectively they do not justify spending $662 million
over the nine-year project period, an estimated $393 million in
one-time costs and $269 million in maintenance and operations
costs, without establishing the business case.
To ensure that the university’s future IT projects are appropriate
expenditures of state resources, the university should adopt
policies and procedures that require a feasibility study before
the acquisition and implementation of significant IT projects.
Such a feasibility study should include at least a clearly defined
statement of the business problems or opportunities being
addressed by the project, as well as an economic analysis of the
project’s life-cycle costs and benefits compared with the current
method of operation. The university should also establish
quantitative measures of increased business process efficiencies
to measure the benefits achieved through common management
and business practices.
138 California State Auditor Report 2004-406 California State Auditor Report 2004-406 139
University Action: Partial corrective action taken.
The university stated that it issued an executive order
establishing policies and procedures requiring feasibility
studies for significant IT projects. Additionally, the university
asserted that it worked with the Legislature on specific
statutory requirements for feasibility studies regarding
university IT projects and will revise its policies pending
new statutory requirements and to provide the more
comprehensive guidance we recommended in our May 2003
letter to the chancellor. The university further indicated
that it would involve its existing quality improvement
process to measure process efficiencies and would begin with
producing a list of qualitative and quantitative measures of
process efficiencies. It expected to put in place a structure for
collecting these measurements by December 2003.
Finding #2: The university’s CMS project costs exceed initial
estimates, and its cost monitoring procedures are inadequate.
Recent project cost data indicate that the university’s earlier
1998 and 1999 cost estimates of between $332 million to
$440 million for its CMS project understated the project’s costs.
A more comprehensive review of actual CMS expenditures
and projections in June 2002 revealed that total project costs
for the types of expenses the university initially estimated—
what it considers to be “new” costs—now total $482 million.
Additionally, this $482 million excludes other project-related
campus costs the university did not include in its estimates
because its focus was only on “new” costs. These other project-
related costs include $63 million in implementation costs
charged to other campus budgets and $117 million in campus
maintenance and operations costs over the now nine-year
development and implementation period, bringing the total
projected costs to $662 million.
Moreover, the university cannot accurately report on the
project’s expected systemwide costs because it has not
established an ongoing process to capture and monitor
the costs campuses actually are incurring or projecting to
incur. Although it tracks central project costs, the chancellor’s
office does not track campus costs because it believes they are
a campus responsibility. As a result, the university was not
aware of its total systemwide costs for the CMS project until
campuses had reported their actual and projected CMS costs in a
June 2002 survey. Furthermore, the university has not reported
138 California State Auditor Report 2004-406 California State Auditor Report 2004-406 139
to the Legislature a clear picture of the project’s financial
status. In its November 2002 Measures of Success report to the
Legislature, the university reported the project budget for fiscal
years 2000–01 and 2001–02 at $30 million and $31 million,
respectively, and the actual costs “at budget;” however, it did not
report campus costs which totaled $29 million and $47 million
in those respective fiscal years.
Additionally, although the university tracks central project
costs, it did not use project status reports that periodically
track variances between the actual and projected CMS costs
on the one hand and the initial and revised CMS project
budgets on the other. Prudent project management calls for
establishing approved initial budgets and tracking actual
costs, enabling managers to report and monitor project progress
through periodic status reports that analyze variances between the
planned budget and the actual costs. These variances measure
project performance and assist management in controlling
the project schedule and costs by predicting shortcomings and
reducing the risk of exceeding the budget.
Similarly, the university does not have a comprehensive
systemwide funding plan for the CMS project. The university’s
funding plan only addressed expected CMS expenditures at
the chancellor’s office, not any campuses’ funding needs. The
chancellor’s office expected campuses to determine their own
costs and funding necessary to implement CMS. However, our
funding survey determined that only seven of 23 campuses were
able to provide funding plans for their projected CMS costs.
When it does not finalize funding for all CMS costs up front, the
university lacks a clear understanding of how the CMS project
funding needs may affect its ability to meet other priorities, such
as academic needs.
To ensure that it adequately monitors and controls project costs,
the university should determine the quarterly cost information
it needs to adequately monitor the project. After making this
determination, the university should establish a mechanism
to collect and compile comprehensive and systemwide project
cost information that includes campus costs. Further, the
university should compare the collected cost information
against the approved systemwide project budget, publishing this
information in a quarterly status report. The university should
also ensure that it includes all costs of the CMS project in its
annual reports to the Legislature, as well as ensure that the CMS
140 California State Auditor Report 2004-406 California State Auditor Report 2004-406 141
project and all future IT projects have a systemwide funding
plan that covers the entire scope of the project in place before
beginning a project.
University Action: Partial corrective action taken.
The university stated that it was in the process of
determining the campus cost information necessary to
monitor the project and establishing a mechanism to collect
and report this data on a systemwide basis. It expected
to complete these tasks by the end of October 2003.
Additionally, the university stated that it would implement
annual reporting of campus and central expenditures in
its annual Measures of Success Report to the Legislature
beginning with the November 2003 report. Finally, the
university asserted that it will ensure that future IT projects
have comprehensive funding plans and will ensure that its
CMS project funding plan includes both its central CMS and
campus plans. It expected to establish a process for collecting
and reporting CMS funding plans for each campus and
combine these in a systemwide report by December 2003.
Finding #3: CMS may not achieve all of the university’s
business objectives due to the university’s weak planning
efforts early in the project and its limited expectations with
regard to systemwide reporting.
The university expects to accomplish certain business objectives
with its CMS project, but problems noted during our review
indicate that CMS may neither fully achieve those objectives nor
offer what could have been achieved from such a systemwide
project. Doubts about CMS fully accomplishing its business
objectives and achieving the potential of a systemwide
implementation can be traced to the university’s weak efforts
early in the planning process and limited expectations with
regard to systemwide reporting.
Although it initially planned to make as few modifications as
possible to the PeopleSoft software, the university ultimately
found that it needed to make about 200 modifications to the
initial versions of the software applications to meet business
requirements and other campus needs. Compounding the time
and costs for modifications, PeopleSoft periodically releases
new versions of the CMS software, and the university intends
to keep current with those releases. Thus, the university will
need to reapply many of the CMS modifications to the new
140 California State Auditor Report 2004-406 California State Auditor Report 2004-406 141
releases, adding potentially significant maintenance costs in
reapplying, testing, and implementing these modifications.
Although we recognize that not all modifications take the same
amount of time and effort, we are unable to quantify which
modifications were most costly because the university did
not track modification costs. Moreover, before purchasing the
software, the university did not sufficiently evaluate its specific
business processes and software to understand up front which
business processes the potential vendors’ software products
could accommodate and which software products would require
modification to meet its business needs. Failing to make these
evaluations up front, the university had no basis to anticipate
the extent of software modifications it eventually would make or
the loss of functionality some campuses would experience.
Furthermore, the university intended CMS to meet the business
objectives of providing ready access to current, accurate, and
complete administrative information, as well as establishing
standards for common reporting processes. However, the
university is not implementing the CMS software throughout
the university in a manner that will maximize systemwide
reporting. Instead of installing shared databases, the university
has been installing separate and distinct databases for all but
two campuses. Separate databases must be separately maintained
and tested. Additionally, a wide variation in functionality across
campuses will result because most campuses are not planning
to implement all the modules or sub-modules (functionality
elements) purchased under the PeopleSoft agreement and
the functionality elements the university created for CMS,
because the PeopleSoft software did not provide the needed
functionality. This lack of uniformity raises the cost of
implementing and maintaining the CMS software and limits
its usefulness in producing systemwide reports.
The university has also experienced problems with fixing
software errors and with information security. Although
providing updates and fixing some minor software errors to
its newly modified CMS software is expected, the university
also needed to make corrections and redistribute some of these
CMS software updates and fixes. When the university takes
more than once to provide complete updates or fix some errors,
campuses must spend more time and money redoing their work
or assume the risk of potential system errors. Furthermore, the
university has not fully addressed the lack of security around a
search feature in the PeopleSoft software that apparently allows
employees access to the confidential information of other
142 California State Auditor Report 2004-406 California State Auditor Report 2004-406 143
employees and students beyond what is needed to do their jobs.
The university might have reduced the need to rework software
fixes and improved information security had it established an
effective quality assurance function. Also, hiring an independent
oversight consultant may likely have assisted the university in
identifying and addressing quality assurance and information
security deficiencies earlier in the CMS project.
Finally, the university’s procurement approach of identifying,
procuring, and implementing its own solution caused it
to assume substantially all the responsibility for the CMS
project, sharing little if any project risk with vendors and
consultants. The university procured the software for the
CMS project in September 1998, ultimately agreeing to pay
PeopleSoft $37 million to use the software for the next eight
years and for an initial amount of training and consulting
services. It then hired consultants on an hourly basis to help
it identify campus business needs, to design and develop the
modifications needed for the software, and to help implement
this software at campuses throughout the university system.
However, the university could have structured its procurement
so that, in return for a fixed fee, the winning firm would be
responsible primarily for the successful implementation of
whatever software product the university decided to use. The
university then could have entered into a contract that paid
the firm only upon completion of key deliverables, such as the
successful modification of functionality elements within the
software to meet the university’s needs. Structuring contracts
to pay only after deliverables have been tested and accepted is
a recommended procurement practice. Instead, the university
chose to purchase only the software, and it is conducting the
substantial amount of work, with the assistance of consultants
paid through additional contracts, necessary to ensure that the
software is modified and implemented properly. The university
concluded that it was best for it to modify and implement the
software, but it never performed sufficient analysis to determine
that a university installation provided the best value. As a result,
it assumed the considerable financial and business risk involved
in ensuring that the software meets its business needs and is
implemented successfully at campuses.
To ensure that it achieves its stated business objectives for
CMS, the university should continue its recently established
practice of tracking actual hours spent on software modifications
and consider this information when estimating the cost and
time associated with developing and applying future software
142 California State Auditor Report 2004-406 California State Auditor Report 2004-406 143
modifications. Also in the future, the university should evaluate
its specific business processes against vendor products before
procuring IT systems, so as to select the product that best
accommodates the university’s specific needs. The university
should also reassess the design of CMS and evaluate the
economies that can be achieved by reducing the number
of separate CMS databases. Similarly, the university should
define the scope and associated costs of CMS by identifying
the specific functionality that is necessary and establish
a minimum level of functionality that all campuses will
implement to not only minimize costs, but also to facilitate
common systemwide reporting.
Additionally, to ensure it adequately addresses CMS project
quality and information security, the university should establish
a quality management plan and continue its efforts to establish
an effective quality assurance function for the CMS project. Such
steps may include hiring an independent oversight consultant
to perform various quality assurance functions and to evaluate
the progress of the CMS project. The university should also
establish a policy on sensitive information requiring that
campuses implement the use of confidentiality agreements for
all employees with access to the CMS system.
Finally, the university should plan future procurements to share
project risk with vendors and consultants, such as allowing
them to propose their own solutions and structuring contracts
to protect the university’s interest, including provisions to pay
only after deliverables have been tested and accepted.
University Action: Partial corrective action taken.
The university stated that it established a practice to record
the actual hours spent to develop modifications and that
it will use the data for ongoing maintenance decisions and
planning future upgrades. Additionally, it stated that in
the requirement development phase of future projects, it
will consider the impact of current business processes on
vendor selection before procuring IT solutions or software
when best practices warrant such a review and that it
implemented a policy that requires this consideration of
business processes related to vendor selection. Further, in
response to our recommendation to reassess the design of
CMS, the university indicated that it would evaluate the
economies and benefits that could be achieved by alternative
technology approaches.
144 California State Auditor Report 2004-406 California State Auditor Report 2004-406 145
It stated that it would solicit contractors for this assessment
by December 2003. The university also stated that it
defined and published the scope of the CMS baseline core
functionality and that campuses will report costs based on
this baseline core functionality, as well as report on the
cost of planned functionality outside of this baseline. The
university indicated it would adjust campus projections
to reflect changes in campus implementation plans. The
university stated that by December 2003 it would evaluate
the opportunity for improvements in systemwide reporting
using CMS and develop documentation for each area of
systemwide reporting to identify the data required, the
source of the data, the edits useful for quality assurance, and
the schedule for data submissions.
The university also stated that it implemented a quality
assurance function for CMS releases and is developing a
quality assurance plan. Further, the university indicated
that although it has conducted internal discussions on the
need for oversight consulting on CMS, that by the end
of October 2003, it would complete its determination of
best practices in higher education regarding independent
oversight consultants. The university also stated that it
issued policy and a letter to campus presidents related to
protection and control of confidential data, including the
required use of confidentiality agreements. It indicated that
it was collaborating with the software vendor to improve
access security in the base software product and expected
completion in late fall 2003. Finally, the university asserted
that it would continue to use risk sharing with vendors when
circumstances are consistent with industry best practices
and when marketplace conditions make such an approach
feasible, appropriate, and cost-effective. Additionally, it
stated that it will revise its policies regarding risk sharing
to comply with any new legislation and to provide the
assurance of change we recommended in our letter to the
chancellor in May 2003.
Finding #4: The processes the university used to select the
software vendor and consultants on the project did not
clearly demonstrate best-value procurements.
The university’s process to select the software vendor and
consultants for the CMS project did not clearly demonstrate
best-value procurements that consider both quality of proposals
144 California State Auditor Report 2004-406 California State Auditor Report 2004-406 145
and overall costs. For example, the procurement process by
which the university selected a single CMS software vendor
raises questions about whether the university used a fair and
objective competitive process. Specifically, its solicitation
document did not provide for a method to select only one
vendor, although the university decided late in the process
that it needed such a method. Moreover, when the selection
narrowed to two vendors, the university did not formally modify
the procurement process nor use quantitative scoring to select
a best-value vendor objectively. Likewise, the university could
not demonstrate that it resolved issues that the procurement
evaluation teams raised for the software ultimately selected. The
university also could not show us how it determined that
the cost differences between the competing vendors were
immaterial. Further, the university’s analysis comparing the
finalist vendors’ costs did not compare costs for a systemwide
implementation and was based on a fraction of the actual
maintenance and operations costs now estimated.
Additionally, the university’s practice of employing consultants
to work on the CMS project without appropriate competition
raises more questions about the propriety of its business
dealings. For instance, the university hired consulting firms
under sole-source contracts for reasons that appear questionable.
Further, although it recommends a discussion with consulting
firms about scope of work and rates, the university does not
require the solicitation of offers from more than one prequalified
consultant with university-awarded master agreements. As a
result, the university has not always solicited offers from
multiple prequalified consultants before procuring their
services and, therefore, cannot demonstrate that it procured
best-value services.
To ensure it uses recommended practices in its future
procurements, the university should use the procurement
process appropriate to the procurement objective, restarting
the process or formally modifying the process through written
notification to vendors as the objectives change. The university
should also establish a practice of using quantitative scoring
to clearly demonstrate that it followed an objective evaluation
process to identify the best-value vendor. It should also
document the resolution of evaluation team concerns to
demonstrate that it considered and addressed or mitigated
these concerns. Finally, the university should enforce its policy
that prohibits the use of sole-source contracts when multiple
146 California State Auditor Report 2004-406 California State Auditor Report 2004-406 147
vendors or consultants are available and establish a policy for
the use of its master agreements to require the solicitation of
offers from at least three prequalified vendors or consultants.
University Action: Partial corrective action taken.
The university stated that it issued a bulletin reminding
campuses to use the procurement process appropriate to
the procurement objective. Additionally, it indicated that it
modified existing policies to require the use of quantitative
scoring to identify the best-value vendor. However, although
previously the university stated that it would further
review its procedures for the resolution and documentation
of concerns arising during evaluation processes, its
September 2003 update did not address this topic. Further,
the university stated that it reissued its sole source policy
and guidance to campuses and revised and reissued its policy
and guidelines for master agreements requiring campuses to
solicit at least three offers when using these agreements.
Finding #5: Data center services have improved, but data
warehousing needs remain.
Unlike its procurement of the CMS software, the university
did use recommended procurement practices to select the
outsourced data processing services needed to run CMS. The
university conveyed its needs to potential vendors, asking them
to propose solutions. The university also used an objective
selection process with weighted criteria to evaluate potential
vendors. Further, the university shared risk with the vendor
by establishing contract terms aimed at holding the vendor
accountable for meeting preestablished service levels. When
it experienced inadequate service from the data center in the
early months of the contract, the university used the procedures
outlined in the contract to help raise the data center services
to agreed levels. The service levels have improved in recent
months, with the vendor achieving or coming within one
percentage point of achieving targets in the five months ending
in November 2002.
Although the university worked to address its CMS data
processing needs and is implementing more efficient means for
reporting, it only now is starting to address campus CMS data
storage and retrieval (data warehousing) needs. The outsourced
data center processes CMS transactions, but is not designed for
data warehousing. Data warehousing can provide for optimum
146 California State Auditor Report 2004-406 California State Auditor Report 2004-406 147
data storage and reporting, such as enabling the production of
reports that contain historical analysis of university operations.
Largely because of concerns over CMS project resources,
the university reportedly removed data warehousing from
the CMS project scope early in the project and made this
important component a campus responsibility, not including
the costs as part of its CMS project costs. Now, with some
campuses expressing an interest in data warehousing services,
the university is addressing the data warehousing needs for a
voluntary consortium of campuses and expected to release its
final version of the data warehousing model in early 2003.
To ensure it continues to receive improved service levels from
the data center vendor, the university should continue to
monitor and take action to resolve problems with the vendor.
The university should also ensure that it provides campuses
with the means to effectively and efficiently store and retrieve
data needed for management reporting by expediting the CMS
data warehousing project, and it should include the CMS-related
costs of data warehousing in its CMS project costs.
University Action: Partial corrective action taken.
The university stated that it would continue to monitor
and manage the performance of the CMS data center and
take appropriate and prompt action to assure appropriate
service levels. Further, it indicated that it is in the process
of determining the feasibility of data warehousing for the
CMS project. The university stated that by December 2003
it would define the requirements for data warehousing on
campuses and systemwide as a beginning step to a feasibility
study regarding data warehousing as part of the CMS project.
Finding #6: The university’s oversight over potential conflicts
of interest needs improvement.
The university did not do enough to detect or prevent conflicts
of interest by decision makers for CMS-related procurements. It
did not identify all necessary employee positions in its conflict-
of-interest code as designated positions required to file annual
statement of economic interest forms (Form 700s) and did not
always retain and make available certain required filings of these
forms. Additionally, the university did not require consultants
on the project to file Form 700s, although they performed
duties similar to employees in designated positions. Further, the
148 California State Auditor Report 2004-406 California State Auditor Report 2004-406 149
university failed to provide for adequate disclosure processes to
help ensure that individuals participating in the procurement
process were free from conflicts. Also, it did not provide
appropriate guidance to employees to identify potential conflicts
using the Fair Political Practices Commission (FPPC) process
for determining conflicts. Finally, it lacks a policy that spells
out for university employees what constitutes “incompatible
activities,” such as accepting anything of value from anyone
seeking to do business with the university, and does not
require that employees in designated positions receive regular
ethics training.
Our review of Form 700s found an employee who appeared
to have a conflict of interest while participating in the
CMS software procurement decision and an employee who
possibly may have used nonpublic information to benefit
personally. Conflicts of interest cast a shadow over the
university’s reputation for fair and honest business practices and
undermine public confidence in the university’s procurement
decisions. Moreover, if an employee uses information not
available to the general public for personal financial gain, it not
only harms the university’s reputation but also is unlawful.
To ensure that the university takes appropriate action to prevent
potential conflicts of interest in the future, the Legislature
should consider requiring the university to provide periodic
ethics training to designated university employees similar to
that required by the Government Code for designated state
employees. Additionally, the Legislature should consider
requiring the university to establish an incompatibles activities
policy for university employees similar to that addressed in
Government Code, Section 19990.
Similarly, the university should conduct periodic conflict-
of-interest training, such as the ethics training required of
state agencies for designated employees, and should establish
an incompatible activities policy that it communicates to
university employees. The university should also enhance its
disclosure form to indicate what constitutes a conflict, identify
all participating vendors, and state the prohibition of using
nonpublic information to benefit personally; and it should
require all employees to sign this form before participating in
the procurement process. Additionally, the university should
update its conflict-of-interest code to classify all positions
responsible for evaluating or overseeing vendors or consultants
and should require consultants that serve in a staff capacity
148 California State Auditor Report 2004-406 California State Auditor Report 2004-406 149
and that participate or influence university decisions to file
Form 700s. Further, university human resources staff should be
reminded of their responsibility to collect, retain, and make
available filed Form 700s for the required seven-year period.
Finally, the university should remind its employees of the
prohibition against using information not available to the public
to benefit financially, and discipline infractions if necessary.
Legislative Action: Legislation proposed.
The Legislature introduced and amended Senate Bill 971
which, among other items, would require the university to
offer to each of the university’s designated employees, on
at least a semiannual basis, an orientation course on the
relevant employee ethics statutes and regulations that govern
official conduct. Additionally, the Legislature introduced
and amended Assembly Bill 491, which, among other items,
would require the university to develop guidelines for
IT projects that are consistent with Section 19990 of the
Government Code. Both bills were placed on inactive status
in September 2003.
University Action: Partial corrective action taken.
The university stated that by December 2003 it would
develop a comprehensive web-based conflict-of-interest
and ethics training program for delivery to designated
employees who will be required to certify completion of the
training. The training includes coverage of the Fair Political
Practices Commission (FPPC) eight-step process for assessing
potential conflicts and employees’ responsibility to seek
the advice of counsel when questions exist. Additionally,
the university stated that it presented a workshop in
February 2003 to update university filing officers on the
FPPC filing requirements and that its counsel reviewed
conflict-of-interest issues and would fully cooperate
with any action taken by the FPPC. The university also
indicated that it distributed a memorandum identifying
key laws that govern the behavior and activities of
university employees in areas of incompatible activities,
conflict of interest, and ethics.
The university stated that it revised and reissued
requirements for procurement disclosure forms. The
university reported it enhanced its procurement disclosure
form to clearly indicate what constitutes a conflict of interest
and state that evaluators are prohibited from using
150 California State Auditor Report 2004-406 California State Auditor Report 2004-406 151
nonpublic information to benefit personally. Further, the
university stated that it would ensure that all participants
understand the scope and nature of their commitments
when participating in a procurement activity, and that,
when possible, it would list on the disclosure form all
vendors participating in the procurement. It also stated
that it advised university officials to review carefully the
existing designated position list to determine whether
existing positions require incorporation and stated that in
determining its designated positions, filing officers would
identify employees in positions responsible for evaluating
and overseeing vendors and contractors. It further indicated
that it would require consultants to file Form 700s when
they are hired to make or participate in making decisions
that foreseeably will have a material effect in a university
financial interest. The university asserted that it reminded
filing officers in February 2003 of the requirement to collect,
retain, and make available for the required seven-year
period the filed Form 700s and that it would repeat this
reminder each year. Finally, the university indicated that
the memorandum identifying key laws that it distributed
addresses the prohibition against employees using
information not available to the public to benefit financially.
150 California State Auditor Report 2004-406 California State Auditor Report 2004-406 151
152 California State Auditor Report 2004-406
STATEWIDE PROCUREMENT PRACTICES
Proposed Reforms Should Help Safeguard
State Resources, but the Potential for
Misuse Remains
REPORT NUMBER 2002-112, MARCH 2003
Audit Highlights . . .
Department of General Services and the Stephen P. Teale Data
Our review of the State’s Center responses as of September 2003
procurement practices
revealed the following:
The Joint Legislative Audit Committee (audit committee)
þ Until the governor’s asked the Bureau of State Audits to audit the California
May 2002 Executive Order, Multiple Award Schedule (CMAS) program and the
departments did not
State’s sole-source contracting procedures. Specifically, the audit
compare prices among
committee asked that we review the process used by General
California Multiple Award
Schedule vendors. Services when establishing the CMAS vendors list and the
procedures and practices used to identify qualified contractors
þ Inadequate oversight
and consultants when using noncompetitively bid and CMAS
by the Department of
General Services (General contracts to procure goods and services. The audit committee
Services) contributed to also asked us to include in our review procurements related to
the problems we identified
the state Web portal.
with departments’
purchasing practices.
þ Without comparing prices, Finding #1: Departments largely ignored recommended
the State purchased procedures for purchasing from CMAS vendors.
millions in goods and
services for the Web portal Our review of CMAS purchases made by nine state departments
from vendors that played revealed that, before May 2002, when an Executive Order called
a role in defining the
for wholesale changes in the State’s procurement practices, few
approach and architecture
departments took prudent steps, such as comparing prices, to
for the project.
ensure that they obtained the best value when acquiring goods
þ Estimated Web portal
and services from CMAS vendors. For example, largely at the
project costs given to
request of two former officials of the Governor’s Office, the
administrative control
agencies and the Legislative Department of General Services (General Services), the Stephen
Analyst’s Office were P. Teale Data Center (Teale Data Center), and the Health and
sometimes inaccurate.
Human Services Data Center purchased more than $3.1 million
þ Before the Executive Order, in goods and services for the state Web portal from one CMAS
departments frequently vendor without comparing prices or using some other means
misused alternative
to determine that the selected vendor provided the best value
procurement practices—
to the State. Additionally, General Services and the Teale Data
sole-source contracts and
emergency purchases. Center purchased items for the Web portal totaling $690,000
that were not included in the vendors’ CMAS contract.
California State Auditor Report 2004-406 153
Recent changes to the CMAS requirements have slowed but not
halted departments’ misuse of the CMAS program. Specifically,
departments did not obtain at least three price quotes, as
required, for two of the 25 CMAS purchases made after the date
of the Executive Order.
In order to ensure that the State receives the best value
when acquiring goods and services, we recommended that
departments stress adherence to all CMAS requirements and
reject requested purchases if these requirements are not met.
Additionally, departments should review the appropriate CMAS
contract to ensure that the requested good or service is included
in the contract.
General Services’ Action: Corrective action taken.
According to General Services, former Governor Gray Davis’
Cabinet Secretary and Deputy Chief of Staff and the former
Director of the Department of Finance jointly issued a
memorandum to all departments notifying them that
General Services’ comprehensive training program for state
contracting and procurement professionals is mandatory. The
memorandum also encouraged all departments to review their
procurement and contracting operations to ensure that all
activities within these programs are conducted in compliance
with requirements. These requirements are discussed most
recently in a management memo issued by General Services
on May 28, 2003, that establishes strict requirements for
procuring goods and services through the use of CMAS and
non-competitively bid acquisition methods.
Finding #2: The State’s failure to compare prices created the
appearance that some companies may have had an unfair
advantage in selling Web portal components to the State.
The Web portal was developed with guidance from a group
of executives from several private businesses, some of which
later sold products for the project. Members of this group,
called the Web Council, gave their “unanimous blessing to
the portal’s conceptual approach and its specific architecture.”
According to the minutes and agendas from Web Council
meetings, representatives of several companies participating
in the council made presentations to discuss their companies’
products. Three of these companies ultimately sold hardware
154 California State Auditor Report 2004-406 California State Auditor Report 2004-406 155
and software components to the State for the Web portal
totaling $2.5 million. These companies sold their products to
the State, either directly or indirectly through resellers with
CMAS contracts. The concept of obtaining guidance from
industry experts is meritorious if, after obtaining the guidance,
the State engages in an open, competitive procurement process.
However, if obtaining advice from industry experts is followed
by procurement of their goods or services without comparing
prices to those offered by others, as was the case with numerous
CMAS purchases for the Web portal, an appearance of unfairness
is created.
In September 2002, the Teale Data Center assumed responsibility
for providing management, maintenance, and support for the
Web portal project. To ensure that the State’s investment in
the Web portal is a prudent use of taxpayer resource, it should
use the competitive bidding process for purchasing goods and
services for the project.
Teale Data Center Action: Corrective action taken.
Teale Data Center regularly utilizes General Services’
contract registry to seek competition. Further, it is standard
Teale Data Center practice to exceed the minimum number
of bids required for informal bids as this practice ensures
diverse vendor participation. Finally, as the existing
Web portal services and maintenance contracts required
renewal, Teale Data Center has competitively bid all
subsequent new contracts.
Finding #3: General Services and former officials of the
Governor’s Office did not follow state policy governing
information technology projects.
General Services—the administrator of the Web portal
project—failed to obtain the necessary approvals from the
former Department of Information Technology (DOIT) and the
Department of Finance (Finance) before significant changes were
made to the Web portal project. The changes, which increase
previously approved project costs by 94 percent, were made at
the direction of the former director of eGovernment. Among
the changes, estimated to cost $9.2 million, were significant
enhancements related to the energy crisis and terrorist threats and
ongoing maintenance provided by consultants rather than state
personnel, as was originally planned. General Services submitted a
special project report to DOIT and Finance explaining the reasons
154 California State Auditor Report 2004-406 California State Auditor Report 2004-406 155
for the increased cost and seeking approval for the enhancements.
However, the enhancements were completed four to six months
before General Services submitted the report.
Additionally, General Services did not adequately coordinate
and monitor Web portal purchasing and reporting activities. As
a result, the special project reports submitted to DOIT, Finance,
and the Legislative Analyst’s Office (LAO) did not accurately
account for all Web portal purchases. Specifically, at least one
special project report that General Services submitted was
inaccurate because it did not include more than $1.3 million in
Web portal costs incurred by its Telecommunications Division
and the Health and Human Services Data Center. According to
the former chief of General Services’ Enterprise Business Office,
only costs that were under her control were reported to the
individual preparing the special project reports.
Finally, it appears that responsible officials at General Services
were unaware that a revised Web portal project report,
which nearly doubled the estimated cost of the project, had
been submitted to DOIT, Finance, and the LAO reflecting a
significant increase in total project costs. According to officials
at Finance, they met with former officials of the Governor’s
Office and representatives from General Services to discuss the
proposed cost increases. The officials at Finance stated that
it is not uncommon for minor modifications to be made to a
special project report after it has been submitted for approval.
However, we believe that changes to a project that effectively
double the estimated cost of the project do not constitute
minor modifications. Moreover, Finance could not provide any
documentation of its analysis of the proposed project changes
and resulting cost increase. Nevertheless, it approved submitting
the revised estimates to the Legislature based on available
information, given the high priority of the project.
To ensure that Web portal costs are properly accounted for, the
Teale Data Center should monitor project expenses by recording
estimated costs when contracts and purchase orders are initiated
and actual costs when paid. The Teale Data Center should also
submit special project reports to Finance and the LAO when
required and ensure that reported costs accurately reflect actual
expenditures and commitments to date. Finally, the data
center should make certain that special project reports contain
estimates for at least the same number of years that earlier
reports cover so that reviewers can easily identify changes in the
overall projected costs.
156 California State Auditor Report 2004-406 California State Auditor Report 2004-406 157
Teale Data Center Action: Corrective action taken.
The Teale Data Center’s administrative processes require
an internal analysis and approval of estimated costs prior
to the initiation of the bidding process. If the resulting
procurement activity results in costs that exceed the
original estimate, approval is required before acquisition
can be completed. Teale Data Center’s Finance Division has
developed a spreadsheet used to monitor projected versus
actual expenditures. Should requests for acquisitions vary
from the original plan, they are analyzed to determine the
reason for the change and if it is within budget authorization
prior to the expenditure being made. The spreadsheet is
updated monthly and is shared with the manager of the Web
portal and the assistant director of the Enterprise Division.
Furthermore, the Teale Data Center will continue to
submit special project reports to the Department of Finance
and the Legislative Analyst’s Office, when required, which
will accurately reflect all costs for the Web portal. Finally,
the Teale Data Center will ensure that any future special
project report and feasibility study report have consistent
reporting periods.
Finding #4: The use of multiple departments to make purchases
for the Web portal resulted in payments for services that were
required under earlier agreements.
Several departments made Web portal purchases rather than one
office coordinating and making all purchases. Consequently, no
one office carefully tracked existing purchases and compared
them to newly requested purchases, and the State contracted
for some services even though the same services had already
been required under earlier agreements. For example, General
Services’ Telecommunications Division issued a $173,000
purchase order to a consulting firm for project management
of ongoing operations and maintenance of the Web portal.
However, the terms and services of this contract duplicated some
of the terms and services of another purchase order that General
Services’ Enterprise Business Office had previously issued to the
consulting firm.
Similarly, the Health and Human Services Data Center entered
into a $246,000 agreement with a consulting firm to create a
plan to develop a Web portal mirror site. In reviewing the three
reports that the consulting firm submitted in fulfillment of its
156 California State Auditor Report 2004-406 California State Auditor Report 2004-406 157
agreement with the Health and Human Services Data Center,
we found that the content of the reports was information the
consulting firm was already obligated to provide under an earlier
contract with General Services.
General Services should review past payments to the consulting
firm and another vendor by General Services, the Health and
Human Services Data Center, and the Teale Data Center to ensure
that the State has not paid for goods or services twice. If duplicate
payments were made, General Services should recover them.
General Services’ Action: Corrective action taken.
General Services reviewed the transactions in question and
concluded that duplicate payments did not occur.
Finding #5: Recent actions by General Services and the Teale
Data Center have reduced Web portal costs.
According to the most recent special project report, jointly
submitted by General Services and the Teale Data Center, total
estimated costs of the Web portal were nearly $6 million less
than previously reported. The reduced costs were largely due
to cutbacks in Web portal maintenance that included a major
reduction in the number of hours for the consulting firm to
maintain the portal.
In June 2002, the interim director of DOIT stated that the
consulting firm’s Web portal agreements were expensive and
little had been done to transfer the consulting firm’s expertise
to state employees so that a state department could ultimately
operate the portal. He recommended that General Services
extend the consulting firm’s contract until a competitively
selected contractor became available. He also recommended
reducing the size of the contract by restricting the consulting
firm’s role to limited maintenance and knowledge transfer
functions, ultimately turning over the maintenance of the Web
portal to state employees.
In January 2003, the Teale Data Center entered into a six-month
contract with the same consulting firm for $350,000 in Web
portal maintenance. Unlike the manner in which previous
maintenance contracts had been established, however, the Teale
Data Center solicited proposals from 20 different companies
and six firms responded. The Teale Data Center evaluated the
responses and eventually chose the consulting firm, achieving
158 California State Auditor Report 2004-406 California State Auditor Report 2004-406 159
a 39 percent average reduction in the hourly rate over previous
noncompetitively bid agreements with the firm. Therefore, the
Teale Data Center should continue to use the competitive bidding
process for purchases of goods and services for the project.
Teale Data Center Action: Corrective action taken.
The Teale Data Center strongly supports the competitive bid
process and has competitively bid all new contracts for the
Web portal.
Finding #6: State departments improperly used sole-source
contracts and emergency purchase orders.
Before the May 2002 Executive Order, state departments often
did not adequately justify the need for sole-source contracts.
Requests for sole-source contracts were often ambiguous or failed
to demonstrate that the contracted good or service was the
only one that could meet the State’s needs. In addition, because
they failed to make sufficient plans for certain purchases,
departments often used sole-source contracts inappropriately.
We reviewed 23 requests for sole-source contract approval
submitted by various departments and found eight examples
of departmental misuse of this type of exemption. General
Services, however, approved all 23 requests. In four requests that
General Services approved, the departments failed to provide the
kind or degree of justification we expected to see. We could not
determine whether the circumstances warranted a sole-source
contract for one of the 23 requests because the department’s
justification was ambiguous. Finally, in three of the 23 sole-
source requests, the departments sought the contracts because
they failed to properly plan for the acquisition and, as a result,
did not have time to acquire the goods or services through the
normal competitive bidding process.
Similarly, departments frequently misused the State’s emergency
purchasing process by failing to meet the legal requirements for
this type of procurement. For 17 of the 25 purchase requests we
reviewed, the departments were requesting emergency purchases.
In the remaining eight cases, the departments were requesting
approval for reasons other than meeting emergency needs, such
as seeking the purchase of items to meet special needs. Although
General Services did not have the proper authority to grant
exceptions for these purchases, it approved all eight.
158 California State Auditor Report 2004-406 California State Auditor Report 2004-406 159
Of the 17 emergency purchase requests totaling $21.3 million,
nine totaling $2.3 million completely failed to identify the
existence of an emergency situation that fell within the
statutory definition or to explain how the proposed purchase
was related to addressing the threat posed by an emergency.
State departments should require their legal counsel to review all
sole-source contracts and emergency purchases to ensure they
comply with statutes governing the use of noncompetitively bid
contracts. Departments should also ensure that adequate time
exists to properly plan for the acquisition of goods and services.
Moreover, General Services should require its Office of Legal
Services to review all sole-source contract requests above a
certain price threshold. General Services should also implement
review procedures for sole-source contracts and emergency
purchase orders to ensure that departments comply with
applicable laws and regulations and require departments to
submit documentation that demonstrates compliance. General
Services should reject all sole-source and emergency purchase
requests that fail to meet statutory requirements. Finally,
General Services should seek a change in the current contracting
and procurement laws if it wants to continue to exempt
purchases from competitive bidding requirements because of
special or unique circumstances.
General Services’ Action: Partial corrective action taken.
General Services has implemented policies and procedures
that provide for its Office of Legal Services to review all
non-competitively bid contract requests that exceed
$250,000. Additionally, General Services has developed
a form that requires detailed information be provided to
justify non-competitively bid procurements. Specifically,
the form requires departments to provide detailed responses
for various issues, including (1) why the acquisition is
restricted to one supplier, (2) background events that led
to the acquisition, (3) the consequences of not purchasing
the good or service, and (4) what market research was
conducted to substantiate the lack of competition. Finally,
General Services is working to enhance the form to provide
additional assurance that non-competitive procurements are
properly justified.
160 California State Auditor Report 2004-406 California State Auditor Report 2004-406 161
Legislative Action: None.
General Services is reviewing the need for additional
exemption authority related to competitive bidding. At this
time, a final decision has not been made on the need to
pursue additional authority in this area.
Finding #7: General Services needs to strengthen its
oversight of state purchasing activities.
General Services has provided weak oversight and administration
of the CMAS program. We found that General Services, which is
responsible for auditing state departments for compliance with
contracting and procurement requirements, is not performing
the audits required by state law. Specifically, between July 1999
and January 2003, General Services had completed only 105
of 174 required reviews. Moreover, less than one-half of the
105 reviews were completed on time.
Additionally, General Services does not sufficiently review CMAS
vendors to ensure that they comply with the terms of their
contracts with the State. For instance, from July 1998 through
September 2002, General Services had only reviewed 29 of 2,300
active CMAS vendors. Perhaps more importantly, General Services
does not always make sure that other state and local government
contracts on which CMAS contracts are based are, in fact, awarded
and amended on a competitive basis. As a result, the State may
be paying more than it should for the goods and services it
purchases. Finally, General Services does not consistently obtain
and maintain accurate data on departments’ CMAS purchases.
Consequently, it is sometimes charging other state departments
more than it should for administrative fees. For example, we
reviewed 90 CMAS purchases at nine departments and found
24 instances in which General Services had either entered the
incorrect amount in its accounting system or had no record of the
transaction. We further reviewed 10 of the 24 transactions and
determined that General Services had overcharged departments
more than $219,000.
We recommended that General Services implement the
recommendations made by the Governor’s Task Force on
Contracting and Procurement Review (task force), which
include increasing the frequency of audits and reviews of state
departments. General Services should consider reducing or
eliminating the delegated purchasing authority of departments
that fail to comply with contracting and procurement
160 California State Auditor Report 2004-406 California State Auditor Report 2004-406 161
requirements. Additionally, General Services should increase
the frequency of its reviews of CMAS vendors and ensure
that processes established by other governmental entities for
awarding and amending contracts are in accordance with CMAS
goals. Finally, General Services should consult with departments
to determine what can be done to facilitate monthly
reconciliation of CMAS purchasing and billing activities.
General Services’ Action: Partial corrective action taken.
General Services is committed to fully addressing the
recommendations contained in the task force’s report and is
continuing to assign significant resources to that activity. For
instance, General Services has initiated a cornerstone of the
procurement reform effort—the training of state procurement
officials. General Services has also implemented a system to
track the volume and type of state procurement contracts.
As a result, the State is now able to capture, through an
internet-based system, data on all significant purchases on
a near-real time basis. General Services has also facilitated
meetings with the Department of Finance and departmental
internal auditors to revise existing audit procedures to include
CMAS and non-competitively bid contracts. Further, General
Services is considering limiting its audits and reviews of
some departments to an evaluation of the adequacy of the
departments’ most recent internal reviews. General Services
noted that compliance with purchasing and contracting
requirements is a major part of maintaining approved
purchasing authority. If these requirements are not
met, purchasing authority will be reduced or eliminated.
Although implementing a program that results in an increase
in the frequency of vendor reviews is a priority, the State’s
current budget situation limits General Services’ ability to
obtain and assign additional resources to this activity. In the
interim, General Services is focusing its limited resources
on the review of the most frequently used CMAS suppliers.
Finally, General Services believes that the implementation
of a mandatory statewide electronic procurement system
that would enable them to capture actual department
purchasing activity in real time is the ultimate solution to
its billing challenges. While General Services recognizes the
importance of such a system, it is not feasible in the current
fiscal environment. As an interim corrective action, General
Services issued a memorandum to its customer departments
advising them of the importance of regularly reconciling
their purchasing information with invoices.
162 California State Auditor Report 2004-406 California State Auditor Report 2004-406 163
Finding #8: Although task force recommendations address
most weaknesses, some cannot be immediately implemented
and others are needed.
In August 2002, the task force recommended 20 purchasing
reforms, completing its directive from the governor’s Executive
Order issued on May 20, 2002. The recommendations, which
focus on the use of the CMAS program and noncompetitive
bid contracts, call for comprehensive changes in the State’s
contracting and procurement procedures. Prompted by the
controversy surrounding the Oracle enterprise licensing
agreement, the governor asked the task force to review the
State’s contracting and procurement procedures and recommend
the necessary statutory, regulatory, or administrative changes
to “ensure that open and competitive bidding is utilized to the
greatest extent possible.” The task force’s recommendations
include the following:
• Departments must compare prices among CMAS vendors.
• Acquisitions of large information technology projects using
CMAS contracts and master agreements should be prohibited
unless approved in advance.
• General Services needs to establish specific criteria to qualify
piggybacking vendors.1
• General Services should increase the frequency of its compliance
reviews of purchasing activities of state departments.
• General Services should implement a new data integration
system to address deficiencies in its ability to capture data and
report on contracting and procurement transactions.
In general, we believe the task force’s recommended changes, if
properly implemented, should address many of the weaknesses
in the CMAS program and noncompetitive bidding procedures
we identified in our report. However, we believe that additional
steps should be implemented based on the results of our audit.
For example, General Services should revise its procedures for
awarding contracts to vendors based on contracts they hold with
other government entities because it often awards CMAS contracts
without adequately evaluating the competitive-pricing processes
that other state and local governments use to award base contracts.
1Vendors that do not have an existing federal multiple-award schedules contract but
obtain a CMAS contract by agreeing to provide goods and services on the same terms
as vendors that do have a multiple-award contract through the federal or some other
government entity, are commonly referred to as piggyback contracts.
162 California State Auditor Report 2004-406 California State Auditor Report 2004-406 163
General Services also needs to develop classes that provide
comprehensive coverage of sole-source contracts, emergency
purchases, and CMAS contracts, and departments need to
ensure that affected personnel attend the classes periodically.
Also, because most of the departments we surveyed indicated
they had experienced problems working with CMAS vendors,
General Services should also consider holding periodic
information sessions with the vendors. Further, in addition
to implementing a new data integration system, which both
General Services and the task force acknowledge is a long-
term solution, we believe General Services should work
with departments to establish a process to reconcile their
purchasing information with invoices and reports prepared by
General Services. Such reconciliation would allow departments
to report and correct errors to General Services, thereby
preventing incorrect billings and increasing the reliability of
purchasing data. Finally, to increase departments’ ability to
access online information about the CMAS program, General
Services should explore the possibility of including copies of
vendor contracts on its Web site.
General Services’ Action: Partial corrective action taken.
General Services is continuing to focus additional efforts
on obtaining further assurance that processes used by
other government entities to execute contracts are in
accordance with CMAS goals. As part of this process,
General Services has developed and implemented written
policies and procedures that more clearly address this
activity. Specifically, the CMAS analyst, through a review of
documents and conversation with the awarding entity, must
ensure that the process used by the awarding entity meets
the State’s standards for solicitation assessment.
As previously discussed, General Services has begun training
of state procurement officials. In conjunction with the
California State University at Northridge’s Center for
Management and Organization Development, General
Services conducted an extensive survey of individuals
involved in state purchasing activities. Based on this
data, General Services is phasing in a series of new state
acquisition courses. The first classes within General Services’
comprehensive training and certification program were
held on April 30, 2003. Additionally, the first classes within
General Services’ 64-hour Basic Certificate Program began on
October 7, 2003.
164 California State Auditor Report 2004-406 California State Auditor Report 2004-406 165
Finally, according to General Services, while its Web site does
provide a search tool by which departments can identify
CMAS contracts by the categories of goods and services
provided, departments are not able to access line-item
detail on-line. Implementing a detailed catalog containing
CMAS goods and services requires implementation of a
comprehensive electronic procurement system. A dynamic
software and hardware solution will be required to support
the CMAS program, which has over 2,300 active contracts
and more than 1,600 suppliers. At this time, the State’s
budget situation prevents the pursuit of this complicated
and costly project.
164 California State Auditor Report 2004-406 California State Auditor Report 2004-406 165
166 California State Auditor Report 2004-406
HEALTH AND HUMAN SERVICES
AGENCY DATA CENTER
Investigations of Improper Activities by
State Employees, August 2002 Through
January 2003
ALLEGATION I2002-652 (REPORT I2003-1), APRIL 2003
Health and Human Services Agency Data Center’s response as
of July 2003
We investigated and substantiated an allegation that a
manager of the Health and Human Services Agency
Data Center (data center) violated conflict-of-
Investigative Highlights . . . interest laws. Our investigation showed that work the manager
performed influenced the formation of a $345,000 contract
A former manager of the
between the data center and company 1, a private corporation
Health and Human Services
that the manager negotiated for employment with while he was
Agency Data Center
(data center) engaged in in a position to influence the contract.
the following improper
governmental activities:
Finding: A manager violated conflict-of-interest laws.
þ Negotiated employment
with a company while The manager was both directly and indirectly involved in the
he was in a position to
contract with company 1. Specifically, while he was employed at
influence a $345,000
the data center, the manager drafted the statement of work that
contract between the data
center and that company. was incorporated as part of the contract between the data center
and company 1, a private consulting firm the manager began to
þ Drafted contract
work for one business day after ending his state employment.
language that was
incorporated into the The statement of work describes the State’s and contractor’s
contract between the data responsibilities, contract duration, tasks for the contractor to
center and a company
perform, payment methods, and other provisions.
that he began working
for one business day after
ending his employment The manager was also indirectly involved in creating the
with the State. contract between the data center and company 1 because he
prepared documents that data center staff ultimately relied on
to establish the contract. We also substantiated that while he
was employed at the data center, the manager negotiated for
employment with company 1. State law prohibits employees
from having a financial interest in any contract they make
in their official capacity. Further, the cost to the State for the
California State Auditor Report 2004-406 167
manager’s services as a consultant was more than three times the
previous cost of his state salary and benefits, despite the fact that
the manager’s duties were essentially the same.
Data Center Action: Partial corrective action taken.
The data center has referred our findings to the Fair Political
Practices Commission and the attorney general for evaluation
of the alleged violations of conflict-of-interest laws. The data
center also requested a review by the Department of Personnel
Administration to determine whether it should take adverse
action against employees who may have aided or assisted the
manager. Further, the data center has provided mandatory
in-service training to educate key employees involved in the
procurement process and their responsibilities under state laws.
168 California State Auditor Report 2004-406
STATE CONTROLLER’S OFFICE
Does Not Always Ensure the Safekeeping,
Prompt Distribution, and Collection of
Unclaimed Property
REPORT NUMBER 2002-122, JUNE 2003
Audit Highlights . . . State Controller’s Office response as of December 2003
Our review of the State
The Joint Legislative Audit Committee (audit committee)
Controller’s Office (controller),
Bureau of Unclaimed Property requested that we evaluate the process used by the State
(bureau), revealed the following: Controller’s Office (controller) Bureau of Unclaimed
Property (bureau) for identifying unclaimed property from
þ The bureau’s computerized
Unclaimed Property System corporations, business associations, financial institutions,
lacks sufficient controls insurance companies, and other holders. Further, the audit
to prevent unauthorized
committee asked us to determine whether the bureau distributes
changes, and the
unclaimed property to eligible recipients accurately and in a
duplication of account
data, potentially resulting in timely manner. We were also asked to evaluate the bureau’s
the payment of fraudulent process of safeguarding unclaimed property in its custody. Lastly,
or duplicate claims.
we were to determine whether the bureau evaluates claimant
þ The bureau’s manual satisfaction, is responsive to complaints, and has a process in
tracking of securities is place to identify and implement corrective action.
unreliable and the bureau
is inconsistent in how
quickly it sells securities.
Finding #1: Inaccurate data contained in the bureau’s
þ The bureau excludes property system has resulted in the payment of fraudulent
more than $7.1 million in and duplicate claims.
unclaimed property from
its Web site. The bureau relies on its computerized Unclaimed Property System
(property system) to track unclaimed property escheated to the
þ The bureau does not
State by persons and businesses holding unclaimed property
consistently review and
(holders) and to disclose that the controller has the unclaimed
distribute claims in a
reasonable amount of time. property. However, the property system is not sufficiently
reliable. Our primary concern is that the controller has not
þ The bureau does not ensure
implemented controls to prevent bureau employees from
that it receives all of the
reported contents of safe making unauthorized changes to the system, despite knowing
deposit boxes. about this problem for eight months. Further, the property
system does not generate reports that would reveal when
þ The controller’s Financial-
related Audits Bureau did unauthorized changes are made and by whom. These flaws
not pursue an estimated allowed two student assistants to conspire to modify owner
$6.7 million in unclaimed
names in the data and allowed their accomplices to fraudulently
property from one holder.
claim some of the property.
California State Auditor Report 2004-406 169
Prior to 2002, the property system lacked effective controls to
prevent duplicate data from being loaded into the property
system. Although the controller took action to correct this
weakness, as of May 6, 2003, the bureau had not yet removed
all of the duplicate data from its property system. While the
Information Systems Division reports it has taken action
to prevent payments on properties listed on the duplicate
reports, some of the properties are still on the bureau’s Web
site. Individuals using the Web site to determine whether the
controller has their property may inadvertently conclude that
they are owed more than the actual amount.
The bureau does not reconcile the total amount remitted for
each holder report to the total of all the individual accounts
loaded into the property system by that report. This may result
in claimants not receiving funds to which they are legally
entitled. In addition, the bureau’s staff manually entered nearly
6,700 holder reports directly into the property system due to
problems with a holder’s electronically submitted reports. In
doing so, the bureau bypassed most of the automatic system
checks that could have identified errors in the data, such as
checking for duplicate information. The bureau has established
a procedure to verify the data in these records as claims come in,
but it does not intend to verify all of the data entered directly
into the property system.
To increase the reliability of the data in the property system, the
bureau should do the following:
• Implement the programming changes necessary to ensure
that employees cannot make unauthorized and unmonitored
changes to the property system.
• Remove all duplicate account data from the property system.
• Ensure that both current and newly hired staff review unclaimed
property accounts entered manually when claims are filed
against the property to determine the accuracy of the data.
To ensure the accuracy of the data loaded into the property
system, the bureau should require its staff to reconcile the total
amount remitted by each holder to the total of all the individual
records in the property system for that report.
170 California State Auditor Report 2004-406 California State Auditor Report 2004-406 171
Controller’s Action: Corrective action taken.
The controller modified its property system to limit
on-line property updates and to generate audit reports that
allow supervisory review of any such on-line transactions.
Additionally, the controller developed a plan to delete all
the duplicate reports from the system, including modifying
the property system to prevent the duplicate properties from
appearing on the bureau’s Web site.
Furthermore, the controller conducted training classes
to ensure that all staff continues to adhere to current
procedures for verification of claims filed for properties on
the reports entered manually. The controller retrained staff
on proper procedures for holder overpayments. Additionally,
the controller made the necessary programming changes
to fix system problems, including the development of a
periodic report to identify any out of balance reports.
Finding #2: The bureau may incorrectly bill holders for
interest penalties.
Inaccuracies in the property system may result in the incorrect
billing of holders for interest penalties from which they should
be exempt under the controller’s amnesty program. Beginning
in 2000, holders were allowed amnesty for their past failures to
report unclaimed property on or before November 1, 1999, and
were exempted from paying an interest penalty. However, the
bureau did not include an amnesty indicator in the property
system for all qualifying holder reports, and the controller has
not modified its program that calculates interest penalties to
exclude holder reports that were granted amnesty. The controller
will have to correct both problems to avoid inappropriately
billing the holders that it granted amnesty.
To prevent the billing of penalties for late reporting to holders
granted amnesty, the controller should do the following:
• Identify reports covered by the amnesty program that do not
currently have an amnesty indicator and add it.
• Modify its program that generates bills for interest penalties to
exclude those reports with an amnesty indicator.
170 California State Auditor Report 2004-406 California State Auditor Report 2004-406 171
Controller’s Action: Corrective action taken.
The controller reconciled all amnesty reports in the tracking
system and the unclaimed property system. Further, the
controller reviewed interest billings previously issued to
verify that no erroneous billings were issued for approved
amnesty reports. Additionally, the controller modified
its procedures to ensure that all interest billings are
reviewed and that no amnesty reports are incorrectly billed
for interest. Lastly, the controller developed a plan for
programming changes to prevent generating interest billings
for approved amnesty reports.
Finding #3: Although holder reports must be processed
in order to account for property escheated to the State,
thousands of holder reports await processing.
To allow for the tracking and eventual disbursement of
unclaimed property, the bureau must process the holder reports
by loading the detailed owner data into the property system.
Although the bureau must complete this process to be able
to disclose on its Web site that it has the owner’s property,
to pay claims, to bill holders for interest due on late filings,
and to reconcile the amounts reported by the holders to the
amounts actually remitted by the holders, it told us that, as
of June 5, 2003, it had not uploaded more than 8,500 holder
reports, some as far back as 1996. More than 4,500 of these reports
are less than one year old and are not considered a backlog.
During discussions with the bureau, we learned that two
conditions contributed to its backlog of holder reports:
• Electronic reports in unreadable formats.
• Large increases in the number of holder reports submitted.
To enable the bureau to upload data reported in formats that it
cannot access, it should do the following:
• Continue its efforts to contact the holders and request that
they resubmit the owner data in the current reporting format.
• Consider contracting with an outside entity to read the
remaining reports or to convert them into a usable format.
172 California State Auditor Report 2004-406 California State Auditor Report 2004-406 173
To allow for the timely notification to owners that the State
has their property and the prompt billing of interest penalties,
the bureau should ensure that it uploads holder reports within
12 months of receipt.
Controller’s Action: Corrective action taken.
The controller completed its analysis of the backlogged
reports and contacted the holders as necessary for any
replacement media needed. Further, the controller developed
alternatives for reading or converting any remaining reports,
including options to contract with an outside firm, if
necessary, to read or convert the data. Lastly, the controller
developed a plan to process reports within a year of receipt.
Finding #4: The bureau’s tracking of securities in its custody
needs improvement.
Because the bureau cannot use the computerized property
system to track changes in securities, it tracks these manually,
increasing the probability of error and the number of staff
needed to accommodate the workload. We found that the
bureau’s manual tracking of securities is unreliable and that
the bureau is inconsistent in how quickly it sells securities.
Moreover, because the bureau tracks securities by company
name rather than by individual owner, when corporate actions
such as stock splits result in the issuance of additional securities,
the bureau does not consistently associate the new securities
with the original securities. This results in securities for the same
owner being sold on different dates for different prices, further
complicating the bureau’s reconciliation process, increasing
both the potential for errors and the risk of allegations that the
bureau has mismanaged owners’ assets.
To eliminate the bureau’s manual tracking of securities and dispel
any impressions that it exercises judgment in deciding when is
the best time to sell securities, thereby reducing the potential for
errors, eliminating unnecessary work, and reducing the potential
for litigation against the State, the controller should seek
legislation to require it to sell securities immediately upon receipt.
To ensure that the holders remit all of the reported securities, the
bureau should compare the shares received to the shares reported
by the holders, using the holder report summary sheets.
172 California State Auditor Report 2004-406 California State Auditor Report 2004-406 173
Alternatively, the controller should consider having holders
deliver duplicates of the securities they have transferred into the
controller’s name to a specified broker authorized to accept them
on the State’s behalf. The controller should instruct and give
the broker authorization to sell the securities immediately upon
receipt. This may also require legislation. Additionally, the bureau
should immediately sell all securities already in its custody.
If the bureau is unable to sell securities immediately upon
receipt, it should do the following:
• Reconcile the securities remitted to the securities reported
within one month of the receipt of the securities, for securities
not already in its custody.
• Modify the property system to allow it to track all changes
to securities, including the effective dates, receipts, sales,
disbursements, and corporate actions, on an owner-by-owner
basis. The bureau should ensure that it updates the property
system to account for securities currently tracked in its
manual ledgers. This process should be automated to allocate
changes in the number of securities to the affected accounts
with minimal human intervention.
• Sell all securities related to a particular account within two
years of the initial receipt, regardless of corporate actions.
Additionally, the property system should be modified to
generate a monthly report to alert the bureau to securities
approaching the two-year deadline for sale, regardless of the
timing of corporate actions.
In either case, the bureau should do the following:
• Review all of its manual ledgers to ensure that it has
accurately recorded all corporate actions, receipts, sales, and
disbursements of securities. Once this review is complete, the
bureau should discontinue the use of its manual ledgers.
• Complete its reconciliation of the securities remitted to the
securities reported for all securities not previously reconciled.
Legislative Action: None.
Although the controller did not seek legislation to require it
to sell securities immediately upon receipt, as discussed in
the following paragraph it did address the issue internally.
174 California State Auditor Report 2004-406 California State Auditor Report 2004-406 175
Controller’s Action: Corrective action taken.
The controller directed staff to immediately sell securities
received with holder reports. Further, the controller
developed a plan to accelerate the sale of securities currently
in house. Additionally, the controller reviewed options to
streamline the process of escheating securities to facilitate
the more immediate sale of securities. Future contracts
with third-party contractors include a requirement that
securities be delivered to the controller-contracted broker
for immediate sale. The controller created standardized
procedures for making entries into the security ledgers to
improve consistency of entries in the ledgers, including a
quality review of the entries. Additionally, the controller
developed a plan to improve the timeliness of reconciling
the remitted securities to reported securities.
Finding #5: Property belonging to governmental agencies
and some private entities are excluded from the bureau’s
Web site.
We also found that the bureau excludes a large amount of
unclaimed property reported to it for federal and state departments,
local governments, schools and school districts, other states, and
some private entities from its Web site. As of April 30, 2003, the
bureau held more than $7.1 million in unclaimed property for
various entities that it has not posted on its Web site. Even if the
entities check the Web site to see if the State has some of their
property, they would erroneously conclude that it does not.
To fully inform all entities that it has their unclaimed property
in its possession, the bureau should do the following:
• Discontinue excluding any properties from its Web site.
• When it receives unclaimed property belonging to any
governmental entity, notify that entity. If it does not receive
sufficient information to determine which governmental
entity the property belongs to, it should seek additional
information from the holder.
Controller’s Action: Corrective action taken.
The controller issued instructions to holders in writing
and through the Web site of their responsibilities to notify
owners prior to the escheatment of accounts. Additionally,
174 California State Auditor Report 2004-406 California State Auditor Report 2004-406 175
the controller discontinued its practice of excluding
government properties from its Web site. Further, the
controller developed a plan to notify government agencies
of potential unclaimed properties in excess of $1,000 on
an annual basis and simplified the process for transferring
property to them.
Finding #6: The bureau does not approve and distribute
claims in a timely manner.
The Unclaimed Property Law (law) requires the bureau to consider
each claim for the return of property within 90 days after it is
filed and to provide written notice to the person claiming the
property (claimant) if the claim is denied. Although the law does
not specifically require the bureau to approve or deny claims
within 90 days, we believe that once the claimant has provided all
required documentation, 90 days is a reasonable amount of time
for the bureau to either approve or deny the claim. However, the
bureau does not consistently do so. Claims for securities generally
take longer to review and to distribute to the claimant than claims
for most other types of property. Lastly, although the bureau has
received numerous complaints regarding the timely distribution
of claims, it has not streamlined the claim distribution process.
To ensure that it distributes assets to bona fide claimants in a
timely manner, the bureau should do the following:
• Review all claims and either approve or deny them within
90 days of receipt.
• Distribute assets on approved claims within 30 days of approval.
Controller’s Action: Corrective action taken.
The controller identified means of streamlining the
approval of claims by increasing the threshold for applying
its streamlined claim approval process from $1,000 to
$5,000. Additionally, the controller created a new unit to
process unclaimed property claims from heirfinders and
investigators.
176 California State Auditor Report 2004-406 California State Auditor Report 2004-406 177
Finding #7: The bureau does not compare the contents of safe
deposit boxes it receives to the holder-prepared inventories.
To determine the adequacy of the bureau’s safekeeping of the
contents of safe deposit boxes, we reviewed a sample of 32 safe
deposit boxes. We expected that the bureau’s inventories
would conform materially to the holders’ inventories; however,
we found that the bureau does not reconcile the holders’
inventories to its own inventories or to the boxes’ contents to
ensure that it has received all of the property listed. Instead,
the bureau creates its own inventories from the contents
actually received and usually disregards the holder inventories.
The bureau’s process of creating its own inventories results in
unnecessary work and does not ensure that it has received all
of the reported contents of the safe deposit boxes. If the bureau
compared the contents received to the contents reported by the
holder, it would be able to identify any missing property and
take prompt action to request that the holder either explain the
difference or remit the missing property. Doing so would reduce
its liability for items that were not remitted by the holder.
To ensure that it has properly accounted for all of the owners’
properties, the bureau should develop a standard inventory form
for holders to use to report the contents of safe deposit boxes
and for the bureau to use to verify that it has received all of the
reported contents from the holders. This standard form should
include a section for the bureau to indicate its receipt of all of the
reported contents, the date of review, and any follow-up required
for contents that were reported but not remitted by the holder.
Controller’s Action: Pending.
The controller will develop and implement the necessary
forms, instructions, and procedures.
Finding #8: Although state law allows the bureau to auction
the contents of safe deposit boxes, it did not auction property
for almost two years.
The law allows the bureau to sell the contents of safe deposit
boxes in its custody to the highest bidder at public sale, including
sales via the Internet. Although the bureau is not required to
sell the contents of safe deposit boxes, failure to do so results in
higher costs to the State to store and safeguard those contents.
The floor of the bureau’s vault is crowded with the safe deposit
box contents it has received from holders but has not sent to
176 California State Auditor Report 2004-406 California State Auditor Report 2004-406 177
storage, and its shelves are overflowing with binders and the
bagged contents of safe deposit boxes. We found that the bureau
had not conducted an auction for almost two years, resulting in
the overcrowding of its safe deposit box vault with the contents
of safe deposit boxes that it has received from holders.
To reduce the overcrowding in its safe deposit box vault, the
bureau should conduct an auction of the contents of safe
deposit boxes at least monthly.
Controller’s Action: Partial corrective action taken.
The controller completed a pilot project for conducting
on-line Internet auctions of safe deposit box contents.
Further, the controller implemented an ongoing on-line
auction using new procedures and system updates to
verify that sale proceeds are received for all items sold.
The controller explored the need for additional space for
secured storage of the safe deposit contents to reduce the
overcrowding.
The controller completed its Request for Proposal with
a private auctioneer to conduct a large public auction of
unclaimed property. Additionally, the controller created new
procedures to verify and reconcile public auction proceeds
to the actual hammer price from the auction. The controller
developed a plan to implement programming changes to
post auction proceeds to the related owner’s account.
Finding #9: The controller does not ensure the collection of
all unclaimed property.
The controller’s Financial-related Audits Bureau (audit bureau)
does not always fully pursue unclaimed property that its
auditors have a reasonable basis for believing should be remitted
to the State. Specifically, we found that even though its auditors
estimated in January 2002 that one holder failed to remit
$6.7 million beginning as far back as 1978, the audit bureau did
not move forward to substantiate or invalidate the estimated
findings. After we brought this to the controller’s attention, the
audit bureau reopened the examination of the holder. Assuming
that the audit bureau substantiates the $6.7 million and the
holder remits the funds on June 30, 2003, the estimated interest
penalty would be nearly $8.2 million, resulting in the potential
collection of more than $14.9 million. By not exercising due
diligence in pursuing the collection of unclaimed property that
there is a reasonable basis to believe should have been remitted,
178 California State Auditor Report 2004-406 California State Auditor Report 2004-406 179
the controller is not fulfilling its responsibility to reunite owners
with their lost or forgotten property.
To ensure that it collects all unclaimed property, the controller
should complete its examination of estimated unclaimed
property that its auditors have a reasonable basis for believing
should be remitted to the State. Further, the bureau should
ensure that it bills and collects the applicable interest penalties
based upon the results of the audit bureau’s examination.
Controller’s Action: Pending.
The controller plans to complete its follow-up
examination to substantiate or invalidate the estimated
unclaimed property referred to in the examination of this
holder by January 31, 2004. Further, the controller plans
to bill the holder for any additional audit findings by
February 27, 2004.
178 California State Auditor Report 2004-406 California State Auditor Report 2004-406 179
180 California State Auditor Report 2004-406
GOVERNOR’S OFFICE OF
EMERGENCY SERVICES
Its Oversight of the State’s Emergency
Plans and Procedures Needs Improvement
While Its Future Ability to Respond to
Emergencies May Be Hampered by Aging
Equipment and Funding Concerns
REPORT NUMBER 2002-113, JULY 2003
Governor’s Office of Emergency Services’ response as of
Audit Highlights . . . September 2003
Our review of the Governor’s The Joint Legislative Audit Committee (committee)
Office of Emergency Services’
requested that the Bureau of State Audits (bureau) review
(OES) and counties’ ability
to coordinate and respond and assess the Governor’s Office of Emergency Services’
to multijurisdictional and (OES) policies and procedures for assessing and coordinating
multiagency emergencies
multijurisdictional and multiagency responses to emergencies
revealed the following:
under the Standardized Emergency Management System (SEMS)
þ OES lacks a formal and the emergency plan. Further, the committee requested the
process to regularly
bureau to determine if OES is maintaining the emergency plan
review and update the
as required by law and whether a sample of local government
State Emergency Plan
and its related annexes. emergency operation centers (EOCs) are adequately prepared
to respond to emergencies following SEMS. We found that
þ OES does not consistently
the State’s emergency plan and related annexes provide
perform activities needed
to evaluate and improve its adequate guidance to agencies responding to multijurisdictional
coordination of emergency emergencies, but that OES lacks a formal process to regularly
responses under the
evaluate and update these plans. Additionally, OES is not
Standardized Emergency
consistently evaluating the use of SEMS by preparing statutorily
Management System.
required after-action reports following all declared disasters. Also,
þ Clarification of the roles
OES has had difficulty in acquiring and maintaining emergency
and responsibilities of the
response equipment due to what it asserts is inadequate funding.
State’s Office of Homeland
Security and OES would Finally, our review of six county EOCs found that they had
be beneficial. adequate plans and training to prepare for emergencies. However,
OES’s recent survey of all county EOCs reveals that some counties
þ With aging equipment
and other equipment not are in need of potentially costly upgrades to improve their ability
in place, OES’s ability to to respond to emergencies.
task its own resources
during an emergency may
be limited.
California State Auditor Report 2004-406 181
Finding #1: OES has not established a formal process to
regularly evaluate and update the state emergency plan and
related annexes.
Although we found that the State’s emergency plan and related
annexes adequately guide agencies to respond to emergencies,
OES lacks a formal process to regularly evaluate and update these
documents as necessary. OES indicates that previous emergency
plan updates were made in 1959, 1984, 1989, 1998, and 2003.
OES’s review of the plan in 2003 was part of a federal effort to
ensure that the emergency plan is current. When we asked whether
OES regularly updates the emergency plan and related annexes, the
director of OES’s Planning and Technological Assistance Branch
explained that they do not, but that they are updated when
changes in state or federal laws impact emergency management,
or when changes in regulations, policies, or significant procedures
occur. Although OES has not established a formal process to
regularly review the emergency plan and its related annexes, other
states regularly update their plans so that they may incorporate
lessons learned into their plans. Absent a formal and regular
evaluation process for the emergency plan and its related annexes,
the State’s emergency plan and annexes may not reflect current
practices or provide sufficient guidance during an emergency.
To ensure that the emergency plan and its related annexes are
regularly evaluated and updated when necessary, we recommended
that OES develop and follow formal procedures for conducting
regular assessments of these plans to determine if updates are required.
OES Action: Partial corrective action taken.
OES indicates it is in the process of revising the plans
review policy in the OES Policy and Procedures Manual
to incorporate review and maintenance of the State’s
emergency plan. The revised policy will establish a formal
time frame for review and progressive maintenance of the
State’s emergency plan based upon a review checklist, which
is under development. The checklist includes planning
criteria from multiple state and federal publications that
focus on preparedness and response planning considerations.
Finding #2: OES has not consistently evaluated the use of
the SEMS.
OES is missing important opportunities to identify and make
improvements to SEMS. This is because OES fails to consistently
and adequately prepare, or follow up on, the statutorily required
182 California State Auditor Report 2004-406 California State Auditor Report 2004-406 183
after-action reports following declared disasters to incorporate
lessons learned during proclaimed emergencies. OES also does
not follow its own policies of maintaining SEMS through regular
meetings of its SEMS advisory board and technical group—two
user groups that are intended to review SEMS issues and make
recommendations for improvement. Since SEMS establishes the
organizational framework through which multiple agencies can
jointly respond to an emergency, it seems reasonable to expect
OES to take a more proactive role in ensuring that this critical
element of California’s emergency response effort is consistently
evaluated for further improvements and enhancements.
To ensure that SEMS remains a workable method to respond
to emergencies, OES should more consistently evaluate its use
and identify areas of weaknesses and needed improvements.
Specifically, OES should do the following:
• Institute internal controls to ensure it receives after-action
reports from all responding entities to an emergency, such as
requiring after-action reports prior to reimbursing local agencies
for response-related personnel costs. Further, OES should ensure
that the reports by local governments evaluate the use of SEMS
for any needed improvements and enhancements.
• Prepare after-action reports after each declared disaster that
review emergency response and recovery activities.
• Develop a system that tracks weaknesses noted in the after-
action reports, which unit is responsible for correcting
those weaknesses, and what corrective actions were taken
for each weakness.
• Reconvene the SEMS advisory board and technical group
to foster more communication on the use of SEMS, and to
provide OES advice and recommendations on SEMS.
OES Action: Partial corrective action taken.
OES is developing policies and procedures for development
of after-action reports to consistently evaluate SEMS. The
policies and procedures will address automatic assignment
of responsibilities for the after-action reports, required and
optional content, process for evaluating SEMS compliance,
recommendations for follow-up and change, and a clear
indication of those declared disasters that do not require an
after-action report.
182 California State Auditor Report 2004-406 California State Auditor Report 2004-406 183
OES indicates that SEMS issues are addressed at ongoing
statewide forums, such as the Statewide Emergency Planning
Committee, the OES Fire and Rescue Advisory Committee/
FIRESCOPE Board of Directors, and other related meetings.
Additionally, OES continues to convene the Mutual Aid
Regional Advisory Committees in all six mutual aid regions
where SEMS-related issues are identified and discussed. Any
significant issue will be raised to OES’s management for
evaluation and appropriate action, including convening the
SEMS advisory board and/or the technical group.
Finding #3: Data problems prevent OES from evaluating how
well it coordinates resources during emergencies.
Inaccurate and missing data in its Response Information
Management System (RIMS) prevents OES from evaluating how
well it coordinates responses during emergencies. Because OES
is not using RIMS to capture accurate mission approval times
and resource arrival times, it lacks data to evaluate how well it
coordinates emergency responses. Mission approval times are
important because the faster OES approves a resource request,
the faster resources are likely to arrive on scene. Our review of
RIMS data revealed that 13 out of 27 sampled mission approvals
were late, and we were unable to determine the resource
approval time for two of the requests. Furthermore, our testing
showed that RIMS users did not report resource arrival times
for 24 out of 27 resource requests in our sample. If OES had this
information, it could evaluate whether resources are arriving
promptly to emergency sites while better tracking the resources
tasked to emergencies.
We recommended that OES take steps to ensure that it can
accurately track how long it takes to approve resource requests
and pinpoint when those resources arrived at the emergency.
OES Action: Pending.
OES indicates it will convene a meeting of an internal RIMS
Working Group to address these findings and assess how to
incorporate our recommendations. The first meeting will
be held on October 20, 2003, where the group will begin
to evaluate possible RIMS upgrades, discuss SEMS forms
and reports improvements, and propose mission tasking
application modifications. The group will also discuss system
184 California State Auditor Report 2004-406 California State Auditor Report 2004-406 185
changes to ensure that RIMS data is accurate and consistent.
Following discussions with OES in November, we learned
that the October 20th meeting took place.
The group will also determine how best to utilize RIMS for
the Fire and Rescue Branch and explore all available options
to meet its needs. Future plans include expanding the group
to local government representatives for their input, as well as
surveying RIMS users for system improvement ideas.
Finding #4: OES needs to ensure key staff are properly trained.
Citing a lack of funding, OES has not conducted a needs
assessment to determine the training needs for management and
workers that staff state and regional centers. OES has developed
an individual training plan (training plan) program; however, OES
had only developed training plans for seven of the 14 state center
staff we reviewed. Although the training plan can be a useful tool,
because OES does not use it for all state center staff and does not
provide guidance to all supervisors preparing training plans, OES
cannot ensure that all state center staff receive the training they
need to effectively respond to emergencies.
To ensure that state agencies—including itself—are adequately
prepared to respond to emergencies within the State, OES should
determine the most critical training that emergency operations
center staff, at state and regional levels, need in order to fulfill
their duties, and then allocate existing funding or seek the
additional funding it needs to deliver the training.
OES Action: Partial corrective action taken.
OES indicates that its training policy was revised in June 2003.
The policy, in part, outlines “core competencies” for all OES
staff, which include principles of emergency management,
SEMS (introduction and EOC functions), and RIMS. The
training policy has been provided to all branch managers
who have been asked to use it in the development of their
staff’s individual training plans.
Finding #5: Clarification of the roles and responsibilities of
OHS and OES would be beneficial.
In February 2003, the governor established the Office of
Homeland Security (OHS) within the Office of the Governor.
Some of the responsibilities assigned to OHS by the executive
184 California State Auditor Report 2004-406 California State Auditor Report 2004-406 185
order and to the director of OES appear to have the potential
to overlap. For example, under the California Emergency
Services Act, the director of OES is assigned the responsibility of
coordinating the emergency activities of all state agencies during
a state of war emergency or other state emergency, and every state
agency and officer is required to cooperate with the director in
rendering assistance. However, under the executive order, OHS
is assigned the responsibility of coordinating security efforts of
all departments and agencies of the State and the activities of
all state agencies pertaining to terrorism-related issues, and is
designated as the principal point of contact for the governor.
Moreover, the director of OES is required to report to the governor
through OHS, but that reporting function is not limited to issues
related to state security or terrorism, and thus appears to require
OES to make all reports to the governor through OHS.
To ensure the State is adequately prepared to address emergencies
and to avoid misunderstandings, OHS should work with the
governor on how best to clarify the roles and responsibilities of
OHS and OES.
OES Action: Partial corrective action taken.
OHS indicates that it continues to work with OES and the
Governor’s Office to clarify the roles and responsibilities, but
offers no specific information about its efforts.
Finding #6: Equipment concerns may impact OES’s future
ability to respond to emergencies.
OES has had difficulty acquiring and maintaining emergency
response and communication equipment due to what it asserts
is inadequate funding. Specifically, 26 percent of OES’s active fire
engines have been in service for longer than the 17-year useful
life that OES has adopted. OES also has no heavy urban search
and rescue vehicles, which help extricate people from collapsed
structures, despite a statutory mandate to obtain these vehicles.
With aging equipment, and other equipment not in place, OES’s
ability to task its own resources during an emergency may be
limited. OES has recently acquired sufficient funding to replace
its aging fire engines and has taken steps to replace older fire
engines, but its request for 18 heavy urban search and rescue
vehicles was not funded. However, OES has not performed a
current needs assessment to determine how many heavy urban
search and rescue vehicles it needs in order to respond to an
emergency within one hour, as required under statute.
186 California State Auditor Report 2004-406 California State Auditor Report 2004-406 187
Further, OES has not tried to establish the thermal imaging
equipment-purchasing program required by law. OES’s failure
to take the statutorily required steps to establish this program
may have denied local governments from taking advantage
of an opportunity to obtain this equipment at a lower cost
than they could obtain on their own. Finally, OES is facing
a problem with its Operational Area Satellite Information
System (OASIS), a satellite network that serves as a backup
communications system, which is degrading and threatens OES’s
ability to coordinate with local governments should phone
communications become disabled during a major emergency.
To ensure that it and local governments have the equipment
to adequately respond to emergencies, OES should take the
following actions:
• For its fire engine program, OES should continue with its
schedule for replacing older and poor performing fire engines
in the fleet.
• OES should perform a needs analysis to determine the number
of heavy urban search and rescue units that are required
to respond to a major earthquake. If this needs analysis
concludes that additional units are required, OES should
submit a budget change proposal to acquire this equipment,
and it should develop a maintenance and replacement
schedule for this equipment.
• OES should take the required steps to establish a thermal
imaging equipment-purchasing program, including
determining the interest among local governments in
purchasing this equipment. However, if OES determines
that it cannot identify funding sources to pay its share, OES
should explore the use of the State’s buying power to enter
into a contract that allows local governments to purchase this
equipment at a lower cost.
OES should study options to extend the life of or replace OASIS.
However, if it concludes that OASIS should be replaced,
OES should justify this replacement by demonstrating that
maintenance costs are exorbitant and that OASIS is down for
excessive periods for repair.
186 California State Auditor Report 2004-406 California State Auditor Report 2004-406 187
OES Action: Partial corrective action taken.
OES states that it has taken the following actions regarding
the recommendations above:
• OES indicates that it is taking possession of 21 new
engines in accordance with the three-year procurement
contract that was initiated in fiscal year 2000–01. Further,
OES plans to obtain an additional 21 engines over the
next three years. According to OES, all of its fire engines
continue to undergo annual safety inspections, as well as
after each fire incident.
• OES indicates that it will update its initial needs analysis
for heavy rescue units in the State by conducting a current
assessment of the statewide capability. However, OES
states that it is restricted from submitting budget change
proposals for more heavy rescue units, but will explore
funding through other sources.
• OES plans to convene a committee meeting in
January 2004 to discuss the legislative mandate for
thermal imaging equipment. OES will identify further
corrective action following this committee meeting.
• OES indicates that it has now executed a new three-year
maintenance contract for its OASIS system. The contract
period covers January 2003 through December 2005. OES
states that it will continue to seek options for upgrading
and extending the life of OASIS through the federal grant
process, partnering efforts with other state and local
agencies, and the State’s budget change proposal process.
188 California State Auditor Report 2004-406
TERRORISM READINESS
The Office of Homeland Security, Governor’s
Office of Emergency Services, and California
National Guard Need to Improve Their
Readiness to Address Terrorism
REPORT NUMBER 2002-117, JULY 2003
Audit Highlights . . .
Office of Homeland Security, Governor’s Office of Emergency
Our review of the Governor’s Services, and California National Guard responses as of
Office of Emergency Services’ September 2003
(OES) and the California
National Guard’s (National
The Joint Legislative Audit Committee (audit committee)
Guard) terrorism readiness
activities revealed: requested that the Bureau of State Audits conduct an audit
of the terrorism readiness efforts of the Governor’s Office
þ Both agencies have
of Emergency Services (OES) and the California National Guard
developed plans that
adequately guide their (National Guard). Specifically, the audit committee asked
response to terrorist that we review and evaluate the terrorism prevention and
events, but OES has not
response plans, policies, and procedures of these agencies
included a prevention
and determine whether the plans are periodically updated and
element in the State’s
terrorism response plan. contain sufficient guidance. It also asked that we determine
whether OES and the National Guard have provided sufficient
þ OES has not always
training to their staff to effectively respond to terrorism activities
identified the critical
training that staff in the and assess how the training compares to best practices or other
operations centers need reasonable approaches. The audit committee further requested
to effectively complete
that we determine whether both agencies take advantage of all
their duties.
state and federal funding for terrorism readiness. Finally, the audit
þ OES does not regularly committee asked that we determine whether the National Guard’s
develop and administer
recruitment and retention practices and staffing levels impact its
state-level terrorism
readiness to respond to terrorism activities or its ability to attract
readiness exercises with
other state and local qualified personnel for terrorism readiness positions.
agencies, as its terrorism
response plan requires.
Finding #1: The terrorism response plan guides the State’s
þ Clarification of the roles
response but does not include ways to help prevent terrorism.
and responsibilities of the
State’s Office of Homeland
Although the State Emergency Plan (emergency plan) and terrorism
Security and OES would
response plan adequately define the roles and responsibilities
be beneficial.
of numerous state and local agencies in responding to various
continued on next page emergencies, including terrorism, they do not address how
the State could help prevent terrorist attacks from occurring.
Lacking in the terrorism response plan is guidance for terrorism
prevention. One reason for this deficiency may be that
California State Auditor Report 2004-406 189
þ Although the National the Legislature did not envision a prevention role when it
Guard generally relies established OES in the California Emergency Services Act (act).
on its members’ military
Rather, the act sets the focus of OES as coordinating the State’s
training to respond to
response activities. However, the State needs to plan how it can
terrorism missions, it has
not provided all of the help prevent terrorist events from occurring to best protect the
training its staff in its Joint citizens of the State against the consequences of such events.
Operations Center needs
Acknowledging this void in the current terrorism response plan,
to adequately respond to
these missions. the director of the Office of Homeland Security (OHS) stated that
his office plans to revise the current state plan to make it more
þ The National Guard
concise and include a prevention component.
believes it has not had
sufficient funding to
participate in exercises To ensure that the State is adequately prepared to address
involving other state terrorist threats, OHS should continue its plans to develop a
and local emergency
state plan on terrorism that includes a prevention element
response agencies.
OHS Action: Corrective action taken.
OHS states that it is identifying key prevention elements that
should be incorporated into the terrorism response plan.
Finding #2: OES has no formal process to periodically review
and update the terrorism response plan.
OES lacks a formal process to regularly review the terrorism
response plan and update it as determined necessary. Rather,
OES staff state that they update the terrorism response plan
when changes in statute affecting emergency management or
changes occur in regulations, policies, or significant procedures.
Although OES has not established a formal process to regularly
review the terrorism response plan, other organizations and
states we contacted do regularly update and incorporate lessons
learned into their plans. Without an established process to
regularly review the plan, OES cannot ensure that it remains
current and adequately protects the State. Furthermore, OES
would make its assessment more consistent and effective if
it developed a checklist to guide its efforts in evaluating the
terrorism response plan.
OHS and OES should ensure that the state plan addressing
terrorism is reviewed on a regular basis and updated as
determined necessary to ensure that it adequately addresses
current threats and benefits from the lessons learned in actual
terrorist readiness events occurring both in California and
nationwide. Additionally, they should develop a checklist to
guide periodic evaluations of the state plan addressing terrorism
to ensure that such assessments are consistent and effective.
190 California State Auditor Report 2004-406 California State Auditor Report 2004-406 191
OES Action: Corrective action taken.
OES states that it is developing formal procedures to review,
assess, and update the emergency plan and its related
annexes, including the terrorism response plan. OES also
states that it is developing a checklist to guide its reviews.
Finding #3: OES has not identified the training needs for all
of its staff.
OES has not conducted a needs assessment to determine the
training requirements for all personnel in its state and regional
operations centers. Although OES does develop individual
training plans for some of its staff, which identify an individual
employee’s career goals and objectives, it does not prepare them
for all staff working in state and regional operations centers.
Furthermore, OES does not provide guidance to all supervisors
preparing the training plans to ensure that they include training
related to core competencies. Core competencies are the key
skills employees need to possess to perform their assigned duties.
To ensure that state agencies, including OES, are adequately
prepared to respond to terrorist events occurring within the State,
OES should identify the most critical training required by staff at
state and regional operational centers and then allocate existing
funding or seek additional funding it needs to deliver the training.
OES Action: Corrective action taken.
OES states that it has identified the core competencies for
all OES staff and has developed a training policy to guide
managers as they develop training plans for OES staff.
Finding #4: OES has not conducted state-level terrorism
readiness exercises as called for in its terrorism response plan.
With the exception of federally or state mandated exercises
associated with nuclear power plants and hospitals, the State
does not presently have an established program to provide
exercises to ensure that state agencies are prepared to respond to
terrorist events. According to OES, it has not regularly developed
and administered terrorism readiness exercises because it is not
funded to do so. However, it has not requested state funding
to conduct the exercises. OES has participated in terrorism
readiness exercises when other agencies have held them, and
staff have received training through activation experiences.
190 California State Auditor Report 2004-406 California State Auditor Report 2004-406 191
However, these activities would not necessarily test and enhance
the capabilities of state agencies, local governments, and related
entities to prepare for, respond to, and recover from terrorist
events as called for in the terrorism response plan. OHS has
recently decided that the California National Guard should
be responsible for coordinating state-level exercises, awarding
$1.6 million in federal funds to them. Because of the unique
role that OES plays in coordinating emergencies, it will be
important for OES to work with the National Guard to establish
an effective exercise program.
To ensure that state agencies, including OES, are adequately
prepared to respond to terrorist events occurring within the
State, OES should assist the National Guard in providing state-
level terrorism readiness exercises.
OES Action: Corrective action taken.
OES states that it is developing a functional exercise for the
state and regional operations centers. It also states that it will
continue to work with the National Guard in developing
terrorism readiness exercises.
Finding #5: The effect of budget cuts are uncertain.
An OES analysis stated that budget cuts it is required to sustain
due to the current state budget crisis will severely hinder its
ability to fulfill its overall mission, including terrorism readiness.
However, since February 2003, OES is to report to the Governor’s
Office through the OHS director, and the OHS director told us he
believes that OES can meet its statutory mission despite budget
cuts incurred as of June 2003. To optimize its efficiency, the
OHS director intends to assess the OES organization to identify
more efficient ways for OES to fulfill its statutory responsibilities,
focusing its resources on mission-related activities.
To ensure that the State is adequately prepared to address terrorist
threats, OHS should continue its plans to thoroughly assess OES
functions to determine how it can optimize its efficiency.
OHS Action: Pending.
OHS states that it continues to assess OES functions to evaluate
how best to address the budget cuts and that once the 2004–05
budget is finalized, it will be better able to address this finding.
192 California State Auditor Report 2004-406 California State Auditor Report 2004-406 193
Finding #6: Clarification of the roles and responsibilities of
OHS and OES would be beneficial.
The authority provided to OES under the act and the authority
provided to OHS by the governor’s February 2003 executive order
appear to have the potential to overlap. Further, the directors
of the two offices appear to have differing views on their roles
and responsibilities. A lack of clarity in their respective roles and
responsibilities could adversely affect the State’s ability to respond
to emergencies, such as a terrorist event.
To ensure that the State is adequately prepared to address
terrorist threats, OHS should work with the governor on how
best to clarify the roles and responsibilities of OHS and OES.
OHS Action: Pending.
OHS states that it is working with OES and the Governor’s Office
to clarify the roles and responsibilities of the two offices.
Finding #7: Joint Operations Center staff have not yet completed
all the training they need to effectively coordinate missions.
The Joint Operations Center is responsible for receiving state
missions from OES and developing and overseeing the National
Guard’s response to requests for its services. In June 2002, the
Joint Operations Center identified training it believes its staff
need to adequately respond to state emergencies. However, 32 of
the 38 members required to take specific courses had received
less than half the designated training. According to the National
Guard, lack of funding and limited availability of classes have
hindered its ability to train its Joint Operations Center staff in
the identified areas. Without proper training, the ability of the
National Guard to respond promptly and effectively to state
missions may deteriorate.
To ensure that its members are adequately trained to respond
to terrorism missions, the National Guard should determine
the most critical training its Joint Operations Center staff need
to fulfill their duties and then allocate existing funding or seek
the needed funding to provide the training, documenting why
it is needed.
192 California State Auditor Report 2004-406 California State Auditor Report 2004-406 193
National Guard Action: Corrective action taken.
The National Guard states that it has developed a plan that
identifies the training needed by the various members of the
Joint Operations Center. The National Guard adds that it has
not received any additional funding to provide training to
members of the Joint Operations Center.
Finding #8: The Army Guard Division does not provide
required terrorism awareness training to its members.
The National Guard’s Army Guard Division does not provide
terrorism awareness training required by U.S. Army regulations
as part of its terrorism readiness force protection (force
protection) program. According to the commanders of the
Army Guard units we visited, the reason they have not fully
implemented the terrorism awareness training is that they have
not received the guidance to implement it. Further, although
the regulation provides that one way the units can offer the
required training is through an approved web-based course,
the director of the Joint Operations Center stated that his
office had been unaware of such a course until recently.
However, while visiting an Air Guard unit in April 2003,
we discovered that it had been using a Web-based course
to fulfill the requirement for terrorism awareness training
since June 2002. Therefore, despite its responsibility for
implementing the force protection program in both the Air
Guard and Army Guard divisions, the Joint Operations Center
was unaware of the practices of the Air Guard Division that
could have benefited the Army Guard Division. Had the Joint
Operations Center been more aware of the training being
utilized in the Air Guard Division, it could have identified this
best practice and shared it with the Army Guard Division.
The National Guard should develop guidance for its Army Guard
Division to implement its terrorism readiness force protection
program. Additionally, it should ensure that its Joint Staff
Division, including the Joint Operations Center, share best
practices between its Air Guard and Army Guard divisions.
194 California State Auditor Report 2004-406 California State Auditor Report 2004-406 195
National Guard Action: Partial corrective action taken.
The National Guard states that the Army Guard Division is
developing a regulation to implement its terrorism readiness
force protection program, commenting that it should be
fully implemented by December 2004. Additionally, the
National Guard states that the Chiefs of Staff for the Army,
Air, and Joint Staff divisions meet each week and include a
discussion of best practices among the divisions.
Finding #9: The National Guard would benefit from increased
state-level terrorism exercises
The National Guard believes that it has not had sufficient
opportunities to participate in exercises with other state and
local emergency response agencies. In June 2003, OHS advised
us that it has now allocated $1.6 million in federal funding to
the National Guard to coordinate terrorism readiness exercises
that include both state agencies and rural jurisdictions.
Therefore, the National Guard should soon be able to participate
in terrorism readiness exercises with other state and local
emergency response agencies.
The National Guard should use the recently awarded funds
from OHS to identify the type and frequency of state-level
exercises responding to terrorist events that the State needs
to be adequately prepared. The National Guard should then
provide the exercises it has identified.
National Guard Action: Partial corrective action taken.
The National Guard states that it has formed an exercise
management team consisting of staff from the National
Guard and other state and local agencies that have first
responder responsibilities. With current grant funding, the
National Guard plans to coordinate four regional and one
statewide exercise by October 2004.
194 California State Auditor Report 2004-406 California State Auditor Report 2004-406 195
196 California State Auditor Report 2004-406
CALIFORNIA LAW ENFORCEMENT AND
CORRECTIONAL AGENCIES
With Increased Efforts, They Could
Improve the Accuracy and Completeness
of Public Information on Sex Offenders
REPORT NUMBER 2003-105, AUGUST 2003
Audit Highlights . . .
Department of Justice’s response as of December 2003
Our review of the Department
of Justice’s (Justice) database The Joint Legislative Audit Committee (audit committee)
of serious and high-risk
asked the Bureau of State Audits (bureau) to evaluate the
sex offenders, known as the
accuracy of the State’s database of registered sex offenders.
Megan’s Law database,
disclosed the following: Further, the audit committee asked us to determine if state and
local law enforcement agencies are implementing Megan’s Law in a
þ The Megan’s Law database
manner that maximizes the registration data’s accuracy. Lastly, we
contains thousands of
errors, inconsistencies, and were asked to identify deficiencies in the current state Megan’s Law
out-of-date information. that hinder the accuracy of the sex offender data and to provide
legislative recommendations to address identified deficiencies.
þ Because it excludes records
for some serious and high-
risk sex offenders and
erroneously lists others as Finding #1: The Megan’s Law database omits some records of
incarcerated, the Megan’s juvenile sex offenders tried in adult courts, and inappropriately
Law database does not
includes others.
inform the public about
these offenders. The law provides that only juveniles with juvenile court
adjudications for their sex offenses are protected from public
þ Conversely, because it
includes hundreds of disclosure under Megan’s Law. However, we found omitted from
duplicate records and the Megan’s Law public information a total of 51 Department of the
erroneously indicates
Youth Authority (Youth Authority) records of juvenile sex offenders
that 1,142 incarcerated
tried in adult courts. In 20 cases, Department of Justice (Justice) staff
sex offenders are free, it
may unnecessarily alarm did not mark the records as coming from adult courts; in 31 other
the public. cases, Youth Authority or Department of Corrections (Corrections)
did not prepare pre-registration or notification forms or Justice did
þ The address information for
roughly 23,000 records in not receive or process them. Without information about serious and
the Megan’s Law database high-risk juvenile sex offenders tried in adult courts and released into
has not been updated
communities, California residents have no way of knowing that
for at least a year largely
they are living near these convicted offenders.
because sex offenders have
not registered.
In addition to problems with the overall accuracy of the Megan’s
continued on next page
Law database, we found that Justice does not always prevent the
public disclosure of juvenile sex offenders’ records. Specifically,
Justice erroneously disclosed to the public 42 records for sex
California State Auditor Report 2004-406 197
þ Although Justice main- offenders convicted in juvenile courts, thwarting the additional
tains that its primary protection and confidentiality that the Legislature has afforded
responsibility is to
to juveniles.
compile the sex offender
data it receives from law
enforcement agencies and To ensure that the records of juvenile sex offenders are properly
confinement facilities, classified and disclosed to the public, we recommended that
it has taken steps to
Justice do the following:
improve the accuracy of
the information in the
Megan’s Law database. • Coordinate with the Youth Authority and periodically reconcile
its sex offender registry with Youth Authority information.
• Provide training to its staff regarding the proper classification
of records, such as flagging juvenile records appropriately for
public disclosure.
• Revise its pre-registration process with Youth Authority to
include a request for court information, which can be used to
properly classify juvenile records.
• Request the Judicial Council to amend its juvenile
commitment form to require that Youth Authority send a
copy of the form to Justice.
Justice Action: Partial corrective action taken.
Justice reports that it worked with Youth Authority to develop
an automated process for updating juvenile sex offender
status in the Violent Crime Information Network (VCIN)
with Youth Authority data. Justice has implemented this
process and plans to use it to update the VCIN monthly. It
is working on other modifications that will improve data
synchronization between Justice and Youth Authority, and
plans to complete them by the end of January 2004. Justice
also implemented new procedures and trained its staff to
ensure that all juvenile sex offender records are properly
classified for purposes of public disclosure. Additionally, the
Judicial Council is evaluating legal issues associated with
Justice’s request for Youth Authority to provide more detailed
court disposition information with sex offender registration
documents to help facilitate the classification process.
Finding #2: The Megan’s Law database omits some records
with inaccurate offense codes.
Of approximately 18,000 records in the VCIN that are classified
as “other” and not shown to the public, Justice identified 1,900
records that have offense code 290 rather than the more specific
198 California State Auditor Report 2004-406 California State Auditor Report 2004-406 199
offense codes for which the sex offenders were convicted. Local
law enforcement agencies and Justice staff sometimes enter the
290 offense code in reference to the section of the California Penal
Code that mandates registration for sex offenders when they are
uncertain of the appropriate code, and the VCIN automatically
classifies records with this offense code as “other.” Records classified
as other are not included in the Megan’s Law database and thus not
disclosed to the public. Justice ultimately determines the proper
offense code by researching conviction information, but stated that
until recently it has not had the necessary staffing resources to do
the work. Justice subsequently updated the offense code for 497
of the 1,900, raising the classification to serious for 351 of them.
For most of the remaining 1,403 records, Justice is waiting for
responses from other states.
We recommended that Justice continue reviewing records for
which it has only the 290 offense code and update the offense
codes as appropriate.
Justice Action: Corrective action taken.
Justice continues to review criminal history information to
verify that registered sex offenders are properly classified for
purpose of public disclosure in the Megan’s Law database.
As of December 9, 2003, Justice has reviewed approximately
15,500 of the approximate 18,000 sex offenders classified as
“other,” resulting in the reclassification of 1,390 of these sex
offenders to “serious.” Justice is in the process of researching
the remaining 2,500 records, most of which have offense code
290, and has requested conviction information from courts.
Finding #3: Some sex offender records continue to indicate
the incarcerated status after offenders are discharged
from prison or paroled, while others show incarcerated sex
offenders as residing in local neighborhoods.
We found that for 582 records in VCIN that indicate the offenders
are in prison, there were no records with matching Criminal
Information and Identification (CII) numbers on Corrections’ list of
inmates. A sample of 59 of these revealed that 48 of the offenders
were no longer in prison. Another 1,142 records incorrectly indicate
the sex offenders are free when, in fact, they are incarcerated.
Additionally, of 2,575 records Justice identified as pending release
from prison for more than a year, 1,787 of these offenders had
already been released. Because Justice does not review Corrections’
monthly list of prison inmates to identify sex offenders who
198 California State Auditor Report 2004-406 California State Auditor Report 2004-406 199
appear on the list one month but not the next, it does not know
if Corrections should have completed a form notifying Justice and
local law enforcement that it will soon be releasing a sex offender
or that one has died, and Justice does not know which offenders
require follow-up to determine their true status. Unless Justice
corrects these records or these offenders register, their records in
the Megan’s Law database will continue to incorrectly indicate
that they are incarcerated.
We recommended that Justice regularly compare its records
showing the incarcerated status with information provided by
Corrections to determine which sex offenders are confined and
those who are no longer in confinement, continue to work with
Corrections to improve this process, and produce exception
reports to resolve those records in question. Justice can then
update these records appropriately.
Justice Action: Pending.
Justice is in the process of modifying the program it uses
to update the VCIN using Corrections’ list of incarcerated
sex offenders, so that an offender’s incarceration status will
be removed from the Megan’s Law database when it no
longer appears on Corrections’ list. The offender’s status will
automatically change to “released” and a violation notice
will be activated if the offender does not register with local
law enforcement as required. Justice is also modifying the
VCIN to generate violation notices based on the date of
release, rather than on the date of notification, as reported
in the pre-release notification documents. Justice anticipates
it will complete these changes by the end of January 2004.
According to Justice, these changes will significantly reduce
future discrepancies between Justice’s and Corrections’ data.
To the extent possible, Justice and Corrections will pursue
other methods for ensuring complete synchronization of
sex offender data. However, Justice believes that it would
not be practical to generate monthly exception reports as a
means of identifying any sex offender records that cannot be
properly matched to Corrections’ data. It says that the use
of such reports would be extremely time-consuming, since it
would potentially require the manual research of thousands
of possible matches each month.
200 California State Auditor Report 2004-406 California State Auditor Report 2004-406 201
Finding #4: The Megan’s Law database includes hundreds of
duplicate records primarily created by personnel who lack
adequate training.
We identified 437 records in the Megan’s Law database that were
obvious duplicates of other database records. Consequently, the
public cannot rely on the sex offender information shown in a
zip code search to identify the number of offenders in a specific
community. The public also cannot rely on the information
retrieved from the Megan’s Law database in response to a search
for a specific sex offender by name, because more than one record
can appear for an offender and, without dates on the records, the
public cannot determine which record is the most current.
Personnel who update sex offender records create duplicate
records because they do not always search for existing records
before creating new ones. According to Justice’s policies and
procedures, when a sex offender registers, personnel updating
sex offender records are required to search the database to
determine if the offender matches existing records. However,
Justice has not provided sufficient training to its personnel and
to all local law enforcement agencies that update sex offender
records. For example, we found that personnel at one city’s
police department entered 89 of the 437 duplicate records.
We recommended that Justice periodically analyze its data
to identify and eliminate obvious duplicates. As a first step,
Justice should review the bureau’s analysis identifying obvious
duplicate records and eliminate these duplicate records.
Additionally, to ensure that local law enforcement and its
own staff update sex offender information appropriately, we
recommended that Justice design and implement an appropriate
training program.
Justice Action: Partial corrective action taken.
Justice has implemented an improved system for identifying
duplicate records in the VCIN through a specially designed
data-string search and manual verification process. As a
result of the initial search conducted in August 2003, Justice
identified and eliminated 512 duplicate records from the
database. In late October 2003, Justice began these searches
on a weekly basis and as of December 9, 2003, identified
273 additional duplicate records, which it has merged and
deleted. These weekly searches will augment the existing
process of identifying duplicate records based on a cross
match of CII numbers.
200 California State Auditor Report 2004-406 California State Auditor Report 2004-406 201
In addition, by mid-2004 Justice plans to complete the
programming necessary to implement Live Scan, an electronic
fingerprinting technology, allowing local law enforcement
agencies to electronically transmit to Justice the offenders’
fingerprints with each registration transaction. The fingerprints
will be automatically verified for immediate and reliable
identity confirmation, which according to Justice, will eliminate
duplicate entries.
Also, Justice has been working with local law enforcement
agencies to research and identify options for providing
a statewide training program designed to improve the
accuracy of sex offender data from both data entry and field
enforcement standpoints. To determine how best to deploy
its limited training staff, Justice has been soliciting local
agency input regarding their need for training and other
assistance through field contact, surveys, and a regional
law enforcement meeting. Based on this input, Justice will
modify its existing technical training program to focus on
problem areas, incorporate enforcement strategies in the
curriculum, and achieve greater efficiency through regional
training it facilitates. Justice has trained its staff who process
registration information in order to minimize technical
errors that may contribute to data inaccuracy and plans to
conduct this internal training on an ongoing basis.
Finding #5: The Megan’s Law database does not show
when sex offenders’ records were updated, limiting the
information’s usefulness to the public.
Because the Megan’s Law database does not include the dates of
offenders’ registrations, the public has no way of distinguishing
the records recently updated from those updated long ago,
thereby limiting the usefulness of the information. We found that
approximately 23,000 records were last updated before April 2002,
and about 14,000 of those were last updated before April 1998.
Often, registrants do not comply with annual registration
requirements, and many offenders with outdated information
are not required to register in California because they may have
moved outside the State, been deported or incarcerated, or are
deceased. Without information in the Megan’s Law database to
tell them whether the last update was a week or five years ago, or
a specific disclaimer explaining the possibility of outdated data,
people viewing the database cannot evaluate the usefulness of the
information they read.
202 California State Auditor Report 2004-406 California State Auditor Report 2004-406 203
We recommended that Justice modify the Megan’s Law database to
include the date that the registration information was last provided.
Justice Action: Corrective action taken.
Justice has modified the Megan’s Law database to include
a message indicating if and for how long an offender has
been in violation of registration requirements. According
to Justice, the message reads: “Note: This sex offender has
been in violation of registration requirements since <date>.”
Justice states that vendors are developing foreign language
translations of this message and anticipates adding them to
the Megan’s Law database by February 2004.
Finding #6: The public would be well served by Justice
attaching disclaimers to the Megan’s Law database.
Even if state and local agencies accurately reported all the
information they receive, the Megan’s Law database would
continue to be incomplete and inaccurate as a result of sex
offenders not registering as required or providing inaccurate
information when they do register. Currently, Justice includes
some disclaimers in the information it provides the public.
However, we believe that modifying the existing disclaimers
and adding others about potential inaccuracies and errors could
help the public better understand and use the data to protect
themselves and their families. As of the end of our audit, Justice
was in the process of finalizing additional disclaimers that
incorporate our suggestions.
We recommended that Justice finalize its disclaimer information
and direct law enforcement agencies to provide the disclaimers
to the public members who view the Megan’s Law database. The
disclaimer information should include the following:
• A statement that Justice compiles but does not independently
confirm the accuracy of the information it gathers from
several sources, including sex offenders who register at
law enforcement agencies and custodians who report to
Justice when sex offenders are released from confinement
facilities. This statement should advise the viewer that the
information can change quickly and that it would not be
feasible for California’s law enforcement agencies to verify the
whereabouts of every sex offender at any given time.
202 California State Auditor Report 2004-406 California State Auditor Report 2004-406 203
• A statement that the information is intended not to indicate
the offenders’ risk to the public but to help people form their
own assessments of risk.
• A statement that the location information is based on the
“last reported location,” which may have changed.
• A statement to remind viewers that a fingerprint comparison
is necessary to positively identify a sex offender.
Justice Action: Corrective action taken.
Justice developed a comprehensive disclaimer containing the
specific elements we recommended and has added the English
version of this disclaimer to the Megan’s Law database. Justice
anticipates that translations of the disclaimer in 12 other
languages will be added to the Megan’s Law database by
mid-January 2004.
Finding #7: Justice’s review of the Megan’s Law data has not
been adequate.
State law declares the Legislature’s intent that Justice continuously
reviews the sex offender information in the Megan’s Law
database. However, Justice has interpreted this intent language
to direct it only to continually review the accuracy of its entry
of information, not of the information itself. Our legal counsel
agrees with Justice that the intent language is not binding and
states that because Justice is responsible for administering the
Megan’s Law database, it has flexibility in determining how it
will fulfill the Legislature’s intent that it continually review sex
offender data. However, we believe Justice’s review has not been
adequate because the Megan’s Law database is intended for the
public’s use in safeguarding itself from dangerous sex offenders.
According to Justice, because it is only a repository, not the
originating source, of much of the Megan’s Law information,
it is beyond the purview of Justice to ensure that information
provided by courts and registering agencies is accurate.
The Associated Press reported in January 2003, based on
information provided by Justice, that Justice did not know the
whereabouts of 33,296 registered sex offenders because they
had not registered annually as required. Subsequently, Justice
determined that 663 of the 33,296 sex offenders had, in fact,
registered within the past year. In addition, Justice confirmed
that 2,833 sex offenders are living outside the State and
204 California State Auditor Report 2004-406 California State Auditor Report 2004-406 205
1,360 are deceased. However, Justice received either outdated,
incomplete, or no information on the remaining 28,440 sex
offenders who did not register.
Justice obtained information on deaths from the Department
of Health Services (Health Services), deportations from the
Immigration and Naturalization Service (INS), and sex offenders
living in other states from the National Law Enforcement
Telecommunication Services. However, until 2003, Justice
had not requested death information to use for updating sex
offenders’ records. According to Justice, previously it did not
obtain the information from Health Services or the INS because
it has no underlying statutory responsibility for seeking out
information from these agencies.
We recommended that Justice design and implement a program
to check the data as a whole for inconsistencies and periodically
reconcile the data with other reliable information. Additionally,
we recommended that Justice continue to work with Health
Services, the INS, and other public agencies to obtain valuable
information and update the sex offenders’ records.
Justice Action: Corrective action taken.
Justice has contracted with Health Services and the
Social Security Administration to regularly obtain updated
death certificate information. It will use this information
on a quarterly basis to update sex offender information
in the VCIN. Also, Justice recently compared records in
the VCIN with deportation records maintained by the
INS and updated the VCIN to reflect offenders identified
as deported. In November 2003, Justice obtained on-line
access to INS’ deportation files, which will enable it to identify
on an ongoing basis sex offenders who have been deported. In
addition, Justice has begun ongoing analysis of its sex offender
database to identify and correct record errors, which includes a
series of special searches for key words and unique transaction
sequences that may indicate possible data entry errors.
204 California State Auditor Report 2004-406 California State Auditor Report 2004-406 205
206 California State Auditor Report 2004-406
UNIVERSITY OF CALIFORNIA,
SAN FRANCISCO
Investigations of Improper Activities by
State Employees, February 2003 Through
June 2003
ALLEGATION I2000-715 (REPORT I2003-2),
SEPTEMBER 2003
University of California, San Francisco, response as of
September 2003
After investigating the allegation, we determined that
Investigative Highlight . . . the University of California, San Francisco (UCSF), used
proprietary bidding specifications that restricted fair
The University of California,
competition for several roofing projects under a contract totaling
San Francisco, used proprietary
bidding specifications $495,000 and thus may have violated state law and Regents’
that restricted fair policies.1 The specifications placed unnecessary requirements
competition for a contract
on potential bidders, which limited the number of contractors
totaling $495,000.
able to submit competitive bids for the projects. Further, the
specifications unnecessarily forced contractors to use a specific
manufacturer’s products and limited their ability to use substitute
products, even if the substitute products were less expensive and
superior in quality. As part of our investigation, we hired a roofing
consultant to evaluate the bidding specifications.
Finding: UCSF used specifications that restricted competitive
bidding for roofing projects.
In conflict with state law and Regents’ policies, UCSF used
specifications for roofing projects that restricted competitive
bidding. According to our roofing consultant, the language
used in UCSF’s specifications primarily limited competition in
three ways.
1 The Louisiana Office of State Purchasing defines a “proprietary specification” as a
specification that cites brand name, model number, or some other designation that
identifies a specific product to be offered exclusive of others. Stephen M. Phillips,
who serves as counsel for the National Roofing Contractors Association and the
National Roofing Legal Resource Center defines a “proprietary specification” (also
known as a closed or restrictive specification) as any specification that is restrictive
to a specific product.
California State Auditor Report 2004-406 207
First, the specifications included certain contractor requirements
that served no purpose other than to limit the number
of contractors competing for the work. For example, the
specifications required contractors to list three projects in which
they employed a similar type of roof system within a 50-mile
radius of the project location. While requiring documentation
of previous experience is valid, according to our consultant,
specifying a 50-mile limitation served only to restrict competition.
Second, portions of the specifications forced potential bidders to
use specific brand products produced by a single manufacturer.
For example, the specifications’ requirements differed from
applicable industry standards in regard to two of the necessary
products, so that only one brand of product could meet the
specifications. The specifications also listed physical properties
for the entire roof membrane. According to our roofing
consultant, the only reason to impose such a requirement would
be to limit contractors to using membrane products made by a
single manufacturer.
Third, the specifications limited contractors’ ability to use
substitute products regardless of whether those substitutes
were equal to or better than those products called for. In one
instance, the specifications limited contractors’ ability to
submit alternative products, even if the substitute products
were less expensive and had adequate or superior performance
properties. In two instances, the specifications limited
bidders’ ability to fully assess the time and cost ramifications
of providing substitute materials; in another instance, the
specifications dictated that the contractor incur additional costs
associated with submitting substitute products, costs, according
to our consultant, the contractor should not bear. While
using proprietary products and not allowing substitutions is
appropriate in some instances, our consultant concluded in this
instance it was not justified.
UCSF Action: Partial corrective action taken.
Ü UCSF reported that the contract in question contained
detailed requirements that it believes are based on legitimate
business needs to ensure contractor availability at the
construction site, maintain the product warranty, and
discourage substitutions of potentially inferior roofing
products. UCSF agreed that the specifications relating to the
208 California State Auditor Report 2004-406 California State Auditor Report 2004-406 209
manufacturer’s products were tightly written, but added that
it was done so as to minimize any impact on patients in the
buildings affected. However, UCSF reported that the bid
specifications for more recent contracts have been prepared
with assistance from independent roofing consultants to avoid
any appearance of inappropriate proprietary specifications that
would unduly limit competition.
208 California State Auditor Report 2004-406 California State Auditor Report 2004-406 209
210 California State Auditor Report 2004-406
SCHOOL BUS SAFETY II
State Law Intended to Make School Bus
Transportation Safer Is Costing More
Than Expected
REPORT NUMBER 2001-120, MARCH 2002
The Commission on State Mandates response, State
Audit Highlights . . . Controller’s Office response, and most school district
responses as of March 20031
Our review of the School Bus
Safety II mandate found that: The Joint Legislative Audit Committee (audit committee)
requested that the Bureau of State Audits examine
þ The costs for the mandate
the claims under the School Bus Safety II mandate.
are substantially higher
than what was initially Specifically, we were asked to review the Commission on
expected. State Mandates’ (commission) guidelines to determine if they
adequately define the mandate’s reimbursable activities and
þ The costs claimed by seven
provide sufficient guidance for claiming reimbursable costs.
school districts varied
significantly depending In addition to examining any prior reviews of the claims, we
upon the approach taken were asked to examine a sample of claims to determine if the
by their consultants.
costs met the criteria for reimbursement. Finally, the audit
þ The different approaches committee asked us to evaluate the commission’s methodology
appear to result from for estimating the future costs of this mandate.
the lack of clarity in the
guidelines adopted by
the Commission on State
Finding #1: The commission’s guidance regarding claims
Mandates (commission).
reimbursement lacks clarity.
þ Most of the school districts
The guidance issued by the commission does not provide sufficient
we reviewed lacked
sufficient support for the clarity to ensure that school districts claim reimbursement for
amounts they claimed. mandated activities in an accurate and consistent manner. Instead,
the guidance established a broad standard that has allowed a
þ The commission could
have avoided delays variety of interpretations by school districts as to what costs to
totaling more than 14 claim. The lack of clarity in the guidance appears to be the result
months when determining
of several factors, including the broad language in the statutes
whether a state mandate
from which the guidelines were developed. In addition, the test
existed and in developing
a cost estimate. claim process does not require the claimant to be specific when
identifying activities to be reimbursed. Further, the commission’s
executive director states that the commission, as a quasi-judicial
body, is limited in making changes to the guidelines. Finally,
1School districts responding to the audit were Ceres Unified School District, Dinuba Unified
School District, Elk Grove Unified School District (Elk Grove), Fresno Unified School District,
and San Dieguito Union High School District. Elk Grove’s response was as of October 2002.
California State Auditor Report 2004-406 211
the fact that the school districts’ interests appear to have been
better represented in the process than the State’s also may have
contributed to the ambiguity on this issue.
We recommended the Legislature amend the parameters and
guidelines through legislation to more clearly define activities that
are reimbursable and to ensure that those activities reflect what
the Legislature intended. The guidelines should clearly delineate
between activities that are required under prior law and those
that are required under the mandate. To ensure that the State’s
interests are fully represented in the future, we recommended
the commission ensure that all relevant state departments and
legislative fiscal committees be provided with the opportunity
to provide input on test claims and parameters and guidelines.
Further, we recommended the commission follow up with entities
that have indicated they would comment, but did not. Finally,
we recommended that the commission notify all relevant parties,
including legislative fiscal committees, of the decisions made at
critical points in the process, such as the test claim statement of
decision, the adoption of the parameters and guidelines, and the
adoption of the statewide cost estimate.
Legislative Action: Legislation passed.
On September 30, 2002, the governor approved
Assembly Bill 2781 (Chapter 1167, Statutes of 2002). This new
law requires the commission to specify that costs associated
with implementation of transportation plans are not
reimbursable claims and requires the amended parameters and
guidelines to be applied retroactively as well as prospectively.
Commission Action: Corrective action taken.
In January 2003, the commission amended the parameters
and guidelines as outlined in Chapter 1167, Statutes of 2002.
Additionally, commission staff implemented new procedures
to increase the opportunity for state agencies and legislative
staff to participate in the mandates process; notify relevant
parties of proposed statements of decision, parameters and
guidelines, and statewide cost estimates; and follow up
with entities that are late in commenting on claims. For
example, in addition to a letter initially inviting state agency
participation, commission staff now send a letter notifying
all parties of the tentative hearing dates for each test claim.
Additionally, they send e-mail notices of release of analyses of
test claims, proposed parameters and guidelines, statewide
212 California State Auditor Report 2004-406 California State Auditor Report 2004-406 213
cost estimates, and proposed statements of decision to fiscal
and policy committee staff. Further, commission staff contact
state agencies, claimants, and other relevant parties when
comments are late.
Finding #2: Most school districts we reviewed lacked
sufficient documentation for their costs.
We found that many school districts did not maintain sufficient
documentation to support their claims. In fact, of the more
than $2.3 million total direct costs the seven districts we
reviewed submitted for reimbursement in fiscal year 1999–2000,
only $606,000 (26 percent) was traceable to documents that
sufficiently quantified the costs. To support the remaining
$1.7 million (74 percent), these school districts relied
substantially upon incomplete supporting data. School districts
are to follow the parameters and guidelines issued by the State
Controller’s Office (Controller) when claiming reimbursement
under the mandate. The districts asserted they had sufficient
support, yet the documentation we reviewed lacked crucial
elements, such as corroborating data, and failed to substantiate
the amounts claimed for reimbursement in many instances.
In addition, some school districts claimed amounts for time
increases to complete school bus routes, yet they failed to
maintain corroborating evidence to support these increases.
Further, one district based much of the costs it claimed on
questionable assumptions and even claimed for activities that
appear to be beyond the scope of the mandate. Only San Diego
City Unified School District had support for all the $5,171 in
direct costs it claimed. Additionally, San Jose Unified School
District had sufficient documentation to support nearly all the
$590,000 in direct costs that it claimed.
School districts should ensure that they have sufficient support
for the costs they have claimed. In addition, the commission
should work with the Controller, other affected state agencies,
and interested parties to make sure the language in the guidelines
and the claiming instructions reflects the commission’s
intentions as well as the Controller’s expectations regarding
supporting documentation.
212 California State Auditor Report 2004-406 California State Auditor Report 2004-406 213
School District Action: Partial corrective action taken.
Ceres Unified School District, Dinuba Unified School District,
and Fresno Unified School District conducted time studies to
support costs associated with the mandate. San Dieguito Union
High School District has taken steps to ensure that its claimed
activities are supported by sufficient documentation, including
ensuring that it properly maintains training records in its
computer system. Elk Grove Unified School District previously
stated that when the commission came out with new rules,
regulations, and guidelines regarding the mandate, it would
follow them.
Commission Action: Corrective action taken.
Commission staff worked with the Controller and others
to amend existing parameters and guidelines and adopt
new parameters and guidelines that reflected its intention
and the Controller’s expectations regarding supporting
documentation. In January 2003, the commission
adopted the Controller’s proposed language, as modified
by commission staff, that requires claimants to maintain
documentation developed at or near the time actual costs
were incurred in order to support their reimbursement
claims. The commission intends to address the language
in all future parameters and guidelines, and in existing
parameters and guidelines as they are amended.
Finding #3: The commission did not identify the true fiscal
impact of the mandate until three years after the law was passed.
The Legislature was not aware of the magnitude of the fiscal
impact of its action when it passed the 1997 law that comprises
the majority of the School Bus Safety II mandate. Three different
entities that analyzed the 1997 law before its passage believed
that it would not be a state mandate and thus the State would
not have to reimburse the districts’ costs. Further, these entities
advised the Legislature that annual costs would be no more than
$1 million, considerably less than the $67 million in annual
costs that the commission is now estimating. This misperception
of the likely costs prevailed until January 2001, when the
commission finally released a statewide cost estimate. Although
the commission is required to follow a deliberate and often time-
consuming process when determining whether a test claim is a
214 California State Auditor Report 2004-406 California State Auditor Report 2004-406 215
state mandate and adopting a statewide cost estimate, it appears
that it could have avoided a delay of more than 14 months.
Consequently, the Legislature did not have the information
necessary to act promptly to resolve the issues of possible concern
previously discussed in this report. Finally, commission staff
believe that waiting for actual reimbursement claims reported
to the Controller and using this data to estimate statewide costs
for the mandate results in more accurate estimates. However,
commission staff have not sought changes to the regulations to
include sufficient time for waiting for the claim data.
We recommended the commission ensure that it carries out
its process for deciding test claims, approving parameters and
guidelines, and developing the statewide cost estimate for
mandates in as timely a manner as possible. If the commission
believes it necessary to use actual claims data when developing
the statewide cost estimate, it should consider seeking regulatory
changes to the timeline to include the time necessary to obtain
the data from the Controller.
Commission Action: Corrective action taken.
Commission staff implemented new procedures to ensure
that it carries out its process in as timely a manner as
possible. Specifically, they now propose statewide cost
estimates for adoption approximately one month after
they receive initial reimbursement claims data from the
Controller. They also close the record of the claim and start
their staff analysis if claimant responses are not submitted
timely. Claimants who choose to rebut state agency positions
at a later time may provide rebuttal comments to the
draft staff analysis. Further, the commission initiated
a rulemaking package in February 2003 to incorporate
the current methodology for developing statewide cost
estimates into the commission’s regulations.
214 California State Auditor Report 2004-406 California State Auditor Report 2004-406 215
216 California State Auditor Report 2004-406
LOS ANGELES UNIFIED
SCHOOL DISTRICT
Outdated, Scarce Textbooks at Some
Schools Appear to Have a Lesser Effect
on Academic Performance Than Other
Factors, but the District Should Improve
Its Management of Textbook Purchasing
and Inventory
REPORT NUMBER 2001-124, JUNE 2002
Audit Highlights . . .
Los Angeles Unified School District’s response as of
Our review of the Los Angeles
September 2003 and the California Department of
Unified School District
Education’s response as of June 2003
(LAUSD) concludes that:
þ Although we found more The Joint Legislative Audit Committee (audit committee)
classes in low-performing
asked the Bureau of State Audits (bureau) to determine
schools that did not have
enough textbooks for whether Los Angeles Unified School District’s (LAUSD)
each student, we cannot program and policies regarding textbooks and other instructional
conclude that the higher
materials result in a disparity in the quantity and quality of
prevalence of textbook
textbooks for a sample of high- and low-performing schools. The
shortages has a direct
relation to their school audit committee also requested that we do the following:
performance.
• Use our sample to determine if a correlation exists between
þ Factors such as the
number of credentialed demographic data, such as socioeconomic status and race,
teachers, the level of and the quantity and quality of the textbooks used by
parents’ education, and
LAUSD schools.
students’ transiency and
socioeconomic status do
• Identify funding sources that are available and those LAUSD
appear to affect school
performance. uses to purchase textbooks and other instructional materials,
and identify the total amount LAUSD spent on textbooks and
þ LAUSD does not always
other instructional materials for the past two years, review its
spend its restricted
textbook and other process for allocating funds, and assess the amounts actually
instructional materials allocated to the schools in our sample.
funds appropriately, and
it spends, on average, less
• Compare LAUSD’s average amount spent per student over the
per student than other
large districts in the State past two years for textbooks and other instructional materials
for these resources. to the amount spent by a representative sampling of school
districts and the statewide average for all school districts.
California State Auditor Report 2004-406 217
• Determine whether publishers are providing free instructional
materials to the same extent to all school districts and review
LAUSD’s conflict-of-interest policy regarding the purchase of
textbooks and other instructional materials to determine if it
is consistent with the requirements of state law and whether
LAUSD personnel follow the policy.
Although our audit of 16 LAUSD schools did not reveal any
significant disparities in textbook quality and quantity among
high- and low-performing schools, we did find students in both
types of schools using outdated textbooks and that did not have
a core subject textbook available for use in the classroom and at
home. Moreover, other factors, such as teacher credentialing and
student transiency, appear to have a greater impact on student
academic performance. We also found that LAUSD can improve
its management of textbook purchasing and inventories.
Specifically, we found:
Finding #1: Students do not always have sufficient textbooks.
LAUSD policy requires that each student have a textbook in the
core subjects for use in the classroom and at home. However, we
found widespread use by LAUSD schools of textbooks restricted
to the classroom and not available for students to take home,
commonly referred to as class sets. Until LAUSD addresses its
textbook shortages, it cannot ensure that each student in classes
without textbooks receive the same instruction as their peers in
classes that have textbooks for each student.
We recommended that to make sure that each student has the
best opportunity to achieve academically, LAUSD enforce its
existing policy.
LAUSD Action: Corrective action taken.
LAUSD reports that a checklist has been developed and
that it is being used by textbook services staff to review the
status of school sites in relation to the number of textbooks
available. LAUSD assigned staff to ensure each school
remains current with the policy of a textbook for each
student in the core subject area.
218 California State Auditor Report 2004-406 California State Auditor Report 2004-406 219
Finding #2: LAUSD is not fully complying with state law
requiring school districts to annually certify that students
have sufficient textbooks and/or instructional materials.
State law requires school districts to hold a public hearing and
to determine through a resolution, whether each student has
or will have before the end of the fiscal year, in each subject
area, sufficient textbooks and/or instructional materials that
are consistent with the content and cycles of the curriculum
framework adopted by the State Board of Education (state
board). However, LAUSD’s fiscal year 2000–01 certification was
incomplete because LAUSD does not require its schools to certify
for each subject adopted by the state board. Rather LAUSD has
only required its schools to certify that that they have sufficient
textbooks in subjects that are consistent with the state board’s
most recent adoption cycle. Until it requires schools to certify
in accordance with state law, LAUSD will be out of compliance
with the law and will be unable to ensure that its students have
sufficient textbooks.
We recommended that LAUSD require its schools to certify
annually that each student has, or will have prior to the end of
that fiscal year, in each subject area, sufficient textbooks and/or
instructional materials that are consistent with the content and
standards of the curriculum framework adopted by the state board.
LAUSD Action: Corrective action taken.
LAUSD provided evidence indicating that new procedures
are in place that requires all schools to certify that they have
sufficient materials in all subject areas falling under the
content and curriculum frameworks adopted by the State.
LAUSD’s certifications began in April 2003.
Finding #3: LAUSD’s goal of a six to one student-to-computer
ratio is inconsistent with its consultant’s recommendation
and best practices.
In May 2000, LAUSD adopted a five-year instructional technology
plan, which includes a goal of moving toward a student-to-
computer ratio of six to one. However, this goal is inconsistent
with a recommendation made by its consultant in 1998 that
LAUSD adopt the maximum student-to-computer ratio for
ideal learning of five to one. A June 2001 report issued by the
218 California State Auditor Report 2004-406 California State Auditor Report 2004-406 219
Chief Executive Officer Forum on Education Technology also
indicates that a reasonable goal for the number of students per
instructional computer is five or less.
We recommended that LAUSD consider adopting a student-to-
computer ratio of five to one.
Ü
LAUSD Action: None.
LAUSD stated that it has no plans to move toward a student-
to-computer ratio of 5-to-1, but does plan to continue to
move toward a 6-to-1 ratio.
Finding #4: LAUSD’s low-performing schools have fewer
teachers that possess a basic teaching credential than high-
performing schools.
Our analysis of LAUSD data for about 560 elementary, middle,
and high schools for fiscal years 1999–2000 and 2000–01
revealed that LAUSD’s low-performing schools generally have
fewer fully credentialed teachers than its high-performing
schools. A November 1997 report by the California Commission
on Teacher Credentialing (commission) states that the quality
of teachers is the single most important determinant of student
success and achievement in school. As part of its Teaching As
a Priority Program, LAUSD plans to (1) increase the number
of teachers in its low-performing schools who possess basic
credentials by providing stipends directly to teachers assigned or
transferring to Academic Performance Index rank-1 schools and
(2) issue recruitment and retention grants to the local districts
so that they can tailor their efforts to local conditions. LAUSD
also plans to contract with an external evaluator to measure
the effectiveness of its efforts in recruiting and retaining
credentialed teachers in LAUSD’s low-performing schools using
data collected over a three-year period.
We recommended that to increase the number of teachers who
possess basic credentials in its low-performing schools, LAUSD
continue its current recruitment and retention efforts and
expand those efforts to include all financial incentives offered by
the State or federal government. Further, LAUSD should review
220 California State Auditor Report 2004-406 California State Auditor Report 2004-406 221
the recommendations of its outside evaluator and implement
those recommendations that will further increase its ability to
recruit and retain teachers in low-performing schools.
LAUSD Action: Partial corrective action taken.
LAUSD reported that in October 2002 it implemented a fast
track process for considering credentialed teacher applications
and created a new on-line teacher application. LAUSD also
stated that it developed a Teacher Quality Strategic Plan,
which was approved in concept by the Los Angeles City
Board of Education in March 2003 and is being implemented.
LAUSD stated that it held a summit on February 21, 2003, so
that it can continue to work with universities and colleges
to increase the number of credentialed teachers assigned
to LAUSD. Moreover, LAUSD reported that through its
ongoing efforts to expand the number of teacher recruits
from Teach for America and the New Teacher Project (NTP),
it has increased the number of NTP teachers to 750 for fiscal
year 2003–04. Finally, LAUSD reported that in March 2002
two external evaluators made recommendations on ways
to improve its human resource and recruitment practices;
however, LAUSD did not provide specifics on its intent to
implement these recommendations.
Finding #5: LAUSD does not always spend restricted textbook
funds appropriately.
LAUSD allocated a total of $92 million in restricted Instructional
Materials Fund (IMF) and Schiff-Bustamante Standards-Based
Instructional Materials Program (Schiff-Bustamante) funds in
fiscal year 2000–01 to its elementary, middle, and high schools.
According to LAUSD accounting records, schools inappropriately
spent $16.2 million of these funds to purchase other books that
are not part of the core curriculum, such as library books or test
preparation workbooks and instructional materials. Further, our
review of a sample of eight invoices found that school staff are
not always using the correct accounting codes, which suggests
that LAUSD cannot ensure that funds designated for purchasing
textbooks are spent appropriately.
We recommended that LAUSD provide training to school
accounting staff to ensure that they are aware of the proper
accounting for textbook funds and conduct periodic monitoring of
the use of state-restricted textbook and IMFs to ensure the uses
are appropriate.
220 California State Auditor Report 2004-406 California State Auditor Report 2004-406 221
LAUSD Action: Corrective action taken.
LAUSD stated that it has provided training to the Local
District Business Managers on the accounting for and use of
state textbook funding and that these managers will conduct
periodic reviews of textbook purchases. Additionally, they
are working with local school site staff to ensure compliance
with appropriate expenditure guidelines. Further, LAUSD
will send letters to publishers regarding its procurement
procedures, has listed terms and conditions on its purchase
orders, and has linked commodity codes to textbooks so
that purchases are stopped during the ordering process if
inappropriate materials are being ordered.
Finding #6: Publishers of textbooks and instructional
materials are not treating all schools fairly.
State law requires publishers to provide any instructional
materials free of charge to school districts in California to
the same extent as they provide them to any school district
nationwide. The California Department of Education
(department) refers to this law as the “most-favored-nations
clause.” Some publishers are not equitably providing free
instructional materials (commonly referred to as gratis items)
to different schools within LAUSD, as state law requires. For
example, during a review of only 15 invoices, we found two
cases where schools did not receive the same gratis items from
the same publisher for the same textbooks. In total, we found
that four schools were shortchanged gratis items worth more
than $60,000. Unfortunately, the disparate treatment shown in
our examples, as well as in any other cases that may exist, would
most likely not be detected because neither LAUSD nor the State
conducts any monitoring to ensure that publishers comply with
the most-favored-nations clause.
To ensure that publishers are treating all California schools
equitably, we recommended that the department modify its
regulations or seek legislation, if necessary, to require publishers
and manufacturers to report, at a minimum, all offers of free
instructional materials for Kindergarten through grade 12
within 30 working days of the effective date of the offer. The
department should also maintain a comprehensive Web site
that contains this information and require publishers to report
to the department in a standard electronic format. Further, the
department should establish a hotline to receive complaints
regarding unfair treatment and instruct school districts to
222 California State Auditor Report 2004-406 California State Auditor Report 2004-406 223
contact the hotline if they receive textbook prices or free
materials that differ from those posted on the department’s Web
site. Finally, when necessary, the department should pursue cost
recovery for any violations of the most-favored-nations clause
and work with school districts to identify and remove any other
obstacles that prevent them from effectively monitoring the
most-favored-nations clause.
To ensure that its schools are treated fairly by publishers, we
recommended that LAUSD ensure that school and local district
staff involved in purchasing textbooks and other instructional
materials are aware of the state law that requires publishers to
treat schools equitably and have access to current publisher
price and gratis item lists when placing orders. In addition,
LAUSD should modify its accounting system to include standard
book numbers and should collect damages from the publishers
identified in our report for noncompliance with the most-
favored-nations clause. Moreover, LAUSD should conduct
periodic monitoring of the prices and gratis items publishers
offer its schools for similar purchases and pursue cost recovery
for any exceptions found. Finally, LAUSD should work with
the department to identify and remove any other obstacles
that prevent it from effectively monitoring the most-favored-
nations clause.
LAUSD Action: Partial corrective action taken.
LAUSD reported that it has taken several steps to increase
awareness of the most-favored-nations clause. For example,
it has provided training to Local District Business Managers,
revised its price lists and order forms, and sent letters to
publishers requiring them to provide current information to
schools at the time of order. LAUSD also reported that it will
consider including ISBN numbers during the development
of its new financial systems that it plans to implement over
the next five years. LAUSD negotiations with publishers
identified in our report are continuing and thus far it has
identified $1.8 million in gratis items discrepancies to
schools. LAUSD reports that its Textbook Services Office,
with the support of its general counsel and the department,
are pursuing all exceptions found for cost recovery.
LAUSD reported that it is participating in the department’s
Instructional Material Advisory Group on free and gratis
items and is reporting violations to the State. To monitor
publisher compliance with the most-favored-nations clause,
LAUSD is implementing a process to periodically review a
random sample of invoices.
222 California State Auditor Report 2004-406 California State Auditor Report 2004-406 223
Department Action: Partial corrective action taken.
Although the department did not address modifying its
regulations or seeking legislation, it did report that it will
continue to include a publishers’ web link requirement in
the Publishers’ Invitations to Submit for future Kindergarten
through grade eight adoptions. Due to reductions in its
budget, the department stated that it has chosen to develop a
complaint procedure form and place the form on its Web site
instead of establishing a hotline. Further, the department
stated that it plans to work with the state board to develop
the appropriate legislation and administrative regulations to
pursue cost recovery for any violations of the most-favored-
nations clause. Finally, the department reported that it meets
periodically with representatives of the Learning Resources
Display Centers and has discussed the topic of improving
information on gratis items. The department also stated that
as no-cost improvements are identified and agreed to in these
meetings they will be implemented.
Finding #7: Central administration of textbook purchases
might resolve several shortcomings.
LAUSD might be able to resolve many of the shortcomings in
its process for ordering textbooks if it centralizes this function.
Specifically, LAUSD could reduce inappropriate charges against
restricted state textbook funds, improve its payment record and
ability to do business with preferred vendors, and ensure that
schools receive the same gratis items from publishers.
We recommended that LAUSD consider centralizing its textbook-
purchasing function at LAUSD or the local district level.
LAUSD Action: Corrective action taken.
In lieu of our recommendation, LAUSD stated that it has
implemented new policies and procedures for ordering
textbooks. Its Local District Purchasing Services Coordinators
will oversee purchasing and ensure equitable treatment
from publishers on gratis items. The coordinators will also
track the timely delivery of shipments by publishers and the
timely receipt of textbooks by schools.
224 California State Auditor Report 2004-406 California State Auditor Report 2004-406 225
Finding #8: LAUSD’s textbook inventory system is not
fully implemented.
Between May 1999 and August 2000, LAUSD purchased, for
almost $2 million, an inventory system designed to monitor and
account for textbooks and maintain data on textbook damage.
Despite LAUSD’s considerable cost and effort to help schools
implement the inventory system, we found that the system is
not widely used. Ensuring that schools implement the system
would enable LAUSD to monitor and account for its textbooks
adequately so that each student has a textbook for all subjects.
LAUSD would also be able to begin complying with a state law
requiring it to publicly report information regarding the quality
and currency of textbooks and instructional materials so that
parents can make meaningful comparisons between public
schools before enrolling their children. Although LAUSD’s
Business, Finance, Audit, and Technology Committee lists the
development of a centralized textbook inventory system as one
of its technology projects, it reported in May 2002 that this
project is not fully funded.
LAUSD should proceed with its plans to develop a centralized
textbook inventory system. The system should include all texts
and other instructional materials at each school and include
ongoing standardized training and both implementation and
technical support.
LAUSD Action: Partial corrective action taken.
LAUSD told us that it is proceeding with the implementation
of a centralized inventory system and that three additional
staff have been assigned to aid these efforts. LAUSD stated
that the inventory system is being supported in the senior
and middle schools. In addition, a temporary web-based
central inventory system is in place and is being populated
with inventory data until its new student information system,
which will include textbook inventory data, is put in place.
Finding #9: LAUSD can improve the way it holds students
and parents accountable for lost or damaged textbooks.
LAUSD’s inadequate system for tracking textbooks also
diminishes the ability of some schools to ensure that students
or their parents are accountable for lost or damaged textbooks.
In addition, during our testing of 16 schools, we found
224 California State Auditor Report 2004-406 California State Auditor Report 2004-406 225
varying degrees of compliance with LAUSD’s policy for student
accountability. Consequently, schools may not be recovering as
many textbooks or as much money as they could.
LAUSD should make sure that schools and local district staff
are aware of and are complying with its student accountability
policy for lost or damaged textbooks, including the maintenance
of an accounting or inventory system that clearly identifies the
student and the type of school property issued to the student.
LAUSD Action: Pending.
LAUSD reported that it is developing an accountability process
to reduce textbook loss and damage rates. LAUSD will
provide its local district staff with training and will then
work with schools on this issue. Baseline loss rates have been
determined so that it can measure progress at the middle and
senior high schools each spring.
Finding #10: LAUSD can strengthen its conflict-of-interest
and disclosure code to include staff involved in textbook-
purchasing decisions.
LAUSD can further improve its controls over textbook
purchasing by modifying its conflict-of-interest and disclosure
code to require principals and members of textbook evaluation
committees to complete an annual disclosure statement that
would reveal any potential conflicts with textbook publishers
or manufacturers. LAUSD’s ethics officer told us that he
expects to submit the most recently proposed revisions to the
disclosure code for approval by the end of June 2002, which
will include adding principals to the designated employee list.
In addition, he told us that future proposals would include
the results of LAUSD’s continuous review of other district and
school positions and their changing responsibilities to see if it is
appropriate to add them to the list of designated positions. By
strengthening its code, LAUSD can further reduce the risk of bias
or the appearance of impropriety in the textbook adoption and
purchasing process.
We recommended that LAUSD revise its conflict-of-interest and
disclosure code to include principals and textbook evaluation
committee members in its list of designated positions. In
addition, LAUSD should continue its plan to review other
district and school positions for inclusion in the code as
designated positions.
226 California State Auditor Report 2004-406 California State Auditor Report 2004-406 227
LAUSD Action: Partial corrective action taken.
On October 21, 2003, the Los Angeles County Board of
Supervisors approved revisions to LAUSD’s conflict of
interest and disclosure code (code). LAUSD made revisions
to its code to add, delete, and change the titles of numerous
positions due to organizational changes since its last
revision. The LAUSD also created a new disclosure category
for positions involved in employee relations. Our review of
the code found that although LAUSD did include principals
in its list of designated positions, it did not include textbook
committee members.
226 California State Auditor Report 2004-406 California State Auditor Report 2004-406 227
228 California State Auditor Report 2004-406
UNIVERSITY OF CALIFORNIA
Its Partnership Agreement Could Be
Improved to Increase Its Accountability
for State Funding
Audit Highlights . . . REPORT NUMBER 2001-130, JULY 2002
The University of California’s response as of July 2003
Our review of the University
of California’s (university) The Joint Legislative Audit Committee (audit committee)
partnership agreement
requested that the Bureau of State Audits conduct a
revealed the following:
comprehensive audit of the University of California’s
þ Of 22 objectives included
(university) performance under the partnership agreement. As
in the agreement,
part of the audit, the audit committee asked that we evaluate
9 contain outcomes that
identified quantifiable the effectiveness of the methods the university has established
and clear targets to to allocate the increased state funding it receives and the
measure improved
procedures it has developed to measure campuses’ performance
performance, and 13 do
in meeting the goals of the partnership agreement. In addition,
not. Thus, the university’s
ability to demonstrate it requested that we compare university expenditures before and
its success in using state after the partnership agreement to determine how the university
funds to achieve the
has allocated and expended its increased state funding. Further,
objectives is limited.
we were to determine whether the university has implemented a
þ The university’s state-supported summer term with services similar to the regular
expenditures for support
academic year, and we were to analyze the university’s annual
salaries increased at
Undergraduate Instruction and Faculty Teaching Activities
a faster rate than its
expenditures for academic report (instructional report) for the past three years and present
staff salaries within conclusions reached on any trends we identified.
instruction, research, and
public service between
1997 and 2001—two years
Finding #1: The university cannot fully measure its
before and three years after
the partnership agreement accomplishments because the partnership agreement does
went into effect. not always establish measurable and clear targets.
þ Certain factors have an In May 2000, the university and the governor entered into
impact on the 4.8 primary a four-year partnership agreement encompassing fiscal
course-to-faculty ratio
years 1999–2000 through 2002–03. The overall intent of the
the university agreed to
maintain as part of the agreement was to provide the university with funding stability
partnership agreement. in exchange for its progress toward meeting certain objectives
For example, we found
included in the partnership agreement. As a result, although
that 13 percent of the
the Legislature is not a party to the partnership agreement,
primary courses taught
by regular-rank faculty the Legislature and the governor appropriated additional state
had enrollments of two funds during the first two years of the partnership agreement
students or fewer.
that they expected the university to use, in combination with
California State Auditor Report 2004-406 229
existing resources provided by the State, to accomplish objectives
identified in the partnership agreement. However, although the
partnership agreement contains clear and measurable targets
for some of the objectives it outlines, it does not contain such
targets for many others. Therefore, the university’s ability to
demonstrate its success in using state funds to achieve the
partnership agreement’s objectives is limited.
Specifically, in our review of the 22 objectives specified in the
partnership agreement, we found that only 9 contain outcomes
that identify quantifiable and clear targets to measure improved
performance. For the other 13 objectives, the partnership
agreement does not identify clear and measurable targets, even
when the objectives lend themselves to the establishment of
such targets. For example, 1 objective states that beginning
in 2001, the university should increase the percentage of
students from low-participating high schools who enroll in the
university. A target for this objective might identify a specific
percentage and establish a deadline for the university to reach
it, while stating that the university could revise these goals as
circumstance warranted. However, the agreement contains no
such target.
We recommended that the university propose establishing
clear and measurable targets when preparing future partnership
agreements. These targets should allow the university to better
assess its success in meeting the objectives of the partnership
agreement. In addition, if the university is concerned that it
will be expected to meet a measurable target when it has not
received the related funds or when factors outside its control
impede its progress, it should propose that as circumstances
change it can revise the targets.
We also recommended that the university confer with the
governor and the Legislature to determine whether having the
Legislature provide input on objectives and measurable targets
for future partnership agreements might be beneficial.
University Action: Pending.
The university indicated that it would consider our
recommendations relating to future partnership agreements
if a new agreement is negotiated.
230 California State Auditor Report 2004-406 California State Auditor Report 2004-406 231
Finding #2: The university has spent more of its increased
state funding on support staff than on academic staff.
Although the university’s primary mission is to teach and
conduct research in a wide range of disciplines and to provide
public services, it increased its expenditures for support staff
salaries made out of its general operating funds at a greater rate
than it increased its expenditures for academic staff salaries
within instruction, research, and public service between 1997
and 2001. Only 44 percent of its increase in salary expenditures
during this time related to these academic salaries, while
56 percent related to support staff salaries. Moreover, the
proportion of employees that the university hired in certain
support classifications using general operating funds over the
five-year period was much greater than those it hired in certain
academic positions, despite its nearly 13 percent growth in
enrollment. The majority of the increases in the university’s
expenditures occurred in five job classifications, four of which
were support classifications. The number of full-time equivalent
(FTE) professorial-tenure employees at the university grew by
504, or 10 percent, while the number of its FTEs within advising
services increased by 532, or 59 percent, and the number of its
FTEs within fiscal, management, and staff services increased by
2,075, or 43 percent.
The hiring of both academic and support staff may have
contributed to achieving the partnership agreement objectives,
and the university’s hiring decisions may have appropriately
reflected its needs. However, because the partnership agreement
does not contain objectives or measurable targets that identify
the areas in which the university believes growth in positions is
necessary, the Legislature and the governor may not be able to
evaluate whether the university’s decisions reflect the intent of
the agreement. The addition of such targets to the partnership
agreement would increase the university’s accountability for
its use of state funds and would enable both the State and the
university to better monitor the proportion of increased funding
spent on academic and support salaries.
We recommended that the university confer with the governor
and the Legislature to determine whether it would be beneficial
to establish targets to evaluate how the growth in academic and
support positions and spending are consistent with the priorities
of the partnership agreement. For example, the university could
establish targets that address the growth and positions it believes
are needed in such categories as professorial-tenure faculty,
other faculty, fiscal staff, clerical staff, and managers to meet
230 California State Auditor Report 2004-406 California State Auditor Report 2004-406 231
the objectives of the partnership agreement. In addition, the
university should confer with the governor and the Legislature
to determine whether it is beneficial for the university to report
on the actual growth that has occurred compared to the targets.
University Action: Pending.
The university indicated that it would consider our
recommendations relating to future partnership agreements
if a new agreement is negotiated.
Finding #3: Two factors have an impact on the primary
course-to-faculty ratio.
The university compiles certain ratios involving the teaching
activities of regular-rank faculty in its annual instructional report,
which responds to inquiries made by the Legislature and also
addresses one of the objectives included in the partnership
agreement. According to that objective, the university in effect
agrees to maintain an average workload of 4.8 primary courses
per faculty FTE per year. The university defines primary course
as a regularly scheduled, unit-bearing course usually labeled as
a lecture or seminar. The university’s instructional report states
that for academic year 1999–2000, the university’s primary course-
to-faculty ratio was 4.9, exceeding the agreement’s requirement.
However, two factors have an impact on the primary course-
to-faculty ratio. First, our analysis shows that one- and
two-student primary courses represented 0.7 of the university’s
4.9 ratio in academic year 1999–2000. Although no requirement
exists regarding the minimum number of students in a primary
course, having a significant number of small-enrollment primary
courses could affect a student’s ability to graduate in four years.
Second, because Berkeley’s faculty apparently teach more
primary courses than the faculty at any other campuses when
Berkeley’s data are converted from a semester to a quarter basis,
the higher number of courses taught by Berkeley’s faculty affects
the university-wide ratio. However, in the instructional report,
the university does not discuss the impact of Berkeley’s faculty
teaching more primary courses.
To ensure that the Legislature and the governor have a complete
understanding of the factors influencing the primary course-to-
faculty ratio included in the instructional report, we recommended
that the university disclose in its instructional report the
workload of its regular-rank faculty by the number of students
232 California State Auditor Report 2004-406 California State Auditor Report 2004-406 233
enrolled in courses. In addition, it should disclose that Berkeley’s
faculty teach more primary courses on a quarter basis than the
faculty of other campuses and should communicate the impact
that Berkeley’s data has on the university-wide ratio.
University Action: Pending.
The university stated that it plans to report information
about class sizes for regular-rank faculty. It also indicated
that future instructional reports would address the impact
on the universitywide ratios of converting semester data to
quarter equivalents.
Finding #4: The campuses could not demonstrate that they
correctly classified many of the one- to two-student primary
courses we reviewed.
Our analysis of a sample of the one- to two-student courses
offered by the university in academic year 1999–2000 found
that the campuses were unable to demonstrate that they had
correctly classified 33 percent of them as primary courses. As
discussed previously, the university defines primary courses as
a regularly scheduled, unit-bearing course usually labeled as
a lecture or seminar. On the other hand, independent study
course is defined as a unit-bearing activity for which students
receive credit toward their degree, but it is not regularly included
in the schedule of courses and usually focuses on independent
study or special projects by arrangement between a student and
faculty member. Seminars and lectures typically have higher
enrollments, whereas independent study courses involve one
student or a small group of students. The university calculated
the primary course-to-faculty ratio by dividing the total number
of primary courses by the number of regular-rank FTE faculty.
Therefore, if the campuses incorrectly classify primary courses as
independent study courses or vice versa, it affects the accuracy
of the ratio.
Although nothing precludes the university from providing
primary courses with enrollments of only one- to two-students, we
focused our review on these courses because we believed these
courses were likely to have the highest risk of misclassification
because independent study courses generally have low enrollments.
We reviewed 240 primary courses with enrollments of only one
to two students at the eight campuses that are included in the
university’s instructional report. We found that the campuses
232 California State Auditor Report 2004-406 California State Auditor Report 2004-406 233
were unable to provide sufficient support to demonstrate that
they correctly classified 79, or 33 percent, of the 240 courses in
our sample.
When we asked the university whether it offers guidance to the
campuses or verifies the data used in the instructional report,
the director of policy analysis responded that the university
annually provides instructions and definitions for the campuses’
uses in classifying courses. The director of policy analysis also
stated that the university trusts the campuses to provide accurate
information and does not verify the data included in the tables.
However, we found the guidance the university provides to the
campuses to be very general and subject to interpretation.
We recommended that the university perform the following actions:
• Clarify the definitions of primary course and independent
study course in the instructions it provides to the campuses.
• Ensure that the campuses consistently interpret the definitions
of primary course and independent study course by periodically
reviewing the campuses’ data for accuracy and consistency.
• Review more closely the existing classifications of courses and
make corrections where appropriate. This review should include,
but not be limited to, primary courses with low enrollments.
University Action: Pending.
The university stated that based on the recommendations of
its Task Force on Faculty Instructional Activities (task force),
it plans to report each course using the following categories:
faculty-designed instruction, faculty-supervised group
instruction, and faculty-supervised tutorial instruction. An
implementation task force, which will include the Academic
Senate and campus representatives, will work with staff
from the university’s Office of the President to develop
clear operational definitions for each category. Finally, the
university also indicated that it will periodically review the
campuses’ data and categorization of courses under the new
reporting scheme for accuracy and consistency.
234 California State Auditor Report 2004-406 California State Auditor Report 2004-406 235
Finding #5: The instructional report does not address
the workload of non-regular-rank faculty and
miscellaneous instructors.
Non-regular-rank faculty and miscellaneous instructors—adjunct
professors, lecturers, teaching assistants, retired faculty, and
others—teach a significant number of the university’s primary
and independent study courses. However, the partnership
agreement does not address the workload ratios for non-regular-
rank faculty and miscellaneous instructors, and the university
does not address these staff in its workload-by-FTE table in the
instructional report. We found that non-regular-rank faculty
teach 30 percent of all primary courses and have a primary
course-to-instructor ratio of 8.5. The miscellaneous instructors
teach 16 percent of the primary courses, but we were unable to
determine their workload ratio because the university’s system
was not designed to capture certain data used to calculate the ratio.
In light of the partnership agreement’s objective of graduating
students in four years or less, it would seem appropriate for
the university to also provide the Legislature and the governor
with information regarding the workload ratio for all of
its instructors, not just its regular-rank faculty. In fact, the
partnership agreement could be expanded to include objectives
and measurable targets that specifically address the workload of
these staff. The Legislature and the governor would then have
a more complete picture of the workload of all instructors and
could more appropriately evaluate that workload to determine
whether fluctuations occur that may affect the ability of
students to enroll in the classes they need to graduate.
We recommended that the university propose expanding future
partnership agreements to include objectives and measurable
targets that address workload ratios and course enrollment levels
for all regular- and non-regular-rank faculty and miscellaneous
instructors. Additionally, the university should disclose in its
instructional report the course-to-faculty ratio for non-regular-rank
faculty and the workload ratios for miscellaneous instructors.
Similar to our recommendation for regular-rank faculty, the
university should also disclose non-regular-rank faculty and
miscellaneous instructor workloads by the number of students
enrolled in courses.
234 California State Auditor Report 2004-406 California State Auditor Report 2004-406 235
Finally, to enable it to calculate and report the workload for
miscellaneous instructors, the university should develop a
method to capture the FTE data related to these instructors.
University Action: Pending.
The university stated that the recommendations relating to
future partnership agreements will be a matter of negotiation
with the governor. However, it indicated that in future
reports on instructional activity, the university plans to
include course-to-faculty ratios and information about class
sizes for non-regular-rank faculty. Finally, the university
stated that it considered carefully how best to capture
the FTE associated with several groups of miscellaneous
instructors and it has found that it can capture the FTE
for some of the groups. However, it also indicated that for
other individuals, such as professional staff researchers, it
is impossible to determine the exact portion of their FTE
related to instructional activities without an extensive audit
of their time. Because of the expense associated with doing
that, the university would prefer simply to report their
instructional activities as a whole, rather than per FTE.
236 California State Auditor Report 2004-406
CALIFORNIA’S CHARTER SCHOOLS
Oversight at All Levels Could Be Stronger
to Ensure Charter Schools’ Accountability
REPORT NUMBER 2002-104, NOVEMBER 2002
Audit Highlights . . .
Chartering entities’ and the California Department of
Oversight of charter schools Education’s responses as of January 2004
at all levels could be
stronger to ensure schools’ The California Legislature passed the Charter Schools Act
accountability. Specifically:
of 1992 (Act) to provide opportunities for communities
þ The four chartering to establish and operate schools independently of
entities we reviewed do
the existing school district structure, including many of
not ensure that their
the laws that school districts are subject to. The Legislature
charter schools operate in
a manner consistent with intended charter schools to increase innovation and learning
their charters. opportunities while being accountable for achieving measurable
student outcomes. Before a charter school can open, a chartering
þ These chartering entities’
fiscal monitoring of their entity must approve a petition from those seeking to establish
charter schools is also weak. the school. Under the Act, three types of entities—a school
district, a county board of education, and the State Board of
þ Some charter schools
Education—have the authority to approve petitions for charter
assess their educational
programs against their schools. As of March 2002, there were 360 charter schools
charters’ measurable serving approximately 131,000 students throughout California.
student outcomes, but
More than 70 percent of the agencies chartering those schools
others do not.
have only one charter school. The Joint Legislative Audit
þ The Department of Committee requested that we conduct a comprehensive audit
Education (department)
of California’s charter schools. We assessed the actions of the
could, but does not target
Fresno Unified School District (Fresno), Los Angeles Unified
its resources toward
identifying and addressing School District, Oakland Unified School District, San Diego City
charter schools’ potential Unified School District, and the California Department of
academic and
Education (department). Specifically, we found that:
fiscal deficiencies.
þ Finally, although two new
statutes attempt to add Finding #1: Chartering entities do not ensure that charter
accountability, without schools meet targeted student outcomes.
the chartering entities and
department increasing In order to hold the charter schools accountable, the Legislature
their commitment to required that each charter petition contain certain elements,
monitoring, these new
including measurable student outcomes proposed by the school
laws may not be as
effective as they could be. to accomplish its educational program. These outcomes give
the chartering entity criteria against which it can measure the
school’s academic performance and hold it accountable. Each
California State Auditor Report 2004-406 237
chartering entity we reviewed has interpreted its oversight
responsibilities differently, typically developing some practices
for overseeing charter schools. However, none of the chartering
entities has adequately ensured that their charter schools are
achieving the measurable student outcomes set forth in their
charter agreements.
A school’s charter represents an agreement between it and
the chartering entity. The charter agreement is critical for
accountability, as it outlines the standards the school is agreeing
to be held to; therefore, we expected to find that chartering
entities had established monitoring guidelines and activities
to ensure that their charter schools were complying with their
agreements. Although three of the four chartering entities
we visited have chartered schools since 1993, and each has
chartered at least eight schools, none had developed and
implemented an adequate process to monitor their schools’
academic performance. Without periodically monitoring their
schools for compliance with the charter terms, the chartering
entities cannot determine whether their charter schools are
making progress in improving student learning as identified in
their charters, nor are the chartering entities in a position to
identify necessary corrective action or revocation.
To ensure that the chartering entities hold their charter schools
accountable through oversight, the Legislature should consider
amending the statute to make the chartering entities’ oversight
role and responsibilities explicit.
To ensure that charter schools are held accountable for the
taxpayer funds they receive and demonstrate accountability for
the measurable outcomes set forth in their charters, the chartering
entities should consider developing and implementing policies
and procedures for academic monitoring. At a minimum, the
policies and procedures should outline the following:
• Types and frequency of the academic data charter schools
should submit.
• Manner in which the chartering entity will review the
academic data.
• Steps the chartering entity will take to initiate
problem resolution.
238 California State Auditor Report 2004-406 California State Auditor Report 2004-406 239
Legislative Action: Unknown.
We are unaware of any legislative action implementing
this recommendation.
Chartering Entity Action: Partial corrective action taken.
Fresno Unified School District (Fresno) said that it has
continued to conduct a comprehensive annual review of
its charter schools and sought to refine and improve its
monitoring process with increased emphasis on academic
outcomes. Fresno noted that it is improving its charter
petition review process and is expecting its Board of
Education to approve formalized and expanded policies and
regulations in early spring 2004.
Los Angeles Unified School District (Los Angeles) reported
that it is in the process of devising a system to include those
charter schools that use Los Angeles’ testing services in its
district data collection and analysis of state-mandated testing
programs. Charter schools that do not use Los Angeles’ testing
services must submit their data annually. In addition, its
Program Evaluation and Research Branch (PERB) will develop
a system for charter school monitoring consistent with the
legislative intent. PERB will continue to conduct charter school
evaluations that coincide with a school’s charter renewal.
Oakland Unified School District (Oakland) said it has
developed a Memorandum of Understanding (MOU) that it
intends to execute with each charter school in January 2004.
Oakland described the MOU as informing its charter schools
of Oakland’s policies and procedures, reminding the charter
schools of their obligations under federal and state laws, and
reinforcing the charter as a binding agreement. In addition,
Oakland reported that for monitoring the charter schools’
academic health it has analyzed existing charter
schools’ measurable goals and communicated with
charter schools seeking charter renewal where academic
improvement is needed. In January and February 2004,
Oakland intends to conduct a planning session with the
charter schools regarding how the schools will monitor
themselves and Oakland will evaluate their performance.
San Diego City Unified School District (San Diego) stated
it has reviewed certain aspects of its charter schools’
performance including participation in the standardized
testing and reporting program and compliance with state
238 California State Auditor Report 2004-406 California State Auditor Report 2004-406 239
intervention program guidelines. In addition, San Diego
reported that it has instituted a timeplan and process for
completing its accountability framework, which the charter
school principals accepted in December 2003, and is focusing
on academic achievement when assessing charter renewals.
Finding #2: Chartering entities do not ensure the schools’
compliance with various legal requirements that are
conditions of apportionment.
Although exempt from many statutes, charter schools are still
subject to at least three legal requirements as conditions for
receiving state funds. These requirements include (1) hiring
teachers who hold a Commission on Teacher Credentialing
permit, except for teachers of non-core, non-college-prep
courses; (2) offering, at minimum, the same number of
instructional minutes as noncharter schools; and (3) certifying
that students have participated in state testing programs in
the same manner as other students attending public schools.
Requirements 1 and 2 became conditions of receiving state
funds beginning January 2002, whereas requirement 3 has
been a condition of receiving state funds since January 2000.
Since these requirements are conditions of apportionment, we
expected to find that the chartering entities had established
guidelines and activities to ensure compliance with these legal
provisions. Most of the chartering entities we reviewed lack
policies and sufficient procedures to validate that all of their
charter schools have met these conditions of apportionment.
Moreover, although the charter school statute requires an
annual audit, these audits do not address all of the conditions
set forth in the statute. By not verifying that all of their charter
schools comply with these legal requirements, the chartering
entities cannot be assured that their charter schools have
satisfied the conditions of apportionment.
To ensure that their charter schools are meeting statutory
conditions for receiving state funding, the chartering entities
should verify these conditions through the schools’ independent
financial audits or some other means.
240 California State Auditor Report 2004-406 California State Auditor Report 2004-406 241
Chartering Entity Action: Partial corrective action taken.
Ü
Fresno did not address this recommendation.
Los Angeles noted that it will collect and assess its charter
schools’ academic testing data. In addition, Los Angeles
is requiring its charter schools to submit their audited
financial statements within four months of the fiscal year
close and will review this information.
Oakland said that in October each year it collects teacher
credential information and it is currently conducting a file
review to ensure complete information. If Oakland’s data
is incomplete, it will send correction letters to the charter
schools affected. Oakland expects to obtain in January 2004
from each charter school certification of the school’s intent
to comply with instructional requirements and a master
schedule. Oakland plans to continue this process annually
each October. With regard to statewide tests, Oakland
reported that it provided its charter schools with detailed
test information, and incorporated test requirements in its
MOU. On an ongoing basis it will share test information
and perform spot checks on testing days.
San Diego reported that it reviewed audits submitted
to assess the degree to which attendance accounting is
reviewed and presented a scope of audit template to its
charter schools. San Diego also reported that it is revising
its policy and guidelines for charters to incorporate more
precise academic accountability language. In addition,
San Diego has confirmed that all of its charter schools are
participating in the standardized testing and reporting
program and the credential status for all charter school
teachers under contract for 2002–03.
Finding #3: Chartering entities lack policies and procedures
for sufficient fiscal monitoring and have not adequately
monitored their charter schools.
When chartering entities authorize the creation of a charter
school, they accept the responsibility for monitoring its fiscal
health. Without fiscal monitoring, charter schools are not
held accountable for the taxpayer funds they receive nor will
the chartering entity always know when they should require
corrective action or revoke a charter. Despite the crucial need
for consistent fiscal monitoring, we found that the chartering
entities lacked policies and procedures for such monitoring
and have not adequately monitored their charter schools’ fiscal
240 California State Auditor Report 2004-406 California State Auditor Report 2004-406 241
health, even though some charter schools appear to have fiscal
problems. The four chartering entities we reviewed could not
demonstrate that they always receive the financial information
they request. Moreover, although all four chartering entities
asserted that they have procedures for reviewing fiscal data
and identifying and resolving problems, none could provide
evidence of such. Further, even though all four chartering
entities recently developed or adopted new policies and
procedures regarding charter schools, only two of those policies
address fiscal monitoring and appear to provide for improved
monitoring of the chartering entities’ charter schools’ fiscal health.
Having an audit and correcting noted deficiencies are ways
charter schools demonstrate accountability for the taxpayer
funds they are entrusted with. Although each charter must
specify the manner in which annual independent financial
audits shall be conducted, not all audit reports contain all the
information relevant to school operations. We expected the
chartering entities to have policies and procedures in place for
reviewing the audit reports of their charter schools to determine
the significance of any audit findings and for ensuring that the
schools resolved reported problems. However, some entities
did not adequately review the reports and ensure that reported
problems were resolved.
To ensure that charter schools are held accountable for the
taxpayer funds that they receive and that they operate in a
fiscally sound manner, the chartering entities should consider
developing and implementing policies and procedures for fiscal
monitoring. At a minimum, the policies and procedures should
outline the following:
• Types and frequency of fiscal data charter schools should
submit, including audited financial statements, along with
consequences if the schools fail to comply.
• Manner in which the chartering entity will review the financial
data, including the schools’ audited financial statements.
• Financial indicators of a school with fiscal problems.
• Steps the chartering entity will take to initiate problem
resolution or to ensure that reported audit findings are
adequately resolved.
242 California State Auditor Report 2004-406 California State Auditor Report 2004-406 243
Chartering Entity Action: Partial corrective action taken.
Fresno stated that its annual review includes monitoring of
the charter schools’ fiscal condition. Fresno also mentioned
that it enforces MOUs with each charter school, which
require a charter school to comply with fiscal monitoring
processes. Fresno cited its charter petition review process,
which includes a review of a charter school’s initial fiscal
plans and documents. Fresno noted that it is developing
more formalized and expanded procedures, with board
consideration and approval expected in early spring 2004.
Los Angeles’ fiscal policies require the charter schools
to submit audited financial statements and three fiscal
reports. Los Angeles will review budget and fiscal data and
require the school to respond appropriately to any concerns
identified. If the school does not submit the required
reports or address Los Angeles’ concerns, Los Angeles will
initiate charter revocation proceedings.
Oakland referred to its MOU and it outlined the types
and frequency of fiscal data the charter schools should
submit, including audited financial statements, proposed
budgets, interim financial reports, and an unaudited full-year
report. Oakland plans to implement these requirements in
February 2004 following receipt of the signed MOUs. Oakland
also stated that it is adapting another district’s assessment grid
that outlines financial indicators and Oakland will implement
this in February 2004. Finally, Oakland stated that it would
initiate a revocation process when necessary.
San Diego stated that its school board approved an MOU
for all charter schools that articulates the type, frequency,
content, and comprehensiveness of fiscal information each
school must submit. In addition, San Diego has addressed
certain schools’ fiscal performance on a case-by-case basis,
including implementation of a fiscal watch process.
Finding #4: Chartering entities cannot justify the oversight
fees they charge and risk double-charging the State through
mandated-costs claims.
For fiscal years 1999–2000 and 2000–01, the four chartering entities
charged their charter schools more than $2 million in oversight
fees. Nevertheless, none of the four chartering entities could
document that the fees they charged corresponded to their actual
242 California State Auditor Report 2004-406 California State Auditor Report 2004-406 243
costs in accordance with statute, because they failed to track their
actual oversight costs. As a result, the chartering entities may be
charging their charter schools more than permitted by law.
Moreover, these chartering entities also participated in the
State’s mandated-costs reimbursement process, which reimburses
entities for the costs of implementing state legislation. The
chartering entities claimed costs in excess of $1.2 million
related to charter schools for the two fiscal years we reviewed.
However, because the chartering entities did not track the actual
costs associated with overseeing their charter schools, they risk
double-charging the State.
Although the statute is clear that the entities’ oversight fee is
capped at a certain percentage of a school’s revenue based on
actual costs, it is unclear regarding which revenues are subject
to the oversight fee. Consequently, the chartering entities
are interpreting the law differently and may be applying
the percentage to more revenues than permitted or to fewer
revenues than they could be to cover their oversight costs.
To ensure that chartering entities can justify the oversight fee
they charge their charter schools and to minimize the risk
of double-charging the State for the costs of charter school
oversight, they should:
• Establish a process to analyze their actual costs of charter
school oversight.
• Compare the actual costs of oversight to the fees charged and,
if necessary, return any excess fees charged.
• Use the mandated-costs reimbursement process as appropriate
to recover their unreimbursed costs of overseeing charter schools.
To ensure that the chartering entities charge their oversight fees
appropriately, the Legislature should consider clarifying the law
to define the types of charter school revenues that are subject to
the chartering entities’ oversight fees.
244 California State Auditor Report 2004-406 California State Auditor Report 2004-406 245
Chartering Entity Action: Partial corrective action taken.
Fresno said that it is verifying all allocated personnel time
charges included in its oversight fee and its mandated cost
claim. Fresno stated that it is reviewing mandate revenue
it has received and will return to the State any funds it has
received that were included in its charter school oversight fee.
Los Angeles reported that it will define specific oversight
responsibilities and the estimated costs. In addition,
it is setting up tracking systems to capture oversight
expenditures and will compare these costs to the fees its
charter schools pay. If appropriate, Los Angeles will use the
mandated cost recovery process.
Oakland stated that it determined that the costs of past
oversight far exceeded the revenue collected from its
1 percent oversight fee. In addition, Oakland said it plans
to create a process by July 2004 to identify actual costs to
present this information to its charter schools.
San Diego reported that it has established a process to
verify and publish the actual costs of oversight and, where
expenses are less than the percentage charged a charter
school, San Diego has agreed to refund the possible excess.
Legislative Action: Unknown.
We are unaware of any legislative action implementing
this recommendation.
Finding #5: The department could use existing data to
identify fiscally or academically struggling charter schools
and then question the responsible chartering entities.
The department plays a role in the accountability of charter
schools. The department has the authority to recommend
that the State Board of Education take action, including but
not limited to charter revocation, if the department finds, for
example, evidence of the charter school committing gross
financial mismanagement, or substantial and sustained departure
from measurably successful academic practices. Although the
chartering entity is the primary monitor of a charter school’s
financial and academic health, the department has the authority
to make reasonable inquiries and requests for information. It
currently uses this authority to contact a chartering entity if it
has received complaints about a charter school.
244 California State Auditor Report 2004-406 California State Auditor Report 2004-406 245
If the department reviewed the financial and academic
information that it currently receives regarding charter schools
and raised questions with the chartering entities regarding
charter schools’ fiscal or academic practices, the department
could target its resources toward identifying and addressing
potential academic and fiscal deficiencies. In this way, it would
provide a safety net for certain types of risks related to charter
schools. The concept of the State as a safety net is consistent
with the California Constitution, which the courts have found
places on the State the ultimate responsibility to maintain the
public school system and to ensure that students are provided
equal educational opportunities. However, the department does
not target its resources toward identifying and addressing charter
schools’ potential academic and fiscal deficiencies.
To fulfill its role as a safety net, the department should review
available financial and academic information and identify
charter schools that are struggling. The department should then
raise questions with the schools’ chartering entities as a way of
ensuring that the schools’ problems do not go uncorrected.
Department Action: None.
Ü
As stated in its initial response to our audit, the department
continues to disagree with our audit’s premise. In its one-
year response to our audit report, the department stated that
it is continuing to use its established complaint and inquiry
process and will notify a charter-authorizing entity when
information suggests a charter school may be struggling. The
department described its action as a strategic and efficient
method of intervention on a case-by-case basis.
Finding #6: The department does not plan to review audits
submitted under Senate Bill 740 to identify fiscally deficient
charter schools.
Senate Bill 740 (Chapter 892, Statutes of 2001) requires each
charter school to submit to its chartering entity and the
department, by December 15 of each year, an independent
financial audit following generally accepted accounting
principles. Although not specifically required by the law, we
expected the department to plan to review the audits required
by Senate Bill 740 in order to raise questions with chartering
entities about how they were working with charter schools to
246 California State Auditor Report 2004-406 California State Auditor Report 2004-406 247
resolve the schools’ fiscal deficiencies. However, the department
does not plan to systematically review charter schools’ audits
for this purpose. The department will collect but not review
the charter schools’ audit reports, data which helps reflect the
schools’ accountability for taxpayer funds.
The department should take the necessary steps to fully
implement Senate Bill 740, including reviewing audit exceptions
contained in each charter school’s audit report and taking the
necessary and appropriate steps to resolve them.
Department Action: Partial corrective action taken.
The department stated that Senate Bill 740 does not require
it to review charter schools’ audit reports. The department
said that it is implementing all statutorily required activities
under this bill, including processing funding determinations,
adjusting apportionments, administering the Charter Schools
Facilities Grant program, staffing the Advisory Commission
on Charter Schools, and ensuring the Kindergarten through
grade 12 audit guide includes audit procedures for elements
specified in Senate Bill 740. The department also noted that
with the passage of Assembly Bill 2834 (Chapter 1124, Statutes
of 2002), it received a position to review charter school audit
reports and ensure audit findings are resolved.
Finding #7: The department cannot assure that
apportionments to charter schools are accurate.
Although the department apportions charter school funds on
the basis of average daily attendance (ADA), its apportionment
process is faulty because it relies primarily on the certifying
signatures of school districts and county offices of education—
both of which lack the necessary procedures to ensure that charter
schools comply with apportionment requirements. As a result,
the department cannot be assured that charter schools have met
the apportionment conditions the Legislature has established and
receive only the public funds to which they are legally entitled.
So that it does not improperly fund charter schools, the
department should work with the appropriate organizations to
ensure that charter schools’ reported ADA is verified through an
independent audit or other appropriate means and that charter
schools have met other statutory conditions of apportionment.
246 California State Auditor Report 2004-406 California State Auditor Report 2004-406 247
Department Action: None.
In its initial response to the audit report, the department said
it disagreed with the finding related to this recommendation.
Similarly, in its one-year response, the department said that it
is relying on its processes, such as the certification process to
verify ADA and that it follows up on concerns regarding charter
schools’ ADA. The department mentioned Senate Bill 740
and its requirement to ensure that the Kindergarten through
grade 12 audit guide includes procedures for auditing charter
schools related to nonclassroom-based instruction and that the
department expects these procedures to be included in the audit
guide for fiscal year 2003–04.
Finding #8: Statutory guidance for disposing of a revoked
charter school’s assets and liabilities is unclear.
In January 2002 Fresno revoked the charter for Gateway Charter
Academy (Gateway). After its revocation action, Fresno sought
the department’s guidance regarding the disposition of Gateway’s
assets and liabilities. Fresno’s concerns, covering a variety of
financial issues, highlight a policy gap regarding a chartering
entity’s authority following a charter revocation—authority that
statutes do not clearly address. For example, Fresno asked for
clarification of its role in accounting for and recovering Gateway’s
assets, particularly since Gateway was no longer a public entity.
In addition, Fresno lacked an understanding of how to respond
to Gateway’s creditors, who were seeking repayment of liabilities.
Without established procedures for recovering public assets and
addressing potential liabilities, including a clearly defined division
of responsibilities assigned to the department and the chartering
entity, the State may be unable to reclaim taxpayer-funded
assets. Although the recent enactment of Assembly Bill 1994
(Chapter 1058, Statutes of 2002) requires a school’s charter to
specify closeout procedures, a policy gap remains regarding
revoked or closed charter schools.
To ensure that a charter school’s assets and liabilities are
disposed of properly when it closes or its charter is revoked,
the Legislature may wish to consider establishing a method for
disposing of the school’s assets and liabilities and requiring the
department to adopt regulations regarding this process.
248 California State Auditor Report 2004-406 California State Auditor Report 2004-406 249
Legislative Action: Unknown.
In September, 2002, the Legislature passed and the governor
signed Assembly Bill 1994 (Chapter 1058, Statutes of 2002).
This bill amended the Education Code, Section 47605, to
require charter petitions to include a description of the
procedures to be used if the charter school closes, including
plans for the disposition of any of the school’s net assets.
The department stated it has no statutory authority to
dispose of a charter school’s assets or pay its debts.
Finding #9: Recent changes to charter school law may not
completely answer existing questions about accountability.
During its 2001–02 session, the Legislature approved two charter
school bills that address some of the issues we raise in our report.
Senate Bill 1709, signed into law on August 12, 2002, expands
the number of entities to which charter schools—beginning in
2003—must submit by December 15 of each year copies of their
annual independent financial audit reports for the preceding
fiscal year. However, as we discussed earlier, the department’s
recent inclusion as a recipient of charter schools’ audit reports
may not necessarily lead to greater accountability or awareness
of charter schools’ fiscal health, unless the department reviews
the audit reports.
Assembly Bill 1994, signed on September 29, 2002, provides both
technical and substantive changes to the charter schools law. For
example, this bill requires charter schools, through the county
superintendent, to submit an annual statement of all receipts
and expenditures (annual statement) from the preceding fiscal
year. The annual statements must following a format prescribed
by the department. Furthermore, the bill requires that each
county superintendent verify the mathematical accuracy of the
charter schools’ annual statements before submitting them to the
department. These annual statements provide both chartering
agencies and the department with additional financial data to
assess the fiscal health of charter schools. However, the chartering
agencies are not adequately reviewing the financial records and
audit reports they already receive. In addition, the department
does not use currently available funding data to identify
potentially struggling charter schools in order to raise questions
with chartering agencies. As a result, without an increased
commitment by chartering agencies and the department to
monitor charter schools, the level of accountability will not
reach its full potential as provided for in the statute.
248 California State Auditor Report 2004-406 California State Auditor Report 2004-406 249
250 California State Auditor Report 2004-406
CALIFORNIA’S EDUCATION
INSTITUTIONS
A Lack of Guidance Results in Their
Inaccurate or Inconsistent Reporting of
Campus Crime Statistics
REPORT NUMBER 2002-032, DECEMBER 2003
California education institutions’ and the California
Postsecondary Education Commission’s responses as of
December 2003
Audit Highlights . . .
Chapter 804, Statutes of 2002, requires the Bureau of State
Our review of California’s Audits (bureau) to report to the Legislature the results
education institutions’ of its audit of not less than six California postsecondary
compliance with the Jeanne
education institutions (institutions) that receive federal student
Clery Disclosure of Campus
aid. The bureau was also directed to evaluate the accuracy
Security Policy and Campus
Crime Statistics Act (Clery Act) of the institutions’ statistics and the procedures they use to
revealed the following: identify, gather, and track data for publishing, disseminating,
þ The Clery Act does not and reporting accurate crime statistics in compliance with
always provide clear the requirements of the Jeanne Clery Disclosure of Campus
definitions. Security Policy and Campus Crime Statistics Act (Clery Act).
We evaluated compliance with the Clery Act at California
þ Institutions sometimes
report inaccurate or State University, Sacramento (Sacramento); City College of
incomplete statistics in San Francisco (San Francisco); San Diego State University
their annual reports.
(San Diego); University of California, Davis (Davis); University
þ Institutions have of California, Santa Barbara (Santa Barbara); and University of
significant discretion in Southern California (USC).
identifying reportable
locations.
Chapter 804, Statutes of 2002, also requires the California
þ Institutions do not always Postsecondary Education Commission (Commission) to provide
request sufficient detail on its Internet Web site a link to the Internet Web site of each
on crimes from campus
California institution of higher education that includes on that
security authorities and
Web site the institutions’ criminal statistics information.
police agencies to avoid
duplication or exclusion of
a reportable incident.
Finding #1: Institutions receive little guidance on
þ Not all institutions
converting California’s definitions of crimes to Clery Act
disclose required campus
reportable crimes.
security policies and notify
current students and
The Clery Act requires eligible institutions to compile crime
employees of the annual
statistics in accordance with the definitions used in the uniform
reports’ availability.
crime reporting system of the United States Department of
California State Auditor Report 2004-406 251
Justice, Federal Bureau of Investigation (FBI). Definitions for
crimes reportable under the Clery Act can be found in both
the FBI’s Uniform Crime Reporting Handbook (handbook)
and federal regulations. If the United States Department of
Education (Education) finds that institutions have substantially
misrepresented their crime statistics, it may impose a civil
penalty of up to $25,000 for each violation or misrepresentation
and may suspend or terminate the institution’s eligibility status
for Title IV funding. Although some state and federal entities
provide limited guidance to some institutions, it appears that
no single governing body exists within California to provide
guidance to all institutions required to comply with the
Clery Act on such matters as converting California’s definitions
of crimes to those reportable under the Clery Act. This lack of
comprehensive guidance can result in the inconsistent reporting
of crime statistics by the institutions and exposes them to
Educations’ penalties.
To provide additional guidance to California institutions for
complying with the Clery Act, the Legislature should consider
creating a task force to perform the following functions:
• Compile a comprehensive list converting crimes defined in
California’s laws to Clery Act reportable crimes.
• Issue guidance to assist institutions in defining campus,
noncampus, and public property locations, including
guidelines for including or excluding crimes occurring at
other institutions.
• Obtain concurrence from Education on all agreements reached.
• Evaluate the pros and cons of establishing a governing body
to oversee institutions’ compliance with the Clery Act.
Legislative Action: Unknown.
Finding #2: Some institutions do not maintain documentation
of the incidents they include in their annual reports and others
inaccurately report the number of incidents.
The six institutions we visited have established procedures to
capture what each institution believes are reasonably complete
crime statistics. Although the Federal Student Aid Handbook
requires institutions to retain records used to create their annual
reports, including the crime statistics, for three years after the
252 California State Auditor Report 2004-406 California State Auditor Report 2004-406 253
due date of the report, only Sacramento retained documentation
to identify the specific incidents that were included in its 2002
annual report. San Diego was only able to provide documentation
to identify the specific incidents it reported for calendar years
1999 and 2001. We were able to re-create the statistics for
San Francisco using data from crime reports and other relevant
documents. Davis, Santa Barbara, and USC did not maintain their
documentation in a manner that would allow us to identify the
specific incidents included in their annual reports; however, Davis
and Santa Barbara chose to re-create their statistics. We were unable
to re-create and verify the statistics for USC. According to our
analysis, institutions mostly over-reported their crime statistics.
However, except for Davis and San Francisco, the percentage of error
was generally small.
To improve the accuracy and completeness of their data, we
recommended that five of the six institutions retain adequate
documentation that specifically identifies the incidents they
include in their annual reports.
Institutions’ Actions: Pending.
The education institutions generally agreed with our
recommendation and included plans to implement either
systems or methods to retain adequate documentation of the
incidents they include in their annual reports.
Finding #3: Institutions do not always have an adequate process
for accurately identifying crimes at reportable locations.
To comply with the Clery Act requirement for reporting the
statistics for crimes occurring in or on noncampus buildings and
property, and on public property, institutions must determine
which locations meet the Clery Act definitions of noncampus
and public property. Two of the six institutions we visited
did not have a sufficient process for identifying all reportable
noncampus locations in their statistics. Another institution did
not differentiate in its annual report, crimes occurring on campus
from those occurring at public property locations, such as streets
surrounding the campus. When institutions do not adequately
capture and report statistics for all noncampus and public
property locations, they risk distorting actual levels of crime.
To improve the accuracy and completeness of their data, we
recommended that four of the six institutions should establish
procedures to ensure that they accurately identify all reportable
locations and report all associated incidents.
252 California State Auditor Report 2004-406 California State Auditor Report 2004-406 253
Institutions’ Actions: Pending.
The education institutions generally agreed with our
recommendation and included plans to implement policies
and procedures to ensure that they identify all reportable
locations and report all associated incidents.
Finding #4: Collecting insufficient information from campus
security authorities and police agencies can lead to other errors.
The Clery Act requires institutions to collect crime statistics
from campus security authorities and state or local police
agencies (police agencies). However, the institutions did not
always collect sufficient detail, such as the time, date, location,
and nature of an incident, to determine if the incidents are
reportable. Specific details of an incident aid in verifying
whether it is reportable and whether the same crime has been
reported by more than one of its sources. Institutions that do
not collect sufficient detail on an incident may over-report
actual crimes by counting an incident more than once.
To improve the accuracy and completeness of their data, we
recommended that three of the six institutions should establish
procedures to obtain sufficient information from campus
security authorities and police agencies to determine the nature,
date, and location of incidents.
Institutions’ Actions: Pending.
The education institutions generally agreed with our
recommendation and included plans to request sufficient
information on incidents, including the nature, date, and
location of the incident.
Finding #5: Institutions do not always comply with Clery Act
requirements.
The Clery Act outlines numerous campus security policies
that institutions must disclose in their annual reports.
Although most of the institutions make reasonable efforts to
disclose their policies, they can do more to ensure compliance
with all statutory requirements. The Clery Act and federal
regulations also require institutions to distribute their annual
reports to enrolled students and current employees and to
notify prospective students and employees of the availability
of the annual report. San Francisco is the only one of the
254 California State Auditor Report 2004-406 California State Auditor Report 2004-406 255
six institutions we reviewed that does not do so. In addition, the
Clery Act requires that institutions make timely reports to the
campus community on Clery Act reportable crimes considered
a threat to other students and employees. However, only one of
the six institutions established a time frame to report incidents
to the campus community.
To improve the accuracy and completeness of their data, we
recommended that three of the six institutions should establish
procedures to include all required campus security policies
in their annual reports. Further, we recommended that two
institutions should establish procedures to notify all current and
prospective students and employees of the reports’ availability.
Finally, we recommended that five of the six institutions
should establish a policy to define timely warning and establish
procedures to ensure that they provide timely warnings when
threats to campus safety occur.
Institutions’ Actions: Partial corrective action taken.
The education institutions generally agreed with our
recommendations and stated that they will make the necessary
changes to correct the deficiencies noted in our report.
However, only four of the five institutions agreed with
our recommendation concerning timely warnings and
included plans to implement a policy. Santa Barbara does
not believe that it should establish a policy to define what it
considers a timely response for disseminating information
to the campus community on Clery Act reportable crimes
considered to be a threat to other students and employees.
This is because Education has stated that it is not necessary
to define timely reports. However, Education also stated that
campus security authorities should consult their local law
enforcement agencies for guidance. Thus, nothing precludes
Santa Barbara from implementing our recommendation to
establish a policy to define timely warnings.
Finding #6: The Commission’s Web site does not link users to
the institutions’ Web sites.
State law requires the Commission to provide a link to the
Web site of each California institution containing criminal
statistics information. However, as of September 4, 2003,
the Commission’s Web site did not include links to almost
300 campuses listed on the Web site of Education’s Office of
254 California State Auditor Report 2004-406 California State Auditor Report 2004-406 255
Postsecondary Education. The Commission believes that it would
need assistance from the Bureau for Private Postsecondary and
Vocational Education in the Department of Consumer Affairs to
maintain a comprehensive list of institutions and their Web sites.
Without such a list, the Commission is unable to provide links to
the Web site of each institution, as state law requires.
To ensure that it provides links to the Web site of each
California institution that includes on that Web site criminal
statistics, the Commission should work with the Bureau
for Private Postsecondary and Vocational Education in the
Department of Consumer Affairs to update its Web site.
Additionally, the Commission should periodically reconcile its
Web site to the federal Web site.
Commission Action: Partial corrective action taken.
The Commission stated that it is working with the Bureau
for Private Postsecondary and Vocational Education to
ensure that all links are included on the Commission’s
Web site. Further, the Commission reported that it will
regularly check with Education to ensure that it has
complete information. Finally, the Commission stated that
it has updated its Web site to include links to all California
institutions on Education’s Web site.
256 California State Auditor Report 2004-406
DEAF AND DISABLED
TELECOMMUNICATIONS PROGRAM
Insufficient Monitoring of Surcharge
Revenues Combined With Imprudent
Use of Public Funds Leave Less Money
Available for Program Services
REPORT NUMBER 2001-123, JULY 2002
California Public Utilities Commission’s and Deaf and Disabled
Telecommunications Program’s responses as of August 2003
Audit Highlights . . .
The Joint Legislative Audit Committee requested
Our review of the Deaf and that we conduct an audit of the Deaf and Disabled
Disabled Telecommunications
Telecommunications Program (DDTP) and California
Program (DDTP) concludes that:
Public Utilities Commission’s (CPUC) accounting controls to
þ Neither the DDTP nor the determine whether they are sufficient to ensure the proper
California Public Utilities accounting of program revenues and expenditures. We were
Commission (CPUC) is
also asked to assess the DDTP’s procedures for ensuring that its
fulfilling its responsibilities
to ensure that telephone contracting practices comply with Public Contract Code and its
companies (carriers) methods for ensuring that the scope of its contracted work is
are remitting required
sufficient, meets the needs of its customers, and is cost effective.
surcharges, possibly
resulting in hundreds
of thousands of dollars We determined that neither the DDTP nor the CPUC is fulfilling
going uncollected. its responsibilities to ensure that telephone companies (carriers)
are collecting and remitting required surcharges on intrastate
þ Only about 32 percent of
certified carriers remitted telecommunications charges, possibly resulting in hundreds
surcharge payments over of thousands of dollars going uncollected. Moreover, the DDTP
the last two years.
does not always further its mission when expending public funds,
þ Some of the DDTP’s potentially leaving less money available for program services.
expenditures are
for unreasonable or
unnecessary items. Finding #1: Neither the DDTP nor the CPUC maintain a
reliable record of carriers that are providing services subject
þ The salaries of select
to the surcharge.
DDTP employees average
24 percent higher than
Although the DDTP and the CPUC share responsibility for
those of comparable
ensuring that all mandated surcharges are remitted to the
state positions.
Deaf Equipment Acquisition Fund (DEAF) Trust, neither entity
þ Most DDTP contracts we
has a firm grasp on which carriers should be collecting and
reviewed comply with
remitting these surcharges. As of April 2002, the CPUC’s list of
the Public Contract Code
and contain adequate active carriers—or those currently certified to operate and/or
standards for contractors provide telecommunications services in California—totaled
to adhere to.
1,483. At least 68 percent of the carriers on the CPUC’s active
list did not remit surcharge revenue for 2000 or 2001. However,
California State Auditor Report 2004-406 257
the CPUC is not sure how many or which of these carriers
are actively providing the intrastate services that are subject
to the surcharge. Consequently, the CPUC could provide no
definitive reason for why these carriers did not remit during the
past two years. Some options include (1) they do not provide
services subject to the surcharge, (2) they stopped operating
before January 2000 or did not begin operating until after
December 2001, (3) they do not collect the surcharge from their
customers, or (4) they simply do not remit the surcharges they
collect. No one knows for sure what the reason is. In any event,
it is likely that some, if not many, of these carriers should be
submitting surcharge revenue.
We recommended that the DDTP work with the CPUC to develop
and maintain a reliable record of carriers that are providing
services subject to the surcharge. We also recommended that the
CPUC should require that all active carriers that do not submit
surcharge revenues certify that they in fact do not provide
services subject to the surcharge.
DDTP and CPUC Action: Partial corrective action taken.
As of January 1, 2003, CPUC staff assumed responsibility
for developing and maintaining a reliable record of carriers
providing services and monitoring the payment history of
these carriers. The CPUC secured a programming vendor to
develop a Telecommunications Carrier Surcharge Database,
which encompasses all functions of carrier activity, including
carrier reporting and carrier remittance monitoring. The
database reviews bank deposits to ensure carriers’ monthly
reporting of their billings that are subject to surcharges as
well as to determine the correct payment of surcharges by
the carriers. Further, the CPUC stated it has improved its
own Telecommunications Division Carrier Database, which
currently has 1,758 licensed telecommunications carriers. The
CPUC flagged 368 carriers as having invalid mailing addresses
and will investigate these carriers for compliance with CPUC
orders. The CPUC did not specifically comment on our
recommendation that it should require all carriers that do
not submit surcharge revenues certify that they in fact do not
provide services subject to the surcharge.
258 California State Auditor Report 2004-406 California State Auditor Report 2004-406 259
Finding #2: The DDTP does not adequately review or record
the payments it receives.
The DDTP is responsible for reviewing incoming transmittal
forms, which detail remittances, and for maintaining an
accurate record of payments so it can recognize which carriers
have not remitted as frequently as required. Although the DDTP
receives transmittal forms, it does little more than a cursory
spot check of these forms before filing them away. In addition
to not reviewing these forms adequately, the DDTP does not
maintain an accurate record of payments or a payment history
of carriers. As a result, it has been remiss in identifying both
small and large carriers that have missed payments, potentially
resulting in hundreds of thousands of dollars of uncollected
funds. For example, the DDTP did not recognize that one
large carrier missed submitting a payment for June 2000. As
of April 2002, the carrier still had not submitted the payment,
which—if similar to subsequent payments—should have been
approximately $200,000. Also, because the DDTP does not
maintain accurate records based on the transmittal records
it receives, it is unable to investigate potential discrepancies
between the information recorded on the transmittal form
and that in the DEAF Trust statements provided by the Bank of
America, leaving potential errors unspotted.
We recommended that the DDTP track the payment history of
each carrier and monitor these records to identify delinquent
carriers. Also, beginning on July 1, 2003, the CPUC will ultimately
be responsible for ensuring that it collects all surcharges. Thus,
the CPUC will also have to monitor payment history records to
ensure that carriers are remitting surcharges as required.
CPUC Action: Corrective action taken.
In order to effectively monitor surcharges remitted by
carriers, the CPUC secured a programming vendor to
develop a Telecommunications Carrier Surcharge Database.
As described in corrective action for Finding 1, this database
is to assist in carrier reporting and carrier remittance
monitoring. The database reviews bank deposits to ensure
carriers’ monthly reporting of their billings that are subject
to surcharges as well as determines the correct payment of
surcharges by the carriers.
258 California State Auditor Report 2004-406 California State Auditor Report 2004-406 259
Finding #3: The DDTP does not identify late payments or
report them to the CPUC.
The DDTP is to send out past-due notices to carriers when
they have failed to remit as required and contact the CPUC
concerning all delinquent surcharges. However, the DDTP does
not carry out any of these procedures. Although the CPUC has
ultimate enforcement power, the DDTP neither tracks which
carriers are late in submitting payments nor confirms that the
carriers are remitting the appropriate late-payment penalty. As
a result, large amounts of revenue in the form of late-payment
penalties go uncollected, and the DDTP has missed out on
thousands of dollars of revenue that could be used to provide
services to the deaf and disabled communities. For example,
one large carrier failed to submit surcharge remittances for
September and October 2001. When it finally did so on
April 2, 2002—142 and 111 days late, respectively—the carrier
did not submit any late-payment penalties, which should have
been almost $31,000.
We recommended that the DDTP regularly notify delinquent
carriers and the CPUC of all past-due amounts. We also
recommended to the CPUC that it enforce late-payment penalties.
CPUC Action: Partial corrective action taken.
The CPUC stated that it continues to endorse the enforcement
of late penalties and carrier certification of nonservice. Over
the past year, the CPUC developed a checklist of requirements,
which are placed on each carrier and imposed by the CPUC
in the carrier’s grant of authority. These requirements cover,
among others, whether the carrier is subject to surcharge and
whether it must file a written acceptance letter. According
to the CPUC, having this information allows it to evaluate
its expectations against carrier performance and to take
actions to revoke the authority of nonperforming carriers.
After reviewing the requirements of each carrier, the CPUC
relayed this information to the Administrative Law Judge
Division, and communicated the compliance requirements
to all carriers, allowing for carrier follow-up. Nonresponsive
carriers were listed in a 30-day notice period in the CPUC’s
daily calendar to alert them to the potential for the CPUC to
revoke their authority.
260 California State Auditor Report 2004-406 California State Auditor Report 2004-406 261
In the first eight months of 2003, 16 licensed carriers
contacted the CPUC on their own volition to ask the CPUC
to take back the authority it had granted to the carrier to
do business in California. In addition, the CPUC revoked
another 135 licenses. To do so, the CPUC identifies carriers
that are nonperforming according to the requirements
mentioned above. After a due process, the CPUC typically
revokes the authority of these carriers. In most of these cases,
these carriers are no longer in business and simply do not
respond to official communications, telephone calls, etc.
Lastly, we mentioned earlier that the CPUC secured a
programming vendor to develop a Telecommunications
Carrier Surcharge Database. The vendor will also develop a
program that will monitor the database for carriers that have
not reported Total Intrastate Billings Subject to Surcharge
for a particular month. The program will also monitor for
underpayment of surcharges by carriers. A letter will be sent to
the carrier to resolve each outstanding problem.
Finding #4: The CPUC could improve its oversight of the
DDTP and the program.
The CPUC, despite being the governing body over the program
and the DDTP, does not always demonstrate consistent oversight
over the carriers or the revenue collection functions performed
by the DDTP. For example, the CPUC does not ensure that
carriers are following its instructions regarding the collection
and remittance of surcharge revenues. Specifically, we found that
carriers did not consistently apply the surcharges to the different
types of intrastate service charges. In addition, carriers apply
different methods when reporting and paying late-payment
penalties. This may be occurring because the guidance provided
by the CPUC is not detailed enough. As a result, there is a great
deal of inconsistency and inefficiency in the surcharge process.
Also, the CPUC is beginning to conduct remittance review
audits of various carrier practices and procedures for some of its
universal service programs, but it does not do so for the DDTP.
Although the DDTP claims it does unofficial “spot reviews”
of transmittal forms to ensure accuracy, these reviews pale in
comparison to a highly detailed remittance audit. No such
formal review has taken place since 1997. Unchecked carrier
practices and procedures create the potential for errors that
would hamper the DDTP’s ability to carry out its mission.
260 California State Auditor Report 2004-406 California State Auditor Report 2004-406 261
We recommended that the CPUC rewrite its transmittal form
instructions in explicit detail, ensuring consistency among
carriers. In addition, the CPUC should conduct periodic
remittance audits of DDTP surcharge revenues.
CPUC Action: Partial corrective action taken.
The CPUC stated that it engages consultants and in-house
staff to conduct audits of its public programs, including
financial audits of the DDTP program and audits of carriers’
compliance with required surcharges. The CPUC recently
utilized the hiring freeze exemption process to hire two
Financial Examiners to work on some of these audits. Audit
fieldwork by the Financial Examiners has been completed for
four small local exchange carriers, and audit results are being
reviewed and reports are being prepared. A contract with the
Department of Finance (DOF) to perform audits on some
larger carriers beginning early this fiscal year was approved
in July 2003. The DOF will focus on a mid-sized local
exchange carrier, a large inter-exchange carrier, and a large
wireless carrier. The CPUC did not comment on rewriting its
transmittal form instructions in more explicit detail.
Finding #5: The DDTP does not always further the program’s
mission when expending public funds.
The DDTP sometimes spends public funds on items that
are unrelated to program services or that do not further the
program’s mission. Specifically, the DDTP has spent excessive
amounts on food for training sessions, committee meetings, and
other events. In addition, many program employees have DDTP
credit cards, sometimes charging imprudent expenditures such
as gifts and meals. Also, the DDTP has in the past reimbursed
employees for expenses typically not permitted in public service,
such as moving expenses and temporary rent payments. As
a result, less money is available for the individuals it serves.
However, the DDTP has initiated corrective action by adopting
new policies on allowable expenditures.
To ensure the prudent use of public funds in furtherance of the
program’s mission, we recommended that the DDTP adhere
to its newly revised internal control procedures that define
allowable expenses.
262 California State Auditor Report 2004-406 California State Auditor Report 2004-406 263
DDTP Action: Corrective action taken.
Assembly Bill 1734, signed into law on June 20, 2002, authorized
the CPUC to enter into contract(s) for the provision of the
DDTP services. In July 2003, the Department of General
Services (DGS) approved a contract between the CPUC and
the California Communications Access Foundation (CCAF)
to provide the personnel to operate the DDTP. As a result, the
DDTP no longer exists in its previous form; rather the CCAF
provides services previously provided the DDTP. The DDTP
implemented a new policy specifically defining allowable and
nonallowable expenses.
Finding #6: The DDTP has not always reported taxable fringe
benefits and needs additional controls to prevent personal
use of vehicles.
Previously, the DDTP failed to report to the proper taxation
authorities taxable fringe benefits received by some of its
employees. These benefits include paid parking and what appears
to be personal use of leased vehicles. When we informed DDTP
management of this, it began to initiate corrective action, including
reporting parking benefits as additional income to the employee.
However, the DDTP can strengthen its internal controls to prevent
or record and report employees’ personal use of leased vehicles.
Thus, we recommended that the DDTP develop additional
procedures to prevent personal use of DDTP-leased vehicles.
For example, the DDTP should label all its vehicles and require
employees to maintain daily log records of miles driven. When
personal use occurs, the DDTP should report it as a taxable fringe
benefit to the proper taxation authorities. We also recommended
that the DDTP follow its new procedures to report parking fringe
benefits as taxable income on employees’ W-2 forms.
DDTP Action: Corrective action taken.
As stated earlier, the DDTP no longer exists in its previous
form; rather the CCAF provides services previously provided
the DDTP. The DDTP’s payroll service reported to the
employee and the proper taxation authorities the taxable
amount of any parking benefits per IRS rules. Also, the DDTP
developed and implemented mileage logs, employees had
262 California State Auditor Report 2004-406 California State Auditor Report 2004-406 263
begun to log miles driven and locations visited on a daily
basis, and supervisors verified the mileage driven. Finally, the
DDTP also ordered decals for its leased vehicles, which state,
“For Official Use Only,” along with the DDTP logo.
Finding #7: Some DDTP contracts lack adequate benchmarks
or standards to measure contractor performance.
Some of the contracts that we tested lacked specific performance
standards for contractors as well as provisions for monetary
penalties for nonperformance. The fact that the DDTP has
expressed some dissatisfaction with some of the services
provided exacerbates this problem. Had the DDTP established
appropriate service levels, performance measures, and provisions
to collect for noncompliance in the original contract, the
vendors might have performed at acceptable levels or the DDTP
might have collected penalties for their failure to do so.
We recommended that the DDTP ensure that all future contracts
have established performance standards as well as provisions
to collect damages from nonperforming contractors. Also, the
program’s administration will undergo some changes over the
next year, including the CPUC potentially contracting out for
many of the services the DDTP currently provides. Whether the
CPUC contracts out for all or some of the day-to-day provision
of program services, it should include specific provisions in its
contracts that require contractors to comply with state laws,
regulations, and policies related to reimbursable expenses. In
addition, it should include specific performance standards in
its contracts and monitor whether the contractors are meeting
those standards. Finally, the CPUC should include provisions
in its contracts that will allow it to collect damages from
nonperforming contractors.
DDTP and CPUC Action: Partial corrective action taken.
Assembly Bill 1734, signed into law on June 20, 2002,
authorized the CPUC to enter into contract(s) for the
provision of the DDTP services. The CPUC reported that it
conducted a competitive bidding process to contract for the
personnel to operate the DDTP. The CPUC reported that
its competitive bidding process and subsequent contract
adhered to all required state contracting rules including
requirements related to reimbursable expenses. According to
264 California State Auditor Report 2004-406 California State Auditor Report 2004-406 265
the CPUC, its contract with the CCAF includes performance
measures to be met by CCAF and penalties for noncompliance.
The CPUC also stated that it holds all contracts providing
services or goods for the DDTP. Program contracts that
existed prior to July 1, 2003, have been or are currently
being transitioned to state contracts. The transition of these
contracts includes submission for review and approval by
DGS. The CPUC said that all future program contracts will
also be submitted for DGS review and approval.
264 California State Auditor Report 2004-406 California State Auditor Report 2004-406 265
266 California State Auditor Report 2004-406
CALIFORNIA PUBLIC UTILITIES
COMMISSION
State Law and Regulations Establish Firm
Deadlines for Only a Small Number of Its
Proceedings
REPORT NUMBER 2003-103, NOVEMBER 2003
Audit Highlights . . .
Our review of whether the California Public Utilities Commission’s response as of
California Public Utilities November 2003
Commission (commission)
promptly resolves formal and The Joint Legislative Audit Committee (audit committee)
informal proceedings found requested that the Bureau of State Audits determine
the following:
whether the California Public Utilities Commission
þ Few of the 1,602 (commission) promptly completes the various types of
formal proceedings the administrative proceedings it is responsible for conducting. The
commission initiated
audit committee asked that we determine how the commission
between January 1, 2000,
sets priorities in the water, telecommunications, and energy
and June 30, 2003, were
subject to statutory areas when conducting its various types of administrative
deadlines. proceedings. Additionally, we were asked to review staffing levels
to assess whether these levels are adequate for the commission
þ Commission staff
provided various reasons to comply with its statutory mandates regarding administrative
for delays, including proceedings. As part of the assessment, we were to consider
that the outcomes of
other studies that may have been performed related to staffing.
some proceedings were
Finally, the audit committee requested that we identify any
dependent on other
decisions or investigations timelines contained in law or regulations for the completion of
or the proceedings were proceedings. We were asked to select a sample of proceedings
purposely kept open to
that exceeded the timelines yet remain unresolved and another
take up related issues
sample that exceeded the timelines but were resolved and
or to manage them in
multiple phases. determine the reasons for delays.
þ Two factors contributed
to delays in processing
Finding #1: Some proceedings the commission closed
the more informal
promptly that it later reopened appeared to be delayed.
advice letters, which
the commission uses to
The commission resolved five of 45 proceedings we reviewed
approve minor requests
within the statutory deadline or guideline, but because its
from utilities: Some had
a lower workload priority tracking system does not appropriately reflect the resolution of
and some required proceedings that are reopened, these proceedings appeared to
formal resolution or
have been delayed. The commission’s system tracks numerous
investigation.
pieces of information about each proceeding, including the
continued on next page title and type of proceeding, when it was opened and closed,
and when it was reopened. However, when the commission
California State Auditor Report 2004-406 267
Although the commission cited reopens a proceeding, such as when it considers requests for
workload and inadequate a rehearing, and then closes the proceeding again, the later
staffing as contributing to
closing date replaces the initial one. Because only the later
delays in processing its formal
proceedings and advice closing date is used in measuring how long the commission
letters, the lack of a workload took to resolve the proceeding, the commission appears to
tracking system hinders its
have required more time than it actually did. When we became
ability to justify staffing needs.
aware that the closing dates in the tracking system were not
always accurate, we reviewed all 70 of the proceedings that
had reopen dates and found that the commission resolved
43 within the original deadlines.
We recommended that the commission modify its tracking
system to retain the original closing date as well as record its
subsequent closing date for those proceedings it reopens.
Commission Action: Pending.
The commission stated that it will implement the
recommendation as best as it is able with the commission’s
existing resources, but it also indicated that this aspect
of the report deserved a brief comment. The commission
believes that our report fails to contemplate the perhaps
significant cost of either enhancing or replacing the tracking
system. However, based on discussions with our information
technology staff, we do not believe the cost to modify the
commission’s tracking system to retain the original closing
date and subsequent closing date for reopened proceedings
would be significant. Further, since the commission
acknowledges that it does not know whether the costs to
enhance or replace its tracking system would be significant,
it should first determine what those costs are. If they are
prohibitive, the commission should manually track the
original closing dates of all proceedings it reopens.
Finding #2: The commission did not report certain proceedings.
Although the commission tracks and reports to the Legislature
whether it has met certain deadlines established in law, it does
not report whether it is meeting the 60- and 90-day deadlines for
issuing draft decisions. Moreover, it does not adequately track
the submission date that would allow it to do so. Specifically,
although commission staff provided us with submission dates
for rate-setting and quasi-legislative proceedings, two of the
12 submission dates reviewed for accuracy were erroneous. In
addition, the commission initially was unable to provide us with
submission dates for adjudicatory proceedings. According to
268 California State Auditor Report 2004-406 California State Auditor Report 2004-406 269
the chief administrative law judge (ALJ), the commission based
its decision to report only certain deadlines to the Legislature
on its belief that the Legislature is most concerned with the
portion of these proceedings involving commissioners’ actions;
therefore, it tracks and reports whether the commissioners have
met the 60-day deadline to approve final decisions. However,
because ALJs are most often responsible for meeting the 60- and
90-day deadlines to prepare draft decisions, the commission’s
decision not to report compliance with these deadlines to the
Legislature overlooks the portion of the proceedings subject
to these deadlines. Therefore, because state law requires the
commission to issue draft decisions within either 60 or 90 days
of submission, we believe it is important to accurately track
all submission dates in order to monitor compliance with
these requirements.
To ensure it is complying with the 60- and 90-day deadlines
between submission date and filing a draft decision, we
recommended that the commission better track its submission
dates and monitor whether it is meeting its deadlines.
Commission Action: Pending.
The commission stated that it will implement the
recommendation as best as it is able with the commission’s
existing resources.
Finding #3: The commission did not prepare a work plan
access guide annually as required by law.
Although state law requires that the commission develop,
publish, and annually update a work plan access guide (work
plan), it did not prepare the work plan for 2000 through 2002.
Among other things, state law requires the commission to
include within the work plan a description of the scheduled rate-
making proceedings and other decisions it may consider during
the calendar year, information on how the public and ratepayers
can gain access to the commission’s rate-making process, and
information regarding the specific matters to be decided.
Ultimately, the commission did prepare a work plan for 2003
that included its criteria for determining regulatory priorities
and a list of the 2003 major proceedings. The commission states
in its 2003 work plan that it allocates its staff resources for
decision making according to a stated set of priorities established
by its president.
268 California State Auditor Report 2004-406 California State Auditor Report 2004-406 269
To ensure it discloses to the public and the Legislature its
process for prioritizing its proceedings, we recommended that
the commission continue to annually prepare and publicize
a work plan, which includes its criteria for prioritizing formal
proceedings, as required by law.
Commission Action: Corrective action taken.
The commission stated that it will implement the
recommendation as best as it is able with the commission’s
existing resources.
Finding #4: The commission delayed closing or failed to close
advice letters promptly.
Staff promptly reviewed and approved 17 of the telecom-
munications division’s and 10 of the energy division’s advice
letters, which the commission uses to address minor requests
from utilities. However, staff either delayed closing or failed
to close these 27 advice letters in the proposal and advice
letter (PAL) tracking system. This represents 30 percent of the
90 advice letters we selected for testing. We believe that the high
proportion of advice letters in our sample that remain open
according to the dates in the PAL tracking system when they are
actually closed should be of concern to the commission because
it recently began using data recorded in the PAL tracking system
to report to the commissioners on the status of advice letters.
This type of erroneous data generated by the tracking system
could be misleading to the commission and to those to
which the commission reports this information.
We recommended that to ensure the information included
in the PAL tracking system is accurate for reporting to the
commissioners in public meetings on the timeliness of advice
letters, the commission should review all advice letters in the
system and close those where it is appropriate to do so.
Commission Action: Pending.
The commission stated that it will implement the
recommendation as best as it is able with the commission’s
existing resources, but it also indicated that this aspect of the
report deserved a brief comment. The commission believes
that our report fails to contemplate the perhaps significant
cost of either enhancing or replacing the PAL tracking
system. However, the commission’s response mischaracterized
270 California State Auditor Report 2004-406 California State Auditor Report 2004-406 271
this issue because our recommendation does not require the
commission to enhance or replace the PAL tracking system,
but to correct the data generated by it.
Finding #5: The telecommunications division does not
adequately maintain and track its advice letters.
The commission’s telecommunications division (telecommunications)
lacks a filing system that allows it to store advice letters and the
supporting documentation for the letters in a central location.
Thus, telecommunications had difficulties locating advice
letter files and related supporting documents. Specifically,
telecommunications staff required several weeks to locate
60 advice letter files we requested and were ultimately unable to
locate six of them. We observed in many instances that advice
letters were located at an analyst’s desk or piled on tables rather
than in a central filing area. Telecommunications staff conceded
that maintaining and tracking advice letters has been and
continues to be a problem.
In an attempt to address its filing problems, telecommunications
has initiated a pilot project that allows utilities to submit advice
letters and supporting documents in an electronic format. A
program manager indicated that telecommunications intends to
maintain electronic copies of the advice letter and supporting
documents, which he believes will facilitate their storage
and tracking. Although this may eventually prove successful,
telecommunications still needs to file and track the advice letters
and supporting documents of utilities that currently choose not
to file electronically in such a way that it is able to accurately
and promptly retrieve them.
Finally, as part of its processing, telecommunications requires
utilities to submit a summary sheet with their advice letters.
Telecommunications uses this summary sheet to track the advice
letter’s progress by indicating the differing levels of review
and approval it has received. However, staff often could not
locate the relevant summary sheet or, when found, it was not
fully completed.
We recommended that as part of its new electronic filing
process, the commission ensure that the telecommunications
division creates an effective centralized filing system for those
advice letters and supporting documents not submitted in
electronic format. Additionally, for purposes of oversight and
270 California State Auditor Report 2004-406 California State Auditor Report 2004-406 271
external and internal review, the commission should ensure
that telecommunications staff consistently complete and retain
summary sheets to evidence appropriate approval and review
and that telecommunications maintains the summary sheets in
its advice letter files.
Commission Action: Pending.
The commission stated that it will implement the
recommendation as best as it is able with the commission’s
existing resources.
Finding #6: The commission lacks a workload tracking system
that would allow it to justify its staffing needs.
Although the commission indicated that staffing is a limiting
factor in promptly processing its formal proceedings and advice
letters, it was unable to provide us with workload analyses to
support these contentions. In fact, the Department of Finance
(Finance), in various reports and management letters it prepared
between February 1998 and February 2003, reported that the
commission lacks a workload tracking system that would allow
it to justify its staffing needs. In response to a February 2003
management letter, the commission began to revise its workload
tracking system to address Finance’s concerns; however, it does
not anticipate implementing key phases of the new system
until the end of 2003 or the beginning of 2004. Thus, during
our audit the commission was unable to provide us any staffing
analyses that would allow us to determine whether its staffing
levels are adequate to promptly process formal proceedings and
advice letters.
We recommended that the commission continue to work with
Finance on improving its workload tracking system so that it
can justify its staffing needs.
Commission Action: Pending.
The commission stated that it will implement the
recommendation as best as it is able with the commission’s
existing resources, but it also indicated that this aspect of the
report deserved a brief comment. The commission indicated
that if we could not perform a quantitative analysis of the
commission’s staffing levels, then we might have performed
some qualitative analysis. The commission further stated
that we could have interviewed commission management
272 California State Auditor Report 2004-406 California State Auditor Report 2004-406 273
to see what activities or projects they believed should
be undertaken but are prevented by inadequate staffing
levels. Contrary to the commission’s response, however, we
met with the commission’s management staff on several
occasions. During these meetings, management staff asserted
that workload and inadequate staffing contributed to delays.
However, as we stated in our report, while the commission’s
management staff asserted they were short of staff, they
could not provide evidence to support their claims.
272 California State Auditor Report 2004-406 California State Auditor Report 2004-406 273
274 California State Auditor Report 2004-406
CALIFORNIA ENVIRONMENTAL
PROTECTION AGENCY
Insufficient Data Exists on the Number
of Abandoned, Idled, or Underused
Contaminated Properties, and Liability
Concerns and Funding Constraints Can
Impede Their Cleanup and Redevelopment
REPORT NUMBER 2002-121, JULY 2003
Audit Highlights . . .
California Environmental Protection Agency, the Department
Our review of the entities of Toxic Substances Control, and the State Water Resources
under the California Control Board combined response as of October 2003
Environmental Protection
Agency (Cal/EPA) that oversee
The Joint Legislative Audit Committee requested that the
the cleanup of contaminated
sites, the Department of Toxic Bureau of State Audits conduct an audit of the California
Substances Control (Toxics) Environmental Protection Agency (Cal/EPA) and its
and the State Water Resources
entities involved in the cleanup of properties contaminated
Control Board (State Water
Board), found the following: by hazardous material and waste, the Department of Toxic
Substances Control (Toxics) and the State Water Resources
þ State law does not
Control Board (State Water Board). We were asked to provide
require Toxics or the
information on how many orphan sites and sites with orphan
State Water Board to
capture information on shares exist in the State, as well as how much funding is needed
brownfields, such as the and how much is directly available to clean up those sites.
number of sites and their
potential reuses.
Finding #1: California lacks a comprehensive inventory
þ Toxics anticipates needing
between $124 million of brownfields.
and $146 million for the
California does not have a uniform definition for brownfields.
remediation of 45 existing
orphan sites and Further, state law does not require Toxics or the State Water
$2.4 million in fiscal year Board to maintain databases to capture information on
2003–04 for orphan shares.
brownfields, such as the number of sites and their potential
þ The State Water Board’s reuse. On May 30, 2003, Toxics did submit an application to the
unaudited data indicate United States Environmental Protection Agency (U.S. EPA) to
that it has seven orphan receive a state response grant. Toxics intends to use a portion of
sites to which it has
the grant to work with the State Water Board and the regional
committed $1.4 million in
state resources for cleanup. water quality control boards (regional water boards) to maintain
and display accurate geographical information on brownfield
continued on next page
sites and other properties that pose environmental concerns.
California State Auditor Report 2004-406 275
þ The reuse of brownfields We recommended that if Toxics does not receive funding from
faces challenges, such as the U.S. EPA, Cal/EPA should seek guidance from the Legislature
the liability provisions
to determine if it desires a database to track the State’s efforts
the federal Superfund
to promote the reuse of properties with contamination. If the
law imposes and limited
funding opportunities. Legislature approves the development or upgrade of a statewide
database that includes relevant data to identify brownfields sites
Toxics and the State Water
and their planned and actual uses, Cal/EPA should establish a
Board have yet to apply
for certain federal grants uniform brownfield definition to ensure consistency.
available to assist with
the State’s assessment and
cleanup costs for certain sites, Cal/EPA Action: Partial corrective action taken.
such as mine-scarred lands.
Cal/EPA told us that Toxics was awarded funds from the U.S.
EPA under the Small Business Liability Relief and Brownfields
Revitalization Act. In conjunction with the award of these
funds, Toxics and the State Water Board plan to continue
efforts to operate and enhance their site information
databases. The grant also calls for a survey and inventory of
brownfields in the State. To accomplish this task, Cal/EPA
will describe or define the types of properties to be included
in this inventory.
Finding #2: Existing databases do not provide a
comprehensive reporting of orphan sites and sites with
orphan shares.
Toxics maintains a database to track the number of
contaminated sites in the State. Although this database
currently reports the number of orphan sites under its
jurisdiction, the database is not able to track the number of
sites with orphan shares. Additionally, due to incomplete data
relating to responsible parties in the State Water Board’s
database, we were unable to identify the number of orphan
sites under its jurisdiction. The State Water Board told us that
orphan shares do not exist since the nine regional water boards
apportion liability for cleanup using a strict application of
joint and several liability. Under a strict application of joint
and several liability there are no orphan shares because even
though some share of the cleanup costs is not attributable to
a responsible party, each must assume full responsibility for
those costs.
We recommended that to obtain a comprehensive listing of
the number of orphan sites and sites with orphan shares, the
Legislature should consider requiring Cal/EPA and its entities to
capture necessary data in their existing or new databases.
276 California State Auditor Report 2004-406 California State Auditor Report 2004-406 277
Legislative Action: None.
We are unaware of any legislative action implementing
this recommendation.
Finding #3: Toxics and the State Water Board have yet to
apply for all available federal grants.
The Small Business Liability Relief and Brownfields
Revitalization Act (revitalization act) provides grants
and loans to states, local governments, and other eligible
participants to inventory, characterize, assess, conduct
planning, and remediate brownfields. However, Toxics and the
State Water Board have not applied for all available monies
under the revitalization act to assist with the State’s assessment
and cleanup costs for certain sites.
We recommended that to reduce the State’s brownfield
assessment and cleanup costs, Cal/EPA should ensure that
Toxics and the State Water Board apply for all available
funding under the revitalization act.
Cal/EPA Action: Pending.
Cal/EPA stated that the U.S. EPA recently announced six
workshops it plans to conduct to assist those interested in
applying for grants under the revitalization act. Staff from
Cal/EPA, Toxics, and the State Water Board plan to attend
these workshops and will consider applying for these
grant funds. Cal/EPA stated that the decision would depend
upon a variety of factors, including the costs of preparing an
application, costs associated with administering the grant
funds, and limitations on the use of the funds.
276 California State Auditor Report 2004-406 California State Auditor Report 2004-406 277
278 California State Auditor Report 2004-406
CALIFORNIA INTEGRATED WASTE
MANAGEMENT BOARD
Its New Regulations Establish Rules for
Oversight of Construction and Demolition
Debris Sites, but Good Communication
and Enforcement Are Also Needed to Help
Prevent Threats to Public Health and Safety
REPORT NUMBER 2003-113, DECEMBER 2003
Audit Highlights . . .
Responses of the California Integrated Waste Management
Our review of the California Board, the County and the City of Fresno, and the County and
Integrated Waste Management the City of Sacramento as of December 2003
Board (board) and local
agencies’ oversight of solid
Each year Californians generate an estimated 66 million
waste facilities found:
tons of solid waste, which must be properly handled
þ The board had not to prevent health and environmental threats. In 1976
finalized regulations
Congress enacted the Resource Conservation and Recovery
for construction and
demolition debris Act of 1976, which expanded the federal government’s role in
sites when a large fire regulating the disposal of solid wastes and required that all solid
broke out at the Archie
waste landfills comply with certain minimum criteria adopted
Crippen Excavation Site
by the U.S. Environmental Protection Agency. In that same
(Crippen Site), which
accepted construction and year, when cities and counties became responsible for enforcing
demolition waste in Fresno. these standards, each local government, with the California
Integrated Waste Management Board’s (board) approval,
þ The board’s interim
directions did not provide designated a local enforcement agency (LEA) to enforce state
the local enforcement minimum standards and solid waste facility permits.
agencies (LEAs) with
clear guidance on how to
Our audit concluded that, although the board has established
handle construction and
demolition debris sites. regulations for many types of solid waste streams, it could have
improved its interim guidance in its LEA Advisory #12 (advisory)
þ Representatives of several
for areas pending regulation. While the board was preparing
agencies visiting the
Crippen Site before the regulations for construction and demolition debris waste sites,
fire failed to cite and a serious fire broke out at the Archie Crippen Excavation Site
remediate conditions
(Crippen Site), which accepted construction and demolition debris,
that ultimately made the
in Fresno, resulting in a threat to public health and suppression
fire difficult to suppress,
raising concerns about and cleanup costs of over $6 million. Further, the board has
public health. established a system for reviewing LEAs’ performance that meets
statutory requirements for scope, but not for frequency.
þ The board does not track
“excluded” solid waste
sites because regulations
do not require it to do so.
continued on next page
California State Auditor Report 2004-406 279
þ The board does not Finding #1: Until recently, the board had only an advisory
complete a review of each statement in place of regulations for construction and
LEA every three years, as
demolition debris sites.
required by law.
While working on regulations for construction and demolition
þ Through legal challenges to
debris sites during the last six years, the board advised the
enforcement actions, solid
waste facility operators LEAs to follow its advisory for permitting of “nontraditional”
can delay correction of facilities, including construction and demolition debris waste
identified problems.
sites. The advisory’s purpose is to guide LEAs and board staff
on the permitting of nontraditional facilities with activities
not yet covered by regulations. “Nontraditional facilities”
are those facilities other than landfills, transfer stations, and
composting facilities that handle or process solid waste. Although
not precluding LEAs from accepting applications for solid waste
facility permits at these sites, the advisory strongly encourages
LEAs not to accept applications for solid waste facility permits
for materials and handling methods that are under evaluation.
However, the advisory also states that should an LEA consider
a facility proposal that appears to fall into the nontraditional
facility category, but not be certain whether the advisory’s interim
policy applies to the particular facility, the LEA can contact the
board’s permitting branch representative for assistance.
In August 2003, after many draft proposals and public comments,
the first phase of the regulations became effective, covering the
transfer and processing of construction and demolition debris.
At that time, work was also progressing on the second phase,
dealing with the disposal of construction and demolition debris.
The board has indicated it adopted regulations for construction
and demolition debris disposal in September 2003, and they are
scheduled to become effective in January 2004.
We recommended that to meet the goals of the California
Integrated Waste Management Act of 1989 (Waste Act) and
improve regulation of solid waste, the board should complete
and implement as promptly as possible its work on the second
phase of regulations for construction and demolition debris
sites, covering the disposal of the waste materials.
Board Action: Partial corrective action taken.
The board stated that on September 17, 2003, it adopted the
second phase of regulations for construction and demolition
debris sites. In addition, on November 10, 2003, the
regulations were submitted to the Office of Administrative
Law (OAL) for approval. OAL’s 30 working day review period
280 California State Auditor Report 2004-406 California State Auditor Report 2004-406 281
ended on December 26, 2003. The regulations will become
effective soon after approval by OAL and filing with the
Secretary of State.
Finding #2: Concerns about the Crippen Site were not addressed.
In the two years before the Crippen Site fire, staff of the city
of Fresno Code Enforcement Division, the city of Fresno
Fire Department, the Fresno LEA, and the board visited the
site. According to the city of Fresno’s Planning Commission
resolution to revoke the Crippen Site’s conditional use permit
after the fire, the Crippen Site had accumulated material in
type and quantity that violated the terms of the conditional use
permit, and the debris pile had existed for at least seven years
before the fire. Thus, staff of each of these agencies observed the
conditions at the Crippen Site. However, because of questions
about the board’s written direction in its advisory and verbal
directions to the LEA at the time of the board staff’s visit to the
Crippen site, lack of communication between some of these
agencies, and failure to cite the conditions, the problems at the
Crippen Site were not remediated.
We recommended that to ensure sites are adequately monitored,
the board should clarify the intent of the advisory for currently
known or newly identified nontraditional sites for which
regulations are not yet in place. For example, the board should
resolve the ambiguity between the advisory’s statement that
LEAs are strongly encouraged not to accept applications for
solid waste facility permits for materials and handling methods
under evaluation, on the one hand, and its statement that
it is ultimately the responsibility of the LEAs to determine
whether to require solid waste facility permits for such sites, on
the other hand. In addition, when it determines that an LEA
has inappropriately classified a site—for example, treating a
composting site as a construction and demolition debris site—
the board should work with the LEA to correct the classification.
Board Action: Pending.
The board has stated that subsequent to the adoption of
Phase II of the Construction and Demolition Debris and
Inert Debris regulations, board staff determined that the
advisory no longer provided needed guidance and therefore
suspended it. Further, the board stated that it will continue
to assist LEAs in placing solid waste handling activities,
280 California State Auditor Report 2004-406 California State Auditor Report 2004-406 281
including ones handling new or unique waste streams,
within the appropriate tier of the regulatory framework. In
addition, the board stated that this assistance will continue
to include periodic training on the regulations, solid waste
facility type definitions, and tier permit requirements, as well
as ongoing technical support through direct contact with
board staff and through the board’s Web site.
Finding #3: Questions arose about the city of Fresno’s
handling of the Crippen Site fire.
During a hearing of a Senate select committee on air quality
in the Central Valley, questions arose about the city of
Fresno’s preparedness for the Crippen Site fire, its fire-fighting
techniques, and its timing of requests for expert assistance. In
April 2003 a city of Fresno task force made up of concerned
citizens, representatives of various interest groups, city and
county officials and staff, and current and former members
of the City Council issued its report on the events associated
with the Crippen Site fire and made 24 recommendations for
addressing identified problems. Areas the recommendations
covered included, but were not limited to, issuing of permits,
monitoring sites with conditional use permits, setting staffing
levels and providing training, determining the adequacy of
policies and procedures for code enforcement, establishing
adequate means for communicating warnings about health
hazards, and assessing the adequacy of the emergency response
plan. As of late October 2003 the city’s status report on its
implementation of the recommendations indicated that only
seven recommendations remained outstanding.
We recommended that to ensure it appropriately permits,
monitors, and enforces compliance with the terms of its
conditional use permits and has an adequate system in place
to deal with emergencies, such as the Crippen Site fire, the
city of Fresno should continue to implement the remaining
recommendations from its task force report on the response to the
Crippen Site fire. In particular, it should ensure the proper training
of staff to ensure they identify existing problems at sites with
conditional use permits and effectively enforce compliance with
regulations and the terms of conditional use permits, and Code
Enforcement should continue implementing its proactive, risk-
based monitoring of conditional use permits. It should also take
steps to ensure its response to emergencies is effective and prompt.
282 California State Auditor Report 2004-406 California State Auditor Report 2004-406 283
City of Fresno Action: Partial corrective action taken.
As of November 25, 2003, the city of Fresno reported that
it had implemented 21 of the 24 recommendations and
expected to implement the remaining three by January 2004.
Finding #4: New regulations address the lack of oversight
of construction and demolition debris sites, but certain
operations still lack adequate regulation.
The board’s new requirements for processing construction and
demolition debris now provide regulatory guidance for oversight
of facilities and operations. However, some construction and
demolition operations and facilities may fit into the excluded
tier of the board’s regulatory system. The board’s regulations do
not require operators in the excluded tier to notify the LEA of
their intent to operate, and such operators who increase their
activity enough to require a permit are merely “honor bound”
to notify the LEA of any changes that modify their current
operations. If the LEA is not aware that an excluded tier activity
is taking place, the LEA is unable to monitor the activity. Relying
on operators to self-report or the industry to self-monitor
is insufficient to ensure that all excluded tier activities are
accounted for, tracked, and monitored to ensure that materials
on site are stable and will not harm public health and safety.
Regulations specify that the LEA or the board can inspect an
excluded tier activity to verify that the activity continues to
qualify as an excluded tier activity and can take any appropriate
enforcement action. However, our survey of LEAs indicated
that 26 of 48 responding LEAs, including the two LEAs we
reviewed, monitor excluded tier activities only by responding
to complaints or reports from other entities. None of these LEAs
stated that it performs periodic on-site visits or inspections
outside of receiving a complaint.
Of the 48 LEAs responding to our survey, 43 told us that they
track the existence of excluded tier activities when they are
notified that a local government is considering a conditional use
permit or when another entity or department files a complaint
with the LEA. However, regulations do not require this tracking,
and our visit to one LEA identified that after initially confirming
that an activity falls in the excluded tier, the LEA does not track
or perform any further monitoring of that activity to determine
whether the operator has maintained or changed its activity
282 California State Auditor Report 2004-406 California State Auditor Report 2004-406 283
level. Also, local governments may not forward all conditional
use permits to their LEAs for review, so some operations may
remain unknown to the LEAs.
We recommended that to ensure the enforcement community
is aware of excluded operations that could potentially grow
into a public health, safety, or environmental concern, the
board should require, pursuant to the Public Resources Code,
Section 43209(c), LEAs to compile and track information on
operations in the excluded tier. To track this information, each
LEA should work with its related cities and counties to develop
a system to communicate information to the LEA about existing
and proposed operations in the excluded tier with the potential
to grow and cause problems for public health, safety, and the
environment. For example, cities and counties might forward
to LEAs information about requests for conditional use permits,
revisions to current conditional use permits, or requests for
new business licenses. We are not suggesting that the LEA track
all operations in the excluded tier—for example, backyard
composting or disposal bins located at construction sites. In
addition, the board should require LEAs to periodically monitor
operations in the excluded tier to ensure that they still meet the
requirements for this tier. Finally, in its triennial assessments of
each LEA, the board should review the LEA’s compliance with
these requirements regarding excluded sites.
Board and the Counties of Fresno and Sacramento Actions:
Pending.
The board stated that it placed operations into the excluded
tier through rulemaking pursuant to the Administrative
Procedures Act, which includes full participation by
stakeholders and potentially affected parties. In addition,
the board stated that the placement is based on professional,
technical, and scientific analysis. Further, the board stated that
it defines these excluded activities so that there is regulatory
certainty that they do not require permits. Nevertheless, the
board stated that LEAs are still responsible for being aware of
changes in activities located in their jurisdiction. The board
agreed that there may be some value in encouraging LEAs, in
concert with other local regulatory requirements, to develop
mechanisms for identifying and tracking activities that may
trigger additional regulatory requirements.
Although the county of Fresno responded to the audit report,
its responses did not specifically address this recommendation.
284 California State Auditor Report 2004-406 California State Auditor Report 2004-406 285
The county of Sacramento stated that the management of
Solid Waste in local jurisdictions is most often carried out,
through State delegation, by counties and cities. Funding of
programs is an area that is a significant consideration, and it
is problematic to charge fees to businesses that are exempt or
in categories that may not require inspection or regulation.
Finding #5: Board evaluations are substantially appropriate in
scope, but do not meet the three-year mandate.
Our review of five LEA evaluations the board completed found
that the established scope of the evaluation is appropriate
and that the board complied with that scope. The evaluation
covers all six specific areas of interest identified in regulations
and further ensures that the LEAs continue to comply with
certification requirements. However, the board is not timely
with its LEA evaluations, beginning or scheduling evaluations
to begin on average about 11 months after the end of the
mandated three-year cycle. However, the board’s definition of
what represents a three-year cycle increases the problem. The
board defines the three-year cycle as beginning at the conclusion
of the LEA’s last evaluation and ending at the date the next
evaluation is initiated. Our interpretation of the statutory
requirement, however, is that LEA performance evaluations
should be completed every three years or more frequently. Thus,
if an evaluation is completed on February 1, 2001, the next
should be completed no later than February 1, 2004. The board’s
approach, when combined with the time required to actually
conduct an evaluation and develop a workplan, if necessary,
may delay the discovery and resolution of potential performance
shortcomings in an LEA.
We recommended that to comply with existing law, the board
should complete evaluations of LEAs within the three-year cycle.
If that is not feasible, the board should propose a change in law
that would allow a prioritization system to ensure that it at least
evaluates LEAs with a history of problems every three years.
Board Action: Pending.
The board has stated that staff believes the third cycle of
LEA evaluations can be completed within the three-year
cycle, partly because of the experience it has gained during
the last two cycles. In addition, the board stated that its
staff constantly re-examines its internal practices and will
continue to work on methods to streamline the evaluation
284 California State Auditor Report 2004-406 California State Auditor Report 2004-406 285
process, such as firmer deadlines for internal fact-finding and
report review. The board also stated that it will consider our
suggestions as it reviews the recommendation.
Finding #6: Legal challenges can significantly delay correction
of identified problems at noncomplying solid waste sites.
Even if all regulations were in place, all monitoring occurred
promptly, and enforcement actions were initiated promptly,
identified problems would not necessarily be corrected
immediately. The process to correct violations can be lengthy,
and it may involve hearings and legal proceedings, including
appeals of decisions in each. The Waste Act contains a
comprehensive enforcement scheme for solid waste facilities,
designed to allow LEAs to bring various enforcement actions
against owners and operators for violations of the Waste Act.
Under certain circumstances, the board may take enforcement
actions itself. This enforcement scheme includes the ability to
issue a corrective action order or a cease and desist order, to
administratively impose civil penalties, and to suspend or revoke
a permit under certain conditions. However, this enforcement
scheme allows a person who is the subject of any of these
enforcement actions to request a hearing before a local hearing
panel, which must be established pursuant to the requirements
and procedures delineated in Public Resources Code, and then
before the board. If a hearing is requested, the enforcement
order is “stayed,” or rendered inoperative, until all appeals to
the local hearing panel and the board have been exhausted or
the time for filing an appeal has expired, unless the LEA can
make a finding that the activity constitutes an imminent threat
to the public health and safety or environment. Consequently,
a person who is the subject of an LEA enforcement order can
continue the activity that is the subject of the order until all
appeals have been exhausted.
We recommended that the Legislature may wish to consider
amending the current provisions of the Waste Act that allow a
stay of an enforcement order upon the request for a hearing, and
to streamline or otherwise modify the appeal process to make it
more effective and timely and enhance the ability to enforce the
Waste Act.
286 California State Auditor Report 2004-406 California State Auditor Report 2004-406 287
Legislative Action: None.
We are not aware of any action taken by the Legislature
regarding the Waste Act.
Board and the Counties of Fresno and Sacramento Actions:
Pending.
The board stated that it may be time to re-examine the
effectiveness of this provision. In addition, board staff agrees
that this issue warrants further consideration.
Although the county of Fresno responded to the audit report,
their responses did not specifically address this recommendation.
The city of Sacramento stated that local jurisdictions use a
proactive approach utilizing education, audit (inspection),
and enforcement in ensuring compliance with applicable
laws and regulations. The current mandated process for solid
waste enforcement is particularly cumbersome, protracted,
and costly. The city of Sacramento further stated that the
Legislature, CalEPA, and the board should consider allowing
or mandating an enforcement process more consistent
with other successful processes in the State and local
environmental regulatory programs.
286 California State Auditor Report 2004-406 California State Auditor Report 2004-406 287
288 California State Auditor Report 2004-406
STATE OF CALIFORNIA
Its Containment of Drug Costs and
Management of Medications for
Adult Inmates Continue to Require
Significant Improvements
Audit Highlights . . .
REPORT NUMBER 2001-012, JANUARY 2002
Our review of the State’s
Department of General Services’ response as of January 2003
drug and medical supply
procurement practices reveals: and Department of Corrections’ response as of December 2002
þ Annual expenditures for Chapter 127, Statutes of 2000, required the Bureau of
the five agencies most State Audits (bureau) to report to the Legislature on the
frequently purchasing
trends in state costs for the procurement of drugs and
drugs increased by an
medical supplies for offenders in state custody and to assess the
average of 34 percent per
year between fiscal years major factors affecting those trends. The statutes also required
1996–97 and 2000–01. the bureau to summarize the steps that the Department of
þ The Department of Corrections (Corrections), the Department of General Services
General Services has (General Services), and other appropriate state agencies have
explored a variety of taken to improve drug and medical supply procurement and
options, but it has not
to comply with prior bureau recommendations relating to
gone far enough in
necessary reforms to improve the procurement of drugs.
improving the State’s
drug procurement process.
Moreover, the State needs In fiscal year 1996–97 state agencies purchased $41.6 million
a statewide process
in drugs, but in fiscal year 2000–01 their purchases rose to
for contracting for
medical supplies. $135.1 million, which represents an annual average increase of
34.3 percent for this five-year period. During the same period
þ The Department of
state agencies’ expenditures for medical supplies rose from
Corrections’ (Corrections)
$11.1 million to $14.2 million, which represents roughly a
Health Care Services
Division continues to have 27 percent increase.
significant weaknesses
that prevent it from
Restrictions in state and federal law prevent human
effectively monitoring its
pharmacies’ purchases of immunodeficiency virus-positive inmates in federal and state
drugs, such as: prisons, such as Corrections’, from benefiting from the State’s
AIDS Drug Assistance Program. Further, Corrections may not use
• As of November 2001
it had not updated the federal supply schedule, which by federal law places limits
its formulary nor on the prices of drugs that the federal Department of Veterans
monitored compliance
Affairs, the Department of Defense, the Public Health Service,
with the existing one.
and the Coast Guard purchase because it is not affiliated with
• It lacks a utilization one of these eligible federal agencies.
management program
that can assist in
However, we found that General Services and other state
reducing costs.
agencies such as Corrections could do more to control the State’s
drug and medical supply expenditures. Specifically, we found:
California State Auditor Report 2004-406 289
• Its pharmacy staff do not regularly review monthly reports to
understand if purchases are cost-effective.
• Its pharmacy prescription tracking system cannot support
monitoring, cost-containment efforts, or day-to-day manage-
ment of pharmacy services.
• Corrections does not plan to replace this system until
November 2006, and development of the new system is
already behind schedule.
• Finally, we found that Corrections is not eligible for some
options, such as the AIDS Drug Assistance Program and the
federal supply schedule.
Finding #1: General Services needs to do more to identify the
best option for reducing drug costs.
General Services has not been successful in securing more
individual contracts with drug manufacturers for more drugs
at less-than-wholesale acquisition cost, the standard price a
wholesaler pays a manufacturer for drug products not including
special deals, such as rebates or discounts. Further, General
Services recently contracted with the Massachusetts Alliance
for State Pharmaceutical Buying but failed to fully analyze
other options, such as contracting with Minnesota Multistate
Contracting Alliance for Pharmacy (MMCAP) or directly with a
group-purchasing organization, before doing so. This action may
have prevented the State from achieving greater future savings.
General Services should increase efforts to solicit bids from
drug manufacturers so that it can obtain more drug prices on
contract. Further, General Services should fully analyze measures
to improve its procurement process, such as joining MMCAP or
contracting directly with a group-purchasing organization.
General Services’ Action: Partial corrective action taken.
General Services reported that it has awarded two-year
contracts covering 321 line items, primarily generic drugs,
which went into effect on November 1, 2002. Further, based
on analysis of the bids it received, General Services identified
an additional 140 drug line items for inclusion in its contract
with the Massachusetts Alliance for State Pharmaceutical
Buying (Massachusetts Alliance). In January 2003 General
Services received statutory authority to enter into contracts
290 California State Auditor Report 2004-406 California State Auditor Report 2004-406 291
in a bid or negotiated basis with manufacturers and suppliers
of single-source or multi-source drugs, which it believes allows
it to explore additional strategies for managing drug costs.
General Services also reported that it was conducting
a detailed review of the effectiveness of using the
Massachusetts Alliance. General Services stated that as part
of its review it surveyed a number of group-purchasing
organizations and compared the advantages of using other
group-purchasing organizations with its current relationship
with the Massachusetts Alliance. General Services told us
that its current agreement produced the greatest savings,
which it estimated at roughly $5.9 million annually. General
Services stated that it is committed to continually evaluating
other approaches and is working with MMCAP to analyze
drug procurement data.
Finding #2: Although General Services is spearheading efforts
to develop a statewide drug formulary, it has not ensured
that state agencies will be able to enforce the formulary.
A drug formulary is a listing of drugs and other information
representing the clinical judgment of physicians, pharmacists,
and other experts in the diagnosis and treatment of specific
conditions. One of the main purposes of a formulary is to create
competition among manufacturers of similar drugs when the
clinical uses are roughly equal. The success of a statewide formulary
and the State’s ability to create enough competition to negotiate
lower drug prices for certain products depend on how well state
agencies adhere to the statewide formulary when they prescribe
drugs. Currently, Corrections, which was responsible for roughly
68 percent of the State’s drug purchases in fiscal year 2000–01,
has an outdated formulary and lacks sufficient data to perform
reviews that can identify prescribing patterns. Agencies that help
develop but do not adhere to strict guidelines for enforcing the
formulary would negate the State’s effort.
Therefore, General Services should fully consider, and attempt
to mitigate, all obstacles that could prevent the successful
development of a statewide formulary.
290 California State Auditor Report 2004-406 California State Auditor Report 2004-406 291
General Services’ Action: Partial corrective action taken.
General Services has formed a Pharmacy Advisory Board
(board) to assist in its implementation and administration of
a statewide pharmaceutical and medical supply program. The
board held one meeting in September 2002 and plans to hold
its next meeting in early 2003. General Services’ Common
Drug Formulary Committee, which is a subcommittee of the
board, has received approval to begin contract negotiations
for a number of proprietary drugs that were recommended
for inclusion on the State’s common drug formulary listing.
Finding #3: The State lacks statewide agreements for
purchasing medical supplies.
Often state agencies are not aware of what their institutions are
purchasing and how much they are paying for medical supplies.
Typically, each state agency or individual institution generally
procures its own medical supplies. Currently, General Services
has only two medical supply contracts and is unaware of what
medical supplies the agencies use and what they pay for them.
However, it believes that having a medical supply catalog would
aid state agencies in obtaining these supplies.
General Services should ask state agencies to determine their
needs and then consider contracting for a medical supply
catalog to maximize the State’s buying power.
General Services’ Action: Partial corrective action taken.
General Services has formed a Medical and Surgical Supply
subcommittee to focus on the needs of state and local
government entities. General Services reported that it is
developing a request for proposal for the medical and surgical
supply program, which it expects to release in early 2003.
Finding #4: Corrections’ Health Care Services Division
(Health Care Services) lacks an effective system for
controlling drug purchases.
Despite the recommendation in our January 2000 report
to update its departmental formulary and use it to control
which drugs medical professionals can prescribe routinely,
as of November 2001, Corrections’ Health Care Services
still had not done so. Further, Health Care Services does not
monitor its pharmacies’ noncontract purchases from the
292 California State Auditor Report 2004-406 California State Auditor Report 2004-406 293
State’s prime vendor and cannot substantiate the reasons
they are choosing to purchase potentially more expensive
noncontract drugs. Until Health Care Services addresses
significant deficiencies, neither an external or internal
pharmacy benefits manager can accomplish the task of
improving its contracting and procurement for drugs.
As we previously recommended, Health Care Services should
update its formulary and ensure that headquarters and prison
staff monitor compliance with the formulary. Further, Corrections
should ensure that prisons receive monthly contract compliance
reports from the prime vendor and use them to monitor
noncontract purchases. Finally, Corrections should await
the results of its consultant’s report and identify those
recommendations that will be beneficial to the program.
Only then should it decide whether to hire an internal or
external pharmacy manager to assist in resolving its pharmacy
operations deficiencies.
Corrections’ Action: Partial corrective action taken.
Corrections reported that it had revised its formulary and
planned to distribute it in early 2003. It also plans to hold
trainings on this formulary and on the use of reports it
receives from the prime vendor to monitor noncontract
purchases. Corrections also reported that it received its
consultant’s report and identified the recommendations
beneficial to the pharmacy program, such as the creation
of a Pharmacy Services Unit at its headquarters. However,
although it has identified the resources necessary to
implement the recommendations, Corrections reported that
it is still in the process of filling the position of pharmacy
services manager for that unit.
Finding #5: Health Care Services did not always meet criteria
for using mail-order pharmacy services.
Although Corrections obtained approval from General Services
to use mail-order pharmacy services in prisons when pharmacist
vacancy rates rise to more than 50 percent, it did not demonstrate
that the use of mail-order pharmacy services was necessary.
Specifically, we cannot substantiate Corrections’ shortage of
pharmacists and thus its need for mail-order pharmacy services
because Health Care Services lacks sufficient information
about its use of registry employees. A registry service provides
292 California State Auditor Report 2004-406 California State Auditor Report 2004-406 293
pharmacists who can fill in for long- or short-term staffing
needs resulting from vacancies, illnesses, or exceptional
workload conditions.
Further, Corrections still has not addressed our previous
recommendation that it consider whether it has appropriately
divided responsibilities between its pharmacists and pharmacy
technicians. This analysis could indicate that Corrections
may be able to allow pharmacy technicians to assume more
responsibilities so that it can lower the number of pharmacists
necessary to run its pharmacies.
Corrections should take the necessary steps to substantiate its
position that a shortage of pharmacists exists. Additionally,
it should analyze whether it has the appropriate division
of responsibilities between its pharmacists and pharmacy
technicians. If it is able to substantiate that a pharmacy shortage
exists and General Services approves another contract for mail-
order pharmacy services, Health Care Services should ensure that
prisons meet the contract conditions before beginning to use
these services and monthly thereafter.
Corrections’ Action: Partial corrective action taken.
Corrections reported that it has gathered and reviewed data
related to pharmacists, pharmacy technicians, the number
of satellite pharmacies, and its use of registry pharmacists
to evaluate the extent of a pharmacist shortage. However,
Corrections told us that it is unable to determine the
appropriateness of the staffing ratios until it decides on
which consultant recommendations it will implement.
Finding #6: Although its prescription tracking system
is inadequate, Corrections has made little progress in
implementing a new system.
Corrections has been trying to replace its prescription tracking
system and other health care information technology systems
since 1991 without significant progress. Currently, it is
behind schedule on its plans to implement a new health care
management system by November 2006 as part of its Strategic
Offender Management System and is not considering an
automated pharmacy system in the interim.
294 California State Auditor Report 2004-406 California State Auditor Report 2004-406 295
Corrections should accelerate the acquisition and implementation
of the Strategic Offender Management System and its new health
care management component.
Corrections’ Action: Partial corrective action taken.
Corrections reported that its implementation of the new
system depends on infrastructure and resources. However,
Corrections also reported that it has completed a feasibility
study report, as an interim solution, to procure an existing
pharmacy management software package for its local
institutions and headquarters. Corrections told us that the
report is being reviewed by the Department of Finance.
Finding #7: Corrections made significant errors in attempting
to streamline its drug dispensing process.
Corrections neither sought the necessary approvals to contract
with the vendor of an automated drug delivery system nor
ensured that it uses the system in accordance with state law. The
California State Prison, Sacramento’s, entering a limited-time
agreement to obtain two machines for $4,999.99 appears to be
a circumvention of the State’s requirement of securing at least
three competitive bids for each contract of $5,000 or more.
Corrections also failed to consider thoroughly the legal
ramifications of using an automated drug delivery system. To
control misuse, state law allows the removal of drugs from these
machines in only one of three circumstances: (1) to provide
drugs for a new prescription order, (2) to provide drugs in an
emergency, or (3) to provide drugs that the medical practitioner
has prescribed for an inmate to take as the need arises.
Corrections contends that it is using the system appropriately,
since the law pertains only to skilled nursing or intermediate
care facilities. However, our attorney’s analysis of the law is
that Corrections’ authority to use these machines in health
care facilities in its prisons is unclear. Specifically, although
the legislative history of Senate Bill 1606 indicates that the
Legislature had skilled nursing and intermediate care facilities
in mind when drafting it, the state law setting forth the
circumstances in which automated drug delivery machines may
be used refers to “facilities” in a generic sense and not merely
skilled nursing and intermediate care facilities.
294 California State Auditor Report 2004-406 California State Auditor Report 2004-406 295
Corrections should cease using its automated drug delivery
system until it secures a contract in accordance with the State’s
public contracting laws. Further, Corrections should seek an
opinion from the attorney general to support its current use of
the machines.
Corrections’ Action: Partial corrective action taken.
Corrections reported that it received approval on a contract for
the automated drug delivery machines on December 24, 2001.
However, Corrections has chosen not to seek an opinion from
the attorney general because it does not believe that Health and
Safety Code, sections 1261.5 and 1261.6, apply to its pharmacies.
296 California State Auditor Report 2004-406
DEPARTMENT OF HEALTH SERVICES
It Needs to Significantly Improve Its
Management of the Medi-Cal Provider
Enrollment Process
REPORT NUMBER 2001-129, MAY 2002
Department of Health Services’ response as of April 2003
The state Department of Health Services (department)
administers California’s Medicaid program, referred to as
Medi-Cal, which accounts for almost $27 billion in annual
Audit Highlights . . . expenditures. A provider must obtain a valid Medi-Cal provider
number in order to bill the Medi-Cal program for services
Our review of the Department
provided to an eligible Medi-Cal beneficiary. The department’s
of Health Services’ Provider
Provider Enrollment Branch (branch) is responsible for reviewing
Enrollment Branch’s
management of the Medi-Cal applications for providers such as physicians, physician groups,
provider enrollment process pharmacies, and clinical laboratories. The branch received
revealed that:
more than 27,000 applications between February 14, 2001, and
þ It lacks reliable data January 31, 2002.
to determine the size of
its backlog.
The Joint Legislative Audit Committee requested that we
þ It could not substantiate examine the process used by the department for enrolling
its decisions to designate Medi-Cal providers. Our audit concluded that until the branch
certain providers as being addresses certain deficiencies, it would continue to have
at high risk for fraud.
difficulty meeting its regulatory timelines, securing additional
þ It did not always review staff, and effectively managing its operations. Specifically:
disclosure statements
required by the federal
Health and Human Services Finding #1: The branch cannot determine the number of
Agency, aimed at identifying
applications remaining to be processed.
applicants with a history of
defrauding or abusing the The branch does not know how many of the roughly 27,000
Medicaid system.
applications it received between February 14, 2001, and
þ It will continue to have January 31, 2002, have been approved, denied, or remain
difficulty effectively to be processed. In February 2001, the branch instituted a
managing its operations
new database—the Provider Enrollment Tracking System
until it develops a
(PETS)—which can provide such information. However, branch
strategic plan and fully
implements its data management is unable to use PETS to provide management
tracking system. reports that will allow it to determine the number of
applications awaiting final disposition because staff have not
always entered data into the database consistently. Although
California State Auditor Report 2004-406 297
the branch had devoted time and resources to develop PETS
and train staff, we found no evidence that the branch has
implemented a procedure to review periodically the data that
staff input into PETS. Because staff do not enter data into
PETS consistently, the branch can neither effectively track the
applications it processes nor use the reports PETS is capable of
producing to identify its backlog and manage its operations.
We recommended that to improve the management of the
Medi-Cal provider enrollment process, the branch should use
PETS more effectively to track how long an application has
been in a certain step of the enrollment process, making sure
that notification is sent to the applicant at proper intervals;
and modify PETS so it can track the status of high- or low-risk
provider types and determine whether the average processing
times vary. The branch also should identify all applications that,
according to PETS, are still in progress, determine their actual
status, and update PETS, if necessary. Further, the branch should
review PETS-generated reports at least monthly and perform
analyses to determine whether staff are entering data accurately
and consistently. Finally, it should fully use the capabilities of
PETS for developing reports on a variety of productivity indicators,
including, for example, aging reports and reports showing the
number of applications approved, denied, and in progress.
Department Action: Corrective action taken.
In its one-year response dated April 23, 2003, the department
stated that PETS is now used to determine the length of
time an application is in progress, track the status of high-
and low-risk provider types, and determine the average
processing time for both. Additionally, in order to conform
to the timeframes required by the enrollment regulations,
PETS now generates several reports for department staff to
use to track the progress and status of pending applications.
Further, PETS has been modified to allow staff to track those
applications that are resubmitted within 35 days, because
when initially submitted the applications were not complete.
At the end of December 2002, the department completed
the establishment of additional edits in the PETS database
to ensure data entered is valid. The branch will continue to
monitor and review reports produced by PETS and add edits
to meet program report needs as required.
298 California State Auditor Report 2004-406 California State Auditor Report 2004-406 299
Finding #2: The branch does not ensure that it reviews
applications within 180 days.
Although PETS cannot provide meaningful information for
those applications that are pending branch action, it does
show that the branch frequently took more than 180 days
to process some applications. We found that the data was
reliable when branch staff entered both the receipt and
completion date. In addition to not consistently tracking the
applications it processes internally, the branch also does not
monitor applications it refers to the department’s Audits and
Investigations (A&I) unit for on-site reviews. The branch does
not use PETS to establish or track dates indicating when it
should receive a response back from A&I so that it can meet its
regulatory deadlines.
We recommended that to improve its monitoring of referrals, the
branch should use PETS to track applications it refers to A&I. Also,
the branch should work closely with A&I to monitor the status of
its referrals to ensure that the total review time for applications
does not exceed regulatory requirements. In addition, the
department should establish policies and procedures for the
branch and A&I to coordinate their review processes so it is able
to meet regulatory requirements and ensure that A&I implements
its new case-tracking system by late 2002.
Department Action: Corrective action taken.
The department reported that, in addition to having the
data in PETS, the branch entered all of its referrals directly
into A&I case-tracking system, which was implemented in
October 2002. The department also stated that branch staff
have been trained to use the system and have direct access to
check the status of pending referrals.
Finding #3: The branch could not substantiate its decisions to
designate certain providers as high- or low-risk.
The branch’s objective is to prevent providers with fraudulent
intent from participating in the Medi-Cal program. Consequently,
it is reasonable that the branch should use relevant and available
information to identify those provider types that pose a greater
risk of fraud. Further, the branch should document these
decisions and review them periodically to ensure that they are
still relevant. However, the branch could not substantiate how it
determines the risk that it assigns to certain provider types, nor
does it reevaluate its risk assessment periodically.
298 California State Auditor Report 2004-406 California State Auditor Report 2004-406 299
We recommended that the branch periodically perform an
analysis to justify its existing risk assessments for high- and
low-risk provider types and submit its analysis for department
approval. Upon approval of the analysis, the branch should
issue a policy memo to staff. Further, the department should
formalize its process for determining which provider types
should be subject to increased scrutiny and when, based upon
the most recent anti-fraud trend information available.
Department Action: Partial corrective action taken.
The department stated that informally it continually evaluates
risk assessments for effectiveness and applicability. The
department told us that it will continue to work with its
partners to identify and evaluate risk indicators and trends. If
any significant changes in current assessments of high- and
low-risk providers are proposed, formal documentation will
occur. Also, A&I and the branch have established monthly
meetings with the first meeting occurring in December 2002,
to address anti-fraud issues and to review all provider types
that need closer scrutiny.
Finding #4: The branch needs to rectify its poor decision
to cease reviewing certain provider disclosure statements,
which exposes the State to loss of federal funds.
Although both state and federal regulations require applicants
or providers to submit disclosure statements with their
applications, in its effort to reduce its backlog, the branch
inappropriately stopped reviewing disclosure statements for
certain applicants or providers. Specifically, the branch did not
review all disclosure statements received between October 2000
and September 2001 for physician and allied group applicants or
providers. As a result, the branch increased the risk of enrolling
providers who may have disclosed questionable financial
relationships or a past history of fraud, abuse, or criminal
convictions relating to other Medicare or Medicaid programs.
We recommended that the branch identify all physician providers
who were enrolled between October 2000 and September 2001
and review their disclosure statements in accordance with federal
requirements. The branch should direct staff to continue to
review disclosure statements for all providers.
300 California State Auditor Report 2004-406 California State Auditor Report 2004-406 301
Department Action: Partial corrective action taken.
The department reported that it plans to implement this
recommendation on a flow basis. Specifically, as the branch
receives requests or inquiries from providers who enrolled
between October 2000 and September 2001, staff will review
the initial application. If the initial application does not include
a disclosure statement, one will be requested and reviewed.
Finding #5: Reenrollment of existing providers could
strengthen the Medi-Cal enrollment process.
To strengthen the enrollment process and weed out potentially
fraudulent providers, the branch should expand its efforts to
reenroll existing providers. In August 1999, the department
began to reenroll certain provider types identified as problematic.
The branch is continuing its efforts to reenroll durable medical
equipment and non-emergency medical transportation providers.
However, due to the increase in workload resulting from its
reenrollment efforts, the branch has postponed its reenrollment
of independent pharmacies until summer 2002.
We recommended that the branch complete its current
reenrollment efforts and consider expanding these efforts to
include all provider types to ensure provider integrity in the
Medi-Cal program.
Department Action: Partial corrective action taken.
The department told us that its reenrollment efforts for
durable medical equipment, orthotics and prosthetics,
and non-emergency medical transportation providers is
substantially complete. The department received approval to
create a reenrollment section in fiscal year 2002–03. Initial
mailings to reenroll pharmacy and physician providers were
sent in February 2003 and as of March 2003 the branch had
notified approximately 1,000 of these providers and was
awaiting either responses or application packages.
Finding #6: A strategic plan would help the branch address
its performance deficiencies.
The branch has addressed only a few of the essential elements of
strategic planning such as defining its mission and establishing
its top priorities. However, the branch has not described the
300 California State Auditor Report 2004-406 California State Auditor Report 2004-406 301
actions necessary to achieve its top priorities. For example,
the branch states that it will reduce the backlog of physician
applications, but does not address critical questions relevant
to doing so, such as how it will determine the number of
applications in progress and whether it has sufficient staff.
We recommended that the branch develop a strategic plan to
identify key responsibilities and establish priorities. This plan
should clearly describe how the organization would address
its many short- and long-term responsibilities, particularly
those that we observed it has not sufficiently accomplished.
In addition, the branch should conduct a study to determine
how long it takes staff, on average, to process applications for
the various provider types. Using results from the study and
accurate workload standards, the branch should assess whether
it has the appropriate staffing levels.
Branch Action: Corrective action taken.
The branch reports that it has developed a strategic plan,
which is currently in place.
Finding #7: The department did not adhere to state hiring
practices in its efforts to seek additional resources for the branch.
Although state laws establish the standards to use in contracting
for personal services, the department did not follow these
standards when attempting to secure employees to assist the
branch with processing provider enrollment applications.
Specifically, the department had not obtained approval to use
up to 10 contractor staff to assist the branch during the period
of July 2001 through January 2002, but had incurred costs of
roughly $490,000. Also, the department may not have met the
State’s standards for using personal services contracts when it
hired student assistants through contracts with the California
State University Sacramento Foundation (foundation). Between
March 1, 2001, and January 31, 2002, the branch incurred costs
of more than $138,000 in salaries, employment taxes, and fees
to reimburse the foundation for the 22 student assistants it
hired. However, the department did not prepare an analysis to
demonstrate that contracting with the foundation could result
in actual overall cost savings to the State.
302 California State Auditor Report 2004-406 California State Auditor Report 2004-406 303
We recommended that the department should discontinue its
use of contractor staff to assist the branch in processing provider
enrollment applications. It should also ensure that it adheres to
state standards for using personal services contracts when hiring
employees such as student assistants.
Department Action: Corrective action taken.
The department stated it discontinued its use of contractor
staff effective May 31, 2002. Further, the department
contends that it does adhere to state standards for using
personal service contracts when hiring employees such as
student assistants and will continue to do so.
302 California State Auditor Report 2004-406 California State Auditor Report 2004-406 303
304 California State Auditor Report 2004-406
DEPARTMENT OF MANAGED
HEALTH CARE
Assessments for Specialized and Full-
Service HMOs Do Not Reflect Its Workload
and Have Disparate Financial Impacts
REPORT NUMBER 2001-126, MAY 2002
Audit Highlights . . .
Department of Managed Health Care’s response as of
Our review of the assessment May 2003
structure of the Department
of Managed Health Care The Joint Legislative Audit Committee requested that we
found that:
review the assessment mechanism used to generate funds
þ The portion of assessments for the Department of Managed Health Care (department)
charged to specialized
to determine whether the assessments paid by different classes
health maintenance
of health maintenance organizations (HMOs) reflect the level of
organizations (HMOs),
at 48 percent, exceeds the regulatory activity related to them. It also asked us to propose
22 percent of identifiable alternative assessment structures, if necessary, that would more
workload attributable to
closely reflect the level of regulatory costs and ensure adequate
specialized HMOs.
funding to meet the department’s statutory responsibilities.
þ The current assessment
structure results in disparate
financial impacts with Finding #1: The annual assessments paid by two classes
specialized HMOs charged
of HMOs—specialized and full-service—are not
about nine times more per
distributed equitably.
dollar of premiums than
full-service HMOs.
The percentage of the total assessment that the department charges
þ Alternative methods could to specialized and full-service HMOs does not match the level
better align assessments of effort the department devotes to these two classes of HMOs.
with workload and
Although assessments for specialized HMOs amount to 48 percent
reduce disparities in
of total assessments, only 22 percent of the department’s work
financial impact.
that is identifiable by HMO class is attributable to them.
In addition, our review of six
core operating units found that:
In addition, the financial impact of the assessment on HMOs, as
þ Four units are meeting represented by the percentage of their premiums that the HMOs
deadlines and/or have are charged for assessments, varied widely between the different
greatly expanded services.
classes of HMOs. Specifically, the assessments the department
þ Two units, Financial billed to full-service HMOs amounted to about 0.04 percent of
Oversight and Licensing, their premiums on average, while those for specialized HMOs
are often late issuing
amounted to about 0.37 percent on average, or about nine times
financial examination
more per premium dollar.
reports and sending written
notifications to HMOs
regarding material changes
in health care plans.
California State Auditor Report 2004-406 305
We developed four alternative assessment methodologies and
found that two would both better reflect actual workload and
reduce the disparity in financial impacts. Assessments under
these two methods are based in whole or in part on the split
in identifiable workload between specialized and full-service
HMOs, and on total premiums received by individual HMOs.
We recommended that the Legislature consider changing the
department’s assessment structure to reflect the proportion of the
documented workload that the department devotes to specialized
and full-service HMOs and to reduce disparities in the financial
effect on HMOs. We also recommended that the Legislature require
the department to report to it triennially on the proportion of
assessments charged to each class of HMO and the proportion of
the documented workload related to each class of HMO.
Legislative Action: Legislation passed.
In May 2003, the governor approved legislation requiring full-
service HMOs to pay for a larger share of the department’s costs.
Effective July 1, 2003, full-service HMOs will be required to pay
65 percent of the department’s costs, not covered by other fees
and reimbursements. Current law has no provision requiring
the department to report triennially to the Legislature on the
proportion of assessments charged to or the proportion of
documented workload related to each class of HMO.
Finding #2: The department is generally effective in meeting
deadlines, but it must improve the timeliness of financial
examinations and its responses to requested plan changes.
The department has increased the output for some of its
core functions, has introduced several new services for HMO
enrollees, and is generally better at meeting deadlines when
compared to the same functions previously carried out by the
Department of Corporations (Corporations). For example, in
the first half of fiscal year 2001–02, the department’s Division of
Plan Surveys completed 20 routine medical surveys (surveys) and
ended calendar year 2001 with only four backlogged surveys. In
contrast, Corporations had an output of seven surveys in the
first half of fiscal year 1998–99 and 40 backlogged surveys at
the end of calendar year 1998.
On the other hand, the department’s Division of Financial Oversight
is having difficulty completing financial examinations on time.
Its backlog of 13 examinations at the end of calendar year 2001
306 California State Auditor Report 2004-406 California State Auditor Report 2004-406 307
compares unfavorably to the backlog of two examinations that
Corporations experienced at the end of calendar year 1998. The
Division of Financial Oversight has seen a large increase in its
routine workload which, combined with staff vacancies and an
increase in nonroutine work, contributed to the backlog. When the
department does not complete financial examinations on time, the
public is not fully informed of the financial status of HMOs.
In addition, the department’s Division of Licensing has often
failed to promptly notify HMOs of its decision regarding the
HMO’s requests to make significant changes, known as material
modifications, to health plans. It was late in sending written
notifications for 42 of the 122 material modification filings it
received in 2001. According to department staff, workload issues
may have been a factor contributing to late notifications. In
addition, the Division of Licensing had no reliable means of
tracking the status of its workload, and limitations in its manual
processes made it difficult to ensure that statutory turnaround
requirements were met. When the department does not notify
HMOs of delays in approving their requests for changes, they are
not able to respond to department concerns, resulting in delays
in changes that the HMOs believe are necessary and significant.
We recommended that the department establish deadlines for
the publishing of financial examination reports and closely
monitor the success of its efforts to meet deadlines for these
reports. In addition, we recommended that the department
closely monitor the time elapsed between its receipt of requests
for material modifications and the notifications it sends to
HMOs, and make it a priority to send written notifications
within the statutory deadline.
Department Action: Corrective action taken.
The department says it now includes target preliminary
report and final report dates on its examination schedule
and is making all reasonable efforts to remain compliant
with statutory deadlines. It believes no examination reports
are currently out of compliance with statutory deadlines.
The department says that it has also taken steps to ensure
that health plans are promptly notified of the status of their
material modifications. Its attorneys are required to issue
within the statutory 20-business-day period either (1) an
order of approval, denial, or postponement or (2) a deficiency
306 California State Auditor Report 2004-406 California State Auditor Report 2004-406 307
letter, upon receipt of a written request from an HMO to
extend the statutory period. The department says that
through the third quarter of fiscal year 2002–03, with three
exceptions, it issued orders of postponement or extensions
for all material modifications it had not approved or denied
within the statutory deadline.
308 California State Auditor Report 2004-406
DEPARTMENT OF REHABILITATION
Its Delay in Correcting Known Weaknesses
Has Limited the Success of the Business
Enterprise Program for the Blind
REPORT NUMBER 2002-031, SEPTEMBER 2002
Audit Highlights . . .
Department of Rehabilitation’s response as of September 2003
Our review of the Department
of Rehabilitation’s (department) The California Welfare and Institutions Code, Section 19640.5,
administration of the Business
requires the Bureau of State Audits to conduct a fiscal
Enterprise Program for the
audit of the Business Enterprise Program for the Blind
Blind (program) reveals that:
(program) every third fiscal year until January 2002 and a
þ Program participants’ programmatic review every five years until January 2003. This
(operators) average net
programmatic review is the last of the series of reviews required
income has increased,
but 30 percent of them by the statute. The program trains qualified blind persons to
still earned less than the operate their own food-service businesses and provides them
minimum wage in fiscal
with food service facilities located in government buildings
year 2000–01.
throughout the State. Specifically, we found:
þ In May 2002 the
department completed
its first strategic plan Finding #1: The department only recently provided strategic
for the program; direction to its staff and participants.
however, the plan lacks
defined outcomes and In May 2002, in conjunction with the California Vendor’s Policy
performance measures.
Committee, the Department of Rehabilitation (department)
þ Although the department issued its first strategic plan for the program. The department’s
has been working for previous lack of action to establish strategic priorities for
more than seven years to the program, identify expected outcomes, or offer methods
update its regulations, it
to measure improvement hampered the program’s ability to
has yet to do so.
fulfill its mission and to address deficiencies in its operations
þ The department has not that various audits identified as early as 1991. The plan does not
ensured that partnerships
reflect decisions regarding the prioritization of scarce resources,
between operators and
show which areas the department believes the program needs
private food-service
businesses are consistent to improve the most, or provide any mechanism for the
with federal law and program to use to determine what level of resources to expend
pay their fair share of
to attain planned objectives. Moreover, the current plan does
program costs.
not identify expected outcomes or offer performance measures
continued on next page
or benchmarks. Consequently, the department might dedicate
resources to an area but never be able to determine if the
program has reached—or is moving toward—a stated goal.
California State Auditor Report 2004-406 309
þ Since August 1998 the We recommended that the department, in consultation with the
program has not actively California Vendor’s Policy Committee, should revise the program’s
pursued the collection
strategic plan to include expected outcomes and performance
of past-due vending
measures so the department can evaluate the program’s success
machine commissions
from private companies. and measure its progress in achieving strategic goals and improving
noted deficiencies.
þ The program does not
adequately monitor
operators or provide
Department Action: Corrective action taken.
them with all required
consulting services. In its September 2003 response to our audit, the department
reported that in consultation with the California Vendor’s
Policy Committee, it revised the program’s strategic plan to
include expected outcomes and performance measures.
Finding #2: The department has not updated its guidelines
for administration of the program.
The department lacks guidance the program needs for sound
administration. The program has neither updated its regulations
nor provided updated policies for program administration to its
staff. The lack of clear guidance may lead to disparate service
delivery and compromise the program’s success. State law and
regulations require that every three years the department review
and consider updating its regulations for the administration of
the program. However, the department has been working for at
least seven years to update the regulations. Because of this delay
and the program’s reliance on a 1994 policy and procedures
manual that is outdated in some areas and provides insufficient
guidance in others, the program has lacked clear guidelines on
how it should operate. The program has not provided sufficient
guidelines in its purchase of equipment and establishment of
private partnerships. As a result, the department cannot ensure
that the purchase of equipment is consistent among locations
and that its private partnerships conform to federal law and
its own mission statement. The department attributes its
delay in updating its regulations on staff vacancies and on the
magnitude and importance of the task; however, we found the
department’s reasons for not being able to establish guidelines to
be unfounded. The department is currently developing a new
draft of the proposed regulations, but it has not established
timetables or deadlines to manage the process. The department
intends to revise its policy and procedures manual to coincide
with the new regulations once they are adopted.
310 California State Auditor Report 2004-406 California State Auditor Report 2004-406 311
We recommended that the department should aggressively and
promptly pursue development of program regulations. If the
current draft is too complex or lengthy, the program should
consider breaking the draft regulations into segments, first
identifying and addressing the highest priorities. The department
should ensure that the guidelines include measures that will
improve consistency in equipment purchase decisions, including
a list of allowed and disallowed equipment and supplies, and
statewide criteria for equipment purchase and replacement.
Department Action: Pending.
The department has not yet updated its regulations.
However, it reported that it has drafted proposed regulations
and plans to divide the proposed regulations into separate
parts for submitting through the regulatory process based
on program priorities. At the time of its September 2003
response, the department expected to finish dividing and
prioritizing its proposed regulations in September 2003, and
then to proceed with those regulatory changes it deemed
are the highest priority. The department offered no expected
timetable for completing the approval process of any of its
proposed regulations.
Ü
The department disagrees with our finding that it lacks
sufficient guidelines to ensure that staff members use
the same standards or information to decide whether
equipment purchases are warranted. The department
reported that it believes its current system provides
consistency and flexibility.
Finding #3: By allowing operator partnerships with private
businesses, the program has collected inequitable operator
fees and may not have complied with federal law.
By encouraging private partnership agreements between
blind operators and private food service businesses, the
department recently has allowed the private businesses to
obtain program benefits that federal law intended for blind
operators. Under a private partnership agreement, a contract
between a program participant and a private food service
business, the private business pays the program participant a
monthly amount and in exchange is allowed to prepare and
sell food at a program site in a state or federal building and to
receive other program benefits such as consulting services and
equipment maintenance.
310 California State Auditor Report 2004-406 California State Auditor Report 2004-406 311
We found numerous problems with the program’s administration
of its private partnership agreements. Specifically, it has not
adequately ensured that its actions conform to the intent of
the federal Randolph-Sheppard Act under which the program
was created. Moreover, because it has not developed guidelines
on when or how to implement the partnerships, it cannot be
sure that the partnerships are allowable, prudent, or consistent
or that they protect the interests of the State or the program
participants. Because of the terms of the partnerships, the
department has lost its ability to monitor the investment of
program funds in these locations in the same way that it can
monitor the use of program funds at other locations, and it
has not obtained enough information from the partnerships
to determine if they are successful business ventures. Further,
although the program generally provides the same services to
private partnerships that it would to other program participants,
it allows some partnerships to pay disproportionately lower fees
than other program participants pay.
To improve its administration of private partnerships, we
recommended that the department take the following steps:
• Establish and follow guidelines for partnerships, ensuring that
they are in agreement with federal and state law, regulations,
and guidance.
• Require program staff to further study the cost and benefit
of each partnership to ensure that future agreements do not
inequitably drain program resources.
• Establish a review process for proposed private partnerships
that allow the department to adequately protect the interests
of the State and program participants.
• Monitor partnerships to enable the department to compare
the costs and benefits of partnerships and determine if they
achieve program objectives.
• Ensure that program staff are able to monitor the success of all
locations, including private partnerships.
312 California State Auditor Report 2004-406 California State Auditor Report 2004-406 313
Department Action: Pending.
The department reported that its proposed regulations
address agreements between program participants and
private entities and it reported that, in consultation with
the California Vendors’ Policy Committee, it will establish
guidelines to ensure compliance with federal and state
law, regulations, and guidance. However, the department
did not provide us with an estimate of when these
Ü proposed regulations would be approved. At the time of
its September 2003 response, the department had yet to
determine what parts of its proposed regulations would be
submitted for approval through the regulatory process.
The department stated that it already evaluates the costs and
benefits of agreements between program participants and
private entities, but will review its evaluation process to ensure
that the review adequately protects program resources.
Ü
The department reported that it does not plan to establish
a review process for proposed partnerships. It believes its
current process adequately protects the interests of the State
and program participants.
The department also reported that it would review its
monitoring procedures to further its ability to compare
the costs and benefits of agreements and determine if they
achieve program objectives.
Further, the department reported that it will continue to
monitor the success of all locations.
Finding #4: The department has not corrected flaws in its
process for pursuing past-due commissions, some of which
may now be uncollectible.
Since August 1998 the department has not actively collected
past-due commissions owed to the program by private vending
machine businesses operating on federal and state properties.
The department’s lack of pursuit of these past-due commissions
may have rendered these commissions uncollectible. Moreover,
the department’s collection process is inadequate and its new
database cannot track past-due commissions. This problem has
been compounded because the department has not maintained
all its contracts, conducted planned audits, and appropriately
trained its collection staff.
312 California State Auditor Report 2004-406 California State Auditor Report 2004-406 313
We recommended that the department consider moving the
commission-collection function to its accounting section, which
already collects operator fees for the program and possesses
the necessary collection knowledge and accounts receivable
tracking system.
Department Action: Corrective action taken.
The department reported that it completed its evaluation
of its resources and feasibility of moving the commission-
collection function and has moved the commission-
collection function to the department’s specialized services
division. It also reported that it has added an additional staff
person to the commission-collection function and that it
continues to refine its database.
Finding #5: The department has not consistently met all of
its responsibilities to program participants as required by law
and its own regulations.
By not fulfilling all its responsibilities to program participants
in terms of training, feedback, and financial monitoring, the
department may have hindered the ability of participants
to succeed and engage in improved work opportunities.
Specifically, the department has not complied with state law
that requires it to provide the program’s initial training in two
locations, nor has it consistently provided upward mobility
training as required by federal law. Further, the department
has not always offered operators documented feedback that
might enable them to increase the success of their facilities even
though its own policies require that it give such feedback every
three months. Finally, the department has not ensured that
operators submit required financial reports and fees, and thus
cannot readily identify operators who may be having operating
difficulties and need assistance.
We recommended that the department offer program
participants a second training location and ensure that
it identifies and offers upward mobility training classes.
Further, the department should track location reviews to
ensure that business enterprise consultants complete the
reviews at least quarterly. We also recommended that the
department should ensure that consultants contact operators
regarding missing monthly operating reports when they are
a month or more delinquent as required by regulations, and
314 California State Auditor Report 2004-406 California State Auditor Report 2004-406 315
discontinue its practice of waiting 60 days before identifying
delinquent monthly operating reports. Finally, the department
should ensure that the program monitors operators adequately
to prevent the accumulation of significant past due fees and
lengthy delinquencies in reporting. When operators refuse
to submit financial reports as required by regulations, the
department should demonstrate it is willing to suspend and
terminate operators’ licenses to ensure compliance with
program requirements.
Department Action: Partial corrective action taken.
The department reported that it completed an evaluation of
the program’s entire training program to ensure it meets the
needs of program participants and the requirements of state
and federal laws and regulations. As a result, the department
has extended its annual licensing class for new participants,
which it continues to provide in one location, from six
months to eight months. It also reported that it will provide
additional training at field office locations via teleconference
or face-to-face for all its program participants at least annually.
The department reported that it had provided training in
four locations during 2003 and plans to provide training
opportunities for participants and staff in the northern and
southern part of the State at least once a year.
The department also reported that it has completed all required
quarterly location reviews in the last two quarters of fiscal year
2002–03 and expects to complete all quarterly location reviews
in fiscal year 2003–04. In addition, the department reported
that it established a tracking system to ensure that required
reviews are completed.
Further, the department reported that it reviewed its current
process for entering operating report data and determined that
it is the most cost-efficient method of entering the data. It
also reported that it strengthened its use of its tracking system
and emphasizes routine reporting and appropriate follow-up
of operator status. Finally, the department reported that it
will continue to pursue operators with delinquent reports and
unpaid fees consistent with its available resources and priorities.
314 California State Auditor Report 2004-406 California State Auditor Report 2004-406 315
Finding #6: The department has not corrected weaknesses in
its process for assigning interim locations.
In a previous report, issued in August 1997, we reported
that the department’s policy for classifying and circulating
announcements for available locations was inequitable because it
had not developed a fair process for assigning interim locations.
To date, the department still has not corrected this weakness.
To ensure that its application and selection process for locations
is equitable, we recommended that the department establish
procedures to circulate announcements for all permanent and
interim food service locations to eligible operators.
Department Action: Pending.
The department maintains that its established procedures
to circulate announcements for all permanent locations
and to select interim operators are appropriate and fair.
However, the department reported that it has re-evaluated
the procedures it uses to select interim operators and has
included procedures in the proposed regulations to ensure all
interested operators have equal opportunity to be considered
for interim locations.
316 California State Auditor Report 2004-406
DEPARTMENT OF HEALTH SERVICES
It Needs to Better Control the Pricing of
Durable Medical Equipment and Medical
Supplies and More Carefully Consider Its
Plans to Reduce Expenditures on These Items
Audit Highlights . . . REPORT NUMBER 2002-109, DECEMBER 2002
Department of Health Services’ response as of January 2004
Our review of the Department
of Health Services’ (department)
purchasing and contracting The Joint Legislative Audit Committee asked us to examine
practices for durable medical
the Department of Health Services’ (department)
equipment (DME) and medical
supplies under the California purchasing and contracting practices for durable medical
Medical Assistance Program equipment (DME) and medical supplies under the California
(Medi-Cal) revealed that:
Medical Assistance Program (Medi-Cal). We found that the
þ While the number department’s cost control procedures have been ineffective
of beneficiaries and in reining in spending for items with no maximum allowable
related expenditures are prices (unlisted items). In addition, the department has failed to
increasing, federal funding
ensure that it does not approve expenditures for unlisted DME
for Medi-Cal is likely to
decrease by $222 million items that should be charged under listed codes at a lower cost.
in fiscal year 2002–03. Further, the department has delayed price updates for its medical
supplies for an average of 15.5 years, and many of its product
þ The department’s cost
codes may be obsolete. Finally, the department’s inadequate
control procedures have
not prevented significant planning for two initiatives it believes will reduce its DME and
spending increases for medical supply costs may result in increased administrative costs
unlisted items—those with
and a failure to reduce expenditures.
no established maximum
allowable product
costs (MAPCs).
Finding #1: The department’s cost control procedures have
þ It has been more than been ineffective in reining in spending for unlisted items.
15 years on average
since the department last The department’s expenditures for unlisted DME and medical
updated the MAPCs for supplies have increased significantly over the past four years,
many medical supplies.
and its cost control procedures have done little to rein in these
þ The department’s expenditures. Specific areas our audit identified include:
inadequate planning for
two initiatives it believes
• The department’s payments for unlisted DME items accounted
will reduce its DME and
for most of the increases in expenditures for all DME. From
medical supply costs—
converting its medical 1998 through 2001, expenditures for unlisted DME increased
supply billing codes to by $34.3 million, or 89.4 percent. Similarly, the department’s
universal product numbers
expenditures for unlisted medical supplies increased, even
and negotiating contracts
with manufacturers—may though total medical supply expenditures have decreased in
undermine their success. recent years. In 2001, the department paid 11.1 percent less
California State Auditor Report 2004-406 317
for medical supplies with established maximum prices, but
27.5 percent more for medical supplies without such prices
than it did in 1998.
• Although state regulations require providers and manufacturers
to provide Medi-Cal with rates that do not exceed the price
they charge to the general public, in December 1997, the
department instructed its field office staff to discontinue
reviewing authorization requests for cost.
• Field office staff lack cost-comparison tools, such as functional
equivalence tables, that would allow them to compare
requested items to other items that perform the same essential
functions. Because they lack this information, the field
office staff must rely on their experience and judgment to
determine whether amounts are appropriate. Further, because
the department lacks cost-comparison tools that will allow
its field office staff to make meaningful comparisons of the
requested items with other available products, field office staff
tends to approve a product regardless of cost as long as it is
medically necessary.
• We found that other states have some procedures that the
department may wish to consider adopting. For example, we
found that New York’s Medicaid program caps reimbursement
for unlisted items at the lesser of 150 percent of the provider’s
acquisition cost, or the provider’s usual and customary charge
to the general public. Further, New York uses a voice-activated
authorization system to process routine authorization requests
and thus free up staff resources to perform other reviews.
• Field office staff do not ensure that providers use listed codes
whenever possible or justify why they do not. By not doing
so, the department may pay more for an unlisted item than it
would pay for another listed or unlisted item that meets the
patient’s needs. In fiscal year 2001–02, the department paid
an average of $622 for wheelchairs with listed codes, but an
average of $3,121 for unlisted wheelchairs.
• While the department attributed the large difference in
average prices for listed versus unlisted wheelchairs to
obsolete maximum allowable product costs (MAPCs)—the
department last updated its MAPCs for listed wheelchairs
in 1985 (17 years ago)—we found that the department’s
failure to enforce cost control procedures also contributed
to the rising cost of unlisted wheelchairs. For example,
the department’s June 1998 policy statement requires field
318 California State Auditor Report 2004-406 California State Auditor Report 2004-406 319
office staff to approve unlisted wheelchairs only if providers
document information including why a listed code cannot
be used for the equipment the patient needs, and that the
requested wheelchair is the lowest cost item among other
comparable brands or types that meet the patient’s medical
needs. However, field office staff apparently approve requests
for prior authorization for all wheelchairs as long as the
requests are accompanied by a physician prescription. Staff
also allow the use of unlisted codes for all wheelchairs and
components. Consequently, the department may be paying
more than necessary for customized wheelchairs.
We recommended that the department should do the following
to ensure that it receives a fair and reasonable price for DME,
medical supplies, and hearing aids:
• Analyze its payments for unlisted DME and medical supplies
to determine whether it should establish maximum allowable
product costs for any of these items.
• Analyze periodically its expenditures to determine
utilization of high-dollar items and possible causes for
increases in expenditures.
• Consider developing a voice-activated authorization system
for straightforward transactions to free staff resources for more
complex prior authorizations or cost analyses.
• Develop tools, such as functional equivalence and price
comparison tools, for its field office staff to compare prices
among similar items for unlisted DME and medical supplies.
• Cap reimbursement for unlisted items at the lesser of a
department-determined percentage of the provider’s cost (e.g.
150 percent of cost) or the provider’s usual and customary
cost charged to the general public, and require providers to
submit their cost information with claims for reimbursement.
• If the department does not wish to set this cap and require
providers to submit cost information, it should enforce its
requirement that providers of unlisted wheelchairs document
why the wheelchair cannot be billed under listed codes
and that the recommended wheelchair is the least costly of
alternative items that meet patient needs.
318 California State Auditor Report 2004-406 California State Auditor Report 2004-406 319
Department Action: Partial corrective action taken.
The department reports that it has taken the following actions:
• The department continues to convert its current billing
codes to the national Healthcare Common Procedures
Coding System codes (national codes) as required by
the federal government for compliance with the Health
Insurance Portability and Accountability Act, and has already
implemented eight of these national codes for pediatric
wheelchairs. It expects to finish converting to the national
codes by summer 2004, and once fully implemented,
the department will use only national codes for all DME.
The national codes clearly define specific products with
established Medicare reimbursement rates, which the
department will use when reimbursing Medi-Cal providers.
• The department has also sponsored legislation establishing
DME maximum reimbursement rates at either 80 percent
(non-wheelchairs) or 100 percent (wheelchairs) of the
established Medicare rate. Consequently, once it finishes
converting its billing codes to the national codes,
the department will eliminate its current practice of
reimbursing certain billing codes without an established
Medicare maximum rate at up to 90 percent of the
manufacturer’s suggested retail price.
• The department established maximum quantity and
frequency limits for 35 additional medical supply items.
• The department changed its pricing policy for medical
supplies. Instead of setting reimbursement rates using
the highest priced manufacturer’s item within a given
category, the department now uses the median priced
manufacturer’s item.
• In some instances, the department has reduced the
mark-up a manufacturer can use to establish the average
wholesale price from 35 percent above the dealer cost
listed in the dealer catalog to 25 percent.
• The department now requires a copy of an approved
treatment authorization request to accompany all claims
for miscellaneous medical supplies billed to the program
using unlisted codes.
320 California State Auditor Report 2004-406 California State Auditor Report 2004-406 321
• EDS, the Medi-Cal fiscal intermediary, now reviews
expenditure data on a weekly basis to determine changes
in payment patterns. The department assists with this
review. It also uses EDS systems to track payment changes
weekly and over time.
• In lieu of creating a voice-activated system, the department
developed a less-costly way to implement authorization
controls to prevent recipients exceeding the department’s
limit for selected medical supplies. It established a per-
beneficiary, per provider limitation on certain supplies
and uses the claims processing system to check claims for
beneficiaries who exceed the department’s limit by using
multiple providers.
• The department is reviewing price data, product
specifications, features, and other product information for
DME as part of its contracting activities. The department
plans to use this data to revamp and update field office
tools that staff can use to select the least expensive type of
item that meets the patient’s needs.
• With the passage of the 2003-04 Budget Trailer Bill, the
department changed its reimbursement methodology for
all DME. For those items with a maximum allowable rate
for California established under the Medicare program
(maximum allowable rate), the new reimbursement
rates are generally stated as a percentage of the lowest
maximum allowable rate. For those DME items without
a maximum allowable rate, the reimbursement rate is
generally the lower of the amount billed, a percentage of
the manufacturer’s suggested retail price, or cost plus a
percentage markup.
Finding #2: The department overpaid for some rentals.
Field office staff’s misunderstanding of regulations may have
caused the department to pay $8.3 million more for renting
stationary volume ventilators over three years than the
department would have paid by purchasing these items. Our
review found that the department would have paid $4.1 million
if it had purchased these items, rather than the $12.4 million it
paid for renting them. Field office staff stated that regulations
require them to approve only rentals of ventilators and
prohibit them from purchasing them, which we found to be a
misunderstanding of the regulations.
320 California State Auditor Report 2004-406 California State Auditor Report 2004-406 321
We recommended that the department clarify its rental policies
with its field office staff to ensure that overpayments for DME
rentals are not occurring.
Department Action: Partial corrective action taken.
The department states that it is currently exploring
implementing a “capped” rental reimbursement
methodology on some DME items.
Finding #3: The department has not kept its codes and prices
current and may not be receiving the lowest rates offered by
providers or manufacturers.
The department has been lax in updating its prices for items
with MAPCs, and it may not be getting the same rates offered by
providers or manufacturers to the general public. Specifically, we
found the following:
• While technology improvements have made some items
less expensive, the department has been lax in updating its
prices for these items, and may be missing out on savings
opportunities on these items. For example, the department
issued only 10 operational instructional letters to its fiscal
intermediary in the past three years. Of these 10 letters,
only four actually updated a price on file, and those updates
affected the MAPC for only seven of thousands of product
codes for DME, medical supplies, and hearing aids.
• The department may be hampered in updating DME and
hearing aid rates on a timely basis because these rates are
established in regulations. In order to change these rates, the
department must initiate and obtain approval for a change to
the regulations, which can be a lengthy process.
• Although state regulations require the department to update
its medical supply rates no less than every 60 days, on
average for those medical supply product codes billed during
fiscal year 2001–02, the department allowed 5,720 days, or
about 15.5 years to elapse between price updates. This could
potentially cost the department money. For example, we
found that for two product codes the department could save
an additional $911,000 by making sure to update its prices in
fiscal year 2002–03.
322 California State Auditor Report 2004-406 California State Auditor Report 2004-406 323
For those items for which it has established maximum allowable
product costs, the department should ensure that it reviews and
updates these rates on a regular and frequent basis. Further, to
enable the department to become more responsive to changes in
prices, the department should seek legislation to remove prices
for DME and hearing aid items from regulations.
Department Action: Partial corrective action taken.
The department states that it hopes its ongoing universal
product number (UPN) project will resolve issues with
keeping its codes and prices current. The department is
continuing to collect data on UPN codes to determine
the availability of these codes for DME. Additionally, the
department states that its contract renegotiation process will
serve as a mechanism for determining if reimbursements
need to be adjusted thereby providing the department a
process for reviewing and updating rates.
Additionally, with the passage of the 2003-04 budget trailer
bill, the department was given the authority to establish
maximum allowable reimbursement rates and utilization
controls in provider manuals, and is no longer required to
promulgate regulations to add, delete, or change a covered
service or reimbursement rate.
Finding #4: The department has not fully considered the
challenges and costs of implementing its cost-savings plans.
To combat the rising costs of DME and medical supply items, the
department plans to implement the following two cost-savings
measures in the near future:
• The department hopes to convert its medical supply codes
from the current federally required billing code structure to
the more detailed universal product number (UPN) codes to
gain more relevant and timely information on the products it
pays for.
• The department plans to implement negotiated contracts for
some DME and medical supply items.
While both plans could potentially reduce the department’s
costs, both could also increase expenditures if the department
fails to properly plan and support these actions—yet the
department’s plans remain vague, incomplete, and unfocused.
322 California State Auditor Report 2004-406 California State Auditor Report 2004-406 323
For example, the department has not discussed its contract
negotiation plans with providers or manufacturers who may
prove to be resistant to the department’s efforts.
In order to realize future cost savings for Medi-Cal, the department
should continue to develop and use a UPN structure for
medical supplies and contract negotiations for its DME items.
However, the department should ensure that it adequately plans
and considers possible limitations of its efforts. Further, the
department should bring manufacturers and providers into its
planning sessions as soon as possible.
Department Action: Partial corrective action taken.
The department states that it is continuing its efforts to develop
a UPN structure for medical supplies and DME, and plans to
thoroughly study the benefits, possibilities, and limitations
of using UPNs for billing. The department estimates that this
project will take a minimum of two to three years to fully
implement. The department further states that it is pursuing an
exception from the national coding requirements for DME and
medical supplies to allow it to demonstrate the feasibility
and cost effectiveness of the UPN as a coding standard.
324 California State Auditor Report 2004-406
STATEWIDE FINGERPRINT
IMAGING SYSTEM
The State Must Weigh Factors Other
Than Need and Cost-Effectiveness When
Determining Future Funding for the System
REPORT NUMBER 2001-015, JANUARY 2003
Audit Highlights . . .
Department of Social Services’ response as of December 2003
Our review of the California
Chapter 111, Statutes of 2001, directed the Bureau of State
Department of Social Services’
(Social Services) Statewide Audits (bureau) to conduct an audit of the Department
Fingerprint Imaging System of Social Services’ (Social Services) Statewide Fingerprint
(SFIS) revealed:
Imaging System (SFIS). This system was designed to detect
þ Social Services implemented duplicate-aid fraud. The bureau was asked to report on the level
SFIS without determining of fraud detected through SFIS; the level of fraud deterrence
the extent of duplicate-aid
resulting from SFIS; SFIS’s deterrence of eligible applicants,
fraud throughout the State.
especially the immigrant population, from applying for public
þ It based its estimate of the benefits; and SFIS’s cost-effectiveness.
savings that SFIS would
produce on an evaluation
of Los Angeles County’s
Finding #1: Social Services did not know the extent of
fingerprint imaging system,
duplicate-aid fraud before implementing SFIS.
rather than conducting its
own statewide study.
Before SFIS was in place, estimating how much duplicate-aid
þ Because Social Services fraud actually existed in the State was difficult. Social Services
did not collect key was aware only of potential cases of duplicate-aid fraud that
statewide data during its
the counties brought to its attention. The methods the counties
implementation of SFIS, we
used to detect duplicate-aid fraud prior to SFIS met the federal
are not able to determine
whether SFIS generates requirement and were similar to those used in other states.
enough savings to cover the According to our survey, the counties used computer matches
estimated $31 million the
as the primary method to detect possible duplicate-aid fraud,
State has paid for SFIS or
followed closely by tips from concerned citizens or other
the estimated $11.4 million
the State will likely pay organizations. Data from the counties responding to our survey
each year to operate it. regarding the number of duplicate-aid fraud cases identified
þ In deciding whether prior to the implementation of SFIS did not suggest to us that
to continue SFIS, the duplicate-aid fraud was a serious problem.
Legislature should consider
the benefits SFIS provides as
Social Services had a few options available for determining
well as what appears to be
the known extent of duplicate-aid fraud in the State prior
valid concerns regarding the
system, such as the fear it to implementing SFIS. For example, it could have surveyed
may provoke in immigrant the counties as we did or requested counties to analyze their
populations eligible for the
Integrated Earnings Clearance/Fraud Detection System and
Food Stamp program.
California State Auditor Report 2004-406 325
DPA 266 data to determine the extent of duplicate-aid fraud.
The DPA 266 is a report that tracks, among other things,
statewide statistics on duplicate-aid investigation requests.
We raised concerns regarding the accuracy and completeness of
the DPA 266 in our March 1995 report, titled Department of Social
Services: Review and Assessment of the Cost Effectiveness of AFDC
Fraud Detection Programs. Social Services has not resolved fully its
problems with the DPA 266. Our survey results indicate that the
counties do not report information consistently on the DPA 266,
and therefore it is an unreliable report.
According to the chief of its fraud bureau, Social Services no
longer verifies the accuracy of the information the counties
report, because it does not consider the DPA 266 to be a
statistical or claiming document but merely an activity report.
However, this statement is inconsistent with Social Services’
instructions for completing the DPA 266, which state that
information collected on the DPA 266 is used to prepare a
federal program activity report and special reports for the
Legislature. Specifically, federal regulations require state agencies
to submit to the United States Department of Agriculture
(USDA) an annual program activity statement that includes data
on investigations of fraud. If Social Services had captured more
detailed and reliable data using the DPA 266, it may have been
able to present a clearer picture of the extent of duplicate-aid
fraud identified by the counties.
To ensure that it reports accurate and complete information
to the USDA, Social Services should require the fraud bureau
to incorporate the review of DPA 266 data into its on-site
visits to counties.
Social Services’ Action: Pending.
Social Services stated that its fraud bureau is in the process of
developing procedures to verify the accuracy of the DPA 266
data and will incorporate these procedures into its on-site
visits to counties.
Finding #2: During implementation, Social Services missed its
opportunity to determine SFIS’s cost-effectiveness.
Social Services and the Health and Human Services Agency
Data Center (data center) did not capture critical data during
the implementation phase that would have allowed them to
326 California State Auditor Report 2004-406 California State Auditor Report 2004-406 327
quantify the savings attributable to SFIS. For example, each
month two randomly selected groups of cases would be drawn
from a subset of counties implementing SFIS over a six-month
period to establish a control group and an experimental group
of recipients. Individuals in the control group would not be
fingerprinted, but individuals in the experimental group would
be fingerprinted. Then the amount of benefits paid to each
group in the first calendar month in which SFIS had its full
effect on the experimental group would be used to calculate an
initial savings amount. The recidivism rate—the rate at which
individuals previously terminated from receiving aid return to
aid—would be tracked for each county for one year and used to
adjust the initial savings.
The deputy director of Social Services’ Welfare-to-Work Division
told us that in mandating SFIS, the Legislature did not provide
any statutory authority or resources to require counties to collect
data. Although we agree that state law mandating SFIS neither
explicitly mandates the collection of data nor provides funding
for these efforts, it does require Social Services and the data
center to design, implement, and maintain the system. Moreover,
other state laws and policies establish the State’s expectations
for implementing information technology (IT) projects. For
example, state law holds the head of each agency responsible
for the management of IT in the agency that he or she heads,
including the justification of proposed projects in terms of cost
and benefits. Further, state policy requires agencies to establish
reporting and evaluation procedures for each approved IT project
and to prepare a post implementation evaluation report that
measures the benefits and costs of a newly implemented IT system
against the project objectives. The State does not consider a
project complete until the Department of Finance approves
the post implementation evaluation report. Data collection is
a key component in preparing this report. Therefore, the data
center and Social Services were remiss in not bringing the lack
of authority and resources to the Legislature’s attention so they
could effectively implement SFIS. Moreover, because counties did
not begin to use SFIS until March 2000, roughly four years after
the passage of the law, it is reasonable to conclude that the data
center and Social Services had ample opportunity to do so.
To ensure that its implementation of future IT projects meets state
expectations, Social Services and the data center should collect
sufficient data to measure the benefits and costs against the project
objectives. They also should identify promptly any obstacles that
may prevent them from implementing effectively the project.
326 California State Auditor Report 2004-406 California State Auditor Report 2004-406 327
Social Services’ Action: Pending.
Social Services and the data center stated that they will
continue to adhere to all appropriate IT policies and
processes, and identify obstacles that may prevent an
appropriate analysis of impacts of the IT project.
Finding #3: Incomplete cost data and a flawed method for
estimating savings renders Social Services’ cost-benefit
analysis for SFIS unreliable.
Social Services tracks some of the costs associated with SFIS, but it
does not track county administrative costs. As a result, it does not
know the full costs of operating SFIS. Further, because Social Services
did not capture the data necessary to determine the savings
attributable to SFIS during its implementation, Social Services
developed an estimate based on the results of Los Angeles County’s
AFIRM demonstration project. However, the methodology it used to
estimate the State’s savings of roughly $150 million over five years
for SFIS is flawed and therefore unreliable.
Although we were able to substantiate the data center’s and
Social Services’ costs, we were not able to determine the counties’
actual costs because Social Services did not require counties
to track SFIS administrative costs separately. Social Services
estimated that the total administrative costs that all counties
except Los Angeles incurred for CalWORKs and the Food Stamp
program for fiscal year 2000–01 would be roughly $1.8 million, yet
Riverside County told us that its estimated costs for the same fiscal
year were roughly $1.4 million; Riverside County alone estimated
its costs as amounting to 78 percent of the costs Social Services
estimated for 57 counties. Additionally, Social Services’ estimate
does not include the cost that counties incur for investigating
possible fraudulent activity. Furthermore, Social Services chose
not to include any administrative costs for Los Angeles County
in its estimate because the county had not yet implemented
SFIS. Therefore, Social Services may be understating the cost of
implementing and operating SFIS substantially.
Social Services’ November 2000 estimate also attempts
to quantify benefits or savings that would accrue to the
CalWORKs and Food Stamp programs. The estimate does not
include savings attributable to the avoidance of duplicate-
aid fraud in the Food Stamp program because the data was
328 California State Auditor Report 2004-406 California State Auditor Report 2004-406 329
not available. Further, Social Services did not include savings
resulting from Los Angeles County’s use of SFIS because the
county was not yet using SFIS when Social Services built the
estimate. Finally, Social Services used data from Los Angeles
County’s demonstration project to support key assumptions
in its development of the SFIS savings estimate, which is
inappropriate because it assumes that these conditions hold true
in other counties. In fact, Social Services was unable to provide
documentation to support some of its key assumptions.
To improve its management of SFIS, Social Services should
identify the full costs of operating SFIS by requiring counties
to track their administrative costs separately. To ensure that
its estimates are representative of the entire state and its key
assumptions are defensible, Social Services should study the
conditions of a sample of counties instead of assuming that
conditions in one county hold true in other counties and
maintain adequate documentation, such as time studies or other
empirical data to support its estimates.
Social Services’ Action: Pending.
Social Services disagreed that it should separately track SFIS
administrative costs, stating that these costs are included
in general eligibility determination activities in the State’s
federally approved cost allocation plan. Social Services’
failure to recognize the importance of these costs causes us
concern. Until Social Services understands the total cost of
operating SFIS, the State cannot properly evaluate the system
in terms of costs and benefits.
Social Services agreed that maintaining adequate
documentation to support its estimates is important
and believes that in most instances sampling several
counties is a better representation of the entire state.
However, Social Services stated that, in the case of SFIS,
it and the Legislature appropriately relied on data from
Los Angeles County’s demonstration project since it
was specifically designed to test fingerprint imaging and
because Los Angeles County represents 40 percent of the
statewide public assistance caseload. Nonetheless, Social
Services asserted that it has processes in place to assure that
assumptions are appropriately documented.
328 California State Auditor Report 2004-406 California State Auditor Report 2004-406 329
Finding #4: The majority of matches SFIS identifies are
administrative errors, and the actual level of fraud it detects
is quite small.
Although Social Services does not know how many applicants
SFIS deters from attempting to receive duplicate-aid, it can
determine the number of applicants that SFIS detected who
were attempting to receive duplicate aid. However, we found
that the actual number of matches SFIS has identified as
possible fraudulent activity is substantially fewer than the
number of matches it identifies as administrative errors made by
county staff. Between March 1, 2000, and September 30, 2002,
SFIS detected a total of 25,202 matches, 7,045 which were
still pending resolution as of September 30, 2002. Of the
remaining 18,157 items with a final disposition, staff identified
only 478 of the items, or roughly 3 percent, as possible fraud
situations. Further, investigators found fraud in only 45 of the
478 possible fraud items, just 0.2 percent of the 18,157 items
resolved, according to SFIS reports. In order to determine how
long items had been pending resolution, we asked for an aging
report as of October 21, 2002. We found that roughly 3,000 of the
4,920 matches shown as pending resolution in SFIS were more
than 99 days old, and 1,100 had been pending for a year or more.
Social Services told us that it generates monthly reports from
SFIS that allow it to see whether counties are investigating and
resolving discrepancies but that it reviews these reports in detail
only twice a year. Moreover, although Social Services provides
training and instructs counties to promptly resolve any matches
that SFIS identifies, it does not have a regulation, policy, or set of
procedures requiring counties to do so. Additionally, Social Services
has yet to develop written procedures for its own staff to follow
when reviewing reports that SFIS generates. Without policies and
procedures, Social Services cannot ensure that SFIS information
remains current, which can diminish its usefulness.
To improve its management of SFIS, Social Services should
establish policies and procedures that require counties to resolve
pending items in the resolution queue promptly. Additionally,
the fraud bureau should develop written procedures for its
staff to follow up on items pending in the resolution queue.
The procedures should include fraud bureau staff requesting
a monthly aging report to use as a tool to determine whether
items pending in the resolution queue are current and, if
necessary, contacting the appropriate counties. Furthermore,
Social Services should ensure that counties investigate and
record the outcomes of their investigations in SFIS.
330 California State Auditor Report 2004-406 California State Auditor Report 2004-406 331
Social Services’ Action: Corrective action taken.
Social Services stated that it has developed an aging report
for use as a tool to monitor pending items in the resolution
queue. Further, it told us that written procedures to guide its
staff in following up with counties to resolve pending cases
have been developed.
Finding #5: Social Services does not collect the data it needs
to determine if it is successful in reaching its Food Stamp
program target populations.
California’s Legislature voiced its concern over low participation
rates by requiring Social Services to develop a community
outreach and education campaign to help families learn about
and apply for the Food Stamp program. In an annual report to
the Legislature dated April 1, 2002, Social Services stated that it
believes its outreach efforts have had an effect on increasing the
number of applications received and the caseload of the Food
Stamp program. However, the Legislature specifically instructed
Social Services to identify target populations and report on the
results of its outreach efforts. Social Services identified two target
populations: families terminating from CalWORKs and legal
noncitizens. Although Social Services recognizes that the ultimate
measurement of its outreach efforts’ success depends on its ability
to reach the target population, it did not collect data to evaluate
the participation rates of these two populations. Instead, it chose
to rely on the USDA’s report of estimated state Food Stamp
program participation rates, which presents information that is
up to three years old. Furthermore, the USDA’s report does not
have information specific to Social Services’ target populations.
Therefore, Social Services does not know if its efforts to reach legal
noncitizens have been successful.
To report accurately the results of its community outreach
and education efforts to the Legislature, Social Services should
establish a mechanism to track the participation rates of the
target populations.
330 California State Auditor Report 2004-406 California State Auditor Report 2004-406 331
Social Services’ Action: Corrective action taken.
Social Services stated that it has contracted with the
University of California, Los Angeles, to collect data
necessary to track non-citizens’ participation in the Food
Stamp program. Social Services believes that this data, in
combination with data from the federal census, will allow it
to track non-citizen participation over the years.
Finding #6: Decision makers should consider the benefits
and drawbacks of SFIS when deciding future funding for
the system.
The primary benefits that the State derives from continuing
to use SFIS are the proven effectiveness of fingerprint imaging
technology to identify duplicate fingerprints and its ability
to identify applicants who may travel from county to county
seeking duplicate aid. However, several factors could also
support discontinuing the use of SFIS. For one, the State is
spending $11.4 million or more annually to operate SFIS
without knowing the actual savings that it may be producing.
Additionally, although we were not able to verify some of the
concerns that opponents of SFIS raised, other concerns appear
valid. For example, the fingerprint imaging requirement may
add an element of fear to the welfare application process and
thus may keep some eligible people from applying for needed
benefits. The State must weigh these factors in deciding whether
to continue to fund SFIS.
The Legislature should consider the pros and cons of repealing
state law requiring fingerprint imaging, including whether
SFIS is consistent with the State’s community outreach and
education campaign efforts for the Food Stamp program.
To assist the Legislature in its consideration of the pros
and cons of repealing state law requiring fingerprint imaging,
Social Services and the data center should report on the full costs
associated with discontinuing SFIS.
Legislative Action: Legislation proposed.
The Legislature is currently considering Assembly Bill 1057
(Lieber), which proposes to repeal the requirement for
Social Services to use SFIS. This bill is currently in the
Assembly Committee on Human Services.
332 California State Auditor Report 2004-406 California State Auditor Report 2004-406 333
Social Services’ Action: Pending.
Social Services agreed, but stated that it has previously
provided this information to the Legislature. Social Services
Ü did not state clearly the actions it will take to address
our recommendation.
332 California State Auditor Report 2004-406 California State Auditor Report 2004-406 333
334 California State Auditor Report 2004-406
DEPARTMENT OF HEALTH SERVICES
Its Efforts to Further Reduce Prescription
Drug Costs Have Been Hindered by Its
Inability to Hire More Pharmacists and
Its Lack of Aggressiveness in Pursuing
Available Cost-Saving Measures
REPORT NUMBER 2002-118, APRIL 2003
Audit Highlights . . .
Department of Health Services’ response as of October 2003
Our review of the Department of
Health Services’ (Health Services)
The Joint Legislative Audit Committee (audit committee)
practices for containing Medical
Assistance Program (Medi-Cal) requested that the Bureau of State Audits examine
pharmaceutical costs found current practices for containing Medicaid pharmaceutical
the following:
and related expenditures and to assess the extent to which
þ Health Services may not these practices can be or are applied to the Department of
fully achieve the roughly Health Services’ (Health Services) Medi-Cal Fee-for-Service
$104 million General Fund
drug program. As part of the audit, the audit committee
cost savings it predicted
asked that we conduct a survey of selected states’ Medicaid
for fiscal years 2002–03
and 2003–04 because program practices aimed at containing costs. Further, the audit
it has been unable to committee requested that the survey include, but not be limited
hire pharmacists, has
to, other states’ pharmacy reimbursement practices, policies to
not considered fully
the consequences of encourage the use of generic drugs, drug formulary practices,
some planned activities, timely collection of rebates from manufacturers, establishment
and has presented
of disease management programs, and the net costs of drugs.
questionable estimates.
Additionally, we were to compare Health Services’ current
þ Although Health Services practices with the cost containment practices of the California
employs some cost-saving Public Employees’ Retirement System (CalPERS). Using the
strategies, such as the List
data obtained from the surveyed states and CalPERS, we were
of Contract Drugs, it has
been slow to consider or asked to assess the applicability of the data to Medi-Cal and, if
adopt others. applicable, determine the extent to which Health Services uses
such practices. Finally, we were asked to assess Health Services’
þ Its efforts to educate
staffing levels and contracting needs for carrying out its Medi-
physicians and pharmacists
about inappropriate or Cal pharmaceutical functions. Specifically, we found that:
medically unnecessary drug
therapy are limited.
Finding #1: Health Services has been unable to hire
þ Health Services has
needed pharmacists.
not sought funding for
disease management
Health Services has not been able to fill pharmacist positions
pilot projects that could
approved during budget negotiations for fiscal years 2001–02
potentially benefit the
Medi-Cal population. and 2002–03 to meet increases in its workload and to implement
several budget reduction proposals. Additionally, although Health
Services contracted with its fiscal intermediary, Electronic Data
Systems Federal Corporation (EDS), for the services of five more
California State Auditor Report 2004-406 335
pharmacists, as of March 2003, it had also been unable to hire the
pharmacists. Consequently, Health Services had not performed
some of its ongoing duties as promptly as it could. Further, we
question whether Health Services will fully achieve the cost
savings that it estimated for fiscal years 2002–03 and 2003–04.
According to Health Services, it has failed to increase its
pharmacist staff because its ability to recruit individuals with the
appropriate knowledge and skills is hampered by the disparity
between the salaries it can offer and those offered in the private
sector, and there is a shortage of pharmacists in the State.
However, Health Services’ efforts to advertise open positions
have consisted of sending more than 4,000 notices to licensed
pharmacists in the counties surrounding Sacramento.
Health Services agreed that it should pursue other approaches
to attempt to meet its staffing needs. For example, Health
Services might be able to reassign general pharmacist duties
to a nonpharmacist position that requires a lesser level of
expertise and might be easier to fill. However, Health Services
points out that the nonprofessional classifications have a federal
reimbursement rate of 50 percent, 25 percent lower than the
professional classifications, which may have a greater impact
on the State’s General Fund. Another option available to Health
Services is to use interns from a pharmacy school, such as the
University of the Pacific in Stockton, to assist its pharmacists in
performing some of their duties.
To address its difficulties in attracting qualified pharmacists, we
recommended that Health Services should do the following:
• Broaden its recruitment efforts beyond the counties of
Sacramento and San Joaquin to all of California and advertise in
pharmacy periodicals. If necessary, it should seek the appropriate
approvals to expand its recruitment efforts beyond California.
• Perform an analysis to identify the number of staff it needs
to meet its federal and state obligations. The analysis
should include a reevaluation of the duties assigned to the
pharmacist classifications to identify those that could be
performed by nonpharmacist classifications. Further, it should
quantify the effect that using nonpharmacist staff has on its
federal reimbursement for personnel costs.
• Research its ability to use the services of interns.
336 California State Auditor Report 2004-406 California State Auditor Report 2004-406 337
Health Services’ Action: Partial corrective action taken.
Health Services indicated that it sent flyers to every
pharmacist in the State and placed advertisements in a
number of pharmacy publications. After receiving the
approval of the Department of Personal Administration for
a recruitment and retention payment of $2,000 per month,
Health Services stated that it recruited and hired four
pharmacists in October 2003. However, Health Services does
not believe seeking the appropriate approvals to expand its
recruitment efforts beyond California would be fruitful, due
to the State’s more stringent licensing requirements.
Additionally, Health Services stated it has reclassified three
unfilled pharmacist positions to analyst positions for database
creation and analysis to assist the pharmacists. Finally, Health
Services also indicated that it is continuing to seek interns
from the University of the Pacific in Stockton, but has been
unsuccessful in obtaining a proposal from the university.
Finding #2: Health Services does not complete many drug
reviews promptly.
Between October 1999 and November 2002, it has taken Health
Services as long as, and in a few instances longer than, one year
to review new drugs before adding them to its drug list. Health
Services has not established a deadline that addresses how long
the entire new-drug process should take for drugs without a
priority designation. It believes a reasonable time frame to
conclude a new-drug review is roughly four to eight months.
As part of its review of new drugs, Health Services negotiates
with drug manufacturers for state supplemental rebates. Delays
in finalizing its negotiations for the supplemental rebates
could result in Health Services paying higher prices for the new
drugs than it otherwise would pay. Health Services attributes
many of the delays in completing new-drug reviews to the
drug manufacturers’ lack of responsiveness and difficulties that
arise during negotiations in addition to its inability to hire
pharmacists to perform the new-drug reviews.
We recommended that Health Services revise its procedures
for performing new-drug reviews to include a timeline for
completing reviews and specific steps on how staff should
address manufacturers’ nonresponsiveness.
336 California State Auditor Report 2004-406 California State Auditor Report 2004-406 337
Health Services’ Action: Pending.
Health Services indicated that it has increased the number
of pharmacists who can negotiate contracts and is making
changes so that it can complete new drug reviews more
timely. For example, its staff are reviewing drafts of new or
updated procedures for drug reviews, contract processes,
and recordkeeping.
Finding #3: Health Services could further reduce costs by
completing more reviews of entire drug categories.
Between 1998 and 2002, Health Services has only performed four
therapeutic category reviews (TCRs) for the 113 classes of drugs
on the drug list. A TCR entails reviewing all the drugs in one
therapeutic or chemical drug category included in the drug list
and negotiating supplemental rebate contracts for new or existing
drugs on the drug list that are in that category. Health Services’
procedures require it to develop a TCR schedule annually
and make it available to the public on request. Yet, in 2002,
Health Services did not develop a TCR schedule. In addition,
Health Services reported in its November 2002 budget estimate
that by performing TCRs of the drugs included in the categories
of atypical antipsychotics and nonsteroidal anti-inflammatory
drugs, it could achieve cost savings of almost $39 million in fiscal
year 2002–03 and more than $46 million in fiscal year 2003–04.
However, it has yet to perform any of these TCRs because under its
current staffing situation, it is unable to do so.
We recommended that Health Services conduct the TCRs specified
in its budget proposal for fiscal year 2002–03. Further, it should
develop and adhere to annual schedules for future reviews.
Health Services’ Action: Pending.
Health Services noted that the Legislature revised the law
to require it to complete a TCR within 120 days instead of
150 days. Additionally, Health Services plans to complete
four TCRs annually. Health Services also stated that it has
hired and is training pharmacists to perform TCRs for
cholesterol-lowering agents (statins) and anti-hypertensive
(ace inhibitors) drugs.
338 California State Auditor Report 2004-406 California State Auditor Report 2004-406 339
Finding #4: The State is relying on other cost-saving
strategies that may not be fully realized or may be delayed.
Health Services’ original budget for fiscal year 2002–03 included
certain cost savings totaling $127 million for pharmacy benefits
provided to Medi-Cal beneficiaries. However, by November 2002,
when it began the budget process for fiscal year 2003–04, Health
Services had not implemented some activities related to these
cost savings and had to reduce the estimated savings to about
$80 million for fiscal year 2002–03. It estimated savings for
fiscal year 2003–04 of $127 million. However, it may not fully
achieve the added cost savings identified in the November 2002
estimate, or the savings may be delayed. Specifically, we found
the following:
• Health Services has not routinely established supplemental
rebate contracts with manufacturers of generic drugs, although
it has clear authority to do so. Health Services told us that it has
not aggressively pursued supplemental rebates for generic
drugs because of its inability to hire pharmacists and the
reluctance of generic drug manufacturers to negotiate lower
prices. Yet, Health Services reported that it could achieve cost
savings of roughly $40 million to the General Fund for fiscal
years 2002–03 and 2003–04, by pursuing supplemental rebate
contracts with generic drug manufacturers. However, because of
the difficulties Health Services has experienced in filling vacant
pharmacist positions, we question whether it will achieve this
cost savings.
• Health Services may not be successful in achieving savings
that result from a change it developed for one of its three
predetermined pharmacy reimbursement rates. Specifically,
a trailer bill to the budget act for fiscal year 2002–03,
Assembly Bill 442 (AB 442), requires Health Services to
base the maximum allowable ingredient cost (MAIC) on
the mean of the wholesale selling price (WSP) of a generic
drug from selected major wholesale distributors. The MAIC
is the price set by Health Services for a generic drug. State
law defines the WSP as the price, including discounts and
rebates, paid by a pharmacy to a wholesale drug distributor
for a drug. According to Health Services, it plans to ask
selected wholesalers in California to report their WSPs for
generic drugs and it intends to use the reported WSP plus
an appropriate markup to reimburse pharmacies for each
drug ingredient cost. Health Service reported that, once
implemented, the new reimbursement method will provide
cost savings of roughly $9 million to the General Fund
338 California State Auditor Report 2004-406 California State Auditor Report 2004-406 339
for fiscal years 2002–03 and 2003–04. However, we again
question whether Health Services will achieve these cost
savings for several reasons that include its difficulties in hiring
pharmacists to implement this new reimbursement method
and its lack of a plan to address what action it will take if
wholesalers are unwilling to share their pricing data.
• Another cost-saving activity that AB 442 requires Health
Services to perform is creating a subset of the existing drug
list—a preferred prior-authorization drug list (sublist).
Health Services’ drug list is a list of preferred drugs that a
physician can prescribe and for which a pharmacy can seek
reimbursement without first obtaining approval from Health
Services through its treatment authorization request (TAR)
process. Although pharmacists will still have to submit TARs
and provide justification for prescribing drugs not included on
the drug list, it will require pharmacists to take even greater
steps to justify and document reasons for selecting a drug that
is not included on the sublist.
According to Health Services, the sublist will contain drugs
that were deleted from the drug list or were not approved for
addition to the drug list. It would add drugs to the sublist after
evaluating the drug using certain criteria, including the cost
of the drug, which is partially driven by the willingness of the
manufacturer to negotiate a supplemental rebate contract.
However, we question the necessity of a sublist given the
additional workload this process would create. Specifically,
Health Services’ proposal might require it to re-review drugs
it has already subjected to the new-drug review process. The
increased workload to implement the sublist would further
overburden a staff already unable to complete their required
tasks. Health Services reported that implementing the sublist
would result in cost savings to the General Fund totaling
$9 million for fiscal years 2002–03 and 2003–04. However,
according to Health Services, its cost-saving estimate was based
on a cursory review of drug utilization by private third-party
payers, yet, it could not provide us with the documents to
support its review. Therefore, we cannot verify the accuracy of
the estimate or determine whether the savings exceed the costs
associated with the increase in Health Services’ workload.
• Finally, AB 442 also added language that prohibits
manufacturers from making retroactive adjustments to federal
and state rebates owed as a result of revisions to their best
prices or average manufacturer price (AMP)—the average
340 California State Auditor Report 2004-406 California State Auditor Report 2004-406 341
prices paid by wholesalers for drugs distributed to the retail
class of trade, which is reported to the federal government
by manufacturers. Currently, federal law requires drug
manufacturers to pay rebates based on their AMP and best price
data, but the federal rebate agreement allows manufacturers to
make adjustments to their AMPs or best prices. For Medi-Cal,
these adjustments can affect payments manufacturers made
in prior quarters for not only the federal rebates but also state
supplemental rebates, which are often based on AMPs. Health
Services told us that this has resulted in California having to
pay back rebates or provide manufacturers with credits toward
future rebate payments. By prohibiting manufacturers from
retroactively adjusting federal and state rebates owed, Health
Services reported that it could achieve $13 million in savings to
the General Fund for fiscal years 2002–03 and 2003–04.
However, before proposing this legislative change, Health Services
should have obtained approval from the federal Centers for
Medicare and Medicaid Services (center) to allow it to prohibit
manufacturers from making retroactive adjustments to the
federal rebates they owe based on revisions to their AMPs or best
prices. According to Health Services, it anticipates that when
it eventually refuses to make retroactive changes to the federal
rebates, manufacturers will protest because their agreement
with the federal government allow them to make adjustments.
Therefore, Health Services indicated that ultimately it might
need to seek a revision to state law to exclude federal rebates.
Although state law will protect the State’s supplemental rebate
portion of the cost savings, if Health Services does not receive or
further delays obtaining federal approval, it is unlikely the full
savings related to protecting the federal rebates can be achieved.
To ensure that it fully achieves the added cost savings identified
in the November 2002 estimate, we recommended that Health
Services should do the following:
• Negotiate state supplemental rebate contracts with
manufacturers of generic drugs, as the Legislature intended.
• Obtain written assurance from drug wholesalers that they will
provide their wholesale selling prices so that it can compute
the new MAIC for generic drugs. If the wholesalers are not
willing to provide this information, Health Services should
seek legislation to compel them to do so.
340 California State Auditor Report 2004-406 California State Auditor Report 2004-406 341
• Perform an analysis to support its proposal to create a preferred
prior-authorization list. The analysis should include an
evaluation of the impact this proposal has on its workload
and adequate documentation to support its estimated savings.
• Seek federal approval from the center to prohibit manufacturers
from making retroactive adjustments to federal rebates owed as
a result of revisions to their AMPs or best prices.
Health Services’ Action: Pending.
Health Services stated that it has solicited contract proposals
from five manufacturers of generic drugs and, if the
manufacturers respond, Health Services expects to execute
contracts in February 2004.
Health Services stated that it met with wholesalers in
October and November 2003 to obtain written agreements
with wholesalers to supply their wholesale selling prices. It
plans to hold one more meeting by the end of 2003.
Health Services indicated that it believes a preferred prior
authorization list would be cost effective, but it did not
provide an overall analysis to support this contention.
Instead, Health Services stated that it plans to analyze the
cost effectiveness of a preferred prior authorization list on
a drug-by-drug or therapeutic drug category basis. Health
Services noted that it analyzed the therapeutic class of drugs
used in the treatment of multiple sclerosis. Although, it
concluded that it should include the least costly product on
its preferred prior authorization list, Health Services did not
quantify the potential savings to the State.
Finally, Health Services indicated that the center has
released a regulation for public comment that would allow
manufacturers to make retroactive adjustments to their
AMPs or best prices for a three-year period. However, this
new regulation still conflicts with Health Services’ legislation
that permanently bars manufacturers from adjusting their
AMPs or best prices retroactively. Health Services stated that
it is seeking the centers’ concurrence to allow California’s
existing law to supercede the new federal regulation.
342 California State Auditor Report 2004-406 California State Auditor Report 2004-406 343
Finding #5: Health Services just recently began working with
manufacturers to reconcile federal and state rebates.
In a March 1996 audit, we reported that although Health Services
prepared invoices specifically for supplemental rebates, the
invoices did not specify the amount the manufacturers owed.
Rather, the invoices instructed manufacturers to calculate and
submit required supplemental rebates along with their federal
rebate payments. We further reported that Health Service had
failed to monitor and track supplemental rebate payments.
We estimated that Health Services had not collected roughly
$40 million in supplemental rebates owed to the State and
the federal government. During the fiscal year 2002–03
budget process, Health Services received approval and hired
four analysts as of February 2003 to help resolve these issues,
although it had requested approval to increase its staff of
analysts for almost the past five years. Between January 1991 and
September 30, 2001, the amount of unresolved rebates grew to
more than $216 million, or 6 percent of the $3.4 billion invoiced.
State law requires that Health Services and manufacturers
cooperate and make every effort to resolve rebate payment
disputes within 90 days of the manufacturers notifying Health
Services of a dispute in the calculation of the rebate payments.
Health Services estimated that it could achieve a total of
$10.5 million in savings to the General Fund for fiscal years
2002–03 and 2003–04 by resolving some of these rebate disputes.
To ensure that it has sufficient staff to work with manufacturers
to resolve disputed rebates promptly and achieve cost savings,
we recommended that Health Services evaluate periodically the
number of staff needed to resolve disputed rebates within 90 days.
Health Services’ Action: Pending.
Health Services expects to expand its staff by filling analyst
positions and one manager by the end of December. Health
Services anticipates resolving the backlog of disputes by the
end of fiscal year 2004–05.
Finding #6: Health Services’ AIDS Drug Assistance Program
has not taken advantage of the new automated billing and
tracking system.
Unlike Health Services’ Medi-Cal drug program, the AIDS Drug
Assistance Program (ADAP) does not have access to a unit
rebate amount based on confidential pricing information that
would enable it to calculate and bill correctly the federal rebate
342 California State Auditor Report 2004-406 California State Auditor Report 2004-406 343
payments owed by manufacturers. Instead, the ADAP relies on
manufacturers to calculate and remit the correct amounts and
thus cannot ensure that it has received the full rebate amounts. In
1998, the Health Care Financing Administration, now the Centers
for Medicare and Medicaid Services, published a federal register
notice that provided the ADAPs in all states with an option to
receive the same federal rebates as the Medicaid program and to
encourage ADAP’s to emulate the Medicaid model.
However, because ADAP does not have access to the unit rebate
amount information from the center, it bills manufacturers
for its federal rebates using an estimated unit rebate amount
that may be inaccurate. Additionally, the manufacturers send
the rebates to the ADAP, usually including the actual unit
rebate amounts they used to calculate the federal rebate owed;
however, ADAP cannot verify whether the amounts are correct.
In fact, our comparison of the federal rebates received by the
ADAP with those received by Medi-Cal for nine of 67 drugs we
reviewed found that the ADAP’s federal rebates were lower, even
though the amounts should have been the same. For example,
for one drug, the ADAP received a rebate for one quarter that
was nearly $125,000 less than the amount it would have
received using Medi-Cal’s unit rebate amount data for that drug
for the same quarter.
The ADAP also does not use an automated system to track the
billing and collection of manufacturers’ federal rebates. Without
an effective accounting system, the ADAP cannot ensure that
it submits invoices to manufacturers and receive their federal
rebate payments promptly. In fact, we found that the ADAP did
not send 14 invoices totaling $2.9 million to manufacturers for
the first quarter of 2001 until October 18, 2002, or more than
six months after the completion of the quarter. Consequently,
the State does not have the use of those funds for other
commitments and is not maximizing the amount of interest
it would otherwise collect by depositing the rebates earlier.
Additionally, we suggest that it would be prudent for the ADAP
to assess and collect interest from manufacturers that do not
remit their rebates promptly as does the Medi-Cal program.
We believe that it would benefit the ADAP to take advantage
of Health Services’ Rebate Accounting and Information System
(RAIS) to invoice drug manufacturers and, when the RAIS
achieves its projected capability, to calculate interest on amounts
owed by manufacturers when they delay in submitting federal
rebate payments. In fact, in a letter dated January 2001, the
344 California State Auditor Report 2004-406 California State Auditor Report 2004-406 345
director of the center urged state Medicaid directors to work
with the ADAPs in their state to assist in the submission of
federal rebate claims to manufacturers within the requirement of
the drug pricing confidentiality provisions.
We recommended that Health Services should follow the
center’s guidance and ensure that the ADAP and Medi-Cal staff
coordinate their activities for obtaining federal rebates by using
the RAIS for invoicing its manufacturers. Furthermore, it should
ensure that its ADAP emulates the Medicaid model by seeking
legislation to assess and collect interest from manufacturers
when they delay submitting federal rebates.
Health Services’ Action: Pending.
Health Services indicated it plans to ensure that the ADAP and
Medi-Cal staff work together to improve the invoicing and
collection of ADAP’s rebates, either through the use of RAIS
or other processes. However, Health Services stated that it
does not plan to seek legislation to assess and collect interest
from manufacturers when they delay submitting federal
rebates. Specifically, Health Services stated that ADAP has not
experienced delays in collecting rebates from manufacturers
of brand name drugs, which generate the greatest amount of
rebates. ADAP has experienced delays in collecting rebates
from manufacturers of generic drugs and Health Services plans
to remove their drugs from its drug list rather than continuing
to use resources to pursue small rebates.
Finding #7: Health Services pays less for certain brand name
drugs than it does for their generic counterparts, but it can
improve its contracting process.
Although the supplemental rebates that Health Services negotiates
with brand name drug manufacturers generally ensure that
Medi-Cal incurs lower costs for drugs than do other state
programs, Health Services does not have procedures to ensure
that it accurately tracks the expiration dates of its supplemental
rebate contracts and thus has ample time to renegotiate contracts.
Our review of Health Services’ drug prices found that it restricts
its reimbursement to eight brand name drugs because it is
generally able to obtain lower net costs for them than for their
generic counterparts after applying the supplemental rebates
it receives from the manufacturers. However, for the other two
drugs we found that the net costs of the brand names were higher
than those of the generics because Health Services failed either
344 California State Auditor Report 2004-406 California State Auditor Report 2004-406 345
to renegotiate the contracts or to secure critical contract terms
from the manufacturer—errors that we estimated cost Medi-Cal
roughly $57,000 in 2002.
Currently, Health Services maintains a database that lists each
supplemental rebate contract’s terms, effective date, and expiration
date. However, Health Services does not have a review process
in place to ensure staff have entered all contracts appropriately
into this database or its RAIS used for invoicing purposes. Further,
although Health Services can run ad hoc reports to determine when
its contracts will expire, it does not have a process to ensure that
it follows up on and renegotiates contracts before the expiration
dates. Until Health Services establishes such processes, it cannot
ensure that it invoices all manufacturers at the correct amount.
Moreover, it cannot ensure that it renegotiates or renews contracts
before the expiration dates and runs the risk of continuing to allow
pharmacies to dispense more costly drugs.
To ensure it obtains the lowest net cost for drugs, we
recommended that Health Services should do the following:
• Establish policies and procedures to ensure that it follows
up on and renegotiates supplemental contracts before their
expiration dates. Further, it should establish a review process
to ensure supplemental rebate contracts are appropriately
entered into its contract tracking database and RAIS.
• If it is unable to complete negotiations for state supplemental
rebates before contracts expire, it should immediately instruct
EDS to remove the restriction on brand name drugs to allow
pharmacies to dispense less expensive generic drugs without
requiring TAR approval.
• Ensure that it secures written assurance from the drug
manufacturer for all agreements made during a negotiation
and includes this information in the terms and conditions of
the contract.
Health Services’ Action: Partial corrective action taken.
Health Services stated that it has temporarily redirected
pharmacists from other functions, in addition to hiring
four pharmacists, to renew and complete new contracts.
Health Services also indicated that it has established a review
process to ensure that supplemental rebates are appropriately
entered into its contract tracking database and RAIS.
346 California State Auditor Report 2004-406 California State Auditor Report 2004-406 347
Additionally, Health Services noted that if it is unable to
complete negotiation for state supplemental rebates, it plans
to remove the restriction to allow the use of generic drugs
when there is a net cost savings to the State. Furthermore,
it has begun evaluating the net cost impact of removing the
restrictions to use brand name drugs on a case-by-case basis.
Finally, Health Services stated it will ensure that all terms
and conditions are delineated in the supplemental rebate
contracts with manufacturers.
Finding #8: Health Services could save $20 million
annually by placing the responsibility on the pharmacists
to recover copayments.
Federal law allows states to establish copayments; however, it
does not allow states to assess charges for certain services, such
as emergency services and services provided to any beneficiary
under age 18. Additionally, it does not allow states to deny care
to any beneficiary unable to afford the copayment. State law
allows each participating pharmacy to retain the $1 copayment
it collects from each Medi-Cal beneficiary filling a prescription.
Further, the beneficiary remains liable to the pharmacy for any
unpaid copayments. Health Services could not provide us with
an analysis of the pharmacies’ collection rates for copayments,
but it believes their collection rates are low.
At least one state, however, has taken a more aggressive approach
toward collecting copayments from beneficiaries. Montana
instituted copayments so that beneficiaries could share in the
cost of their medical care, thus allowing it to reduce the cost to
the state. Montana deducts the copayments from the pharmacies’
reimbursements, placing the responsibility of collecting
copayments on the providers. Health Services estimates that if
implemented, by deducting the copayment from the pharmacy
reimbursement rate, it would save Medi-Cal more than $20 million
annually, after adjusting for beneficiaries who are exempt.
We recommended that Health Services evaluate the pros and
cons of deducting copayments from its reimbursement rate and
having pharmacies collect these payments from beneficiaries.
The evaluation should include, at a minimum, an analysis of
costs, benefits, and pharmacies’ collection rates.
346 California State Auditor Report 2004-406 California State Auditor Report 2004-406 347
Health Services’ Action: None.
Health Services indicated that the 2003–04 Budget
Act includes a 5 percent reimbursement reduction for
pharmacies effective January 1, 2004. Health Services
believes that this reduction will allow for greater annual
savings than deducting copayments from its reimbursement
rate and having pharmacists collect the payments from
beneficiaries. Additionally, Health Services stated that an
analysis of the costs, benefits, and pharmacy collection
rates would likely require it to hire a contractor to conduct
a survey of pharmacies, which would require a budget
augmentation to pay for the contract.
Finding #9: Drug alerts requiring TAR approval may prove to
be an effective cost control.
Two steps Health Services could take to possibly realize cost
savings are adopting “duration of therapy’ and “step therapy
protocol” edits in its drug utilization review (DUR) program—a
mechanism to ensure that prescriptions for covered outpatient
drugs are appropriate, medically necessary, and not likely to have
adverse medical effects. In 2000, the secretary of the Health and
Human Services Agency established a task force to explore drug
use and cost control strategies in the Medi-Cal program. One
issue discussed by the task force was the possibility of having
Health Services reestablish a hard edit for duration of therapy
to control the use of certain drugs that become unnecessary
or inappropriate after a specified period—for example, drugs
prescribed for specific medical conditions, such as ulcers. In the
past, Health Services used a hard edit for duration of therapy
but decided to discontinue its use because of the substantial
increase in the volume of TARs that its staff had to process as a
result of the edit. However, Health Services could not provide us
with data to support its claim that the volume of TARs that staff
had to process increased substantially because of that particular
hard edit. Additionally, task force participants supporting the
reestablishment of the edit believed that it would prevent
unnecessary prescription refills, reduce inappropriate therapies
for certain medical conditions, and possibly reduce costs.
Another hard edit that might be useful in controlling drug
costs would require a physician to prescribe a less expensive
but therapeutically equivalent drug for a beneficiary who is in
the early stages of a particular medical condition. This type of
hard edit, called step therapy protocols or accepted treatment
348 California State Auditor Report 2004-406 California State Auditor Report 2004-406 349
guidelines, would recommend starting treatment of a condition
with a less expensive drug that has a verified equivalent effect
and moving on to a more expensive drug only if the patient is
not responding to the first drug. Health Services told us that it
had previously considered implementing step therapy protocols,
however, it was unable to provide us with data or an analysis
evaluating the costs and benefits of altering its process to include
step therapy protocols. However, one state that responded to
our survey reported that it has achieved cost savings totaling
more than $3.1 million for 9,600 claims by implementing step
therapy protocols.
To achieve additional savings in its Medi-Cal pharmacy program,
we recommended that Health Services should do the following:
• Measure the effect that the use of the duration-of-therapy hard
edit has on its workload. If feasible, consider reestablishing this
edit for additional savings.
• Evaluate its ability to adapt its prospective DUR program by
using other types of hard edits, including step therapy protocols
for specific drugs or classes of drugs. The evaluation should
include an analysis of the costs and benefits associated with
these approaches.
Health Services’ Action: Pending.
Health Services stated that it has experienced delays in
implementing duration of therapy hard edits due to the
loss of pharmacist staff at its fiscal intermediary. However,
its fiscal intermediary has hired a pharmacist who is now
training to perform this function. Finally, Health Services
indicated it is evaluating a cost-containment proposal from
its fiscal intermediary to install some additional hard edits in
its claim payment system.
Finding #10: Health Services’ educational methods related to
DUR are indirect and project oriented.
Health Services’ retrospective DUR process monitors drug use
and cost trends to identify misuses and educational needs.
Through this process, Health Services has identified and
developed responses to costly Medi-Cal drug patterns. Currently,
Health Services’ educational program disseminates information
only to general audiences periodically and comprises a small
number of active and proposed projects that are heavily
348 California State Auditor Report 2004-406 California State Auditor Report 2004-406 349
dependent on the expertise and resources of its DUR board
members. Consequently, efforts to educate providers about
inappropriate or medically unnecessary drug therapies, and the
potential to capture cost savings that may result from changes in
drug prescribing and dispensing behavior, are limited.
Specifically, in contrast to Medicaid programs in some other
states we surveyed, Health Services does not promote education
that emerges from the retrospective DUR program by sending
“Dear Dr.” letters to physicians and pharmacists (providers).
Instead, Health Services told us that the use of Dear Dr. letters
to providers for DUR education would be very difficult to
implement and administer in California because of the large
number of Medi-Cal beneficiaries and providers. However, we
question this assertion. Although it may not be feasible to send
Dear Dr. letters to all Medi-Cal drug providers, Health Services
can, as do Medicaid programs in other states, use profiling to
identify providers whose practices indicate that are most in need
of intervention and send letters only to them.
In addition, Health Services’ DUR board is responsible for
identifying drug therapy problems and recommending the types
of interventions that will most effectively improve the quality
of drug therapy. In this capacity, it has recommended a number
of educational projects. Most of the projects will ultimately
implement direct educational interaction with prescribers in
specific subject areas. The advantage of Health Services’ approach
is that it can rely on the expertise and resources of its voluntary
DUR board members. However, Health Services’ heavy reliance
on the DUR board can also prove to be a potential weakness of
DUR education. Health Services devotes only minimal resources
to the board and the projects selected for development. However,
because it lacks a formal plan outlining the goals, anticipated
outcomes, and resource needs of the DUR educational program,
we could not assess the adequacy of the resources it devotes to the
DUR education program or what its future needs may be.
As we previously discussed, Health Services is already having
difficulty hiring the pharmacists it needs. If it needs to expand
its involvement in the DUR educational program, one approach
it might consider is outsourcing some of those functions to a
pharmacy school, as is done in other states, such as Oregon and
Idaho. Health Services told us that it has considered contracting
out some of its retrospective DUR and educational activities to a
school of pharmacy; however, it has not conducted an evaluation
of the costs and benefits of outsourcing these functions.
350 California State Auditor Report 2004-406 California State Auditor Report 2004-406 351
To improve its efforts to educate providers about inappropriate
or medically unnecessary drug therapies and potentially capture
additional cost savings, we recommended that Health Services
should do the following:
• Reevaluate the cost-effectiveness of using Dear Dr. letters
in a focused educational program that targets physicians
and pharmacists, whose prescribing or dispensing practices
are inappropriate.
• Work with the DUR board to develop a formal plan for its
educational activities that includes at a minimum, the goals,
anticipated outcomes, and resource needs. Further, Health
Services should update the plan annually.
• If, in the future, it determines that it lacks adequate resources
for its retrospective DUR and educational activities, it
should evaluate the cost-effectiveness of outsourcing some
of these functions.
Health Services’ Action: Pending.
Health Services indicated that it is in the process of filling
two research analyst positions created to determine the cost
effectiveness of Dear Dr. letters and any other prescribing
education efforts it undertakes as part of its drug expenditure
reduction initiatives. Additionally, Health Services stated
that it will develop prescriber profiles to create general
documents for all prescribers and to facilitate its plans for
peer-to-peer interaction.
Finding #11: Despite working with other organizations on
disease management, Health Services has not sought funding
for the pilot projects.
Although many states have implemented disease management
programs, which are designed to improve the quality of care
for Medicaid populations and ultimately contain costs for
both prescription drugs and Medicaid overall, Health Services’
progress toward a comprehensive disease management program
is minimal. Recently, Health Services has collaborated with the
California Pharmacists Association (CPhA) to develop Medi-Cal-
specific pilot projects for disease management. The Medi-Cal
Pharmacist Care Project was initially proposed in 2000 by the
University of Southern California (USC) School of Pharmacy,
in cooperation with the CPhA and Health Services, as an effort
350 California State Auditor Report 2004-406 California State Auditor Report 2004-406 351
to establish a framework wherein qualified pharmacists would
serve as coordinators of disease management for high-risk Medi-
Cal beneficiaries suffering from asthma and diabetes. A second
proposal focusing on pharmacist services for hypertension
was developed in 2002. The objectives of the proposals are to
determine whether a pharmacist-coordinated model of disease
management, applied to the Medi-Cal population, can improve
health outcomes for beneficiaries.
However, Health Services lacks the funding it needs to begin
the proposed pilot projects because it has relied on its nonprofit
partners to secure funds. Consequently, until Health Services
seeks funding to move forward on these pilot projects, the
potential benefits of disease management programs and their
applicability to the Medi-Cal population will remain unrealized.
We recommended that Health Services consider seeking funds
to continue its collaboration with the CPhA and USC for the
proposed pharmacist-coordinated disease management pilot
projects. Then evaluate the results of the pilot projects and, if
feasible, implement the models on a more widespread basis.
Health Services’ Action: Pending.
Health Services indicated that CPhA recently received
significant monetary commitments to fund a pilot project.
Thus, CPhA is moving forward on a pilot project in the
San Diego area that focuses on diabetes and, according to
Health Services, one of its pharmacists is providing feedback
to CPhA on the pilot project’s design. Health Services stated
that, if results are positive, it would take the appropriate
steps to incorporate the project in the Medi-Cal program.
Finding #12: Health Services may be able to achieve
additional savings by reevaluating its policy regarding
optional pharmacy benefits.
Under federal law, states are allowed to exclude several therapeutic
classifications from reimbursement in their pharmacy benefit
programs. Health Services made a policy decision to include five
of these optional classes of drugs as part of its pharmacy benefit:
anorexia, weight loss, or weight gain drugs; cough and cold drugs;
smoking-cessation drugs; barbiturates; and benzodiazepines, which
include antianxiety drugs. Health Services’ data show that, had it
excluded these classes of drugs from its pharmacy benefit, it might
have saved the State nearly $80 million during 2001.
352 California State Auditor Report 2004-406 California State Auditor Report 2004-406 353
Health Services justifies its spending for these optional services
with its belief that these drugs are keeping overall drug costs
down. According to Health Services, if it did not cover these
drug classes—in particular, the cough and cold drugs—its
beneficiaries would demand prescription drugs from their
physicians to relieve their symptoms, thereby creating a shift
to higher-priced drugs that are not optional. Additionally,
Health Services told us that other costs, such as Medi-Cal
hospitalization costs, might increase because without the
optional drugs, some beneficiaries might ultimately require
hospitalization. However, Health Services could not provide us
with an analysis to support the net effect that discontinuing to
offer the optional drug class would have on increasing drug and
hospitalization costs for certain beneficiaries. After conducting
such an analysis, Health Service might be able to limit cough
and cold drugs to beneficiaries who have asthma or are elderly,
and similarly limit or eliminate other categories.
We recommended that Health Services conduct a study to
identify the effect of discontinuing all or a portion of the
optional drug therapeutic classifications from its benefits on
Medi-Cal beneficiaries and Medi-Cal’s drug costs. If it determines
it is cost-effective to do so, Health Services should discontinue
some or all of the optional drug classifications.
Health Services’ Action: Pending.
Health Services stated that before discontinuing all or a
portion of the optional drug therapeutic classifications, it
must consider the health care consequences and costs in
other parts of the Medi-Cal program that could occur with
the removal of these drugs. Health Services indicated that it
is currently reviewing all of its options.
352 California State Auditor Report 2004-406 California State Auditor Report 2004-406 353
354 California State Auditor Report 2004-406
DEPARTMENT OF SOCIAL SERVICES
Continuing Weaknesses in the
Department’s Community Care Licensing
Programs May Put the Health and Safety
of Vulnerable Clients at Risk
REPORT NUMBER 2002-114, AUGUST 2003
Department of Social Services’ response as of October 2003
The Joint Legislative Audit Committee requested that we
assess the Department of Social Services’ (department)
Audit Highlights . . .
policies and practices for licensing and monitoring
As the State’s agency for community care facilities. Since our last review in August 2000
licensing and monitoring (child care report), the department has more selectively granted
community care facilities, the
criminal history exemptions and has prioritized and quickly
Department of Social Services:
processed legal actions against facility licensees. However, the
þ Has been less prompt department could improve in other areas.
in communicating
exemption decisions.
Finding #1: The caregiver background check bureau granted
þ Has not adequately
managed or investigated exemptions without considering all available information.
subsequent criminal
The caregiver background check bureau (CBCB) did not
history reports.
sufficiently consider information other than convictions
þ Did not always follow when reviewing five of the 45 approvals we examined. The
its complaint procedures
department’s evaluator manual instructs the CBCB staff to
or make certain that
facilities fully corrected consider factors such as the age of a crime, a pattern of activity
identified deficiencies. potentially harmful to clients, and compelling evidence to
demonstrate rehabilitation. However, the CBCB did not always
þ Has adequately reviewed
consider all these factors. For example, the CBCB ignored self-
the counties it contracts
with to license foster disclosed crimes not appearing on individuals’ criminal history
family homes, but has records (rap sheets) and accepted without question character
not always corrected
references that appeared inadequate.
identified deficiencies.
þ Was not always timely, To ensure that criminal history exemptions are not granted to
consistent, and thorough
individuals who may pose a threat to the health and safety of
in its enforcement of
clients in community care facilities, the department should:
legal decisions.
• Make certain it has clear policies and procedures for granting
criminal history exemptions.
California State Auditor Report 2004-406 355
• Ensure staff are trained on the types of information they
should obtain and review when considering a criminal history
exemption, such as clarifying self-disclosed crimes and vague
character references.
Department Action: Partial corrective action taken.
The department reported that it agrees with these
recommendations. It has drafted procedures related to
exemption processing, trained its staff on these procedures
in September 2003, and will release an updated procedures
manual in November 2003. The department reported that
rap sheet screening procedures, among others, have been
finalized and it is training staff on this material.
Finding #2: The CBCB often did not perform criminal history
checks within established time frames.
The CBCB’s performance in promptly communicating to
facilities and individuals the ultimate decisions on exemption
requests worsened since we issued the child care report, despite
the CBCB extending its time frames for decisions from 45 days
to 60 days. In 20 of the 45 (44 percent) criminal history
exemption approvals we examined, the CBCB did not meet its
timeline in effect when the exemption decisions were made,
even though there was nothing unusually complex about
most of the cases. In July 2003, emergency regulations became
effective that prohibit an individual from being in a licensed
facility until the CBCB completes a criminal history review.
This regulatory change addresses the concern that individuals
with dangerous criminal backgrounds may begin work before
the department has evaluated their criminal history. However,
the CBCB’s delays will also prevent individuals with less serious
criminal histories from working until the CBCB completes its
criminal history reviews. Thus, the CBCB’s delays may impede a
person’s ability to work.
To process criminal history reviews as quickly as possible so that
delays do not impede individuals’ right to work or its licensed
facilities’ ability to operate efficiently, the department should
work to make certain that staff meet established time frames for
making exemption decisions as requested.
356 California State Auditor Report 2004-406 California State Auditor Report 2004-406 357
Department Action: Partial corrective action taken.
The department said that it was placing a higher priority
on individuals with lesser crimes or infractions because this
group represents the largest majority of workload and allows
these individuals to be in a facility as quickly as possible.
The department stated that individuals needing a standard
exemption will take longer to process.
Finding #3: The CBCB’s quality control review of exemption
decisions was not always effective.
Although the CBCB performed quality control reviews of
exemption analysts’ processing of exemption requests, we had
one or more concerns with six of 17 cases that were subject
to the CBCB’s quality control process, indicating further
improvement is necessary. The CBCB’s quality control process is
designed to help ensure that the exemption analysts reached the
proper decisions based on the available information, including,
but not limited to, rap sheets. In addition, the CBCB requires
the quality assurance reviewer to verify that exemption analysts
properly complete departmental forms and correctly draft letters
communicating the exemption decision to the appropriate
people and entities. However, we found that the CBCB’s quality
assurance reviewers sometimes failed to question cases for which
exemption analysts had recommended approval despite missing
documents or vague disclosures.
The department should assess its quality control review process
and ensure that these policies and procedures encompass a
review of the key elements of the exemption decision process.
Department Action: Partial corrective action taken.
The department stated that it is modifying its quality control
procedures and expects final procedures to be in place by the
end of 2003.
356 California State Auditor Report 2004-406 California State Auditor Report 2004-406 357
Finding #4: The department could better track and assess
arrest-only information and better review criminal history
information before issuing clearances.
If the CBCB receives arrest-only information, which discloses
arrests for crimes without convictions, the CBCB may refer the
information to the department’s Background Information Review
Section (BIRS). The BIRS determines whether an investigation of
the circumstances leading to the arrest is necessary.
We expected the BIRS to have a process in place that did
the following:
• Recorded when a case was referred to the field for
investigation.
• Tracked a case to ensure that an investigation took place.
However, when the BIRS initiated an investigation, it failed
to effectively track cases to their conclusion and has no
systematic follow-up on cases it referred to the field to ensure an
investigation is completed. As a result, necessary investigations
may not have been completed, potentially exposing clients in
community care facilities to unfit caregivers.
In addition, the department’s policies and procedures for
processing and tracking arrest-only investigations are not always
clear. For example, confusion exists about how field investigators
are to report their recommendations on cases involving behavior
that is considered “conduct inimical”—behavior so harmful
or injurious, either in or out of a facility, that there may be a
statutory basis to ban an individual from a licensed community
care facility. It is clear that both the BIRS and licensing offices
should be informed of the recommendation, but it is not clear if
the field investigators are to inform the licensing offices directly,
or indirectly, through the BIRS. Without clear communication
to track the status of a case, it is possible that after determining
that an individual is unfit to be a caregiver, the department
would fail to take action to remove the individual.
If the arrest-only information reflects a crime the CBCB
considers inconsequential, such as a vehicle code infraction,
or if a field investigation initiated by the BIRS cannot develop
sufficient information to legally exclude the individual, either
unit will issue a criminal history clearance. In three of 25 cases
358 California State Auditor Report 2004-406 California State Auditor Report 2004-406 359
with arrest-only information we examined, the CBCB (two
cases) and the BIRS (one case) inappropriately issued criminal
history clearances to individuals who were actively involved
in court-mandated diversion programs. In these three cases—
two cases involving welfare fraud and perjury and one case
involving possession of a controlled substance—the CBCB
and the BIRS failed to follow department policy of seeking
additional information to determine whether the individuals
were satisfactorily meeting the court’s requirements. By clearing
individuals currently participating in diversion programs, we
believe that the CBCB and the BIRS risk ignoring important
information that could be used to better protect clients in
community care facilities.
So that investigations of arrest-only information are properly tracked
and communicated, we recommended that the department:
• Develop a process for the BIRS to record when it refers a case
for investigation and track a case to make certain that an
investigation takes place.
• Make certain that policies and procedures are consistent and
clear on where the responsibility lies for ensuring that the
necessary action occurs upon an investigation’s completion.
We also recommended that the department review and enforce
its arrest-only policies and procedures to ensure that it is issuing
criminal history clearances only when appropriate to do so and
properly train staff on these policies and procedures.
Department Action: Corrective action taken.
The department stated that it implemented a system that
generates a listing of cases and the dates these cases are
referred to the field for investigation. The department
said the list will prompt its analysts to inquire about the
status of case investigations. In addition, the department
reported that it implemented procedures that clearly define
the responsibilities for ensuring that an investigation has
been completed and appropriate action taken. Finally, the
department stated that it had implemented procedures that
address clearance criteria for arrests and that all appropriate
staff have been trained.
358 California State Auditor Report 2004-406 California State Auditor Report 2004-406 359
Finding #5: The CBCB’s handling of subsequent criminal
history information was weak.
The Department of Justice (Justice) sends the CBCB subsequent
rap sheets (subraps) to notify the CBCB of crimes for which
caregivers or others at a facility have been arrested or convicted
after the CBCB conducts its initial criminal history review.
However, significant problems exist in the way the CBCB
processes subrap information it receives from Justice. For
example, the CBCB did not have adequate procedures for
tracking its handling of subraps and sometimes did not record
when it had received them. By not tracking its process, the
CBCB was unable to effectively monitor whether it promptly
considered subraps to protect clients in community care
facilities. Furthermore, the CBCB was slow to notify facilities
when exemptions were needed based on conviction information
in subraps and did not notify its licensing offices when
individuals could no longer be present in facilities because they
failed to respond to these notices. Because of these delays, the
CBCB sometimes allowed individuals unfit to be caregivers to
remain in that role.
To ensure the department can account for all subraps it
receives and that it processes this information promptly, we
recommended that the department develop and implement a
policy for recording a subrap’s receipt and train staff on this
policy. In addition, upon receiving a subrap, the department
should ensure that staff meet established timeframes for
notifying individuals that they need an exemption.
So that the department’s licensing staff have accurate
information about who should or should not be in a facility,
thereby helping to protect clients, the department should meet
its established time frame for notifying licensing staff and
facility owners/operators that an individual has not submitted
a criminal history exemption request as necessary and may no
longer be present in a facility.
Department Action: Partial corrective action taken.
The department said that it has modified its computer
system to allow for better subrap tracking. In addition,
the department reported that all policies, procedures, and
training plans will be in place by January 2004. Moreover,
the department stated that it has placed a higher priority on
cases where individuals have received approval to work in a
facility and are later arrested for certain crimes or are
360 California State Auditor Report 2004-406 California State Auditor Report 2004-406 361
convicted of a crime. Finally, the department reported that
it is reassessing its work priorities in order to establish more
realistic timeframes regarding exemption needed notices.
Finding #6: Under the CBCB’s current criminal history review
procedures, certain out-of-state crimes may go undetected.
If an individual leaves a community care facility and returns
to work within two years, the CBCB may not be aware of that
individual’s complete criminal record for the two-year period. To
meet the Health and Safety Code requirement that it maintain
criminal record clearances for two years after a caregiver or adult
nonclient resident is no longer in a facility, the CBCB receives
subraps from Justice disclosing any in-state criminal activity
over the two-year period. Department policy is to rely on these
ongoing disclosures and not require a full criminal background
check when these individuals return to work in a licensed
facility. As a result, a caregiver or nonclient resident could leave
a facility, be arrested or convicted of a crime outside of the
State, which would not appear in Justice’s subraps, and then
return to a facility within two years without the CBCB knowing
about the criminal activity. Unlike Justice, according to the
operations branch chief of the Community Care Licensing
Division, the Federal Bureau of Investigation does not offer a
subrap service. However, he acknowledged that the problem
we outlined exists, and stated that the department would
continue to look at the issue.
We recommended that the department assess its Federal
Bureau of Investigation background check practices to
ensure that it is fully aware of an individual’s criminal
record should that individual have a two-year or less gap in
employment in community care.
Department Action: Pending.
Ü The department assessed its practices as we recommended,
but reported that limited resources will prohibit it from
requiring additional Federal Bureau of Investigation
background checks for individuals who become disassociated
from a facility and then return to work within two years.
360 California State Auditor Report 2004-406 California State Auditor Report 2004-406 361
Finding #7: The department did not always follow required
complaint procedures.
The department asserts that most of the corrective actions it
undertakes are identified through its complaint process rather
than other facility evaluations. However, we found when
licensing analysts (analysts) identified facilities’ deficiencies
during complaint investigations, they did not always ensure that
caregivers complied with the corrective action plans. For 11 of
the 33 substantiated complaints we reviewed, the department
could not demonstrate that the facilities completely corrected
the problems that prompted the complaints. By not following
through to see that corrections are made, the department negates
its efforts in investigating and substantiating complaints.
To protect clients’ welfare, laws and procedures mandate certain
time frames within which the department must initiate and
follow through on complaint investigations, but the department
did not always meet these timeframes. For example, our review
of 75 complaints the department received in calendar years 2001
and 2002 identified 19 complaints for which the department
made its initial facility visits beyond the 10-day requirement set
by law. The visits ranged from two to 175 days late. Whenever
the department delays an initial facility visit following receipt
of a complaint, the department runs the risk of perpetuating a
client’s exposure to the alleged harmful conditions.
Finally, the department’s policies specify that abuse complaints
are a top priority and require analysts and supervisors to
handle these complaints differently from routine complaint
investigations because these complaints represent a serious
threat to the clients’ well-being. However, the department did
not consistently follow these special procedures for the top-
priority allegations among the 75 complaints we reviewed.
For instance, the department did not refer two of 22 abuse
complaints to the field investigators as required and did not
send another three within the required time frame of eight
working hours after receiving the complaint. When analysts
do not refer or are slow to refer serious complaints to the field
investigators, the analysts risk jeopardizing the expeditious
handling of complaints and may affect the immediate safety of
vulnerable clients.
To address the department’s weaknesses in following required
complaint procedures, we recommended that the department:
362 California State Auditor Report 2004-406 California State Auditor Report 2004-406 363
• Continue to emphasize complaint investigations over other
duties and require supervisors to review evidence that facilities
took corrective action before signing off on a complaint.
• Require analysts to begin investigating complaints within
10 days of receiving complaints.
• Ensure that analysts follow policies requiring them to refer
to the investigations unit any serious allegation within
eight hours of receipt.
Department Action: Partial corrective action taken.
In August 2003, the department reminded its licensing staff
of the importance of conducting and completing complaint
investigations in a timely manner through a Workload
Prioritization memorandum. The department reported that it
will require all supervisors to wait to sign off on complaints
until all plans of correction are complete. The department
cited its increasing emphasis on complaints and the concern
that all corrections be completed for making this change.
The department indicated it plans to change its evaluator
manual to reflect the requirement that licensing field
staff issue a citation within 10 days of receipt of the
investigative findings.
Finding #8: Certified family homes may have avoided
correcting their deficiencies by changing certification from
one foster family agency to another.
The department is responsible for licensing foster family
agencies—private nonprofit corporations that in turn certify
adults (certified parents) to operate foster family homes (certified
family homes). However, because the department does not
require foster family agencies to request information about
applicants’ compliance histories, the opportunity exists for
certified parents to avoid correcting identified deficiencies.
We recommended that the department require foster family
agencies to ask each applicant whether he or she had
uncorrected, substantiated complaints at any other foster family
agency and to verify the accuracy of an applicant’s statements
with the applicant’s immediate prior foster family agency.
362 California State Auditor Report 2004-406 California State Auditor Report 2004-406 363
Department Action: Partial corrective action taken.
The department reported that it is developing a self-
assessment Technical Assistance Guide for foster family
agencies and plans to finalize it by February 2004. In
addition, the department stated that this guide will serve
as the foundation for regulations that it will develop
within a year.
Finding #9: The department sometimes granted facility
licenses based on incomplete applications and did not always
perform required post-licensing visits.
When making its decision to license a new facility, the
department did not always demonstrate that it collects and
considers all required information and documents that help
ensure the safety of vulnerable clients, such as evidence that the
applicant obtained the necessary health screening and client
care training. For example, of the 54 licenses we reviewed that
the department granted during 2001 and 2002, the department
granted 12 licenses before the applicants met one or more of
the necessary requirements. In addition, the department did not
consistently conduct all necessary post-licensing evaluations
or ensure that the visits it did perform were made within
statutory timelines. Specifically, of the 54 licenses we reviewed,
44 required post-licensing visits. For 13 of these facilities, the
department could not provide documentation that it had
conducted the necessary post-licensing visits. Moreover, the
department conducted post-licensing visits late for an additional
21 facilities.
To ensure that it issues licenses only to qualified individuals,
we recommended that the department ensure that analysts
follow the department’s checklist in collecting and considering
all required licensing information, including, but not limited
to, health screening reports, administrator’s certification, and
necessary background checks.
We also recommended that the department conduct the
necessary post-licensing evaluations within the required
time frame to make certain that newly licensed caregivers are
operating according to regulations.
364 California State Auditor Report 2004-406 California State Auditor Report 2004-406 365
Department Action: Partial corrective action taken.
The department reported that it completed reviews of
its licensing processes for its four program areas and is
developing plans to better assure that all information
necessary to approve licenses is received and reviewed. In
September 2003, the department issued a memo outlining its
program focus in response to the fiscal year 2003–04 budget.
The memo lists post-licensing evaluations as an important
activity and introduces annual and sample visit protocols
that will provide additional time for post-licensing visits.
Finding #10: The department did not always evaluate staff
performance or provide required staff training.
To periodically monitor the quality of the most important
aspects of an analyst’s work, the department created its quality
enhancement process (QEP) reviews. Although supervisors in
the foster care program prepared and documented the necessary
QEPs for the analysts we selected to review, supervisors in the
adult and senior care programs at the licensing offices we visited
did not. In fact, adult and senior care program supervisors did
not complete nine of the 11 QEP reviews of analysts we selected
for examination. Although the supervisor recalls preparing
QEPs for the remaining two analysts, she could not provide
documentation to support her assertion. We believe ongoing
assessment of the analysts’ performance is essential to ensure the
analysts are effectively applying program policies.
The Health and Safety code sets out staff development and
training requirements for all analysts so they have the skills
necessary to properly carry out their duties. Although these
requirements are designed to provide information analysts need
to stay current with the demands of their jobs, of the 22 analysts
we selected who required this level of training during fiscal
year 2001–02, 20 had training hours that fell short of statutory
requirements. Without the necessary ongoing training, we
question whether analysts are prepared to effectively perform
their duties.
We recommended that the department make certain that
all licensing office supervisors conduct QEP reviews of their
assigned analysts. In addition, we recommended that the
department make available to analysts the necessary training
and develop a method to track whether analysts are meeting
statutory training requirements.
364 California State Auditor Report 2004-406 California State Auditor Report 2004-406 365
Department Action: Partial corrective action taken.
Ü The department reported that it suspended its QEP
evaluations in offices with severe staffing shortages and that
it plans to reimplement these evaluations when staffing
levels improve.
The department also stated that it had developed a new
training database and instructed staff on its use. In addition,
the department said it is developing a training need
assessment tool to assist it in determining the specific needs
of each licensing program.
Finding #11: The department has adequately monitored
county licensing functions, but did not always ensure
counties promptly corrected deficiencies.
As the department’s agents for licensing and monitoring foster
family homes within their geographical boundaries, contracted
counties must follow related state law and department
guidelines for implementing and enforcing rules and regulations
pertaining to foster family homes. Although the department
reviews the counties’ licensing programs, it provides limited
guidance regarding time frames to department staff performing
the reviews, for preparing their reports, notifying counties about
deficiencies, and to provide counties to correct deficiencies. Our
analysis revealed that liaisons sometimes allowed a long time to
elapse between the end of their reviews and the due date for the
counties to submit their corrective action plans. Four counties
we reviewed originally had between 120 days and 329 days
after the end of the review to submit their plans, and the liaison
granted extensions to the due dates for three of these. By
not obtaining the counties’ evidence of prompt corrective
action, the department has limited the effectiveness of its
county reviews and potentially allows counties to continue
to operate improperly.
To help ensure that counties contracting with the department
to license and monitor foster family homes adequately and
promptly respond to complaints and enforce corrective actions,
we recommended that the department establish reasonable time
frames for liaisons to prepare reports resulting from reviews
of the counties and to notify counties of the results of those
reviews and for counties to submit and complete their corrective
action plans.
366 California State Auditor Report 2004-406 California State Auditor Report 2004-406 367
Department Action: Corrective action taken.
The department said that it developed a formal policy
with timeframes for liaisons to prepare reports and send
notification of the review results to the affected county. In
addition, the department developed standard timeframes
for staff to utilize in developing corrective action plans. This
policy went into effect October 1, 2003.
Finding #12: Despite recent efforts to improve, the
department could do more to oversee county criminal
history exemptions.
There are 42 counties that contract with the department
to license foster family homes, and these counties perform
background checks on potential caregivers and nonclient
residents to ensure that people with serious criminal histories
are not providing foster care or living in foster family homes.
Contracted counties must submit exemption reports each
quarter, but the department did not fully utilize the reports.
The department has not provided its staff guidance on when
to review the reports, what to look for when they perform
their reviews, and when to follow up. We believe collecting
and reviewing the exemption reports on a continuous basis
allows the department to track criminal record information
from all 42 counties and make certain it is aware of all their
exemption processing.
We recommended that the department develop procedures
to ensure that it promptly and consistently reviews quarterly
reports on exemptions granted by each contracted county to
help ensure that counties contracting with the department
to license foster family homes are making reasonable decisions
regarding criminal history exemptions.
Department Action: None.
Ü In its response, the department stated that it has continually
reviewed its quarterly county exemption reporting process
with the counties and licensing supervisors. However, the
department has not addressed the need for it to establish
internal procedures to ensure the information the counties
submit is promptly and consistently reviewed.
366 California State Auditor Report 2004-406 California State Auditor Report 2004-406 367
Finding #13: By conducting follow-up visits, the department
could have improved its enforcement of legal actions.
Once the department signs a decision revoking a caregiver’s
license, excluding a caregiver or adult nonclient resident, or
putting a caregiver on probation, the legal division is responsible
for sending a copy of the decision to the applicable licensing
office. The licensing office is then responsible for enforcing
the legal actions. We reviewed 26 legal actions which resulted in
a caregiver’s probation, exclusion, or license revocation.
In 11 instances the department either did not adhere to its
follow-up procedures to ensure the caregivers complied with
the terms of the probation, revocation, or exclusion, or did not
document its actions. Specifically, in five cases, the department
failed to follow up with the caregiver promptly and in two cases
did not visit the caregiver at all. In the remaining four cases, the
department did not document the actions it took to follow up
on the legal decision that was made.
To improve its enforcement of legal actions, we recommended
that the department conduct follow-up visits to ensure that
enforcement actions against facilities are carried out and that
it document its follow-up for enforcement of revocation and
exclusion cases.
Department Action: Corrective action taken.
The department stated that in August and September 2003 it
issued memos reemphasizing the importance of conducting
required visits to facilities to enforce legal actions.
368 California State Auditor Report 2004-406
DEPARTMENT OF HEALTH SERVICES
It Needs to Better Plan and Coordinate
Its Medi-Cal Antifraud Activities
REPORT NUMBER 2003-112, DECEMBER 2003
Audit Highlights . . .
Departments of Health Services’ and Justice’s responses as of
Our review of the Department December 2003
of Health Services’ (Health
Services) activities to identify The Joint Legislative Audit Committee (audit committee)
and reduce provider fraud
asked us to review the Department of Health Services’
in the California Medical
Assistance Program (Medi-Cal) (Health Services) reimbursement practices and the systems
revealed the following: in place for identifying potential cases of fraud in the Medi-Cal
þ Because it has not yet program, with the aim of identifying gaps in California’s efforts
assessed the level of to combat fraud. Many of the concerns we report point to the
improper payments lack of certain components of a model fraud control strategy to
occurring in the Medi-Cal
guide the various antifraud efforts for the Medi-Cal program.
program and systematically
Specifically, we found:
evaluated the effectiveness
of its antifraud efforts,
Health Services cannot
know whether its antifraud Finding #1: Health Services lacks some components of a
efforts are at appropriate model fraud control strategy.
levels and focused in the
right areas. Although Health Services has received many additional staff
positions and has established a variety of antifraud activities to
þ Health Services has not
combat Medi-Cal provider fraud, it lacks some components of a
clearly communicated roles
and responsibilities and has comprehensive strategy to guide and coordinate these activities
not adequately coordinated to ensure that they are effective and efficient. Specifically, it has
antifraud activities both
not yet developed an estimate of the overall extent of fraud in
within Health Services
and with other entities, the Medi-Cal program. Without such an assessment, Health
which has contributed to Services cannot be sure it is targeting the right level of resources
some unnecessary work or
to the areas of greatest fraud risk. The Legislature approved
ineffective antifraud efforts.
Health Services’ 2003 budget proposal for an error rate study
þ An updated agreement with to assess the extent of improper payments in the Medi-Cal
the California Department program, and Health Services is just beginning this assessment.
of Justice could help Health
Services better coordinate
investigative efforts related In addition, Health Services has not clearly designated who
to provider fraud. is responsible for implementing the Medi-Cal fraud control
program. A model antifraud strategy involves a clear designation
continued on next page
of responsibility for fraud control, which in turn requires someone
or a team with authority over the functional components
that implement the antifraud program. Although Audits
California State Auditor Report 2004-406 369
þ Because it lacks an and Investigations (audits and investigations) is the central
individual or team with coordination point for antifraud activities within Health Services,
the responsibility and
some antifraud efforts are located in other divisions and bureaus of
authority to ensure
Health Services or in other state departments over which audits and
fraud control issues and
recommendations are investigations has no authority. Thus, audits and investigations’
promptly addressed and designation as the central coordination point within Health
implemented, some well-
Services does not completely fill the need for an individual or
known problems may
go uncorrected. team that crosses departmental lines and is charged with the
overall responsibility and authority for detecting and preventing
þ Health Services does
Medi-Cal fraud.
not obtain sufficient
information to identify and
control the potential fraud Rather than measuring the impact of its efforts by the amount
unique to managed care. of reduction in fraud, Health Services measures its success by
reference to unreliable savings and cost avoidance estimates. A
component of a model antifraud strategy requires evaluating
the impact of antifraud efforts on fraud both before and after
implementation of the effort. However, Health Services measures
its efforts by the achievement of goals established during
the development of its savings and cost avoidance estimates.
Although antifraud efforts offer savings, they also need to be
measured against their effect on the overall fraud problem to
determine whether the control activities should be adjusted.
Finally, Health Services does not currently have processes to
ensure that each claim faces some risk of fraud review. According
to Health Services, although its current claims processing
system subjects each claim to certain edits and audits, it does
not subject each claim to the potential for random selection
and in-depth evaluation for the detection of potential fraud.
The 2003 budget proposal included establishing a systematic
process to randomly select claims for in-depth evaluation and
this is one of the components the Legislature approved.
We recommended that Health Services develop a complete
strategy to address the Medi-Cal fraud problem and guide its
antifraud efforts. This should include adding the currently missing
components of a model fraud control strategy, such as an annual
assessment of the extent of fraud in the Medi-Cal program, an
outline of the roles and responsibilities of and the coordination
between Health Services and other entities, and a description of
how Health Services will measure the performance of its antifraud
efforts and evaluate whether adjustments are needed.
370 California State Auditor Report 2004-406 California State Auditor Report 2004-406 371
Health Services’ Action: Pending.
Health Services stated that it is in the process of implementing
the model fraud control strategies. It has received federal
funding for evaluating and measuring payment accuracy
and will develop plans for annual payment accuracy studies
that will aid in allocating resources and evaluating fraud
deterrence and detection efforts. Health Services also stated
that it will document the roles and responsibilities of the
various programs participating in antifraud efforts and
will work with the Health and Human Services Agency to
improve the coordination of antifraud activities with other
departments under its authority.
Finding #2: Health Services has not yet conducted routine
and systematic measurements of the extent of fraud in the
Medi-Cal program.
Health Services has not systematically assessed the amount
or nature of improper payments in the Medi-Cal program.
Improper payments include any payment to an ineligible
beneficiary, any payment for an ineligible service, any duplicate
payment, payments for services not received, and any payment
that does not account for applicable discounts. Without this
information, Health Services does not know whether it is
overinvesting or underinvesting in its payment control system,
or whether it is allocating resources in the appropriate areas.
The Legislature approved portions of Health Services’ May 2003
budget proposal including an error rate study and random
sampling of claims. Building upon its authorization to conduct
an error rate study, in August 2003 Health Services applied to the
federal Centers for Medicare and Medicaid Services to participate
in its Payment Accuracy Measurement (PAM) project for fiscal
year 2003–04. In its PAM proposal, Health Services stated
that it would develop an audit program to accomplish certain
objectives, including identifying improper payments, and a
questionnaire to confirm that a beneficiary actually received the
services claimed by the provider. However, until Health Services
completes its audit program and procedures, it is premature to
conclude on the adequacy of its approach to verify services with
beneficiaries to estimate the level of fraudulent payments.
370 California State Auditor Report 2004-406 California State Auditor Report 2004-406 371
We recommended that Health Services establish appropriate
claim review steps, such as verifying with beneficiaries the
actual services rendered, to allow it to estimate the amount of
fraud in the Medi-Cal program as part of its PAM study. We also
recommended that it ensure the payment accuracy benchmark
developed by the PAM model is reassessed by annually
monitoring and updating its methodologies for measuring the
amount of improper payments in the Medi-Cal program.
Health Services’ Action: Pending.
Health Services reported that it will ensure an appropriate
claim review step is included to verify with the beneficiary
that actual services were rendered. It also plans to reassess
monitoring and measurement methodologies annually.
Finding #3: Health Services does not evaluate the effect
on the extent of fraud of its antifraud activities and uses
unreliable savings estimates.
Health Services does not perform a cost-benefit analysis for each of
its antifraud activities, nor does it use reliable savings estimates to
justify its requests for additional antifraud positions. According
to Health Services, it uses a form of cost-benefit analysis, using
estimated savings or cost avoidance as the benefit, to make
decisions regarding resource allocations. Health Services indicated
that it looks at the costs and savings of its antifraud activities in
the aggregate and not by specific activity because not all the fraud
positions it received are directly involved in savings and cost
avoidance activities. Although it acknowledged that it does not
use a formal cost-benefit analysis, Health Services asserts that it
performs an intuitive type of assessment.
Health Services computes a savings and cost avoidance chart
(savings chart) to estimate the savings it expects to achieve from its
antifraud activities in the current and budget year. Health Services
also uses the savings chart to quantify the achievements of each
of its antifraud activities in the prior year and as a management
tool to allocate resources. Health Services used the savings chart
it created in November 2002 to support its request for 315 new
positions for antifraud activities in its May 2003 budget proposal,
of which the Legislature ultimately approved 161.5 positions.
However, Health Services’ November 2002 savings chart
potentially overstates its estimated savings because of a flaw in
the methodology it uses to calculate the savings. Health Services
372 California State Auditor Report 2004-406 California State Auditor Report 2004-406 373
calculates its savings and cost avoidance estimates for some
categories by using the average 12-month paid claims history
of providers who have been placed on administrative sanctions.
Health Services assumes that 100 percent of the claims it
paid during the prior 12-month period to those providers
sanctioned in the current year would be savings in the budget
year. However, it does not perform any additional analysis to
determine what proportion of the sanctioned providers’ paid
claims was actually improper. We questioned the soundness
of Health Services’ methodology because even though the
improper portion of the claim history would be potential
savings, any legitimate claims submitted by the sanctioned
provider could continue as a program cost for beneficiaries who
would presumably receive health care services from another
provider who would bill the program.
We recommended that Health Services perform cost-benefit
analyses that measure the effect its antifraud activities have on
reducing fraud. Additionally, it should continuously monitor
the performance of these activities to ensure that they remain
cost-effective.
Health Services’ Action: Pending.
Health Services stated that through the use of enhanced
data analysis software and relationships with its various
contractors, it will develop a standard cost-benefit analysis
methodology for each antifraud proposal.
Finding #4: The provider enrollment process continues to
need improvement.
Health Services’ Provider Enrollment Branch (enrollment branch)
screens applications to ensure that the providers it enrolls are
eligible to participate in the Medi-Cal program. This includes
ensuring that all Medi-Cal providers have completed applications,
disclosure statements, and agreements on file, to help it determine
whether providers have any related financial and ownership
interests that may give them the incentive to commit fraud or were
previously convicted of health care fraud. It also must suspend
those Medi-Cal providers whose licenses and certifications are not
current or active. Although these activities are important first lines
of defense in preventing fraudulent providers from participating
in the Medi-Cal program, the enrollment branch is not fully
performing either of these activities.
372 California State Auditor Report 2004-406 California State Auditor Report 2004-406 373
In our May 2002 report, Department of Health Services: It Needs
to Significantly Improve Its Management of the Medi-Cal Provider
Enrollment Process, Report 2001-129, we made a number of
recommendations to improve the provider enrollment process.
However, the enrollment branch has not fully implemented
many of these recommendations. For example, we recommended
that the enrollment branch use its Provider Enrollment Tracking
System to ensure that it sends notifications to applicants at proper
intervals. However, the enrollment branch still does not track
whether it sends the required notifications to applicants, nor
does it notify a provider when an application is sent to audits and
investigations for secondary review.
New legislation that took effect on January 1, 2004, increases
the importance of sending these notifications. If the enrollment
branch does not notify applicants within 180 days of receiving
their applications that their application has been denied, is
incomplete, or that a secondary review is being conducted,
it must grant the applicant provisional provider status for up
to 12 months. Moreover, this new legislation requires these
notifications for applications be received before May 1, 2003. As of
September 29, 2003, the enrollment branch had 1,058 applications
still open that it received before May 1, 2003. If the enrollment
branch did not notify these applicants of its decision on or before
January 1, 2004, it must grant them provisional provider status
regardless of any ongoing review.
It is noteworthy that when the enrollment branch refers
applications to audits and investigations for secondary review,
the processing time typically extends well beyond 180 days.
Because audits and investigations currently has about a six-month
backlog, the first thing an analyst does when performing a
preliminary desk review is contact the applicant to verify the
current address and continued interest in applying to the
program. The analyst also redoes some of the screening previously
performed by the enrollment branch, such as checking to confirm
that the applicant’s license is valid, resulting in inefficiencies and
further extending the time applicants are left waiting.
Health Services is unable to ensure that all provider applications
are processed consistently and in conformity with federal and
state program requirements. The enrollment branch reviews
applications for certain provider types, such as physicians,
pharmacies, clinical labs, suppliers of durable medical equipment,
and nonemergency medical transportation. The enrollment
374 California State Auditor Report 2004-406 California State Auditor Report 2004-406 375
branch checks a variety of sources to confirm licensure,
verify the information provided on the application, confirm
that the applicant has not been placed on the Medicare list of
excluded providers, and refers many applications to audits and
investigations for further review. However, other divisions within
Health Services and other departments responsible for reviewing
certain types of provider applications and recommending
provider enrollment do not conduct a similar review. Since
different units and departments screen providers against different
criteria, Health Services may be allowing ineligible individuals to
participate as providers in the Medi-Cal program.
Health Services’ procedures are not always effective to ensure
that enrolled providers remain eligible to participate in the
Medi-Cal program. Our review of 30 enrolled Medi-Cal providers
that Health Services paid in fiscal year 2002–03 disclosed two
with canceled licenses. Even though state law requires providers
whose license, certificate, or approval has been revoked or is
pending revocation to be automatically suspended from the
Medi-Cal program effective on the same date the license was
revoked or lost, as of August 2003, the provider numbers for
both of these providers were being used to continue billing and
receiving payment from the Medi-Cal program every month
since the cancellations occurred. Our review of the 30 selected
providers also found that, despite the fraud prevention
capabilities these required disclosures and agreements provide,
the enrollment branch did not always have the agreements
and disclosures required by state and federal regulations. Two
of the 30 provider files we reviewed did not contain disclosure
statements, and Health Services could not locate agreements
for 24 of these providers. The disclosure statements provide
relevant information to ensure that the provider has not been
convicted of a crime related to health care fraud, and that the
provider does not have an incentive to commit fraud based on
the financial and ownership interests disclosed. The provider
agreements give Health Services a certification that the provider
will abide by federal and state laws and regulations, will disclose
all financial and ownership interests and criminal background,
will agree to a background check and unannounced visit, and will
agree not to commit fraud or abuse.
Our May 2002 audit recommended that the enrollment branch
consider reenrolling all provider types. Reenrollment would
improve the enrollment branch’s ability to ensure that all
providers have current licenses, disclosure statements, and
agreements on file. Although the enrollment branch has begun
374 California State Auditor Report 2004-406 California State Auditor Report 2004-406 375
reenrolling certain provider types it has identified as high risk,
it has not developed a strategy to reenroll all providers and does
not have a process to periodically check the licensure of existing
providers with state professional boards. Additionally, it has not
completed an analysis to determine what resources it would
need to reenroll all providers.
To improve the processing of provider applications, we
recommended that Health Services complete its plan and
related policies and procedures to process all applications
or send appropriate notifications within 180 days, complete
the workload analysis we recommended in our May 2002
audit report to assess the staffing needed to accommodate its
application processing workload, and improve its coordination
of efforts between the enrollment branch and audits and
investigations to ensure that applications, as well as any
appropriate notices, are processed within the timelines specified
in laws and regulations.
To ensure that all provider applications are processed
consistently within its divisions and branches and within other
state departments, we recommended that Health Services ensure
that all individual providers are subjected to the same screening
process, regardless of which division within Health Services is
responsible for initially processing the application. In addition,
we recommended that Health Services work through the
California Health and Human Services Agency to reach similar
agreements with the other state departments approving
Medi-Cal providers for participation in the program.
To ensure that all providers enrolled in the Medi-Cal program
continue to be eligible to participate, we recommended that
Health Services develop a plan for reenrolling all providers on
a continuing basis; enforce laws permitting the deactivation of
providers with canceled licenses or incomplete disclosures; and
enforce its legal responsibility to deactivate provider numbers,
such as when there is a known change of ownership. Further,
we recommended that Health Services establish agreements
with state professional licensing boards so that any changes in
license status can be communicated to the enrollment branch
for prompt updating of the Provider Master File.
376 California State Auditor Report 2004-406 California State Auditor Report 2004-406 377
Health Services’ Action: Pending.
Health Services stated it has taken some steps to improve
the processing of provider applications and has created a
workgroup to establish a complete work plan for processing
applications as required by the new legislation. It will also
evaluate the internal workload study on application processing
and finalize the analysis. With the addition of new staff to
enhance antifraud efforts, Health Services noted that provider
enrollment and audits and investigations began to develop
closer working relationships, and cited various actions taken
to improve communication and coordination. In addition, its
programs will participate and coordinate internally, as well as
with other departments, programs, and entities that perform
similar enrollment functions with the aim of using consistent
enrollment processing procedures. Finally, Health Services
indicates that it is developing a plan to reenroll all providers,
will improve its procedures to ensure that provider numbers are
properly deactivated, and is working with professional licensing
boards to obtain provider permit and licensing information
that is timely and readily useable.
Finding #5: The pre-checkwrite process could achieve more
effective results.
Health Services has a review process it calls pre-checkwrite
that identifies and selects certain suspicious provider claims
for further review from the weekly batch of claims approved for
payment. Although the pre-checkwrite process appears effective
in identifying suspicious providers, Health Services does not
review all of the providers flagged as suspicious. Moreover, Health
Services does not delay the payments associated with suspect
provider claims pending completion of the field office review.
We reviewed 10 weekly pre-checkwrites, which identified a
total of 88 providers with suspicious claims from which Health
Services selected 47 for further review. At the time of our audit,
42 provider reviews had been completed, and 31, or 74 percent,
of these had resulted in an administrative sanction and referral
to the Investigations Branch (investigations branch) or to law
enforcement agencies. According to Health Services, limited
staffing precludes it from reviewing all suspicious providers. Health
Services states that it must perform additional analysis to develop
sufficient evidence and a basis for placing sanctions, including
withholding a payment or placing utilization controls on providers.
376 California State Auditor Report 2004-406 California State Auditor Report 2004-406 377
However, when Health Services does not promptly complete
its reviews and suspend payment of suspicious provider claims
until it completes its on-site review, its pre-checkwrite process
loses its potential effectiveness as a preventive fraud control
measure. Health Services could use existing laws to suspend
payments for claims that its risk assessment process identifies as
potentially fraudulent or abusive and release them once a pre-
checkwrite review verifies the legitimacy of the claim. Although
laws generally require prompt payment, they make an exception
for claims suspected of fraud or abuse and for claims that require
additional evidence to establish their validity.
We recommended that Health Services consider expanding
the number of suspicious providers it subjects to this process,
prioritize field office reviews to focus on those claims or
providers with the highest risk of abuse and fraud, and use the
clean claim laws to suspend payments for suspicious claims
undergoing field office review until it determines the legitimacy
of the claim.
Health Services’ Action: Pending.
Health Services stated that it received additional staffing in
fiscal year 2003–04 to expand the number and timeliness of
pre-checkwrite reviews. It also indicated it will work with
its legal office to maximize the pre-checkwrite activities and
develop criteria to suspend specific claims and hold checks
until the review is complete.
Finding #6: Health Services and the California Department of
Justice have yet to fully coordinate their investigative efforts.
Although Health Services is responsible for performing a
preliminary investigation and referring all cases of suspected
provider fraud to the California Department of Justice (Justice)
for full investigation and prosecution, it does not refer cases as
required. Moreover, Health Services and Justice have been slow in
updating their agreement even though the agreement is required
by federal regulations and could be structured to clarify and
coordinate their roles and responsibilities and, thus, help prevent
many of the communication and coordination problems we
noted with the current investigations and referral processes.
Our comparison of fiscal year 2002–03 referrals of suspected
provider fraud cases from Health Services’ case-tracking system
database to similar records from Justice’s case-tracking system
378 California State Auditor Report 2004-406 California State Auditor Report 2004-406 379
database revealed that 63 (41 percent) of the 152 Health Services
case referrals to Justice were late, incomplete, or never received.
According to Justice, it did not include 60 of the 63 referrals in
its database because they were incomplete when Justice received
them or it received them close to the date of indictment by an
assistant U.S. Attorney for the Eastern District of California
(U.S. Attorney). For the remaining three cases, although Health
Services asserts that it referred them to Justice, Health Services
could not provide documentation that clearly demonstrates its
referral of them. Our review of 14 investigation cases corroborated
that Health Services’ investigations branch referred cases to Justice
late; Health Services referred 12 an average of nearly five months
after the date it had evidence of suspected fraud.
Although Health Services acknowledged that referring cases to
Justice after indictment by the U.S. Attorney is no longer its
practice, according to the investigations branch, it investigates
and refers cases to the U.S. Attorney because the U.S. Attorney
indicts suspected providers and settles cases quickly. Justice, on
the other hand, typically focuses on developing cases for trial
to pursue sentences that it believes reflect the seriousness of the
defendant’s conduct. Although both approaches have merit,
depending on the particular case, Health Services and Justice
have not come to an agreement on when each approach is
appropriate and who should make that determination.
Additionally, according to Health Services’ investigations branch
chief, because neither federal nor state laws provide a clear
definition of what constitutes suspected fraud, the investigations
branch can refer cases to Justice at varying points in the process,
including before, during, or after it has met the reliable evidence
standard. Admittedly, the law does not clearly define what
constitutes suspected fraud, but Health Services and Justice
should reach an agreement on what standard must be met to
assist both agencies in coordinating their respective provider
fraud investigation and prosecution efforts.
The agreement between Health Services and Justice that is
required by federal regulations could help alleviate many of
the current problems about when Health Services should refer
cases to Justice. Over the last several years, Health Services
and Justice have intermittently discussed an update of the
existing 1988 agreement. However, these two entities have yet
to complete negotiations for an update of this agreement or to
define and coordinate their respective roles and responsibilities
for investigating and prosecuting suspected cases of Medi-Cal
provider fraud.
378 California State Auditor Report 2004-406 California State Auditor Report 2004-406 379
We recommended that Health Services promptly refer all cases
of suspected provider fraud to Justice as required by law and that
both Health Services and Justice complete their negotiations
for a current agreement. The agreement should clearly
communicate each agency’s respective roles and responsibilities
to coordinate their efforts, provide definitions of what a
preliminary investigation entails and when a case of suspected
provider fraud would be considered ready for referral to Justice.
To ensure that Health Services and Justice promptly complete
their negotiations for a current agreement, we recommended
that the Legislature consider requiring both agencies to report
the status of the required agreement during budget hearings.
Health Services’ Action: Pending.
Health Services stated that a draft agreement would be
finalized soon. It further indicated that it clarified the need to
make timely referrals to Justice in its policy and procedures.
Justice Action: Pending.
Justice stated that both agencies are working quickly and
in good faith to establish an agreement that will serve to
strengthen the working partnership between the two agencies.
Legislative Action: Unknown.
We are unaware of any legislative action implementing
this recommendation.
Finding #7: A more effective feedback process could
strengthen Health Services’ antifraud efforts.
Although audits and investigations is responsible for
coordinating the various antifraud activities within Health
Services, its line of authority does not extend beyond audits
and investigations. What is lacking is an individual or team
with the responsibility and corresponding authority to ensure
that worthwhile antifraud recommendations are tracked,
followed up, and implemented. Such an individual or team
would provide Health Services’ management with information
about the status of the various projects and measures that are
under way, to ensure that antifraud proposals, including those
involving external entities, are addressed promptly.
380 California State Auditor Report 2004-406 California State Auditor Report 2004-406 381
Without an individual or team with the responsibility and
corresponding authority to follow up and act on recommendations
for strengthening its antifraud efforts, some antifraud coordination
issues or detected fraud control vulnerabilities may continue to
go uncorrected. For example, although Health Services’ provider
enrollment process is the first line of defense to prevent abusive
providers from entering the Medi-Cal program, the provider
enrollment process continues to need improvement. Similarly,
another unresolved fraud control coordination issue is the lack of
an updated agreement between Health Services and Justice related
to the investigation and referral of suspected provider fraud cases.
Although laws make each of these state agencies responsible for
certain aspects of investigating and prosecuting cases of suspected
provider fraud, the current case referral practices result in a
fragmented rather than a cohesive and coordinated antifraud
effort. Both agencies indicate that they have made some efforts
to update their 1988 agreement, but they have yet to complete
negotiations for a current agreement that spells out each agency’s
respective roles and responsibilities.
We recommended that Health Services consider working through
the California Health and Human Services Agency to establish
and maintain an antifraud clearinghouse with staff dedicated to
documenting and tracking information about current statewide
fraud issues, proposed solutions, and ongoing projects, including
assigning an individual or team with the responsibility and
corresponding authority to follow up and promptly act on
recommendations to strengthen Medi-Cal fraud control weaknesses.
Health Services’ Action: Pending.
Health Services recognizes the contribution a clearinghouse
can potentially make and will work with the California
Health and Human Services Agency to more fully explore
this recommendation and different approaches for
its implementation.
Finding #8: Health Services needs to give proper attention to
potential fraud unique to managed care.
In addition to its fee-for-service program, Health Services also
provides Medi-Cal services through a managed care system.
Under this system, the State pays managed care plans monthly
fees, called capitation payments, to provide beneficiaries with
health care services. Although fraud perpetrated by providers
and beneficiaries, similar to what occurs under the fee-for-service
380 California State Auditor Report 2004-406 California State Auditor Report 2004-406 381
system, can also occur, another type of fraud unique to managed
care involves the unwarranted delay in, reduction in, or denial
of care to beneficiaries by a managed care plan.
Because of incomplete survey results and its concerns about
the reliability of encounter data, which are records of services
provided, Health Services does not have sufficient information
to identify managed care contractors that do not promptly
provide needed health care. In addition, Health Services does
not require its managed care plans to estimate the level of
improper payments within their provider networks to assure
they are appropriately controlling their fraud problems and not
significantly affecting the calculation of future capitated rates.
We recommended that Health Services work with its external
quality review organization to determine what additional
measures are needed to obtain individual scores for managed
care plans in the areas of getting needed care and getting
that care promptly, complete its assessment on how it can use
encounter data from the managed care plans to monitor plan
performance and identify areas where it should conduct more
focused studies to investigate potential plan deficiencies, and
consider requiring each managed care plan to estimate the level
of improper payments within its Medi-Cal expenditure data.
Health Services’ Action: Pending.
Health Services stated that its new contracted vendor should
be able to gather data to address the inadequacies found in
the surveys. It is also assessing how it can use managed care
plan data to help target areas for focused monitoring. Health
Services will consult internally and with outside entities on
the feasibility of implementing through appropriate contract
language the requirement that managed care plans estimate
the level of improper payments within their Medi-Cal
expenditure data.
382 California State Auditor Report 2004-406
CALIFORNIA’S WORKERS’
COMPENSATION PROGRAM
The Medical Payment System Does Not
Adequately Control the Costs to Employers
to Treat Injured Workers or Allow for
Adequate Monitoring of System Costs and
Patient Care
REPORT NUMBER 2003-108.1, AUGUST 2003
Audit Highlights . . .
Division of Workers’ Compensation, Department of Industrial
Our review of the workers’ Relations’ response as of January 2004
compensation medical
payments system revealed that: The Joint Legislative Audit Committee requested that
þ Rising medical costs we review the medical costs related to the workers’
are contributing to the compensation insurance system and the extent to which
increasing costs of the
the payment structure has resulted in unacceptably high
workers’ compensation
reimbursement rates.
system—costs California’s
employers are required
to pay.
Finding #1: Workers’ compensation medical costs are rising
þ Despite numerous because the medical payment system has not been well
warnings from research
maintained or fully developed.
experts, the Division of
Workers’ Compensation
The costs of the State’s workers’ compensation program to
(division) has done
employers are spiraling upward, and numerous studies point
little to respond to the
problems in the workers’ to the rising medical costs of treating injured workers as a
compensation medical major contributor to the problem. The Workers’ Compensation
payment system.
Insurance Rating Bureau (rating bureau) reported that the
þ Fee schedules intended to average total estimated medical cost per workers’ compensation
control the amounts paid claim involving lost work time increased by 254 percent from
for medical services and
1992 to 2002. The insurance premiums charged to employers
products are outdated or
to provide workers’ compensation coverage increased from
nonexistent. The medical
payment system lacks $5.8 billion to $14.7 billion between 1995 and 2002.
enforceable treatment
guidelines that can help
The medical costs of the workers’ compensation system are
contain medical costs and
rising in part because the State has not taken the necessary
streamline the delivery of
medical care to injured steps to ensure that the costs of treating injured workers are
workers. Researchers point within reasonable limits. The administrative director of the
to inadequate control over
Department of Industrial Relations’ (Industrial Relations)
treatment utilization as a
primary cause of escalating Division of Workers’ Compensation (division) is responsible
costs in the workers’ for administering and monitoring the workers’ compensation
compensation system.
continued on next page
California State Auditor Report 2004-406 383
þ Although the division system. However, the administrative director has not maintained
could adopt fee schedules or fully developed the medical payment system. Despite
developed by other entities,
mandates to biennially update the medical fee schedules for
such as Medicare, it would
professional services, inpatient hospital facilities, and for
first have to decide on
how to adjust those fee medical products—such as pharmaceuticals and durable medical
schedules to best meet equipment—other than for minor adjustments, these schedules
the needs of the workers’
have not been updated since 1999, and they are essentially a
compensation system.
patchwork of prior fee schedules.
þ The division lacks a data
collection system that
In addition, costs for services performed at facilities such as
allows it to monitor
outpatient surgical centers and emergency rooms are not
medical costs and measure
the effectiveness of reforms covered by fee schedules but are paid on the basis of what are
made to the system. known as usual, customary, and reasonable charges for such
services. Health care experts consider this basis for payment to be
inflationary, and thus these charges may be contributing to the
escalating costs in the workers’ compensation system.
Numerous studies have pointed to opportunities to improve cost
control in the system; however, the division has not built upon
those studies to implement corrective actions. The division’s
administrative director states that the division has not been
able to dedicate more effort to improving the medical payment
system due in part to staff reductions, indicating that he has lost
almost 17 percent of his authorized positions and 19 percent of
his filled positions since fiscal year 1999–2000. He added that
when he was appointed in 1999, he was instructed to place
a greater priority on improving the workers’ compensation
judicial process.
Further, the Legislature and administration have sometimes
responded to the needs of the system with measures that impede
improvement, such as requiring the use of data not currently
being collected to develop a new fee schedule for outpatient
surgical facility charges and reducing the funding for tasks
critical to improving cost control.
Because rising medical costs in workers’ compensation contribute
to increased costs to California’s employers, we recommended
that greater importance should be placed on more closely
managing the costs of providing medical care to injured workers.
As such, the administrative director should take the steps
necessary to identify the organization and level of resources
needed to effectively administer the workers’ compensation
medical payment system and should work with the Department
of Finance and the Legislature to obtain those resources.
In addition, as part of an effort to more closely manage the
384 California State Auditor Report 2004-406 California State Auditor Report 2004-406 385
medical payment system, the administrative director should
more aggressively pursue corrective action needed to address
issues identified in research reports, such as those from the
Commission on Health and Safety and Workers Compensation
(commission), the Industrial Medical Council (medical council),
the California Workers’ Compensation Institute, and the
Workers’ Compensation Research Institute, as well as any issues
raised by internal studies conducted by Industrial Relations.
We further recommended that to ensure future legislation does
not contain any unintended impediments to the improvement
of the workers’ compensation system, the administrative
director should be proactive in working with the Legislature to
identify and amend any provisions that would adversely affect
the administrative director’s ability to effect changes.
Industrial Relations’ Action: Partial corrective action taken.
Industrial Relations believes that the enactment of
Senate Bill 228 (Chapter 639, Statutes of 2003) should reduce
the resources needed to adopt fee schedules. It reports that
the division is currently reviewing its resources and assessing
what specific expertise is needed.
Although Industrial Relations responded that the governor’s
proposal to further reform the workers’ compensation
system will address concerns from stakeholder groups and
research organizations, its response does not address how it
will more aggressively respond to issues raised by researchers
and experts in the field that we describe in our report.
Industrial Relations reports that the Labor and Workforce
Development Agency (agency) and the division worked very
closely with the Legislature and the Governor’s Office on
the proposals that were included in the 2003 reform and are
currently assisting the Governor’s Office in developing and
reviewing legislative proposals to build on existing reforms.
Legislative Action: Legislation proposed.
Conference committee convened.
Finding #2: A lack of effective utilization controls leads to
higher medical costs.
The workers’ compensation payment system lacks a process that
would allow doctors to use a uniform set of treatment guidelines
as a standard for treating similar workplace injuries and illnesses.
384 California State Auditor Report 2004-406 California State Auditor Report 2004-406 385
Medical treatment guidelines that provide standards for the
treatment reasonably required to relieve the effects of workers’
injuries, and that are presumed correct unless medical opinion
establishes the need for a departure from those guidelines, can
serve to ensure that injured workers receive the care they need to
return to work, control medical costs, and increase the efficiency
of the delivery of those medical services. Researchers point to
inadequate controls over treatment utilization as a primary
cause of escalating costs in the workers’ compensation system.
Overall, they report that in the area of professional medical
services, California’s average payment amount per claim is
typical of other states, but the number of treatments per claim
provided to injured workers is far above the average.
Despite the research pointing out the absence of utilization
controls, California’s system is without an effective process that
would make treatment utilization review standards consistent
among insurers. As a result, according to a study conducted by
the division, there is little consistency in the processes or criteria
used by insurers and claims administrators to determine the
necessity of treatments proposed by physicians. In fact, one-third
of the claims administrators included in the study reported using
more than one set of criteria but did not provide a methodology
for selecting which one they used for a particular case.
The medical council has developed treatment guidelines and
it recently voted to review the medical evidence on treatment
and utilization and to update its guidelines. However, the law
requires that the medical council be made up of members of
the medical community that would be subject to the treatment
guidelines and maintain liaisons with the medical, osteopathic,
psychological, and podiatric professions. As such, we question
whether the medical council is the entity that can most
effectively develop treatment guidelines without giving the
appearance that it could be influenced by the extent to which
the guidelines might adversely affect the financial interests of the
medical community.
We recommended that the administrative director, in coordination
with the medical council, should adopt a standardized set of
treatment utilization guidelines, based on clinical evidence, to
deter over- or underutilization of physician services and other
professional medical services and products. The administrative
director should consider, to the extent possible, adopting treatment
guidelines that are developed by independent entities and that are
386 California State Auditor Report 2004-406 California State Auditor Report 2004-406 387
updated with adequate frequency to reflect advancing technology
and changes in professional practice. If the administrative director
adopts treatment guidelines developed by the medical council, he
should take the steps necessary to ensure that those guidelines are
developed without the appearance of undue influence from any
group that participates in the State’s workers’ compensation system.
Industrial Relations’ Action: Partial corrective action taken.
Industrial Relations points out the reforms in Chapter 639,
Statutes of 2003, effective January 1, 2004, requires the division
to adopt a medical utilization schedule by December 1, 2004,
but did not state when it would update such a schedule. It
further states that the new reforms eliminated the medical
council, thereby making moot the recommendation to consult
with it on treatment utilization guidelines.
Industrial Relations states that the commission (an independent
entity) will survey and evaluate existing medical treatment
utilization standards and that it expects the commission’s
findings and recommendations by July 1, 2004. Industrial
Relations states that until December 1, 2004, the most
recent update of the American College of Occupational and
Environmental Medicine Occupational Medical Practice
Guidelines are presumed to be correct in determining the
extent and scope of medical treatment.
Finding #3: The current legal and regulatory structure for
utilization control is ineffective.
A primary cause of the lack of effective utilization controls is
that under the current law, utilization reviews are usually not
admissible as evidence in judicial proceedings to resolve disputes
between medical providers and claims administrators. To be
admissible as evidence, a decision reached through a utilization
review would need to be supported by a report from a physician
performing an examination of the injured worker—a level of
review not typically used by insurers and claims administrators
when approving payment for treatment. Therefore, utilization
reviews prepared by claims administrators have no weight in
judicial proceedings.
In addition, the law requires that the administrative director
adopt model utilization protocols in order to provide utilization
review standards and requires insurers and claims administrators
386 California State Auditor Report 2004-406 California State Auditor Report 2004-406 387
to comply with those protocols. However, the regulations
adopted by the former administrative director do not establish
utilization review standards based on utilization protocols but
instead allow insurers to establish their own unique utilization
review plans as long as they meet certain administrative
requirements. We believe that the regulations fail to achieve
the objective of using utilization reviews to contain medical
costs. However, the administrative director stated that he does
not believe he has the statutory authority to make utilization
reviews mandatory for insurers.
The absence of an effective utilization control process leads
to disagreements between medical providers and claims
administrators over proposed treatments for injured workers.
However, the system does not have an effective process for
resolving those disputes. Under the current dispute resolution
structure, unresolved disagreements are finally settled by the
Workers’ Compensation Appeals Board after going through
the judicial process within the workers’ compensation system.
Lacking a more efficient intermediary process, nearly 20 percent
of the workers’ compensation cases end up going through this
judicial process. This lengthy process of resolving disputes can
prolong the duration of workers’ compensation cases.
To ensure that the treatment guidelines can serve as an
authoritative standard for the treatment of workers’ injuries,
we recommended that the administrative director should seek
the changes necessary in the Labor Code to ensure that all
insurers and claims administrators are required to follow the
standardized treatment guidelines and that treatment guidelines
are accepted for use in judicial proceedings.
In addition, after obtaining any needed amendments to the
law the administrative director should amend the division’s
regulations to reflect those changes to the law. Specifically, the
division’s regulations should require that insurers and claims
administrators adhere to the standardized treatment guidelines
and should clearly define the role of treatment guidelines in
determining treatment and in judicial proceedings.
388 California State Auditor Report 2004-406 California State Auditor Report 2004-406 389
Industrial Relations’ Action: Pending.
Industrial Relations stated that the new reforms provide that
upon adoption by the administrative director of a medical
utilization schedule, the schedule shall be presumptively
correct on the issue of extent and scope of medical
treatment. According to Industrial Relations, the new law
will ensure that insurers and claims administrators follow the
treatment guidelines in the schedule, and that the guidelines
are accepted in judicial proceedings.
Industrial Relations also states that the division is in the
process of drafting new utilization review regulations to
implement the new reforms.
Legislative Action: Legislation proposed.
Conference committee convened.
Finding #4: Proposed changes to the medical payment
system may control fees for medical services and products
but do not ensure lower overall medical costs or access to
quality care.
The administrative director and the commission have presented
two different proposals for improving medical cost controls
using variations of Medicare-based fee schedules. The Medicare
payment system for physician services is founded on a valuation
of the resources needed to provide each service. This system is
known as the resource-based relative value scale (RBRVS) system.
Basing part or all of the workers’ compensation system on the
Medicare RBRVS system would have several advantages, among
them the values on which payments are based would be derived
from the amount of resources needed to perform services, rather
than on customary charges. In addition, Medicare updates its
schedules regularly, and so the values would remain current.
Health policy experts believe resource-based systems to be
less inflationary than charge-based ones. However, because
the payments are resource based, it is projected that for some
medical specialties, such as surgery and anesthesia, the payment
amounts would be reduced from the traditional charge-based
payments, and payments for evaluation and management
services would be increased. This redistributive effect of the
RBRVS system is a major point of controversy among providers
of these affected medical specialties, in spite of the RBRVS
system’s ability to contain costs.
388 California State Auditor Report 2004-406 California State Auditor Report 2004-406 389
More work is needed to ensure that injured workers have access
to quality care at reasonable costs to employers. If the State
adopts a payment system that is based on indexed values, such
as the RBRVS, it will need to determine how to adjust the RBRVS
to arrive at payments that will meet this objective. There is no
universal way to make these adjustments. Other states that
have implemented a payment system based on the RBRVS have
used a variety of approaches in adapting the system to fit their
needs. Some considerations the State must weigh include the
need to balance adequate access to care against overutilization
and whether a transition strategy may be needed to mitigate the
effects of the payment redistribution that would be caused by an
RBRVS payment system.
We recommended that when determining the future structure
of the workers’ compensation medical payment system,
the administrative director should consider the costs and
practicalities of maintaining such a complex system and
should give consideration to adopting a payment system that
is based on models that are maintained by other entities, such
as a variation of the RBRVS maintained by the federal Centers
for Medicare and Medicaid Services, as he has done with his
current proposal for modifying the physician fee schedule. If
the administrative director decides to continue modifying the
current workers’ compensation payment system, he should
consider pursuing a variety of activities, including the following:
• Continue his efforts to identify the adjustments needed to
ensure that payments for services in the proposed modified
physician fee schedule are high enough to encourage
participation by physicians and other professionals in order to
provide adequate access to care for injured workers.
• Seek the needed resources to develop and maintain fee
schedules for the remaining medical services and products,
such as outpatient surgical facilities, pharmaceuticals,
emergency rooms, durable medical equipment, and home
health care.
One proposal to improve California’s workers’ compensation
payment system requires converting the entire system to a
combination system that would use a variation of the Medicare
payment system for medical services, facilities, and products,
and the Medi-Cal payment system for pharmaceuticals. If this
proposal is adopted, the administrative director should consider
the following steps:
390 California State Auditor Report 2004-406 California State Auditor Report 2004-406 391
• Develop adjustments to the fee schedule for physician services
and other professional services so as to mitigate any effects
on access to care caused by adopting a resource-based relative
value payment system that results in redistributing payment
amounts away from medical specialties, such as surgery, and in
increasing payments for evaluation and management services.
• Monitor the medical payment system to determine whether
a reasonable standard of care can be achieved at the capped
prices for services and products contained in the proposal.
• To fully benefit from adopting the Medi-Cal payment system
for pharmaceuticals, in addition to adopting the Medi-Cal fee
schedule, the administrative director should also study the
feasibility of establishing a process to secure rebates from drug
manufacturers like the supplemental rebates enjoyed by the
Department of Health Services in its Medi-Cal pharmaceuticals
purchase program.
Because there are no universally successful formulas for
determining payments for medical services and products,
we recommended that the administrative director should
consult also with other states that have adopted Medicare-
based payment systems and consider any measures they have
employed to secure quality care at reasonable prices.
Industrial Relations’ Action: Pending.
Industrial Relations reports it is taking the following steps to
address the recommendations we made above:
• The reforms that took effect on January 1, 2004, revised
the existing medical payment system by repealing the
existing Official Medical Fee Schedule language and
replacing it with provisions that require reimbursement of
pharmaceuticals at 100 percent of the Medi-Cal rate; and
that inpatient hospital services and outpatient surgeries
that occur in either a hospital or ambulatory surgical
center be reimbursed at no more than 120 percent of the
relevant Medicare rate.
• To gauge access to care, the division’s administrative
director is preparing to contract with the University of
California to conduct a study of injured workers’ access to
medical treatment. The initial study is to be conducted in
2004 using funding from existing resources.
390 California State Auditor Report 2004-406 California State Auditor Report 2004-406 391
• Industrial Relations believes that the legislative changes in
Chapter 639, Statutes of 2003, should reduce the resources
needed to adopt fee schedules. The division is currently
reviewing its resources and assessing what specific
expertise is needed. Since the hospital, outpatient, and
pharmaceutical fee schedules are based on data already
compiled by government entities outside the division, the
resources required by the division for these fee schedules
may be available within existing resources.
• The new reforms require that the existing Official Medical
Fee Schedule for physician services be reduced by 5 percent
and remain in effect until January 1, 2006, at which time
the administrative director has the authority to adopt a new
physician fee schedule.
• The reforms require the administrative director to contract
for an independent annual study of access to medical
treatment for injured workers. If it is found that access
to quality health care or products is insufficient, the
administrative director may make appropriate adjustments
to medical and facilities’ fee schedules.
• The division will study the feasibility of securing rebates
from drug manufacturers for pharmaceuticals dispensed
in workers’ compensation cases. However, Industrial
Relations notes that because workers’ compensation in
California is not designed as a single payer system, the
division may be limited in its ability to negotiate lower
pharmaceutical prices.
• Finally, Industrial Relations states that the division has
been in contact with virtually all other states through the
International Association of Industrial Accidents Boards
and Commissions (IAIABC) and will consult with those
states with Medicare-based payment systems.
Finding #5: The division lacks a data collection system that is
adequate to monitor the workers’ compensation system.
The division does not currently have a data collection system
that will allow it to perform the necessary research to monitor
the effect of policy decisions on the quality and availability of
care to injured workers. Although legislation that took effect in
1993 mandated the development of a data collection system,
392 California State Auditor Report 2004-406 California State Auditor Report 2004-406 393
the Workers’ Compensation Information System (WCIS) is
still incomplete. According to the division, intense opposition
to data collection from insurers, a shortage of knowledgeable
and experienced staff, and technical difficulties in installing
the proper hardware and software infrastructure have delayed
the implementation of the WCIS. The division still has not
identified a projected completion date for the system.
The WCIS consists of three components: two are used to collect
information on the nature and duration of workplace injuries,
and the third collects data on medical treatments and payments.
The first two components are complete and operational, but the
division is still working to identify the types of medical data it
needs to collect to provide useful information for monitoring
the performance of the medical payment system. However,
the division has not provided us with any assurance that the
medical data it collects will generate the information required
to meet the statutory objectives for the system. According
to the administrative director, identification of the needed
medical data has been slow due in part to the effort required to
work through the concerns the insurers have about the cost of
reporting the data.
Further, the division stated that, if its funding is stabilized by
passage of a state budget that includes employer user fees or
sufficient General Fund moneys, and if the proposed funding
augmentation for Assembly Bill 749 is made, it will identify a
timeline for completing the medical data collection module
of the WCIS expansion. The 2003–04 Budget Act includes
both employer user fees and an augmentation to fund
Assembly Bill 749 mandates.
Now that the division’s budget contains employer user fees and
a spending augmentation the administrative director asserts
is needed to complete the division’s WCIS, we recommended
that the administrative director should place the WCIS
implementation project on a timeline to facilitate its completion
as quickly as possible. In addition, the administrative director
should exercise the authority necessary to ensure that the data
collected in the WCIS will provide the information needed to
adequately monitor medical costs and services.
392 California State Auditor Report 2004-406 California State Auditor Report 2004-406 393
Industrial Relations’ Action: Pending.
Industrial Relations states that division staff is working
closely with staff from the Information Systems Unit to
design, develop, and implement a prototype model for
medical data collection. The division developed a proposed
list of medical data elements to be collected, based on
IAIABC guidelines. The division plans to reduce the number
of data elements, based on an analysis of the ability to
collect each data element and its anticipated usefulness.
The major remaining obstacle to the ability of the WCIS to
collect medical data elements is the cooperation of claims
administrators, who may not be capturing the data elements
the division believes necessary to adequately analyze medical
treatment. Initial data has been received from the State
Compensation Insurance Fund.
394 California State Auditor Report 2004-406
STATE BAR OF CALIFORNIA
Although It Reasonably Sets and Manages
Mandatory Fees, It Faces Potential Deficits
in the Future and Needs to More Strictly
Enforce Disciplinary Policies and Procedures
REPORT NUMBER 2002-030, APRIL 2003
The State Bar of California response as of October 2003
Chapter 342, Statutes of 1999, directed the State Bar of
Audit Highlights . . . California (State Bar) to contract with the Bureau of State
Audits to conduct a performance audit of the State Bar’s
The State Bar of California
operations from January 1, 2002, through December 31, 2002.
(State Bar) continues to make
some improvements since our We found that the State Bar continues to reduce its backlog of
audit in 2001. For example, it: disciplinary cases that resulted from its virtual shutdown in
1998. Overall, the State Bar’s efforts have significantly decreased
þ Made further changes
to reduce its backlog of the number of cases in its backlog from 1,340 at the end of
disciplinary cases. 2000 to 401 at the end of 2002. In addition, the State Bar
continues to ensure that dues for members are reasonable
þ Continued to ensure
and are not used to support voluntary functions. However,
that mandatory fees
are reasonable and deficiencies similar to those identified by the State Bar’s staff in
do not support its 2000 internal random review of disciplinary cases continue to
voluntary programs.
be an issue. Moreover, the State Bar’s financial forecast indicates
However, the State Bar needs that if fees remain at its current level, the State Bar could face a
to do the following: deficit in its general fund at the end of 2005.
þ Ensure that policies and
procedures for processing
Finding #1: The State Bar has made significant progress in
disciplinary cases are
being followed. decreasing its backlog of disciplinary cases.
þ Monitor its need for an Since our 2001 audit, the State Bar has continued its efforts
increase in membership to decrease its backlog of disciplinary cases. For example, it
fees to avoid a potential
created a backlog team in its enforcement unit. The backlog
deficit in its general fund
team, composed generally of the most experienced investigators,
in the future.
focused exclusively on the backlog cases. The overall goal for
2002 was to have a backlog of no more than 400 cases. The
State Bar’s efforts significantly decreased the number of cases
in its backlog from 1,340 at the end of 2000 to 401 at the end
of 2002. According to a backlog reduction report prepared by
its staff, the State Bar is currently focusing on not allowing the
backlog to increase beyond 400 in 2003. Further, it maintains an
“aspirational goal” of reducing the backlog to 250 by the end of
California State Auditor Report 2004-406 395
2003, but the report stated that the State Bar’s ability to achieve
that goal has been negatively impacted by budget constraints
and other external factors.
We recommended that the State Bar continue its efforts to
reduce its current backlog.
State Bar Action: Partial corrective action taken.
The State Bar reported that it is continuing its efforts to
reduce the backlog. In June 2003, it reported that the
backlog had risen to 756. However, as of October 2003 the
State Bar reduced it to 566 cases. The State Bar stated it
maintains its goal of bringing the backlog back down to 400
by the end of 2003.
Finding #2: The State Bar needs to strictly enforce its policies
and procedures when processing complaints.
The State Bar’s internal random review process indicates that staff
do not always follow policies and procedures when processing
complaints. Specifically, in 2002, the State Bar identified some
of the same type of deficiencies as reported in its random
review in 2000. Its two reviews in 2002 identified staff’s failure
to enter information into the computer database, poor record
keeping and file maintenance, and not sending closing letters
to complainants or respondents. Because State Bar staff did not
always provide proper record keeping and file maintenance,
the reviewers sometimes found it difficult to determine if a
case had been appropriately handled. However, the reviewers
found that the areas of concern were not generally significant
enough to have an adverse effect on the overall disposition of
a case. To address some of these issues, the State Bar conducted
group and individual training, and it issued a training bulletin
to remind staff of the policies and procedures.
We recommended that the State Bar require that each file
contain a checklist of important steps in the process and
potential documents to ensure that employees follow policies
and procedures for processing cases. Each applicable item should
be checked off as it is performed or received. An employee’s
supervisor should be responsible for reviewing the checklists
to ensure their use. In addition, the State Bar should
conduct spot checks of current cases that are being closed.
Responsible staff should be required to resolve any issues
concerning files determined to be noncompliant.
396 California State Auditor Report 2004-406 California State Auditor Report 2004-406 397
State Bar Action: Partial corrective action taken.
The State Bar reported that it has implemented the use of
checklists to ensure important steps are taken and necessary
documents are contained in the files. It also has begun
implementation of a computer verification system. This
system does not allow a matter to be closed or forwarded
unless the file is properly updated. In addition, the State Bar
reported that it has postponed until November 2003 the
implementation of having supervising attorneys in the
Office of the Chief Trial Counsel spot-check closures every
month to verify that files include closing letters and detailed
closing memos. Instead, the State Bar performed a one-
time, large-scale audit of cases closed in 2002. A full analysis
of the results was to have been completed by the end of
October 2003.
Finding #3: Cost recoveries for the State Bar’s client security
fund and disciplinary activities continue to be low.
Since our 2001 audit, the State Bar’s cost recovery rates improved
slightly, although the rates remain low. Specifically, the Client
Security Fund cost recovery rates increased from 2.5 percent
in 2000 to 10.9 percent in 2002. A similar increase occurred in
the cost recovery rates from the disciplinary process. In 2002,
these amounts increased from 28.8 percent to 36.4 percent.
Because cost recoveries are still low, the State Bar used more of
its membership fees to subsidize support for its Client Security
Fund and disciplinary process than it might otherwise need to.
The State Bar believes that other recovery methods, such as the
State’s offset program, may not be feasible. One cost recovery
method that may be available is the collection of money debts
under the California Enforcement of Judgments Law. However,
according to the executive director, the State Bar’s position is
that state statutes explicitly define the specific circumstances
and methods by which it is to impose and collect its disciplinary
costs, and thus the Legislature has implicitly excluded other
methods more generally provided in the law.
When our audit report was issued in April 2003, the executive
director told us that the State Bar was seeking a legislative
amendment, similar to statutory language applicable to
costs imposed in disciplinary proceedings of the Department
of Consumer Affairs, to help it strengthen its collection
enforcement authority. Because existing state law does not
396 California State Auditor Report 2004-406 California State Auditor Report 2004-406 397
explicitly state that the State Bar can use the methods provided
in the Enforcement of Judgments Law, the State Bar believes it
needs statutory language that states it can do so. This language
would provide the State Bar independent authority to pursue
legal action for these costs.
We recommended that the State Bar pursue a legislative
amendment that would help it strengthen its enforcement
authority over collections related to client security and
disciplinary costs.
State Bar and Legislative Action: Corrective action taken.
The State Bar reported that on September 6, 2003, the
governor approved Assembly Bill 1708 (AB 1708). Effective
January 1, 2004, sections 6086.10(a) and 6140.5(d) of the
Business and Professions Code will provide that court orders,
which impose disciplinary costs or require the reimbursement
of the Client Security Fund by attorneys who have been
suspended, disbarred, or the subject of a public reproval,
will be enforceable as a money judgment. The remedy will
apply retroactively to all court orders imposing disciplinary
costs or Client Security Fund reimbursements. The State Bar
reported that these changes would permit it to obtain writs
and abstracts of judgments and seek orders of examinations
in the superior courts. In addition, the recording of abstract
judgments would then typically be reflected in the reports
of credit agencies. Further, the State Bar reported that it
created a working group of staff to establish the processes and
procedures necessary to implement these new statutes on the
effective date of January 1, 2004.
Finding #4: Although it continues to ensure that mandatory
fees are reasonable and do not support voluntary programs,
the State Bar faces potential deficits in the future.
For the year 2002, the State Bar’s financial records for the
general fund indicate that it charged a reasonable level of
fees. The general fund’s revenues of $46.4 million exceeded
its expenses by $2.5 million. However, because the board of
governors approved transfers to other funds of $5.9 million,
its general fund balance declined from $6.6 million in 2001
to $3.3 million in 2002. A financial forecast prepared by the
State Bar predicts that in 2003 through 2007, if membership
fees remain at $390 a year, general fund expenses will exceed
its revenues. Although the State Bar’s general fund balance is
398 California State Auditor Report 2004-406 California State Auditor Report 2004-406 399
expected to decrease as a result of its expenses increasing faster
than its revenues, a deficit is not expected to occur until the end
of 2005 because of the newly created Public Protection Reserve
Fund. As of January 1, 2001, the State Bar established this fund to
provide a hedge against the unexpected and to assure continuity
of its disciplinary system and other essential public protection
programs. However, if State Bar expenses continue to exceed
its revenues, a deficit in the combined available balance for the
general fund and Public Protection Reserve Fund is anticipated by
the end of 2005 that will continue to grow through 2007.
We recommended that the State Bar continue to monitor for the
necessity of a fee increase to ensure that mandatory fees are set
at a reasonable level to meet its operational needs.
State Bar Action: Partial corrective action taken.
In June 2003, the State Bar reported that because of the
State’s current fiscal situation it was seeking a one-year
fee bill that would maintain mandatory dues at $390 for
the 2004 billing year. The State Bar expected to rely on
existing reserves to balance the general fund budget for
2004 and anticipated proposing a multi-year fee bill with a
tiered fee increase that would support ongoing operations
without relying on reserves. In October 2003, the State Bar
reported that the 2004 general fund budget was balanced by
transferring the revenue allocated to the Lawyer Assistance
Program back to the general fund; enhancing member
revenue by restricting eligibility for reduced fees for certain
categories of members (member fee scaling); eliminating the
general fund contribution to the Public Protection Reserve
Fund; eliminating 16 positions; and reducing proposed
non-personnel expenditures. The State Bar also reported that
AB 1708 was signed in September 2003, authorizing it to
collect up to $390 per member in annual membership fees
for 2004. This authorization maintains the same fee level in
effect since 2001. AB 1708 also amends existing statute to
restrict eligibility for member fee scaling and allows the State
Bar to enforce the collection of disciplinary costs incurred in
the general fund and reimbursements to the Client Security
Fund as money judgments to be included in an individual’s
membership fee. The State Bar is hopeful this legislation will
provide additional funding and ease pressure to increase
member fees. Finally, the State Bar reported that it would
continue to review its operations for improvements in
efficiency, with staff reductions, as appropriate.
398 California State Auditor Report 2004-406 California State Auditor Report 2004-406 399
400 California State Auditor Report 2004-406
SAN DIEGO UNIFIED PORT DISTRICT
It Should Change Certain Practices to
Better Protect the Public’s Interests in
Port-Managed Resources
REPORT NUMBER 2001-116, APRIL 2002
Audit Highlights . . .
San Diego Unified Port District’s response as of April 2003
Although many San Diego The Joint Legislative Audit Committee requested that we review
Unified Port District (Port)
the San Diego Unified Port District’s (Port’s) contracting and
actions we reviewed were in
accordance with state law personnel policies and procedures as well as the public’s access
and Port policies, we noted to the Port’s records and decision-making process.
the following exceptions:
þ The Port did not disclose
Finding #1: The Port has not always done enough to seek fair
that it offered below-
market rental payments market value in its leases.
to one hotel, potentially
The Port earns some of its revenue by leasing the property it
lowering the Port’s
revenue by $7.4 million manages around the San Diego Bay (bay). Contrary to its leasing
over 10 years. policies, when the Port signed a lease with one of its hotels in
1995, it granted a below-market rate for 10 years and did not
þ For three major
developments, the Port disclose that it was doing so. The below-market rate may result
did not seek competition in the Port receiving $7.4 million less in rental payments over a
by issuing requests for
10-year period.
proposals or qualifications.
þ The Port’s contracting The Port may also be charging below-market rates to the marinas
practices sometimes do around the bay. When setting rental rates, the Port rejected rates
not ensure fair and open
suggested by an independent appraiser. Instead, the Port selected
awards of its contracts
and purchases. an appraisal methodology that did not consider rents paid by
comparable properties, such as the City of San Diego’s Mission
þ The Port lacks postemploy-
Bay marinas. As a result of its decision to adopt a methodology
ment guidelines for its
that did not consider rates paid by nearby marinas, Port
officials and often failed
to meet its timelines for revenues between July 1999 and June 2001 were approximately
employee discipline appeals. $600,000 lower than what they would have been had they used
þ The Port can improve its an alternative methodology.
compliance with open
meeting laws. We recommended that the Port obtain market value rent when
awarding leases or disclose and provide appropriate justification for
offering below-market rent when the Board of Port Commissioners
(board) considers approval of the lease. We further recommended
California State Auditor Report 2004-406 401
that the Port consider adopting an appraisal methodology for its
marinas that combines economic analysis with a review of rents
paid on comparable properties.
Port Action: Corrective action taken.
The Port created an advisory committee to review the
Port’s proposed policies governing real estate leases and
rentals. The board adopted the advisory committee’s
recommendation and instituted a policy that requires
market value rent but the board retains the right to grant
rent discounts, waivers, or other concessions. In addition,
another adopted policy requires using appraisals that
comply with the Uniform Standards or Professional
Appraisal Practice to assist in determining market rent for
new flat-rent leases and for rent reviews in existing leases.
Finding #2: The Port pursued some major development
projects without publicly soliciting proposals.
The Port did not issue requests for proposals or qualifications
on three major development projects and therefore may have
missed opportunities to receive additional proposals from
qualified developers. For one hotel development project, the
Port chose to conduct a negotiating session over a holiday
weekend, instead of issuing a request for proposals or
qualifications. In another case, the Port received four unsolicited
proposals to develop a hotel on Harbor Island but did not
issue a request for proposals or qualifications to identify other
interested parties. The Port also chose not to issue a request
for proposals or qualifications for a third development project
because it believed a tenant with a lease on an adjoining
property would be best suited for the development. By not
using a more open and competitive process for developing these
projects, the Port has made itself vulnerable to claims that it has
acted unfairly and not in the public’s best interests.
We recommended that the Port solicit competition through
requests for proposals or qualifications when developing major
projects, unless there is a compelling public interest not to do so.
Port Action: Corrective action taken.
The Port agrees with our recommendation and has
implemented a policy consistent with our recommendation.
402 California State Auditor Report 2004-406 California State Auditor Report 2004-406 403
Finding #3: The Port’s contracting practices do not always
match its policies or follow best practices
Some of the Port’s actions in awarding contracts and making
purchases have not been in line with best practices or its
own policies. The Port amended two information technology
contracts totaling more than $1.7 million when significant
changes in the scope of work indicated that the projects should
have been bid separately and issued as separate contracts.
Because it did not open this work to the competitive bidding
process, the Port denied other consultants the opportunity to
compete for these projects and has no assurance that it obtained
the services at the best possible price and terms.
In addition, we found that the Port did not apply best practices
in awarding the $1.6 million contract because it allowed the
consultants that had helped develop the requirements for the
project to also bid on that project. Prudent practices would
not allow consultants to bid on projects for which they had
developed the requirements because it leaves the Port open to
claims of favoritism and unfair competition.
In addition, because the purchasing department treated service
contracts according to the approval rules for supply purchases,
certain service purchase orders between $50,000 and $75,000
did not receive the board approval that Port policy required.
The purchasing department was also failing to notify the board
of service purchase orders between $25,000 and $50,000 as
required by Port policy. Without board approval or notification,
commissioners missed the opportunity to provide some
oversight of these contracts or request additional information
when they had questions.
We recommended that the Port competitively bid new contracts
instead of amending existing contracts when the scope of work
changes significantly. We also recommended that the Port adopt
a policy that would prohibit contractors that have developed
specific requirements for a project from subsequently bidding
on that project. We further recommended that the Port follow
its policy requiring board notification and approval of certain
service purchases.
402 California State Auditor Report 2004-406 California State Auditor Report 2004-406 403
Port Action: Corrective action taken.
The Port agrees that it should bid new contracts instead
of amending existing contracts when the scope of work
changes significantly and is now reviewing each contract
to ensure compliance. The Port has revised its policies
to prohibit contractors that have developed specific
requirements for a project from subsequently bidding on
that project. Also, the Port reports that it is now complying
with board policies concerning board involvement in
approving contracts.
Finding #4: The Port needs to better adhere to conflict-of-
interest laws and may need to adopt additional guidelines.
The Political Reform Act of 1974 requires that public officials
disclose personal interests that might be affected while performing
their duties and also requires that they disqualify themselves
from any governmental decisions that would affect their financial
interests. We found that one commissioner did not report real
estate within two miles of the Port’s jurisdiction as required by
law. Although he corrected the error in his fiscal year 2001–02
disclosure statement, we believe that the Port’s commissioners
and employees required to file disclosure statements should
reexamine their statements to ensure that they are complete
and accurate.
Furthermore, although both the federal and state government
have adopted post-employment guidelines for elected officials
and government employees, the Port’s conflict-of-interest
policy does not include similar requirements for its officials. As
a result, the Port has left itself open to claims that the actions
of its exiting and former officials could constitute an improper
influence on Port decisions. In particular, a former commissioner
represented several clients in actions before the board less than a
year after leaving the board.
We recommended that the Port encourage its commissioners
and employees that file disclosure statements to review their
current and past statements for completeness and accuracy. We
further recommended that the Port consider adopting post-
employment guidelines similar to those in place at the State and
federal levels.
404 California State Auditor Report 2004-406 California State Auditor Report 2004-406 405
Port Action: Corrective action taken.
The Port has adopted a comprehensive ethics code that
contains post-employment restrictions that are more restrictive
than those of the Fair Political Practices Commission.
Finding #5: The Port has not always followed its policies and
procedures for appeals of personnel actions.
The Port does not always conduct appeals of personnel actions
as required in its rules and regulations. Based on our review of
employees’ appeals of disciplinary actions, we found that the
Port almost always exceeds the time frames established in its
appeal procedures. Because these procedures cause the Port’s
employees to have certain expectations about how the Port will
act on disciplinary appeals, it is important for the Port’s practices
to match its policies.
We recommended that the Port ensure that personnel appeals
are conducted according to Port procedures.
Port Action: Corrective action taken.
The Port has revised its policies and procedures to ensure
that it either complies with timelines or documents
employees’ consent when extensions of time are granted.
Finding #6: The Port can improve its compliance with open
meeting laws.
The Ralph M. Brown Act (Brown Act) states that a local
legislative body may not take action or discuss any item that has
not been publicly identified in the agenda or added by a vote
of the body. However, in one instance, the board discussed an
issue in closed session even though it had not given appropriate
notice that the issue was being continued from a prior meeting.
The impact on the public’s access to the decision-making process
was mitigated by the fact that the board did not act on this and
one other issue at the meetings where they were discussed. In
addition, we found three instances in which the Port’s agenda
descriptions for closed-session personnel discussions failed to provide
sufficient information to meet the requirements of the Brown Act.
404 California State Auditor Report 2004-406 California State Auditor Report 2004-406 405
The Brown Act also allows local legislative bodies to recover
their costs for providing agendas to individuals or groups
that request an agenda be sent to them before each meeting.
However, the Brown Act indicates that the fee charged cannot
exceed the costs of providing the service. Yet the Port has not
analyzed its costs for providing this service in over 10 years,
even though it now faxes most agendas instead of mailing them.
Without this analysis, the Port cannot ensure that the fees it
charges for providing this service do not exceed the costs it incurs.
We recommended that the Port ensure it properly notifies the
public of all board discussions, as required by state law. We
further recommended that the Port reevaluate the fees it charges
for distributing agendas to ensure the fees do not exceed the cost
of distributing the agendas.
Port Action: Corrective action taken.
The Port agrees with the recommendation and has established
additional procedures to ensure proper public notice of
board discussions.
406 California State Auditor Report 2004-406
RED LIGHT CAMERA PROGRAMS
Although They Have Contributed to a
Reduction in Accidents, Operational
Weaknesses Exist at the Local Level
REPORT NUMBER 2001-125, JULY 2002
Audit responses as of July 2003 to September 20031
Audit Highlights . . .
Red light cameras have The Joint Legislative Audit Committee (audit committee)
contributed to a reduction of asked us to review the implementation, application,
accidents; however, our review
and efficacy of red light camera programs statewide.
of seven local governments
We found that accidents related to motorists running red
found weaknesses in the
way they are operating their lights have generally decreased where local governments have
programs that make them employed cameras. However, the seven local governments
vulnerable to legal challenge.
we reviewed—Fremont, Oxnard, Los Angeles County
Specifically, we found that the
local governments: (Los Angeles), Long Beach, the city of San Diego (San Diego),
the city of Sacramento (Sacramento), and the city and county
þ Need to more rigorously
of San Francisco (San Francisco)—need to make operational
supervise vendors to
improvements to maintain effective control of their programs,
maintain control of
their programs. comply with state law, and avoid legal challenges.
þ All but one would use
photographs as evidence Finding #1: Local governments have been challenged on
in criminal proceedings
their control of red light camera programs.
even though it would
appear to conflict with
Several local governments have been taken to court by alleged
the law governing
red light violators who claim that the local governments are not
the program.
operating their red light camera programs as required under the
þ Generally follow required
law. Although the law stipulates that only a government agency,
time intervals for
in cooperation with a law enforcement agency, can operate a
yellow lights.
program, it offers no further explanation or definition of what
Of the local governments
operate means, leaving the term open to interpretation. Because
we visited, only San Diego
local governments contract out the bulk of services for these
and Oxnard have generated
significant revenue from their programs, private sector vendors inevitably play an important
red light camera programs. role. However, if municipalities delegate too much responsibility,
they run the risk of their program being perceived as vendor
Our review of available data
shows that red light accident controlled. For example, a court found that San Diego failed to
rates decreased between satisfy the plain meaning of the word operate and that it had no
3 percent and 21 percent
after red light cameras were
installed by five of the local
1Each of the seven auditee’s responses were received on the following dates: Los Angeles,
governments in our sample.
Long Beach, San Diego, and Sacramento, July 2003; San Francisco and Fremont,
August 2003; and Oxnard, September 2003.
California State Auditor Report 2004-406 407
involvement with or supervision over, the ongoing operation
of the program and concluded that San Diego exhibited a lack
of oversight. San Francisco is in the early stages of defending
itself against a similar lawsuit. However, a court ruled in favor
of Beverly Hills, which was also the subject of a lawsuit alleging
concerns over program operations like those in San Diego.
We recommended that to ensure local governments maintain
control and operate their red light camera programs and avoid
legal challenge, the Legislature should consider clarifying the
law to define the tasks that a local government must perform
to operate a red light camera program and the tasks that can be
delegated to a vendor.
Legislative Action: None.
No legislative action found.
Finding #2: Local governments must more rigorously
supervise vendors to retain program control.
We found that the local governments we visited do not exercise
enough oversight of their vendors to avoid the risk of legal
challenge over who operates their red light camera programs.
Best practices for oversight consists of several elements to
monitor and control vendor activities. Such oversight includes
strong provisions in local governments’ contracts with vendors
to protect the confidentiality of motorists’ photographs and
personal data, making periodic site visits to inspect the vendor’s
operations for compliance with the law and contract terms,
establishing criteria for screening violations, having controls in
place to ensure that the vendor only mails properly authorized
and approved citations, making decisions as to how long certain
confidential data should be retained, and conducting periodic
technical inspections of red light camera intersections. However,
at the outset of our review, we found that the seven local
governments did not exhibit all of the oversight elements we
believe are needed to avoid legal challenge. After our inquiries,
Long Beach took steps to amend the contract with its vendor to
address two elements of oversight that were absent.
To maintain control over their programs and minimize the risk
of legal challenges, we recommended that local governments
conduct more rigorous oversight of vendors by employing all of
the oversight elements we identified.
408 California State Auditor Report 2004-406 California State Auditor Report 2004-406 409
Local Government Action: Partial corrective action taken.
The seven local governments for which this finding applied
reported the following corrective actions:
Fremont: Fremont reports that it now performs weekly
spot checks of intersections with red light cameras. Further,
Fremont completed a vendor site visit in April 2003, and
concluded that the vendor maintains its office facility in
an organized manner and is conducting business to the
city’s satisfaction. During this visit, Fremont concluded that
the security over data was appropriate and that the vendor
Ü
was purging Department of Motor Vehicles’ records every
90 days. Fremont did not report action on our finding that
its contract lacks a specific provision that makes the misuse
of the photographs a breach of the contract.
Long Beach: Long Beach reports amending its vendor
contract to specifically state that photographs are
confidential and to include a provision on when to destroy
confidential documents. Further, Long Beach reports
implementing a procedure to reconcile citations it has
approved against those that the vendor has mailed.
Los Angeles: In August 2002, Los Angeles conducted
an oversight visit of the vendor and it plans to perform
other visits periodically. From this initial oversight visit,
Los Angeles concluded that the internal controls are
sufficient to maintain the integrity of the evidence and
to ensure that only authorized citations are mailed to
Ü
offending drivers. However, it will reevaluate the need for
additional controls over the citation process when it awards
a new vendor contract in December 2003. Los Angeles
has developed new business rules that require the vendor
to comply with all confidentiality provisions of the
California Vehicle Code. The business rules also require
that information and pictures for unenforced violations
be destroyed immediately. The business rules will take
effect when the county awards a new contract for red light
camera services in December 2003. Recently, Los Angeles
has adopted new maintenance procedures to inspect
intersections equipped with red light cameras. The new
procedures provide that at least once per quarter, or when
signal timing is changed, the county’s department of public
works, red light camera vendor, and the California Highway
Patrol will conduct a joint on-site test and certification to
ensure that camera settings and calibration are correct.
408 California State Auditor Report 2004-406 California State Auditor Report 2004-406 409
Oxnard: Oxnard suspended its program in January 2003 and
reports that it changed red light camera vendors, with the
new vendor beginning to install cameras in September 2003.
Under the new vendor contact, Oxnard reports that the
vendor must adhere to the confidentiality provisions in
law, with any violation constituting a breach of contract
Ü
with the city. Although the new contract does not require
that data and photographs relating to unenforced citations
be destroyed immediately, the contract does require that
the vendor adhere to the city’s policy for records retention
and destruction of confidential information. Oxnard also
indicates that during an upcoming visit to the vendor’s
facility, police officers will review the vendor’s procedures
for compliance with the contract and the practices outlined
in our report. Finally, Oxnard believes that the vendor’s
system allows for a remote confirmation of the calibration
of red light cameras. However, Oxnard indicates that it
will conduct periodic inspections of intersections to ensure
systems are intact and report any problems to the vendor.
Sacramento: Sacramento reports restarting its program in
October 2002 as a joint photo enforcement program with
the Sacramento County Sheriff’s Department (sheriff’s
department). In September 2003, the city plans to enter
an agreement with the sheriff’s department, which will
essentially allow the county to operate the red light camera
program in the city as a part of a countywide enforcement
program. The city believes this agreement will standardize
and centralize the program so that only one program,
with one standard is in effect. The city will have input
into camera locations, but the day-to-day operation,
maintenance, inspections, and issuance of citations will
become the responsibility of the sheriff’s department. The
city indicates that sheriff’s department staff will perform the
citation screening, processing, and mailing functions that
the vendor previously performed. The vendor will continue
to maintain the cameras, develop the film and convert it to
digital images, and archive the film. However, Sacramento
indicates that all photographs relating to unenforced
citations will be retained for three years because the city
attorney believes that such retention is necessary to comply
with California Government Code, Section 34090, and a city
Ü council resolution. Also, although Sacramento County will
operate the city’s program, the city of Sacramento indicates
that it does not intend to review the need for revising the
410 California State Auditor Report 2004-406 California State Auditor Report 2004-406 411
contract language to specifically protect the confidentiality
of data and photographs obtained from the Department of
Motor Vehicles until after the current vendor contract expires.
San Diego: San Diego indicates it has restarted the program
using the same vendor and that it has made numerous
changes that should significantly improve the city’s
oversight of the vendor. Specifically, the revised vendor
contract adds provisions that specify the confidentiality
of program data and increase the penalties for contract
violations. In addition, the city has developed detailed
business rules to guide the vendor’s review process. The
city’s police department will also inspect the vendor’s
facility each week . These inspections will be documented
and will review security and data handling, along with
testing a sample of alleged violations for proper handling
by the vendor. The city’s police department and traffic
engineering office will conduct periodic inspections of
red light camera intersections to ensure that the system
settings and original construction designs have not been
altered or tampered with. Further, the city attorney’s office
developed issuing guidelines for the alleged violations that
it deems are prosecutable and the police department has
agreed to follow these guidelines. Although not directly
related to vendor oversight, the city is now using dual
cameras—one showing the front view and one showing
the review view—to better show the vehicle approaching
the intersection and continuing through it during the red
light phase. Finally, San Diego has changed the payment
structure to pay the vendor based on a fixed monthly fee
for each intersection equipped with red light cameras.
San Francisco: San Francisco reports taking several actions
to address our recommendations. It now conducts all team
meetings at the vendor’s facility and intends to inspect the
vendor’s facility to ensure that confidential information
is being safeguarded. In addition, San Francisco has
commenced inspections of red light camera intersections to
ensure that camera settings are appropriate and to determine
whether the system is functioning properly. Further, in
June 2003, San Francisco indicates the police department
reconciled authorized citations with those mailed to ensure
that only authorized citations were mailed for the period
between October 2002 and May 2003. This reconciliation
found no errors or inconsistencies. Finally, it has amended
the vendor contract to require the vendor to destroy all data
related to unenforced violations.
410 California State Auditor Report 2004-406 California State Auditor Report 2004-406 411
Finding #3: Most local governments believe photographs can
be used for other law enforcement purposes.
According to state law, photographs captured by red light
cameras are to be used only for enforcing compliance with
traffic signals. However, local governments have differing
interpretations of the confidentiality of the photographs taken
by red light cameras. Six of the seven local governments in
our sample acknowledged that they have used or would use
the photographs for purposes other than enforcing red light
violations, such as investigating unrelated crimes. According
to our legal counsel, a literal reading of the statute prohibits
use of the photographs for purposes other than to prosecute
motorists for running red lights. However, several jurisdictions
believe that other laws, as well as the California Constitution,
would permit the use of red light photographs as evidence in
criminal proceedings. According to our legal counsel, in view
of the conflicting interpretation of the law, the courts will
ultimately decide whether local governments are violating the
red light camera law when they use photographs in criminal
investigations. The California Constitution also provides that
with a two-thirds vote of its members, the Legislature can
specifically exclude certain evidence from criminal proceedings,
and according to our legal counsel, this would likely include
photographs related to traffic signal enforcement.
Because a potential conflict exists between the confidentiality
provision in the Vehicle Code and the California Constitution
regarding the admissibility of evidence, we recommended
that the Legislature consider clarifying the Vehicle Code to
state whether photographs taken by red light cameras can be
used for other law enforcement purposes.
Legislative Action: None.
No legislative action found.
Finding #4: Local governments may not have addressed
engineering improvements before installing red light cameras.
Although we found that traffic safety was usually the reason
for selecting intersections for red light camera enforcement,
we could not always verify that local governments addressed
engineering solutions before placing red light cameras at
intersections. The Federal Highway Administration recommends
that before installing a red light camera system, traffic engineers
review the engineering aspects of the potential sites to determine
412 California State Auditor Report 2004-406 California State Auditor Report 2004-406 413
whether the problem of vehicles running red lights could be
mitigated by engineering changes or improvements. San Francisco
best demonstrated that it met this best practice, while the
other local governments we visited conducted their engineering
improvements on a more informal and ongoing basis.
We recommended that before installing red light cameras,
local governments should first consider whether engineering
measures, such as improving signal light visibility or using
warning signs to alert motorists of an upcoming traffic signal,
would improve traffic safety and be more effective in addressing
red light violations.
Local Government Action: Partial corrective action taken.
The six local governments for which this finding applied
reported the following corrective actions:
Ü
Fremont: Fremont has not reported the action it plans to
take on this recommendation.
Long Beach: Long Beach reports that should it decide to
expand the program beyond the three-year pilot, it will
perform engineering reviews at each location identified for
red light enforcement.
Ü Los Angeles: Los Angeles has not reported the action it plans
to take on this recommendation.
Oxnard: Oxnard indicates that its traffic engineer has
considered all possible options prior to installing red
light cameras, including using an all-red interval to clear
intersections, adjusting yellow light time intervals, adding
new roadway striping, installing light-emitting diodes
in signal lamps, and adjusting the posted speed limits.
However, as noted in our audit, we could not determine if
Oxnard took these steps before installing red light cameras
under its original program.
Ü
Sacramento: Sacramento has not reported the action it plans
to take on this recommendation.
San Diego: San Diego has developed selection criteria
for intersections, and it indicates that a detailed list of
engineering solutions will be first considered at intersections
selected for enforcement before it restarts the red light camera
program. Also, intersections selected for enforcement will
have a one second all-red interval to allow vehicles in the
intersection time to clear.
412 California State Auditor Report 2004-406 California State Auditor Report 2004-406 413
Finding #5: Some local governments bypassed state-owned
intersections with high accident rates.
Caltrans allows red light cameras at state-owned intersections
but requires an encroachment permit for construction. The
time it takes to obtain an encroachment permit—which
grants the local government access to a state right-of-way
for construction—was viewed differently among the local
governments we visited. Fremont and Long Beach avoided
placing red light cameras at state-owned intersections because
they anticipated that the Caltrans permitting process would
be too cumbersome and would unnecessarily delay the start of
their programs. San Diego stated that Caltrans was unwilling
to allow red light cameras on state-owned intersections, but
the city could not provide evidence of Caltrans’ refusal. Also,
Los Angeles did not consider state-owned intersections for its
program. By avoiding state-owned intersections, these local
governments failed to place cameras at some of the more
dangerous intersections within their jurisdictions.
To focus on traffic safety and to avoid overlooking high-accident
locations that are state owned when considering where to place
red light cameras, we recommended that local governments
diligently pursue the required Caltrans permitting process, even
though it may cause some delays to their programs.
Local Government Action: Partial corrective action taken.
The four local governments for which this finding applied
reported the following corrective actions:
Fremont: Fremont reports that it will be pursuing the
installation of red light cameras at state-owned intersections
in the near future and that it has begun discussions with
Caltrans regarding these installations.
Long Beach: Long Beach reports that should it decide to expand
the program beyond the three-year pilot, it will consider placing
red light cameras at state-owned intersections.
Los Angeles: Los Angeles has not reported the action it plans
Ü to take on this recommendation.
San Diego: The city indicates that it will place red light cameras
at state-owned intersections if those intersections meet the
selection criteria, regardless of any potential delays.
414 California State Auditor Report 2004-406 California State Auditor Report 2004-406 415
Finding #6: Not all local governments require vendors to
follow municipal permit and engineering standards when
installing red light cameras.
Local standards may include issuing the proper permits
to perform the work, reviewing engineering drawings and
plans for the suitability of the work proposed, and inspecting
the finished work for accuracy and adherence to the plans
and local construction requirements. Six of the seven local
governments we visited required vendors to follow local permit
and engineering standards to ensure proper construction and
inspection of red light camera systems. However, San Diego
chose not to apply its local permitting and engineering
standards to red light camera intersections. Specifically,
San Diego did not ensure that plans were prepared by a
registered civil or electrical engineer, nor was the construction
subject to the city’s formal plan check, permitting, and
inspection procedures.
We recommended that to ensure that intersections are constructed
and cameras are installed as planned, local governments should
follow their own permit processes by reviewing the as-built plans
and inspecting the intersection after construction.
Local Government Action: Corrective action taken.
The one local government for which this finding applied
reported the following corrective action:
San Diego: San Diego indicates that it will follow its own permit
process. Specifically, it will require that a registered engineer
design and submit plans for each red light camera installation
for review and approval. Further, a city inspector will inspect
the construction of each site before it is placed in operation,
and as-built plans will be prepared to illustrate the actual
construction of each site.
Finding #7: Caltrans guidance to local governments related
to yellow light time intervals could be more specific.
With few exceptions, the local governments we visited complied
with a new law requiring that the minimum yellow light
time interval at intersections with red light cameras meet the
standards established by Caltrans. The law became effective
January 1, 2002, and was prompted by the Legislature’s concern
that yellow light time intervals at such intersections may be
shorter than Caltrans’ standards. Caltrans’ standards use the
414 California State Auditor Report 2004-406 California State Auditor Report 2004-406 415
speed of the approaching traffic to determine the appropriate
time interval for a yellow light. However, the Caltrans traffic
manual does not specify how traffic engineers are to determine
the speed of the approaching traffic, which can be done in one
of two ways: using the posted speed limit or surveying the traffic
speed. Therefore, local governments that do not meet Caltrans’
standards using both posted speeds and speed survey results
run the risk that their yellow light time intervals may be
legally challenged.
To avoid the risk of legal challenges, we recommended that local
governments petition Caltrans to clarify its traffic manual to
explain when local governments should use either posted speeds
or the results from speed surveys to establish yellow light time
intervals at intersections equipped with red light cameras.
Local Government Action: Partial corrective action taken.
The seven local governments for which this finding applied
reported the following corrective actions:
Ü Fremont: Fremont has not reported the action it plans to
take on this recommendation.
Long Beach: Long Beach indicates that it sent a letter
to Caltrans that specifically requested clarification on
whether the yellow light time intervals at red light camera
intersections should be based on engineering surveys.
However, the city had not received a response as of
July 2003.
Ü Los Angeles: Los Angeles has not reported the action it plans
to take on this recommendation.
Oxnard: Oxnard indicates that its yellow light time intervals
comply with accepted standards, but does not indicate
whether it petitioned Caltrans to clarify the guidance in the
Caltrans traffic manual.
Ü Sacramento: Sacramento has not reported how it will
address this recommendation.
San Diego: The city indicates that it has increased minimum
yellow light time intervals to 3.9 seconds and 3.4 seconds,
for a straight through movement and a left turn, respectively.
City engineers will also review the approach speeds at red
light camera intersections to ensure that the yellow light
time intervals meet or exceed Caltrans’ standards.
416 California State Auditor Report 2004-406 California State Auditor Report 2004-406 417
San Francisco: San Francisco reports that it intends to seek
confirmation from Caltrans regarding its current practices for
yellow light time intervals.
Finding #8: Accounting for program revenues and
expenditures is weak.
Although good internal control practices dictate that local
governments properly account for the revenues and expenditures
of their respective red light camera program, only Fremont did
so. Because each local government pays their respective vendor
based on the number of red light citations that motorists’
pay, it would be prudent for them to properly account for
program revenues. Additionally, we found that only Fremont
and Long Beach conduct monthly reconciliations of their
vendors’ invoices with the courts’ payment records to ensure
that they are paying their vendors the appropriate amount.
Also, San Diego, San Francisco, and Oxnard could only provide
us with estimates for some of their program costs. Without a
more precise method of accounting for program expenditures,
these local governments cannot accurately determine the cost-
effectiveness of their programs and ensure that local resources
are used appropriately.
To allow for better accountability over red light camera
programs and to ensure that vendors are paid appropriately, we
recommended that local governments improve their methods of
tracking revenues and expenditures related to their programs.
Local Government Action: Partial corrective action taken.
The five local governments for which this finding applied
reported the following corrective actions:
Ü Los Angeles: Los Angeles has not reported the action it plans
to take on this recommendation.
Oxnard: Oxnard indicates that the city’s accounting system
now allows for the tracking of expenditures related to the red
light camera program.
Sacramento: Sacramento indicates that it hopes the
partnership with the Sacramento County Sheriff’s
Department will improve accountability over the program,
but it does not indicate specific actions that will occur to
implement this recommendation.
416 California State Auditor Report 2004-406 California State Auditor Report 2004-406 417
San Diego: San Diego’s police department and courts have
changed their accounting processes to allow for the accurate
accounting of red light camera ticket revenues and expenses.
San Francisco: To more accurately calculate expenditures,
San Francisco reports that it is looking into setting up an
accounting procedure to track police effort on the program.
418 California State Auditor Report 2004-406
LOS ANGELES COUNTY METROPOLITAN
TRANSPORTATION AUTHORITY
It Is Too Early to Predict Service Sector
Success, but Opportunities for Improved
Analysis and Communication Exist
Audit Highlights . . .
Although it is too early
to predict the success of REPORT NUMBER 2002-116, DECEMBER 2003
the Los Angeles County
Metropolitan Transportation
Authority’s (MTA) Los Angeles County Metropolitan Transportation Authority
decentralization of its bus response as of December 2003
services into five service sectors,
our review found the following: The Joint Legislative Audit Committee (audit committee)
requested that we review the Los Angeles County
þ The MTA did not perform
Metropolitan Transportation Authority’s (MTA)
any cost-benefit analyses
or fiscal projections, decentralization of bus operations in the Los Angeles region
nor did it fully consider into service sectors. The audit committee specifically requested
alternatives to sectors
that we assess the MTA’s fiscal projections or cost-benefit
before implementing them.
analyses to determine whether service sectors will reduce or
þ Despite the MTA’s limited add costs. We also reviewed various issues related to service
analysis, we generally
sectors, including the training that MTA provided to sector
did not find negative
governance councils and the manner in which governance
effects associated with the
MTA’s decentralization of council meetings are advertised. Finally, the audit committee
bus operations. requested that we review the potential for overlapping services
þ The MTA lacks a way to in those areas where municipalities provide transit services. We
determine cost savings and found the following:
ridership data accurately
at the sector level.
Finding #1: The MTA did not perform extensive analysis and
þ The MTA could provide
planning before establishing sectors.
better training to
governance councils in two
Before implementing service sectors, the MTA did not conduct
areas that limit their ability
any cost-benefit analyses or fiscal projections, nor did it fully
to make service changes:
the MTA’s consent decree consider alternatives to sectors. During the sector creation
and union contracts. process, the MTA limited its analysis of the impacts of sectors on
bus operations to a draft plan that it compiled in March 2002
þ Weaknesses in the methods
the MTA uses to advertise detailing its vision and goals for service sectors. However, this
governance council plan lacked any financial analysis. Thus, before embarking on its
meetings could cause it to
sector implementation, the MTA did not develop any estimates
miss opportunities to use
as to what the costs of establishing and operating sectors would
these meetings effectively
as a means of improving be and did not establish a baseline that it later could use to
community input into bus determine whether its actual costs met its expectations. The
operations and tailoring
MTA’s limited analysis in planning for sectors has reduced its
services to local needs.
ability to measure the effectiveness or efficiency of its sector
implementation.
California State Auditor Report 2004-406 419
We recommended that the MTA ensure that it plans for
future projects adequately by conducting sufficient analysis.
Specifically, the MTA should consider conducting cost-benefit
analyses, fiscal projections, and analyses of alternatives when
implementing major changes or programs.
MTA Action: Pending.
Ü The MTA’s response to our report did not specifically address
each recommendation. Instead, the MTA stated that it
appreciates that our recommendations are aligned with
its intent to continue to attain its objectives in facilitating
community-based bus services.
Finding #2: The MTA transferred some existing problems to
the new service sectors’ operations.
The MTA transferred some existing problems to the new service
sectors. Specifically, we found the following:
• The MTA has problems calculating actual amounts saved by
sectors because the recorded costs of the service sectors do
not include their divisions’ use of some support functions.
Specifically, the MTA does not allocate expenditures related
to the divisions’ use of the regional rebuild center, which
performs heavy maintenance; the divisions’ use of the bus
operating control center; and the training provided by the
operations central instruction department. Because the MTA
does not allocate the costs of some support functions to the
divisions using the services, the divisions’ reported costs do
not reflect the true expense of operating the divisions, so
total expenditures are understated. MTA management cited a
limitation in the MTA’s information systems as the reason for
not being able to allocate these costs. The MTA plans to create
a new method for charging these costs to sectors by July 2004.
• The MTA’s methodology for computing boarding data is not
sufficient to allow it to provide accurate ridership data at the
sector level. The MTA uses a sample methodology to calculate
its ridership. This methodology is accurate when used to
calculate total annual ridership for the MTA as a whole, but
it becomes increasingly inaccurate and therefore meaningless
for decision making when used to calculate ridership for
smaller levels, such as sector ridership numbers, because the
smaller levels are based on smaller sample sizes that do not
yield statistically valid conclusions. Although the MTA is
420 California State Auditor Report 2004-406 California State Auditor Report 2004-406 421
implementing a new automated passenger count system that
it plans to have fully in place by late 2004, the sector general
managers currently lack accurate information on boardings
and thus lack important feedback on how their decisions
affect bus ridership.
We recommended that the MTA continue its efforts to track all
costs associated with sector operations and to identify the actual
savings generated. Further, we recommended that the MTA
continue its efforts to improve its computation of boarding data.
MTA Action: Pending.
Ü The MTA’s response to our report did not specifically address
each recommendation. Instead, the MTA stated that it
appreciates that our recommendations are aligned with
its intent to continue to attain its objectives in facilitating
community-based bus services.
Finding #3: The MTA has not communicated adequately with
its governance councils regarding some pertinent issues.
Although the MTA provided training to the governance
councils on their various responsibilities, it has not
communicated adequately with its governance councils
regarding some pertinent issues. Specific areas our audit
identified include the following:
• Some governance council members that we spoke with
expressed their belief that the MTA should return cost savings
to the sectors that generated the savings. However, the MTA
has certain limitations that prevent it from calculating these
savings, and it has not communicated these limitations to
the various governance councils. Further, the MTA board
of directors retains final authority for approving budgets,
and it has not yet addressed the issue of where cost savings,
once it becomes possible to calculate them, will be spent.
Nonetheless, some sector general managers may have
established erroneous expectations with their governance
councils that the MTA at present cannot fulfill.
• The MTA provided limited training to governance councils in
two areas that could limit the councils’ ability to make service
changes: the MTA’s consent decree and union contracts.
Under the MTA’s consent decree, an agreement that the MTA
entered into in response to a civil rights lawsuit brought by
420 California State Auditor Report 2004-406 California State Auditor Report 2004-406 421
various plantiffs representing bus riders, the MTA must reduce
load factors (the number of passengers in relation to the
number of seats on its buses) to agreed-upon ratios by year.
Governance council members could become frustrated if they
attempt to make service changes that the MTA’s headquarters
subsequently overturns because of consent decree violations.
Further, because of provisions in one union contract,
governance councils face limitations in cutting some services
if they expect municipal operators to pick up these lines.
We recommended that the MTA clearly define and communicate
to the governance councils all the information they need to
accomplish their goals, including information on limitations
related to the MTA’s problems in calculating actual sector
savings, as well as information on the consent decree and
union contracts.
MTA Action: Pending.
Ü The MTA’s response to our report did not specifically address
each recommendation. Instead, the MTA stated that it
appreciates that our recommendations are aligned with
its intent to continue to attain its objectives in facilitating
community-based bus services.
Finding #4: Weaknesses exist in the methods the MTA uses to
advertise governance council meetings.
Weaknesses in the methods the MTA uses to advertise
governance council meetings could result in it missing
opportunities to use these meetings effectively to improve
customer input into bus operations and to tailor service to local
needs. Specifically, we found the following:
• The MTA does not run print advertisements of governance
council meetings on a monthly basis, and does not have a
regular schedule in which it publishes advertisements for
governance council meetings. Therefore, the public does
not have a predictable way of knowing when a governance
council meeting is about to occur.
• The brochures that the MTA designed for specific sectors
lack information on the times and dates of governance
council meetings. Additionally, four monthly brochures the
MTA issued in 2003 to communicate overall MTA news did
422 California State Auditor Report 2004-406 California State Auditor Report 2004-406 423
mention the governance council meeting times and dates.
However, each brochure highlighted only a single council per
month, even though other councils also met during this time.
• The MTA advertises its monthly governance council meetings
in announcements added to the MTA’s “Board Meetings/
Agendas” section of the MTA Web site. Bus riders must know
where to look for this information. The MTA’s sector Web
page contains general information about the sectors, and the
MTA Web site has a page with links to bus line timetables.
However, neither page provides links to the information
about the monthly sector governance council meetings on the
“Board Meetings/Agendas” page.
• The MTA displays sector information, such as a general
sector overview and a map of the sector area, on its Web site,
but it does not show the bus routes for which each sector
is responsible. The MTA does not publish this information
anywhere else, including in its bus route schedules or via
posters on the vehicles. The only avenue the MTA currently
provides bus riders to determine what sector is responsible
for a given route is through its toll-free number for customer
service (1-800-COMMUTE). However, the MTA does not
publish the fact that bus riders can get sector-related
information from staff members through this number.
We recommended that the MTA ensure that it uses appropriate
and sufficient means of communicating to bus riders
information on governance councils and sectors. For example,
we recommended that the MTA consider adding information
about bus routes and their corresponding sectors to its service
sector and bus route Web pages, and it should consider adding
information about its governance council meetings to these
Web pages. Further, we recommended that the MTA consider
adding information on governance council meeting times and
locations to the brochures designed for specific sectors that it
places on buses. It should also consider regularly advertising this
information in newspapers.
MTA Action: Pending.
Ü The MTA’s response to our report did not specifically address
each recommendation. Instead, the MTA stated that it
appreciates that our recommendations are aligned with
its intent to continue to attain its objectives in facilitating
community-based bus services.
422 California State Auditor Report 2004-406 California State Auditor Report 2004-406 423
Finding #5: The MTA needs to involve municipal transit
operators in the formation of its new transportation system.
The issue of duplicative service is a longstanding problem that
predates service sectors, and the MTA plans to address this
issue by comprehensively reorganizing bus services. The MTA
expects to begin implementing a new hub-and-spoke network
by December 2004 and to complete the process by June 2006.
However, the MTA only recently started its planning efforts and
has not yet invited municipal operators to participate directly
in these initial planning and brainstorming stages. Although
MTA staff stated the MTA delayed the planned implementation
of the new network, in part to conduct more outreach with
the municipal transit operators, the MTA’s current efforts
have been limited to making brief presentations at meetings
that municipal operators have attended. If the MTA does not
effectively introduce municipal operators’ views by allowing
them to participate directly, as opposed to the indirect process of
simply collecting input, it risks formulating a plan that will not
receive sufficient buy-in from municipal operators, which could
be detrimental to the network’s future success.
We recommended that the MTA continue its planned efforts
to focus on eliminating duplicative routes to the extent
possible. Specifically, we recommended that the MTA allow
stakeholders, such as municipal transit operators, to participate
directly in the planning process. If the MTA does not proceed
with its restructuring plans, we recommended it create and
implement policies and procedures to ensure that it coordinates
service changes with municipal operators in such a way that it
eliminates duplicative services to the extent possible.
MTA Action: Pending.
Ü The MTA’s response to our report did not specifically address
each recommendation. Instead, the MTA stated that it
appreciates that our recommendations are aligned with
its intent to continue to attain its objectives in facilitating
community-based bus services.
424 California State Auditor Report 2004-406
CALIFORNIA DEPARTMENT OF
CORRECTIONS
A Shortage of Correctional Officers, Along
With Costly Labor Agreement Provisions,
Raises Both Fiscal and Safety Concerns
and Limits Management’s Control
REPORT NUMBER 2002-101, JULY 2002
California Department of Corrections’ response as of
August 2003
The Joint Legislative Audit Committee requested
Audit Highlights . . . that the Bureau of State Audits conduct an audit of
various Department of Corrections’ (department)
Our review of the California
fiscal problems. The audit committee expressed particular
Department of Corrections’
(department) ongoing fiscal interest in the collective bargaining process that governs the
problems revealed: department’s relationship with its correctional officers, the
assignment of new cadets from the academy to prisons, the
þ A shortage of correctional
impact of statewide mandated salary savings on correctional
officers continues to drive
overtime costs higher. officers’ use of overtime and sick leave, and the impact of
medical transportation costs on the cost of medical care.
þ At its current pace of hiring,
it may take the department
until 2009 to meet its
Finding #1: The department pays large overtime costs to
need for additional
correctional officers. cover for unmet correctional officer need.
þ Some officers work excessive The department has been unable to attract and train enough
amounts of overtime while correctional officers to meet its needs. Specifically, as of
others at the same prison
September 2001, its full-time and intermittent officers numbered
work very little overtime.
only 19,910 while its budget and labor agreement allow for a
þ Certain provisions in the maximum of 23,160 officers. As a result, the department has
labor agreement between an unmet need of about 3,250 officers. To fill this unmet need,
the State and the California
the department has resorted to assigning overtime. During the
Correctional Peace Officers
Association, related first half of fiscal year 2001–02, the department spent more than
primarily to correctional $110 million on custody staff overtime––already $36 million
officers, will eventually add
more than its overtime budget of $74 million for the entire fiscal
about $518 million to the
year. We estimate that the department will not fill its unmet
department’s annual costs.
officer need until sometime between the end of 2005 and the
beginning of 2009, depending on the number of future academy
graduates and the officer attrition rate.
California State Auditor Report 2004-406 425
To reduce its use of overtime, the department should consider
the feasibility of further increasing the number of correctional
officer applicants and, if warranted, the physical capacity for
training them. Additionally, the department should pursue
additional funding from the Legislature to operate its academy at
full capacity. Once it can attract more cadets to its academy, the
department should pursue funding for additional correctional
officer positions that it will need to reduce its reliance on
overtime. Until such time, as the department has enough
correctional officers to meet its needs and incurs only unavoidable
overtime, the department should be realistic in its budget and
plan for the overtime it will need to cover its unmet need. Finally,
the department should maximize its use of intermittent officers
by either converting them to full-time or ensuring that they work
as close to the 2,000-hour-a-year maximum as possible.
Department Action: Partial corrective action taken.
The department states that as part of the fiscal year 2003–04
governor’s 20 percent reduction plan, it submitted a proposal
to restructure the academy so that 12 weeks of training will
be provided at the academy and the remaining four weeks of
training will be provided at the cadets’ assigned institution.
The department asserts that the authority for this change was
contained in Senate Bill 19X and was signed into law by
the governor in March 2003. However, implementation of the
restructured academy is contingent upon the State and
the union representing correctional officers reaching agreement
on the implementation of the on-the-job training requirement.
The department indicates that it is in negotiations with the
union regarding this issue. The department believes that
the reduced length of the academy will allow it to schedule an
additional two classes per year, potentially graduating several
hundred additional officers per year.
The department also states that it is pursuing authority and
funding for additional correctional officer positions, and
indicated that the use of sick leave by correctional officers
continues to be a major contributor to overtime. In addition,
the department stated that as part of its analysis of correctional
officer needs through June 2005, it has developed procedures
to project the overtime necessary to cover vacancies, and has
incorporated this information into its fiscal year 2003–04
budget request. Further, the department indicated that its
institutions maximize their use of intermittent officers by
converting them to full-time when positions become vacant
and if, or when, intermittent officers are eligible for and accept
426 California State Auditor Report 2004-406 California State Auditor Report 2004-406 427
permanent positions. Finally, the department reports that
193 intermittent officers were appointed to full-time positions
during the period from January 1, 2003, to June 30, 2003.
Finding #2: Savings from vacant budgeted positions are
insufficient to finance shortfalls in the overall funding for
correctional officers and overtime.
The savings the department realizes by intentionally leaving
more than 1,000 of its authorized correctional officer positions
vacant under the Institutional Vacancy Plan do not result in net
salary savings because the budget for each officer is not sufficient
to meet the actual costs when an officer works full time.
Specifically, we estimated that the department would experience
a net deficit of about $193 million related to its funding of
correctional officers and overtime in fiscal year 2001–02.
To reduce its use of overtime, the department should fill vacant relief
officer positions currently in its Institutional Vacancy Plan once it
has filled its positions currently vacant because of insufficient staff.
Department Action: Partial corrective action taken.
The department states it is making every effort to fill
vacant positions. The department reports that it has
reduced its vacant permanent full-time positions to 429
as of June 30, 2003, compared to 1,040 at June 30, 2002. It
also indicates that 160 additional cadets were scheduled to
graduate in August 2003, and another 504 in October 2003.
Finally, the department notes that it continues to work with
the administration related to its long-term staffing needs,
including developing a strategy related to the remaining
vacant relief officer positions in its Institutional Vacancy Plan.
Finding #3: A more strategic assignment of new cadets and
better monitoring of overtime worked at each prison would
be beneficial.
The department does not consider the varying amounts of
overtime that correctional officers work at its prisons when
assigning cadets from its academy. In particular, based on our
review of the November 2001 academy, we found that there was
no strong correlation between the assignments of new cadets and
the amount of overtime at each prison. In addition, we found
that a total of 235 officers at 26 different prisons averaged more
426 California State Auditor Report 2004-406 California State Auditor Report 2004-406 427
than 80 hours of overtime each work period between July and
December 2001. The department could also better protect the
health and safety of everyone in the prison setting by more evenly
distributing the total overtime among individual officers within
each prison.
To reduce health and safety risks for its employees, the department
should reassess the number of budgeted full-time positions at
each prison and determine whether reallocations are warranted
because of excessive overtime at specific prisons. Additionally,
the department should pursue options to limit overtime that
individuals work so that individuals do not exceed the 80-hour
cap considered relevant for health and safety risks.
To better match the supply of correctional officers with the
demand for correctional officers that use of overtime hours
indicates, the department should consider assigning its academy
graduates to those prisons that experience the highest levels of
overtime. For example, if it has too many qualified candidates to
fill a class, the department could give preference to candidates
willing to go to the 10 prisons with the most overtime.
Department Action: Partial corrective action taken.
The department states that it is conducting a standardized
staffing study that will assess staffing needs and establish
standardized staffing patterns for each prison based on mission
and location. In addition, the department reports that the
number of correctional officers averaging more than 80 hours
of overtime has decreased from the 235 we reported for July
through December 2001, to 159 for January through June 2003.
Further, the department states that until the pool of candidates
on its correctional officer certification list increases significantly,
competition is inadequate to make high vacancy institutions
attractive to correctional officer candidates. Nevertheless,
the department will continue efforts to increase the pool of
candidates willing to work at high vacancy institutions.
Finding #4: Certain provisions of the new labor agreement
increase the department’s fiscal burden and limit
management’s control.
The new labor agreement between the State and the California
Correctional Peace Officers Association includes many provisions
that either increase personnel costs or create challenges for the
department to effectively manage its staff. Ranging from salary
428 California State Auditor Report 2004-406 California State Auditor Report 2004-406 429
increases and enhanced retirement benefits to seniority-based
overtime, some of these provisions were included in the prior
labor agreement, but many are new to the labor agreement that
was ratified in February 2002. The department estimates that
the annual cost of new provisions in the agreement will be as
high as $300 million a year by fiscal year 2005–06, the latest year
for which it has estimated costs. In developing these estimates,
the department included classes of employees who are covered
by the agreement, such as medical technical assistants and
correctional counselors, as well as correctional officers. Focusing
mainly on costs related to correctional officers and including
the entire term of the labor agreement, we analyzed five new
and three continuing provisions of the labor agreement and
estimate that the department’s annual costs for these provisions
will eventually amount to about $518 million. Further, several
changes in the provisions related to sick leave have likely
resulted in additional overtime to cover for the increased use of
sick leave. Finally, a continuing provision related to how post
assignments are made limits the department’s ability to assign
particular individuals to posts of its choosing.
428 California State Auditor Report 2004-406 California State Auditor Report 2004-406 429
430 California State Auditor Report 2004-406
GOVERNOR’S OFFICE OF
EMERGENCY SERVICES
Investigations of Improper Activities by
State Employees, March 2002 Through
July 2002
ALLEGATION I2000-607 (REPORT I2002-2),
NOVEMBER 2002
Governor’s Office of Emergency Services’ response as of
September 20021
In April 2000 we reported, among other things, that poor
Investigative Highlights . . . supervision and inadequate administrative controls in the
fire and rescue branch of the Governor’s Office of Emergency
The Governor’s Office of
Services (OES) had enabled employees to commit various
Emergency Services engaged
improprieties, including claiming excessive overtime and travel
in the following improper
governmental activities: costs.2 Subsequently, we received information that one employee
(employee A) continued to claim excessive amounts of overtime.
þ Allowed an employee
We investigated and substantiated this and other improprieties.
(employee A) to continue
to be paid for his
commute time.
Finding #1: Despite prior knowledge, OES continued to pay
þ Entered into an agreement employee A for his commute.
with employee A’s
bargaining unit that State policy prohibits state agencies from paying employees for
the Department of time spent commuting from their home to the work site. Even
Personnel Administration
though OES became aware that this was occurring as early as
determined was invalid.
November 1998, it continued to allow employee A to claim his
þ Failed to follow its own commute time, which contributed, in part, to the extraordinary
administrative controls
amount of overtime he subsequently received. Specifically, during
concerning overtime.
the fiscal year July 1, 1999, through June 30, 2000, employee A
received approximately $100,207 in wages, of which $35,743, or
36 percent, was overtime pay. For the next fiscal year, July 1, 2000,
through June 30, 2001, he was paid approximately $107,137, of
which $40,523, or 38 percent, was overtime.
1Since we report the results of our investigative audits only twice a year, we may receive
the status of an auditee’s corrective action prior to a report being issued. However, the
auditee should report to us monthly until its corrective action has been implemented.
As of January 2004, this is the date of the auditee’s latest response.
2When we notified the director of OES in 2000 that we would be investigating the
allegations made at that time, he informed us the CHP had begun a similar investigation
at OES’s request. To avoid duplicating investigative efforts, we met and coordinated with
the CHP. We reported these improprieties in investigative report I2000-1.
California State Auditor Report 2004-406 431
Although much of employee A’s overtime related to emergency
events, nearly half was associated with nonemergency activities
such as meetings or training classes. For example, of 815 hours
of overtime employee A claimed in fiscal year 1999–2000,
370 hours, or approximately 45 percent, was for nonemergency
events. In fiscal year 2000–01, he claimed 862 hours of
overtime, of which 390 hours, or about 45 percent, pertained to
nonemergency activities.
Finding #2: Employee A may not have been told to stop
claiming his commute time.
Employee A and his managers have provided conflicting
information regarding whether he was told to stop claiming
his commute time. In July 1999, as our prior investigation
drew to a close, we spoke with the former manager of the fire
and rescue branch about the matter.3 He told us that it was his
understanding that employee A had been told that he no longer
could claim his commute time and that he had stopped doing so.
During our current investigation, employee A told us that it had
always been his understanding that his home was his designated
headquarters and, as a result, he claimed the time it took him to
drive from his home to locations within his assigned work area.
He added that to compensate for this, he sometimes did not
claim all the time he spent conducting state business, such as
when he worked late or responded to e-mail messages or pages on
his days off. It is unclear to us why, if employee A believed this
arrangement was appropriate, he felt he needed to compensate in
some way for charging commute time as work hours. Regardless,
we found no written evidence that OES instructed the employee
that he no longer could claim his commute.
Employee A not only continued to claim his commute time,
but it appears that OES never intended to prevent him from
claiming this time unless it could reassign him to a work area
closer to his home. In a letter dated April 7, 1999, the former
manager thanked the chief of a fire district located within
employee A’s work area for offering OES the ability to locate one
of its employees, employee A, at the fire district’s headquarters.
However, the former manager added, “We have reevaluated
our situation and do not currently plan to relocate [employee
A’s] office from his current home office at this time.” OES
allowed the abuse to continue by declining the offer to move
the employee’s office from his home to a more central location
within his assigned work area.
3This manager retired from OES effective March 30, 2001.
432 California State Auditor Report 2004-406 California State Auditor Report 2004-406 433
Finding #3: OES entered into a questionable agreement with
employee A’s bargaining unit.
On April 7, 1999, the same day OES formally rejected the chance
to relocate employee A’s office to a location within his assigned
work area, OES entered into a questionable agreement with
employee A’s bargaining unit. Further, not only did OES enter
into this questionable agreement with employee A’s bargaining
unit—an agreement that the current manager of the fire and
rescue branch believes permitted the employee to continue to
claim his commute—but it also did not provide the Department
of Personnel Administration (DPA) an opportunity to review
and approve the agreement as required. When we asked the
appropriate DPA official to review the agreement, he questioned
its appropriateness and said he considered it invalid.
Finding #4: The Fire and Rescue Branch still does not adhere
to administrative controls concerning overtime.
Because the Fire and Rescue Branch (branch) failed to follow its
own administrative controls concerning overtime, employees
have continued to incur nonemergency overtime that lacked
advance authorization. In an attempt to address the past failure
of the branch to control excessive nonemergency overtime and
related expenses, OES reported to us on February 10, 1999, that
it had implemented an administrative system that required
employees in the branch to submit in a timely manner various
documents that included but were not limited to a monthly
calendar of planned activities, overtime authorization and
claim forms, authorization for on-call hours, and absence and
time reports. OES reported that supervisors would compare
each document with previously approved authorizations and
individual planning documents to ensure agreement and
to continuously monitor overtime use and travel expenses.
However, one supervisor responsible for performing these
control functions admitted that some employees under his
supervision had not submitted the appropriate documents by
the third working day of each month, as required. As a result,
the supervisor said that there might have been instances when
he was not able to review and approve planned overtime and
travel incurred by employees under his supervision.
Although we did not perform an extensive review of the
records of each employee in the branch, we did note several
instances in which employees did not receive advance approval
of nonemergency overtime. For instance, during July 1999,
employee A claimed 84.5 hours of overtime, 73 of which related
432 California State Auditor Report 2004-406 California State Auditor Report 2004-406 433
to nonemergency events. However, none of the documents
we obtained from the branch show that employee A received
prior approval for the nonemergency overtime he claimed. In
June 2000, of 99.5 hours of overtime claimed by employee A,
60.5 hours were nonemergency overtime. Again, the documents
we obtained did not show that employee A obtained prior
authorization to work the overtime. In June 2001, another
employee, employee B, claimed 43.75 hours of overtime, all for
nonemergency events. Yet none of the documents we reviewed
indicated that he had received prior approval for the overtime.
Given that employee A and the rest of the branch historically
have incurred significant amounts of nonemergency overtime,
we believe it would be prudent for OES to follow its own
administrative procedures designed to monitor and control
overtime and travel costs.4
OES Action: Corrective action taken.
OES reported that the unresolved supervisory and
administrative issues associated with the branch were a
result of miscommunications during changes to branch
management or inadequate training, but that these issues
have now been addressed. Employee A has been reassigned
to a work area where he lives. OES also reported that it has
established administrative controls concerning overtime
authorization and that it has counseled all branch employees
that nonemergency overtime will not be incurred without
prior authorization.
4We previously reported that only 41 percent of overtime claimed by employees at the
branch from November 1996 through June 1997 related directly to emergency conditions.
434 California State Auditor Report 2004-406
DEPARTMENT OF INDUSTRIAL RELATIONS
Investigations of Improper Activities by
State Employees, August 2002 Through
January 2003
ALLEGATION I2002-605 (REPORT I2003-1), APRIL 2003
Department of Industrial Relations response as of April 2003
We investigated and substantiated allegations that an
official with the Department of Industrial Relations
(department) improperly claimed reimbursements
Investigative Highlight . . . for relocation and commute expenses for travel between his
residence near San Diego and his headquarters in San Francisco.
A Department of Industrial
We also found that the official improperly claimed payment
Relations official claimed
for lodging and meals incurred within a close proximity of
reimbursement for more than
$17,000 in travel expenses to his headquarters. At the time we received the allegation, the
which he was not entitled. department was already investigating these issues, and we
asked that it report its findings to our office. The department
concluded that the official improperly claimed $5,726 in travel
costs related to relocation and lodging expenses. After receiving
the department’s report, we performed some additional analysis
and follow-up work and determined that the official had
claimed an additional $11,803 in improper travel expenses.
Finding #1: The official claimed relocation expenses but did
not relocate.
The State reimbursed the official for relocation expenses when
he neither relocated nor obtained the necessary approval for
the reimbursement. The department found that $4,939 of the
official’s $4,982 claim for relocation expenses was improper,
and it recommended disallowing these costs. However, the
department allowed the remaining $43, which represents a
9-cent-per-mile reimbursement for relocation travel between
the official’s home near San Diego and his headquarters in
San Francisco. However, we determined that the State should
not have paid the $43 because the official did not relocate.
California State Auditor Report 2004-406 435
Department Action: Corrective action taken.
The department agrees with our finding and required the
official to reimburse the State for improper relocation
expenses totaling $4,982.
Finding #2: The official submitted improper claims for
lodging and meal expenses.
The official made improper claims for lodging and meals. The
department reported that the official improperly received $787
in reimbursement for unallowable lodging expenses that he
incurred within 50 miles of his headquarters location. Our
analysis determined that the official also improperly received
$1,082 in meal and incidental expenses incurred within 50 miles
of his San Francisco headquarters.
Department Action: Corrective action taken.
The department agrees with our finding and required the
official to reimburse the State a total of $1,869 for lodging,
meal, and incidental expenses incurred within 50 miles of
his headquarters.
Finding #3: The official claimed and the department
approved other unallowable and unnecessary expenses.
Of the $47,790 in travel costs the official incurred between
April 2000 and November 2001, the State paid $2,334 for
24 days of lodging in San Diego, which is within 35 miles of
the official’s home, $3,941 for flights between San Diego and
his San Francisco headquarters, and $3,768 more than he was
entitled to receive for costs associated with flights between
San Diego and Sacramento.1
We also found that the official claimed unnecessary rental
car expenses. A portion of the rental car expenses the official
claimed was for weekend rentals for which he stated no business
purpose. Although the department did not address the issue,
we found that of the $3,417 in rental car expenses the official
incurred during the 20-month period we reviewed, $635 related
to vehicles he rented in San Diego on weekends.
1The $47,790 includes $31,831 in travel claims that the official submitted for reimbursement
and $15,929 in travel expenses not included on a travel claim, but that the State paid
directly to a vendor. This figure does not include any relocation expenses.
436 California State Auditor Report 2004-406 California State Auditor Report 2004-406 437
Finally, we found that even though a majority of the $31,831
in travel claims that the official submitted lacked sufficient
explanations for his trips, as state regulations require, the
department approved his claims. We spoke with two executives
about the department’s process for reviewing and approving
travel claims, because they had approved a number of the
official’s claims. Both executives told us they do not or usually do
not attempt to verify the purpose of each trip listed on the claims.
Department Action: Partial corrective action taken.
The department reported that it will require an executive-
level civil service officer familiar with state reimbursement
rules to authorize all exempt employee travel claims
before submitting them to the accounting department for
processing. The department also reported that it will require
a senior level (or higher) accounting officer to audit all
exempt employees’ travel claims before making payment.
After the department began its investigation of the official’s
travel expenses, and well after the official had incurred
Ü the expenses and received reimbursement, the department
decided that, for the purpose of determining which costs
were valid and in compliance with state requirements, it
would consider the official’s San Francisco headquarters to be
his “primary residence.” This determination was based on the
California Code of Regulations, Title 2, Section 599.616.1(b),
which states that a place of primary dwelling shall be
designated for each state officer and employee and that the
primary dwelling shall be defined as the actual dwelling place
that bears the most logical relationship to the employee’s
headquarters and shall be determined without regard to any
other legal or mailing address.
Ü
The department’s determination that the official’s primary
dwelling was one and the same as the San Francisco
headquarters allowed the official to travel between
San Francisco and San Diego at state expense, based on the
assumption that all such travel is for a business purpose.
Consequently, the department did not recommend that
the official repay the State for $2,334 in lodging expenses
and $635 in rental car expenses he incurred in San Diego,
the $3,768 overpayment for trips the official took between
San Diego and Sacramento, or the $3,941 in airfare for
flights between San Diego and San Francisco. Since the
department determined that for the purpose of calculating
travel expenses, the official’s residence is his headquarters in
San Francisco and not where he resides (near San Diego),
436 California State Auditor Report 2004-406 California State Auditor Report 2004-406 437
these expenses became allowable; however, we question
this determination and find no indication that the official’s
headquarters is an “actual dwelling place.” Moreover, the
department does not appear to have used the best interests
of the State as its guiding principle when making this after-
the-fact determination that contradicted statements on the
travel claims.
438 California State Auditor Report 2004-406
DEPARTMENT OF DEVELOPMENTAL
SERVICES, PORTERVILLE
DEVELOPMENTAL CENTER
Investigations of Improper Activities by
State Employees, August 2002 Through
January 2003
ALLEGATION I2002-952 (REPORT I2003-1), APRIL 2003
Department of Developmental Services response as of
October 20021
The Department of Developmental Services (department)
investigated and substantiated an allegation that the
Porterville Developmental Center (center) illegally
Investigative Highlights . . . appointed two individuals to psychologist positions.
Porterville Developmental
Center: Finding #1: The center illegally appointed two individuals to
psychologist positions.
þ Failed to verify whether
two employees had In violation of state law, the center appointed two individuals,
completed the education
employee A and employee B, to psychologist positions,
requirements for the
positions to which they even though neither of the individuals met the educational
were appointed. requirements for the position.
þ Accepted two additional
Specifically, employee A began working for the center
applications after the
final filing date had as a psychology intern in October 1999. That position
already passed. required enrollment in and completion of at least one year
of a postgraduate program leading to a doctoral degree in
psychology. When employee A applied for the intern position,
she projected a completion date of May 2000 for her doctorate.
In August 2000, employee A applied for the psychologist
position and revised her projected completion date for her
degree to September 2000. Although the center appointed
employee A to a psychologist position in October 2000, no
one verified that she had completed her doctoral degree,
even though completion of the degree is required prior to
1Since we report the results of our investigative audits only twice a year, we may receive
the status of an auditee’s corrective action prior to a report being issued. However, the
auditee should report to us monthly until its corrective action has been implemented.
As of January 2004, this is the date of the auditee’s latest response.
California State Auditor Report 2004-406 439
such an appointment. As of July 31, 2002, employee A still had
not met the educational requirements for the position she had
been working in for nearly two years.
Similar to the situation with employee A, no one at the center
verified whether employee B had completed his doctoral degree
prior to his appointment as a psychologist.
Finding #2: Employee A and center employees failed to
follow other center hiring procedures.
On July 28, 2000, a program within the center advertised a
vacancy for a psychologist position. As of the August 4, 2000,
final filing date, the exams unit had received two applications,
one from employee C and one from employee D, which it
forwarded to the appropriate program to schedule interviews.
Subsequently, a nursing coordinator for the program directly
accepted applications from employee A and another employee,
employee E. The exam analyst later wrote a note on employee
E’s application form acknowledging that the employee had
changed his mind and decided to apply for the position. Center
procedures state that an applicant submitting an application
after the final filing date must obtain approval from the center’s
personnel officer for admission to the interview process.
However, no record indicates that the exams unit was aware that
the nursing coordinator also directly accepted an application
from employee A. Neither employee A nor the nursing
coordinator notified the exams unit of employee A’s application;
as a result, the exams unit did not find out about the application
until after it had interviewed employee A and approved her
appointment to the position.
Center and Department Action: Corrective action taken.
The department conferred with the State Personnel Board
and has taken corrective action by having employees A and
B voluntarily transfer to psychology-associate positions. In
addition, the center has implemented new procedures to
prevent this type of illegal appointment from occurring in
the future. The new procedures include a stringent process
for review of applicants’ credentials by at least three levels of
personnel, including two levels at the center and one at
the department.
440 California State Auditor Report 2004-406
DEPARTMENT OF FISH AND GAME
Investigations of Improper Activities by
State Employees, August 2002 Through
January 2003
ALLEGATIONS I2002-636, I2002-725, AND I2002-947
(I2003-1), APRIL 2003
Department of Fish and Game’s response as of February 20031
We asked the Department of Fish and Game
(department) to investigate on our behalf allegations
that a regional manager claimed vacation and sick
Investigative Highlights . . . leave hours he was not entitled to receive, engaged in various
contracting improprieties, and mistreated employees.
Employees of the Department
of Fish and Game
(department) engaged in
Finding #1: The department mismanaged its leave-
the following improper
accounting system.
governmental activities:
A manager of one of the department’s regions failed to ensure
þ Improperly claimed
479 hours of leave his region made monthly updates to the State’s leave-accounting
balances, a benefit worth system for more than two years, and even after the region took
approximately $20,322, to
steps to bring the system up to date, the manager improperly
which he was not entitled.
claimed 479 hours of leave balances to which he was not entitled.
þ Circumvented competitive-
bidding requirements. The State’s leave-accounting system tracks vacation, sick leave,
þ Violated conflict-of- and annual leave as well as other employee leave balances, such
interest prohibitions. as compensatory time off and personal holidays. The leave-
accounting system automatically posts credits to the employees’
þ Mistreated subordinates
monthly leave balances, but regional staff must account for
and breached other norms
of good behavior in a way any leave its employees have taken—which it had not done for
that brought discredit to more than two years. Thus, for the 180 regional employees the
the department.
manager oversaw, the region reported leave balances that were
greater than the employees’ actual balances. In doing so, the
region exposed the State to undue liability in that employees
might have taken more leave than they were entitled to. Also,
employees may have found planning vacations difficult, given
1Since we report the results of our investigative audits only twice a year, we may receive
the status of an auditee’s corrective action prior to a report being issued. However, the
auditee should report to us monthly until its corrective action has been implemented.
As of January 2004, this is the date of the auditee’s latest response.
California State Auditor Report 2004-406 441
that they did not receive an accurate accounting of their
leave balances. To correct this problem, regional staff, under
the manager’s direction, began reconciling each employee’s
leave balances. In most cases, staff assigned to perform the
reconciliation easily resolved cases in which individuals identified
discrepancies. In some instances regional staff were unable to
locate employees’ time sheets. In such cases, their only recourse
was to grant those employees the automatic leave accrual,
even though the employees might already have taken time
off, because the region lacked supporting documentation by
which to reduce the employee’s leave balances. However, some
controversy remained involving the manager’s leave balances.
The manager disputed his staff’s recalculation and rather than
provide documentation to support his dispute, he supplied staff
with amounts he believed were correct. When the department’s
investigators questioned him, the manager stated that he had
support for these adjustments; however, after reviewing the
information the manager provided, the department concluded
that the support was inadequate. The department concluded
that the manager received a combined 479 hours of sick leave
and annual leave that he was not entitled to, a benefit worth
approximately $20,322.
Finding #2: The manager and other employees violated
contracting and conflict-of-interest laws.
Contrary to state laws, regional staff split various transactions
into smaller ones enabling them to circumvent competitive
bidding requirements. These transactions related to the purchase
of equipment or services provided by companies that a seasonal
employee of the department owned or was affiliated with. For
example, from February through June 2001, two companies—
the employee owned one and founded the other—invoiced the
department a total of $62,000 for five underground storage tanks
used to provide water for sheep and deer. Instead of treating this
as one transaction, regional staff spread these costs among five
purchase orders, thereby circumventing competitive-bidding
requirements. In addition, supporting documents associated
with the purchase of the five underground storage tanks lacked
evidence that the department actually obtained competitive
bids. The manager and regional staff also allowed one of the
companies to begin work related to the underground storage
tanks before the department had established contracts for the
work, thereby exposing the State to additional liabilities. The
department concluded that the seasonal employee violated
442 California State Auditor Report 2004-406 California State Auditor Report 2004-406 443
conflict-of-interest prohibitions because one of his companies
submitted a $10,667 invoice for one underground storage tank
at the time he was a state employee.
Finding #3: The manager mistreated subordinates.
The department investigated several complaints concerning the
manager’s conduct and concluded that the manager made sexually
suggestive comments or jokes in the presence of female staff
members (who found his comments offensive), made inappropriate
gestures to a staff member on several occasions, repeatedly cursed
in staff members’ presence, and intimidated staff by yelling at
them to an extent that they perceived as unprofessional.
Department Action: Corrective action taken.
The department initiated an administrative action against
the manager for violating provisions of the Government
Code: inexcusably neglecting his duty; treating the public or
other employees inappropriately; and breaching other norms
of good behavior, either during or after duty hours, in a way
that discredited the department. A subsequent May 2002
agreement between the department and the manager called for
a reduction in the manager’s pay by 5 percent for five months,
a reduction in his leave balances by 479 hours; and required the
manager to complete department-specified training, including
topics on management techniques, equal employment
opportunity, conflicts of interest, and contracting. However,
the department did not reduce the manager’s leave balances by
the agreed-upon amounts until February 4, 2003, after we made
further inquiries into the matter.
442 California State Auditor Report 2004-406 California State Auditor Report 2004-406 443
444 California State Auditor Report 2004-406
CALIFORNIA UNEMPLOYMENT
INSURANCE APPEALS BOARD
Investigations of Improper Activities by
State Employees, February 2003 Through
June 2003
ALLEGATION I2002-661 (REPORT I2003-2),
SEPTEMBER 2003
California Unemployment Insurance Appeals Board’s response
as of September 2003
We investigated and substantiated an allegation
involving the California Unemployment Insurance
Appeals Board (Appeals Board) improperly granting
Investigative Highlights . . . unofficial time off to employees even though it had already
compensated them for the overtime they worked.
The California Unemployment
Insurance Appeals Board
engaged in the following
Finding: The Appeals Board improperly granted leave that
improper governmental
resulted in economic waste.
activities:
The Appeals Board improperly granted four days of leave to most
þ Improperly granted leave
valued at an estimated of its employees. The Appeals Board employs 517 employees,
$170,314 to 314 of its consisting of both exempt and nonexempt employees.
nonexempt employees who
Exempt employees who work time in excess of the minimum
it already compensated for
average workweek shall not be compensated in overtime or
their overtime.
compensatory leave. In contrast, the Appeals Board can either
þ Failed to maintain pay or award leave to nonexempt employees for overtime
accurate time and
worked. In October 2001, the Appeals Board and the bargaining
attendance records for
each employee. unit representing the Appeals Board’s administrative law judges
(who are exempt employees) entered into an agreement to grant
these employees one day off each quarter in 2002 in exchange
for an increased workload.
The Appeals Board has some flexibility in granting informal leave
to exempt employees who work substantial overtime, but the
same flexibility may not extend to granting leave to nonexempt
employees. Nevertheless, the Appeals Board decided to also grant
four days of informal administrative leave to its 314 nonexempt
employees, even though it had already compensated those
employees for overtime worked, resulting in an economic loss to
the State. We could not determine the exact loss to the State since
California State Auditor Report 2004-406 445
the Appeals Board does not use the State Controller’s Office’s leave
accounting system nor does it have a formal method to track the
leave it grants to its employees. However, the leave improperly
granted to 314 nonexempt employees totaled an estimated
$170,314. The Appeals Board also violated state regulations when
it failed to keep complete and accurate time and attendance for
each employee.
Agency Action: Partial corrective action taken.
Ü
The California Labor and Workforce Development Agency
(agency), to whom the Appeals Board reports, disagreed
with our conclusion that the Appeals Board improperly
granted leave. The agency argued that Government Code,
Section 19991.10, provides departments broad discretion
to grant administrative time off as part of the appointing
power’s basic authority to manage its departments and that
the statute sets forth no standards or criteria and provides
no limitations upon the granting of such leave, except that
no paid leave shall exceed five working days without prior
approval of the Department of Personnel Administration
(Personnel Administration). The agency also pointed out
that the State Personnel Board (SPB) defined administrative
time off as paid time granted by an appointing power
to employees for the good of the service, to promote
morale, and for other good reasons. However, the agency
failed to note that the SPB also provided examples of the
specific types of situations where administrative time off
has been granted, such as when the appointing power
determines that the safety of the employees is better
served by their remaining at home or when work facilities
have been destroyed or rendered uninhabitable because
of lack of heat or electricity. Current state regulations
related to Government Code, Section 19991.10, support
the SPB’s interpretation in that the regulations allow
appointing powers to grant such employees administrative
time off in emergency situations, but do not provide
additional guidance on how the discretion provided
by Section 19991.10 of the Government Code may be
exercised. Thus, the Appeals Board’s use of administrative
leave in this case does not appear to be consistent with
the intent of state law and regulations. We also believe
that the Appeals Board’s decision to grant administrative
leave to those employees who it already compensated for
overtime is wasteful and duplicative.
446 California State Auditor Report 2004-406 California State Auditor Report 2004-406 447
Notwithstanding, the agency said that it has asked Personnel
Administration to review and provide written clarification
on the matter and that it would instruct the Appeals Board
to abide by any instructions Personnel Administration
provides. With regard to our conclusion that the Appeals
Board failed to track its employees’ use of the administrative
leave, the agency reported that it believed there was an
internal misunderstanding surrounding the recording of
administrative leave granted because the Appeals Board
did not provide its employees with clear directions on how
to record such leave. As a result, the agency directed the
Appeals Board to develop a formal policy for the reporting of
such absences.
446 California State Auditor Report 2004-406 California State Auditor Report 2004-406 447
448 California State Auditor Report 2004-406
DEPARTMENT OF TRANSPORTATION
Investigations of Improper Activities by
State Employees, February 2003 Through
June 2003
ALLEGATION I2002-700 (REPORT I2003-2),
SEPTEMBER 2003
Department of Transportation’s response as of September 2003
We investigated and substantiated an allegation that
an employee for the Department of Transportation
(Caltrans) misappropriated $622,776 in state money.
Investigative Highlights . . . Our investigation showed that the employee submitted two
purchase requests for products the department never received.
A Caltrans’ employee engaged
The employee arranged for the company to hold these funds
in the following improper
governmental activities: from these fictitious purchases and act as the State’s fiscal agent.
þ Misappropriated
$622,776 by requesting Finding: An employee misappropriated state funds.
purchases and confirming
the receipt of products that The employee misappropriated $622,776 by submitting two
Caltrans did not receive. purchase requests. After submitting the purchase requests, the
þ Directed a company to employee directed the company to cancel delivery of the items
hold state funds outside and hold the payments in a company maintained account. In
the State Treasury and addition to initiating the purchase, the employee also verified
act as a fiscal agent
the receipt of the products even though the company never
without approval.
sent these items. According to the employee, she directed the
company to hold these funds outside the State Treasury and act
as a fiscal agent to correct clerical errors and purchase training
and information technology (IT) products for her unit.
In addition, poor management contributed to the
misappropriation of funds. The employee’s manager did not
verify the receipt of the products on the fictitious purchases.
The employee’s unit gave the employee the responsibility and
authority to request products, ensure their receipt, and monitor
the funds used, which created the opportunity to misappropriate
the funds.
Although Caltrans cannot completely account for the
misappropriated funds, it paid unauthorized taxes and fees to
the company. The balances that the employee and the company
California State Auditor Report 2004-406 449
maintained did not reconcile partly because the company
commingled state funds with its own. However, the State
did pay unauthorized taxes and fees. The company retained
$44,191, which represented sales taxes associated with the false
purchase requests, and charged the State $68,505 to maintain
the account. Although the company likely earned interest
during the two-year period it retained these funds, it did not
allocate this interest to the State. Nevertheless, the company
remitted $75,698 to Caltrans, an amount it considered to be the
balance the State paid for undelivered products.
Caltrans’ Action: Partial corrective action taken.
Caltrans reported that it reinstated its prior policy of
having all IT purchases shipped to, received, accepted,
inventoried, and tagged by its Shipping and Receiving and
Property Control units. Further, Caltrans reported that it
initiated a practice of utilizing the Department of General
Services’ Technology and Acquisitions Support Branch for
all IT procurements over $500,000. Caltrans transferred
the employee to another branch where her duties do not
include procurement-related duties and will take appropriate
disciplinary action against the employee upon completion
of its review of case documentation. Caltrans added that
it has contacted the appropriate law enforcement agencies
to investigate any criminal implications or activity relating
to the misappropriation. Caltrans also reported that it will
make appropriate changes to its procedures after completing
a review of its internal controls related to approval
authorizations and documentation.
450 California State Auditor Report 2004-406
PUBLIC UTILITIES COMMISSION
Investigations of Improper Activities by
State Employees, February 2003 Through
June 2003
ALLEGATION I2002-753 (REPORT NUMBER I2003-2),
SEPTEMBER 2003
Public Utilities Commission response as of September 2003
We investigated and substantiated that a supervisor
with the Public Utilities Commission (PUC)
improperly deposited into his personal bank account
Investigative Highlights . . . funds he received from the annual state railroad conference
(conference) he oversaw.
A supervisor with the Public
Utilities Commission (PUC):
Finding #1: The supervisor improperly deposited conference
þ Improperly deposited into
funds into his personal bank account.
his personal bank account
$80,759 he received from
In violation of state law, the supervisor improperly deposited
PUC-sponsored conferences
he oversaw during 1999, into his personal bank account at least $80,759 he received as
2000, and 2001. a result of his involvement with the conference. Specifically,
between June and August 1999, he deposited $30,056 in
þ Achieved a profit of
checks he received from various individuals or groups of
$37,542 after paying
conference expenses. individuals who attended that year’s conference. Between May
and August 2000, the supervisor deposited into his personal
þ Used $1,408 in funds
account $8,835, representing a $95 registration fee for as
he received during the
1999 conference to pay many as 93 individuals. The following year, between July and
for alcohol. October 2001, the supervisor deposited $41,868 in his personal
account, most of which related to $200 registration fees for more
than 130 attendees.
The supervisor maintained that the conference was not a
state-sponsored function but rather a joint effort involving
various representatives from government, railroad companies,
and consulting firms. He reasoned that the State paid only for
registration and per diem costs for state-employed attendees and
that no one, including his supervisors, indicated that he was
handling conference funds inappropriately. Nonetheless, the
decision to manage these funds outside the State Treasury is not
consistent with state law. The law characterizes funds as public
California State Auditor Report 2004-406 451
funds when employees receive them in their official capacity.
Documentation such as conference announcements, registration
forms, hotel contracts, and check copies clearly demonstrate
that these events were advertised as a state conference that
the PUC endorsed and that the supervisor acted in his official
capacity with the State when he accepted payments related to
the conference.
Finding #2: The supervisor profited from his involvement
with the state conference.
Because the PUC allowed the supervisor to control conference
funds outside of approved state accounts, he was able to
retain as much as $37,542 in profits. State law prohibits state
employees from engaging in any employment, activity, or
enterprise that is clearly inconsistent, incompatible, in conflict
with, or inimical to their duties as state officers or employees.
Incompatible activities include using state time, facilities,
equipment, supplies, and the prestige or influence of the
State for one’s own private gain or advantage. Our analysis
indicates that the supervisor profited by at least $3,725 from the
1999 conference; $3,386 from the 2000 conference; and $30,431
from the 2001 conference.
We asked the supervisor to review our calculations and
provide any additional evidence, particularly concerning any
conference-related costs that might demonstrate he had not
profited from these events. The supervisor insisted that he
had lost money each year on the conference and that he had
maintained detailed accounting records that proved this until
one of his superiors told him that he no longer needed to keep
them. After reviewing the accounting records and invoices we
obtained from each of the facilities that hosted the conferences,
the supervisor stated that he had paid other costs, such as
off-site dinners and mailing expenses, that these bills did not
reflect. However, he was unable to provide documentation to
support any of these additional costs.
Finding #3: The supervisor used funds to pay for alcohol-
related expenses.
Of the money the supervisor received and paid for costs
associated with the 1999 conference, we identified $1,408 that
pertained to alcohol-related expenses. State law prohibits state
officers and employees from using state resources for personal
enjoyment, private gain, or personal advantage or for an
452 California State Auditor Report 2004-406 California State Auditor Report 2004-406 453
outside endeavor not related to state business. As we mentioned
previously, because state law characterizes the conference funds
the supervisor received and deposited as public money, its use to
purchase alcohol constitutes a misuse of public funds.
PUC Action: Partial corrective action taken.
The PUC discontinued the conference and plans to train
all staff who may accept money from outside parties on
proper record-keeping procedures and fiscal accountability.
In addition, the PUC states it does not plan to initiate
personnel action against the supervisor until it receives and
completes its review of critical documentation.
452 California State Auditor Report 2004-406 California State Auditor Report 2004-406 453
454 California State Auditor Report 2004-406
CALIFORNIA DEPARTMENT OF
TRANSPORTATION
Low Cash Balances Threaten the
Department’s Ability to Promptly Deliver
Planned Transportation Projects
REPORT NUMBER 2002-126, JULY 2003
Audit Highlights . . .
California Department of Transportation’s and the California
Our review of the Department of Transportation Commission’s responses as of January 2004
Transportation’s (department)
delivery of projects in the State The Joint Legislative Audit Committee asked us to examine
Transportation Improvement
the Department of Transportation’s (department) delivery
Program (STIP) and Traffic
Congestion Relief Program of projects in the State Transportation Improvement
(TCRP) revealed that: Program (STIP) and Traffic Congestion Relief Program (TCRP).
þ A lack of cash in the State We found that the department’s ability to promptly deliver
Highway Account will transportation projects is affected by low cash balances in
result in the California the State Highway Account (highway account) and Traffic
Transportation Commission
Congestion Relief Fund (TCRF), and consequently, delayed
(commission) allocating
and cancelled transportation projects will negatively affect the
almost $3 billion less than
it had originally planned State’s aging transportation system. The low cash balances in the
for STIP projects scheduled highway account and TCRF were caused by several factors.
in fiscal years 2002–03
and 2003–04.
Loans from the highway account and TCRF to the State’s
þ Funding uncertainties General Fund drained cash reserves from these accounts at the
associated with the Traffic
same time that the department saw highway account revenues
Congestion Relief Fund
decrease from weight fees. Further, uncertainties related to the
(TCRF) have resulted in
the commission halting all former governor’s mid-year spending proposal have caused the
TCRP allocations, including California Transportation Commission (commission) to halt
those to 15 projects that
all allocations to TCRP projects until the budget uncertainties
currently need $147 million
in order to continue work. are resolved. Moreover, the department’s cash forecast updates
continue to be optimistic, and consequently the department
þ Delayed or cancelled
could end fiscal year 2003–04 with a negative account balance in
transportation projects
the highway account. The department and the commission have
will affect the State’s
aging transportation alternatives to fund projects in the short-term. However, most of
infrastructure, resulting these alternatives also have the potential to decrease the future
in deteriorated highways,
flexibility of scheduling projects for the STIP and one could
more traffic congestion,
and reduced air quality, be perceived as unfair, so the commission needs to carefully
as well as higher costs for consider and set guidelines for their use.
California residents, in
terms of wasted fuel and
lost productivity.
continued on next page
California State Auditor Report 2004-406 455
þ Many of the commission’s Finding: The department has insufficient cash to allow it and
and the department’s regional agencies to deliver planned transportation projects
alternatives to provide
in the STIP and TCRP at the levels originally planned.
needed funding for
projects on a short- Lacking sufficient cash in its major transportation funds
term basis have the
and accounts, the department and regional transportation
drawback of reducing the
department’s flexibility planning agencies are unable to deliver many of their planned
to fund future projects, transportation projects scheduled in the STIP and TCRP. Specific
and one potential
areas our audit identified include:
option available to the
commission may be
perceived as unfair. • Projected cash shortages identified by the department in
its December 2002 cash forecast caused the department to
temporarily halt allocations to STIP and TCRP projects. While
the department’s revised March 2003 cash forecast update
prompted the commission to resume allocations to STIP
(but not TCRP) projects, the department’s estimates may be
overly optimistic, and could result in the commission making
allocations for which the department will lack available funds
when later presented with reimbursement requests from
implementing agencies.
• Although the commission resumed allocations to STIP
projects in April 2003, the allocations are at dramatically
lower levels than originally planned. Specifically, 194 projects
needing $103 million in order to move forward with the next
phase of project delivery will not receive allocations in fiscal
year 2002–03. Moreover, the commission’s actual and planned
allocations for fiscal years 2002–03 and 2003–04 is almost
$3 billion lower than the amounts originally planned.
• Minimal cash reserves in the TCRF will affect the department’s
ability to deliver at least 106 projects that require a minimum
of $3.4 billion more in allocations to continue work. Since
December 2002, 15 TCRP projects have submitted requests for
allocations totaling $147 million, and work has ceased on 12
of these projects due to lack of spending authority.
• The former governor’s May 2003 revision to the governor’s
budget threatens TCRF funds, calling for the Legislature
to delay $938 million of the transfer of state gasoline sales
tax revenues from the General Fund to the Transportation
Investment Fund (TIF). Because state law provides for only a
set number of annual transfers of specified amounts from the
TIF to the TCRF, delays or reductions in amounts transferred
to the TIF could result in a permanent annual loss of revenues
to the TCRF of up to $678 million, unless the Legislature acts
to obligate the General Fund to repay the TCRF in the future.
456 California State Auditor Report 2004-406 California State Auditor Report 2004-406 457
• Delayed or cancelled projects will affect the State’s aging
transportation system, resulting in deteriorated highways,
increased traffic congestion, and reduced air quality.
Additionally, delays in making improvements means that
California residents will pay higher direct costs for wasted
fuel and lost productivity. Also, consumers will pay increased
indirect costs of the delays in the form of higher prices for
goods and services, as well as compounding repair costs for
fixing later what the department should fix now.
• The department and commission have alternatives that they
could use to fund projects over the short term. However,
many of these alternatives have the potential to make future
project scheduling inflexible, and one option—pursuing the
ability for the commission to rescind TCRP allocations—could
be perceived as unfair.
We recommended that, considering the State’s fiscal crisis, the
Legislature may wish to allow the TIF to transfer the entire
$678 million to the TCRF, and then authorize a loan of the money
from the TCRF to the General Fund so that those funds would be
repaid to the TCRF and therefore still be available in future years.
Further, we recommended that the department do the following
to ensure that it can meet its short-term cash needs:
• Continue its efforts to become more precise in revising its
revenue and expenditure estimates and ensure that these
revisions are properly supported and presented in cash
forecast updates to the commission.
• Continue to cautiously pursue other funding alternatives
(GARVEE bonds, SIB loans, direct-cash reimbursement, and
replacement projects) to meet short-term project funding
needs, and continue to set limits on these alternatives to
avoid making future project scheduling inflexible.
Finally, we recommended that should the commission be
granted the authority to rescind unspent allocations, it should
carefully consider statewide priorities and ensure that all
counties are treated fairly before taking such actions.
456 California State Auditor Report 2004-406 California State Auditor Report 2004-406 457
Department and Commission Action: Partial corrective
action taken.
The department states that its cash management team
has expanded its cash forecasting activities to include a
monthly analysis and projection of construction payments
to contractors, which compose a large portion of the
department’s monthly cash disbursements. The department
reports that its cash management team is also in the process
of refining monthly projections of expenditures in the toll
bridge seismic retrofit account, the TCRF, and the public
transportation account to improve its projection of cash
in the transportation revolving account. The department
further reports that its cash management team has adopted
a conservative approach to projecting anticipated federal
collections due to uncertainty over passage of the new
federal transportation act. Finally, the department reports
that aside from monitoring and forecasting cash balances on
a daily basis, its cash management team continues to update
its internal project tracking database to monitor allocations
and expenditures on capital outlay and local assistance
projects. The department reports that it presented a quarterly
cash update to the commission in September 2003 with
recommendations on the amount of cash available for
project allocations.
The department agrees with our recommendation that
it should continue to cautiously pursue other funding
alternatives. The department has implemented the
Transportation Finance Bank Revolving Program (SIB loans)
and is still developing GARVEE financing.
The commission stated that it has not been granted the
authority to rescind unspent allocations, so no action has
taken place.
Legislative Action: Unknown.
We are not aware of any action taken by the Legislature
to allow the TIF to transfer $678 million to the TCRF and to
authorize the loan of these funds to the General Fund.
458 California State Auditor Report 2004-406
CALIFORNIA DEPARTMENT OF
TRANSPORTATION
It Manages the State Highway Operation
and Protection Program Adequately, but
It Can Make Improvements
REPORT NUMBER 2002-103, AUGUST 2002
Audit Highlights . . .
California Department of Transportation’s response as of
Our review of the August 2003
California Department of
The Bureau of State Audits examined the California
Transportation’s (Caltrans)
management of its State Department of Transportation’s (Caltrans) process
Highway Operation and for managing State Highway Operation and Protection
Protection Program (SHOPP)
Program projects. Specifically, we were asked to determine
found that:
whether Caltrans is managing projects to ensure minimal
þ Most SHOPP projects do or no cost overruns and time delays, contractors have valid
not exceed their original
performance bonds from solvent companies, and staff follow
funding allocation. Also,
Caltrans’ public relations policies and procedures.
although most of the
20 projects we reviewed
experienced time delays,
the causes for the delays Finding #1: Some construction engineers do not adhere to
appear reasonable. Caltrans’ policies for managing projects.
þ Resident engineers did Some resident engineers, who manage the project construction
not always maintain
costs and administer the contracts, are failing to keep adequate
complete records of
records of days with adverse weather conditions and days that
project events. Without
these records, Caltrans is contractors choose not to work on scheduled tasks. Thus, the
vulnerable to contractor State lacks necessary records of the causes for project delays
claims for more money
and may not be able to assess and collect damages in disputes
and cannot accurately
assess contractors for with contractors about days when they did not work. Also,
liquidated damages. some resident engineers do not get the required prior approval
from the Division of Construction or the district director
þ Caltrans does not evaluate
for construction change orders, which can lead to delays in
the financial stability of the
surety insurers that issue processing the change orders and to interest charges for late
performance and payment payments to the contractors.
bonds to its contractors.
þ Caltrans lacks To ensure an adequate defense against contract disputes
comprehensive policies and to properly assess liquidated damages, Caltrans should
and procedures instructing
ensure that resident engineers and assistant resident engineers
district staff on how to
maintain complete and accurate daily records of all relevant
document and address
complaints from the events occurring on working and nonworking days and that
public regarding projects. resident engineers complete the weekly statements accurately
and in a timely manner. Further, Caltrans should ensure that
California State Auditor Report 2004-406 459
its staff obtain prior approval for construction change orders
in a timely manner to avoid incurring any unnecessary costs,
such as interest for late payments to the contractor, and to
ensure that managers agree that proposed changes are necessary.
Finally, to aid staff in properly managing construction projects,
Caltrans should continue implementing its capital project skill
development plan and ensure that staff continue to receive
training after the plan expires.
Caltrans’ Action: Corrective action taken.
Caltrans is developing an automated construction change
order approval tracking system. According to Caltrans staff,
this new system will improve the change order and approval
process by documenting the required concurrence and prior
approval for each construction change order. However,
because of limited funding, this new system will not include
the tracking of reported working days. Nevertheless, Caltrans
has revised certain sections of its construction procedures
and specifications manuals. Additionally, it has developed
classes on contract administration, including a class specific
to the tracking and reporting of working days.
Finding #2: Although somewhat limited by state law,
Caltrans can reduce the risk of loss to the state from poor
contractor performance.
Caltrans relies on state-required performance and payment
bonds issued by a surety insurer (insurer) for loss protection
when contractors fail to do the work as specified in the contract.
However, although state law permits Caltrans to obtain financial
statements from insurers, Caltrans believes it lacks authority to
use those statements. Thus, it does not examine the insurer’s
financial statements, either at the beginning of or during a project,
to evaluate its ability to cover possible project losses. However,
because state law prevents Caltrans from knowing that the state’s
Department of Insurance is investigating an insurer that is on its
list of approved insurers, it is important that Caltrans does its own
checking of insurer’s financial statements to reduce its risk of loss.
To ensure that Caltrans can collect on a performance bond
if a contractor does not perform, we recommended that the
Legislature consider expanding Caltrans’ ability to use other
financial indicators included within the financial statements
and information available from rating companies such as
A.M. Best Company and S&P as a basis for determining the
460 California State Auditor Report 2004-406 California State Auditor Report 2004-406 461
sufficiency of an insurer, before accepting performance bonds.
Further, the Legislature should clarify Caltrans’ authority to use
the information it obtains from financial statements and other
financial indicators to object to the sufficiency of an insurer
throughout the bond term.
Legislative Action: Unknown.
We are not aware of any legislation that has passed to
address this issue.
Finding #3: Caltrans can improve its public relations process
to avert negative publicity.
Caltrans can better meet its goal of communicating effectively
with the public about construction projects that inconvenience
drivers. Caltrans provides guidance to the district offices,
but it relies primarily on them to determine when and
how to communicate with the public. Unfortunately, most
district public information officers do not track the nature
and resolution of the complaints they receive, so public
dissatisfaction can grow unbeknown to either the public
information officers or Caltrans’ headquarters.
To ensure that districts handle complaints and inquiries
consistently, Caltrans should develop comprehensive public
relations policies and procedures that specify the process to use
when responding to complaints, the documents that should
be maintained, and the method that district offices should use
to assess their public relations efforts. Further, Caltrans should
monitor the district offices’ public relations efforts periodically.
Caltrans’ Action: Corrective action taken.
Caltrans has developed and fully implemented a new
comprehensive process for addressing project complaints
and requests for information, which includes ongoing
monitoring of the districts’ public affairs function by
Caltrans’ headquarters.
460 California State Auditor Report 2004-406 California State Auditor Report 2004-406 461
462 California State Auditor Report 2004-406
DISABLED VETERAN BUSINESS
ENTERPRISE PROGRAM
Few Departments That Award Contracts
Have Met the Potentially Unreasonable
Participation Goal, and Weak
Implementation of the Program
Further Hampers Success
Audit Highlights . . .
REPORT NUMBER 2001-127, JULY 2002
Our review of the Disabled
Veteran Business Enterprise Audit responses as of July 2003 and October 20031
(DVBE) program found that:
þ Many awarding The Joint Legislative Audit Committee requested that
departments do not report we determine the extent to which departments that
their DVBE participation award contracts (awarding departments) are meeting the
levels; of those that do
3 percent Disabled Veteran Business Enterprise Program (DVBE)
report, most do not
meet the 3 percent participation goal and to identify statutory and procedural
participation goal. mechanisms that could assist in overcoming any barriers to
fulfilling this goal. We found that many awarding departments
þ The reasonableness of
do not report DVBE participation as required under law, and even
the 3 percent goal itself
is not clear. fewer departments actually meet the goal. Specifically, we found:
þ Outreach to potential
DVBEs should be Finding #1: Awarding departments’ DVBE participation
more aggressive.
statistics are not always accurate, and the methodologies
Other factors that contribute they employ are at times flawed.
to the State’s failure to meet
the DVBE goal are: State law requires each awarding department to report to the
governor, Legislature, the Department of General Services
þ The program’s overly
(General Services), and the Department of Veterans Affairs
flexible legal structure
and limited clarifying (Veterans Affairs) by January 1 each year on the level of
regulations. participation by DVBEs in state contracting. General Services
then issues a summary report.
þ The frequency with which
certain departments
exercise their discretion Our own review showed that some awarding departments
to exempt contracts from did not report DVBE statistics and others could not always
DVBE participation.
provide supporting documentation for the DVBE statistics they
þ Lack of effective reported. For example, for fiscal year 2000–01, the Department
evaluation of bidders’
good-faith efforts and
monitoring of contractors’
compliance with contract 1Business, Transportation and Housing; State and Consumer Services; and Youth and
Adult Correctional agencies and Departments of General Services, Transportation, and
DVBE requirements.
Veterans Affairs responses as of July 2003. Departments of Fish and Game and Health
Services and Health and Human Services Agency responses as of October 2003.
California State Auditor Report 2004-406 463
of Fish and Game (Fish and Game) reported $12.1 million in
DVBE participation but could identify only $431,000 in specific
contracts, or less than 3.6 percent of the total. In addition,
the Department of Health Services (Health Services) could
not provide any summarized documentation for the numbers it
reported. Health Services asserted that it had documentation in
individual contract files to support its figures, but indicated it
would be too time intensive to tally the information for our review.
Additional problems with the accuracy of DVBE participation
information exist. The reporting methodology General Services
established is contrary to statutory requirements. According to
statute, the 3 percent DVBE participation goal applies to the
overall dollar amount expended each year by the awarding
department. However, under current reporting regulations issued
by General Services, awarding departments must report the
amount winning bidders “claim” they will pay to DVBEs under
the contract. In its clarifying instructions, General Services has
asked awarding departments to report the amounts “awarded” in
contracts, rather than amounts actually paid to DVBEs.
To ensure DVBE statistics are accurate and meaningful, we
recommended General Services require awarding departments to
report actual participation and maintain appropriate documentation
of statistics, continue its periodic audits of these figures for accuracy,
and, if the audits reveal a pattern of inconsistencies or inaccuracies,
address the causes in its reporting instructions.
General Services’ Action: Partial corrective action taken.
General Services has interpreted the statutes governing DVBE
reporting to provide participation statistics to be reported
based on the value of contracts awarded instead of dollars
actually expended. According to General Services, this is the
Ü same methodology used in the small business participation
report (California Government Code, Section 14840).
General Services believes it is important to use consistent
reporting standards to allow for program comparisons.
Since its six-month response, based on the concerns raised
by our office, General Services has revisited the issue and
concluded that its own interpretation of the DVBE reporting
requirements is reasonable and appropriate. We disagree
with General Services’ interpretation of the DVBE reporting
requirements. As we state on page 18 of the audit report,
departmental reporting of actual payments [to DVBEs]
provides more useful information because it focuses on the
realized benefit to DVBEs.
464 California State Auditor Report 2004-406 California State Auditor Report 2004-406 465
As to the issue of requiring departments to maintain
documentation of participation statistics, to reemphasize
this administrative control procedure, General Services
indicates it has added an instruction to the new participation
report form that addresses the necessity of maintaining
supporting documentation. Departments used this
new form in reporting fiscal year 2001–02 cumulative
participation statistics. General Services is also continuing
to include the audit of the DVBE reporting process within
its comprehensive external compliance audit program
performed of other state agencies. It indicates it uses
the results of these audits to identify areas for possible
improvement within the reporting process.
Finding #2: Not all state agencies have finalized and
implemented their plans to monitor their departments’
reporting of DVBE statistics and, for those failing to meet
the 3 percent goal, require a DVBE improvement plan.
In June 2001, the governor issued executive order D-43-01,
which requires all state agency secretaries to review the DVBE
participation levels achieved by the awarding departments
within their agencies. Further, the executive order requires
each secretary to require awarding departments to develop an
improvement plan if the 3 percent goal is not achieved or the
data is not reported. Three of five state agencies responding to
our survey indicated that they were still developing procedures
to monitor the DVBE participation levels of their subordinate
awarding departments.
We recommended those state agencies that have not already
done so should finalize and implement their plans to monitor
awarding departments’ reporting of DVBE statistics and, for
those failing to meet the 3 percent goal, monitor their efforts to
improve DVBE participation.
Agency Action: Partial corrective action taken.
On June 28, 2002, the governor directed that all state
departments and agencies submit monthly reports to
the State and Consumer Services Agency regarding DVBE
participation. Based on the reporting forms developed by the
State and Consumer Services Agency, state departments and
agencies are required to report total contracting dollars,
464 California State Auditor Report 2004-406 California State Auditor Report 2004-406 465
dollars paid to DVBEs, and DVBE participation percentages.
In addition, departments that have not met the 3 percent
DVBE participation goal are required to explain why.
Each of the following state agencies indicates the
development of plans to monitor awarding departments’
reporting of DVBE statistics: State and Consumer Services
Agency; Business, Transportation and Housing Agency;
Health and Human Services Agency; and the Youth and
Adult Correctional Agency. The Resources Agency did not
provide a one-year update on its efforts to implement this
recommendation. Some agencies reported increases in DVBE
participation during the fiscal year 2001–02. In particular,
the State and Consumer Services Agency reported a DVBE
participation rate of 3.3 percent in 2002, which is an increase
from 1.5 percent in the prior year. Further, the Business,
Transportation and Housing Agency similarly reported
an increase in DVBE participation, indicating 3.7 percent
participation during the fiscal year 2001–02.
Finding #3: The State does not know how many DVBEs
can be certified and the extent to which they can provide
needed goods and services to the State. As a result, the
reasonableness of the 3 percent goal is uncertain.
Even though the law establishes a 3 percent participation
goal for every awarding department, our review did not find
sufficient evidence to support the assumption that this is
an equitable share of contracts for DVBEs. When the DVBE
legislation was being drafted in 1989, several awarding
departments opposed the bill on the grounds that the 3 percent
goal was unrealistic.
The awarding departments’ concern about enough DVBEs
to justify the 3 percent goal seems to have been valid. As of
May 2002, General Services had only 797 DVBEs certified and
available for contracting. The services these DVBEs offered and
their geographical distribution did not always match the State’s
needs. All five agencies responding to our survey and many
awarding departments’ improvement plans identified a limited
pool of DVBEs as one of the impediments to meeting the 3 percent
DVBE participation goal.
To determine if the 3 percent DVBE goal is reasonable, the
Legislature may wish to consider requiring either General
Services or Veterans Affairs to commission a study on the
466 California State Auditor Report 2004-406 California State Auditor Report 2004-406 467
potential number of DVBE-eligible firms in the State, the services
they provide, and their geographic distribution, and compare
this information to the State’s contracting needs.
Based on the results of this study, the Legislature may wish to
consider doing the following:
• Modify the current DVBE participation goal.
• Allow General Services to negotiate department-specific goals
based on individual contracting needs and the ability of the
current or potential DVBE pool to satisfy those needs.
Legislative Action: None.
We have found no indication that any study on
DVBE-eligible firms has been commissioned. Further, the
statutory requirement for the DVBE participation rate
remains at 3 percent, while the reasonableness of this goal
remains unclear.
Veterans Affairs’ Action: None.
According to Veterans Affairs’ September 2002 response
to this recommendation, it appears that the department
was intending to commission a study on the number of
potentially DVBE-eligible firms in the State. However, the
department’s July 2003 update does not specifically address
this recommendation.
Finding #4: General Services is not sufficiently aggressive
or focused in its outreach and promotional efforts for the
DVBE program.
As the administering agency for the DVBE program, General
Services has been responsible for certifying eligible businesses
as DVBEs and conducting promotional and outreach efforts to
increase the number of certified DVBE firms.
It is unclear to what extent General Services’ outreach activities
target disabled veterans’ groups. General Services was also unable
to readily quantify its outreach activities. The information
it ultimately provided was based on old personal calendars
and planners. We also could not evaluate the effectiveness of
these outreach activities since General Services only selectively
monitors the results.
466 California State Auditor Report 2004-406 California State Auditor Report 2004-406 467
To ensure the DVBE program is promoted to the fullest extent
possible, we recommended General Services aggressively explore
outreach opportunities with the U.S. Department of Veterans
Affairs and organizations such as the American Legion, Disabled
American Veterans, and Veterans of Foreign Wars. In particular,
General Services should cultivate a clear working relationship
with county veteran service officers. It should also maintain
complete records of its outreach and set up a system to track
effectiveness. For example, General Services could consistently
survey newly certified DVBEs to determine how they heard about
the program and what convinced them to apply for certification.
Finally, General Services and Veterans Affairs should continue
to work to develop their joint plan for improving the DVBE
program, finalizing and implementing it as soon as possible.
General Services’ and Veterans Affairs’ Action: Partial
corrective action taken.
On June 28, 2002, the governor directed the implementation
of a more intensive DVBE outreach effort, with the staff
dedicated to that effort moved from General Services
to Veterans Affairs. According to General Services, on
August 1, 2002, the two DGS staff members performing the
outreach function physically transferred to Veterans Affairs.
According to the July 2003 response from Veterans Affairs,
it has completed the CDVA Disabled Veterans Business
Enterprise Outreach Program Plan, which became effective
April 1, 2003. The plan indicates that Veterans Affairs will
introduce General Services “outreach team members” to
veteran organizations’ leadership and local county veteran
services officers. However, Veterans Affairs also indicated that
in May 2003, the two employees working on DVBE outreach,
formerly from General Services, returned to that department.
The plan also indicates that Veterans Affairs will establish
working relationships with veteran service representatives and
local county veteran service organizations.
Finding #5: Some awarding departments exempt a significant
number of contracts, potentially limiting their ability to
maximize DVBE participation rates.
Under statute, the DVBE participation goal applies to an awarding
departments’ overall expenditures in a given year. Therefore,
awarding departments have the discretion to apply DVBE
participation requirements on a contract-by-contract basis.
468 California State Auditor Report 2004-406 California State Auditor Report 2004-406 469
The frequency with which certain awarding departments exempt
contracts from DVBE requirements is significant. Further, some
of these awarding departments are not tracking the value of the
contracts they exempt or the required compensating increase in
participation goals for their remaining non-exempt contracts.
For fiscal year 2000–01, two of the five awarding departments
we reviewed, Health Services and Caltrans, did not compensate
for these exemptions with increased participation on other
contracts, and subsequently reported they did not meet
the participation goal. According to our calculations, Health
Services exempted 48 percent of DVBE-eligible contract dollars it
reported in fiscal year 2000–01, which means it would have had
to average almost 6 percent on all remaining eligible contracts to
meet the goal. Similarly, General Services’ procurement division
estimated that it exempted over 50 percent of its contracts
during fiscal year 2000–01.
Awarding departments offer varying reasons for their exemption
decisions. Some departments we reviewed exempt all contracts
with certain characteristics, and the reasonableness of these
blanket decisions may not be clear. For example, at least one
unit within four of the five departments we reviewed has
indicated it exempts all contracts it believes do not offer a
subcontracting opportunity for DVBEs. However, this practice
may significantly reduce a department’s chances for obtaining
more DVBE participation.
To maximize DVBE participation, we recommended awarding
departments attempt to use DVBEs as prime contractors instead
of viewing them only as subcontractors. Further, the awarding
departments should periodically examine the basis for their
assumptions behind blanket exemptions for whole categories of
contracts to ensure the exemptions are justified.
General Services’, Caltrans’, Health Services’, and Fish and
Game’s Action: Partial corrective action taken.
General Services indicates it has policies and practices that
actively encourage the use of DVBEs as prime contractors.
Further, General Services has asserted that its chief deputy
director stressed to General Services staff that all contracts
include DVBE participation unless specifically exempted.
Caltrans indicates that its DVBE exemption requests are
researched to verify that no certified DVBEs are available in
the particular geographic area specified to perform the work.
Caltrans also indicates that it mails DVBE solicitation
468 California State Auditor Report 2004-406 California State Auditor Report 2004-406 469
materials to contractors who are on a special list of DVBEs
and who provide services in the geographical area. Health
Services similarly reported that it now reviews each DVBE
exemption request by requiring its programs to explain why
DVBE participation is not viable or possible. Health Services
also requires that General Services’ Web site be verified to
ensure no DVBEs are available to perform likely subcontract
services in the service location. Fish and Game asserts it does
not have a blanket exemption by category type. However,
it indicates that it does exempt contracts under $10,000
from DVBE participation requirements. Fish and Game has
determined that requiring bidders to undergo a good-faith
effort to find and use a DVBE under these circumstances is
not cost-effective. Fish and Game also indicates that if the
lowest bidder on a contract is a DVBE, it awards the contract
to the DVBE acting as a prime contractor.
Finding #6: Awarding departments do not consistently
scrutinize and evaluate good-faith effort documentation
or ensure that DVBEs are actually being used as called for
in contracts.
The effectiveness of the implementation of the good-faith effort
may be diminished by the lack of consistent or meaningful
standards for awarding departments to follow when evaluating
bidders’ documentation of such efforts. Although statute
requires General Services to adopt standards, it has not issued
much direction to awarding departments on how to evaluate a
bidder’s good-faith effort. The State Contracting Manual offers
appropriate suggestions for procedures in assessing good-faith
effort, but the suggestions are not binding. There is also no
clear requirement in statute requiring awarding departments to
monitor actual DVBE participation to ensure the contractor is
complying with the contract’s DVBE requirements.
A common result of this lack of direction is the cursory
evaluation of a bidder’s good-faith effort documentation and
inconsistent monitoring of actual DVBE usage. For example,
Health Services does not instruct staff to independently verify
bidders’ statements that they solicited DVBEs to participate
as subcontractors. Before February 2002, Health Services also
lacked policy to monitor actual DVBE participation. Caltrans
also does not follow up to ensure the DVBEs that the bidder
claimed to have solicited were actually contacted. Although
470 California State Auditor Report 2004-406 California State Auditor Report 2004-406 471
Caltrans’ procurement unit did have a policy to monitor actual
DVBE participation to ensure contract compliance, we saw no
monitoring consistent with this policy in a sample of their
contract files.
To ensure that prime contractors make a genuine good-faith
effort to find a DVBE, we recommended the Legislature consider
requiring awarding departments to follow General Services’
policies. General Services should issue regulations on what
documentation the awarding departments should require and
how they should evaluate that documentation. These standards
should include steps that ensure the documentation submitted
is accurate. Similarly, General Services should issue regulations
on what steps departments should take to ensure contractors
meet DVBE program requirements. These steps might include
requiring awarding departments to monitor vendor invoices that
detail DVBE participation or requiring the vendor and DVBE to
submit a joint DVBE utilization report.
Legislative Action: None.
We found no indication that the Legislature has required
awarding departments to follow General Services’
policies regarding the evaluation of bidders’ good-faith
effort documentation.
General Services’ Action: Partial corrective action taken.
Effective April 1, 2003, the procurement division of General
Services revised its solicitation instructions and forms to
require bidders to provide additional information and
documentation on their compliance with DVBE program
requirements. These new bidder instructions are available on
General Services’ Web site and are available for use by other
state agencies. Further, General Services states that it has
begun the process of reviewing DVBE program regulations to
identify areas of improvement.
Finding #7: The efficiency and effectiveness of the DVBE
program could be improved with legislation aimed at
providing incentives for DVBE participation and penalties
for bidders who do not comply with program requirements.
Legislation establishing the DVBE program does not have adequate
provisions to ensure compliance with program goals.
470 California State Auditor Report 2004-406 California State Auditor Report 2004-406 471
To increase the efficiency and effectiveness of the DVBE
program, we recommended the Legislature consider doing
the following:
• Replace the current good-faith effort step requiring bidders to
contact the federal government with a step directing bidders
to contact General Services for a list of certified DVBEs.
• Enact a contracting preference for DVBEs similar to the one
for the small business program—that is, allow an artificial
downward adjustment to the bids from contractors that plan
to use a DVBE to make the bids more competitive.
• Require awarding departments to go through their own good-
faith effort in seeking DVBE contractors.
• Provide awarding departments with the authority to withhold
a portion of the payments due to contractors when they fail
to use DVBEs to the extent specified in their contracts.
Ü Legislative Action: None.
We found no indication that the Legislature has passed
legislation addressing the recommendations presented above.
472 California State Auditor Report 2004-406
VETERANS HOME OF CALIFORNIA,
YOUNTVILLE
Investigations of Improper Activities by
State Employees, March 2002 Through
July 2002
ALLEGATION I2000-876 (REPORT I2002-2),
NOVEMBER 2002
Department of Veterans Affairs’ response as of August 20021
We investigated and substantiated that the information
system used by the hospital at the Veterans Home of
Investigative Highlight . . . California, Yountville (home), for processing charges
for services provided to the home’s residents contains charges
The Veterans Home of
attributed to one doctor for services that the doctor could not
California, Yountville,
have provided.
improperly billed Medicare
$55,000 for visits that the
staff physician did not make.
Finding: The home processed charges for services
the doctor could not have provided.
The information system the home uses to bill Medicare,
Medi-Cal, and other insurers showed that one doctor saw
patients 2,614 times from July 1, 1999, through July 17, 2001,
but we concluded that the doctor did not see a patient in
1,792 (69 percent) of those visits. Some of these excess visits
in the system were for patients who were not on the doctor’s
clinic schedule for that day. In 400 other cases, the doctor
was not working on the day in question, including weekends,
holidays, and days that she was on vacation or sick leave.
Furthermore, 148 incorrectly recorded visits were on 50 days
on which the doctor worked from home. As further evidence
of the information system’s lack of credibility, it indicated
that the doctor saw patients on every day of 35 consecutive
days spanning August and September 1999, 34 consecutive days
spanning June and July 2000, and 26 consecutive days spanning
May and June 2001. In fact, the billing system indicated that the
doctor saw patients on all but three of the 70 days from July 15
1Since we report the results of our investigative audits only twice a year, we may receive
the status of an auditee’s corrective action prior to a report being issued. However, the
auditee should report to us monthly until its corrective action has been implemented.
As of January 2003, this is the date of the auditee’s latest response.
California State Auditor Report 2004-406 473
through September 22, 1999. As of January 22, 2002, the home
had billed Medicare $131,000 for 1,488 of these 2,614 patient
visits. However, $55,000 was for 887 visits that we concluded the
doctor did not make.
Department Action: Pending.
The Department of Veterans Affairs (department) reports
that it is actively working to upgrade its billing system and
is working with its billing agent to resolve any charges
billed and reimbursed incorrectly. Further, the department
states that it will ensure that it obtains the signature of the
attending physician/technician to maintain proper practices
and Medicare compliance.
474 California State Auditor Report 2004-406
APPENDIX A
Summary of Recommendations for
Legislative Consideration by Policy Area
Table A.1 presents a summary of the recommendations the
Bureau of State Audits directed to the Legislature from
January 2002 through December 2003. Reports describing
these recommendations are also identified in this table. For
the status of the Legislature’s actions with regards to these
recommendations refer to the page number listed below.
TABLE A.1
Recommendations Directed to the Legislature
Policy Area/Report Number and Title Page Recommendation
Agriculture and Water Resources
2000-016, Water Replenishment District of Southern 13 We recommended, if restrictions on increasing assessment
California: Although the District Has Eliminated Excessive rates are extended past December 31, 2002, the Water
Water Rates, It Has Depleted Its Reserve Funds and Needs Replenishment District of Southern California (district)
to Further Improve Its Administrative Practices should consider seeking legislative approval of statutory
changes that will increase its flexibility to raise funds for its
operations, capital improvement projects, and reserves.
15 In addition, we recommend that the district continue to
create an updated strategic plan and capital improvement
plan to identify the programs and capital improvement
projects that will aid it in fulfilling its mission.
Appropriations
2002-123.2, Federal Funds: The State of California Takes 68 We recommended that as federal grants are brought up
Advantage of Available Federal Grants, but Budget Constraints for reauthorization, the Legislature, in conjunction with the
and Other Issues Keep It From Maximizing This Resource California congressional delegation, may wish to petition
Congress to revise grant formulas that use out-of-date statistics
to determine the share of grants awarded to the states.
71 We also recommended that the Legislature may wish to
ask departments to provide information related to the
impact of federal program funding when it considers cuts
in General Fund appropriations.
2003-106, State Mandates: The High Level of 80 We recommended that the Legislature direct the
Questionable Costs Claimed Highlights the Need for Commission to amend the parameters and guidelines
Structural Reforms of the Process of the animal adoption mandate to correct the formula
for determining the reimbursable portion of acquiring
additional shelter space. If the Commission amends
these parameters and guidelines, the Controller should
amend its claiming instructions accordingly and require
local entities to amend claims already filed.
continued on next page
California State Auditor Report 2004-406 475
Policy Area/Report Number and Title Page Recommendation
2003-107, California Department of Education: The 87 We recommended that when the Legislature considers
Extensive Number and Breadth of Categorical Programs future reform proposals calling for the consolidation of
Challenges the State’s Ability to Reform and Oversee Them categorical programs into block grants, it should ensure
that proposals contain: accountability provisions that
include a focus toward program results and outcomes;
and allocation methods that reflect the recipient’s need,
ability to contribute to program costs, and cost of
providing services.
89 In addition, when the Legislature considers future reform
proposals calling for the consolidation of categorical
programs into block grants, we recommended that it should
determine whether categorical programs involving federal
programs are appropriate candidates for consolidation.
Further, the Legislature should consider whether the reform
proposal (1) is consistent with any legal restrictions that may
apply to any particular funds and the State’s constitutional
obligation to provide equal educational opportunities within
the public school system and (2) includes mechanisms
by which the State can monitor and ensure that it meets
those obligations. Finally, the Legislature should determine
whether state or federal court decisions govern the
funding of particular programs and ensure that block grant
proposals continue to meet those mandates.
90 Next, we recommended that if the Legislature concurs
with California Department of Education’s (CDE)
exclusion of adult average daily attendance (ADA)
when making allocations for the Targeted Instructional
Improvement Grant Program (TIIG) program, it should
enact language to clarify its definition of “total” ADA.
91 Additionally, we recommended that if the Legislature
desires CDE to properly calculate allocations the way the
Legislature intends, it should define “regular” ADA for
the California Public School Library Act program.
92 We also recommended that if the Legislature continues
to fund the School Improvement Programs in the
annual budget and intends that CDE make adjustments
to equalize the funding for schools with kindergarten
through grade six using the same percentage increase
made in base revenue limits for unified school districts
with more than 1,500 ADA, it should enact language
that provides CDE with specific instructions on how to
compute the percentage increase.
93 If the Legislature continues to fund the Miller-Unruh
Basic Reading Act program in the annual budget,
we recommended that it should ensure that CDE
allocates Miller-Unruh reading specialist positions in a
manner that gives first priority to school districts with
underperforming schools and the lowest base revenue
limits. Further, it should ensure that CDE reallocates
unused positions in the following fiscal year.
96 Finally, we recommended that if the Legislature intends
CDE to provide oversight for TIIG, it should enact language
specifically requiring CDE to do so. It should also enact
language to define the term “lowest achieving pupils in
the district.”
476 California State Auditor Report 2004-406 California State Auditor Report 2004-406 477
Policy Area/Report Number and Title Page Recommendation
Business and Professions and Governmental Organization
2001-128, Enterprise Licensing Agreement: The State 113 We recommended that the Legislature consider requiring
Failed to Exercise Due Diligence When Contracting With all Information Technology contracts over a specified dollar
Oracle, Potentially Costing Taxpayers Millions of Dollars amount to receive a legal review by the Department of
General Services.
2002-107, Office of Criminal Justice Planning: 129 To improve the efficiency of the State’s domestic violence
Experiences Problems in Program Administration, and programs and reduce overlap of Office of Criminal Justice
Alternative Administrative Structures for the Domestic Planning’s (OCJP) and Department of Health Services’
Violence Program Might Improve Program Delivery (DHS) administrative activities, we recommended OCJP
and DHS, along with the Legislature, should consider
implementing one of the following alternatives:
• Increase coordination between the departments.
• Develop a joint grant application for the two
departments’ shelter-based programs.
• Combine the two shelter-based programs at
one department.
• Completely consolidate all OCJP’s and DHS’s domestic
violence programs.
2002-110, California State University: Its Common 150 To ensure that California State University (university)
Management System Has Higher Than Reported Costs, Less takes appropriate action to prevent potential conflicts
Than Optimal Functionality, and Questionable Procurement of interest in the future, the Legislature should consider
and Conflict-of-Interest Practices requiring the university to provide periodic ethics
training to designated university employees similar to
that required by Government Code for designated state
employees. Additionally, the Legislature should consider
requiring the university to establish an incompatibles
activities policy for university employees similar to that
addressed in Government Code, Section 19990.
2002-112, Statewide Procurement Practices: Proposed 161 The Department of General Services should seek a
Reforms Should Help Safeguard State Resources, but the change in the current contracting and procurement
Potential for Misuse Remains laws if it wants to continue to exempt purchases from
competitive bidding requirements because of special or
unique circumstances.
2002-122, State Controller’s Office: Does Not Always 174 To eliminate the State Controller’s Office (controller) Bureau
Ensure the Safekeeping, Prompt Distribution, and Collection of Unclaimed Property’s manual tracking of securities and
of Unclaimed Property dispel any impressions that it exercises judgment in deciding
when is the best time to sell securities, thereby reducing
the potential for errors, eliminating unnecessary work,
and reducing the potential for litigation against the State,
the controller should seek legislation to require it to sell
securities immediately upon receipt.
Education
2001-120, School Bus Safety II: State Law Intended to 212 We recommended the Legislature amend the parameters
Make School Bus Transportation Safer Is Costing More and guidelines of the School Bus Safety II mandate
Than Expected through legislation to more clearly define activities that
are reimbursable and to ensure that those activities reflect
what the Legislature intended. The parameters and
guidelines should clearly delineate between activities that
are required under prior law and those that are required
under the mandate.
continued on next page
476 California State Auditor Report 2004-406 California State Auditor Report 2004-406 477
Policy Area/Report Number and Title Page Recommendation
2002-104, California’s Charter Schools: Oversight 239 To ensure that the chartering entities hold their charter
at All Levels Could Be Stronger to Ensure Charter schools accountable through oversight, the Legislature
Schools’ Accountability should consider amending the statute to make the
chartering entities’ oversight role and responsibilities explicit.
245 In addition, to ensure that the chartering entities charge
their oversight fees appropriately, the Legislature should
consider clarifying the law to define the types of charter
school revenues that are subject to the chartering entities’
oversight fees.
249 Finally, to ensure that a charter school’s assets and
liabilities are disposed of properly when it closes or its
charter is revoked, the Legislature may wish to consider
establishing a method for disposing of the school’s assets
and liabilities and requiring the California Department of
Education to adopt regulations regarding this process.
2002-110, California State University: Its Common This audit is also included in the Business and Professions
Management System Has Higher Than Reported Costs, Less and Governmental Organization policy area. See that
Than Optimal Functionality, and Questionable Procurement policy area for the wording of our recommendation.
and Conflict-of-Interest Practices
2003-107, California Department of Education: The This audit is also included in the Appropriations
Extensive Number and Breadth of Categorical Programs policy area. See that policy area for the wording
Challenges the State’s Ability to Reform and Oversee Them of our recommendation.
2002-032, California’s Education Institutions: A Lack 252 To provide additional guidance to California education
of Guidance Results in Their Inaccurate or Inconsistent institutions for complying with the Clery Act, the Legislature
Reporting of Campus Crime Statistics should consider creating a task force to perform the
following functions:
• Compile a comprehensive list converting crimes defined
in California’s laws to Clery Act reportable crimes.
• Issue guidance to assist institutions in defining
campus, noncampus, and public property locations,
including guidelines for including or excluding crimes
occurring at other institutions.
• Obtain concurrence from the United States Department
of Education on all agreements reached.
• Evaluate the pros and cons of establishing a governing
body to oversee institutions’ compliance with the
Clery Act.
Environmental Safety and Quality and Toxic Materials
2002-121, California Environmental Protection Agency: 277 We recommended that to obtain a comprehensive listing
Insufficient Data Exists on the Number of Abandoned, of the number of orphan sites and sites with orphan shares,
Idled, or Underused Contaminated Properties, and Liability the Legislature should consider requiring the California
Concerns and Funding Constraints Can Impede Their Environmental Protection Agency and its entities to capture
Cleanup and Redevelopment necessary data in their existing or new databases.
2003-113, California Integrated Waste Management 287 We recommended that the Legislature may wish to
Board: Its New Regulations Establish Rules for Oversight consider amending the current provisions of the Waste
of Construction and Demolition Debris Sites, but Good Act that allow a stay of an enforcement order upon the
Communication and Enforcement Are Also Needed to Help request for a hearing, and to streamline or otherwise
Prevent Threats to Public Health and Safety modify the appeal process to make it more effective and
timely and enhance the ability to enforce the Waste Act.
478 California State Auditor Report 2004-406 California State Auditor Report 2004-406 479
Policy Area/Report Number and Title Page Recommendation
Health and Human Services
2001-126, Department of Managed Health Care: 306 We recommended that the Legislature consider changing
Assessments for Specialized and Full-Service HMOs Do Not the Department of Managed Health Care’s (department)
Reflect Its Workload and Have Disparate Financial Impacts assessment structure to reflect the proportion of the
documented workload that the department devotes
to specialized and full-service health maintenance
organizations (HMOs) and to reduce disparities in the
financial effect on HMOs. We also recommended that
the Legislature require the department to report to it
triennially on the proportion of assessments charged
to each class of HMO and the proportion of the
documented workload related to each class of HMO.
2002-107, Office of Criminal Justice Planning: Experiences This audit is also included in the Business and Professions
Problems in Program Administration, and Alternative and Governmental Organization policy area. See that
Administrative Structures for the Domestic Violence Program policy area for the wording of our recommendation.
Might Improve Program Delivery
2001-015, Statewide Fingerprint Imaging System: 332 The Legislature should consider the pros and cons of
The State Must Weigh Factors Other Than Need and repealing the state law requiring fingerprint imaging,
Cost-Effectiveness When Determining Future Funding for including whether the Statewide Fingerprint Imaging
the System System (SFIS) is consistent with the State’s community
outreach and education campaign efforts for the Food
Stamp program. To assist the Legislature in its consideration
of the pros and cons of repealing the state law that requires
fingerprint imaging, the Department of Social Services and
the Health and Human Services Agency Data Center should
report on the full costs associated with discontinuing SFIS.
2003-113, California Integrated Waste Management This audit is also included in the Environmental Safety
Board: Its New Regulations Establish Rules for Oversight and Quality and Toxic Materials policy area. See that
of Construction and Demolition Debris Sites, but Good policy area for the wording of our recommendation.
Communication and Enforcement Are Also Needed to
Help Prevent Threats to Public Health and Safety
2003-112, Department of Health Services: It Needs to 380 To ensure that the Department of Health Services and
Better Plan and Coordinate Its Medi-Cal Antifraud Activities the Department of Justice promptly complete their
negotiations for a current agreement that would assist
both in communicating and coordinating their respective
roles and responsibilities for investigating, referring, and
prosecuting cases of suspected Medi-Cal provider fraud,
we recommended that the Legislature consider requiring
both agencies to report the status of the required
agreement during budget hearings.
Information Technology
2001-128, Enterprise Licensing Agreement: The State This audit is also included in the Business and Professions
Failed to Exercise Due Diligence When Contracting With and Governmental Organization policy area. See that
Oracle, Potentially Costing Taxpayers Millions of Dollars policy area for the wording of our recommendation.
2002-110, California State University: Its Common This audit is also included in the Business and Professions
Management System Has Higher Than Reported Costs, Less and Governmental Organization policy area. See that
Than Optimal Functionality, and Questionable Procurement policy area for the wording of our recommendation.
and Conflict-of-Interest Practices
Insurance
2001-126, Department of Managed Health Care: This audit is also included in the Health and Human
Assessments for Specialized and Full-Service HMOs Do Not Services policy area. See that policy area for the wording
Reflect Its Workload and Have Disparate Financial Impacts of our recommendation.
continued on next page
478 California State Auditor Report 2004-406 California State Auditor Report 2004-406 479
Policy Area/Report Number and Title Page Recommendation
Jobs, Economic Development, and the Economy
Report Number 2003-108.1, California’s Workers’ 385 We recommended that to ensure future legislation
Compensation Program: The Medical Payment System does not contain any unintended impediments to the
Does Not Adequately Control the Costs to Employers to Treat improvement of the workers’ compensation system, the
Injured Workers or Allow for Adequate Monitoring of System administrative director should be proactive in working
Costs and Patient Care with the Legislature to identify and amend any provisions
that would adversely affect the administrative director’s
ability to effect changes.
389 Also, to ensure that the treatment guidelines can serve as an
authoritative standard for the treatment of workers’ injuries,
we recommended that the administrative director should
seek the changes necessary in the Labor Code to ensure that
all insurers and claims administrators are required to follow
the standardized treatment guidelines and that treatment
guidelines are accepted for use in judicial proceedings.
Judiciary
2002-030, State Bar of California: Although It Reasonably 398 We recommended that the State Bar of California pursue
Sets and Manages Mandatory Fees, It Faces Potential a legislative amendment that would help it strengthen its
Deficits in the Future and Needs to More Strictly Enforce enforcement authority over collections related to client
Disciplinary Policies and Procedures security and disciplinary costs.
Labor, Employment, and Industrial Relations
Report Number 2003-108.1, California’s Workers’ This audit is also included in the Jobs, Economic
Compensation Program: The Medical Payment System Development, and the Economy policy area. See that
Does Not Adequately Control the Costs to Employers to Treat policy area for the wording of our recommendation.
Injured Workers or Allow for Adequate Monitoring of System
Costs and Patient Care
Local Government
2000-016, Water Replenishment District of Southern This audit is also included in the Agriculture and Water
California: Although the District Has Eliminated Excessive Resources policy area. See that policy area for the
Water Rates, It Has Depleted Its Reserve Funds and Needs wording of our recommendation.
to Further Improve Its Administrative Practices
2001-120, School Bus Safety II: State Law Intended to Make This audit is also included in the Education policy area. See
School Bus Transportation Safer Is Costing More Than Expected that policy area for the wording of our recommendation.
2001-125, Red Light Camera Programs: Although They 408 We recommended that to ensure local governments
Have Contributed to a Reduction in Accidents, Operational maintain control and operate their red light camera
Weaknesses Exist at the Local Level programs and avoid legal challenge, the Legislature should
consider clarifying the law to define the tasks that a local
government must perform to operate a red light camera
program and the tasks that can be delegated to a vendor.
412 Further, because a potential conflict exists between the
confidentiality provision in the Vehicle Code and the
California Constitution regarding the admissibility of
evidence, the Legislature should consider clarifying the
Vehicle Code to state whether photographs taken by red light
cameras can be used for other law enforcement purposes.
2003-106, State Mandates: The High Level of This audit is also included in the Appropriations policy
Questionable Costs Claimed Highlights the Need for area. See that policy area for the wording of
Structural Reforms of the Process our recommendation.
2003-107, California Department of Education: The This audit is also included in the Appropriations policy
Extensive Number and Breadth of Categorical Programs area. See that policy area for the wording of
Challenges the State’s Ability to Reform and Oversee Them our recommendation.
480 California State Auditor Report 2004-406 California State Auditor Report 2004-406 481
Policy Area/Report Number and Title Page Recommendation
Privacy and Public Safety
2001-125, Red Light Camera Programs: Although They This audit is also included in the Local Government
Have Contributed to a Reduction in Accidents, Operational policy area. See that policy area for the wording of
Weaknesses Exist at the Local Level our recommendation.
Revenue and Taxation
2002-122, State Controller’s Office: Does Not Always This audit is also included in the Business and Professions
Ensure the Safekeeping, Prompt Distribution, and Collection and Governmental Organization policy area. See that
of Unclaimed Property policy area for the wording of our recommendation.
2002-126, California Department of Transportation: 458 We recommended that, considering the State’s fiscal
Low Cash Balances Threaten the Department’s Ability to crisis, the Legislature may wish to allow the Transportation
Promptly Deliver Planned Transportation Projects Investment Fund to transfer the entire $678 million to
the Traffic Congestion Relief Fund (TCRF), and then
authorize a loan of the money from the TCRF to the
General Fund so that those funds would be repaid to the
TCRF and therefore still be available in future years.
Transportation
2001-120, School Bus Safety II: State Law Intended to Make This audit is also included in the Education policy area. See
School Bus Transportation Safer Is Costing More Than Expected that policy area for the wording of our recommendation.
2001-125, Red Light Camera Programs: Although They This audit is also included in the Local Government
Have Contributed to a Reduction in Accidents, Operational policy area. See that policy area for the wording of
Weaknesses Exist at the Local Level our recommendation.
2002-103, California Department of Transportation: 461 To ensure that the California Department of Transportation
It Manages the State Highway Operation and Protection (Caltrans) can collect on a performance bond if a contractor
Program Adequately, but It Can Make Improvements does not perform, we recommended that the Legislature
consider expanding Caltrans’ ability to use other financial
indicators included within the financial statements and
information available from rating companies such as A.M.
Best Company and S&P as a basis for determining the
sufficiency of an insurer, before accepting performance
bonds. Further, the Legislature should clarify Caltrans’
authority to use the information it obtains from financial
statements and other financial indicators to object to
the sufficiency of an insurer throughout the bond term.
2002-126, California Department of Transportation: This audit is also included in the Revenue and Taxation
Low Cash Balances Threaten the Department’s Ability to policy area. See that policy area for the wording of
Promptly Deliver Planned Transportation Projects our recommendation.
Veterans Affairs
2001-127, Disabled Veteran Business Enterprise 467 To determine if the 3 percent Disabled Veteran Business
Program: Few Departments That Award Contracts Have Met Enterprise (DVBE) goal is reasonable, the Legislature may
the Potentially Unreasonable Participation Goal, and Weak wish to consider requiring either Department of General
Implementation of the Program Further Hampers Success Services (General Services) or Department of Veterans
Affairs (Veterans Affairs) to commission a study on the
potential number of DVBE-eligible firms in the State, the
services they provide, and their geographic distribution,
and compare this information to the State’s contracting
needs. Based on the results of this study, the Legislature
may wish to consider doing the following:
• Modify the current DVBE participation goal.
• Allow General Services to negotiate department-
specific goals based on individual contracting needs
and the ability of the current or potential DVBE pool
to satisfy those needs.
continued on next page
480 California State Auditor Report 2004-406 California State Auditor Report 2004-406 481
Policy Area/Report Number and Title Page Recommendation
471 Also, to ensure that prime contractors make a genuine
good-faith effort to find a DVBE, we recommended the
Legislature consider requiring awarding departments to
follow General Services’ policies.
472 Finally, to increase the efficiency and effectiveness of
the DVBE program, we recommended the Legislature
consider doing the following:
• Replace the current good-faith step requiring bidders
to contact the federal government with a step directing
bidders to contact General Services for a list of
certified DVBEs.
• Enact a contracting preference for DVBEs similar to
the one for the small business program – that is, allow
an artificial download adjustment to the bids from
contractors that plan to use a DVBE to make the bids
more competitive.
• Require awarding departments to go through their
own good-faith effort in seeking DVBE contractors.
• Provide awarding departments with the authority to
withhold a portion of the payments due to contractors
when they fail to use DVBEs to the extent specified in
their contracts.
482 California State Auditor Report 2004-406
APPENDIX B
Summary of Monetary Benefits Identified In
Audit Reports Released From July 1, 2001,
Through December 31, 2003
We estimate that auditees could have realized more
than $441 million of monetary benefits during the
period July 1, 2001, through December 31, 2003, if
they implemented our recommendations. Table B.1 provides a
brief description of the monetary benefits we found such as cost
recoveries, cost savings, and increased revenues. Finally, many of
the monetary benefits we have identified are not only one-time
benefits; they are monetary benefits that could be realized each
year for many years to come.
TABLE B.1
Monetary Benefits July 1, 2001, Through December 31, 2003
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
July 1, 2001, Through June 30, 2002
2001-102 Department of Insurance Conservation and Liquidation Office: Stronger Oversight Is $1,728,000
(July 2001) Needed to Properly Safeguard Insurance Companies’ Assets
Cost savings and cost recovery—Recovery of overpayment to a contractor for $43,000 and recovery
of reinsurance not yet billed at $1,385,000. In addition, cost savings of $300,000 under CLO’s new
contract with its investment managers, which will recur for many years. The CLO reported that it
recovered the overpayment as of December 21, 2001.
2001-107 Port of Oakland: Despite Its Overall Financial Success, Recent Events May Hamper 7,500,000
(October 2001) Expansion Plans That Would Likely Benefit the Port and the Public
Increased revenue—If the real estate division were to renegotiate its below-market leases to
approximately 25 percent of their aggregate estimated fair market value, it could increase annual
revenues. In 2002, three of the Port’s below-market leases expired. If the Port renegotiated these
leases to 25 percent of market value, the Port would realize over $7.5 million annually.
2001-108 California Department of Corrections: Its Fiscal Practices and Internal Controls Are 907,000
(November 2001) Inadequate to Ensure Fiscal Responsibility
Cost savings and cost recovery—Recover $24,000 of overpayment on overhead, save $150,000 of
future overhead costs through fiscal year 2002–03, save $733,000 by eliminating unneeded contractor,
which will recur for many years, and save $42 million spent on overtime by filing vacant positions, which
will recur for many years. We estimate that savings for fiscal year 2002–03 could be $883,000 ($150,000
plus $733,000) and savings of $733,000 annually for periods thereafter. However, since it may take
CDC a few years to fill its vacant positions, it is not unreasonable to expect CDC to incrementally realize
overtime cost savings over a five-year period starting in fiscal year 2001–02.
continued on next page
California State Auditor Report 2004-406 483
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
2001-120 School Bus Safety II: State Law Intended to Make School Bus Transportation Safer Is $235,800,000
(March 2002) Costing More Than Expected
Cost savings—We recommended that the Legislature clarify what activities are
reimbursable. In 2002, the Legislature passed Assembly Bill 2781, which specifies that
costs associated with implementation of transportation plans are not reimbursable
claims. Costs for a six-year period ending June 30, 2002, were $235.8 million and the
ongoing costs after June 30, 2002, are $44.3 million each year thereafter.
2001-128 Enterprise Licensing Agreement: The State Failed to Exercise Due Diligence When *
(April 2002) Contracting With Oracle, Potentially Costing Taxpayers Millions of Dollars
Cost savings—The State and Oracle agreed to rescind the contract in July 2002. As
a result, we estimate the State will save $8,120,000 per year for five years starting in
fiscal year 2002–03.
2001-116 San Diego Unified Port District: It Should Change Certain Practices to Better Protect the *
(April 2002) Public’s Interests in Port-Managed Resources
Increased revenue—We estimate an increase in revenue of $700,000 per year by
obtaining market value rents. This monetary benefit will recur for many years, however,
it is not anticipated to begin until 2007.
2001-124 Los Angeles Unified School District: Outdated, Scarce Textbooks at Some Schools 1,762,000
(June 2002) Appear to Have a Lesser Effect on Academic Performance Than Other Factors, but the
District Should Improve Its Management of Textbook Purchasing and Inventory
Cost savings—We found that some publishers are not equitably providing free instructional
materials (commonly referred to as gratis items) to different schools within LAUSD, as state
law requires. Subsequently, LAUSD reports that it negotiated with publishers and thus far
one publisher has actually provided approximately $300,000 in gratis items.
Total for July 1, 2001, Through June 30, 2002 $247,697,000
July 1, 2002, Through June 30, 2003
2001-123 Deaf and Disabled Telecommunications Program: Insufficient Monitoring of Surcharge $268,000
(July 2002) Revenues Combined With Imprudent Use of Public Funds Leave Less Money Available for
Program Services
Cost savings—Represents $200,000 in known unremitted collections from intrastate
telecommunication charges and $68,000 in penalties and interest due for 2000 and 2001.
2002-101 California Department of Corrections: A Shortage of Correctional Officers, Along With *
(July 2002) Costly Labor Agreement Provisions, Raises Both Fiscal and Safety Concerns and Limits
Management’s Control
Cost savings—We estimate the department could save $58 million if it reduces overtime
costs by filling unmet correctional officer needs. This estimate includes the $42 million
we identified in our November 2001 report (2001-108). The department stated in its
six-month response to this audit that, following our recommendation to increase the
number of correctional officer applicants, it has submitted a proposal to restructure its
academy to allow two additional classes each year. This action could potentially allow
the department to graduate several hundred more correctional officers each year,
thereby potentially contributing to a reduction in its overtime costs. However, any
savings from this action would be realized in future periods.
2002-107 Office of Criminal Justice Planning: Experiences Problems in Program Administration, 23,000
(October 2002) and Alternative Administrative Structures for the Domestic Violence Program Might Improve
Program Delivery
Cost savings—Represents estimated annual savings from the elimination of duplicative
work conducted by the State Controller’s Office. This savings would recur indefinitely.
484 California State Auditor Report 2004-406 California State Auditor Report 2004-406 485
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
2002-109 Department of Health Services: It Needs to Better Control the Pricing of Durable $ 911,000
(December 2002) Medical Equipment and Medical Supplies and More Carefully Consider Its Plans to Reduce
Expenditures on These Items
Cost savings—Represents savings the department would have achieved in fiscal year
2002–03 had it updated its maximum price for blood glucose test strips and volume
remained the same as it was in the previous fiscal year. Also, beginning in fiscal year
2003–04, the department could save an additional $2.7 million annually if it purchases
stationary volume ventilators instead of renting them. However, because this action has
not taken place, we are not adding the $2.7 million to the monetary benefits estimate.
2002-009 California Energy Markets: The State’s Position Has Improved, Due to Efforts by the Department 29,000,000
(April 2003) of Water Resources and Other Factors, but Cost Issues and Legal Challenges Continue
Cost savings—In response to an audit recommendation, the department renegotiated
certain energy contracts. The department’s consultant estimates that the present value of
the potential cost savings due to contract renegotiation efforts as of December 31, 2002,
by the department and power suppliers, when considering replacement power costs,
to be $580 million. For the purpose of this analysis, we have computed the average
annual cost savings by dividing the $580 million over the 20-year period the savings
will be realized. The estimated savings totaling $580 million over 20 years varies by
year from approximately -$130 million to +$180 million.
Annualized carry forward from prior fiscal years: 64,103,000
2000-134.2 Energy Deregulation† $ 3,000,000
2001-102 Department of Insurance Conservation and
Liquidation Office 300,000
2001-107 Port of Oakland 7,500,000
2001-108 California Department of Corrections 883,000
2001-120 School Bus Safety II 44,300,000
2001-128 Enterprise Licensing Agreement 8,120,000
Subtotal $64,103,000
Total for July 1, 2002, Through June 30, 2003 $94,305,000
July 1, 2003, Through December 31, 2003
2002-121 California Environmental Protection Agency: Insufficient Data Exists on the Number 1,000,000
(July 2003) of Abandoned, Idled, or Underused Contaminated Properties, and Liability Concerns and
Funding Constraints Can Impede Their Cleanup and Redevelopment
Increased revenue—CalEPA would have received up to an additional $1 million in
revenues if it had applied for a one-time federal grant.
2003-106 State Mandates: The High Level of Questionable Costs Claimed Highlights the Need for 4,800,000
(October 2003) Structural Reforms of the Process
Cost savings—If the local entities we audited file corrected claims for the errors we
identified, the State will save $4.8 million ($4.1 million related to the Peace Officers
Procedural Bill of Rights mandate and $675,000 related to the Animal Adoption
mandate). We also recommended that the State Controller’s Office audit the Peace
Officers Procedural Bill of Rights claims that have been filed. We believe that such
audits could yield savings of up to $159.6 million.
2003-102 Water Quality Control Boards: Could Improve Their Administration of Water Quality 301,000
(December 2003) Improvement Projects Funded by Enforcement Actions
Increased revenue—We identified 92 violations that require fine issuance and collection
of the fines and three fines that were issued but not collected. The board could increase
its revenue if it collected these fines.
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484 California State Auditor Report 2004-406 California State Auditor Report 2004-406 485
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
Annualized carry forward from prior fiscal years: $ 92,976,000
2000-134.2 Energy Deregulation $ 3,000,000
2001-102 Department of Insurance Conservation and
Liquidation Office 300,000
2001-107 Port of Oakland 7,500,000
2001-108 California Department of Corrections 733,000
2001-120 School Bus Safety II 44,300,000
2001-128 Enterprise Licensing Agreement 8,120,000
2002-107 Office of Criminal Justice Planning 23,000
2002-009 California Energy Markets 29,000,000
Subtotal $92,976,000
Totals for July 1, 2003, Through December 31, 2003 $98,077,000
Totals for July 1, 2001, Through June 30, 2003 $342,002,000
Totals for July 1, 2001, Through December 31, 2003 $440,079,000
*Although this listing identified monetary benefits the auditee could reasonably expect to realize if it implements our
recommendations, these benefits would not be realized in the period covered in this listing. Therefore, the appropriate amounts
will be included in future years.
† We issued report 2000-134.2 on Energy Deregulation in May 2001. Cost savings is from the annual maintenance cost of a Web
site that we recommended be eliminated because it is not needed. This cost savings will recur for many years.
486 California State Auditor Report 2004-406
INDEX
State and Local Entities With Recommendations
From Audits Included in This Special Report
State Entities
State Bar of California 395
Business, Transportation and Housing Agency 463
Commission on State Mandates 75, 211
State Controller’s Office 49, 75, 169, 211
Corrections, Department of 289, 425
Courts, Administrative Office of the 45
Criminal Justice Planning, Office of 119
Developmental Services, Department of 439
Education, Department of 85, 217 237
Emergency Services, Office of 181, 189, 431
California Environmental Protection Agency 39, 275
Finance, Department of 49, 67, 107
Fish and Game, Department of 441, 463
Franchise Tax Board 57
General Services, Department of 107, 131, 153, 289, 463
Health Services, Department of 67, 119, 297, 317, 335, 369, 463
Health and Human Services Agency 463
Health and Human Services Agency Data Center 167
Homeland Security, Office of 189
Industrial Relations, Department of 25, 383, 435
Information Technology, Department of 107
California Integrated Waste Management Board 279
Justice, Department of 197, 369
Managed Health Care, Department of 305
Mental Health, Department of 49
California National Guard 99, 189
California Postsecondary Education Commission 251
Public Utilities Commission 257, 267, 451
Rehabilitation, Department of 309
Resources Agency 463
California State Auditor Report 2004-406 487
Social Services, Department of 325, 355
State and Consumer Services Agency 57, 115, 463
Teale Data Center, Stephen P. 153
Toxic Substances Control, Department of 275
California Transportation Commission 455
Transportation, Department of 449, 455, 459, 463
California Unemployment Insurance Appeals Board 445
California State University 137, 251
University of California 207, 229, 251
California Veterans Board 3
Veterans Affairs, Department of 3, 463, 473
State Water Resources Control Board 39, 275
Water Resources, Department of 29
Youth and Adult Correctional Agency 463
Local Entities
Ceres Unified School District 211
Charter Schools, Various 237
Dinuba Unified School District 211
Elk Grove Unified School District 211
Fremont, City of 407
Fresno, City and County of 279
Fresno Unified School District 211
Long Beach, City of 407
Los Angeles, City and County of 75
Los Angeles County 407
Los Angeles County Metropolitan Transportation Authority 419
Los Angeles Unified School District 217
Oxnard, City of 407
Sacramento, City of 407
Sacramento, City and County of 279
San Diego, City of 75, 407
San Diego Unified Port District 401
San Dieguito Union High School District 211
San Francisco, City and County of 75, 407
488 California State Auditor Report 2004-406 California State Auditor Report 2004-406 489
San Jose, City of 75
Stockton, City of 75
Water Replenishment District of Southern California 9
488 California State Auditor Report 2004-406 California State Auditor Report 2004-406 489
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
490 California State Auditor Report 2004-406