CSA
Summary
Read the report at California State Auditor ↗
Implementation of
State Auditor’s
Recommendations
Audits Released in January 2003
Through December 2004
Special Report to
Assembly and Senate
Standing/Policy Committees
February 2005
Report No. 2005-406
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February 23, 2005 2005-406
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. This two volume
report includes the major findings and recommendations, along with the corrective actions auditees
reportedly have taken to implement our recommendations. Volume II of 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 ten special reports specifically tailored for each Assembly and Senate
budget subcommittee. These ten special reports are available on our Web site at www.bsa.ca.gov/bsa/
reports/subcom2005-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 2003-111, Oversight of Long-Term
Care Programs: Opportunities Exist to Streamline State
Oversight Activities 3
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 9
Agriculture and Water Resources
Report Number 2003-137, California’s Independent
Water Districts: Reserve Amounts Are Not Always
Sufficiently Justified, and Some Expenses and Contract
Decisions Are Questionable 15
Report Number 2002-016, Water Replenishment
District of Southern California: Although the District
Has Addressed Many of Our Previous Concerns,
Problems Still Exist 25
Report Number 2003-136, Metropolitan Water District
of Southern California: Its Administrative Controls Need
to Be Improved to Ensure an Appropriate Level of Checks
and Balances Over Public Resources 35
Report Number 2003-102, Water Quality Control
Boards: Could Improve Their Administration of Water Quality
Improvement Projects Funded by Enforcement Actions 43
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 49
Appropriations
Report Number 2004-140, Department of
Transportation: Various Factors Increased Its Cost
Estimates for Toll Bridge Retrofits, and Its Program
Management Needs Improving 59
Report Number 2003-131, Franchise Tax Board:
Significant Program Changes Are Needed to Improve
Collections of Delinquent Labor Claims 67
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 73
Report Number 2003-106, State Mandates:
The High Level of Questionable Costs Claimed Highlights
the Need for Structural Reforms of the Process 89
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 99
Report Number 2002-124, Franchise Tax Board:
Its Performance Measures Are Insufficient to Justify
Requests for New Audit or Collection Program Staff 107
Business and Professions and Governmental Organization
Report Number 2004-139, Office of the Secretary
of State: Clear and Appropriate Direction Is Lacking in
Its Implementation of the Federal Help America Vote Act 117
Report Number 2004-108, California Commission
on Teacher Credentialing: It Could Better Manage Its
Credentialing Responsibilities 125
Report Number 2004-106, Wireless Enhanced 911:
The State Has Successfully Begun Implementation, but
Better Monitoring of Expenditures and Wireless 911
Wait Times Is Needed 135
Report Number 2003-123, California Children and
Families Commissions: Some County Commissions’
Contracting Practices Are Lacking, and Both the
State and County Commissions Can Improve Their
Efforts to Find Funding Partners and Collect Data
on Program Performance 145
Report Number 2003-114, Department of Mental
Health: State and Federal Regulations Have Hampered Its
Implementation of Legislation Meant to Strengthen
the Status of Psychologists at Its Hospitals 153
Report Number 2003-122, California Gambling
Control Commission: Although Its Interpretations
of the Tribal-State Gaming Compacts Generally Appear
Defensible, Some of Its Actions May Have Reduced the
Funds Available for Distribution to Tribes 157
Report Number I2004-2, Department of General
Services: Investigations of Improper Activities by State
Employees (Allegation I2003-0703) 169
Report Number I2003-2, University of California,
San Francisco: Investigations of Improper Activities
by State Employees (Allegation I2000-715) 171
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 175
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 185
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 193
Report Number 2002-122, State Controller’s Office:
Does Not Always Ensure the Safekeeping, Prompt
Distribution, and Collection of Unclaimed Property 201
Report Number I2003-1, Health and Human
Services Agency Data Center: Investigations of Improper
Activities by State Employees (Allegation I2002-652) 213
Report Number 2002-112, Statewide Procurement
Practices: Proposed Reforms Should Help Safeguard State
Resources, but the Potential for Misuse Remains 215
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 229
Education
Report Number 2004-108, California Commission
on Teacher Credentialing: It Could Better Manage Its
Credentialing Responsibilities (see summary on page 125)
Report Number 2003-129, The Fiscal Crisis and
Management Assistance Team: Its Recommendations,
if Implemented, Should Help Financially Troubled
School Districts 245
Report Number 2002-032, California’s Education
Institutions: A Lack of Guidance Results in Their Inaccurate
or Inconsistent Reporting of Campus Crime Statistics 249
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 73)
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 229)
Elections and Reapportionment
Report Number 2004-139, Office of the Secretary of
State: Clear and Appropriate Direction Is Lacking in
Its Implementation of the Federal Help America Vote Act
(see summary on page 117)
Energy, Utilities, and Communication
Report Number 2004-106, Wireless Enhanced 911:
The State Has Successfully Begun Implementation, but
Better Monitoring of Expenditures and Wireless 911 Wait
Times Is Needed (see summary on page 135)
Report Number 2003-121, California Public Utilities
Commission: It Cannot Ensure That It Spends Railroad
Safety Program Fees in Accordance With State Law 255
Report Number 2003-103, California Public Utilities
Commission: State Law and Regulations Establish Firm
Deadlines for Only a Small Number of Its Proceedings 259
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 49)
Environmental Safety and Quality and Toxic Materials
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 43)
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 265
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
Health and Human Services
Report Number 2004-111, Sex Offender Placement:
Departments That Are Responsible for Placing
Sex Offenders Face Challenges, and Some Need
to Better Monitor Their Costs 279
Report Number I2004-2, Department of Health
Services: Investigations of Improper Activities by
State Employees (Allegation I2003-0853) 287
Report Number 2003-124, Department of Health
Services: Some of Its Policies and Practices Result in
Higher State Costs for the Medical Therapy Program 289
Report Number 2003-125, California Department of
Corrections: More Expensive Hospital Services and Greater
Use of Hospital Facilities Have Driven the Rapid Rise in
Contract Payments for Inpatient and Outpatient Care 299
Report Number 2003-114, Department of Mental
Health: State and Federal Regulations Have Hampered Its
Implementation of Legislation Meant to Strengthen the Status of
Psychologists at Its Hospitals (see summary on page 153)
Report Number 2003-111, Oversight of Long-Term
Care Programs: Opportunities Exist to Streamline State
Oversight Activities (see summary on page 3)
Report Number 2003-117, California Department of
Corrections: It Needs to Ensure That All Medical Service
Contracts It Enters Are in the State’s Best Interest and All
Medical Claims It Pays Are Valid 305
Report Number 2003-112, Department of Health
Services: It Needs to Better Plan and Coordinate Its
Medi-Cal Antifraud Activities 319
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 265)
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 335
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 349
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 369
Information Technology
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 229)
Insurance
Report Number 2003-138, Department of Insurance:
It Needs to Make Improvements in Handling Annual
Assessments and Managing Market Conduct Examinations 379
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 9)
Jobs, Economic Development, and the Economy
Report Number 2002-018, Workers’ Compensation
Fraud: Detection and Prevention Efforts Are Poorly
Planned and Lack Accountability 387
Report Number 2003-108.2, California’s Workers’
Compensation Program: Changes to the Medical
Payment System Should Produce Savings Although
Uncertainty About New Regulations and Data
Limitations Prevent a More Comprehensive Analysis 405
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 413
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 49)
Judiciary
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 425
Labor, Employment, and Industrial Relations
Report Number I2004-2, California Military
Department: Investigations of Improper Activities by State
Employees (Allegation I2002-1069) 431
Report Number 2003-131, Franchise Tax Board:
Significant Program Changes Are Needed to Improve
Collections of Delinquent Labor Claims (see summary on
page 67)
Report Number 2002-018, Workers’ Compensation
Fraud: Detection and Prevention Efforts Are Poorly Planned
and Lack Accountability (see summary on page 387)
Report Number I2004-1, California Unemployment
Insurance Appeals Board: Investigations of Improper
Activities by State Employees (Allegation I2003-0836) 433
Report Number 2003-108.2, California’s Workers’
Compensation Program: Changes to the Medical Payment
System Should Produce Savings Although Uncertainty About
New Regulations and Data Limitations Prevent a More
Comprehensive Analysis (see summary on page 405)
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 413)
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 335)
Local Government
Report Number 2004-117, City of Richmond: Poor
Spending Decisions and Weak Monitoring of Its Finances
Caused Its Financial Decline and Hinder Its Ability
to Recover 435
Report Number 2003-123, California Children and
Families Commissions: Some County Commissions’
Contracting Practices Are Lacking, and Both the State and
County Commissions Can Improve Their Efforts to Find
Funding Partners and Collect Data on Program Performance
(see summary on page 145)
Report Number 2003-119, Los Angeles County
Metropolitan Transportation Authority: It Could Use
Certain Recommended Management Tools to Improve Its
Oversight of Legal Contracts, and Its Efforts Resulted in the
Award of a Large Construction Contract Within Budget 445
Report Number 2003-137, California’s Independent
Water Districts: Reserve Amounts Are Not Always
Sufficiently Justified, and Some Expenses and Contract
Decisions Are Questionable (see summary on page 15)
Report Number 2002-016, Water Replenishment
District of Southern California: Although the District
Has Addressed Many of Our Previous Concerns, Problems
Still Exist (see summary on page 25)
Report Number 2003-136, Metropolitan Water District
of Southern California: Its Administrative Controls Need
to Be Improved to Ensure an Appropriate Level of Checks and
Balances Over Public Resources (see summary on page 35)
Report Number 2003-101, County Emergency
Medical Services Funds: Despite Their Efforts to
Properly Administer the Funds, Some Counties Have
Yet to Reach Full Compliance With State Laws 449
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 455
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 89)
Privacy and Public Safety
Report Number 2004-101, Prison Industry Authority:
Although It Has Broad Discretion in Pursuing Its Statutory
Purposes, It Could Improve Certain Pricing Practices and
Develop Performance Measures 463
Report Number 2004-111, Sex Offender Placement:
Departments That Are Responsible for Placing Sex Offenders
Face Challenges, and Some Need to Better Monitor Their Costs
(see summary on page 279)
Report Number 2004-105, California Department
of Corrections: Although Addressing Deficiencies in Its
Employee Disciplinary Practices, the Department Can
Improve Its Efforts 469
Report Number I2004-2, California Military Department:
Investigations of Improper Activities by State Employees
(Allegation I2002-1069) (see summary on page 431)
Report Number 2004-106, Wireless Enhanced 911:
The State Has Successfully Begun Implementation, but
Better Monitoring of Expenditures and Wireless 911 Wait
Times Is Needed (see summary on page 135)
Report Number 2003-125, California Department of
Corrections: More Expensive Hospital Services and Greater
Use of Hospital Facilities Have Driven the Rapid Rise in
Contract Payments for Inpatient and Outpatient Care
(see summary on page 299)
Report Number 2003-117, California Department of
Corrections: It Needs to Ensure That All Medical Service
Contracts It Enters Are in the State’s Best Interest and All
Medical Claims It Pays Are Valid (see summary on
page 305)
Report Number 2003-130, California Department of
Corrections: Its Plans to Build a New Condemned-Inmate
Complex at San Quentin Are Proceeding, but Its Analysis
of Alternative Locations and Costs Was Incomplete 481
Report Number I2004-1, Department of Corrections:
Investigations of Improper Activities by State Employees
(Allegation I2003-0896) 485
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 175)
Public Employees, Retirement, and Social Security
Report Number 2004-105, California Department
of Corrections: Although Addressing Deficiencies in Its
Employee Disciplinary Practices, the Department Can
Improve Its Efforts (see summary on page 469)
Report Number I2003-2, Public Utilities Commission:
Investigations of Improper Activities by State Employees
(Allegation I2002-753) 489
Report Number I2003-2, Department of
Transportation: Investigations of Improper Activities by
State Employees (Allegation I2002-700) 493
Report Number I2003-2, California Unemployment
Insurance Appeals Board: Investigations of Improper
Activities by State Employees (Allegation I2002-661) 495
Report Number I2003-1, Department of Fish and
Game: Investigations of Improper Activities by State
Employees (Allegations I2002-636, 725, and 947) 499
Report Number I2003-1, Department of
Developmental Services, Porterville Developmental
Center: Investigations of Improper Activities by State
Employees (Allegation I2002-952) 503
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 213)
Report Number I2003-1, Department of Industrial
Relations: Investigations of Improper Activities by State
Employees (Allegation I2002-605) 505
Revenue and Taxation
Report Number 2003-131, Franchise Tax Board:
Significant Program Changes Are Needed to Improve
Collections of Delinquent Labor Claims (see summary on
page 67)
Report Number 2002-126, California Department
of Transportation: Low Cash Balances Threaten
the Department’s Ability to Promptly Deliver Planned
Transportation Projects 509
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 201)
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 107)
Transportation
Report Number 2004-140, Department of
Transportation: Various Factors Increased Its Cost
Estimates for Toll Bridge Retrofits, and Its Program
Management Needs Improving (see summary on page 59)
Report Number 2003-119, Los Angeles County
Metropolitan Transportation Authority: It Could Use
Certain Recommended Management Tools to Improve Its
Oversight of Legal Contracts, and Its Efforts Resulted in the
Award of a Large Construction Contract Within Budget
(see summary on page 445)
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 455)
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 509)
Veterans Affairs
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 9)
Appendix A
Summary of Recommendations for Legislative
Consideration by Policy Area 513
Appendix B
Summary of Monetary Benefits Identified In
Audit Reports Released From July 1, 2001,
Through December 31, 2004 523
Index
State and Local Entities With Recommendations
From Audits Included In This Special Report 529
INTRODUCTION
This two volume report summarizes the major findings and
recommendations from audit and investigative reports
we issued from January 2003 through December 2004.
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 Volume II, we have compiled the recommendations we
directed to the Legislature and have summarized monetary
benefits such as cost recoveries, cost savings, or increased revenues
that we estimate auditees could realize if they implement our
recommendations in two appendices. For example, in our
August 2004 report (2003-124) we estimate the Department of
Health Services would have saved $4.6 million if it had paid
only the amount specifically authorized by law for the Medical
Therapy Program. 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
California State Auditor Report 2005-406 1
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.
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 7, 2005.
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 2005-406
OVERSIGHT OF LONG-TERM CARE
PROGRAMS
Opportunities Exist to Streamline State
Oversight Activities
REPORT NUMBER 2003-111, APRIL 2004
Departments of Aging, Health Services’, and Social Services’
responses as of October 2004
The Joint Legislative Audit Committee (audit committee)
Audit Highlights . . .
asked that we examine the State’s oversight structure
for the following six long-term care programs that
Our review of the oversight for
six long-term care programs these three departments oversee: adult day health care program,
noted the following concerns: program of all-inclusive care for the elderly, multipurpose senior
þ The departments of services program, skilled nursing facilities, adult day program, and
Health Services and Aging Alzheimer’s day care resource centers. For each program, the
duplicate their oversight audit committee asked us to identify the agencies that provide
for the adult day health
oversight and the number of hours each department spends
care program.
conducting on-site compliance reviews, inspections, and
þ Creating a separate complaint investigations. Also, the audit committee asked us
license unique to the
to identify oversight activities that overlap between different
program of all-inclusive
departments and determine whether the overlapping activities
care for the elderly could
streamline oversight. could be streamlined into a central process. We found
opportunities to streamline or improve the oversight efforts
þ Health Services’
for five of the six programs we reviewed, and for three of
expanded oversight of
the multipurpose senior these programs the opportunities were substantial. For the sixth
services program mirrors program—skill nursing facilities—there is little opportunity for
Aging’s efforts.
the Department of Health Services (Health Services) to alter the
þ Better communication scope, number, or frequency of its reviews because the federal
between the departments government mandates how these reviews are conducted as a
of Social Services and condition of federal funding.
Aging, respectively, with
other entities overseeing
the adult day program
Finding #1: Consolidation and coordination are needed to
and the Alzheimer’s day
care resource centers streamline adult day health care oversight.
needs to occur.
Health Services and the Department of Aging (Aging) duplicate
each other’s efforts when they conduct separate licensing and
certification onsite reviews to oversee adult day health care
centers (health care centers). This duplication occurs because
the separate sets of regulations the departments follow when
conducting their respective reviews overlap. Moreover, the
departments do not conduct a joint review, which could
California State Auditor Report 2005-406 3
mitigate the regulatory overlap. In addition, certain Health
Services’ Medi-Cal field offices conduct separate visits to some
health care centers and may find noncompliance with many of
the same regulations reviewed during the health care centers’
licensing and certification reviews.
To minimize duplication of effort in adult day health care
oversight and potentially lessen the resulting burden on
health care centers, Health Services should incorporate Aging’s
certification review into its licensing review, combine the
licensing and certification regulations, and coordinate to the
extent possible any Medi-Cal field office oversight activities
to occur during the licensing and certification reviews. If
Health Services determines a statutory change is necessary to
implement our recommendation, it should ask the Legislature
to consider changing the statutes governing the adult day health
care program. We also recommended that Aging work with
Health Services to implement this recommendation.
Health Services Action: Partial corrective action taken.
Health Services reports that the Legislature has placed a one-year
moratorium on certification reviews while it develops a
Medi-Cal waiver for the adult day health care program. Health
Services also indicates that it believes there are significant
differences in purpose, requirements, timing, and frequency
of the licensing and certification reviews that justify separate
reviews by the two departments. However, as we noted in
our audit, we found that the separate reviews duplicated the
departments’ efforts and may unnecessarily burden health care
centers. While developing the Medi-Cal waiver, Health Services
indicates that it will work with Aging to clearly separate the
licensing and certification requirements in state regulations.
Finally, Health Services indicates that staff from the Medi-Cal
field offices have coordinated their visits to health care centers
with Health Services and Aging staff to the extent possible.
In addition, the Legislature passed Assembly Bill 2816,
Chapter 455, Statutes of 2004 (AB 2816), to require the
California Health and Human Services Agency to determine
by March 1, 2005, the appropriate department to oversee
health care centers.
4 California State Auditor Report 2005-406 California State Auditor Report 2005-406 5
Finding #2: A single license approach could streamline
oversight of the program of all-inclusive care for the elderly.
The State’s fragmented oversight of the program of all-inclusive
care for the elderly (PACE) also could benefit from a more
unified approach. In addition to having to comply with federal
regulations and a state contract, PACE providers are subject to
multiple state licensing regulations that apply to the various
services a provider may offer, so they face multiple oversight
visits from Health Services. The State could streamline this
oversight by allowing a single license that covers all state and
federal regulations pertaining to the various PACE services,
regardless of the facility providing the services. With a single
license, the State could unite its oversight activities more easily
based on the requirements established in the license agreement.
Such oversight could use a cooperative approach—combining
staff who specialize in different areas of the single license—for a
comprehensive review of all a PACE provider’s facilities during the
same time period rather than having many reviews scattered over
time. This would relieve the extended burden on PACE providers
from a succession of licensing visits to each of their facilities.
The Legislature should consider allowing a single license that
authorizes all the long-term care services a PACE provider offers,
regardless of the facility that provides the services.
Legislative Action: None.
The Legislature has not taken action on this recommendation
as of January 2005.
Finding #3: Health Services’ expanded oversight of the
multipurpose senior services program overlaps with Aging’s role.
Health Services’ expanded oversight of the multipurpose senior
services program (multipurpose program)—which Aging oversees
under Health Services’ supervision—now overlaps with Aging’s
role. After a federal review conducted in 1999, Health Services
expanded its oversight role by accompanying Aging’s staff on
many of their utilization reviews to the local multipurpose
program sites. Health Services believes this expanded oversight
is needed to respond to federal concerns about inadequate
oversight and to ensure that multipurpose program sites
use federal funds appropriately. Although Health Services
is conducting a pilot process to devise a permanent model
for multipurpose program oversight, we believe it should
4 California State Auditor Report 2005-406 California State Auditor Report 2005-406 5
develop a reasonable rationale for the number of utilization
reviews it ultimately decides to attend or, alternatively, assume
responsibility for the program itself.
To reduce overlapping efforts between itself and Aging in
overseeing the multipurpose program, Health Services should
complete its pilot process and develop a reasonable rationale for
the percentage of utilization reviews it attends. Alternatively,
after evaluating the results of its pilot process, Health Services
could assume responsibility for the multipurpose program. We
also recommended that Aging work with Health Services to
implement this recommendation.
Health Services Action: Corrective action taken.
Health Services indicates that it has completed its pilot process
and developed criteria for which site visits it will attend with
Aging. After evaluating the results of its pilot process, Health
Services also decided that it would not assume responsibility
for the multipurpose program.
Further, AB 2816 also required Health Services to determine
a percentage of the multipurpose program utilization reviews
that it will oversee to provide sufficient oversight of Aging,
but small enough to avoid unnecessary duplication of effort
between the two departments.
Finding #4: Although oversight of adult day programs does
not appear redundant, better communication of oversight
concerns could occur.
Because the Department of Social Services (Social Services) limits
its oversight of adult day programs, we found no significant
overlap in oversight for this program. Regional centers,
county mental health departments, and local area agencies
on aging (local area agencies) also oversee adult day programs,
but they focus primarily on the delivery of services to their
clients. Communication about adult day programs takes
place between Social Services and the regional centers, but
better communication between Social Services and two other
departments, Health Services and Aging, would create more
efficient oversight for a small number of facilities shared by adult
day programs and other long-term care programs we reviewed.
6 California State Auditor Report 2005-406 California State Auditor Report 2005-406 7
Social Services should better coordinate its oversight efforts
with Health Services and Aging for the small number of adult
day programs that share facilities with other programs. We also
recommended that Health Services work with Social Services to
implement this recommendation.
Social Services Action: Pending.
Social Services has identified four adult day program facilities
that it has licensed and that also share space with a health care
center. Because some clients do not qualify for health care center
funding, Social Services is working with Health Services and local
health services departments to ensure that no clients will be
turned away if the adult day program license is rescinded.
Finding #5: More communication among oversight entities
could improve oversight of Alzheimer’s centers.
Because most Alzheimer’s centers reside in facilities offering other
long-term care programs—mostly health care centers and adult day
programs—the oversight of Alzheimer’s centers could benefit from
better coordination among state and local agencies. Alzheimer’s
centers are under Aging’s oversight but are directly overseen by local
area agencies, which are government or nonprofit entities under
contract with Aging to provide services to seniors. However, there is
no formal process to share oversight information between the local
area agencies and Health Services, which licenses health care centers,
and between the local area agencies and Social Services, which
licenses adult day program facilities. In the governor’s proposed
budget for fiscal year 2004–05, separate funding for the Alzheimer’s
centers is merged into a block grant that will be provided to the local
area agencies. Thus, Alzheimer’s centers may continue to exist only
to the extent that the local area agencies choose to fund them.
If the Alzheimer’s centers remain a separately funded program in
fiscal year 2004–05, Aging should work with Health Services and
Social Services to share and act on findings from oversight visits.
If funding for the Alzheimer’s centers is merged into a block
grant, the departments and area agencies on aging should share
information to the extent that area agencies on aging choose to
continue funding Alzheimer’s centers. We also recommended
that Health Services and Social Services work with Aging to
implement this recommendation.
6 California State Auditor Report 2005-406 California State Auditor Report 2005-406 7
Aging Action: Pending.
Aging indicates that it requested and received a draft
memorandum of understanding from Social Services that
will serve as a model to guide communication of oversight
findings among itself, Social Services, and the area agencies
on aging. Aging reports that this draft memorandum of
understanding was under review as of October 2004.
8 California State Auditor Report 2005-406
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 August 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 2005-406 9
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: Pending.
The board states that it has a goal to obtain independent
legal counsel during fiscal year 2004–05 to assist it in
developing new policy and direction for the department.
The board recognizes that corrective actions associated with
external audits can provide it with the means to develop
meaningful policy changes for the department.
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
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
10 California State Auditor Report 2005-406 California State Auditor Report 2005-406 11
board should establish a policy to obtain the services of an
independent counsel to assist with its policy-making and
appeal responsibilities.
Board Action: Pending.
The board passed a policy on July 18, 2003, to establish the
need for independent counsel. Although the board added
a retired attorney to the select committee on policies and
procedures, it states budgetary issues have prevented it from
obtaining its own independent counsel to assist in all areas
where it needs legal advice.
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.
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.
10 California State Auditor Report 2005-406 California State Auditor Report 2005-406 11
Board Action: Pending.
The board states that it is currently developing a training
manual that will include procedures for reviewing and
conducting appeals.
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.
Board Action: None.
Currently, the board receives calls from veterans interested
in becoming board members and it redirects these veterans
to the governor’s appointment office. Further, the board
reports that it and the governor’s office are working together
to appoint new members.
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
12 California State Auditor Report 2005-406 California State Auditor Report 2005-406 13
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: Pending.
The board states, with the exception of ethics training, it
does not have funding to provide formal training for board
members. However, it does have plans to provide new board
members with an orientation of the department’s functions.
Further, the board states that it is currently developing a
training manual that will include specific details on policy
making, duties and procedures for conducting appeals,
department operations, requirements of the Bagley-Keene
open meeting act, and requirements of the Health Insurance
Portability and Accountability Act.
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.
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.
12 California State Auditor Report 2005-406 California State Auditor Report 2005-406 13
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: Partial corrective action taken.
The department reports that it has recently developed a
five-year strategic plan that contains goals, objectives, and
action plans that address our recommendations. Further, the
department states that it will continue to address the items
raised by our recommendations, as many will be “on-going”
for many years. Also, the department acknowledges the
importance of continuing the life and disability programs
without incurring any financial hardships to the loan
program, and indicates that premiums will remain stable
through February 1, 2008, under the current policy.
14 California State Auditor Report 2005-406
CALIFORNIA’S INDEPENDENT WATER
DISTRICTS
Reserve Amounts Are Not Always
Sufficiently Justified, and Some Expenses
and Contract Decisions Are Questionable
Audit Highlights . . .
REPORT NUMBER 2003-137, JUNE 2004
Our review of independent Eight independent water districts’ and the State Controller’s
water districts revealed Office’s responses as of December 20041
the following:
þ Five of the eight water The Joint Legislative Audit Committee directed the Bureau
districts we visited may
of State Audits (bureau) to review three specific areas
have trouble defending
concerning independent water districts: (1) policies and
to their ratepayers and
taxpayers the need for procedures for accumulating and using cash reserves and for
some portion of their developing and setting rates to determine whether they met
accumulated resources.
relevant statutory requirements; (2) the benefits and compensation
þ The Office of the packages that water districts offered their directors, and how
Legislative Counsel often boards and their subcommittees met; and (3) policies and
has opined that the
procedures that water districts had in place related to conflicts of
Legislature cannot
interest and ethics. We found that:
lawfully enact a statute
that would transfer
to the State’s General
Fund money in a special Finding #1: Many water districts we visited have difficulty
district’s reserve fund. supporting the need for some of their unrestricted net assets.
þ Three of the eight water In analyzing reserves held by water districts, we found that
districts paid attendance
five water districts had weak or nonexistent reserve policies.
or similar fees for their
Consequently, they may have difficulty defending to ratepayers
directors’ participation in
events that the districts and taxpayers the level of some of their reserves. Most water
could not demonstrate were districts have some type of policy statement about reserves, but
reasonable and necessary.
some statements are more comprehensive than others. Whether
þ One water district did a formal policies exist or not, water districts maintain separate
much better job than did accounts or funds to track the revenues and expenses of key
the others of disclosing
activities for budgeting or cash management purposes. We refer
reimbursements for
to these unrestricted net assets as reserved and any remaining
individual expenses
by directors. net assets that water districts have not designated for a particular
purpose as unreserved.
þ A director at one
water district made
questionable decisions in
which she had financial 1The eight independent water districts are: Alameda County Water District (Alameda),
interests in apparent Crestline-Lake Arrowhead Water Agency (Crestline), Leucadia Wastewater District (Leucadia),
violation of the State’s Otay Water District (Otay), San Gabriel Valley Municipal Water District (San Gabriel),
conflict-of-interest laws. Walnut Valley Water District (Walnut Valley), Western Municipal Water District (Western),
and Wheeler Ridge-Maricopa Water Storage District (Wheeler Ridge).
California State Auditor Report 2005-406 15
Restricted net assets measure the net resources that must be used for
particular purposes because of legal, contractual, or other externally
imposed requirements. Therefore, although the resources are
available, water districts do not have discretion over the purposes
for which these net assets must be spent. Unrestricted net assets can
be broken down into reserved and unreserved categories.
Regarding weak or nonexistent reserve policies, Crestline has
not accounted for a portion of its net assets in a separate fund
as required and, despite having needs that could absorb its
accumulation of unrestricted net assets, has not established
a reserve policy to guide management of its various funds.
Also, Crestline has no policy describing what it deems to be an
appropriate level for its unreserved net assets. Leucadia’s reserve
policy has weaknesses in that it does not establish sufficient
limits or target levels that match the size of each reserve to its
intended purpose. Leucadia also maintains two separate reserves
that work in tandem to serve essentially the same purpose.
Neither Walnut Valley nor Wheeler Ridge has a comprehensive
reserve policy. According to its general manager, Walnut Valley
makes management decisions about the use of reserves through
formal and informal discussions with water district staff and
board members. Because these discussions and decisions are
not formalized in a written, comprehensive policy, it is difficult
for an outside observer to fully understand the water district’s
intentions. Wheeler Ridge on the other hand did not always set
upper limits for its reserve funds and did not include written
descriptions of the circumstances that would prompt the water
district to use its reserve funds. Also Wheeler Ridge has no
written policy governing how frequently it reviews its reserves.
Finally, Western has no formal reserve policy. Western maintains
various reserve funds, but the water district’s board has not
established a formal policy for managing them.
To demonstrate that they are using their accumulated public
funds to cover reasonable and necessary expenses, water districts
should ensure that they have comprehensive reserve policies in
place that, at a minimum, do the following:
• Distinguish between restricted and unrestricted net assets.
• Establish distinct purposes for all reserves.
• Set target levels, such as minimums and maximums, for the
accumulation of reserves.
16 California State Auditor Report 2005-406 California State Auditor Report 2005-406 17
• Identify the triggering events or conditions that prompt the
use of reserves.
• Conform with plans to acquire or build capital assets.
• Receive board approval and be in writing.
• Require periodic review of reserve balances and the rationale
for maintaining them.
Also, the Legislature should consider amending the California
Water Code to require all water districts to develop and implement
comprehensive reserve policies that include the key elements
discussed in this report and outlined in our recommendation to
the water districts.
Water District Actions: Partial corrective action taken.
Four of the five water districts are considering the adoption
of reserve polices. The fifth, Crestline, implemented
policies in August 2004 and September 2004 to address our
recommendations.
Legislative Action: Unknown.
We are unaware of any legislation that addresses our
recommendation.
Finding #2: Changes in standards now require water districts
to report equity in terms of net assets.
We focused on the net assets of the water districts for two
reasons. First, recent changes in governmental accounting
standards now require all governments, including water districts,
to report equity—assets minus liabilities—in terms of net
assets. Second, the Milton Marks “Little Hoover” Commission
on California State Government Organization and Economy
(Little Hoover Commission) reported concerns in 2000 about the
size of special district reserves, including those of water districts.
At the time the Little Hoover Commission was reviewing special
district equity, accounting standards required governments
to include a significant amount of what they had already
spent on fixed (capital) assets for their enterprise activities
as retained earnings, the term used to measure the equity of
enterprise activities at that time. This parallels the way the State
Controller’s Office (controller) still gathers information from
all special districts that report enterprise activities to compile
16 California State Auditor Report 2005-406 California State Auditor Report 2005-406 17
its Special Districts Annual Report. However, we found that
more than half the accumulated equity possessed by the water
districts we visited represented amounts that they had already
spent for their capital assets, even after reducing these figures by
any outstanding debts they incurred to build or acquire them.
Because water districts typically would not choose to sell off the
capital assets that allow them to deliver their goods and services,
their net investment in capital assets should not be viewed as
available to fund future activities, as may have been presumed
when they were included in retained earnings. In addition, the
new governmental accounting standards require governments,
including water districts, to separately report the portion of their
net assets over which they have less control because of externally
imposed requirements such as laws, contract terms, or bond
covenants. This helps to highlight the remaining unrestricted net
assets over which governments have complete discretion.
To ensure that special districts report information on their
enterprise activities in a manner that is consistent with current
governmental accounting standards, the controller should
amend its instructions to special districts and the format of its
Special Districts Annual Report for reporting special district
equity. Specifically, the instructions and reporting format should
reflect special district equity in terms of net assets for all of their
enterprise activities. In addition, to ensure that anyone reading
the Special Districts Annual Report understands clearly how
special districts intend to use the unrestricted net assets from their
enterprise activities, the controller should continue to ask special
districts to separately identify the portion of their unrestricted net
assets that their boards have reserved for specific purposes.
State Controller’s Office Action: Pending.
According to the controller, implementing the
recommendation will depend on the actions taken by its
Advisory Committee on Financial Transactions (committee)
and working through the regulatory process. The controller
stated that the government code authorizes it to prescribe
accounting and reporting procedures only after consultation
with and approval by majority vote of the committee. The
controller also stated that it is coordinating staff activities
and initiated discussion with the Department of Finance
to prepare for a committee meeting tentatively scheduled
for February 2005. The procedures must then be adopted
under the regulatory process administered by the Office of
Administrative Law.
18 California State Auditor Report 2005-406 California State Auditor Report 2005-406 19
Finding #3: Using weak policies and inadequate guidance,
water districts have reimbursed directors for unreasonable
and unnecessary expenses.
Our review of information on expenditure amounts for the
30-month period from July 1, 2001, through December 31, 2003,
revealed that three of the eight water districts we visited
paid a total of about $47,000 in expenses that did not seem
reasonable and necessary. While these questionable expenses
are relatively small compared with the districts’ total spending,
they are nonetheless troubling because of their apparent lack
of a substantial relationship to the water districts’ purposes.
Directors’ expenses that are not reasonable and necessary can
undermine public confidence in the water districts’ stewardship
of their public funds.
Policies and guidance that control water districts’ spending of
public funds should be sufficiently specific and provide enough
constraints to ensure that directors’ expenses are reasonable and
necessary for achieving the water districts’ purposes. However,
state statutes covering directors’ expenses provide only general
direction, and some water districts’ policies appear to be overly
generous about the types of expenses considered appropriate.
Absent sufficient direction from either state statutes or their
own policies, three of the eight water districts we reviewed
paid directors’ expenses that do not appear reasonable and
necessary. These three water districts—Otay, Walnut Valley, and
Western—used public funds during our 30-month review period
to pay attendance or similar fees for their directors’ participation
in events such as social mixers, retirement parties, anniversary
celebrations, and chambers of commerce functions. In the
30 months, payments from the three water districts for 103 such
events totaled about $4,400. Further, Otay and Walnut Valley
used public funds to pay their directors daily stipends totaling
$14,500 for attending these types of events. Moreover, we found
that in a handful of instances, Western paid for the directors’
spouses to attend certain events. We also have concerns about
a $10,000 contribution by Western to a foundation and about
Walnut Valley’s spending of almost $18,000 for 15 meals.
To ensure that all payments to or on behalf of water district directors
are reasonable and necessary, water districts should adopt and
implement policies that identify the types of events that they believe
serve their statutory purposes as water districts and that explain how
these events serve their statutory purposes.
18 California State Auditor Report 2005-406 California State Auditor Report 2005-406 19
Water District Actions: Partial corrective action taken.
Two of the three water districts stated that they have
implemented this recommendation. The third—Western—
stated in its November 2004 response to us that it would
review the ordinance establishing the rules and procedures
for the payment of fees and reimbursement of expenses and
would revise the ordinance by December 2004 if changes
were warranted.
Finding #4: Some water districts disclose directors’
reimbursements more effectively than do others.
One of the eight water districts we visited—Crestline—did not
provide disclosure reports to us, telling us that its directors
incurred no individual administrative expenses exceeding $100.
Each of the remaining seven water districts had some method of
disclosing its directors’ reimbursements. However, the method
adopted by one water district—San Gabriel—enables ratepayers
and taxpayers to see the nature and amount of each incurred
expense more effectively than do the practices used by the other
water districts.
San Gabriel periodically issues a document that describes a
particular cost (for example, the name of a conference attended
or the destination of a flight taken), the date the district incurred
the cost, and the name of the director who incurred it. Directors
for San Gabriel review this document and approve it during a
board meeting open to the public. Further, San Gabriel discloses
on this document when it prepays expenses for a director (for
example, when it purchases an airline ticket for a director
rather than reimbursing the director who purchases a ticket
personally), and the water district discloses all reimbursements
it makes to its directors as required by law. We believe that the
disclosure methods adopted by San Gabriel enable it to more
clearly demonstrate to ratepayers and taxpayers the types of
expenses it pays for its directors.
Six of the other water districts we visited took less obvious steps
in their attempts to comply with the State’s disclosure law.
Alameda provides its board with a quarterly report detailing the
expenses directors incurred for items like conference registration
fees, lodging, and air travel. Although it does not discuss this
report in an open meeting, Alameda makes the internal report
available to those who request it. Otay produces an annual
report that summarizes the expenses each director incurred by
20 California State Auditor Report 2005-406 California State Auditor Report 2005-406 21
month, and Otay’s directors vote on the report in an open board
meeting. Further, rather than limiting its report to just expenses
of $100 or more, Otay discloses expenses as low as $5. However,
Otay does not disclose individual reimbursements as state law
requires; it simply provides the monthly totals for each director
for items like mileage, seminars and conferences, and travel.
As noted earlier, the law requires special districts to disclose
individual charges.
Leucadia, Walnut Valley, and Western indicated that they
disclose director expenses simply as part of their periodic
lists of warrants paid or to be paid that they bring before the
board. Also, Wheeler Ridge told us that its directors incurred
no disclosable expenses during our 30-month review period. It
added, however, that if its directors did incur any disclosable
expenses, it would include them in the overall list of accounts
payable distributed monthly to directors at board meetings.
None of the four water districts produces a distinct report that
separately identifies administrative expenses for their directors.
Therefore, if concerned ratepayers or taxpayers wish to identify
the directors’ expenses, they must hunt for them among all the
other warrants or payables listed. Further, Walnut Valley does
not disclose individual reimbursements as state law requires. We
believe that the practices used by these four water districts to
disclose directors’ expenses through warrant registers or payables
lists are clearly weaker than if they had produced a separate
document for consideration during board meetings.
To clearly inform ratepayers and taxpayers about the nature and
amounts of reimbursements paid to directors, water districts
should adopt and implement policies to periodically report in
public board meetings the specific amounts paid to or on behalf
of directors and the specific purposes of those payments.
Water District Actions: Partial corrective action taken.
Four of the six water districts have adopted and
implemented procedures to enhance the reporting of
director expenses to address this recommendation, while
one other district—Leucadia—is developing a report to
accommodate our recommendation. Although the last water
district—Wheeler Ridge—did not produce a separate report
that identified directors’ expenses, it believes that its current
practice of listing directors’ expenses at the beginning of its list
of payables complies with the spirit and intent of California
law and that further action is not required.
20 California State Auditor Report 2005-406 California State Auditor Report 2005-406 21
Finding #5: Training can increase directors’ awareness that
they must disclose and avoid conflicts of interest.
Among the eight water districts we visited, some offered directors
comparatively comprehensive training in the State’s conflict-of-
interest requirements, and others could not provide evidence
that their training pertained to conflicts of interest. An example
of some directors’ lack of awareness of state conflict-of-interest
laws occurred at Leucadia, where a director appears to have
participated in making decisions in which she had financial
interests. Additionally, water districts do not always ensure that
directors appropriately disclose their economic interests.
One method that water districts can use to help ensure that their
directors comply with the State’s conflict-of-interest requirements
is to provide them with training. All eight of the water districts
we visited claimed to provide some level of training on conflicts
of interest. However, although some water districts give their
directors fairly comprehensive training, other districts could
not show us evidence that their training pertains to conflicts of
interest. Even when water districts make training available to their
directors, the extent to which directors participate in the training
varies significantly among water districts.
As part of Crestline’s orientation for new directors, the water
district’s legal counsel gives a presentation that contains a
summary of conflict-of-interest laws. Also, four of the five
current directors at Alameda have attended the training
seminar put on by the California Special District Association.
Staff at Alameda told us that the fifth director is a former city
councilman who had previously participated in seminars for
new council members conducted by the League of California
Cities and had additional orientation in conflict-of-interest laws
through his former employment. Also, Walnut Valley sent letters
to its directors recommending and encouraging their attendance
at training sessions related to conflicts of interest and ethics.
On the other hand, the general counsel for San Gabriel told us
he offered to provide training to San Gabriel’s directors but, as of
April 2004, the directors had not yet taken advantage of his offer.
Although the water district has recommended various training
courses to its directors, none has attended any course. San Gabriel’s
general manager told us that directors are well informed about
conflicts of interest and ethics and the district’s legal counsel
frequently discusses these issues at board meetings. He also
indicated that four directors are professional engineers and follow
ethics codes of the profession, which are not too different from
22 California State Auditor Report 2005-406 California State Auditor Report 2005-406 23
political ethics codes. Additionally, Leucadia makes training
available to its directors, but not all directors attend the
training courses consistently. Also, Western does not appear to
offer consistent training, relying heavily on on-the-job experience
to build directors’ knowledge of ethics and conflict of interest.
Of the 49 current and former directors at the eight water districts
we visited, we identified one director who may have violated
state conflict-of-interest laws when participating in the approval
of various contracts. A director at Leucadia is the sole owner and
manager of a private consulting firm that offers public relations
services. For one of its clients, an engineering company, the
director’s firm contracted in August 2002 to produce a monthly
newsletter. The director’s consulting firm receives $2,740 per
month to produce the newsletter. In February 2003, six months
after the director’s consulting firm formed this business relationship
with the engineering firm, the director voted to approve at least
two agreements between Leucadia and the engineering firm for
design services: an amendment to an existing contract worth
$67,000 and a new contract for $35,900. We believe that this
director’s participation in the approval of these agreements may
have violated both Section 1090 et seq. of the Government Code
and the Political Reform Act.
In reviewing records from eight water districts, we found that
three water district directors did not include information
related to business positions they held or income they earned
in their economic disclosure statements as required by state
law, state regulation, and district policy. Despite having owned
her consulting firm for at least 10 years, the Leucadia director
previously mentioned did not disclose on her statements
covering 2000 through 2002 either her income from or her
business position with her consulting firm. We saw another
instance of this type of omission on an economic disclosure
statement for one director at Walnut Valley and one at Otay.
When describing why they omitted their business positions
from their economic interest statements, the directors told us
either that they believed such disclosure was not required or that
they simply did not think to include their positions or incomes.
Though regular training on conflicts of interest and ethics cannot
prevent directors from making willful departures from statutory
requirements, it can serve to keep such requirements at the
forefront of directors’ minds and help directors hold one another
accountable for fulfilling their responsibilities as public officials.
22 California State Auditor Report 2005-406 California State Auditor Report 2005-406 23
To ensure that their directors are fully aware of their responsibilities
regarding conflicts-of-interest requirements, water districts should
do the following:
• Provide periodic training related to conflicts of interest.
• Guide directors in completing economic disclosure forms and
stress the importance of disclosing all economic interests as
required by law.
Water District Actions: Partial corrective action taken.
Regarding the provision of periodic training related to
conflicts of interest, one water district—Western—provided
training to its directors in October 2004. Four other water
districts are considering the adoption of policies.
Regarding the provision of guidance in completing economic
disclosure forms and stressing the importance of disclosing
all required economic interests, all three water districts at
which we observed deficiencies are considering the adoption
of applicable procedures.
24 California State Auditor Report 2005-406
WATER REPLENISHMENT DISTRICT OF
SOUTHERN CALIFORNIA
Although the District Has Addressed
Many of Our Previous Concerns, Problems
Still Exist
REPORT NUMBER 2002-016, JUNE 2004
Audit Highlights . . .
Water Replenishment District of Southern California response
as of December 2004
Although it has implemented
many recommendations
of our May 2002 report, The voters of Los Angeles County established the Water
the Water Replenishment
Replenishment District of Southern California (district)
District of Southern California
in 1959 to counteract the effects of overpumping
(district) has not fully
addressed all our concerns. groundwater from the West Coast and Central basins (basins).
Specifically, our review The California Water Code (water code) grants the district broad
revealed that the district:
powers to do what is necessary to replenish and maintain the
þ Adopted a reserve-funds integrity of the basins. In December 1999, the Bureau of State
policy that calls for Audits (bureau) issued a report concluding that the district’s
increasing its reserve
poor management had led to its charging an excessively high
funds, but since adopting
replenishment assessment rate (assessment rate) to entities
the policy, the district
allowed its reserve funds who pump groundwater. Because that report raised significant
to further deplete. issues, the Legislature amended the water code to ensure that
the district implemented the bureau’s recommendations. The
þ Likely overstated its reserve-
funds targets by using Legislature also directed the bureau to perform a second audit.
some faulty assumptions in In May 2002 the bureau issued a report concluding that since
calculating them.
1999 the district had eliminated excessive water rates and it had
þ Included goals and depleted its reserve funds to a level that threatened its ability
objectives in its strategic to maintain the current quantity of groundwater in its basins
plan, but did not include because it lacked a long-term vision of its finances.1 We also
outcomes by which the
concluded that the district had not adequately planned for its
district and public can
measure the district’s capital improvement projects nor implemented adequate
progress in meeting them. accounting and administrative controls over its operating
expenses. The Legislature amended the water code again in 2002
þ Spent district funds on
and required the bureau to perform this follow-up audit of the
items such as gifts and
flowers that its policies district’s operations and management.
specifically prohibit.
þ Incurred costs for items
such as award dinners,
and food and beverages
for meetings that do not
appear to be the most
prudent use of its funds. 1 In this report, the term reserve funds refers to the district’s current net assets, or current
assets less its current liabilities, that are not legally restricted.
California State Auditor Report 2005-406 25
Finding #1: The district’s reserve-funds policy lacks credibility.
In March 2003, to ensure adequate funds to meet its statutory
responsibilities, the district adopted a policy that targets a
minimum of $18.4 million and a maximum of $28.9 million
in reserve funds. However, the policy lacks credibility largely
because the district has since allowed its reserve funds to
diminish even further. Having established a low assessment
rate for fiscal year 2003–04, the district projects its reserve
funds will fall to $3.5 million by June 30, 2004, less than the
maximum that the water code currently allows and a fraction
of the district’s targets. Also, the district has likely overstated
these reserve-funds targets by using some faulty assumptions in
calculating them. Moreover, to fully implement its reserve-funds
policy, the district would need a statutory change to increase
its reserves from the current limit—a change that the district is
not currently seeking. Without a sound reserve-funds policy, the
district cannot ensure that it has an adequate amount of reserves
to continue to meet its responsibilities.
To ensure that the district has sufficient funds to meet its statutory
responsibilities and to show its commitment to its reserve-funds
policy, we recommended that the district set its assessment rate
at a level that will support the district’s planned activities and
allow it to replenish its reserve funds, if necessary, and keep
them at an appropriate level. We also recommended that the
district reevaluate the assumptions that underlie the amount it
targets to have available as reserve funds and, if necessary,
seek legislative approval to revise the amount allowed as
reserve funds.
District Action: Partial corrective action taken.
The district stated that during its annual budget process for
fiscal year 2004–05, it set its assessment rate at $128.25 per
acre-foot of water. The district noted that this amount not
only covers its fiscal year 2004–05 operating costs and debt
service for capital improvement projects, but also replenishes
the reserve funds by $33,000. The district told us that it is
continuing to reevaluate its reserve-funds policy and will
pursue legislation for reserves over $10 million if required to
meet its needs.
26 California State Auditor Report 2005-406 California State Auditor Report 2005-406 27
Finding #2: Some key information is missing from the
district’s strategic and capital improvement plans.
Both our earlier audits highlighted the district’s lack of up-to-
date strategic and capital improvement plans and recommended
that the district develop them. Although the district has
developed strategic and capital improvement plans, both need
refinement. The district’s strategic plan includes goals and
objectives but lacks outcomes by which to measure the district’s
progress in meeting them. In its capital improvement plan—
which should prioritize capital improvement projects—the
district specifies its funding needs and scheduling of proposed
projects as recommended, but does not identify those projects the
district believes it should complete first, possible funding sources
available for each project other than issuing bonds, and the projects
the district’s board of directors (board) has formally approved.
To ensure that the district and the public can assess the district’s
progress in achieving the goals and objectives described in
its strategic plan, the district should refine its plan to include
measurable outcomes.
To make its capital improvement plan more informative to the
district and its ratepayers, the district should consider doing
the following when it updates its capital improvement plan:
• Rank projects by their importance to identify the projects
it believes it should complete first to meet its statutory
requirements.
• Include alternative sources of funding for the projects in
addition to issuing bonds.
• Distinguish between board-approved projects and proposed
projects.
District Action: Partial corrective action taken.
The district plans to begin updating its strategic plan to
include measurable outcomes in mid-2005. The district
believes that this starting date would allow it to consider
incorporating in the strategic plan the results of an ongoing
conjunctive use work group. The district also reported that
it has included in its capital improvement plan a ranking of
projects and an indication of which projects the board has
approved. Finally, the district stated that it has put into
26 California State Auditor Report 2005-406 California State Auditor Report 2005-406 27
place a process to continually seek alternative sources of
funding for projects and it will include the amount in its
capital outlay schedule once it acquires the funding.
Finding #3: The technical advisory committee’s evaluation of
capital improvement projects is incomplete.
The Legislature created a technical advisory committee
(committee) comprising representatives of the ratepayers to
review the district’s proposed capital improvement projects
and provide recommendations to the board. The committee
has worked with the district to develop a process to review and
approve capital projects and to periodically update the capital
improvement plan. Recently, the committee completed its initial
review of 11 projects, nine of which the district included in
its final capital improvement plan, but the district has not yet
had an opportunity to implement the committee’s updating
procedure. The statute mandating the committee will sunset
on January 1, 2005. However, according to the district’s general
manager, the district intends to revise its administrative code
to ensure that the committee remains a part of its process for
reviewing and approving its capital improvement projects. If
the district does not revise its administrative code and the
statute sunsets, the ratepayers may lose important opportunities
to provide input to the district on future capital projects and
during the district’s process for periodically updating the capital
improvement plan.
To ensure that the district continues to collaborate with
ratepayers on projects, we recommended that the district
pursue its plan to revise its administrative code to make the
technical advisory committee part of its process for reviewing
and approving capital improvement projects. If the district fails
to implement this recommendation, the Legislature should
consider extending the committee at least until the committee
has had the opportunity to participate in the process of
periodically updating the district’s capital improvement plan.
District Action: Corrective action taken.
The district’s board passed a resolution in May 2004 to
extend the existence of the technical advisory committee for
the purpose of evaluating projects proposed by the district.
28 California State Auditor Report 2005-406 California State Auditor Report 2005-406 29
Finding #4: The district has established purchasing
procedures but has not adequately enforced them.
The district amended its administrative code in January 2003 to
provide better guidance to staff on allowable and unallowable
expenses. However, because the district does not always follow
its policies, it incurs costs that may not further its public purpose.
We reviewed 57 district payments to employees and vendors and
found that, in violation of its own code, the district has purchased
gifts and paid for questionable telephone expenses.
Specifically, although the district’s administrative code clearly
states that neither employees nor the district’s board should
obligate the district for any unallowable expenses, such as gifts,
our sample of 40 vendor payments during 2003 showed that
for three of these payments, the district spent a total of $194 on
flowers and gifts for a director and a person who was not an
employee. Moreover, the district’s administrative code provides
a $200 monthly communications allowance for directors.
According to the administrative code, the communications
allowance covers equipment and services such as cellular
phones, cellular service, and fax machines. It also states that
directors are to use this allowance in lieu of payment or
reimbursement for any telephone calls, Internet fees, or similar
expenditures. Nevertheless, the district reimbursed or paid
$921 in 2003 for telephone calls directors made when they were
traveling on district business, even though these directors also
received the $200 monthly communications allowance.
Finally, in our 2002 report we noted that the district lacked
written accounting procedures to govern cash disbursements
and purchasing. Although the district has since adopted
procedures, it does not follow them consistently, thereby
diminishing their value. Specifically, during our review of
57 of the district’s payments, the district did not appropriately
approve eight of the payments.
We recommended that the district reaffirm its commitment to
following the policies in its administrative code, and ensure that
its directors and staff abide by its policies, especially policies defining
unallowable purchases such as gifts, use of the communications
allowance, and obtaining appropriate approvals.
28 California State Auditor Report 2005-406 California State Auditor Report 2005-406 29
District Action: Corrective action taken.
The district reported that it has reaffirmed its commitment
to following the policies in its administrative code by
distributing copies of the administrative code that relate to
unallowable purchases, reminding directors and staff of the
district’s policies and its commitment to them. The district
also reported that its finance committee is reviewing the
existing policy and will make a recommendation to the
board if further action is needed.
Finding #5: The district’s administrative code could provide
better guidance on reimbursements.
As we mentioned in our 1999 and 2002 audit reports, the
district’s accounting policies do not require staff to match
approved travel documents to expense claims filed by board
members or district staff. Adding this requirement to the process
of reviewing expense claims is a simple control to ensure
that the district pays only for authorized travel and does not
duplicate payments. However, the district never addressed our
concerns by revising its accounting policies or its administrative
code. Absent an adequate review policy, the district reimbursed
one director twice for a $550 conference registration fee, as we
observed in our sample of 17 employee reimbursements.
Moreover, to ensure that out-of-pocket expenses are business
related or benefit its public purpose, the district developed
a business expense form for board members and staff to use
when requesting any reimbursement for this type of expense.
Although the district’s finance committee requested that board
members use the form, we found that the directors do not
consistently do so. Three of the 17 reimbursements we reviewed
related to this issue, and in all three cases, the directors did not
complete the expense form for reimbursements totaling $503,
including $148 for local meals and meetings between two directors
or a director and staff. Without these expense forms, the district
cannot be sure it has benefited from costs it reimburses.
We recommended that the district update its accounting
procedures to require staff to match travel expenses to approved
travel documents. Additionally, we recommended that the
district amend its administrative code to require board members
and staff to consistently use the business expense form to
document the public purpose of any out-of-pocket expenses.
30 California State Auditor Report 2005-406 California State Auditor Report 2005-406 31
District Action: Partial corrective action taken.
The district has updated its accounting procedures to require
staff to match travel expenses to approved travel documents.
The district also reported that it plans to revise its
administrative code to require that claims shall be submitted
on forms supplied by the district and that such forms shall
include a description of the business purpose of the expense.
Finding #6: The district has incurred costs that may not be
the most prudent use of its funds.
During our review of the district’s administrative costs, we
identified various expenses that may not be the most prudent
use of the district’s public funds, especially given the district’s
decreasing reserve funds and its desire to maintain a low
replenishment assessment rate. In reviewing the district’s 2003
administrative payments, we found the district spent about
$1.19 million on legal services, more than $17,500 for catered
meals and other snacks and beverages for its staff, $2,250 for
award dinners and more than $23,000 to send one director to
17 conferences. By modifying its administrative policies to limit
or prohibit certain purchases, the district could better control its
administrative costs.
To ensure that it uses public funds prudently, we recommended
the district take the following steps:
• Perform a detailed review of the reasonableness of its costs
for contracted legal services, and consider whether hiring an
in-house lawyer is more cost-effective.
• Reassess its use of public funds for such purposes as award
dinners, catered meals, high-cost airfares, and lodging for
local conferences, and revise its administrative code to limit
or prohibit such costs.
• Amend its administrative code to provide better guidance on
reimbursable travel expenses, including a limit on the number
of conferences directors and staff may attend, and a process
for justifying exceptions to that limit.
30 California State Auditor Report 2005-406 California State Auditor Report 2005-406 31
District Action: Partial corrective action taken.
The district reported that it has reviewed the reasonableness
of its costs for contracted legal services and that, in an
effort to better manage legal fees, it has established limits of
authority to improve internal controls over contacting district
counsel. Moreover, the district stated that it has only budgeted
one-third of the costs for attorneys fees for fiscal year 2004–05
compared to the amount it spent during fiscal year 2003–04.
Ü
Further, the district reported that it has reassessed its use
of public funds for such purposes as award dinners, catered
meals, high-cost airfares, and lodging for local conferences,
and has reaffirmed its commitment to following its policies.
However, according to the district, its board found that
the administrative code appropriately addresses the State
Auditor’s issues and concluded that no further revisions
to the administrative code were necessary. Because the
administrative code does not limit or prohibit certain
purchases that may not be the most prudent use of its funds,
we do not agree with the district that the administrative
code addresses our concerns.
Finally, the district reported that its finance committee has
Ü
discussed limiting the number of conferences directors and
staff may attend. However, in its January 5, 2005 meeting,
the board decided not to revise its administrative code to
limit the number of conferences that staff and directors are
allowed to attend.
Finding #7: The district has improved its contract
management practices but can improve in one area.
Although the district made some improvements to its
contract management practices, the district needs to make an
additional refinement to ensure that it pays only for services
it actually receives. The district entered into agreements with
four legislative advocacy firms for fixed monthly fees of up
to $10,000 per month, but did not require the consultants to
submit written, detailed monthly activity reports to enable the
district to evaluate whether the value received was consistent
with the fees paid. According to the general manager, its
legislative advocacy firms routinely report to the general
manager and external affairs staff, often several times a week,
on activities they undertake for the district or on developments
that affect the district. With this constant communication,
the general manager believes the district can make informed
decisions to terminate or renew these contracts based on
32 California State Auditor Report 2005-406 California State Auditor Report 2005-406 33
performance. Also, an appropriate staff member approves
the invoice before the district pays the firm for its services.
Although the district’s discussions with these contractors and
its approval of the invoices are forms of contract management,
these procedures do not provide assurance to those who may
scrutinize the district’s expenses that the district received
services to justify payments in excess of $272,000 during 2003.
To ensure that it appropriately manages its contracts for
professional services, we recommended that the district require
contractors to submit detailed, written monthly activity reports
for professional services at fixed monthly fees.
District Action: Corrective action taken.
The district adopted a procedure that requires contractors
to submit written monthly activity reports for professional
services that contractors provide at fixed monthly fees.
32 California State Auditor Report 2005-406 California State Auditor Report 2005-406 33
34 California State Auditor Report 2005-406
METROPOLITAN WATER DISTRICT OF
SOUTHERN CALIFORNIA
Its Administrative Controls Need to Be
Improved to Ensure an Appropriate
Level of Checks and Balances Over
Public Resources
REPORT NUMBER 2003-136, JUNE 2004
Metropolitan Water District of Southern California’s response
as of January 2005
Audit Highlights . . . The Joint Legislative Audit Committee (audit committee)
requested that the Bureau of State Audits audit the
Our review of the Metropolitan Water District of Southern California
Metropolitan Water District of
(district) and the Center for Water Education (center).
Southern California (district)
Specifically, the audit committee asked us to evaluate the
revealed the following:
district’s policies and procedures for ensuring an appropriate
þ The district’s policies
level of checks and balances over transactions, including its
governing expenses are
employment, promotions, and grievance processes. It also asked
generally not well-defined
and do not always ensure us to evaluate the district’s ethics office for compliance with
that expenses have a the requirements of Chapter 415, Statutes of 1999 (SB 60), and
direct link to the district’s
to examine its process for identifying, handling, and resolving
authorized purposes.
ethics complaints or potential ethics violations. In addition, the
þ More than four years audit committee asked us to determine the reasonableness of
after the enactment of
the district’s contracting practices. Finally, it requested that we
Chapter 415, Statutes
evaluate the activities, purpose, and organization of the center
of 1999 (SB 60), the
district still is trying to and determine whether it should be recognized as a part of the
establish an effective district or as a separate entity. We found that:
ethics office.
þ The district has not
Finding #1: The district does not always ensure that it uses
always established
adequate policies public resources to further its authorized purposes or in a
and procedures for its way that is reasonable and necessary.
purchasing and consulting
contracts. The district may expend funds and use other resources within its
possession only to carry out those purposes that are authorized
þ The district’s personnel
expressly or are reasonably implied by its enabling statute,
policies for hiring and
promoting employees the Metropolitan Water District Act (water act). The water act
are not always current or authorized the district to be created for the purposes of developing,
comprehensive.
storing, and distributing water and allowed it to provide, generate,
and deliver electric power for this purpose. However, its policies
continued on next page . . .
governing expenses generally are not well-defined and at times
California State Auditor Report 2005-406 35
do not always offer adequate assurance that these expenses have
þ The Center for Water a direct link to the district’s authorized purposes. We believe these
Education, a separate policies may be lacking specific guidance, in part, because the
entity created by the district has broadly interpreted the purposes for which it can spend
district, currently depends
district funds. Further, the lack of specificity in its collective policies
primarily upon the district
has allowed the district substantial discretion, resulting in expenses
for funding and needs
to establish policies that have a questionable link to the district’s authorized purposes
and procedures for its and that do not always appear to be reasonable or necessary.
contracting activities.
For example, the district financially sponsors numerous
organizations’ activities without justifying the direct link to the
district’s purposes or establishing any limits on the types of activities
it may sponsor. In addition, the district’s field inspection trips may
not be the most cost-effective way to educate the public on its
operations. The district also pays for social events such as holiday
parties and provides catered meals to executive management and
employees. Further, it reimburses members of its board of directors
(board) and executive management for travel expenses without
always ensuring that such expenses are reasonable and necessary. We
also observed numerous instances where the district leases property
to other entities, both public and private, for a nominal amount
rather than market value, which, if the lease does not serve the
district’s authorized purposes, may constitute a gift of public funds in
violation of the California Constitution.
To ensure that the district expends funds and uses its resources
only to carry out its authorized purposes in a reasonable and
necessary manner, we recommended that it do the following:
• Develop policies that specify limitations on the types of activities
it sponsors to ensure that it funds only those organizations whose
activities have a direct link to the district’s authorized purposes. It
should also require the board to periodically review and approve
each of the district’s sponsorships.
• Identify and consider the use of alternative methods for
educating the public on its operations that would reach a wider
audience and be more cost-effective than field inspection trips.
• Revise its policies to include more specific guidance as to
what constitutes a reasonable and necessary use of public
funds, including the establishment of restrictions on expenses
for parties and catered meals, and ensure that expenses are
reasonable and necessary before paying them.
• Grant leases at less than market value only when doing so
directly furthers its authorized purposes.
36 California State Auditor Report 2005-406 California State Auditor Report 2005-406 37
District Action: Partial corrective action taken.
The district established a new operating policy and
procedures manual regarding district-funded sponsorship
requests. Under this policy, sponsorships will be reported to
the board on a monthly and annual basis. The procedures
manual outlines a “due diligence” process for approving
sponsorship requests. As part of this process, staff are to
describe the proposed event and its relevance to the district’s
mission and initiatives as well as other information such
Ü
as community value and partnership potential. However,
this new policy and the respective procedures still do
not include limitations on the types of activities that the
district may sponsor.
In addition, the district’s board conducted a hearing in
November 2004 to invite public comment on the district’s use
of field inspection trips. Subsequently, the board reaffirmed
its policy on field inspection trips. Consequently, we are still
concerned that the district’s field inspection trips may not be the
Ü most cost-effective way to educate the public on its operations.
The district revised its operating policies for reimbursable
expenses and business travel in December 2004, requiring
that sufficient documentation be provided for reimbursable
expenditures. The policies state that business travel expenses
are eligible for reimbursement if they are reasonable and
necessary for an activity that has a significant and meaningful
link to the district’s purposes, policies, and interests and if they
Ü
are in accordance with its administrative code. However, these
policies do not contain specific guidance as to what constitutes
a reasonable and necessary use of public funds, nor do they
establish restrictions on expenses for parties or catered meals.
Finally, the district states that it has reviewed all leases that have
nominal or reduced rates and has determined that it is receiving
fair value when leasing property. Notwithstanding, the district
reports that it implemented new procedures for managing its
real property in October 2004. Under these procedures, a market
appraisal will generally be used to determine the rents and
fees that the district charges others to use its land. Any request
to reduce those charges is required to be accompanied by an
investment and value analysis approved by the district’s chief
operating officer along with an explanation to justify below
market rates. This analysis must show that the beneficial returns
to the district equal or exceed the standard charges.
36 California State Auditor Report 2005-406 California State Auditor Report 2005-406 37
Finding #2: The district has struggled with its mandate to
establish an ethics office.
More than four years after the enactment of SB 60, the district
still is trying to establish an effective ethics office. It did not hire
an ethics officer until more than two years after the effective
date of SB 60, and that ethics officer did not independently
investigate complaints but primarily referred them to other
district offices that cannot demonstrate how these complaints
were resolved. Of the 65 employees who responded to a survey
we sent to a sample of 100 district staff, 26 percent indicated
they are not familiar with the purpose of the ethics office.
Further, 26 percent of those that addressed the question
indicated that the office does not effectively identify, handle,
or resolve ethics issues. The district is establishing a more
structured ethics office, including implementing a new system
to improve the intake and tracking of ethics complaints, but it is
still too soon to determine the success of these efforts.
We recommended that the district complete the implementation
of its new ethics office and ensure that the office complies with
the requirements of SB 60. For example, the district should
ensure that the electronic log it is developing for tracking
complaints also captures the subsequent resolution of each
complaint to provide the public with information regarding the
resolution of its investigations. The district should also issue
an annual report to the public and interested legislators on its
ethics office’s compliance with SB 60. Finally, the district should
continue its recent efforts at informing district employees about
the ethics office and its functions to ensure that employees are
using this resource fully.
District Action: Partial corrective action taken.
The district states that the electronic tracking log it developed
contains the information that we recommended it include.
In addition, the district states that reports on the compliance
efforts of its ethics office as well as activity status reports are
provided to the board and any public attendees of board
meetings on a monthly basis. The district also states that
its Ethics Quarterly Report is posted on its ethics Web site.
However, the district has not stated that it issued or plans to
issue an annual report to the public and interested legislators
Ü on its ethics office’s compliance with SB 60. Finally, the
district reports that it intends to continue its efforts to keep
employees informed of its ethics programs.
38 California State Auditor Report 2005-406 California State Auditor Report 2005-406 39
Finding #3: The district could improve its controls over
certain types of contracts and grants.
Although the district has established adequate policies and
procedures for construction contracts, it has not always done
so for its purchasing and consulting contracts. Additionally, its
procedures manuals for consulting and purchasing contracts
state that sole-source contracts should be used only in limited
situations and require staff to document the justification for not
using a competitive process. The district does not always ensure
that this occurs.
Further, the district does not have a policy that requires a needs
assessment or verification of potential contractors’ qualifications
in some instances where these steps appear necessary. The
district’s procedures manuals for purchasing and consulting
contracts also are outdated. Finally, the district provides grants,
sometimes through contracts, to groups that provide water
education, explore new water conservation technologies, or
foster appreciation of native and drought-tolerant plants. The
district’s process to award these funds is not always based on
established criteria.
To strengthen its controls over consulting and purchasing
contracts, the district should ensure that it has adequate policies
and procedures and that it prepares justifications for contracts
that are not awarded competitively. We also recommended that the
district define the various factors, including qualitative factors,
it will use to evaluate grant applications and make funding
decisions accordingly.
District Action: Partial corrective action taken.
In December 2004, the district revised its policies
and procedures governing its use of consulting and
purchasing contracts and states that this information
is available electronically to all district employees. The
revised procedures address the circumstances under which
justifications for contracts are needed and discuss what
Ü the justifications are to address. However, as we noted in
our report, the district previously had procedures requiring
justifications and they were not always followed. Thus, it is
unclear if the district’s revised procedures will ensure that
justifications for contracts are prepared as needed.
38 California State Auditor Report 2005-406 California State Auditor Report 2005-406 39
In addition, the district stated that it established a new
operating policy and procedures manual regarding district-
funded sponsorship requests that also pertains to grant
applications. However, the new policy and procedures
manual does not appear to define the specific factors,
including qualitative factors, which the district will use to
Ü
evaluate grant applications.
Finding #4: The district’s personnel policies are lacking and
are not always followed.
The district’s personnel policies are not always current or
comprehensive and do not always ensure sufficient merit
system processes, the basis on which it hires and promotes
employees represented by bargaining units. In their current
state, the policies and procedures invite inconsistency, cannot
ensure appropriate checks and balances over hiring and
promotion decisions, and may lead to employee grievances and
disagreements with bargaining units. Further complicating the
issue, the district does not always follow the hiring policies it
does have, making itself vulnerable to criticism by employees
and other interested parties. However, the district is updating its
operating policies, including its personnel policies.
Additionally, the district has established differing board
approval and disclosure policies for separation and settlement
agreements, even though both types of agreements often share
the same goal of avoiding subsequent legal liability, and both
commit the district to financial obligation. Given the similar
nature of these agreements, we believe they warrant the same
level of board involvement.
To ensure consistency and checks and balances, the district
should continue its effort to develop comprehensive and up-to-
date personnel policies and procedures and ensure that it follows
these policies.
We also recommended that the district provide a listing of
separation agreements to the entire board to aid the board in
understanding the use of these agreements. In addition, because
of the similarities between these agreements and settlements,
the board should establish a consistent policy for its approval of
these agreements. Finally, the board should require the district
to disclose all separation agreements to the full board as it
already does with settlements.
40 California State Auditor Report 2005-406 California State Auditor Report 2005-406 41
District Action: Partial corrective action taken.
The district states that it is in the process of finalizing hiring
and promotion policies and procedures that will include
documentation standards. It reports that these policies will
be adopted in the third quarter of fiscal year 2004–05. In
addition, the district reports that its general counsel will
present formal reports on its use of separation agreements to
the board on a quarterly basis.
Finding #5: The center currently relies heavily on the district
for funding and has yet to develop formal policies and
procedures for its contracts.
In October 2001, the district created the entity now known as
the center to establish a water education facility and museum
(facility). Currently, the center primarily depends on the district
for funding and the provision of administrative and financial
accounting services. Nonetheless, it has entered into agreements
to receive other funding and has received a small amount of
money through endowments and a fund raiser. The center’s
long-term goal is to reduce its reliance on district funding.
The center plans to follow the requirements in the California
Public Contract Code, including competitive bidding, for letting
its future construction contracts, although it is not required
to follow the code’s requirements. It has not yet formulated
policies and procedures for those aspects of the contracting
process that occur before and after the bidding phase. As of
April 2004, the center had entered into a consulting contract
for construction management and planned to seek competitive
bids for construction of the facility. It also had entered into
various other consulting contracts, but it lacks formal policies
and procedures that would govern the award and management
of these contracts. The lack of such policies and procedures
may be preventing the center from receiving the most qualified
contractors and the best prices for its consultants.
We recommended that the center establish formal contracting
policies and procedures for all contracts. These should include
procedures for determining the need for contracts, the scope
of work, and the qualifications of potential contractors. These
policies also should establish procedures for monitoring and
evaluating the subsequent performance of contractors. Finally,
the center should require a competitive process for consulting
services when appropriate to ensure that it receives the best
value for these services.
40 California State Auditor Report 2005-406 California State Auditor Report 2005-406 41
Center Action: Corrective action taken.
The district reports that the center has adopted formal
contracting policies and procedures for all contracts.
42 California State Auditor Report 2005-406
WATER QUALITY CONTROL BOARDS
Could Improve Their Administration of
Water Quality Improvement Projects
Funded by Enforcement Actions
REPORT NUMBER 2003-102, DECEMBER 2003
Audit Highlights . . .
California Environmental Protection Agency response as of
Our review of the State Water January 2005
Resources Control Board’s
(state board) and Regional The Joint Legislative Audit Committee (audit committee)
Water Quality Control Boards’
asked the Bureau of State Audits (bureau) to provide
(regional boards) collection
of fines and subsequent information to the Legislature and others to clarify
expenditure of those funds how money designated to improve the State’s water quality
under the Porter-Cologne
is distributed throughout the State. Specifically, the audit
Water Quality Control Act
committee wanted the bureau to provide information related
(State water quality act)
revealed the following: to the State Water Resources Control Board (state board) and
a sample of Regional Water Quality Control Boards (regional
þ As allowed by law,
boards), including how they assess and collect fines, whether
there is no correlation
between the amount of they spend the fines in accordance with the Porter-Cologne
fines collected by a given Water Quality Control Act (State water quality act), and whether
regional board and the
they spend the money they collect in or near the areas from
amount the regional
which they collect it. The state board reports to the California
board receives from the
state board for water Environmental Protection Agency (Cal EPA), which was created
quality projects. in 1991. The audit committee also asked us to identify any
þ From fiscal years 1998–99 new funds available in the state board’s operating budget and
through 2002–03, the examine the ways those funds have been used. Additionally, the
regional boards collected audit committee wanted to know the number and amount of
about $26 million in
fines the regional boards collected, the public or private entities
fines and the state board
or individuals who violate the State water quality act (polluters)
committed $24.9 million
for water quality projects most commonly, and the changes in the amount of fines
throughout the State. assessed and collected over the last five years.
þ The state board received
almost $21 million from a As allowed by law, there is no correlation between the amount
legal settlement between of the fines collected by a given regional board and the amount
the State and Atlantic
the regional board receives from the state board. When
Richfield Company and
allocating funds to regional boards, the state board attempts to
Prestige Stations, Inc., and
shortly after committed determine how best to use available funds to meet the State’s
$19.2 million of those funds most urgent water quality needs. It appears reasonable that the
for water quality projects
state board would base its fund commitments not on where
throughout the State.
fines are generated but what represents the highest and best use
continued on next page . . .
California State Auditor Report 2005-406 43
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.
44 California State Auditor Report 2005-406 California State Auditor Report 2005-406 45
• 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: Corrective action taken.
A revision to the Administrative Procedures Manual has been
approved by the executive director and posted on the state
board’s internet and intranet sites. It includes specific direction
for requesting funding for projects and reimbursement for staff
costs. Copies have been routed to each state board organization
for inclusion in their manuals. State board staff and
management continue to meet and routinely discuss utilization
of the Cleanup and Abatement Account (CAA), as appropriate.
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
44 California State Auditor Report 2005-406 California State Auditor Report 2005-406 45
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
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: Partial corrective action taken.
The System for Water Information Management Compliance
Module is now able to track the successful completion of
milestones, including requirements related to the successful
completion of SEPs. The state board has been working with
each regional board to ensure that staff understands the
data entry requirements. The Office of Statewide Initiatives
monitors data entry of SEP requirements and prepares a
quarterly report on the status of all SEPs approved by the
regional boards since January 1, 2004. The current report is
posted on the state board’s internet site (www.swrcb.ca.gov).
Efforts are ongoing to issue and collect outstanding MMPs.
Competing priorities for resources remains a significant issue.
Steps taken to address this include:
• The state board has focused efforts on implementation of
electronic submittal and review of discharger self-monitoring
reports (e-SMR). This is scheduled to phase in dischargers
starting in July 2005. e-SMR will replace the current manual
review of reports and will lead to semi-automated or
automated issuance of mandatory penalties, thus assuring
prompt issuance.
• Tracking of report submittal has been dramatically
improved. Information about late and missing reports is
now reliable for most facilities.
46 California State Auditor Report 2005-406 California State Auditor Report 2005-406 47
• New templates and process streamlining for MMPs are
under development.
• A pilot project for MMP process streamlining and other
improvements are planned for the Los Angeles Regional
Board in winter 2004–05.
• Increased use of student help for report review and
violation tracking until e-SMR is under consideration if
resources can be identified.
• Improved prioritization for addressing our enforcement
workload is being internally debated. Improved
effectiveness with existing resources through MMPs and
other enforcement authorities is the goal
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
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.
46 California State Auditor Report 2005-406 California State Auditor Report 2005-406 47
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: Corrective action taken.
Administrative Procedures Manual for accessing the CAA has
been revised as suggested. The division intends to follow the
approved guidance for requests to access the CAA.
48 California State Auditor Report 2005-406
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
REPORT NUMBER 2002-009, APRIL 2003
Audit Highlights . . .
Department of Water Resources’ response as of June 2004
The Department of Water
Resources (department) The California Water Code, Section 80270, requires the
has renegotiated 23 power
Bureau of State Audits to conduct two financial and
contracts with 14 suppliers to
performance audits of the Department of Water Resources’
improve the energy delivery,
financial, and legal aspects of (department) implementation of the power-purchasing
these contracts. In addition, program: the first due by December 31, 2001, and the second
the investor-owned utilities
due by March 31, 2003. We completed the first required audit
are once again responsible for
on December 20, 2001, and this audit fulfills the requirement
purchasing the net short.
for the second audit report. In this audit, we follow up on the
þ The portfolio better fits
department’s actions with respect to the recommendations from
California’s power needs
our 2001 audit. To assist us in forming our conclusions related
due to changes in energy
products and a reduction to the economic issues involved, we retained the services of an
of forecasted demand. energy economics firm to perform various analyses.
þ Reported contract cost
reductions were estimated
Finding #1: With renegotiated contracts and a reduction
at $5.5 billion on a
nominal basis and based in forecasted demand, the contracted electricity portfolio
on assumptions at the better matches California’s needs and better tracks changes
time of the renegotiations.
in fuel costs.
þ Based on March 2003 The department has renegotiated the terms and conditions of
market assumptions,
23 long-term power contracts with 14 suppliers, representing
replacement power costs,
and discounting to present over one-half of the total value of the portfolio. These renegotiated
value, the department contracts contribute to the improved fit of the portfolio to the
consultant currently
State’s forecasted demand by converting significant amounts
estimates ratepayer
of nondispatchable power—power that the department
savings as $580 million.
was obligated to purchase regardless of the need—to power
þ The legal terms and deliveries the department can use when needed. In addition,
conditions of the
the renegotiated portfolio increases power deliveries in
restructured contracts
significantly improved Northern California in 2002 and 2003 to meet demand. Further,
reliability, but the the department was able to shift some deliveries of power from
department remains
Southern to Northern California, which reduced the amount of
restricted in its ability to
surplus power projected in Southern California. The department
assign contracts.
also renegotiated for more capacity tied to tolling agreements—
continued on next page . . .
California State Auditor Report 2005-406 49
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 in its
June 2004 one-year response to us, the department reported
that with the new administration in place, it anticipates
renewed renegotiation activity. The department indicates
that the renegotiated contracts have improved the match of
power deliveries to the State’s needs by reducing the amount
of must take power deliveries (power that must be purchased
regardless of the power need).
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.
50 California State Auditor Report 2005-406 California State Auditor Report 2005-406 51
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’
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.
50 California State Auditor Report 2005-406 California State Auditor Report 2005-406 51
Department Action: Partial corrective action taken.
Since the April 2003 release of our audit, the department
indicates it has renegotiated three power contracts and in its
June 2004 one-year response to us, the department reported
that with the new administration in place, it anticipates
renewed renegotiation activity. 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
52 California State Auditor Report 2005-406 California State Auditor Report 2005-406 53
economic benefits to ratepayers. Another benefit from the
renegotiations is that the State has entered into settlement
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 in its
June 2004 one-year response to us, the department reported
that with the new administration in place, it anticipates
renewed renegotiation activity. 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 credit-
worthy investor-owned utility. Another contract also
52 California State Auditor Report 2005-406 California State Auditor Report 2005-406 53
includes a settlement of claims with the attorney general
and other parties, which the department indicates is
valued at approximately $1.5 billion. In addition, the
Governor’s Office reported in April 2004 that it reached a
settlement with an energy company valued at approximately
$282 million, of which $256 million will be refunded
directly to the department and the investor-owned utilities.
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 are witnesses at 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.
54 California State Auditor Report 2005-406 California State Auditor Report 2005-406 55
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
monitor the investor-owned utilities’ sales of surplus
energy from the energy contracts. The department uses this
information along with data from counterparties to the sales
to ensure that sales of surplus energy are appropriate.
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.
As we had recommended, the department reports that it
continues to receive all dispatch information from the
investor-owned utilities on a daily basis. This information
allows the department to compare actual dispatch of
contract energy with projected dispatches and to determine
54 California State Auditor Report 2005-406 California State Auditor Report 2005-406 55
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’
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.
56 California State Auditor Report 2005-406 California State Auditor Report 2005-406 57
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.
Department Action: Corrective action taken.
The department reports a variety of actions to address our
recommendations. The department notes that it and the
investor-owned utilities have determined that they can
purchase gas at a lower cost under tolling agreements than
having generators supply the gas needed to produce power.
Since the investor-owned utilities act as the department’s
agent when making gas purchases, the credit standing of the
investor-owned utilities has not affected the cost to purchase
gas as the gas sellers are relying on the department’s credit
standing. 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, participates in procurement review
groups with each investor-owned utility, and is a member
of a natural gas working group with the CPUC and several
other state departments. 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, or be
perceived adversely by the financial community. 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
allows it to better monitoring dispatch statements from the
investor-owned utilities. Finally, the department indicates
that it continues to prepare the annual revenue requirement
for the CPUC and perform the financial and accounting
activities required to support the department’s obligations
under the revenue bonds.
56 California State Auditor Report 2005-406 California State Auditor Report 2005-406 57
58 California State Auditor Report 2005-406
DEPARTMENT OF TRANSPORTATION
Various Factors Increased Its Cost
Estimates for Toll Bridge Retrofits, and Its
Program Management Needs Improving
REPORT NUMBER 2004-140, DECEMBER 2004
Audit Highlights . . .
Department of Transportation response as of December 2004
Our review of the Department
The Joint Legislative Audit Committee (audit committee)
of Transportation’s (Caltrans)
Toll Bridge Seismic Retrofit requested that the Bureau of State Audits examine the
Program (program) found that: delays and higher cost estimates for the Toll Bridge
Seismic Retrofit program (program). Specifically, the audit
þ Cost estimates have
increased $3.2 billion committee requested that we identify the factors contributing
since April 2001, including to additional capital and support cost increases, which of
a $900 million program
these factors were unforeseen at the time that the AB 1171
contingency reserve.
estimates were prepared, and the extent to which the design of
þ Approximately the signature span of the San Francisco-Oakland Bay Bridge’s
$930 million of the east span (East Span) independently contributed to costs
$3.2 billion increase
increases. In addition, the audit committee requested that we
relates to the May 2004
bid for the superstructure examine Caltrans’ basis for the program’s schedule, evaluate
of the signature span the adequacy of procedures for modifying cost estimates and
of the San Francisco-
completion dates, and determine whether Caltrans employs
Oakland Bay Bridge’s east
best practices when managing projects that cost more than
span (East Span); the
remainder is attributable $1 billion. Specifically, we found:
to other categories.
þ Various factors have Finding #1: Rising costs and delays plague completion of the
driven cost increases,
State’s largest public safety project.
including volatile markets
for steel and contractor
In its August 2004 report to the Legislature on the status of the
services, a lengthening
program, Caltrans disclosed cost estimates that were $3.2 billion,
of the East Span’s
timeline, and Caltrans or about 63 percent, higher than the estimates it prepared in
past experience with the April 2001. Caltrans’ 2001 estimates formed the basis for the
program, which is reflected
program budget the Legislature adopted in AB 1171. Caltrans’
in contingency reserves.
reevaluation of program costs was triggered in May 2004 by
receiving the sole bid for the signature span’s superstructure,
which exceeded Caltrans’ 2001 estimate by $930 million.
Caltrans’ revised cost estimate for individual toll bridges
was about $2.8 billion more than the cost estimates used for
AB 1171, while the estimated program contingency reserve rose
by $452 million.
California State Auditor Report 2005-406 59
The East Span accounted for most of the increases with
$2.5 billion more in estimated costs. In turn, the East Span’s
signature span component was estimated to cost $1.3 billion
more. Since 2001, the East Span also has been the source
of the program’s longest schedule delays and this delay
can be attributed almost entirely to the signature span.
Caltrans postponed the bid opening for the signature span’s
superstructure by almost one year, and agreed to give contractors
three more years than it originally envisioned to complete it.
Finding #2: Various factors contributed to higher cost
estimates and delays.
No one factor alone caused the significant rising cost estimates
affecting the seismic retrofitting of selected toll bridges. The
multiplicity of factors, along with the limited access Caltrans has
to the proprietary data that supports contractors’ bids, makes it
difficult to attribute dollar effects to specific causes. Nevertheless,
comparing Caltrans’ two cost estimates, from 2001 and 2004,
we found that much of the program’s cost increases occurred
in several areas. Estimates for structural steel, contractor
overhead, and contingency reserves for the East Span’s skyway
and signature span increased by $598 million, $585 million,
and $207 million, respectively. In addition, estimates for the
program’s support costs rose $556 million and the program
contingency reserve increased by $452 million.
Contributing to the higher cost estimates have been volatile
markets for materials and contractor services, which have
yielded bids that include higher than expected steel and
contractor overhead costs. For example, we estimated that a
26 percent increase in steel prices in 2004 added $95 million to
structural steel costs. With regard to the remaining cost increases
in these areas, Caltrans said it believes the bidding contractor
may have added on a margin to its materials costs to cover
other project costs not identified individually in the project bid
items. Caltrans said that future significant material escalations,
bonding and insurance costs, and the perceived risk of the project
might have been included in such a margin. Caltrans also said
that market conditions after September 11, 2001, led to higher
insurance and bonding costs, and greater scrutiny of risk on large
projects, which has contributed to higher overhead bid amounts.
Schedule delays and contract extensions also increased
contractor overhead and Caltrans support costs. Caltrans’ efforts
to increase competition among contractors by extending the
60 California State Auditor Report 2005-406 California State Auditor Report 2005-406 61
bidding period for the signature span’s superstructure, and its
lengthening of the time allowed for contractors to complete
this contract, pushed out the program’s completion date by
four years. These changes indicate that the signature span’s
superstructure was more complicated than Caltrans originally
envisioned and so could be expected to use considerably more
administrative resources.
In addition, Caltrans established contingency reserve amounts
for the skyway, signature span, and the Richmond-San Rafael
Bridge that are significantly higher than contingency reserve
levels of more typical projects, reflecting the greater amount of
risk these projects have for schedule delays and cost overruns.
Caltrans determined these contingency reserve amounts
based on the results of a probabilistic risk analysis model for
construction costs used by a consultant. This represents the
reserve level that the consultant concluded was required to
provide an 80 percent likelihood that the program cost estimate
will not be exceeded.
Finding #3: By not consistently following risk management
best practices, Caltrans has not addressed the East Span
project’s risks adequately.
Even though Caltrans has acknowledged that risk management
is an essential component of project management, it has not
focused sufficiently on managing the risks of the East Span,
including the self-anchored suspension component, or signature
span. Caltrans did not create a risk management plan to define
how it would identify, prioritize, quantify, respond, and track
risks for the project. Although Caltrans identified certain risks
and opportunities through quality assurance, risk analyses, and
information sessions with potential suppliers, steel fabricators,
and contractors, Caltrans has not performed some of the major
processes—planning, tracking, and quantifying—necessary to
maximize the chances of positive rather than adverse events in
the East Span project.
In October 2004, Caltrans put together a summary that is
supposed to be the risk management plan for the East Span
project. This summary includes primarily a historical description
of methods Caltrans used to identify risks, and names of
individuals who are a part of its Project Quality/Risk Assessment/
Oversight Group. However, the summary omits how Caltrans
will perform key risk management processes. For example, it
does not define how Caltrans will identify and quantify risks
60 California State Auditor Report 2005-406 California State Auditor Report 2005-406 61
throughout the life of the project and how risk activities will
be documented and tracked. Moreover, Caltrans created this
summary especially for us, so it was not actually used as the plan
to manage the East Span project’s risk.
Further, Caltrans did not update its cost estimates to incorporate
quantified risks identified through project analyses. Three of the
five analyses it initiated included such information. According
to Caltrans’ director, after AB 1171 became law, Caltrans
managed to the budget set in the bill by mitigating potential
risks. He stated that since 2001, the cost update in Caltrans’
August 2004 report included its first program-wide cost update
and that an August 2004 cost review performed by an outside
consultant was the only program-wide quantitative risk analysis.
We recommended that the department establish a
comprehensive risk management plan, quantify the effect of
identified risks in financial terms, and establish documents to
track identified risks and related mitigation steps.
Caltrans Action: Pending.
With the assistance of consultants, Caltrans indicates that it
has developed a risk assessment report. Further, Caltrans says
that it will designate a dedicated project risk management
coordinator (coordinator) who will regularly update the risk
assessment and prepare a risk response plan in accordance
with Caltrans’ Project Risk Management Handbook. The
coordinator will also conduct quarterly meetings of the risk
response team to reevaluate risks, revise the risk response
plan, and determine whether the risk response plan is being
followed. Caltrans states that the risk response team will classify
risks as high, moderate, or low impact and will estimate the most
probable and credible financial impact of each high impact
risk. Caltrans also says the coordinator will maintain records
assessing progress in implementing the risk response plan.
Finally, Caltrans states that the project manager will incorporate
the risk response plan in the evaluation of project budgeting,
control, and monitoring activities.
Finding #4: Caltrans does not regularly update program cost
estimates to monitor the program’s budget appropriately.
In managing the project’s cost, Caltrans has not followed
generally accepted cost management practices to ensure
that the project could be completed within its 2001 budget,
62 California State Auditor Report 2005-406 California State Auditor Report 2005-406 63
approved by the Legislature in AB 1171. Caltrans did not
regularly update its cost estimates for some components
of the East Span or the entire program, including updating
estimates for capital and support costs. Also, Caltrans did not
use information about identified risks to regularly reassess its
contingency reserves for potential claims and unknown risks. For
example, Caltrans indicated to the Federal Highway Administration
(FHWA) in February 2004 that its program support costs would be
$766 million, $30 million less than the AB 1171 estimated amount.
However, Caltrans’ accounting records show that it already had
spent $612 million in support costs by October 2003, leaving only
$154 million to pay such costs for eight more years, through 2011.
Just six months later, in August 2004, it raised its estimated support
costs to $1.352 billion.
Without updated cost estimates, Caltrans’ program managers
forego the benefits of a detailed overview of the program’s
capital and support costs for all the bridges. Further, Caltrans
indicates that since October 2001, when AB 1171 was passed, its
only published program-wide cost update was its August 2004
report to the Legislature, which disclosed the $3.2 billion cost
overrun. Had it been monitoring the program’s costs regularly,
Caltrans would have realized much earlier that the program was
exceeding its budget under AB 1171.
We recommended that the department update its estimates
of capital and support costs, reassess its contingency reserves
for potential claims and unknown risks, and integrate this
information into a program-wide report on a regular basis.
Caltrans Action: Partial corrective action taken.
Caltrans says it will update capital outlay estimates
annually during design and each quarter for contracts
under construction, and will update support costs quarterly.
However, based on Caltrans’ experience with the bid for
the signature span’s superstructure, annual updates of cost
estimates for unbid projects may not provide up to date and
relevant information. Further, to meet its mandate under
state law to report to the Legislature when it determines
that the program’s actual costs exceed the budget would
necessitate more frequent internal monitoring of the
program’s expenditures and estimated projected costs so that
it can appropriately make this determination. As we noted
in our audit, FHWA strongly recommends development of a
monthly report with current cost forecasts.
62 California State Auditor Report 2005-406 California State Auditor Report 2005-406 63
Caltrans also states that it will quarterly assess the adequacy
of contingency reserves on each construction contract and
that it will budget reserves for contract risks that have been
quantified and are deemed highly likely to occur. While
we agree with Caltrans that it is important to reassess the
contingency reserve for individual projects, however, it is
Ü also important for Caltrans to reassess the sufficiency of
the contingency reserve for the entire program based on
risks identified and quantified through its risk assessment
process. In addition, it is important for Caltrans to reassess
contingency reserves for construction contracts that have not
yet been bid and to determine reserves for awarded contracts
where additional costs are quantifiable and probable, not just
where they are deemed highly likely to occur.
Finding #5: Caltrans did not employ good communications
management, resulting in the failure to report cost overruns
to stakeholders in a timely fashion.
Caltrans has neglected communications planning and
management, failing to inform significant stakeholders regularly
of relevant changes in its estimates of program costs and cost
overruns. State law requires Caltrans to provide periodic status
reports to the Legislature, but Caltrans provided no statutorily
required annual status report for 2003 and no statutorily required
quarterly status report in 2004 until August of that year. It chose
not to disclose program information according to the regular
reporting schedule established by law and disclosed the large
cost overruns long after it should have known that the program
likely would exceed its budget. As a consequence, Caltrans
placed the Legislature in the awkward position of having to try
to devise a funding solution six weeks before the bid on the
signature span’s superstructure was set to expire.
In November 2003, Caltrans submitted a legally required
financial plan update to FHWA showing that the program’s
projects were going beyond the AB 1171 cost levels and that
less than a 3 percent program contingency reserve remained.
In response to FHWA’s questions, Caltrans did not reveal the
probable extent of estimated program costs. Based on internal
Caltrans’ reports and the amounts it eventually reported to the
Legislature in August 2004, Caltrans should have known about
the huge cost overruns. For example, although Caltrans had
advertised the contract for the signature span’s superstructure
at $733 million, internal analyses showed that as early as
August 2002 this contract could be as high as $934 million, while
64 California State Auditor Report 2005-406 California State Auditor Report 2005-406 65
later estimates placed its potential price at more than $1 billion.
Further, the uncommitted balance of $122 million in the
contingency reserve was grossly insufficient given that Caltrans had
not received the superstructure bid, the East Span’s skyway was only
31 percent constructed, and the Richmond-San Rafael Bridge retrofit
costs were underreported by $43 million to $78 million.
In addition, Caltrans provided no information on potential
program funding shortfalls before May 2004 to the Metropolitan
Transportation Commission, a critical stakeholder that
represents the commuters who pay to use the toll bridges.
We recommended that Caltrans submit quarterly status reports
to the Legislature as the law requires, ensure that reports to
FHWA and other stakeholders provide an accurate representation
of the program’s status, and quickly inform stakeholders when
key events affect the program’s overall budget and schedule.
We recommended that the Legislature require Caltrans to
submit quarterly reports within a given time period, and
that it require Caltrans to certify these reports and to include
additional financial information in them. Also, in reviewing the
options to complete the East Span, we recommended that the
Legislature consider requesting that Caltrans provide sufficient
detail to understand the financial implications of each option,
including a breakdown of costs for capital outlay, support, and
contingencies at the project and program level.
Caltrans Action: Pending.
Caltrans agreed to submit quarterly status reports to the
Legislature as the law requires and to ensure that reports
to FHWA and other stakeholders provide an accurate
representation of the program’s status. In addition,
Caltrans said that the impact of key events on the budget
and schedule will be reflected in quarterly updates of the
risk response plan, project status, and statutorily required
reports, and that updating will be reported to stakeholders
immediately if warranted by significant events.
Legislative Action: Pending.
Senate Bill 172, introduced in February 2005, would require
Caltrans to provide quarterly reports within 45 days of the end
of each quarter that would include a programwide summary of
the program’s budget status for support and capital outlay
construction costs. In addition, the bill would incorporate into
state law the audit recommendations we directed to Caltrans.
64 California State Auditor Report 2005-406 California State Auditor Report 2005-406 65
66 California State Auditor Report 2005-406
FRANCHISE TAX BOARD
Significant Program Changes Are Needed
to Improve Collections of Delinquent
Labor Claims
Audit Highlights . . .
Our review of the Franchise
Tax Board’s (board) collection
REPORT NUMBER 2003-131, MAY 2004
activities in connection with
delinquent fees, wages,
Responses of the Franchise Tax Board and the Department of
penalties, costs, and interest
Industrial Relations as of November 2004
(claims) referred by the
Department of Industrial
Relations (Industrial The Joint Legislative Audit Committee requested that the
Relations) found the
Bureau of State Audits review the Franchise Tax Board’s
following:
(board) collection activities in connection with delinquent
þ The board’s success in fees, wages, penalties, costs, and interest (claims) that the
generating collections for
Department of Industrial Relations (Industrial Relations) referred
these claims is limited—
to it. Many of the claims that Industrial Relations refers to the
our analysis of 310 claims
filed in fiscal years 2001–02 board involve an employer owing a wage earner unpaid wages;
and 2002–03 shows if Industrial Relations collects those wages, it passes them on to
that Industrial Relations
the wage earner.
received payments on only
20 percent of them.
þ Further, our review of 60 Finding #1: The board’s success rate in collecting money on
claims shows that, as of Industrial Relations claims is limited.
February 2004, the board
has taken an average We analyzed 310 Industrial Relations claims filed in fiscal years
of almost 18 months to 2001–02 and 2002–03 and found that the board collected
process these claims, and
only 20 percent of them. The board often takes a significant
it still has not completed
processing many of them. amount of time to process these claims, and we believe it could
be more successful if it responded more promptly to the cases
þ The board conducted
Industrial Relations refers. The board took an average of over a
two studies to improve
year to process these 310 claims. Furthermore, our review of a
its collection activities, by
automating its system, sample of claims selected to determine where the delays occur
however, the board in processing suggests that the board’s process takes even longer,
abandoned the project
with the processing of 60 claims averaging almost 18 months by
after realizing it would
not receive the additional the end of February 2004, and many are still not completed.
funding to implement the
changes.
Our review of the amount of time involved between the
þ Although state law individual steps of the claim collections process found that a
requires Industrial significant delay occurred after the board issued the demand-for-
Relations to adopt rules payment notice to the employer. Although the board’s policy is
and regulations to
to generate an order to withhold within 30 days after issuing the
charge the employer a
fee to cover the board’s demand-for-payment notice, the board does not always follow
collection costs, it its policy. We found that the board took an average of 277 days
currently does not do so.
to generate an order to withhold.
California State Auditor Report 2005-406 67
According to the board’s program manager, before issuing
an order to withhold, her staff must engage in several
time-consuming manual searches. The senior compliance
representative who processes the claims must first locate a valid
identification number, either a Social Security number if the
employer is an individual or a federal employer identification
number if the employer is a business. If Industrial Relations does
not provide this information, board staff locate the number
by searching several state databases, including those of the
Department of Motor Vehicles, the Employment Development
Department, and the Office of the Secretary of State. According
to the program manager, the senior compliance representative
then uses this number to search for banks located in the area
surrounding the employer’s place of business and to send them
an order to withhold. If this search fails, the board returns the
claim to Industrial Relations.
According to the board’s program manager, the process for
collecting claims could be expedited if Industrial Relations
provided full and accurate identifying information such as
a Social Security number, a federal employer identification
number, a driver’s license number, and any known bank
information for the employer’s business. We believe that
Industrial Relations has the best opportunity to obtain this
information when mediating a wage claim between the wage
earner and employer. Because Industrial Relations has direct
contact with employers during the initial stages of mediation, it
can more easily collect this information at that time and pass it
on to the board to speed up the collection process.
We recommended that to ensure the board has the
information it needs to process each claim as promptly as
possible, Industrial Relations should attempt to obtain more
complete identifying information from the employer during its
mediation process and provide this information to the board
when referring any claims for collection. This information
should include the employer’s Social Security number or federal
employer identification number, driver’s license number, and
any known bank information related to the employer’s business.
Industrial Relations Action: None.
Industrial Relations indicated that whenever possible, its
staff attempts to obtain information. However, Industrial
Relations believes it does not have the authority to require
employers to provide the information.
68 California State Auditor Report 2005-406 California State Auditor Report 2005-406 69
Finding #2: Industrial Relations does not monitor claims it
has sent to the board.
Even though the board is authorized to collect delinquent fees,
wages, penalties, costs, and interest (claims), Industrial Relations
retains the responsibility for managing the claims at all times.
The assistant chief labor commissioner told us, however, that
Industrial Relations does not monitor these claims’ status after
sending them to the board and even closes the claims in its
database. It would seem appropriate and useful for Industrial
Relations to require the board to provide some type of status
report on individual claims during the time the board is
processing them. With this type of information, Industrial
Relations could monitor the amount of time the board takes
to process claims and could discuss its concerns with the board
when the delays seem excessive. Currently, however, Industrial
Relations does not monitor these claims’ status. It provides the
board with funds to pay for the salary and other administrative
costs of only the one employee assigned to process these claims.
Additionally, Industrial Relations was unable to provide the
board with funding to fully automate the system that processes
these claims, which the board believed would allow claims to
flow through the system in a more expedient manner, thus
allowing for better management of the workload and possibly an
increase in collections.
To monitor the amount of time the board takes to process claims
and discuss any concerns when the delays seem excessive, we
recommended that Industrial Relations require the board to
periodically provide it with a status report on individual claims.
Board Action: Corrective action taken.
The board stated that it provided Industrial Relations a
report on the backlog of cases in October 2004 covering
inventory from July through September 2004. In
January 2005, the board plans to submit the next report
covering October through December.
Industrial Relations Action: Pending.
Industrial Relations indicated that it will conduct regular
meetings with the board to discuss problems and to resolve
any issues as they arise.
68 California State Auditor Report 2005-406 California State Auditor Report 2005-406 69
Finding #3: The board and Industrial Relations abandoned a
project that would improve their collection process.
Although the board’s general fund and the Department of
Motor Vehicles provided funds to automate two other collection
programs, its collection of delinquent child support payments
and vehicle registration fees, the board still manually inputs
the claims that Industrial Relations refers to it into the Non-Tax
Debt Consolidated Debt Collections system. Automated systems
both speed up the process and use fewer staff to generate more
dollars collected. Between 2001 and 2002 the board conducted
two studies—a program proposal and a feasibility study—to
improve its collection activities, decrease the substantial backlog
in claims, and possibly increase resulting revenues. However,
after realizing that it would not receive additional funding
to implement the changes these would require, the board
abandoned the project.
Three other states we reviewed operate similar collection programs
and currently have or are working on implementing some level
of system automation. One of these states retains a percentage
of the amount collected on behalf of the wage earners to cover
its own collection costs and the costs of sending the claims to a
collection agency. We believe that charging employers a fee for
the board’s collection services is consistent with the language
authorizing the board’s collection activities and would clearly
benefit California’s wage earners, as well as the State.
We recommended that if the administration is unwilling to
provide the additional resources needed to ensure that the
board processes claims from Industrial Relations more promptly,
Industrial Relations should consider taking the following actions:
• Adopt rules and regulations to charge a fee, as state law
requires, to employers that delay paying their claims; the board
and Industrial Relations could use such funds to automate the
current system and increase staffing levels as needed.
• Prepare a cost analysis to determine the appropriate fee to
charge employers that delay paying their claims.
Further, we recommended that if the board and Industrial
Relations automate the current system and increase staffing
levels, Industrial Relations should periodically resubmit unpaid
claims for processing.
70 California State Auditor Report 2005-406 California State Auditor Report 2005-406 71
Board Action: Partial corrective action taken.
The board stated it submitted a request to Industrial
Relations to increase the amount of funds allocated to the
program for the fiscal year 2004–05 contract. The request
consisted of several staffing options and funding needed to
automate the program. According to the board, Industrial
Relations approved the option to increase staffing by adding
two temporary employees. The board stated that Industrial
Relations also offered to loan the board one additional staff
to enter cases into the board’s automated system. The board
indicated that it is currently exploring the details of this
option, as well as other automation options. Finally, the
board plans to continue to work with Industrial Relations to
explore various methodologies to assist Industrial Relations
in adding collection fees to accounts placed with the board.
Industrial Relations Action: Pending.
Industrial Relations indicated that it recognizes it must adopt
a regulation to allow the board to charge a fee. In addition,
Industrial Relations is prepared to begin the process of
adopting a regulation as soon as it can obtain from the
board, its estimate of the amount of the fee that will be
required to automate the system and reimburse the board for
its costs associated with collection activities.
70 California State Auditor Report 2005-406 California State Auditor Report 2005-406 71
72 California State Auditor Report 2005-406
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
November 2004
Our review of the State’s
process for identifying,
assessing, and overseeing The Joint Legislative Audit Committee directed the Bureau
education-related categorical of State Audits (bureau) to review the State’s process
programs concludes that:
for identifying, assessing, and overseeing categorical
þ The California programs. Our report concluded that the extensive number and
Department of Education breadth of categorical programs challenges the State’s ability
(CDE) did not take to reform and oversee them. For purposes of our audit, we
sufficient steps to
defined “categorical funding” broadly so that we could identify
implement a pilot project
aimed at reforming allocations made by the California Department of Education
categorical programs. (CDE) and the State Controller’s Office (SCO) for 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
funding needs revenue limit funding. Categorical funding is far-reaching.
improvement. Specifically, For fiscal year 2001–02, CDE and the SCO disbursed roughly
for three of the 12
$17 billion to various recipients for 113 categorical programs. In
categorical programs
reviewed, CDE may not addition, for five of these categorical programs, the State delayed
have accurately calculated CDE’s authority to allocate funding totaling $867 million until
allocation amounts in
fiscal year 2002–03. We reported the following issues:
accordance with state law.
þ CDE has yet to implement
Finding #1: CDE could not demonstrate sufficient efforts
fully the Bureau of
State Audits’ previous to implement a pilot project giving flexibility to categorical
recommendations aimed program funding.
at strengthening its
oversight methods. Chapter 369, Statutes of 2000, enacted in September 2000,
required CDE to establish the Pilot Project for Categorical
þ For a few categorical
Education Program Flexibility (pilot project). Participating
programs, such as
the Lottery Education school districts would have flexibility in spending categorical
Fund program, CDE funds among 24 programs within three clusters: (1) school
does nothing to review
improvement and staff development, (2) alternative and
recipient’s compliance
with applicable compensatory education, and (3) school district improvement.
requirements. Only five school districts actually applied to participate in
the pilot. However, CDE did not take sufficient steps to fully
implement the project, failing to follow recommendations of the
California State Auditor Report 2005-406 73
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: Partial corrective action taken.
CDE stated that it sent a survey in December 2003 and
subsequently received information from all five participating
school districts summarizing their pilot project activities,
experiences, and recommendations. CDE further stated
that it will compile Academic Performance Index and, if
appropriate, Adequate Yearly Progress data for these school
districts. Additionally, CDE stated that in August 2004,
it mailed surveys to 70 nonparticipating school districts
that were broadly representative of California districts.
According to CDE, as of November 8, 2004, 24 districts had
responded, with 11 indicating that they would be likely to
apply to participate in the program. CDE also stated that it is
currently working on an implementation plan for Assembly
Bill 825 (Chapter 871, Statutes of 2004), which consolidates
22 education categorical funding programs into six block
grants effective fiscal year 2005–06. CDE stated that in light
of this new law, further examination is in order about the
need to continue the pilot project. CDE planned to report
the results of its analyses to the governor and Legislature in
the final pilot project evaluation due February 2005.
74 California State Auditor Report 2005-406 California State Auditor Report 2005-406 75
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: Partial legislation passed.
In September 2004, the Legislature enacted Chapter 871,
Statutes of 2004, which addressed our recommendations
related to accountability provisions that include a focus
toward program results and outcomes. This law, which
established six block grants to fund 22 existing categorical
programs, demonstrates the Legislature’s intent to, among
other things, refocus attention on the effect that the
74 California State Auditor Report 2005-406 California State Auditor Report 2005-406 75
expenditure of categorical program funds has on pupil
learning rather than on state spending and compliance
with operational rules for categorical programs. Further,
the law requires—subject to an appropriation in the annual
Budget Act—the Legislative Analyst’s Office to report
and make recommendations by January 1, 2007, on the
effectiveness and distribution effects of the law on pupil
achievement and recommendations on the continuation
or elimination of categorical education programs whose
funding is not part of the block grants established by the
law. However, we are unaware of any specific changes made
to the allocation methods for each categorical program that
reflect the recipient’s need, ability to contribute to program
costs, and cost of providing services.
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,
76 California State Auditor Report 2005-406 California State Auditor Report 2005-406 77
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
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.
76 California State Auditor Report 2005-406 California State Auditor Report 2005-406 77
Legislative Action: Unknown.
In September 2004, the Legislature enacted Chapter 871,
Statutes of 2004, which established six block grants to fund
22 existing categorical programs. However, we are unable to
determine if the Legislature considered factors presented in
our recommendations before enacting the law.
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.
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: Partial legislation passed.
In September 2004, the Legislature enacted Chapter 871,
Statutes of 2004. Among other things, this law created
the Targeted Instructional Improvement Block Grant that
combines the targeted instructional improvement grant
78 California State Auditor Report 2005-406 California State Auditor Report 2005-406 79
and supplemental grants programs and established an
allocation method. Specifically, commencing with fiscal
year 2005–06, the superintendent of public instruction
must apportion block grant funds to a school district in the
same relative statewide proportion that the school district
received in fiscal year 2003–04 for the targeted instructional
improvement grant and supplemental grants programs.
Beginning with fiscal year 2006–07, the amount of funding
a school district receives pursuant for this block grant must
be adjusted for inflation by the amount calculated pursuant
to Section 42238.1 of the Education Code and for growth as
measured by the regular ADA used to calculate the second
principal apportionment for kindergarten and grades 1 to 12,
inclusive. However, as we point out in our discussion of the
California Public School Library Act program, state law does
not specifically define the term “regular” ADA and CDE uses
different definitions for “regular” ADA.
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.
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.
78 California State Auditor Report 2005-406 California State Auditor Report 2005-406 79
Legislative Action: Legislation passed.
In September 2004, the State enacted Chapter 871, Statutes
of 2004. Among other things, this law created the School and
Library Improvement Block Grant by combining the school
library materials program—the California Public School Library
Act program—and the school improvement programs. It also
established an allocation method. Specifically, commencing
with fiscal year 2005–06, the superintendent of public
instruction must apportion block grant funds to a school
district in the same relative statewide proportion that the
school district received in fiscal year 2003–04 for the school
library materials program and the school improvement
programs. Beginning with fiscal year 2006–07, the amount of
funding a school district receives shall be adjusted for inflation
by the amount calculated pursuant to Section 42238.1 of the
Education Code and for growth as measured by enrollment in
kindergarten and grades 1 to 12, inclusive, as reported in the
California Basic Education Data System report.
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.
80 California State Auditor Report 2005-406 California State Auditor Report 2005-406 81
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.
Legislative Action: Legislation passed.
In September 2004, the Legislature enacted Chapter 871,
Statutes of 2004. Among other things, this law created
the School and Library Improvement Block Grant by
combining the school library materials program and the
school improvement programs and established an allocation
method. Specifically, commencing with fiscal year 2005–06,
the superintendent of public instruction must apportion
block grant funds to a school district in the same relative
statewide proportion that the school district received in
fiscal year 2003–04 for the school library materials program
and the school improvement programs. Beginning with
fiscal year 2006–07, the amount of funding a school district
receives shall be adjusted for inflation by the amount
calculated pursuant to Section 42238.1 of the Education
Code and for growth as measured by enrollment in
kindergarten and grades 1 to 12, inclusive, as reported in the
California Basic Education Data System report.
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.
80 California State Auditor Report 2005-406 California State Auditor Report 2005-406 81
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.
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: None.
Although the State funded the Miller-Unruh Basic Reading
Act program in the Budget Acts for fiscal years 2001–02
and 2002–03, it did not do so in the Budget Acts for fiscal
years 2003–04 and 2004–05.
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
82 California State Auditor Report 2005-406 California State Auditor Report 2005-406 83
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
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
82 California State Auditor Report 2005-406 California State Auditor Report 2005-406 83
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.
CDE Action: Partial corrective action taken.
CDE stated that the establishment of a new monitoring
process is under development to replace the current CCR
process. Although it did not address several specific points
of our recommendation, CDE pointed out that it is working
on several tasks that will provide effective oversight of
categorical programs. CDE also stated that as budget
deliberations take place regarding categorical programs, it
will consider the necessary resources to address any newly
required programmatic changes.
CDE stated that it implemented a process to follow up with
LEAs not submitting proposed resolution of findings by the
required 45-day timeframe. It also stated that all federal and
state monitoring findings and the LEAs’ proposed resolutions
of findings are entered in a compliance tracking system. CDE
developed a status report to identify districts that have not
84 California State Auditor Report 2005-406 California State Auditor Report 2005-406 85
responded timely. CDE stated that it contacts those LEAs
that have not submitted their proposed resolutions of
findings on time to determine the reason for the delay and
to provide all necessary monitoring assistance.
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.
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.”
CDE Action: Unknown.
In September 2004, the Legislature enacted Chapter 871,
Statutes of 2004. Among other things, this law created
the Targeted Instructional Improvement Block Grant by
combining the targeted instructional improvement grant
and supplemental grants programs. However, the law does
not include language that specifically requires CDE
84 California State Auditor Report 2005-406 California State Auditor Report 2005-406 85
to provide oversight for this block grant. Further, we are
unaware of other enacted legislation implementing this
recommendation.
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.
CDE Action: Partial corrective action taken.
CDE stated that audit procedures for lottery fund
expenditures have been included in the 2004–05 K-12 Audit
Guide to determine whether lottery funds are being spent for
the purchase of instructional materials. CDE also stated that
the Education Audit Appeals Panel adopted the lottery
86 California State Auditor Report 2005-406 California State Auditor Report 2005-406 87
audit procedures as emergency regulations in June 2004
and will consider adopting the permanent regulations in
November 2004. Finally, CDE stated that it did not propose
Ü audit procedures to determine whether lottery funds are
being spent for non-instructional purposes because the term
non-instructional purposes is not defined in statute.
86 California State Auditor Report 2005-406 California State Auditor Report 2005-406 87
88 California State Auditor Report 2005-406
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 REPORT NUMBER 2003-106, OCTOBER 2003
Rights (peace officer rights)
and the animal adoption Commission on State Mandates’ and State Controller’s Office‘s
mandates found that: responses as of October 20041
þ The costs for both
mandates are significantly The Joint Legislative Audit Committee asked the Bureau of
higher than what the State Audits to review California’s state mandate process
Legislature expected.
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 significantly higher than what the Legislature initially expected.
rights mandate for
In addition, we found that the local entities we reviewed claimed
activities that far
exceed the Commission costs under the peace officer rights mandate for activities that far
on State Mandates’ exceeded the Commission on State Mandates’ (Commission) intent.
(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 The problems we identified highlight the need for some structural
for most of the costs
reforms of the mandate process. Specifically, the mandate process
claimed under the peace
officer rights mandate and does not afford the State Controller’s Office (Controller) the
some of the costs claimed opportunity to perform a field review of the first set of claims
under the animal adoption
for new mandates early enough to identify potential claiming
mandate.
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 limitations and assumptions related to the claims data it uses to
Controller’s Office an
develop the estimates. Finally, Commission staff have indicated that
opportunity to perform
a field review of initial the Commission will not be able to meet the statutory deadlines
claims for new mandates related to the mandate process for the foreseeable future due to an
early enough to identify
increase in caseload and cutbacks in staffing. Specifically, we found:
potential problems.
þ Commission staff have
Finding #1: Local entities claimed reimbursement for
indicated that the
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 entities that received $31 million of the $50 million paid under
foreseeable future due to
the peace officer rights mandate, and we are concerned that
an increase in caseload
and a decrease in staffing.
1San Jose and San Diego County responses as of January 2004; city of Los Angeles,
San Francisco, Stockton, and Los Angeles County responses as of October 2004.
California State Auditor Report 2005-406 89
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
90 California State Auditor Report 2005-406 California State Auditor Report 2005-406 91
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. As of its
October 2004 response, the Controller planned to complete
the audits by December 2004. In addition, it expected to
submit to the Commission suggested amendments to the
parameters and guidelines by November 2004 to clarify that
costs for activities guaranteed by the due process clauses of the
U.S. and California Constitutions are not reimbursable.
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 after early December 2003.
Local Entities Action: Partial corrective action taken.
The city of Los Angeles reports that, subsequent to our audit,
the Controller audited its fiscal year 2001–02 peace officer
rights claim and disallowed the entire claim because the city
did not substantiate the time study data that was the basis
for the claim. To address the Controller’s concern, the city
of Los Angeles reports that it performed a comprehensive
time study and provided all of the data to the Controller in
September 2004. However, as of October 2004, it had not
submitted any revised peace officer rights claims. Los Angeles
County reports that it conducted a time study of its peace
officer rights activities from May to October 2004 and asserts
that the Controller indicated this data can be used to support
its claims related to fiscal years 2001–02 through 2004–05.
However, its one-year response did not indicate whether
the county had submitted any revised claims and suggested
that more clarification regarding the scope of reimbursable
services is needed. In addition, Los Angeles County continues
to believe that a broad scope of its investigation activities are
reimbursable and asserts that the parameters and guidelines
provide no limitation on claimants’ costs in conducting
prompt, thorough, and fair investigations. The city and
County of San Francisco (San Francisco) reports that it has
examined its peace officer rights process carefully as a result
of our audit and a subsequent Controller field audit. As part
of this process, San Francisco indicated that it conducted a
time study in May 2004 and submitted the results to the
90 California State Auditor Report 2005-406 California State Auditor Report 2005-406 91
Controller in June 2004. Further, San Francisco believes that
its time study substantially supports the costs it initially
claimed and, as of October 2004, gave no indication that
it intended to revise its previously submitted claims. The
city of Stockton (Stockton) indicated that, in January 2004,
it filed an amended peace officer rights claim for fiscal
year 2001–02 that was approximately $522,000 less than
its original claim. In addition, Stockton reported that the
Controller was in the process of auditing all of its claims
back to fiscal year 1994–95, but had not issued a report as of
Stockton’s October 2004 response.
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.
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.
92 California State Auditor Report 2005-406 California State Auditor Report 2005-406 93
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.
Controller Action: Partial corrective action taken.
The Controller indicates that it developed draft time study
guidelines in consultation with representatives of local
governments and their consultants and provided them to
interested state agencies for comment in March 2004. As
of October 2004, the Controller expected to make final
guidelines available to claimants in January 2005.
Local Entities Action: Partial corrective action taken.
All six local entities we reviewed provided us responses
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, San Jose,
and Stockton and San Diego County indicated that they
have submitted revised animal adoption claims for fiscal
year 2001–02. In addition, Stockton reports that it filed an
amended peace officer rights claim for fiscal year 2001–02
that was approximately $522,000 less than its original
claim. Finally, although the city of Los Angeles, Los Angeles
County, and San Francisco report that they have conducted
time studies and have been working with the Controller to
resolve issues related to their peace officer rights claims, their
one-year responses to our audit did not indicate that any of
them have submitted revised claims.
92 California State Auditor Report 2005-406 California State Auditor Report 2005-406 93
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
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.
94 California State Auditor Report 2005-406 California State Auditor Report 2005-406 95
Legislative Action: Legislation passed.
Chapter 313, Statutes of 2004, added Section 17572 to the
Government Code to require the Commission to amend the
parameters and guidelines for the animal adoption mandate.
In particular, the legislation requires the Commission to amend
the formula for determining the reimbursable portion of
acquiring or building additional shelter space that is larger than
needed to comply with the increased holding period to specify
that costs incurred to address preexisting shelter overcrowding
or animal population growth are not reimbursable. In addition,
the legislation requires the Commission to clarify how the
costs for care and maintenance shall be calculated. As of
October 2004, Commission staff indicated that this matter is
tentatively set for a March 2005 hearing.
Controller Action: Corrective action taken.
The Controller reports that it submitted to the Commission
suggested parameters and guidelines amendments to clarify
calculation of the average daily census and the documentation
requirements for new animal shelters.
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
94 California State Auditor Report 2005-406 California State Auditor Report 2005-406 95
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.
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: Corrective action taken.
The Controller reports that it, along with representatives from
the Department of Finance, the Legislative Analyst’s Office, the
Commission, and local governments testified on mandate reform
issues before the Assembly Special Committee on State Mandates.
This committee subsequently authored Chapter 890, Statutes of
2004, that implemented certain reforms to the mandate process.
In particular, the Controller indicates that the legislation requires
the Commission, when adopting parameters and guidelines, to
adopt a reasonable reimbursement methodology that balances
accuracy and simplicity; specifies the content of a test claim
filing with the Commission to include a statewide cost estimate;
and codifies the period of reimbursement and procedures
for amendment. As indicated in the following paragraph
regarding Commission action, we note that the legislation
also provides the Controller with an opportunity to review
mandate claims and suggest any needed changes to the
related parameters and guidelines before claims are paid.
96 California State Auditor Report 2005-406 California State Auditor Report 2005-406 97
Commission Action: Corrective action taken.
Commission staff indicate that the Commission and the
Controller sponsored legislation clarifying that, after an
audit is conducted, the parameters and guidelines for a
mandated program could be amended so that claiming errors
can be corrected prior to adoption of the statewide cost
estimate and payment of claims. 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.
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 will continue to update
relevant legislative committees on caseload issues. Finally,
staff will continue to report pending statewide cost estimates
to the Legislature to notify it of potential future costs to the
state budget.
96 California State Auditor Report 2005-406 California State Auditor Report 2005-406 97
98 California State Auditor Report 2005-406
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
Audit Highlights . . .
Department of Finance response as of September 2004 and
Our review of federal grant Health Services response as of July 2004
funding received by California
found that:
The Joint Legislative Audit Committee (audit committee)
þ California’s share of requested that the Bureau of State Audits determine
nationwide grant funding,
whether California is maximizing the amount of federal
at 11.8 percent, was
only slightly below its funds it is entitled to receive for appropriation through the
12 percent share of the Budget Act. Specifically, we were asked to examine the policies,
U.S. population.
procedures, and practices state agencies use to identify and apply
þ Factors beyond the for federal funds. We also were asked to determine if the State is
State’s control, such as applying for and receiving the federal program funds for which it is
demographics, explain eligible, and to identify programmatic changes to state-administered
much of California’s
programs that could result in the receipt of additional federal funds.
relatively low share of
Finally, the audit committee asked us to examine whether the State
10 large grants.
is collecting all applicable federal funds or is forgoing or forfeiting
þ Grant formulas using out-
federal funds for which it is eligible. Specifically, we found:
of-date statistics reduced
California’s award share
for another six grants.
Finding #1: California’s share of federal grants falls short of
þ In a few cases, California its population share, due in part to the State’s demographics
policies limit federal and federal grant formulas.
funding, but the effect
on program participants California’s share of total federal grants awarded during fiscal year
may outweigh funding
2001–02 was 11.8 percent, or $42.7 billion. This share is slightly
considerations.
below California’s 12 percent share of the nation’s population
þ California could increase (population share). For 36 of 86 grants accounting for 90 percent
its federal funding in some of total nationwide federal grant awards in fiscal year 2001–02,
cases, but would have to
California’s share was $5.3 billion less than an allocation based on
spend more state funds to
do so. population share alone. Grants for which California’s share falls
below its population share include ones in which demographics
continued on next page . . .
work against California, and formula grants that provide minimum
funding levels to states or use out-of-date statistics. With regard
to state efforts to gain federal funding, we found that state
California State Auditor Report 2005-406 99
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.
100 California State Auditor Report 2005-406 California State Auditor Report 2005-406 101
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.
100 California State Auditor Report 2005-406 California State Auditor Report 2005-406 101
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.
Health Services’ Action: Corrective action taken.
Health Services says that in collaboration with the
Department of Social Services it submitted to the Centers
for Medicare and Medicaid Services in May 2004 an
Independence Plus federal waiver application seeking to
cover all In-Home Supportive Services residual services
through Medi-Cal. As of July 2004, Health Services indicated
that the application was undergoing review to determine
which services could be approved.
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.
102 California State Auditor Report 2005-406 California State Auditor Report 2005-406 103
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
102 California State Auditor Report 2005-406 California State Auditor Report 2005-406 103
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 undertook several initiatives to reduce
spending on personnel. These included 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
104 California State Auditor Report 2005-406 California State Auditor Report 2005-406 105
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.
104 California State Auditor Report 2005-406 California State Auditor Report 2005-406 105
Finance Action: Corrective action taken.
Control Section 4.10 of the 2003 Budget Act, approved by
Governor Gray Davis in August 2003, required 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.
Finance says that in implementing Section 4.10, federal fund
appropriations were reduced by $16.4 million.
106 California State Auditor Report 2005-406
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 the State and Consumer
Our review of the Franchise Services Agency as of May 2004
Tax Board’s (board) audit and
collection activities revealed Ap rimary revenue-generating agency for the State, the
the following:
Franchise Tax Board (board) processes individual and
þ The board does not corporation tax returns, audits certain tax returns for
always describe the errors, and collects delinquent taxes. Between fiscal years
differing cost components
1990–91 and 2001–02, the board provided an average of
of its various performance
measures, potentially $31 billion in annual tax revenues to the State, over 60 percent
leading to confusion of the State’s General Fund. Although many taxes are self-
about program results.
assessed by individuals and companies, the board’s audit
þ Between fiscal years program reviews the accuracy of tax returns, assessing
1998–99 and 2001–02, additional taxes when appropriate. In turn, the collection
recently acquired audit program pursues delinquent taxpayers identified through the
staff returned $2.71 in
board’s various assessment activities.
assessments for each $1
of cost.
The Joint Legislative Audit Committee requested that we review
þ Because of limitations
the board’s audit and collection programs, identifying recently
in board data, we could
acquired audit and collection program positions, assessing the
not isolate the return
on 175 new collection board’s calculation of the costs and benefits of these positions,
program positions. and determining whether the board uses these positions as
þ The board’s process the Legislature intended. We were also asked to review the
for assessing the board’s methodology for calculating the costs and benefits of
incremental benefit of its audit and collection programs. Finally, we were asked to
recently acquired audit
determine whether a point of diminishing returns exists
and collection program
where additional audit and collection program positions do
positions is flawed.
not generate a $1 to $5 cost-benefit ratio (CBR) and, if so,
þ The board allows some
to determine the board’s actions to shift those positions to
collection program
other activities. We found that:
positions to remain
unfilled in order to pay for
other expenses.
California State Auditor Report 2005-406 107
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:
108 California State Auditor Report 2005-406 California State Auditor Report 2005-406 109
• 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. The board
states that it is using the foundation of this model to link
the cost of work to the revenue generated. With newly added
“revenue streams,” the board reports that it will be able to
more completely measure program performance—that is, the
total cost and total revenue by programs such as the audit
and the filing enforcement programs.
The board states that to add revenue to the ABC model,
it is initially using revenue stream data from existing
fiscal year 2002–03 data sources in order to produce test
performance measures. These test performance measures
will be evaluated, and recommendations for improvements
for fiscal year 2003–04 data collection will be developed.
Furthermore, the board is analyzing changes required for
existing information systems to produce the data required
for a complete measurement for use in the ABC model,
and will make recommendations for future changes. Long
term, the board expects to use the ABC model to produce
meaningful return-on-investment data that, along with other
enterprise performance measures, can facilitate decisions
about the best use of available resources.
Finally, the board reports that it has begun to provide
clarification to performance measures reported to external
decision makers. The board plans to continue this practice in
future communications.
108 California State Auditor Report 2005-406 California State Auditor Report 2005-406 109
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.
110 California State Auditor Report 2005-406 California State Auditor Report 2005-406 111
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 continuing to review the methods
of gathering data for its operations reports. It reports that
it is currently examining revenue as reported by one of its
major taxpayer information systems. The board is working
with system staff to more accurately capture the revenue
from audit and filing enforcement activities. The board states
that this has included rewriting system design documents
as they relate to revenue, and working with staff to ensure
the accuracy of the reporting of revenue. With respect to
cost issues, the board reports that it is looking to use ABC to
better link the costs and the activities.
The board further reports that it has compiled initial costs
and benefit information for its current workplan process and
has made this preliminary information available to both
Finance and the LAO. The board states that it is continuing
its analysis to perfect these initial computations to ensure
that the cost components within the CBRs are accurate and
attributed to the correct workloads. 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
110 California State Auditor Report 2005-406 California State Auditor Report 2005-406 111
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
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: Corrective action taken.
The board reports that if it requests additional audit
positions it will continue to adhere to the specific budget
instructions provided by Finance for the establishment
of new positions. This would include any information
Finance may require in its review of any audit position
request including an analysis of the work to be performed
by the new auditors and the associated assessments to be
derived. In addition, the board reports that it has modified
its supporting audit workplans for both the current and
budget year to include the actual returns of each of the
specific workload types that are currently being performed.
The board states that the confidential backup detail to the
summary workload matrix is available to Finance or the LAO
upon request and will include historical CBR information
for each workload type. Finally, the board reports that in
November 2003 it met with Finance staff and they accepted
these changes to the CBR matrix.
112 California State Auditor Report 2005-406 California State Auditor Report 2005-406 113
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.
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.
112 California State Auditor Report 2005-406 California State Auditor Report 2005-406 113
Board Action: Corrective action taken.
The board reports that it has tested and evaluated a refined
methodology for measuring the effectiveness of manual
collection efforts. Specifically, the board created a conceptual
framework for measuring inputs in terms of time expended
by direct collection staff and support staff, and matching
the results in terms of dollars collected. The board states
that it has populated this model, conducted testing, and
implemented it within its manual collection process. The
board states that the model allows it to establish a base year
for comparison with subsequent year’s results. The board
reports that it has validated the accuracy of the data gathered
to date. However, the board states that because of the three-
year duration of the collection lifecycle, the revenue stream
will not be fully populated until this period has elapsed for
accounts paid incrementally.
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.
114 California State Auditor Report 2005-406 California State Auditor Report 2005-406 115
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.
Furthermore, the board states that the new reporting
methodology was implemented on a limited basis in
January 2004, and will continue to be implemented
throughout the collection program in a phased approach
over the next 12 to 18 months.
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.
114 California State Auditor Report 2005-406 California State Auditor Report 2005-406 115
Board Action: Corrective action taken.
The board reports that it conducted a department-wide
redeployment process to meet mandated budget cuts. As
a result, the board contends that the vacancy rate for the
collections program is at a historic low—less than 4 percent.
The board also states that it is determined to fill vacancies
as quickly as possible, but is sometimes prevented from
achieving this goal by constraints that include meeting
mandated salary savings, and because budget authority for
new positions is often delayed due to the legislative cycle
and budget constraints. To counteract these constraints in
future hirings, the board plans to request position effective
dates that more accurately reflect new hire start dates.
116 California State Auditor Report 2005-406
OFFICE OF THE SECRETARY OF STATE
Clear and Appropriate Direction Is
Lacking in Its Implementation of the
Federal Help America Vote Act
REPORT NUMBER 2004-139, DECEMBER 2004
Audit Highlights . . .
Office of the Secretary of State response as of December 2004
Our review of the Office
of the Secretary of State’s The Joint Legislative Audit Committee (audit committee)
(office) administration of
requested that the Bureau of State Audits (bureau) review
federal Help America Vote
the Office of the Secretary of State’s (office) fiscal year
Act of 2002 (HAVA) funds
revealed the following: 2003–04 budget request and verify that all components of the
federal Help America Vote Act of 2002 (HAVA) grants were
þ The office’s insufficient
implemented within the spirit and letter of the law. Specifically,
planning and poor
management practices the audit committee asked the bureau to review and evaluate
hampered its efforts relevant laws, rules, and regulations; to determine whether
to implement HAVA
the office used HAVA funds only for allowable purposes and in
provisions promptly.
accordance with Section 28 of the Budget Act of 2003; and to
þ The office’s disregard for determine whether the office implemented HAVA in compliance
proper controls and its
with federal requirements. It also asked the bureau to review and
poor oversight of staff
evaluate the office’s policies and procedures for administering
and consultants led to
questionable uses of HAVA funds, including the process of awarding and disbursing
HAVA funds. those funds, and to determine whether it effectively oversees
the use of the funds it awards to ensure that recipients use them
þ The office avoided
competitive bidding for only for allowable purposes. The audit revealed the following:
many contracts paid with
HAVA funds by improperly
using a Department of Finding #1: The office’s insufficient planning and poor
General Services exemption
management practices hampered its efforts to implement
from competitive bidding
some HAVA provisions in a timely way.
and by not following the
State’s procurement policies.
The office is in danger of failing to meet the deadline for at least
þ The office bypassed the one HAVA requirement and other important future implementation
Legislature’s spending milestones because of insufficient planning and other poor
approval authority when
management practices. According to its current schedule, it may
it executed consultant
not fully implement by the January 1, 2006, HAVA deadline a
contracts and then
charged the associated computerized statewide voter registration list that is maintained
costs to its HAVA and administered at the state level. Further, the office could have
administration account.
been more proactive in assisting counties in achieving the successful
continued on next page . . . statewide implementation of other HAVA requirements, such as
provisional voting procedures, a free access system, the posting of
voter information, and voter identification requirements.
California State Auditor Report 2005-406 117
þ The office failed to These shortcomings in meeting HAVA deadlines can be traced
disburse HAVA funds to the office’s incomplete planning for each of the activities it
to counties for the
intended to undertake. As a result of this incomplete planning,
replacement of outdated
as of June 30, 2004, the office had spent only $46.6 million
voting machines within the
time frames outlined in its of the $81.2 million authorized by the Legislature for fiscal
grant application package year 2003–04. The lack of implementation plans for various
and county agreements.
HAVA projects could have been due in part to a lack of project
management oversight. According to the office’s executive
staff, no one individual was assigned the overall responsibility
for HAVA implementation. Instead, direction for administering
HAVA activities came from many staff in the executive office.
Eventually recognizing the need for project management
services to implement HAVA successfully, the office solicited
proposals from vendors for consulting services in June and then
again in October 2004, and gave notice of its intent to award a
contract on December 1, 2004.
To ensure that it successfully implements the requirements
called for in HAVA, we recommended that the office take the
following steps:
• Develop a comprehensive implementation plan that includes
all HAVA projects and activities.
• Designate the individuals responsible for coordinating and
assuring the overall implementation of the plan.
• Identify and dedicate the resources necessary to carry out the
plan and assign roles and responsibilities accordingly.
• Establish timelines and key milestones and monitor to ensure
that planned HAVA activities and projects are completed
when scheduled and that they meet expectations.
Office Action: Pending.
The office responded that it drafted a preliminary
implementation plan that it was in the process of finalizing.
It also stated it had identified a member of its HAVA staff
who will be supported by the consulting firm and will
join a team of managers responsible for implementing all
HAVA requirements. Additionally, it stated that it sent to the
Department of Finance (Finance) its revised spending plan
with details of the proposed distribution of HAVA funds.
118 California State Auditor Report 2005-406 California State Auditor Report 2005-406 119
Finding #2: The office’s disregard for proper controls and its
poor oversight of staff and consultants led to questionable
uses of HAVA funds.
Because of a lack of proper control and oversight, the office
risks having to repay the federal government for costs charged
to HAVA funds that either did not have the adequate support
or were for questionable activities. The office did not provide
many employees with job descriptions that explained their
HAVA responsibilities and that could make employees aware
of potential conflicts of interest, incompatible activities, and
other requirements important in administering federal funds.
Moreover, the office’s conflict-of-interest code and incompatible
activities policy do not prohibit the real or perceived participation
in partisan activity by employees or consultants.
Our review of the $1,025,695 in personal service costs the office
charged to HAVA funds in fiscal year 2003–04 revealed that the
office neither prepared the certifications for its employees that
worked full-time on HAVA activities nor instructed its employees
to complete monthly time sheets or other activity reports
required by federal cost principles to support the personal
service costs charged to HAVA funds. Further, two of the five
employees we reviewed whose entire salaries were charged to
HAVA funds reported attending certain events that did not
appear to relate to allowable HAVA activities. Therefore, the
office cannot assure that the personal service costs charged to
HAVA funds are accurate and allowable.
In addition, the office failed to adequately account for the activities
of some consultants it hired to assist in the implementation of
HAVA. Of the 169 staff activity reports submitted between
December 2003 and September 2004 by the regional outreach
consultants it hired, 62 (37 percent) listed one or more activities
that had no relationship to HAVA requirements. Some of these
consultants reported attending events such as fundraisers and a
state delegation meeting for the Democratic National Convention,
and indicated they were representing the secretary of state at
these events. However, HAVA does not specify these as allowable
activities and some appear to be partisan in nature. Although we
could not quantify the amounts paid to consultants for these types
of activities because the office did not require them to indicate on
their invoices the time spent on each one, we question the office’s
use of HAVA funds to pay for these types of activities.
118 California State Auditor Report 2005-406 California State Auditor Report 2005-406 119
The office also exercised poor oversight of a law firm’s contract
to provide legal services relating to HAVA, approving and paying
for invoiced services that violated the terms of the contract. The
contract stipulated that the law firm’s daily charge for services
would not exceed $1,200 per day and that the firm would
provide services one day a week on an as-needed basis. However,
an invoice for payment listed 17 separate days on which the
amount the firm charged exceeded the contract’s $1,200 per
day limit. Moreover, rather than providing services one day a
week, the firm billed the office for 22 days in January, 21 days in
February, 23 days in March, and five days in the first two weeks
of April 2004. Furthermore, the office paid for services rendered
before a binding contract was in place, and we found no
indication that the former chief counsel reviewed the invoice,
even though he was the office’s representative for this contract
and, therefore, was presumably more familiar with the legal
services rendered and the contract’s payment terms. Instead, the
invoice was reviewed and approved for expedited payment by
the chief assistant secretary of state.
In another example of its poor contract oversight, the office
hired a consulting firm to perform public outreach within
the context of HAVA. The consultant proposed preparing an
outreach plan and was asked to identify specific events, people,
and opportunities for outreach. Although the office used HAVA
funds to pay this consultant $4,750, it was unable to provide us
with a plan or any other work products for this contract.
As a result of the failure to provide proper oversight of employees
and consultants and the failure to prepare and maintain adequate
documents to support the costs charged to HAVA funds, the office
is at risk of having the federal government require repayment of
some, if not all, of the HAVA funds used to pay for these activities.
To establish or strengthen controls, comply with federal and
state laws, and reduce the risk that HAVA funds are spent
inappropriately, we recommended that the office take the
following actions:
• Develop clear job descriptions for employees working
on HAVA activities that include expectations regarding
conflicts of interest, incompatible activities, and any other
requirements important in administering federal funds.
120 California State Auditor Report 2005-406 California State Auditor Report 2005-406 121
• Establish and enforce a policy prohibiting partisan activities
by employees and consultants hired by the office; periodic
staff training and annual certification by all employees that
they have read and will comply should be part of this policy.
• Standardize the language used in all consultant contracts
to include provisions regarding conflicts of interest and
incompatible activities, such as partisan activities.
• Ensure that time charged to HAVA or any other federal
program is supported with appropriate documentation,
including time sheets and certifications.
• Require that contract managers monitor for the completion
of contract services and work products prior to approving
invoices for payment.
• Review invoices to assure that charges to be paid with
HAVA funds are reasonable and allowable and conform to the
terms of the contract.
Office Action: Pending.
The office responded that it communicated, verbally and
in writing, the specific roles and responsibilities of staff—
including the importance of following appropriate activity
and time sheet reporting procedures—and would include in
the their final duty statements a clear statement of conflicts
of interest, incompatible activities, and other requirements
important in administering federal funds. It indicated that it
was also collecting model language to develop written rules
prohibiting inappropriate partisan activities of employees and
consultants, and would establish a program of staff training
and annual certification to ensure ongoing compliance.
Further, it stated that it standardized the consultant contract
language to include conflicts of interest and incompatible
activities provisions. Additionally, it indicated that it obtained
and was adapting for its use, time sheets and procedures used
by other state agencies that receive federal funds. It stated
that it also reminded contract managers of the need to ensure
completion of contract deliverables before approving payment
and was writing detailed procedures for invoice approval. It
indicated it had implemented a system where a manager will
review contractor deliverables and that no HAVA funds would
be disbursed if contract obligations were not met and that this
oversight would be shared by its new management consultant.
120 California State Auditor Report 2005-406 California State Auditor Report 2005-406 121
Finding #3: The office used questionable practices to procure
goods and services related to HAVA.
The office bypassed competitive bidding for most
HAVA expenditures. It obtained and then inappropriately used
a Department of General Services (General Services) exemption
from competitive bidding for 46 of the 77 HAVA-expensed
contracts. Most of the contracts under this exemption did not
have the urgency described in the justification provided to
General Services and could have been competitively bid had the
office planned better. Further, the scope of work sections for
the voter outreach consultant contracts were vague, generally
requiring only that the consultant “perform voter and election
outreach activities” and did not establish any way to determine
whether the consultants’ efforts were successful. Further, the
office could not provide us with a plan showing what activities
these consultants were to complete by any specified deadlines.
Also, the office did not adequately ensure that its voter outreach
consultants were using their compensated time to educate voters
about HAVA-related issues.
Additionally, the office did not follow General Services policies in
making California Multiple Award Schedule (CMAS) procurements
when it split purchase orders to avoid CMAS procurement limits
and competitive bidding requirements on two HAVA-funded
projects. Further, for 10 of the 12 HAVA-expensed purchase orders
it made using CMAS, the office did not follow recommended
policy and obtain comparison quotes from other qualified vendors.
The office also did not follow state procurement policies that
require informal bids for two of the three non-CMAS commodity
purchase orders in our sample that the office issued and paid with
HAVA funds. As a result of these non-competitive procurement
practices, the State is less sure that the office obtained the best
value for the purchases it made with HAVA funds.
To establish or strengthen controls over procurements, we
recommended that the office take the following actions:
• Follow competitive bidding requirements to award contracts
and restrict the use of exemptions to those occasions that
truly justify the need for them.
• When competition is not used to award contracts, establish a
process to screen and hire consultants.
122 California State Auditor Report 2005-406 California State Auditor Report 2005-406 123
• Follow control procedures for the review and approval
of contracts to ensure that contracts include a detailed
description of the scope of work, specific services and work
products, and performance measures.
• Follow General Services policies when using CMAS for
contracting needs.
• Comply with state policy for procuring commodities.
Office Action: Pending.
The office responded that it would restrict the use of exemptions
from competitive bidding to those occasions that truly justify the
need. It also stated it was developing and documenting a process
to screen and hire consultants and, in the interim, would award
non-competitively bid contracts only if specifically approved
by the secretary of state and General Services. Additionally,
the office indicated that it established a standard contract
review process that requires a detailed scope of work, specific
deliverables, and performance measures. Further, it stated that it
would comply fully with applicable state procurement policies.
Finding #4: The office spent HAVA funds on activities for
which it had no spending authority.
The office bypassed the Legislature’s spending approval
authority. It inappropriately executed voter outreach contracts
valued at $230,400 in fiscal year 2004–05 although it had no
spending authority for these activities. Additionally, while
deliberations over the office’s fiscal year 2004–05 HAVA spending
authority were taking place, the consultants that received
fiscal year 2004–05 contracts to perform voter outreach work
had already begun work and subsequently submitted invoices
for their services. To pay for these invoices, the office charged
$84,600 in associated contract costs to its HAVA administration
account, which was inconsistent with its past practice for paying
for such activities.
We recommended that the office prohibit fiscal year 2004–05
expenditures for HAVA activities until it receives spending
authority from Finance and the Legislature.
122 California State Auditor Report 2005-406 California State Auditor Report 2005-406 123
Office Action: Pending.
The office responded that it would make sure that fiscal
year 2004–05 funds are not spent or obligated without the
appropriate spending authority.
Finding #5: The office unnecessarily delayed grant payments
to counties.
The office failed to disburse HAVA funds for replacing voting
machines within the time frames outlined in its grant application
package, internal procedures, and contracts with counties, causing
some to lose interest income they could have used to replace their
voting equipment. In a September 2003 application packet, the
office said that payment would occur approximately 30 days after
a county received written confirmation from the office that its
application had been approved and a contract had been executed.
Correspondingly, the office’s internal accounting procedures
outlined the timeline for payment at approximately 30 days for
application approval and 30 days for disbursement of funds, for a
total of 60 days. However, despite these assurances of prompt
payment, the office disbursed voting machine replacement funds
an average of 168 days after receiving the application, causing one
county to submit a claim for lost interest income.
We recommended that the office disburse federal HAVA funds to
counties for voting machine replacement within the time frames
set out in its grant application, procedures, and contracts.
Office Action: Pending.
The office responded that once it receives spending authority,
it would expeditiously disburse funds to eligible counties that
applied for voting machine replacement funds within the
time frames set out in the grant application, procedures,
and contracts.
124 California State Auditor Report 2005-406
CALIFORNIA COMMISSION ON
TEACHER CREDENTIALING
It Could Better Manage Its
Credentialing Responsibilities
REPORT NUMBER 2004-108, NOVEMBER 2004
Audit Highlights . . .
California Commission on Teacher Credentialing response as of
Our review of the credentialing January 2005
process administered by
the California Commission The Joint Legislative Audit Committee asked us to study the
on Teacher Credentialing
effectiveness and efficiency of the teacher credentialing
(commission) revealed
the following: process administered by the California Commission on
Teacher Credentialing (commission). Our audit found that
þ The commission could
the commission could make improvements to better evaluate the
better evaluate the
effectiveness of the programs it oversees and its internal operations, more effectively
programs it oversees manage its application processing, and refine how it updates
and better measure the
program standards.
performance of the teacher
credentialing process.
þ The commission could Finding #1: The commission has neither fully evaluated nor
take additional steps to accurately reported the results of two of its three teacher
improve its processing of
development programs.
credential applications,
including focusing its The commission’s teacher development programs provide
customer service activities.
funding for individuals who do not yet meet the requirements
þ Several areas of the for a teaching credential. However, the commission has neither
commission’s process sufficiently evaluated nor accurately reported on two of its three
for developing program
teacher development programs. Specifically, the commission
standards lack structure
did not have the effectiveness of the California School
and could be improved.
Paraprofessional Teacher Training Program (paraprofessional
þ The commission suspended program) independently evaluated, as state law requires. The
its continuing accreditation
commission indicates that the high cost of this evaluation is a
reviews in December 2002
and is evaluating its concern, but it could not provide documentation that it sought
accreditation policy, and the funding it believes is needed for the evaluation. Further,
it does not expect to
because the commission did not develop ways to measure and
present a revised policy to
monitor local program performance, nearly 70 participants
its governing body until
August 2005. whose participation in the paraprofessional program was
scheduled to end by December 2003 have not completed
credential requirements. In addition, the commission overstated
the benefits of the Pre-Internship Teaching Program in a report
to the Legislature and could not provide support for certain
assumptions in this report. Finally, although no requirement
California State Auditor Report 2005-406 125
exists for the commission to evaluate its intern program,
commission data indicates that the program has been successful
in meeting its objectives.
We recommended that the commission establish performance
measures for each of its teacher development programs. We also
recommended that the commission ensure that the statistics it
presents in its program reports to the Legislature are consistent and
that it maintains the supporting documentation for these statistics.
Further, we recommended that the commission monitor how
local teacher development programs verify the academic progress
of participants and establish consequences for underperformance.
Finally, we recommended that the commission resume requests
for budget increases to fund an independent evaluation of its
paraprofessional program that assesses all the requirements in the
applicable statute or seek to amend those parts of the law that it
believes would be too costly to implement.
Commission Action: None.
The commission agrees it could adopt additional performance
measures that address the effectiveness of programs in
meeting statutory objectives. The commission indicated
that a process it implemented in 2001 to track candidate
enrollment in each of its teacher development programs will
help the commission monitor the effectiveness of programs
in helping candidates achieve a credential.
Finding #2: The commission could improve its ability to
measure the performance of preparation programs and the
teacher credentialing process.
The commission annually reports on the number of California
teaching credentials it issues and the number of emergency
permits and credential waivers it grants. However, it provides
this information with limited, if any, analysis of the trends
associated with these numbers and does not account for external
factors that could affect these statistics. In addition, if the
commission and the other entities involved worked to remove
current obstacles, the commission could use the results of the
teaching performance assessment, annual data on retention
of teachers, and administrator surveys that are currently in
development to better measure various aspects of the process
and the preparation programs.
126 California State Auditor Report 2005-406 California State Auditor Report 2005-406 127
We recommended that the commission include an analysis
with the statistics it publishes in its annual reports to provide
context to education professionals and policy makers for
why the number of credentials, permits, and waivers it issues
has changed. We also recommended that the commission
collaborate with colleges and universities to determine what
funding is necessary to activate and maintain the teaching
performance assessment as the enabling legislation envisioned
it. It should then request the Legislature and the Governor’s
Office to authorize this function in future budget acts. Finally,
to aid it in developing performance measures for preparation
programs, we recommended that the commission keep itself
informed of surveys and reports that other entities prepare.
We also recommended that the Legislature consider giving the
commission a specific policy directive to obtain and use data
on teacher retention to measure the performance of the process
and preparation programs and provide this information in its
annual reports.
Commission Action: None.
Although the commission agrees that a thoughtful analysis
of teacher supply and demand data is helpful to policy
makers at all levels, it stated that such an analysis would
require additional resources and information that are
not currently available to it. However, we disagreed that
Ü
additional staffing was needed to conduct this analysis
because we found that most of the information needed was
readily available. The commission also indicated that such
an analysis could be at odds with state policy directives
or increase the State’s exposure to litigation. Finally, the
commission indicated that it provides data upon request to
independent bodies that conduct such analyses.
The commission stated that it would continue to work
with colleges and universities to implement the teaching
performance assessment on a voluntary basis and that
it looks forward to direction from state policy makers
in resolving funding issues that have prevented the full
Ü
implementation of the assessment. In addition, the
commission is amending its grant process to include
performance measures for its teacher development programs.
Finally, the commission indicated that it is considering
systematic collection of valid and reliable data gathered
through surveys and performance assessments as part of its
review of the accreditation system.
126 California State Auditor Report 2005-406 California State Auditor Report 2005-406 127
Legislative Action: Unknown.
Finding #3: The commission has not established specific
performance measures for its divisions.
The commission’s February 2001 strategic plan (2001 plan),
which the commission partially updated just after we completed
our fieldwork, was outdated and did not establish the specific
performance measures the commission needed to evaluate the
results of its current efforts. In addition, the commission does not
systematically track whether it is successfully completing the tasks
it outlined in the 2001 plan. As a result of inadequate strategic
planning, the commission has lacked specific performance
measures to guide, evaluate, and improve its efforts.
We recommended that the commission regularly update
its strategic plan and quantify performance measures when
appropriate in terms of the results the commission wants to
achieve. We also recommended that the commission present
the commission’s governing body (commissioners) with an
annual status report on how the commission has achieved the
goals and tasks outlined in the strategic plan.
Commission Action: None.
During the audit, the commission indicated that it had
postponed long-range strategic planning until vacancies on
the commission’s governing body are filled. The commission
indicates that it does not plan to take action to address
our other recommendation because its executive director
annually prepares a list of accomplishments that are directly
linked to the strategic goals, which is read at a commission
meeting. The commission also indicated that its agenda
items provide a status report on the goals and tasks at each
meeting. However, as we observed during the audit, the
Ü
executive director’s list of accomplishments does not track
the progress of the strategic plan tasks.
Finding #4: The commission has made efforts to streamline
and remove barriers from the teacher credentialing process.
Although state law mandates the framework of the teacher
credentialing process, the commission has the responsibility
to analyze the process periodically and report to the Legislature
if particular requirements are no longer necessary or need
128 California State Auditor Report 2005-406 California State Auditor Report 2005-406 129
adjustment. In exercising its oversight of the process, the
commission has implemented some reforms and is contemplating
others. The commission has also worked to reduce the barriers
to becoming a California teacher. In addition to these efforts,
the commission is considering whether to consolidate the
examinations that it requires prospective teachers to pass.
We recommended that the commission continue to consider ways
to streamline the process, such as consolidating examinations it
requires of credential candidates. If the commission determines
that specific credential requirements are no longer necessary, it
should seek legislative changes to the applicable statutes.
Commission Action: Pending.
The commission concurs and added that it has been
exploring the possibility of streamlining examinations for
the past year.
Finding #5: By better managing its customer service,
workload, and technology, the commission could improve
application processing.
By focusing its customer service, better managing its workload,
and taking full advantage of a new automated application-
processing system, the commission could improve its processing
of applications. Facing a significant volume of contacts, the
commission has not taken sufficient steps to focus its customer
service activities. Proper management of customer service is
necessary because the large volume of telephone calls and
e-mails that the commission receives takes staff away from the
task of processing credential applications.
Although the commission typically processes applications
for credentials in less than its regulatory processing time of
75 business days, applications go unprocessed for a significant
amount of this time because staff members are busy with other
duties. The commission has taken some steps to improve its
process, including automating certain functions as part
of its Teacher Credentialing Service Improvement Project
(TCSIP), which is a new automated application processing
system that the commission planned to implement in late
October 2004. However, the commission has not performed
sufficient data analysis to make informed staffing decisions.
TCSIP offers tangible time-saving benefits, such as allowing
colleges and universities to submit applications electronically
128 California State Auditor Report 2005-406 California State Auditor Report 2005-406 129
and automating the commission’s review of online renewals,
but the commission does not plan to use either function to
its full potential in the foreseeable future. Although online
renewals offer the benefit of faster and more efficient processing,
the commission has not sufficiently publicized this benefit.
The commission could do more to inform teachers about the
benefits of online renewal by performing the data analysis
necessary to determine where the commission needs to do
additional outreach and by better highlighting online renewal’s
availability and faster processing time. Finally, we noted that the
commission could be more efficient by automating how it routes
and responds to customers’ e-mails.
We recommended that the commission gather meaningful data
about the types of questions asked in e-mails to use with data
from its telephone system to improve the public information it
provides. To ensure the effective management of its application
workload, we recommended that the commission routinely
monitor the composition of the applications that it has not
yet processed and collect and analyze data on the average
review times for different types of applications. In addition,
we recommended that the commission routinely have TCSIP
create automated reports to track the average processing times
and list applications that are taking more than 75 business
days to process. To optimize the time-saving benefits of TCSIP,
we recommended that the commission require colleges and
universities to submit credential applications electronically
to the extent that is economically feasible and consider
expanding TCSIP to allow school districts to submit applications
electronically, which would then allow for an automated review
of routine applications. Further, to encourage more teachers
to renew their credentials online and to determine whether
additional outreach efforts may be necessary, we recommended
that the commission gather data on and study the percentage
of renewals it receives online for different types of credentials.
Finally, we recommended that the commission automate its
response to and routing of e-mails.
Commission Action: Partial corrective action taken.
The commission indicated that it has developed a method
that staff now use to gather data on e-mails. In January 2005,
the commission changed its Web site to respond to questions
that customers ask on the telephone and in e-mails. The
130 California State Auditor Report 2005-406 California State Auditor Report 2005-406 131
commission disagreed with our recommendation to routinely
Ü monitor the composition of applications waiting to be processed
as well as collect and analyze data on average processing times
for different application types because it did not believe this
recommendation was feasible or cost effective. The commission
states that it plans to develop an automated report to track
application processing times once TCSIP is implemented. The
commission indicates that it will do everything possible to
encourage colleges and universities to submit applications
electronically, but indicates that enhancing the online process
to allow school districts to submit applications electronically
will require additional resources. To encourage more educators
to renew credentials online, the commission indicates its new
Web site has a clearly displayed link for this function. Further,
the Web site and the commission’s pamphlets now state that
online renewals are processed within 10 working days. Finally,
the commission indicates that it has developed an automated
response to all incoming e-mails and is working on a system
to route the e mails.
Finding #6: The commission’s process for developing teacher
preparation program standards lack structure and could
be improved.
The commission is in the midst of a 10-year process of developing
program standards that comply with the requirements of
Senate Bill 2042, Chapter 548, Statutes of 1998 (act). The
commission does not have an overall plan to guide its efforts to
finish implementing program standards or its ongoing standard-
setting activities. Further, the commission’s recent experiences
developing program standards to meet the act’s requirements offer
an opportunity to evaluate how to better manage its future efforts.
Our review of five sets of recently developed program standards
identified areas in the commission’s process for developing
program standards that lack structure and could be improved.
Among other issues, the commission does not use a methodical
approach to form advisory panels of education professionals that
assist it in developing program standards; neither does it always
put in perspective the results of its field-review surveys to the
commissioners when recommending standards for adoption.
Finally, we found that the commission had an inadequate policy
for ensuring staff maintain important documents related to the
development of program standards.
130 California State Auditor Report 2005-406 California State Auditor Report 2005-406 131
We recommended that the commission develop an overall
plan to guide its efforts to update program standards. This
plan should describe the commission’s process for developing
standards and should provide more structure for that process.
We also recommended that the commission develop a
methodical approach to forming advisory panels to ensure that
it objectively appoints education professionals to those panels.
Further, to provide commissioners with a better perspective
on the results of field-review surveys, we recommended that
commission staff report the actual results for each standard.
Finally, we recommended that the commission implement a
more specific record retention policy.
Commission Action: Partial corrective action taken.
The commission indicates that it has finished its work related
to the development and implementation of program standards
to meet the act’s requirements, but agrees that a long-range
plan with associated timelines for reviewing and updating
future program standards would be a helpful planning tool.
Ü
However, as we stated in the report, the commission is still
developing five sets of single subject standards—which it plans
to adopt in July 2005—and it is implementing eight other
single subject standards—four in July 2005 and the remaining
four in July 2006. Thus, we believe that significant planning
efforts remain for the commission.
The commission believes that it uses a methodical approach
to appoint advisory panel members and that its approach
does not lend itself to a checklist type of evaluation of
applicants relative to the commission’s qualifications and
standards. However, our analysis of the commission’s process
Ü
to form advisory panels found that the panel applications
were not structured to specifically address how candidates
meet the commission’s qualifications, the commission
did not use a consistent ranking process to ensure that it
appointed the most qualified or desired candidates, the
commission did not use a checklist or other review tool to
ensure that candidates meet its qualifications, and that it was
unclear how the commission considered the role of ethnic
diversity and other factors in its selections.
Further, the commission disagrees with our recommendation
to present the actual field-survey results to the commissioners
because it indicates that commissioners have not raised an
issue with this method. The commission also noted that it
could provide the results to the commissioners upon request.
132 California State Auditor Report 2005-406 California State Auditor Report 2005-406 133
Finally, the commission indicates that it has updated
its record retention policy for documents related to the
development of program standards.
Finding #7: The commission suspended its continuing
accreditation reviews of colleges and universities.
The commission suspended its continuing accreditation
reviews of colleges and universities in December 2002 to allow
colleges and universities time to implement the commission’s
new standards and for it to evaluate its accreditation policy.
Continuing accreditation reviews are an important component
of the commission’s accreditation system and help ensure that
colleges and universities operate teacher preparation programs
that meet the commission’s standards. Although the commission
has been working with representatives from colleges and
universities to evaluate its accreditation policy, it does not plan to
propose a revision to the commissioners until August 2005.
We recommended that the commission promptly resume its
continuing accreditation reviews and take steps to complete the
evaluation and revision of its accreditation policy promptly.
Commission Action: None.
The commission indicates that it plans to make
recommendations to the commissioners on revisions to the
accreditation framework in spring or early summer 2005.
Because colleges and universities have requested a 24-month
preparation period for onsite accreditation reviews, the
Ü
commission believes that the earliest practical date that it
could initiate site visits would be fiscal year 2006–07.
132 California State Auditor Report 2005-406 California State Auditor Report 2005-406 133
134 California State Auditor Report 2005-406
WIRELESS ENHANCED 911
The State Has Successfully Begun
Implementation, but Better Monitoring
of Expenditures and Wireless 911 Wait
Times Is Needed
REPORT NUMBER 2004-106, AUGUST 2004
Audit Highlights . . .
Department of General Services’ and California Highway Patrol’s
Our review of the State’s responses as of October 2004
wireless enhanced 911
(wireless E911) program Since 1993, Californians have relied on a landline enhanced
revealed that:
911 (landline E911) system for fast, lifesaving responses
þ Under the leadership from police, fire, and emergency medical services. The
of the Department of
landline E911 system improved on the original “basic” 911
General Services’ 911
system by routing calls to dispatchers at the appropriate public
Office (General Services),
California has addressed safety answering points (answering points) and providing
many of the concerns raised the callers’ locations and telephone numbers on dispatchers’
by two federal reports on
computer screens. However, the increasing use of mobile
nationwide implementation
phones for 911 calls has created the need for a similar wireless
of wireless E911.
emergency call system (wireless E911).
þ Although much work
remains to be done,
According to a 2002 report from the Federal Communications
General Services plans
to have wireless E911 Commission (Hatfield report), national progress toward a fully
implemented throughout functioning wireless enhanced 911 system has been delayed,
most of the State by
with many states lacking the central coordination and dedicated
December 2005.
funding source to implement such a system. Thus, 911 callers
þ Most California Highway using mobile phones may have trouble connecting to appropriate
Patrol (CHP) centers
answering points, and may not have their locations or mobile-
do not have systems to
phone numbers transmitted to dispatchers. Such problems
monitor how long they
take to answer 911 calls, with wireless emergency calls can compromise the success of
and more than half the emergency response teams in protecting life and property.
centers that tracked wait
times did not meet the
The Joint Legislative Audit Committee (audit committee)
State’s goal to answer 911
calls within 10 seconds. requested that the Bureau of State Audits review the State’s
emergency 911 response program to explore efficiency
þ Wait times were high, in
improvements and identify the cause of answering delays.
part, because dispatchers
at CHP centers handled We were also asked to determine the status of the State’s
significantly more 911 implementation of the wireless E911 project and to identify
calls per dispatcher than
obstacles that are contributing to any delays. Further, the audit
did local answering points
committee asked us to identify the locations in the State where
we contacted.
wireless 911 call wait times are longest and to determine the
continued on next page . . .
factors that contribute to the delays.
California State Auditor Report 2005-406 135
þ Unfilled dispatcher The Department of General Services’ 911 Office (General Services),
positions at CHP centers which is responsible for coordinating the State’s implementation
contributed not only to
of wireless E911, has helped the State avoid problems other states
longer wait times but also
face during implementation. We are concerned, however, that
to significant overtime
costs for the CHP. the California Highway Patrol (CHP), which responds to the great
majority of wireless 911 calls, has inadequately monitored the
þ The CHP does not expect
calls and has had difficulty hiring dispatchers.
the number of wireless
911 calls diverted to local
answering points to exceed
20 percent statewide. Finding #1: General Services cannot readily differentiate
expenditures for the wireless E911 project from those for the
landline 911 program.
General Services enters expenditures from the 911 program into an
expenditure database it maintains, enabling it to track its costs and
manage the 911 program as a whole. However, General Services does
not include elements in its database that would enable it to readily
differentiate expenditures for the wireless E911 project from those
for the landline 911 program. Rather, General Services can easily
determine only its expenditures for the entire 911 program. As a result,
when we asked General Services how much it had spent to date on the
wireless E911 project, it could not provide us with that information.
However, we analyzed data from General Services’ database and
determined it had spent at least $4.7 million on wireless E911 as of
June 2004. We were not able to obtain all of the wireless costs because
some are not distinguished from landline 911 costs. Although the
chief of General Services’ 911 Office told us that a report that captures
monthly costs for wireless E911 costs is under way, the report may not
completely capture all wireless E911 costs because of the missing data
elements in the database. Adding data elements to uniquely identify
costs as wireless or landline would enable General Services to produce
accurate expenditure information for both the landline and wireless
E911 systems, use the information to make ongoing comparisons of
actual expenditures and planned spending, and monitor the wireless
E911 project to determine if its cost estimates are reasonable.
To adequately monitor the funding and progress of the
implementation of wireless E911, General Services should separately
track expenditures related to the wireless E911 project, comparing
actual to anticipated expenditures.
General Services’ Action: Corrective action taken.
General Services states that it has revised the existing project
database to allow wireless 911 costs to be more easily identified,
and developed a reporting system to assist management in
monitoring those costs. Further, its staff have been trained on
the new expenditure tracking and reporting system.
136 California State Auditor Report 2005-406 California State Auditor Report 2005-406 137
Finding #2: The State has diverted more than $150 million of
911 program funds to the General Fund.
Although the Revenue and Taxation Code states that the money
collected from the telephone surcharge must be used solely for the
911 program, the State Emergency Telephone Number Account
(emergency account) has been tapped for other purposes. In six
fiscal years since 1981–82, a total of almost $177 million has been
transferred from the emergency account to the State’s General
Fund, and only $24.6 million has been transferred back. The latest
transfer was in fiscal year 2001–02 for more than $63 million. It
appears that the State does not intend to repay these transfers
because it does not show any amounts receivable from the General
Fund on its financial statements for the emergency account.
Although General Services believes these transfers will not
adversely affect its ability to implement wireless E911, we
believe the transfers could jeopardize future improvements to the
911 system. The Hatfield report raises serious questions about
the nation’s 911 infrastructure. Specifically, the report states that
the existing landline E911 infrastructure, although generally
reliable, is seriously antiquated and built on outdated technology.
To be effective in an overwhelmingly digital world, the analog
infrastructure may need major upgrades to extend E911 access to
a rapidly growing number of nontraditional devices. In response
to these issues, General Services has indicated it is currently in
the conceptual stages of a project to update the State’s landline
E911 infrastructure, but it does not have a financial plan or cost
estimate for such a project at this time. Should the State decide it
is necessary to upgrade the infrastructure, the $152 million in net
transfers may hamper its efforts. Moreover, because the current
surcharge is close to the legal maximum, if additional revenue is
needed, legislation would be necessary to authorize that increase.
To ensure adequate funding is available for future upgrades of the
911 system infrastructure, General Services should complete its
conceptual plan for the project and, if it determines significant
upgrades are needed, complete a financial plan for the project.
The Legislature should consider the effects on future 911 projects
when diverting funds from the 911 program.
General Services’ Action: Pending.
General Services reports that it is continuing work on the
project it calls Next Generation E911 Network, in which
General Services is evaluating ways to incorporate emerging
136 California State Auditor Report 2005-406 California State Auditor Report 2005-406 137
technologies with a more flexible, sophisticated and cost
effective 911 system. General Services states that it is
currently evaluating responses to a request for information
that it sent out to obtain industry feedback on the 911
database requirements. General Services estimates that it
will complete the evaluation process in February 2005. If it
determines that significant upgrades are ultimately needed,
General Services states that it will complete a financial plan
for the database enhancement phase of the project.
Finding #3: Most CHP centers do not have systems to
monitor how long they take to answer calls.
As required by state law, the CHP answers 911 emergency calls
that originate from wireless phones and are not routed to local
answering points, such as police, fire, or sheriff’s departments.
To respond to these calls, the CHP operates 24 centers that
function as answering points for wireless 911 calls. Of the CHP’s
24 centers, 15 lack systems to track either the amount of time a
caller waits before a dispatcher answers a call or how many calls
are unable to get through because all the center’s lines are busy.
Therefore, at these 15 centers, the CHP can neither determine
how long a caller waits before reaching a dispatcher nor monitor
its activities adequately to ensure that it answers 911 calls
promptly. Thus, the CHP may be unaware that problems exist.
At nine of its 24 centers, the CHP has installed an automatic
call distributor to improve its ability to answer calls. The call
distributor routes incoming calls to available dispatchers and,
when a dispatcher is not available, places the call in a queue
until one becomes available. With these systems, the CHP is
generally able to monitor how long callers must wait before
being answered. However, according to its 911 coordinator, the
CHP has not installed automatic call distributors in 15 of the
24 centers because it believes the volume of calls received by
those centers does not merit the cost of installing and using
the system. Rather, each of the 15 centers has a phone system
with a certain number of phone lines. When a call comes into
one of the centers, an available dispatcher answers the call.
If no dispatcher is available, the call continues to ring until a
dispatcher can pick up the line. Additionally, if the number of
calls coming into the center exceeds its number of phone lines,
the caller receives a busy signal. This type of system is likely
to leave already-distressed callers even more upset by the lack
of assurance that someone is responding to their emergencies.
138 California State Auditor Report 2005-406 California State Auditor Report 2005-406 139
Further, the system lacks a mechanism to track how long callers
wait for dispatchers to answer. Although the CHP does not have
a good system to monitor wait times, the chief of the CHP’s
Information Management Division has indicated that the CHP
closely tracks citizen’s complaints about its handling of 911 calls.
According to the CHP’s 911 coordinator, as part of its
implementation of wireless enhanced 911 (wireless E911), the
CHP will be equipping each of these 15 centers with technology
that will allow the CHP to monitor the amount of time callers
wait before a dispatcher answers the call. The CHP expects to
have the new systems in place by the end of 2005, consistent
with the State’s plan for implementation of wireless E911.
To assist it in answering 911 calls in a timely manner, as the CHP
implements wireless E911, it should include a wait time monitoring
system at the 15 centers that currently are without one.
CHP Action: Partial corrective action taken.
The CHP states that it is in the process of purchasing a
management information system for all of its communications
centers that will enable each center to monitor wait times.
The CHP estimates that installation will be complete by
December 31, 2005, dependent upon availability of funding
and personnel resources.
Finding #4: The CHP handles significantly more 911 calls
per dispatcher than any of the four local answering points
we reviewed.
For the nine centers that collected data, the CHP received between
598 and 1,733 calls per dispatcher each month from January
through March 2004, whereas the local answering points we
contacted received from 95 to 214 calls per dispatcher in the same
period. The difference in the calls per dispatcher between the CHP
and the local answering points is significant because even with
the implementation of the wireless E911 project and its associated
benefits, if the CHP does not have enough dispatchers to answer
the wireless 911 calls it receives, it will likely continue to struggle to
answer calls within the 10-second goal set by the State.
Disparities in staffing, however, do not fully explain the wide
range in wait times at the nine CHP centers. For January through
March 2004, the center with the highest average number of
calls (1,733) per staff person, the Orange County Region, also
138 California State Auditor Report 2005-406 California State Auditor Report 2005-406 139
had the shortest wait time, 4.7 seconds on average. On the
other hand, the Los Angeles and San Francisco Bay Area regions
had significantly fewer calls per staff and longer wait times—
862 calls with a wait time of 49.2 seconds for Los Angeles and
598 calls with a wait time of 38 seconds for the San Francisco
Bay Area Region. Dispatchers at CHP centers, as well as those at
some local answering points, have duties other than answering
emergency calls, such as answering nonemergency calls, but
we do not know the relative impact on wait time of these
additional duties at the various sites. The performances at
the Los Angeles and San Francisco Bay Area CHP centers may
also have been affected by their implementation of wireless
E911. The 911 supervisor at the Los Angeles CHP center points
out that implementation presented an additional challenge
because the center’s staff had to accustom themselves to the
display information from the wireless E911 calls they answered
while continuing to work with the original system on other
calls. Further, he indicated that test calls for wireless E911
implementation take up time, as the dispatcher has to confirm
that various data are correctly transmitted.
To assist it in answering 911 calls in a timely manner, the CHP
should identify additional practices that enable some centers,
such as Orange County, to answer 911 calls in a timely manner
despite high calls to staff ratios, and determine if the practices
can be incorporated at other centers.
CHP Action: Corrective action taken.
The CHP reports that it is addressing this recommendation
through its Command Assessment Program, which requires
biennial evaluation of the management practices and the
essential functions of each CHP command. The CHP will
incorporate innovations noted in these assessments into the
training materials and curriculum at its statewide Dispatch
Academy. The CHP also states that in November 2004, it
will prepare written policy requiring division commanders
to forward the assessment findings and recommendations
pertaining to dispatch operations directly to the Information
Management and Training divisions. The CHP believes this
will expedite the review and consideration of findings by CHP
personnel with responsibility for statewide dispatch policy. The
CHP also adds that successful practices will be added to the
agenda of its Communication Center Commander Conference,
which it will convene no later than the third or fourth quarter
of 2005, assuming funding is available for travel.
140 California State Auditor Report 2005-406 California State Auditor Report 2005-406 141
Finding #5: The CHP does not have a benchmark for the
number of staff needed to answer calls.
According to the assistant commander of its Telecommunications
Division, the CHP has not established a benchmark for the
number of 911 calls per dispatcher that would allow the CHP to
answer 911 calls promptly. If it had a benchmark, the CHP could
compare its centers’ current ratios of 911 calls per dispatcher
against the benchmark to assess the need for additional
dispatchers. To establish a reasonable benchmark, the CHP would
need to develop a better system for tracking the total number of
911 calls received at each of its centers.
Currently, to monitor the number of 911 calls it receives, the CHP
requires each center to track the number of 911 calls it handles
during one day each month and report these counts to the
CHP’s Telecommunications Division. The CHP then multiplies
the counts by the number of days in that month to arrive at an
estimate of the total 911 calls the CHP answered for the month.
However, this process has resulted in unreliable data. The CHP
used a fully manual tally system to count 911 calls in 19 of the
24 centers. In these centers, the CHP relied on dispatchers to
make tally marks on a sheet each time they completed a 911 call.
However, administrators at several centers told us this process did
not produce accurate results because it is difficult for dispatchers
to remember to tally after each call. In fact, four of the 19 centers
preparing manual counts had automatic call distributors, which
enable the centers to produce automated reports detailing the
number of 911 calls they receive each month.
Additionally, this process assumes that the activity level of
one day will be representative of the entire month. However,
the volume of 911 calls the CHP receives is affected by factors
that are highly variable, such as weather and major incidents.
Therefore, one day would not necessarily be representative of
others. Because these centers report the number of 911 calls
for only one day each month, the results are not necessarily
reliable and may result in an overstatement or understatement
of call activity. Only the San Diego center reported calls for each
month based on its automated call distributor data. Additionally,
another center with the automated call distributor, Stockton,
had not submitted tally reports during 2003.
During 2003, the Los Angeles CHP center performed manual tallies
of its 911 counts. However, these manual counts significantly
understated its actual number of 911 calls––by almost 705,000, or
43 percent. On the other hand, the Fresno CHP center produced
140 California State Auditor Report 2005-406 California State Auditor Report 2005-406 141
manual call tallies that significantly overstated its 911 calls––by
almost 222,000, or 76 percent. Because the CHP does not track
actual 911 calls at all its centers, we are unable to determine
whether, in total, the CHP overstated or understated its 911 calls.
Nonetheless, it is clear that the CHP’s current process to develop an
estimate of the number of 911 calls it receives produces unreliable
results. Without reliable data relating to the number of 911 calls
its centers answer, the CHP will have difficulty developing a
benchmark for the number of 911 calls per dispatcher that would
allow the CHP to answer 911 calls promptly.
To assist it in answering 911 calls in a timely manner, the CHP
should implement a reliable system for monitoring the number
of 911 calls its centers receive. Additionally, it should develop a
benchmark reflecting the ratio of 911 calls per dispatcher that
would allow the CHP to answer 911 calls within the state goal of
10 seconds.
CHP Action: Partial corrective action taken.
The CHP states that the management information system
it is implementing, as described in finding #3 above, will
also enable it to monitor the call volume at each of its
call centers. Additionally, the CHP states that it intends to
develop a benchmark that will consider call volume data,
communication center size, and incorporate shift parameters
that affect high traffic volumes along with seasonal and
special events that can induce peaks. The benchmarks will
be used to evaluate and validate dispatch staffing levels. The
CHP reports that it is developing a committee comprised
of management and dispatch personnel to evaluate study
findings and develop a valid staffing matrix. This committee
will first meet during the second quarter of 2005.
Finding #5: CHP dispatchers’ salaries are generally lower than
those of dispatchers at the local answering points.
We compared the dispatcher salaries paid by the CHP in its
Los Angeles and Sacramento centers with those paid by selected
local answering points in the same areas. The salaries of CHP
dispatchers are generally lower than those of dispatchers at the
local answering points we contacted. Although the starting pay
for dispatchers at the Sacramento County Sheriff’s Office is lower
than the CHP’s, all other local answering points we contacted
paid starting salaries ranging from $40 to $842 per month more
than the starting salaries for CHP dispatchers.
142 California State Auditor Report 2005-406 California State Auditor Report 2005-406 143
To help attract and retain dispatchers at its centers, the CHP
should request that the Department of Personnel Administration
perform a statewide salary survey to determine the adequacy of
the current salaries for CHP dispatchers.
CHP Action: Partial corrective action taken.
The CHP states that it will request the Department of
Personnel Administration conduct a statewide survey of
dispatcher salaries prior to the end of March 2005.
142 California State Auditor Report 2005-406 California State Auditor Report 2005-406 143
144 California State Auditor Report 2005-406
CALIFORNIA CHILDREN AND
FAMILIES COMMISSIONS
Some County Commissions’ Contracting
Practices Are Lacking, and Both the State
and County Commissions Can Improve
Their Efforts to Find Funding Partners and
Collect Data on Program Performance
REPORT NUMBER 2003-123, JULY 2004
Audit Highlights . . .
The California Children and Families Commission and various
Our review of the state and county commissions1 responses as of September 2004
five counties’ California
Children and Families The Joint Legislative Audit Committee (audit committee)
Commissions funded by
requested the Bureau of State Audits to review the
Proposition 10 tax revenues
revealed the following: California Children and Families Commission (state
commission) and a sample of county commissions. Specifically,
þ The state commission
the audit committee requested us to review and evaluate the
consistently followed
contracting rules policies and procedures the state commission and a sample
applicable to all state of county commissions use to collect, deposit, distribute, and
agencies, but some county
spend Preposition 10 tax revenues. In addition, the audit
commissions lacked well-
committee requested that we determine whether county
defined and documented
policies and practices for commissions have surplus balances and what they intend to do
awarding contracts to with these funds. Further, we were to determine the extent to
service providers.
which county commissions have periodic internal or external
þ To monitor service providers, reviews, such as performance or financial audits, of their
county commissions operations. Also, we were asked to examine county commissions’
require them to submit
level of oversight of service providers, including the nature and
quarterly progress reports
extent to which service providers have standards and whether
as a condition of
receiving payment. they report their progress to the county commissions. Moreover,
the audit committee requested that we identify the amount
þ The county commissions
county commissions spend on administration and travel, and
maintained significant
fund balances as of determine whether the percentages spent on these activities
June 30, 2003, but are appropriate. We were also asked to determine whether
have earmarked most of
county commissions have sought funding partners to leverage
these fund balances for
local funds through partnerships. Lastly, the audit committee
specific purposes.
requested that we evaluate the process county commissions use
continued on next page . . .
to select their chairpersons.
1El Dorado County, Kern County, Los Angeles County, San Diego County, and
Santa Clara County.
California State Auditor Report 2005-406 145
þ Although the state and Finding #1: Not all county commissions follow well-defined
county commissions policies and procedures when allocating funds.
acknowledge the
importance of funding Two of the county commissions we reviewed maintain insufficient
partners, the commissions records of their funding practices and one lacks well-defined
have received little funding
allocation practices. To gain public credibility and confidence,
outside their Proposition 10
tax revenues. county commissions should consistently follow self-defined
allocation practices that are clear and well documented. In spite
þ Some county commissions
of this, some county commissions lack necessary documentation
lack clear policies limiting
to substantiate their allocation procedures, and one county
their administrative
spending. commission’s funding policies are poorly defined. In addition,
when well-defined policies do exist, another county commission
þ State and county
did not always follow them. Lastly, some county commissions
commissions have only
recently begun to evaluate did not disclose to the public the noncompetitive nature of their
program effectiveness allocations of funds, which could raise concerns about whether
and so far have mainly
service providers are competent and charge a fair price.
reported demographic
and service output data
rather than performance To ensure the appropriate use of program funds and instill
outcomes. public confidence, we recommended that the Kern and
Santa Clara county commissions adopt and follow well-defined
policies to guide their allocation efforts and maintain sufficient
documentation to support their allocation decisions.
First 5 Santa Clara Action: Corrective action taken.
According to First 5 Santa Clara, its commission approved an
interim purchasing policy that defines the different methods
that First 5 Santa Clara may use to select vendors, service
providers, and grantees. First 5 Santa Clara also stated it
now documents the selection process used and retains such
information in its contract files.
First 5 Kern County: Partial corrective action taken.
First 5 Kern stated that it had compared its contracting
policy to that of the county, after which it was modeled,
and identified no significant differences. First 5 Kern stated
that its contracting policy satisfies all legal requirements,
meets the needs of the commission, and it does not intend
to make any changes. Concerning maintaining adequate
documentation, First 5 Kern stated it has implemented an
internal form to document the resolution of any weaknesses
identified by the independent evaluation committee during
its evaluation of proposals, will clearly disclose to the public
the nature of any future funding awards it makes in its
minutes, and implemented a rating tool using proposal-
specific criteria to evaluate future proposals.
146 California State Auditor Report 2005-406 California State Auditor Report 2005-406 147
Finding #2: Efforts to obtain funding partners have produced
little non-state funding.
The California Children and Families Act of 1998 (Act) grants
the state commission and each county commission the authority
to apply for gifts, grants, and donations to further a program
of early childhood development. Although the state and
county commissions acknowledge the important role funding
partners can play in addressing early childhood development
and sustaining ongoing programs, they have received very little
funding from sources other than Proposition 10 tax revenues.
For fiscal year 2002–03, only one county commission we
reviewed had received any grant funding, which represented less
than 1 percent of that commission’s total revenue, and the state
commission received less than 7 percent of total revenue from
contracts and interest on investments.
To address the sustainability of their programs, we
recommended that the state and county commissions continue
to take action to identify and apply for any available grants,
gifts, donations, or other sources of funding.
First 5 Santa Clara Action: Partial corrective action taken
First 5 Santa Clara states it is actively pursuing outside
resources and is retaining a consultant to draft a plan to assist
it in seeking funding opportunities.
First 5 Kern Action: Partial corrective action taken.
First 5 Kern stated that it would continue to explore
opportunities for other sources of funding and mentioned
recently receiving a significant monetary award.
First 5 Los Angeles Action: Partial corrective action taken.
First 5 Los Angeles stated it was focused on creating
partnerships between the commission and communities,
families, and public and private organizations to share the
responsibility for mobilizing social and financial capital.
First 5 El Dorado Action: Partial corrective action taken.
First 5 El Dorado stated it had applied for and received a
federal grant and will continue to research and apply for
additional funding.
First 5 San Diego Action: Partial corrective action taken.
First 5 San Diego stated that the commission had adopted a
20-year financial plan that maintains grant making levels
146 California State Auditor Report 2005-406 California State Auditor Report 2005-406 147
over the plan’s horizon by allocating funds to a sustainability
reserve and drawing on those funds to stabilize funding
levels as revenues decline. First 5 San Diego also stated
it will focus on identifying fund sources that assist the
commission to leverage, broaden, and deepen its impact on
San Diego’s children.
First 5 California Action: Partial corrective action taken.
First 5 California stated it has documented success in
receiving significant funding commitments from the
community, private and public partners, and state and
federal government and will continue its efforts in this area.
Finding #3: Some county commissions lack a clear
commitment to limit their administrative spending.
Recognizing that a certain level of funding must be committed
to administrative functions, four of the five county commissions
we reviewed have expressed a commitment to keep such costs
low. For example, in its strategic plan covering the period
from fiscal year 2001–02 through fiscal year 2003–04, First 5
Los Angeles promised to spend only 5 percent of its revenues
on operational and administrative costs. Additionally, First 5
Kern is limited by county ordinance to spending no more than
8 percent of its annual funding allocation on administrative
expenses. Two county commissions, El Dorado and San Diego,
neither established an explicit maximum on the amount of
administrative costs in their strategic plans nor had a maximum
imposed by county ordinance. Moreover, county commissions
may not be entirely consistent in the types of costs they
consider to be administrative.
Because the Act does not define administrative costs and county
commissions define them differently, we developed a working
definition in order to compare them. Using our definition, some
county commissions spend a larger portion of their revenue or
expenses than others on the administration of their programs.
However, we recognize that other valid definitions exist.
To demonstrate its commitment to keeping administrative
costs low, we recommended that each county commission,
which has not already done so, define what constitutes its
administrative costs, set a limit on the amount of funding
it will spend on such costs, and annually track expenditures
against this self-imposed limit.
148 California State Auditor Report 2005-406 California State Auditor Report 2005-406 149
First 5 Santa Clara Action: Pending.
First 5 Santa Clara stated it is working with the Government
Finance Officers Association (association) to develop a
standard definition of administrative costs for use by county
commissions. First 5 Santa Clara will review the association’s
recommendations and the recommended limit on the
percentage of funding First 5 Santa Clara should spend on
administrative costs and will forward this information to the
commission for approval.
First 5 Los Angeles Action: Corrective action taken.
First 5 Los Angeles stated that its definition of administrative
costs is any costs that are not directly a part of an initiative.
All staff salaries and direct operating costs are considered
administrative. First 5 Los Angeles stated that its practice is
to limit administrative costs to no more than 5 percent of
total revenue and 10 percent of total expenses.
First 5 El Dorado Action: Pending.
First 5 El Dorado stated that it would develop and adopt
administrative cost policies.
First 5 San Diego Action: Pending.
First 5 San Diego will work with the association to
construct and adopt a uniform definition of administrative
expenses and budgetary reporting categories for county
commissions’ financial reporting.
Finding #4: According to outside evaluators, some county
commissions’ service providers have collected little data on
performance outcomes.
County commissions have been gathering data from
service providers, but service providers have collected
scant performance-based outcome data. While one county
commission’s outside evaluators have focused only on discussing
various aspects of programs and have yet to measure program
outcomes, other county commissions’ outside evaluators have
expressed concerns that service providers are not capturing
enough information to reasonably gauge program success.
To ensure that county commissions are basing their funding
decisions on outcome-based data, as required by the Act, we
recommended that they address the concerns expressed by their
outside evaluators to ensure that service providers are collecting
these data.
148 California State Auditor Report 2005-406 California State Auditor Report 2005-406 149
First 5 Santa Clara Action: Partial corrective action taken.
First 5 Santa Clara stated that its staff conducted on-site
monitoring and prepared quarterly reports throughout the
year. In addition, First 5 Santa Clara stated its consultant
conducted interviews with service providers and participants,
held focus groups, and surveyed grantees and parents. All of
these data collection methods contribute to the development
of First 5 Santa Clara’s evaluation report, which it will send
with its six-month response.
First 5 Kern Action: Partial corrective action taken.
First 5 Kern stated it will continue to address the concerns
expressed by its independent evaluator, but asserted that its
consultant recently stated that significant progress has been
made in meeting objectives. The independent evaluator’s
annual report identified specific program data that demonstrate
that sizable numbers of children up to age 5 and their families
are better off than they were. First 5 Kern cited outcomes such
as increased cognitive scores and the favorable cost benefit of
its immunization and dental care programs as examples of the
beneficial affect its funding has had in the county.
First 5 Los Angeles Action: Partial corrective action taken.
First 5 Los Angeles stated it is strongly committed to the
outcomes-based funding aspects of the Act, and has developed
and implemented an accountability framework that is
focused on outcomes. Nevertheless, First 5 Los Angeles
stated that it is essential to collect and monitor important
process and output data in order to understand the relative
contributions of its funded initiatives toward changes in
selected indicators. First 5 Los Angeles also stated that it has
taken several concrete steps that align its accountability efforts
with our recommendations. Specifically, it has adopted a more
comprehensive and reliable set of overarching indicators,
which it intends to track over the next five years.
First 5 El Dorado Action: Pending.
First 5 El Dorado stated that the staff it hired in June 2004 has
extensive experience in data collection and interpretation,
and it will continue to use the School Readiness Initiative and
the statewide Proposition 10 Evaluation Data System to collect
program data.
150 California State Auditor Report 2005-406 California State Auditor Report 2005-406 151
First 5 San Diego Action: Pending.
First 5 San Diego stated that it will work in partnership
with the First 5 Association of California to address the
recommendation related to outcome reporting through a
joint work group proposed to be established on the issue of
statewide evaluation. On the local level, First 5 San Diego
stated that it currently evaluates its performance through
its achievement of the annual implementation plan, which
directly supports First 5 San Diego’s long-term strategic plan.
Finding #5: Internal and external reviews of county commission
operations fail to adequately address performance.
Reviews of county commission operations do not always give
a comprehensive and objective look at performance. Although
each county commission we visited undergoes an annual
independent financial audit of its operations, following well-
established and generally accepted standards, similar reviews
of the county commissions’ performance are not occurring.
Instead, the county commissions’ annual reports to the state
commission consist primarily of self-generated descriptions of
their programs, planning efforts, and funding priorities. These
reports lack an objective review of how the county commissions
are managing their programs and also lack an assessment of how
well county commissions are ensuring that they meet the Act’s
goals and objectives.
To provide a meaningful assessment of annual performance, we
recommended that the state commission require each county
commission to conduct an annual audit of its performance
prior to any future revenue allocations. Such audits should be
objective and should follow guidelines designed to critically
assess each county commission’s performance.
First 5 California: Pending.
First 5 California stated that it is establishing an ad-hoc
working group made up of legislative staff, state and local
commissioners, and others to review current evaluation design
and annual reporting requirements and to suggest changes
and enhancements to clarify and strengthen the reporting
of performance outcomes and other program data. Based on
the recommendations of this group and a joint county/state
working group on technical design issues, First 5 California
stated it would develop a request for proposals to secure a new
evaluation contract.
150 California State Auditor Report 2005-406 California State Auditor Report 2005-406 151
152 California State Auditor Report 2005-406
DEPARTMENT OF MENTAL HEALTH
State and Federal Regulations Have
Hampered Its Implementation of
Legislation Meant to Strengthen the
Status of Psychologists at Its Hospitals
REPORT NUMBER 2003-114, JULY 2004
Department of Mental Health response as of September 2004
The Joint Legislative Audit Committee requested the
Audit Highlights . . . Bureau of State Audits to evaluate the Department of
Mental Health’s (department) status in implementing
Our review of the
Assembly Bill 947, which was enacted as Chapter 717, Statues of
Department of Mental Health’s
1998 (Chapter 717). Specifically, our review found that even
(department) implementation
of Chapter 717, Statutes of though the department has acted to implement Chapter 717 at
1998 (Chapter 717), commonly its four hospitals, a key issue—whether psychologists have the
known as Assembly Bill 947,
authority to serve as attending clinicians in patient care and
revealed that:
treatment—remains unresolved. In addition, state regulations
þ Even though the specifically allow only physicians to order the restraint and
department has acted to
seclusion of patients, an action that psychologists contend is
implement Chapter 717
within their scope of license. Further, no significant changes
at its four hospitals,
a key issue—whether occurred either to the psychologists’ membership on key
psychologists have committees or in the clinical privileges available to them at
the authority to
the department’s hospitals after the enactment of Chapter 717.
serve as attending
Finally, although California is considered one of the more
clinicians in patient
care and treatment— progressive states with regard to the status of psychologists in
remains unresolved. state hospitals, some other states’ statutes allow more privileges
þ State regulations for their psychologists. However, psychologists in these other
specifically allow only states are not always performing these activities in practice.
physicians to order the
restraint and seclusion of
patients, an action that Finding #1: Although the department has attempted to
psychologists contend
implement Chapter 717, it has not resolved the key issue
is within their scope
of whether psychologists have the authority to serve as
of license.
attending clinicians in patient care and treatment.
þ No significant change
occurred either to The department and its hospitals have taken steps to implement
psychologists’ membership the requirements of Chapter 717 by ensuring that medical staff
on certain key committees
bylaws (bylaws) at each hospital allow psychologists to be part
or in the privileges
of the medical staff. Although psychologists are now included
available to them after
Chapter 717 was enacted. on the medical staff at the department’s hospitals, they are not
allowed to serve as attending clinicians. The department, using
continued on next page . . .
California State Auditor Report 2005-406 153
reports it requested from a psychology subcommittee and its
þ Although California is hospital chiefs of staff, issued a special order in January 2003
considered one of the enumerating 27 activities that psychologists could perform
more progressive states
under their scope of license. However, these activities did not
with regard to the status
include the authority to act as an attending clinician or order the
of psychologists in state
hospitals, some other restraint or seclusion of patients. As a result, staff psychologists
states’ statutes allow still contend that the department has not fully implemented
more privileges for their
Chapter 717. The department’s view is that it has implemented
psychologists, but the
psychologists are not the intent of Chapter 717 and has addressed the psychologists’
always performing these contentions to the extent possible within the framework that
activities in practice.
governs patient care in its hospitals. Nevertheless, in 2003 the
department requested medical staff leadership at its hospitals
to develop pilot projects for psychologists to serve as attending
clinicians. According to the department, because of differing
ideologies the pilot projects were never fully developed. The
department is currently attempting to promote solutions to
satisfy its psychologists and psychiatrists, legal requirements, and
standards of care for its patients.
We recommended that the department work to resolve the
continuing issue regarding whether psychologists can serve
as attending clinicians in its four hospitals. The department’s
effort should include providing leadership and guidance to
the administrators, psychiatrists, and psychologists at each
hospital to find reasonable solutions to satisfy the statutory and
regulatory requirements that govern patient care in its hospitals.
Department Action: Pending.
The department drafted a directive to use either attending
or co-attending clinician pilot projects for psychologists in
its hospitals. It believes these pilot projects will serve as a
foundation to move toward resolving the attending clinician
issue. In addition, the department began discussions with
the Department of Health Services to revise state regulations
to reduce barriers to fully implement Chapter 717. The
department believes that reducing regulatory barriers will
enhance its efforts to allow psychologists to participate in the
care of patients as either attending or co-attending clinicians.
154 California State Auditor Report 2005-406 California State Auditor Report 2005-406 155
Finding #2: Psychologists at the department’s four hospitals
are generally underrepresented on key committees in
proportion to their presence on the medical staff.
Our review of the composition of three key committees—
medical executive, credentials, and bylaws—demonstrated that,
with few exceptions, the psychiatrists on these committees
outnumber the psychologists. In addition, the passage of
Chapter 717 in 1998 has had little effect in changing the
composition of one of the committees, while psychologist
representation was either mixed or improved on the other two.
Moreover, we found that, even after the passage of Chapter 717,
psychologists are generally underrepresented on key committees
in proportion to their presence on the medical staff. For example,
while psychologists make up 36 percent of the medical staff at
one of the department’s hospitals, they hold only 10 percent of
the positions on the medical executive committee.
We recommended that to ensure the appropriate level of
representation for psychologists on key committees, the department
direct its hospitals to annually review the composition of their
medical staffs and the proportion of psychologists, psychiatrists,
and other medical staff on their medical executive, credentials, and,
if applicable, bylaws committees. Each hospital should modify, to
the extent possible, the membership of these committees to more
closely reflect the composition of its medical staff.
Department Action: Partial corrective action taken.
The department issued in September 2004 a special order that
directed its hospitals to conduct reviews and modify, to the
extent possible, the membership of their medical executive,
credentials, and, if applicable, bylaws committees to more
closely reflect the composition of their medical staffs. The
department required its hospitals to complete their first
reviews by October 31, 2004, and annually thereafter. The
hospitals will complete changes in committee composition
within their normal voting or appointment process for
committee members.
154 California State Auditor Report 2005-406 California State Auditor Report 2005-406 155
156 California State Auditor Report 2005-406
CALIFORNIA GAMBLING CONTROL
COMMISSION
Although Its Interpretations of the Tribal-
State Gaming Compacts Generally Appear
Defensible, Some of Its Actions May
Have Reduced the Funds Available for
Distribution to Tribes
REPORT NUMBER 2003-122, JUNE 2004
Audit Highlights . . .
California Gambling Control Commission response as of
Our review of the California December 2004
Gambling Control
Commission’s (Gambling The Joint Legislative Audit Committee (audit committee)
Commission) administration requested that the Bureau of State Audits review the
of the Indian Gaming Revenue
California Gambling Control Commission’s (Gambling
Sharing Trust Fund (trust
Commission) administration of the Indian Gaming Revenue
fund) revealed the following:
Sharing Trust Fund (trust fund). Specifically, the audit committee
þ Some tribes have asked that we determine whether the Gambling Commission is
questioned the Gambling
complying with applicable requirements to collect and distribute
Commission’s decisions
about such matters as: money in the trust fund, as well as with the requirements
regarding the allocation of gaming device licenses. Additionally,
• The number of gaming
we were asked to evaluate the Gambling Commission’s
devices that may be
operated statewide. procedures for identifying and addressing conflicts of interest.
• The offsetting of
The Gambling Commission has operated amidst controversy
quarterly license fees
by the amount of since its inception in August 2000, with wide-ranging
nonrefundable, one- questions raised about its appropriate role, authority, and
time prepayments.
many of its actions related to Indian gaming. We found that
• The formula for certain provisions contained in the 1999 Tribal-State Gaming
calculating trust fund Compacts (compacts) between the State and various Indian
receipts.
tribes are susceptible to multiple interpretations. Ultimately,
• The process for although tribal organizations and individual tribes have
allocating gaming contested many of the Gambling Commission’s actions, they
device licenses.
are likely defensible given the ambiguous language used in the
compact. We also concluded that the Gambling Commission
continued on next page . . .
generally administered the trust fund in compliance with its
understanding of the requirements in the compact.
California State Auditor Report 2005-406 157
Finding #1: Some of the Gambling Commission’s
interpretations of compact provisions have been disputed.
Concerns have arisen about specific decisions the Gambling
þ Distributions to Commission has made in collecting and distributing trust
noncompact tribes were
fund receipts and in allocating gaming device licenses. For
generally consistent
example, the statewide limit on gaming devices is one of the
with the Gambling
Commission’s policy, with most contentious issues arising from the compact. The number
the possible exception of of available licenses has contributed to the importance of the
one quarter.
debate about many of the Gambling Commission’s decisions
þ The Gambling because the tribes are competing for a limited resource.
Commission did not Unfortunately, rather than specifying an actual maximum
follow its procedures for
number of gaming devices, the compact describes the process
allocating gaming device
to be used to arrive at the total number of gaming devices to be
licenses for two of the
three draws it conducted. allowed in operation. Ambiguity in this description has resulted
in a number of different interpretations on the maximum number
þ The Gambling
of gaming devices allowed, ranging from 45,206 to 110,189.
Commission has not
adequately communicated
its conflict-of-interest The Gambling Commission’s decision to offset quarterly
policy to staff and
license fees with prepayments has also met with opposition.
commissioners, and the
The Gambling Commission interprets the compact language as
law governing the outside
financial activities of requiring it to offset tribes’ quarterly payments by the amount
commissioners is not clear. of the nonrefundable one-time prepayments the tribes paid
to acquire and maintain the gaming device licenses. However,
the California Tribes for Fairness in Compacting (coalition), a
coalition of several noncompact tribes, believes the Gambling
Commission is misinterpreting the intent of the prepayments,
noting that the Gambling Commission’s staff conceded that
the probable intent of those who drafted the compact was to
establish the prepayment as a separate nonrefundable fee rather
than as a credit against quarterly payments. Nevertheless, the
Gambling Commission notes that the compact’s use of the term
prepayment creates a high level of doubt as to the meaning of
the language. The Gambling Commission focused on the term
prepayment and argues that this term, in ordinary usage, means
payment in advance. The Gambling Commission further points
out that the compact specifies the quarterly payments are to
“acquire and maintain a license.” It reasons that the quarterly
payments cannot logically be for the purpose of acquiring a
license unless the prepayment is credited against them. Finally,
the Gambling Commission staff believe that any ambiguities
in the compact language should ultimately be resolved in favor
of the compact payers as opposed to the compact beneficiaries,
the noncompact tribes. The coalition believes this position
does not comply with the Gambling Commission’s role as
trustee of the trust fund, which, according to the coalition,
is to act in the best interest of the noncompact tribes. If the
158 California State Auditor Report 2005-406 California State Auditor Report 2005-406 159
Gambling Commission had used the coalition’s interpretation,
approximately $37 million more would be available for distribution
to noncompact tribes from the trust fund through December 2020,
given the current allocation of gaming device licenses.
Further, inconsistent compact terms have caused disagreements
over the calculation of quarterly fees for deposit in the trust
fund. The Gambling Commission does not assess any quarterly
fees on the first 350 licenses a tribe has. The coalition disagrees
with the Gambling Commission’s methodology, arguing that
the intent of the compact was for fees to be assessed on all
licenses and that the Gambling Commission’s method for
calculating fees has significantly reduced the amount of trust
fund money available for distribution. The compact provides
that the number of certain gaming devices a tribe operates
determines the quarterly fee it pays per device. However, the
terms of the compact are unclear as to which gaming devices
are to be counted. Specifically, the compact’s schedule of
graduated payments indicates a tribe will pay nothing for its first
350 licensed devices. Consequently, the Gambling Commission
not only does not assess any quarterly fees on the entitlement
and grandfathered devices a tribe has—devices any tribe with
a compact is allowed to operate without a license—but it also
does not assess fees on the first 350 licensed devices. However,
the coalition believes the intent of the payment schedule was
to assess fees on all licensed devices instead of excluding the
first 350 licenses. The coalition argues that the only devices
for which no fees should be assessed are the entitlement and
grandfathered devices. Using the coalition’s interpretation, an
additional $19.1 million in gaming device license fees would
have been paid from September 2002 through December 2003
for the 15 tribes we reviewed. Given the inconsistencies in the
compact provisions, both interpretations appear defensible,
and the compact terms again confused rather than clarified the
intent of the compact.
Questions have also been raised about when to require tribes
to begin making quarterly license fee payments. The Gambling
Commission has taken the position that tribes should begin
making quarterly payments when they receive licenses for
gaming devices rather than after they put the devices into
operation, but the tribes themselves have disagreed on this
issue. For example, the Ewiiaapaayp Band of Kumeyaay Indians
has contended that its payment obligation to the trust fund
should begin only with the commercial operation of the
licensed gaming device. Because the tribe had not put any of its
158 California State Auditor Report 2005-406 California State Auditor Report 2005-406 159
licensed gaming devices into commercial operation, it believed
it did not owe any quarterly fees to the trust fund. However,
the Gambling Commission charged this tribe and continues to
charge other tribes quarterly fees from the time the licenses are
issued until the licenses are surrendered. Furthermore, according
to summaries of meetings the Gambling Commission held with
various tribes, at least seven tribes agree with its decision. The
Gambling Commission indicated that it based its decision on
the operative language of the compact. Specifically, it concluded
that the quarterly payments are in exchange for acquiring and
maintaining “a license to operate a gaming device” rather than
for the actual operation of the gaming device. Additionally, the
Gambling Commission stated that it found no expression in
the language of the compact requiring quarterly payments for a
license to begin only when the tribe begins to receive revenues
for the gaming device. The Gambling Commission has not
established when tribes begin operating their gaming devices,
so we are not able to determine the extent to which trust fund
deposits would have been reduced if the Gambling Commission
had charged quarterly fees only when gaming devices were put
in operation.
Additionally, some tribes disagree with the Gambling
Commission’s process for allocating gaming device licenses.
Under the Gambling Commission’s interpretation of the process
described in the compact for allocating licenses to tribes that
have applied for them, two tribes that applied did not receive
any gaming device licenses during the Gambling Commission’s
third license draw. The compact indicates that gaming device
licenses are to be awarded through a mechanism that places
tribes into five categories of priority based on the number of
gaming devices the tribes already have and whether they have
previously drawn licenses. Noting the compact provisions state
that tribes in a particular priority include those that received
licenses under a previous priority, the Gambling Commission
moves the tribe to a lower priority for the next draw that it
participates in, regardless of how many licenses it receives in the
first draw as long as it received at least one license. At least two
tribes, the Colusa Indian Community of the Colusa Rancheria
(Colusa) and the Paskenta Band of Nomelaki Indians (Paskenta),
disagree with the Gambling Commission’s interpretation of
the license draw process. These tribes believe the compact
bases the priority for awarding gaming device licenses solely on
the number of gaming devices they have. Had the Gambling
Commission interpreted the compact as the two tribes do,
Colusa would have received 108 licenses and Paskenta would
160 California State Auditor Report 2005-406 California State Auditor Report 2005-406 161
have received 75 during the Gambling Commission’s third
license draw. However, under the Gambling Commission’s
interpretation, neither tribe received any licenses.
If the governor concludes the Gambling Commission’s
interpretation and policies do not meet the intended purposes
of the compact, the governor should consider renegotiating
the compact with the tribes to clarify the intent of the compact
language, to help resolve disputes over the interpretation of
compact language, and to enable the efficient and appropriate
administration of the trust fund in each of the following areas:
• The maximum number of licensed gaming devices that all
compact tribes in the aggregate may have.
• The offset of quarterly license fees by nonrefundable one-time
prepayments.
• The number of licensed gaming devices for which each tribe
should pay quarterly license fees.
• The date at which tribes should begin paying quarterly
license fees.
• Automatic placement of a tribe into a lower priority for
subsequent license draws.
Governor’s Office Action: None.
The Governor’s Office has renegotiated compacts with
several Indian tribes. However, it has not taken any specific
action on the issues discussed above.
Finding #2: Some tribes believe the Gambling Commission staff’s
interpretation of “commercial operation” is not equitable.
According to the compact, the license for any gaming device
should be canceled if the device is not in commercial operation
within 12 months of the license being issued, but the compact
does not define what is meant by “commercial operation.” At
least three tribes have argued that the Gambling Commission
staff’s definition of commercial operation does not agree
with the compact language and that the staff have added
requirements not stated in the compact. Gambling Commission
staff believe the intent of the 12-month rule, including the
term “in commercial operation,” is to keep tribes from hoarding
licenses for gaming devices, which would prevent other tribes
from having the opportunity to obtain the licenses. They have
160 California State Auditor Report 2005-406 California State Auditor Report 2005-406 161
therefore been applying a definition of commercial operation
that requires all gaming devices, licensed and unlicensed,
to be available to the public on a continuous basis and to
be simultaneously placed in service on the casino floor. The
underlying rationale for the continuous and simultaneous
requirements is the staff’s position that the license grants a
tribe the right to operate a gaming device, but the license is
not attached to any particular gaming device. However, the
commissioners have not yet formally endorsed this definition.
Nevertheless, the Shingle Springs Band of Miwok Indians had
650 licenses canceled, and the Cahuilla Band of Mission Indians
had 100 licenses canceled when they did not challenge the
Gambling Commission’s notice of intent to cancel them. Two
other tribes—the Campo Band of Diegueno Mission Indians and
the Pauma Band of Luiseno Mission Indians—challenged the
Gambling Commission staff’s position that all devices, licensed
and unlicensed, must be in commercial operation. They argue
that the compact does not require unlicensed devices to be in
commercial operation.
If compact language is not renegotiated, to permit the efficient
and effective tracking of gaming devices in order to determine
whether tribes are appropriately placing them in operation
rather than hoarding licenses, the Gambling Commission
should finalize its definition of what constitutes commercial
operation of gaming devices.
Gambling Commission Action: Corrective action taken.
The Gambling Commission has determined that in order
to meet the compact requirement that a gaming device
authorized by a license is “in commercial operation” within
12 months of the date of issuance of that license, an Indian
tribe must establish each of the following elements:
• The gaming device must be operable and available for play
to the public.
• The gaming device must be capable of accepting consideration
or something of value that permits play.
• The gaming device must be capable of awarding a prize.
The Gambling Commission further stated that once a gaming
device is placed into commercial operation, the compact
provision would be satisfied. Therefore, the Gambling
162 California State Auditor Report 2005-406 California State Auditor Report 2005-406 163
Commission would consider the Indian tribe in compliance with
the compact provision even if the gaming device were placed
into operation for only one quarter, one month, or one day.
Finding #3: A decision regarding multiterminal gaming devices
may result in some tribes being ineligible for trust fund
disbursements and others exceeding the gaming device limit.
The Gambling Commission has had to address how to count
certain electronic games for the purposes of determining the
tribes’ eligibility for receiving trust fund disbursements and
establishing their gaming device allotments under the compact.
The compact limits the number of gaming devices a tribe may
operate to 2,000. However, certain electronic roulette and
craps games are played from multiterminals, meaning that one
machine has several terminals, and at each separate terminal
a player wagers against a common outcome. The Gambling
Commission’s concern was whether it should count the entire
system or each separate terminal as a gaming device. Although
the commissioners have yet to formally adopt a position on
multiterminal devices, the staff’s position is that it should
count each separate terminal as a gaming device, reasoning that
such an interpretation gives meaning to every provision in the
compact’s definition of a gaming device.
For reasons involving a multiterminal gaming device, Gambling
Commission staff determined that one tribe, the Augustine Band
of Cahuilla Indians (Augustine), was ineligible for trust fund
distributions during one quarter in fiscal year 2002–03 for which
the tribe claimed that it was eligible because Augustine had
counted a multiterminal gaming device as one device on its self-
certification of the number of gaming devices it was operating,
making it appear eligible for a trust fund disbursement that
quarter. However, Gambling Commission staff determined that
the tribe operated 351 gaming devices for this quarter, exceeding
the eligibility requirement by two gaming devices.
Similarly, tribes that count multiterminals as a single gaming
device may exceed the 2,000 maximum for gaming devices they
can operate. In fact, according to a February 2004 report on a
review performed jointly by the Gambling Commission and the
Department of Justice, eight tribes were found to be operating
more than 2,000 gaming devices at least in part because they
were counting a multiterminal device as only one device.
162 California State Auditor Report 2005-406 California State Auditor Report 2005-406 163
The Gambling Commission should finalize its position regarding
gaming devices with more than one terminal to determine
whether these devices are counted as one device or as more than
one device. Once its position is final, the Gambling Commission
should enforce compliance with the provisions of the compact
for those tribes operating more than 2,000 gaming devices and
should determine whether any tribe could lose its eligibility for
trust fund distributions by exceeding 350 gaming devices.
Gambling Commission Action: Pending.
The Gambling Commission has conducted workshops
with compact tribes to discuss and receive input on how
multiterminal gaming devices should be counted—as one
device or more than one device. However, as of December 2004,
the Gambling Commission has not made a final decision.
Finding #4: The Gambling Commission may have
underpaid the Lower Lake Rancheria on one of its quarterly
distributions from the trust fund.
The Gambling Commission may have inappropriately underpaid
Lower Lake by $416,000 and overpaid by $5,100 each of the
other tribes eligible in a quarterly distribution from the trust
fund. The former chief counsel of the Gambling Commission
indicated that it did not distribute funds to Lower Lake for
the quarter ending September 30, 2000, because the federal
register did not list it as a federally recognized tribe. Although
the federal Bureau of Indian Affairs (BIA) acknowledged that
it erred in excluding Lower Lake from the register, the former
chief counsel explained that the Gambling Commission bases
eligibility for such payments from the date stated in written
evidence of that recognition, and the BIA did not officially
reaffirm the government-to-government relationship with the
tribe until December 29, 2000. Consequently, the Gambling
Commission concluded that Lower Lake was eligible to receive
a share of trust fund receipts only beginning with the quarter
ending December 31, 2000. However, the BIA also stated in
writing that the government-to-government relationship
between the federal government and Lower Lake was never
severed. Therefore, although Lower Lake did not appear on the
register, the federal government acknowledged that the tribe
had consistently retained its status as a federally recognized
tribe. Furthermore, only an act of Congress can terminate a
tribe’s federal recognition, and to date no act has terminated
Lower Lake’s federal recognition. Finally, the Gambling
164 California State Auditor Report 2005-406 California State Auditor Report 2005-406 165
Commission was made aware of the BIA error when it received
a letter of protest from the tribe’s attorney 11 months before
it made the adjustment distribution in question. However,
because it chose to focus on the date that Lower Lake’s status
as a federally recognized tribe was reaffirmed, the Gambling
Commission concluded that Lower Lake was ineligible for
distributions prior to that date and, consequently, it did not
adjust its first quarterly allocation to include Lower Lake.
The Gambling Commission should confer with the federal
Bureau of Indian Affairs and determine whether there is any
federal requirement that it pay Lower Lake for the quarter
ending September 30, 2000, and, if not, whether anything
prohibits it from paying Lower Lake. Barring any prohibition,
we believe it is appropriate for the Gambling Commission to
provide Lower Lake a share of the funds allocated that quarter
and to deduct that amount from distributions to tribes that
received distributions in that quarter. If any one of these
tribes is no longer eligible to receive trust fund distributions,
the Gambling Commission should either bill the tribe for the
overpayment or seek other remedies to recover the overpayment.
Gambling Commission Action: Pending.
The Gambling Commission’s chief counsel is reviewing the
proper action to be taken with regard to Revenue Sharing Trust
Fund distributions to Lower Lake Rancheria. According to the
Gambling Commission, outside interests have raised legal issues
recently concerning the validity of the federal re-recognition
process of Lower Lake Rancheria. As such, the Gambling
Commission’s legal office is continuing to research this matter.
The chief counsel will be providing advice on this issue to the
Gambling Commission within the next several months.
Finding #5: The Gambling Commission did not always follow
its license draw procedures.
Although staff developed procedures for allocating gaming
device licenses, they did not follow these procedures when
the Gambling Commission conducted its first gaming device
license draw in September 2002 or when it held its second
draw in July 2003. As a result, some tribes received licenses that
should have been allocated to other tribes under the Gambling
Commission’s established procedures.
164 California State Auditor Report 2005-406 California State Auditor Report 2005-406 165
The compact requires gaming device licenses to be awarded to
tribes through a priority mechanism with five categories. Under
the Gambling Commission’s established procedures, a tribe’s
priority for each draw is based on the priority it was placed in
when it last drew licenses, with each tribe automatically moved
to a lower priority category for each draw, and on the total
number of gaming devices it has. In addition, the compact
limits the number of licenses a tribe can draw in each of the
first four priorities (150, 500, 750, and 500, respectively). For the
fifth priority, the only limit in compact language is the number
of licenses that would bring a tribe’s total gaming devices,
licensed and unlicensed, to 2,000. The Gambling Commission
followed these procedures for only one of its three gaming
device license draws. Overall, for the two draws for which it
did not follow its procedures, the Gambling Commission did
not award 307 gaming device licenses to the appropriate tribes
according to its official allocation process.
To ensure that all tribes applying for gaming device licenses are
provided the appropriate opportunity to obtain the number of
licenses they are applying for, the Gambling Commission should
consistently follow the license allocation procedures it has
adopted. Further, it should change its current policy of limiting
to 500 the number of licenses a tribe in the fifth priority may
draw, allowing tribes instead to draw up to their maximum total
authorization to operate up to 2,000 gaming devices.
Gambling Commission Action: Corrective action taken.
Effective September 28, 2004, the Gambling Commission
adopted a policy that is intended to clarify the gaming
device license draw process and ensure that draws are
conducted in accordance with the compact provisions. The
adopted policy no longer limits the number of licenses a
tribe in the fifth priority may draw to 500.
Finding #6: The Gambling Commission does not have a
thorough system for avoiding potential conflict-of-interest
issues.
Although the Gambling Commission has a conflict-of-interest
policy, it has not adequately communicated the policy to
designated staff. For example, key staff we interviewed stated
that they were not aware of any formal, written conflict-of-
interest policy. In fact, after repeated requests for a copy of its
conflict-of-interest policy, the Gambling Commission finally
166 California State Auditor Report 2005-406 California State Auditor Report 2005-406 167
provided us with a copy, two months after our initial request.
Additionally, a former commissioner had to file an amended
statement of economic interest because he was not fully aware
of the requirements for completing the form. By not ensuring
that the commissioners and its staff are aware of its conflict-of-
interest policy, the Gambling Commission runs the risk that
affected employees will not understand their obligations under
the law.
The Gambling Commission should ensure that all staff are
informed of its conflict-of-interest policy. Additionally, the
Gambling Commission should seek clarification of the law
governing the outside financial activities that commissioners
may engage in.
Gambling Commission Action: Pending.
The Gambling Commission is in the process of adopting a
conflict-of-interest policy in accordance with the provisions
of Government Code, Section 19990. A draft was presented
to the commissioners in October 2004. The Gambling
Commission is still in the meet-and-confer process with
unions and anticipates that a final version will be provided
to the Department of Personnel Administration for its review
and approval in January 2005.
Also, the Gambling Commission’s chief counsel is reviewing
the recommendation concerning the clarification of the
law governing outside financial activities in which a
commissioner may engage. It is anticipated that the chief
counsel’s legal opinion and advice will be available in the
next few months.
166 California State Auditor Report 2005-406 California State Auditor Report 2005-406 167
168 California State Auditor Report 2005-406
DEPARTMENT OF GENERAL SERVICES
Investigations of Improper Activities by
State Employees, January 2004 Through
June 2004
INVESTIGATION I2003-0703 (REPORT I2004-2),
APRIL 2004
Department of General Services’ response as of July 2004
We investigated and substantiated an allegation that
an employee at the Office of Fleet Administration
(fleet administration) in the Department of General
Investigative Highlights . . .
Services (General Services) stole gasoline from a General
An employee at the Office of Services’ garage.
Fleet Administration in the
Department of General Services
(General Services) engaged Finding #1: The employee improperly fueled his personal
in the following improper
vehicle with gasoline he stole from a state garage.
governmental activities:
The employee admitted that on at least five occasions he
þ Stole 68 gallons of
improperly fueled his car with gasoline from a General Services’
gasoline worth $136 from
a General Services’ garage. garage. We estimate that for these five transactions, the
employee stole 68 gallons of gasoline worth $136. In addition,
þ Failed to adequately
we identified 141 other questionable fuel transactions, occurring
explain inconsistencies or
discrepancies involving an before 5:45 a.m. when the garage opened, by the employee
additional 1,910 gallons between August 2001 and March 2004 involving a total of
of gasoline worth $3,752
1,910 gallons of gasoline worth $3,752. Although the employee
he dispensed.
claimed that most of these transactions were legitimate, many
þ Benefited from several involved inconsistencies or discrepancies that he could not
deficiencies in General sufficiently explain. For instance, five of these early-morning
Services’ controls over its
transactions indicated that the employee fueled vehicles that
gasoline that allowed the
employee to steal gasoline. another employee later fueled on the same day. In one of these
five transactions, the employee dispensed more fuel than the
vehicle’s tank was capable of holding. In another instance,
the employee fueled a vehicle at 4:46 a.m. even though the
vehicle log showed that the vehicle in question was not returned
to the General Services garage until 7:42 a.m., almost three
hours later. In each instance, the employee failed to provide an
explanation for the discrepancy.
California State Auditor Report 2005-406 169
Finding #2: General Services’ internal controls do not
adequately prevent gasoline theft.
We noted several deficiencies in General Services’ controls
over its gasoline that allowed the employee to steal gasoline.
Before a fleet administration employee can dispense fuel, he
or she must enter their employee number and the vehicle’s
odometer reading and license plate number into an automated
fuel tracking system via a keypad. However, this system allows
employees to enter incorrect data. For example, employees
may enter a valid state license plate number and then fuel a
vehicle with a different license plate. In addition, although its
fuel tracking system has the capability to require employees to
enter a secret personal identification number, or PIN, General
Services has not established PINs for most of the employees who
fuel vehicles. Instead, most employees need enter only their
two-digit employee access code in order to gain authorization
to pump fuel. These codes were posted next to the terminal
where employees enter transaction information, so anyone
could have used them to operate General Services’ gasoline
pumps. Furthermore, the garage manager estimated that
General Services had issued 30 keys to various state employees.
Because General Services has issued so many keys, and because
its fuel tracking system allows employees to input incorrect
information, it cannot assure itself that no one will access the
garage to steal gasoline.
Department Action: Pending.
General Services issued the employee a counseling memo
and recovered $139 from him for the value of the gasoline
the employee admittedly stole. General Services also reported
that it has strengthened its controls over gasoline dispensing
activity by restricting fuel pump access hours to between
8 a.m. and 5 p.m., scheduling training for garage managers
on the automated fuel management system, and pursuing
the installation of a card key entry system to track employee
access to the garage.
170 California State Auditor Report 2005-406
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 2005-406 171
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
172 California State Auditor Report 2005-406 California State Auditor Report 2005-406 173
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.
172 California State Auditor Report 2005-406 California State Auditor Report 2005-406 173
174 California State Auditor Report 2005-406
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 August 2004
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 2005-406 175
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: 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 implemented this
process in November 2003 and uses it to update the VCIN
monthly. In May 2004, Justice completed modifications
to the process of synchronizing data between Justice and
Youth Authority. As a result, a sex offender’s status in the
VCIN automatically changes from incarcerated to released
when the sex offender’s record no longer appears in Youth
Authority’s monthly electronic file. 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. However, according to Justice,
the Judicial Council denied its request to amend its juvenile
commitment form to allow Youth Authority to provide
Justice more detailed court disposition information about
juvenile sex offenders.
176 California State Auditor Report 2005-406 California State Auditor Report 2005-406 177
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 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 the purpose of public disclosure in the Megan’s Law
database. As of August 5, 2004, Justice had completed
reviewing the approximate 18,000 sex offenders classified as
“other,” resulting in the reclassification of 1,431 of these sex
offenders to “serious.” Justice continues to research records
with offense code 290, most of which involve offenses
committed out-of-state and require Justice to acquire
documentation from the courts in other states.
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
176 California State Auditor Report 2005-406 California State Auditor Report 2005-406 177
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
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: Corrective action taken.
Justice modified 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 the offender no longer appears
on Corrections’ list. The offender’s status automatically
changes to “released” and a violation notice is 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.
178 California State Auditor Report 2005-406 California State Auditor Report 2005-406 179
To the extent possible, Justice and Corrections will pursue
other methods for ensuring complete synchronization
of sex offender data. For example, in May 2004, Justice
implemented new program logic to improve the automated
matching of Justice’s and Corrections’ data. As a result, more
than 400 additional records in the VCIN were updated to
reflect incarcerated status. 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.
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.
178 California State Auditor Report 2005-406 California State Auditor Report 2005-406 179
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. This
search augments the existing process of identifying duplicate
records based on a cross match of CII numbers, and has been
effective in detecting and eliminating virtually all duplicate
errors within a week after they are created.
In addition, by early 2005, Justice plans 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 is continuing to improve its statewide training
program on sex offender registration and is developing new
training materials, including a comprehensive registration
reporting manual and a high-quality video regarding legal
aspects. Justice states that final development of these
materials has been delayed until fall of 2004 pending the
outcome of key legislative proposals that could have a
significant impact on reporting and dissemination practices.
To the extent resources permit, Justice continues to provide
law enforcement training on data entry procedures, with
focus on agency-specific reporting problems identified
through ongoing analysis of submitted registration data.
Justice personnel receive regular training in various aspects
of registration processing in order to minimize technical
errors that may contribute to data inaccuracy.
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,
180 California State Auditor Report 2005-406 California State Auditor Report 2005-406 181
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.
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.
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
180 California State Auditor Report 2005-406 California State Auditor Report 2005-406 181
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.
• 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 this
disclaimer to the Megan’s Law database in English and 12
other languages.
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,
182 California State Auditor Report 2005-406 California State Auditor Report 2005-406 183
registered within the past year. In addition, Justice confirmed
that 2,833 sex offenders are living outside the State and
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)1, 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 an
annual basis to update sex offender information in the VCIN.
In November 2003, Justice obtained on-line access to INS’
deportation files, and regularly reviewed them to identify
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.
1On March 1, 2003, the U.S. Immigration and Naturalization Service became part of
the U.S. Department of Homeland Security and changed its name to the Bureau of
Citizenship and Immigration Services.
182 California State Auditor Report 2005-406 California State Auditor Report 2005-406 183
184 California State Auditor Report 2005-406
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’ July 2004
(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 2005-406 185
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.
OES/OHS Action: Corrective action taken.
OES states that it completed a draft revision of the
terrorism response plan in December 2003 that
addresses terrorism prevention as well as organizational and
procedural changes that have occurred since the original
plan was written. OES adds that it continues to coordinate
with OHS to finalize the revised 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
186 California State Auditor Report 2005-406 California State Auditor Report 2005-406 187
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.
OES Action: Corrective action taken.
OES indicates that it has drafted revisions to its Policies
and Procedures Manual to address the need for a process
to formally and periodically review the emergency plan,
including the terrorism response plan. In conjunction with
this effort, OES states that it has developed a checklist,
which includes planning criteria from multiple state and
federal publications that will guide its efforts in updating
the emergency plan in the future. OES plans to update this
checklist with the development of the National Response Plan
in order to assure state practices and plans are in concert with
federal operations. OES plans to finalize its review procedures
once the National Response Plan is approved.
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 revised its training policies, outlining the core
competencies for all OES staff. OES maintains that the
several activations of the State Operations Center and
Regional Operations Centers have provided additional
186 California State Auditor Report 2005-406 California State Auditor Report 2005-406 187
opportunities for appropriate on-the-job training. To further
augment its training policy, OES has developed an internal
working group to prepare an Emergency Operations Guide
that will detail the agency policies and procedures for
emergency operations.
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.
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 will continue to work with the National
Guard and local agencies in developing the statewide exercise
program. It points out that it held a functional exercise of the
State Operations Center and the Inland Regional Operations
Center in March 2004, and was planning on participating in a
terrorism exercise to be held in August 2004.
188 California State Auditor Report 2005-406 California State Auditor Report 2005-406 189
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.
OES/OHS Action: Pending.
OES states that no new budget cuts for OES were included
in the enacted 2004–05 budget. OES adds that the programs
of OES and OHS are both included in the California
Performance Review (CPR), and anticipates that the CPR
report will reflect recommendations for the public and
Legislature to consider.
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/OHS Action: Pending.
Ü OES states that there have not been any formal changes that
further define the relationship of the two agencies. It adds
that OES and OHS recognize the many similarities, as well
188 California State Auditor Report 2005-406 California State Auditor Report 2005-406 189
as differences, in the prevention, preparedness, response,
recovery, and mitigation of terrorism events and other
emergencies and disasters. OES further states that it and
OHS view their relationship as an opportunity to partner
in order to maximize efforts in those common areas, and
utilize each other’s specific expertise in those areas that are
not. OES concludes by stating that the agencies’ roles and
responsibilities should be viewed as a necessary partnership
to manage the emerging threat of terrorism and homeland
security issues, while also maintaining an all-hazards
approach to emergency management.
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.
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.
190 California State Auditor Report 2005-406 California State Auditor Report 2005-406 191
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.
National Guard Action: Corrective action taken.
The National Guard states that it published guidance for
its fiscal year 2005–06 training year in March 2004 and
issued related operational plans in May 2004, which provide
guidance for Army Division organizations to implement their
terrorism readiness force protection programs. 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.
190 California State Auditor Report 2005-406 California State Auditor Report 2005-406 191
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: Corrective action taken.
The National Guard states that it received funding and
spending authority in December 2003 for its Homeland
Security Exercise Team. The National Guard reports that it
has coordinated 24 exercises throughout the State and has
another 18 exercises planned. It adds that these exercises
include several county exercises, several state agencies, and
a statewide exercise that is part of a larger Department of
Defense/U.S. Northern Command exercise.
192 California State Auditor Report 2005-406
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 . . . August 2004
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 State Emergency Plan (emergency plan). Further,
process to regularly
the committee requested the bureau to determine if OES is
review and update the
maintaining the emergency plan as required by law and whether
State Emergency Plan
and its related annexes. a sample of local government emergency operation centers
(EOCs) are adequately prepared to respond to emergencies
þ OES does not consistently
following SEMS. We found that the emergency plan and
perform activities needed
to evaluate and improve its related annexes provide adequate guidance to agencies
coordination of emergency responding to multijurisdictional emergencies, but that OES lacks
responses under the
a formal process to regularly evaluate and update these plans.
Standardized Emergency
Additionally, OES is not consistently evaluating the use of SEMS
Management System.
by preparing statutorily required after-action reports following
þ Clarification of the roles
all declared disasters. Also, OES has had difficulty in acquiring
and responsibilities of the
and maintaining emergency response equipment due to what it
State’s Office of Homeland
Security and OES would asserts is inadequate funding. Finally, our review of six county
be beneficial. EOCs found that they had adequate plans and training to prepare
for emergencies. However, OES’s recent survey of all county
þ With aging equipment
and other equipment not EOCs reveals that some counties are in need of potentially costly
in place, OES’s ability to upgrades to improve their ability to respond to emergencies.
task its own resources
during an emergency may
be limited.
California State Auditor Report 2005-406 193
Finding #1: OES has not established a formal process to
regularly evaluate and update the emergency plan and
related annexes.
Although we found that the 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 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 that it has drafted revisions to its Policies
and Procedures Manual to address the need for a process
to formally and periodically review the emergency plan.
In conjunction with this effort, OES states that it has
developed a checklist, which includes planning criteria
from multiple state and federal publications, that will
guide its efforts in updating the emergency plan in
the future. OES plans to update this checklist with the
development of the National Response Plan in order to
assure state practices and plans are in concert with federal
operations. OES plans to finalize its review procedures
once the National Response Plan is approved.
194 California State Auditor Report 2005-406 California State Auditor Report 2005-406 195
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
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.
194 California State Auditor Report 2005-406 California State Auditor Report 2005-406 195
OES Action: Partial corrective action taken.
OES reports adopting policies and procedures for the
development of after-action reports that address response
actions taken; application of and compliance to SEMS;
suggested modifications to SEMS; and plans and procedures,
training needs, and follow-up recommendations. These
policies require that the after-action report begin with an
initial critique of successes and areas in need of improvement
at each response level. OES requires these levels to prepare and
submit after-action report survey forms, which serve as the
basis for a comprehensive review. OES uses statewide forums
of the emergency response community to address and develop
the recommendations cited in the after-action reports. OES
is also in the process of developing a database to track after-
action report findings and resolutions. Further, OES states that
it is in the process of re-convening the SEMS technical and
advisory groups in order to revitalize the SEMS Technical and
Maintenance System. Finally, OES completed the after-action
report for the fall 2003 wildfire siege and is working on reports
for two more recent disasters.
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.
196 California State Auditor Report 2005-406 California State Auditor Report 2005-406 197
OES Action: Partial corrective action taken.
OES indicates that it plans to update the capabilities of RIMS
in order to address our recommendations. In October 2003,
OES held a meeting of its RIMS Working Group that agreed
upon enhancements to the RIMS system, including the
addition of a web portal that will contain all secure reports,
data, and forms. OES also is integrating new protocols of the
federal Department of Homeland Security into RIMS. While
OES was able to obtain federal grant money to make various
improvements to RIMS, numerous disaster response activities
have delayed implementation. Further, OES indicates that it
is awaiting Department of Finance approval of a RIMS special
project report.
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: Corrective action taken.
OES revised its training policies in June 2003, outlining the
core competencies for all OES staff. OES maintains that
the several activations of the State Operations Center and
Regional Operational Centers have provided additional
opportunities for appropriate on-the-job training. To further
augment its training policy, OES has developed an internal
working group to prepare an Emergency Operations Guide
that will detail the agency policies and procedures for
emergency operations.
196 California State Auditor Report 2005-406 California State Auditor Report 2005-406 197
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
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: None.
OES indicated that there have not been any formal changes
that further define the relationship of OES and OHS. OES
maintains that both agencies’ roles and responsibilities
should be viewed as a necessary partnership to manage
the emerging threat of terrorism and homeland security
issues, while also maintaining an all-hazards approach to
emergency management.
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.
198 California State Auditor Report 2005-406 California State Auditor Report 2005-406 199
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.
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.
198 California State Auditor Report 2005-406 California State Auditor Report 2005-406 199
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.
OES Action: Partial corrective action taken.
OES states that it has taken the following corrective actions
regarding the recommendations above:
• OES indicates that 25 engines out of its current 111 fire
engine fleet have been in service longer than their 17-year
useful lives. To prevent an impact to public safety, OES has
taken possession of 21 new engines that were purchased with
prior year budget appropriations and that all of these engines
have been assigned throughout the State. OES states that it is
currently awaiting approval from the Department of Finance
to award the bid for the next 21 replacement engines. If
funds are available, OES intends to replace seven fire engines
each year to comply with the 17-year replacement cycle.
• OES states that the costs for heavy urban search and rescue
units have increased significantly, costing approximately
$750,000 each. However, OES continues to evaluate its
prior needs assessment in order to update where these
units are needed.
• OES has chaired a meeting of fire representatives across
the State to address the thermal imaging equipment
program. OES plans to complete a survey in August 2004
to address the feasibility of a cost-shared participation
in the program, further indicating that the technical
specifications will be developed in September 2004. OES
indicates that it is exploring all possible funding sources
for this program, including federal grants.
• OES received $3.5 million in federal grant funds for
the modernization of its OASIS system. This funding
will cover final engineering and basic conversion to a
modernized radio and information processing system. If
future funding is available, OES intends to further improve
OASIS by enhancing its connections to both the Public
Switched Telephone Network and Internet.
200 California State Auditor Report 2005-406
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 June 2004
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 2005-406 201
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.
202 California State Auditor Report 2005-406 California State Auditor Report 2005-406 203
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.
202 California State Auditor Report 2005-406 California State Auditor Report 2005-406 203
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.
204 California State Auditor Report 2005-406 California State Auditor Report 2005-406 205
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
reports that need to be submitted in a different form.
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. Also, the controller has developed a plan to process
reports within a year of receipt.
In September 2003, the controller implemented a plan to
liquidate the holder report backlog and to process holder
reports within a year, with the exception of problem
reports. The controller’s efforts have significantly reduced
the backlog from approximately 9,000 at the high point, to
2,894, as of May 31, 2004. The controller’s liquidation efforts
will continue, and it expects further reductions.
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
204 California State Auditor Report 2005-406 California State Auditor Report 2005-406 205
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.
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.
206 California State Auditor Report 2005-406 California State Auditor Report 2005-406 207
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.
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.
206 California State Auditor Report 2005-406 California State Auditor Report 2005-406 207
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,
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.
208 California State Auditor Report 2005-406 California State Auditor Report 2005-406 209
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: Corrective action taken.
The controller developed and implemented a standard
inventory form for use by financial institutions when
sending safe deposit box contents. The controller will use the
new form to reconcile the receipt of items, and it also posted
the form and instructions to its Web site.
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
208 California State Auditor Report 2005-406 California State Auditor Report 2005-406 209
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
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: 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 on-going 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
public auctioneer, which conducted a 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. In February 2004,
the controller also implemented programming changes to
allow it to post the proceeds of unclaimed property auctions
to the owner’s account. This change includes new procedures
and system updates and provides a more accurate method of
maintaining auction proceed records.
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
210 California State Auditor Report 2005-406 California State Auditor Report 2005-406 211
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,
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’s examination of the holder is in progress.
Further, the controller is attempting to obtain access to
information that will help it substantiate or invalidate
the estimated unclaimed property. After the controller
completes the examination, it plans to bill the holder for any
additional audit findings.
210 California State Auditor Report 2005-406 California State Auditor Report 2005-406 211
212 California State Auditor Report 2005-406
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 2005-406 213
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. 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.
214 California State Auditor Report 2005-406
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 March 2004
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 2005-406 215
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.
In February 2004, General Services issued a new Purchasing
Authority Manual (PAM) governing the State’s procurement
function. The PAM provides the requirements for obtaining
and maintaining delegated purchasing authority. It also
serves as the resource that assists in ensuring departments
apply consistent and sound business practices in state
purchasing. The PAM contains purchasing authority
requirements, including statutes, regulations, and policies
and procedures applicable to information technology (IT)
goods and services and non-IT goods. The PAM also includes
information on how departments maintain compliance with
the purchasing authority program.
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
and software components to the State for the Web portal
totaling $2.5 million. These companies sold their products to
216 California State Auditor Report 2005-406 California State Auditor Report 2005-406 217
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
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.
216 California State Auditor Report 2005-406 California State Auditor Report 2005-406 217
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.
218 California State Auditor Report 2005-406 California State Auditor Report 2005-406 219
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 Finance and the LAO, 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
agreement with the Health and Human Services Data Center,
218 California State Auditor Report 2005-406 California State Auditor Report 2005-406 219
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. However,
General Services did note several instances when the scope of
work supporting a purchase order did not clearly, concisely,
or accurately reflect key information. Consequently, General
Services has recognized that this is an area for improvement
within the State’s contracting program and is including this
subject matter within its training and certification program.
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.
220 California State Auditor Report 2005-406 California State Auditor Report 2005-406 221
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
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. The Teale Data Center independently seeks
alternative suppliers and uses the General Services’ contract
registry to seek competition. Further, it is standard practice
at the Teale Data Center to exceed the minimum number of
bids required for informal bids.
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.
220 California State Auditor Report 2005-406 California State Auditor Report 2005-406 221
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.
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
222 California State Auditor Report 2005-406 California State Auditor Report 2005-406 223
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. General Services has existing policies
in place to review and reject all sole-source and emergency
purchases requests that fail to meet statutory requirements.
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
222 California State Auditor Report 2005-406 California State Auditor Report 2005-406 223
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
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 resources to that activity. For
instance, General Services has initiated a cornerstone
of the procurement reform effort—the training of state
procurement officials. Additionally, General Services
implemented a uniform process for reporting the State’s
procurements. Specifically, a database is now readily
accessible to provide comprehensive information on the
State’s purchasing and contracting activities. Beginning
July 1, 2003, all state agencies were required to enter
summary information via the Internet for all purchasing and
contracts over $5,000. The system, entitled State Contract
and Procurement Registration System, captures information
that provides General Services with data to oversee the
State’s contracting and procurement functions.
Further, representatives of General Services have met with
executive management of Finance’s Office of State Audits
and Evaluations (OSAE) to discuss the feasibility of revising
existing audit procedures to provide additional coverage of
CMAS and sole-source bid contract transactions. The OSAE
agreed that its existing guide for evaluation of internal
controls within state agencies should be strengthened in
those areas. It was estimated that the revised guide would
224 California State Auditor Report 2005-406 California State Auditor Report 2005-406 225
be complete by April 2004. In addition to the revised guide,
General Services’ audit and review staff will limit their
activities in an individual department if the work performed
by that department’s internal audit unit sufficiently
addresses areas under the purview of General Services.
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.
General Services believes implementing a program that
results in more frequent vendor reviews should be a
priority. However, the State’s current budget situation limits
General Services’ ability to 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. General Services has also implemented
policies and procedures intended to strengthen the review
of processes used by other governmental entities when
awarding contracts to ensure that they meet the State’s
standards for solicitation assessment. Policies and procedures
also provide that only the most senior CMAS analysts
perform the reviews.
Finally, General Services believes that the implementation of
a mandatory statewide electronic procurement system would
enable it to capture department purchasing activity in real
time and would provide the ultimate solution to its billing
challenges. However, implementation of such a system is
not feasible in the current fiscal environment. As an interim
corrective measure, in September 2003, General Services
issued a memorandum to all departments advising them
of the importance of regularly reconciling their purchasing
information with invoices.
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
224 California State Auditor Report 2005-406 California State Auditor Report 2005-406 225
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.
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
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.
226 California State Auditor Report 2005-406 California State Auditor Report 2005-406 227
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.
As previously stated, General Services is continuing to focus
efforts on obtaining assurance that processes used by other
governmental entities to execute contracts are in accordance
with CMAS goals. For instance, General Services’ staff, 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 of June 2003, approximately 700 state employees had
attended classes within General Services’ comprehensive
training and certification program. These classes dealt with
acquisition ethics and leveraged procurement. However, a
backlog of approximately 900 potential participants existed.
Consequently, General Services is continuing to provide
these courses as part of its Basic Certification Program.
Additionally, General Services is offering a number of
workshops on such subject matters as preparing a statement
of work, documenting the procurement process, evaluating
bids, and contracting for services. Procurement professionals
who have completed the Basic Certification Program and
at least two workshops will be eligible for the Intermediate
Certification Program that is scheduled for implementation
in September 2004. The Advance Certification Program,
General Services’ final certification program, is also planned
for implementation during fiscal year 2004–05.
226 California State Auditor Report 2005-406 California State Auditor Report 2005-406 227
228 California State Auditor Report 2005-406
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 March 2004
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)
committee asked that we identify the initial cost estimates
Common Management System
(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
funding sources for these related expenditures. Additionally,
establish a business case for
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
Finding #1: The university did not develop a business case
operations—are now
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
system. Without such a feasibility study, the university lacks
objectives intended, nor
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 2005-406 229
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.
230 California State Auditor Report 2005-406 California State Auditor Report 2005-406 231
University Action: Corrective action taken.
The university stated that it issued an executive order that
requires feasibility studies for significant IT projects and
establishes policies and procedures for them. The university
further indicated that it has established metrics through its
quality improvement process to measure process efficiencies
and expected to apply these qualitative and quantitative
measures of process efficiencies across the university system
for the first time in spring 2004.
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
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,
230 California State Auditor Report 2005-406 California State Auditor Report 2005-406 231
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
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.
232 California State Auditor Report 2005-406 California State Auditor Report 2005-406 233
University Action: Corrective action taken.
The university stated that it has established procedures and
parameters for implementing quarterly and annual reporting
of data. It stated that it reported consolidated annual data in its
November 2003 Measures of Success document, and included
both central and campus costs to implement and operate
CMS. The costs were collected from campuses and reported
as systemwide totals in four expenditure categories consisting
of implementation, in-kind, integration, and operations
and maintenance. Additionally, the university stated that it
established a process for annually collecting and reporting
CMS financial plans for each campus along with their CMS
expenditure plans. It reports that it collected campus
financial plans for fiscal year 2003–04 and consolidated
campus CMS financial data into a systemwide report used
to identify short- or long-term financing needs for campus
implementation efforts.
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
releases, adding potentially significant maintenance costs in
reapplying, testing, and implementing these modifications.
Although we recognize that not all modifications take the same
232 California State Auditor Report 2005-406 California State Auditor Report 2005-406 233
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 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
234 California State Auditor Report 2005-406 California State Auditor Report 2005-406 235
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
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
234 California State Auditor Report 2005-406 California State Auditor Report 2005-406 235
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 would
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 consideration of current and alternate
business processes related to vendor selection. Further, in
response to our recommendation to reassess the design of
CMS, the university indicated that it evaluated alternative
technology approaches and concluded that retrofitting at
this stage in the university’s implementation did not appear
cost-effective and would introduce a higher technical risk,
even if a single database were viewed to be more technically
efficient. The university also stated that it defined and
236 California State Auditor Report 2005-406 California State Auditor Report 2005-406 237
published the scope of the revised CMS baseline core
functionality and that campuses reported costs based on this
revised baseline core functionality, as well as on the cost of
planned functionality outside of this baseline. The university
stated that it also evaluated the design for systemwide
reporting using CMS and determined that its current design
is appropriate for its needs. The university reports that it
developed documentation for each area of systemwide
reporting that identifies 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 CMS
quality improvement initiative that established a quality
assurance function within CMS. Further, the university
indicated that it would expand oversight to include internal
assessment by individuals outside the IT organizational
environment. 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 the software
vendor developed software product improvements that
restrict or grant users access to confidential data based
on job function. Finally, the university reported 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,
the university stated that it made further revisions to its
IT project procurement guidelines calling for identifying the
best means for sharing risk with vendors ranging from the
university assuming all the risk to extensive risk assumption
by the vendor.
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
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
236 California State Auditor Report 2005-406 California State Auditor Report 2005-406 237
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
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.
238 California State Auditor Report 2005-406 California State Auditor Report 2005-406 239
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 March 2004
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
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
238 California State Auditor Report 2005-406 California State Auditor Report 2005-406 239
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: 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 endorsing, on
a provisional basis, data warehousing as core functionality
within CMS, but that a final decision to include this CMS
functionality is dependent upon the completion and
evaluation of a feasibility study.
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
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
240 California State Auditor Report 2005-406 California State Auditor Report 2005-406 241
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 incompatible 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 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.
240 California State Auditor Report 2005-406 California State Auditor Report 2005-406 241
Legislative Action: Legislation passed.
In August 2004, Chapter 264, Statutes of 2004
(Assembly Bill 1969) was enacted. This legislation requires
the university to offer designated employees ethics training
on at least a semiannual basis.
University Action: Corrective action taken.
The university stated that it developed a comprehensive
web-based conflict-of-interest and ethics training program
for delivery to designated employees who would be tested
to earn a certificate of completion. The training includes
coverage of the 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 provided a session on conflict
of interest at the systemwide human resources conference in
October 2003. However, although the university previously
stated that its counsel reviewed conflict-of-interest issues and
would fully cooperate with any action taken by the FPPC, its
March 2004 update did not address this topic. 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 and would
require all employees to sign these forms before participating
in the procurement process. The university reported that
it also enhanced its procurement disclosure form to clearly
indicate what constitutes a conflict of interest and stated that
evaluators are prohibited from using 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 would continue to update
its conflict-of-interest code and advised university officials
to review carefully the existing designated position list to
determine whether existing positions require incorporation,
and in determining its designated positions, identify
employees in positions responsible for evaluating and
242 California State Auditor Report 2005-406 California State Auditor Report 2005-406 243
overseeing vendors and contractors. It further indicated that
it requires 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 reported 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 and that
it would inform current and future employees of these
requirements.
242 California State Auditor Report 2005-406 California State Auditor Report 2005-406 243
244 California State Auditor Report 2005-406
THE FISCAL CRISIS AND MANAGEMENT
ASSISTANCE TEAM
Its Recommendations, if Implemented,
Should Help Financially Troubled
School Districts
REPORT NUMBER 2003-129, JUNE 2004
The Fiscal Crisis and Management Assistance Team response as
of December 2004
The Joint Legislative Audit Committee (audit committee)
Audit Highlights . . . requested that the Bureau of State Audits conduct a
performance and financial audit of the Fiscal Crisis and
Our review of the Fiscal Crisis
Management Assistance Team (FCMAT), including a review
and Management Assistance
Team (FCMAT) revealed: of its prescribed roles and responsibilities in connection with
school districts requesting emergency apportionment loans
þ FCMAT’s reports include
from the State. Specifically, we were asked to evaluate the mix
recommendations that
are valuable and should of responsibilities that FCMAT has been asked to assume since
help improve the financial its formation. This included assessing the level of involvement
health of school districts.
FCMAT has had with the various school districts receiving state
þ Most of the school emergency loans. In addition, we were asked to determine
districts we reviewed whether FCMAT can demonstrate that its involvement has
have implemented or improved the fiscal health of school districts, and to what
partially implemented
extent its involvement has prevented the need for state
many of FCMAT’s
recommendations. emergency loans to school districts. We were also asked to
examine the policies and procedures that FCMAT uses to acquire
þ Fiscal recovery of a school
the services of contractors, including determining whether
district can take several
FCMAT reasonably justifies the use of noncompetitive personal
years depending on the
nature and severity of its services contracts and how FCMAT monitors and evaluates the
problems. performance of its contractors. The audit committee asked us to
þ Since its formation, review FCMAT’s financial statements to determine the amount
FCMAT’s responsibilities of administrative and overhead costs and, for a sample of school
have expanded, primarily districts that received state emergency loans, to determine the
as a result of legislation.
amount FCMAT charged for its services.
continued on next page . . .
Additionally, we were asked to determine the level of
oversight other entities have over FCMAT, including FCMAT’s
management of its annual budget. We were also asked to
determine, where appropriate, the amounts received by the
trustees or administrators of the school districts. Finally, we were
asked to review and evaluate the process for selecting FCMAT’s
California State Auditor Report 2005-406 245
þ FCMAT’s process for board members and staff, including whether it has defined
selecting consultants minimum qualifications for the various employment levels.
to work on its large
comprehensive reviews
is fair, but FCMAT can
Finding #1: FCMAT provides valuable advice to troubled
improve by sending
school districts.
application packets
to a larger group of
Since FCMAT’s inception, it has completed 369 school district
consultants.
studies and other services, including acting as a fiscal adviser
þ FCMAT’s governing board to school districts and county offices and assisting the State
has good reasons to
Superintendent of Public Instruction.
keep the rate FCMAT bills
school districts low.
Our review of FCMAT’s involvement at 10 school districts
þ The percentage of
revealed that FCMAT provides findings and recommendations
FCMAT’s administrative
that are valuable and should help improve the financial health
and overhead costs seems
reasonable. of school districts. All of the school districts we reviewed
appeared to have implemented or partially implemented some
of the recommendations we selected to review, although due
to various factors, including the severity and nature of their
problems, several of them continue to experience financial
difficulties. Because FCMAT’s recommendations are standards-
based, they have resulted in improved practices, which can
lead to improved overall fiscal health for the school districts
that implemented them. However, FCMAT’s recommendations
can be effective only if school districts take action on them.
School districts are not required to implement FCMAT’s
recommendations and, except for those districts that received
emergency loans, FCMAT is not required to report the progress
the districts make in implementing its recommendations.
Finding #2: FCMAT uses a fair process to identify and
select consultants for its studies, but it does not solicit
a sufficiently large number of consultants to bid on its
comprehensive reviews.
FCMAT is not subject to state contracting laws, but it does put
its more extensive, comprehensive review work out to bid.
However, for the first Oakland Unified School District study
in 1999 and the subsequent studies in the West Contra Costa
and Berkeley school districts, FCMAT did not publish an open
request for application (RFA); instead, it mailed invitations to
bid to only a short list of applicants. FCMAT may have received
more bids from qualified applicants if it had sent invitations to
bid to a larger group. By not soliciting bids from a larger group
of consultants, FCMAT did not ensure that it had a sufficiently
broad pool of experts from which to choose.
246 California State Auditor Report 2005-406 California State Auditor Report 2005-406 247
To obtain the broadest range of consultants to choose from,
FCMAT should expand its list of consultants who receive request
for application packets.
FCMAT Action: Corrective action taken.
FCMAT reported that on June 23, 2004, its governing board
approved a corrective action plan to increase the list of
consultants that receive RFA packets. FCMAT also provided
documents reflecting its efforts to increase the number of
consultants responding to its RFA for a comprehensive study
of the Vallejo City Unified School District.
Finding #3: FCMAT can more effectively use its client
feedback process.
Although most of its clients who completed an evaluation form
are pleased with its performance, FCMAT does not keep records
of its resolution of complaints and thus cannot ensure that it
addresses the concerns they raise. Using this information from
its customers, FCMAT should be able to improve its service over
time and continue using consultants that its customers have
found helpful and professional.
To improve its customer service, FCMAT should ensure that it
adequately addresses the issues its customers raise in post-study
evaluations by developing a process for tracking the concerns
and documenting the steps it takes to resolve them.
FCMAT Action: Corrective action taken.
FCMAT reported that on June 23, 2004, its governing board
approved a corrective action plan to develop a process for
tracking the concerns customers raise in the post-study
evaluation and documenting the steps FCMAT takes to resolve
them. FCMAT also provided copies of the follow-up and
resolution report form that it used to resolve issues raised on
three post-study evaluations in March and April 2004.
Finding #4: FCMAT has good reasons to keep its billing rate low.
To offset some of the costs of performing management
assistance studies, the Legislature authorized FCMAT to charge
school districts that are not declared as fiscal emergencies a
daily rate for these services. Currently, FCMAT’s governing
board has approved a $400 rate per team member for every
246 California State Auditor Report 2005-406 California State Auditor Report 2005-406 247
day that FCMAT or its consultants are on site at the districts.
This rate is on the low end of what FCMAT pays its consultants
for these services, but it appears reasonable given FCMAT’s
understanding that the Legislature intended FCMAT to assist
financially troubled school districts to head off financial crises,
such as bankruptcy, thereby avoiding the need for emergency
loans from the State. FCMAT generally does not bill school
districts that have received state emergency loans or that
FCMAT’s board has designated as being in a fiscal emergency for
its services. Rather, the State pays FCMAT’s costs in such cases,
either through FCMAT’s annual appropriation for management
assistance studies or through separate appropriations specific to
particular school districts.
Finding #5: FCMAT’s administrative costs appear reasonable.
For the three fiscal years 2000–01 through 2002–03, FCMAT’s
studies cost an average of $3.1 million annually, including
$2.1 million per year for management assistance studies
and an average of $1 million during each of the three years
for comprehensive studies of school districts as mandated
by legislation. Of the $2.1 million, it billed approximately
$632,000, or 31 percent of its average costs per year, to the
school districts that received the services. Also during this period,
FCMAT spent, on average, $419,000 per year, or 13 percent of the
$3.1 million, on administrative costs, including costs for office
space, utilities, office supplies and equipment, and other costs not
directly associated with its studies.
We noted that the administrative costs do not include the
portion of two managers’ salaries that is related to administrative
duties, such as approving staff time sheets and attending
FCMAT’s board meetings. However, it is not likely that including
the portion of their salaries associated with performing those
tasks would cause FCMAT’s total administrative costs to exceed
a reasonable proportion of the total costs. Further, given the
small size of FCMAT, it is reasonable that its administrative
costs, most of which would remain the same regardless of the
number of studies it performs, represent a higher proportion of
its total costs when compared to larger organizations because
FCMAT cannot benefit from the economies of scale that large
organizations enjoy.
248 California State Auditor Report 2005-406
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 2004
Audit Highlights . . .
Chapter 804, Statutes of 2002, requires the Bureau of State
Audits (bureau) to report to the Legislature the results
Our review of California’s
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,
and reporting accurate crime statistics in compliance with
þ The Clery Act does not
the requirements of the Jeanne Clery Disclosure of Campus
always provide clear
definitions. Security Policy and Campus Crime Statistics Act (Clery Act).
We evaluated compliance with the Clery Act at California
þ Institutions sometimes
State University, Sacramento (Sacramento); City College of
report inaccurate or
incomplete statistics in San Francisco (San Francisco); San Diego State University
their annual reports. (San Diego); University of California, Davis (Davis); University
of California, Santa Barbara (Santa Barbara); and University of
þ Institutions have
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 2005-406 249
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
250 California State Auditor Report 2005-406 California State Auditor Report 2005-406 251
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: Corrective action taken.
The education institutions reported that they implemented
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.
250 California State Auditor Report 2005-406 California State Auditor Report 2005-406 251
Institutions’ Actions: Corrective action taken.
The education institutions reported that they have established
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: Corrective action taken.
The education institutions reported that they have
established policies and procedures 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
252 California State Auditor Report 2005-406 California State Auditor Report 2005-406 253
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: Corrective action taken.
The education institutions reported that they have made the
necessary changes to correct the deficiencies noted in our report.
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
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.
252 California State Auditor Report 2005-406 California State Auditor Report 2005-406 253
Commission Action: Corrective action taken.
The Commission stated that it has assigned a staff person
to work 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
also stated that its staff spend time daily checking and
updating the campus information on its Web site. Finally,
the Commission reported that staff periodically reconcile its
Web site with the federal Web site.
254 California State Auditor Report 2005-406
CALIFORNIA PUBLIC UTILITIES
COMMISSION
It Cannot Ensure That It Spends Railroad
Safety Program Fees in Accordance With
State Law
REPORT NUMBER 2003-121, MAY 2004
California Public Utilities Commission response as of
Audit Highlights . . . November 2004
Our review of the California The Joint Legislative Audit Committee requested the Bureau
Public Utilities Commission
of State Audits to determine whether the California
(commission) revealed that:
Public Utilities Commission (commission) uses Railroad
þ The commission does
Safety Program fees according to requirements specified in the
not have an effective
California Public Utilities Code. Specifically, we found:
method to track the time
its employees spend on
railroad safety activities.
Finding #1: The commission does not have an effective
þ The commission cannot method to track the time its employees spend on railroad
ensure that it charges only
safety activities.
allowable travel-related
expenses to the Railroad
The commission uses a timekeeping system that does not track
Safety Program.
the actual time its employees spend working on railroad safety
þ Inaccuracies in its cost activities. As a result, some inspectors inconsistently report their
allocation plan and hours, and the commission uses estimates to determine the
table have caused the
direct labor expenditures of clerical, supervisory, and legal staff
commission to incorrectly
charge indirect costs who work on activities related to the Railroad Safety Program.
to the Railroad Safety In fiscal years 2002–03 and 2003–04, errors in those estimates
Program.
resulted in overcharges to the Railroad Safety Program. However,
þ Without a system to track the commission did not take sufficient steps to ensure that
direct and indirect costs, similar errors would not reoccur. In fact, we found that between
the commission cannot July 2003 and February 2004 the commission incorrectly
establish reliable budgets
charged the Railroad Safety Program $281,000 for staff in its
and set appropriate fees.
legal divisions.
The commission has been trying to upgrade its timekeeping
system since as early as spring 2002 to allow its employees to
record the actual time they spend on projects or activities
and to integrate its timekeeping system with its accounting
system. However, the commission has experienced delays
and does not expect to complete the system upgrades until
California State Auditor Report 2005-406 255
September 2004. Thus, it cannot ensure that the fees it collects
are spent only on the direct labor charges of Railroad Safety
Program employees.
We recommended that the commission should move quickly
to fully implement upgrades to its timekeeping system to allow
employees to record the actual time they spend on railroad
safety activities and to enable the commission to reconcile
expenditures to funding sources. We also recommended that
the commission should ensure that it determines the effect
that incorrectly charging hours for staff in its legal divisions has
on the allocation of indirect costs to the Railroad Safety Program
and adjust its accounting records for fiscal year 2003–04.
Commission Action: Partial corrective action taken.
The commission indicated that staff in the Information and
Management Services Division and the Consumer Protection
and Safety Division received training on its timekeeping
system in October 2004 and have begun entering data into
the system. The commission plans to train staff in its other
divisions by December 2004 and estimates that staff in these
other divisions will begin entering data into the system by
January 2005. Finally, the commission stated that it made
the appropriate adjustments to its accounting records.
Finding #2: The commission cannot ensure that it charges
only allowable travel-related expenses to the Railroad
Safety Program.
Because of weaknesses in its method of processing travel expense
claims submitted by railroad safety inspectors, the commission
cannot ensure that all travel-related expenses charged to the
Railroad Safety Program are allowable.
Specifically, the commission does not always require inspectors
to report the proper program cost account codes or the
percentage of time they spend traveling for Railroad Safety
Program inspections on their travel expense claims. Further,
although inspectors’ time sheets may indicate time spent on
other programs, the commission does not direct its accounting
staff to charge costs among programs according to the indicated
percentages. Consequently, the commission cannot ensure
that only allowable travel-related expenses are charged to the
Railroad Safety Program.
256 California State Auditor Report 2005-406 California State Auditor Report 2005-406 257
We recommended that the commission should establish
procedures requiring inspectors to identify the program cost
account codes to be charged for their travel expenses on their
travel expense claims. Additionally, the commission should
require its accounting staff to enter all valid codes shown on the
travel expense claim into the accounting system.
Commission Action: Corrective action taken.
The commission indicated that it implemented a process
under the guidance of the Consumer Protection and Safety
Division’s budget control and fiscal officers.
Finding #3: Inaccuracies in its cost allocation plan (plan)
and table have caused the commission to incorrectly charge
indirect costs to the Railroad Safety Program.
The commission has not established a formal process for
periodically reviewing and updating its plan in accordance with
state accounting procedures. The plan contains the method of
distributing operating expenses or equipment costs that cannot
practically be charged directly to the programs that benefit
from the accumulated costs. Additionally, the commission
does not maintain its accounting system’s cost allocation table
(table), which contains data that are the basis of the allocation
of expenditures and encumbrances in the commission’s
accounting system, the California State Accounting and
Reporting System. Consequently, both the plan and table
contained inaccuracies that resulted in the commission
improperly charging the Railroad Safety Program for indirect
costs. For example, the commission did not change its table to
reflect all the unit codes established during its reorganization.
Without a formal process for evaluating the accuracy of its plan
and table, the commission cannot ensure that it appropriately
charges indirect costs to various programs, including the
Railroad Safety Program.
We recommended that the commission develop policies and
procedures to ensure that it maintains its plan and table for
indirect charges in accordance with the State Administrative
Manual. Specifically, the commission should periodically review
and update its plan and table to ensure that the allocation bases
are appropriate. Further, it should ensure that management
reviews and approves any changes to the plan.
256 California State Auditor Report 2005-406 California State Auditor Report 2005-406 257
Commission Action: Partial corrective action taken.
The commission plans to update its fiscal year 2004–05 cost
allocation plan and table by January 2005. It also plans
to submit the cost allocation plan to its management for
review and approval. Thereafter, the commission plans to
review its cost allocations annually and/or when changes to
its organizational structure require adjustments to the cost
allocation factors. Finally, the commission indicated that it
adjusted its accounting records for fiscal year 2003–04.
258 California State Auditor Report 2005-406
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 . . .
California Public Utilities Commission’s response as of
December 2004
Our review of whether the
California Public Utilities
Commission (commission) The Joint Legislative Audit Committee (audit committee)
promptly resolves formal and
requested that the Bureau of State Audits determine
informal proceedings found
the following: whether the California Public Utilities Commission
(commission) promptly completes the various types of
þ Few of the 1,602
administrative proceedings it is responsible for conducting. The
formal proceedings the
audit committee asked that we determine how the commission
commission initiated
between January 1, 2000, sets priorities in the water, telecommunications, and energy
and June 30, 2003, were areas when conducting its various types of administrative
subject to statutory
proceedings. Additionally, we were asked to review staffing levels
deadlines.
to assess whether these levels are adequate for the commission
þ Commission staff to comply with its statutory mandates regarding administrative
provided various reasons
proceedings. As part of the assessment, we were to consider
for delays, including
other studies that may have been performed related to staffing.
that the outcomes of
some proceedings were Finally, the audit committee requested that we identify any
dependent on other timelines contained in law or regulations for the completion of
decisions or investigations
proceedings. We were asked to select a sample of proceedings
or the proceedings were
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
determine the reasons for delays.
multiple phases.
þ Two factors contributed
Finding #1: Some proceedings the commission closed
to delays in processing
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 within
approve minor requests the statutory deadline or guideline, but because its tracking system
from utilities: Some had
does not appropriately reflect the resolution of proceedings that are
a lower workload priority
reopened, these proceedings appeared to have been delayed. The
and some required
formal resolution or commission’s system tracks numerous pieces of information about
investigation. each proceeding, including the title and type of proceeding, when it
was opened and closed, and when it was reopened. However, when
continued on next page . . .
the commission reopens a proceeding, such as when it considers
requests for a rehearing, and then closes the proceeding again, the
California State Auditor Report 2005-406 259
Although the commission cited later closing date replaces the initial one. Because only the later
workload and inadequate closing date is used in measuring how long the commission took to
staffing as contributing to
resolve the proceeding, the commission appears to have required
delays in processing its formal
proceedings and advice more time than it actually did. When we became aware that the
letters, the lack of a workload closing dates in the tracking system were not always accurate, we
tracking system hinders its
reviewed all 70 of the proceedings that had reopen dates and found
ability to justify staffing needs.
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’s Action: Corrective action taken.
The commission indicated that it is now retaining multiple
closing dates within its tracking system. Additionally, it plans
to further modify the tracking system to perform queries and
prepare reports utilizing the retained data.
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
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.
260 California State Auditor Report 2005-406 California State Auditor Report 2005-406 261
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’s Action: Corrective action taken.
The commission stated that it implemented internal work
rules to require its ALJs to report submission dates earlier and
more accurately. However, the commission did not indicate
whether it is using the submission dates to monitor whether
it is meeting its deadlines.
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.
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’s Action: Corrective action taken.
The commission indicated that its current process is to
continue to prepare an annual work plan that contains work
priorities and criteria for determining priorities.
260 California State Auditor Report 2005-406 California State Auditor Report 2005-406 261
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’s Action: Partial corrective action taken.
The commission stated that it has revised its internal process
and is currently reviewing all open advice letters.
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.
262 California State Auditor Report 2005-406 California State Auditor Report 2005-406 263
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 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’s Action: Partial corrective action taken.
The commission indicated that on January 5, 2004, it
implemented new rules for handling advice letters, which
eliminated the paper process. However, it indicated that closed
paper advice letters are in temporary bulk storage making it
difficult to retrieve them. The commission is considering other
options to handle the bulk files, budget permitting, such as
microfilming or archiving in a central state location off premises.
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),
262 California State Auditor Report 2005-406 California State Auditor Report 2005-406 263
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’s Action: Partial correct action taken.
The commission stated that it is currently implementing
a new workload tracking system, which it plans to begin
using with the December 2004 pay period. It also indicated
that the new system maintains historical employee position
information, which is necessary for accurately determining
staffing requirements.
264 California State Auditor Report 2005-406
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 2004
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 2005-406 265
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: Corrective action taken.
The board stated that on September 17, 2003, it adopted the
second phase of regulations for construction and demolition
debris sites. On November 10, 2003, the regulations were
submitted to the Office of Administrative Law (OAL) for
approval. OAL filed the regulations with the secretary of state
on December 26, 2003. The regulations became effective on
266 California State Auditor Report 2005-406 California State Auditor Report 2005-406 267
February 24, 2004. The board also stated that it is working
with the local enforcement agencies and operators
through training and ongoing assistance to effect prompt
implementation of the regulations.
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: Corrective action taken.
The board stated that on January 22, 2004, it sent a notice
to all LEAs rescinding the advisory. With the adoption
of the Construction and Demolition Waste and Inert
Disposal regulations, the board’s regulations provide
a comprehensive regulatory permitting structure. In
addition, existing regulations now address the permitting
266 California State Auditor Report 2005-406 California State Auditor Report 2005-406 267
requirements for any solid waste facility; therefore, the
advisory is no longer necessary. Further, the board stated
that it will continue to assist LEAs in determining what
activities require a permit and where the activities fit in
the existing tiered regulatory structure. Also, the board has
posted detailed responses to questions from LEAs regarding
the compostable materials and construction and demolition
debris regulations on its 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.
268 California State Auditor Report 2005-406 California State Auditor Report 2005-406 269
Board Action: Corrective action taken.
As of January 18, 2005, the city of Fresno reported that it
had implemented all 24 recommendations.
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
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.
268 California State Auditor Report 2005-406 California State Auditor Report 2005-406 269
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 Action: Pending.
The board stated that it engaged in discussions regarding
this recommendation with entities such as the Enforcement
Advisory Council and the California Conference of Directors
of Environmental Health. The board also stated that while it
has the authority to request information it deems necessary
to evaluate LEAs, it does not have the authority to require
the implementation of a tracking system. Nevertheless, the
board stated that LEAs are still responsible for being aware of
changes in activities located in their jurisdiction. However,
the board has stated that it began discussions with LEAs
about the idea of developing, in concert with other local
regulatory entities, a mechanism for identifying and
tracking activities that may trigger additional regulatory
requirements. In addition, the board stated that on
September 10, 2004, the governor signed Assembly Bill 2159
into law. The bill requires LEAs to maintain a record of,
and take any action that the LEA is authorized to take
regarding a complaint, referral, or inspection relating to the
operation of a solid waste facility or other activity within the
LEA’s jurisdiction. The new requirement became effective
January 1, 2005.
270 California State Auditor Report 2005-406 California State Auditor Report 2005-406 271
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: Partial corrective action taken.
The board stated that staff indicated that it should be able
to accomplish the evaluation cycle within the three-year
timeframe, in part by examining internal practices in order
to streamline the evaluation process and establishing firmer
deadlines for internal fact-finding and report review. Further, if
these methods are not adequate, staff will examine, as needed,
alternative approaches to the current statutory scheme for LEA
evaluation, such as establishment of a prioritization system,
and/or examine other evaluation models to identify if the
board needs to modify its current system. The board stated
that the third cycle of evaluations began in April 2003 and
staff had completed 33 evaluations with an additional
270 California State Auditor Report 2005-406 California State Auditor Report 2005-406 271
10 scheduled for completion within six months. Given the
rate of completion, the board stated that staff expects to
complete all evaluations within the three-year timeframe.
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.
272 California State Auditor Report 2005-406 California State Auditor Report 2005-406 273
Legislative Action: Partial legislation passed.
The Legislature introduced and amended Assembly Bill 2159,
which provides that a request for a hearing would not
stay a cease and desist order, under specified conditions,
and revised the procedures for appealing hearing panel or
hearing officer decisions to the board. It also requires an
enforcement agency to maintain a record of, and take any
action that the enforcement agency is authorized to take
regarding a complaint, referral, or inspection relating
to the operation of a solid waste facility or other activity
within the jurisdiction of the enforcement agency that is an
excluded operation, as specified.
Board Action: Pending.
The board stated that its staff agrees that this issue warrants
further consideration.
272 California State Auditor Report 2005-406 California State Auditor Report 2005-406 273
274 California State Auditor Report 2005-406
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 2004
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 2005-406 275
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 for fiscal years 2003–04 and 2004–05.
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 informally surveyed
other state brownfield programs for information about the
challenges, features, and operating costs of their inventories.
Cal/EPA also intends to hold a series of discussions with
various stakeholders and will use the information to proceed
with its inventory efforts.
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.
276 California State Auditor Report 2005-406 California State Auditor Report 2005-406 277
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.
Legislative Action: Legislation passed.
Chapter 705, Statutes of 2004 (Assembly Bill 389) directs
Toxics to install improvements to its database systems
to maintain and display information that includes
the number of brownfield sites, each brownfield site’s
location, acreage, response action, site assessments, and
the number of orphan sites where the department is
overseeing the response action.
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 Toxics applied for and was awarded grant
funds from the U.S. EPA for a variety of brownfield activities,
including targeted site investigations, program coordination
with the State Water Board, public outreach activities, Web site
improvements, and assisting local jurisdictions. Additionally,
Cal/EPA stated that Toxics and the State Water Board are
actively pursuing other available competitive brownfield funds.
276 California State Auditor Report 2005-406 California State Auditor Report 2005-406 277
278 California State Auditor Report 2005-406
SEX OFFENDER PLACEMENT
Departments That Are Responsible for
Placing Sex Offenders Face Challenges,
and Some Need to Better Monitor
Their Costs
REPORT NUMBER 2004-111, DECEMBER 2004
Audit Highlights . . .
Departments of Developmental Services, the Youth Authority
Our review of the departments
from Youth and Adult Correctional Agency, and Mental Health
of Developmental Services
responses as of December 2004
(Developmental Services),
the Youth Authority (Youth
Authority), and Mental Health The Joint Legislative Audit Committee (audit committee)
(Mental Health) processes
asked us to review the process and costs of the
and related costs for releasing
departments of Developmental Services (Developmental
sex offenders into the local
community revealed: Services), the Youth Authority (Youth Authority), and Mental
Health (Mental Health) for placing sex offenders in local
þ Developmental Services
communities. Specifically, the audit committee asked us to
cannot identify the total
number of individuals it review the three departments’ policies and procedures for
serves who are registered identifying, evaluating, and placing sex offenders in local
sex offenders, or the
communities. It also asked us to review the contracts these
related costs, and is not
departments have with homes used to house sex offenders and
required to do so.
to identify the placement costs that each department incurred
þ Youth Authority’s out-
for the last three fiscal years. Finally, the audit committee asked
of-home placement
us to evaluate the relationship between regional centers’ housing
standards do not conform
to laws and regulations agents and homeowners for a sample of placements made
otherwise governing through Developmental Services during the last fiscal year. For
housing facilities. In
purposes of our audit, we defined a sex offender as follows: At
addition, it cannot track
Developmental Services, these are consumers who are required
the cost of housing
sex offenders in the to register as sex offenders under the Penal Code, Section 290; at
community because of an the Youth Authority, this population includes youthful offenders
inadequate billing system.
eligible for placement in its Sex Offender Treatment Program; at
þ Only three sexually Mental Health, this population includes SVPs as defined by the
violent predators (SVPs) Welfare and Institutions Code, Section 6600. We found that:
have been released to
Mental Health’s Forensic
Conditional Release
Finding #1: Various laws complicate the treatment of sex
Program, but procuring
offenders by Developmental Services.
housing for SVPs may
continue to be difficult,
Developmental Services cannot identify the total number of its
and the program has
proven costly. consumers who are sex offenders and is not required to do so.
Specifically, the Lanterman Developmental Disabilities Services
continued on next page . . . Act does not require that consumers provide criminal histories,
California State Auditor Report 2005-406 279
such as prior sex offenses, when accessing services provided
In addition, the State through regional centers. Furthermore, the law only allows
currently has no process the California Attorney General (attorney general) to provide
to measure how successful
Developmental Services the criminal histories of its potential
the SVP component of this
consumers in very limited circumstances. That same law
program is or to determine
how to improve it. generally prohibits law enforcement agencies and others from
sharing this information with Developmental Services or the
regional centers. Because Developmental Services cannot always
identify the registered sex offenders in its consumer population,
it cannot isolate the costs associated with placing them in
local communities. Developmental Services also may not be
able to identify and assist consumers with specific services and
supports needed to address the behaviors related to his or her
sex conviction. When regional centers identify consumers
who are sex offenders, they face barriers in placing them in
local communities. For example, one community’s protest
caused Developmental Services to postpone a regional center’s
implementation of the community placement plan for a small
group of consumers in that community.
To most appropriately provide services and supports to its
consumers, we recommended that Developmental Services
consider seeking legislation to enable it and the regional centers
to identify those consumers who are sex offenders by obtaining
criminal history information from the attorney general. If
the Legislature chooses not to allow access to criminal history
information, Developmental Services should seek to modify its
laws and regulations governing the individual program plan
process to include a question that asks potential consumers if
they must register as sex offenders.
Developmental Services Action: Pending.
Developmental Services agreed that a mechanism should be in
place to facilitate regional centers’ ability to identify those of its
consumers who are required to register as sex offenders under
Penal Code, Section 290. It stated that this information would
enhance the regional center’s ability to assist those consumers in
complying with related laws and also to assess the appropriate
type and level of services and supports that the person
needs. To that end, Developmental Services reported that it
will immediately begin exploring options, in collaboration
with the Association of Regional Center Agencies, that
address the need to obtain sufficient information to meet the
legal requirements for consumers who fall under Penal Code,
Section 290. It also stated that such options would include
280 California State Auditor Report 2005-406 California State Auditor Report 2005-406 281
a review of the individual program planning process by
which regional centers have the ability to solicit information
to ensure that consumers receive services and supports
appropriate to their needs and to protect consumers from
situations that may not be in their best interest.
Legislative Action: Unknown.
Finding #2: The Youth Authority has problems with placement
and monitoring of sex offenders, as well as with contracting.
The Youth Authority’s standards to assure that basic and
specialized needs of the parolees are met do not conform to
laws and regulations otherwise governing housing facilities.
Because parole agents do not always complete evaluations
and inspection of these homes, the safety of the parolees may
be in jeopardy. For example, parole offices failed to perform
background checks of owners, operators, and employees for
12 of the 14 homes that we reviewed. Also, parole offices do
not always follow procedures for supervising parolees who
are sex offenders, making it difficult for parole agents to
promptly identify whether these youths need more intensive
monitoring. Specifically, the Youth Authority could not provide
documentation to demonstrate that parole agents held case
conferences for nine of the 60 paroled sex offenders in our
sample. Moreover, according to our review, parole agents were
up to 96 working days late in documenting the case conferences
for 36 of the sex offenders.
In addition, the Youth Authority’s contracts with homes do not
contain some of the elements of a valid contract. For example,
the contracts do not specify the term for the performance
or completion of the services, nor do they clearly describe
the level of service the homes must provide. Moreover, the
Youth Authority could not justify the rates it pays to homes.
Further, the Youth Authority has not adequately designed and
implemented a billing system to track housing costs for youthful
offenders. Finally, although the Youth Authority has a conflict-
of-interest code meant to avoid potential conflicts of interest,
it does not ensure that all of its supervising parole agents and
those employees who perform the duties of the supervising
parole agents file statements of economic interests.
To assure that at a minimum it meets the basic and specialized
needs as well as safety of sex offenders who are on parole, we
recommended that the Youth Authority address the deficiencies
in its out-of-home placement standards and modify its regulations
280 California State Auditor Report 2005-406 California State Auditor Report 2005-406 281
accordingly. It should also conduct periodic reviews of a sample of
the parolees’ case files to ensure parole agents’ compliance with its
supervising procedures. In addition, to ensure that its contracting
process meets state requirements, we recommended that the Youth
Authority seek guidance from the departments of General Services
(General Services) and Finance (Finance).
To ensure that it can accurately identify the costs associated
with housing sex offenders in the community, we recommended
that the Youth Authority identify and correct erroneous data
in its billing system, implement controls and procedures to
ensure the completeness and accuracy of the records, and
reconcile the invoices in its billing system with the payments
in its accounting records. To ensure that the Youth Authority
places paroled sex offenders in group homes that provide the
most adequate services for the least amount of money, we
recommended that it conduct a study of out-of-home placement
rates paid by each of its parole offices and ensure that the rates
set are commensurate with the services the homes provide.
Finally, to ensure that it avoids potential conflicts of interest, the
Youth Authority should ensure that all supervising parole agents
and employees who are performing duties similar to those of the
supervising parole agents file a statement of economic interests.
Youth Authority Action: Pending.
The Youth Authority agreed with our recommendations and
has assigned a project coordinator to oversee various groups
that will have responsibility for addressing the deficiencies
noted in our report. For example, the Youth Authority
stated that a work group has been established to address the
deficiencies in its out-of-home placement standards and to
modify its regulations. This work group has been instructed
to include specific input from the Department of Social
Services, Community Care Licensing, and the Department of
Alcohol and Drug Programs on their respective standards and
licensing requirements. In addition, the Youth Authority stated
that it would devise a plan for getting back into compliance
with regard to conducting case conferences. The Youth
Authority also reported that it has assigned the deputy director
of Administrative Services the task of coordinating a meeting
with General Services and Finance to ensure that its contract
process is consistent with state law and its own policies. Further,
the Youth authority stated that a workgroup will address
the issue of the appropriate tracking of costs associated with
housing sex offenders and will review the billing, contracting,
282 California State Auditor Report 2005-406 California State Auditor Report 2005-406 283
and payment process. The Youth Authority stated that it will
assign a staff person to conduct a study of its out-of-home
placement rates and to chair a workgroup to ensure that its
rates are commensurate with the services the homes provide.
Finally, the Youth Authority reported that its personnel office
is in the process of establishing a checklist to ensure that
statements of economic interest are filed when an employee
assumes or leaves office. The Youth Authority stated that it
also revised its conflict-of-interest code to include positions for
employees who are performing duties similar to supervising
parole agents. The revision is scheduled to take effect in
October 2005. In the interim, the Youth Authority stated that it
would request all parole agents with supervisory responsibilities
to complete statements of economic interests.
Finding #3: Mental Health should improve fiscal oversight
of the Forensic Conditional Release Program, and the State
lacks a process to measure its success.
Superior courts at the county level play a major role in the
release of sexually violent predators (SVPs) to Mental Health’s
Forensic Conditional Release Program (Conditional Release
Program) and retain jurisdiction over these individuals
throughout the course of the program. Once an SVP resides
in a secure facility for at least one year, he or she is eligible to
petition the court to enter the Conditional Release Program.
Although few SVPs qualify for the program (only three since the
program’s inception in 1995), procuring housing for them may
continue to be difficult, and Mental Health needs to improve
its fiscal oversight. For example, it lacks adequate procedures to
monitor Conditional Release Program costs. According to the
former chief of Mental Health’s Forensic Services Branch, due
to budget cuts it no longer has an auditor position available to
perform audits and detailed reviews of costs. In addition, Mental
Health does not adhere to its policies and procedures designed
to reduce program costs. For example, it does not presently
ensure that SVPs apply for other available financial resources
such as food stamps and Social Security income. Finally, the
State currently has no process to measure how successful its
Sex Offender Commitment Program is (the Conditional Release
Program is its fifth treatment phase in this program) or to
determine how to improve it.
To ensure that contractors adhere to the terms and conditions
in its contracts, we recommended that Mental Health either
reinstate the auditor position or designate available staff to fulfill
282 California State Auditor Report 2005-406 California State Auditor Report 2005-406 283
the audit functions. In addition, Mental Health should follow
through on its policy to reduce costs associated with the SVP
component of the Conditional Release Program.
To enable the State to measure the success of the SVP
component of the Conditional Release Program, we
recommended that the Legislature consider directing Mental
Health to conduct an evaluation of the program.
Mental Health Action: Partial corrective action taken.
Mental Health stated that although it will need to receive
new funding to reinstate positions eliminated through
past budget reductions, it will use Conditional Release
Program operations staff to review invoices and supporting
documentation prior to making a payment. However,
Mental Health did not address fully its efforts to ensure that
contractors adhere to the contract terms and conditions for
the SVP component of the Conditional Release Program.
Specifically, although Mental Health plans to review invoices
and supporting documentation prior to making payments to
its contractors, as the State Contracting Manual requires, it
fails to address adequately the steps it will take to fulfill the
audit functions we described in our audit report. Specifically,
Mental Health does not indicate if it will seek funding for
the auditor position nor does it outline the specific audit
steps its Conditional Release Program staff will undertake.
Thus, we look forward to Mental Health’s subsequent
responses relating to this audit issue.
In response to our recommendation that Mental Health
should follow through on its policy to reduce costs
associated with the SVP component of the Conditional
Release Program, Mental Health reported that it will
update the Conditional Release Program policies and
procedures manual to specify the right to cancel contracts
if circumstances cause the service or product to be no
longer needed. In addition, Mental Health stated that one
contractor enacted procedures to ensure that SVPs are made
aware of and follow through with the need to pursue all
other sources of support before they receive life support
funds. This contractor also added language to its standard
terms and conditions stating that the amounts received
284 California State Auditor Report 2005-406 California State Auditor Report 2005-406 285
by SVPs in the Conditional Release Program as life support
funds must be repaid by the SVP. Mental Health also stated
that it will update the policies and procedures manual to
specify that the amount an SVP receives in life support funds
to pay the cost of housing will be evaluated and determined
separately from the amount received to pay the cost of other
items such as food and clothing.
Legislative Action: Unknown.
284 California State Auditor Report 2005-406 California State Auditor Report 2005-406 285
286 California State Auditor Report 2005-406
DEPARTMENT OF HEALTH SERVICES
Investigations of Improper Activities by
State Employees
ALLEGATION NUMBER I2003-0853 (REPORT I2004-2),
SEPTEMBER 2004
Department of Health Services’ response as of October 2004
We investigated and substantiated an allegation that
managers and employees at the Department of Health
Services (Health Services) regularly used state vehicles
Investigative Highlight . . . for their personal commutes.
For eight months, one
employee regularly used a Finding: Health Services’ employees received a benefit from
state vehicle for his 180-mile
their misuse of state vehicles.
daily commute.
In an effort to justify a business need for the number of vehicles
leased by a Health Services’ office (office), the office manager
allowed employees under her supervision to use state vehicles
for their personal commutes. Nine employees, including the
manager, used state vehicles to commute between their homes
and the office in violation of state laws and regulations. We
determined that as a result of their misuse of state vehicles,
office employees received a personal benefit of $12,346. Because
the employees received a personal benefit as a result of the
manager’s decision, it appears that they violated state law
prohibiting the use of state resources for personal gain.
Department of Health Services’ Action: Corrective action taken.
Health Services agreed with our findings and reported that
it conducted a cost/benefit analysis of state vehicle usage
and returned four of the 12 vehicles used by the office.
Additionally, Health Services reported that office employees
no longer use state vehicles for personal use. Further, Health
Services reported that it performed a detailed reconciliation
of the state vehicle mileage logs with employee time sheets
and based on those findings, it will prepare and serve notice
of adverse action to the affected employees.
California State Auditor Report 2005-406 287
288 California State Auditor Report 2005-406
DEPARTMENT OF HEALTH SERVICES
Some of Its Policies and Practices Result
in Higher State Costs for the Medical
Therapy Program
REPORT NUMBER 2003-124, AUGUST 2004
Audit Highlights . . .
Department of Health Services’ and Los Angeles County’s
Our review of the Department responses as of October 2004 and November 2004, respectively
of Health Services’ (department)
Medical Therapy Program The Joint Legislative Audit Committee (audit committee)
(MTP) revealed the following:
requested that the Bureau of State Audits (bureau) review
þ During fiscal year Department of Health Services’ (department) and county
2002–03 the department billing practices for the Medical Therapy Program (MTP) and
spent $4.6 million more
evaluate whether such practices minimize the State’s costs for
than state law specifically
authorizes because it: MTP services. Based on our review, we found:
• Fully funded certain
county positions without Finding #1: The Department of Health Services’ authority to
the express statutory
fully fund certain county costs is unclear.
authority to do so.
The department is required to divide MTP costs equally between the
• Used a method for
sharing the State’s State and counties in accordance with Section 123940 of the Health
Medicaid program, and Safety Code (Section 123940). However, the department has
the California Medical
fully funded the costs of county personnel to coordinate with
Assistance Program
special education programs in public schools. These coordination
(Medi-Cal), payments
with counties that activities are required under Chapter 1747, Statutes of 1984
resulted in the State (AB 3632). Although AB 3632 does not require it, the department
incurring a larger
contends that it has the budget authority to pay 100 percent of
portion of MTP costs
county costs for coordinating the delivery of MTP services with
than specifically
authorized in law. special education. Despite the department’s practice of fully
paying for the additional county costs related to coordinating
• Did not identify and
activities under AB 3632, the department has not received express
reap the State’s share
of Medi-Cal payments statutory authority to fund these county activities at a level
made to certain counties greater than 50 percent of county costs. In particular, neither
for MTP services.
provisional language in the budget act nor language in the MTP’s
þ A majority of MTP claims implementing statute authorizes a deviation from the requirements
are denied for Medi-Cal of Section 123940. Consequently, the department’s legal authority
payment due to a child’s
to fully fund these county coordination activities is unclear.
lack of eligibility.
continued on next page . . .
Should the Legislature decide to discontinue fully funding county
costs for coordinating the delivery of MTP services with special
education, it should consider the impact such a decision might
California State Auditor Report 2005-406 289
þ Lacking federal approval, have on the State’s overall financial obligations related to special
the department allows education. Specifically, the State receives federal funding each
Medi-Cal to pay MTP
year under the Individuals with Disabilities Education Act.
claims without requiring
As a condition of receiving this federal funding, the State is
that other health care
insurers, if any, pay first. prohibited from reducing the amount of state financial support
for special education and related services below the level of that
þ Limits on the number
support in the preceding fiscal year. Failing to maintain this level
of times Medi-Cal will
pay for certain therapy of state support may cause the State to face a possible reduction
procedures are a barrier in federal special education funds.
to obtaining Medi-Cal
reimbursement for MTP
We recommended that the department seek specific statutory
services and may be overly
restrictive for children in authority from the Legislature to fully fund county personnel
the MTP. whose jobs include coordinating the MTP with special education
þ Except for Los Angeles, agencies as required by AB 3632. Should the Legislature decide
the counties we visited to reduce the State’s current funding for these activities, it
took reasonable steps to should consider the implications of such an action on the
follow up on and correct
State’s responsibility under the federal Individuals with Disabilities
MTP claims denied for
Education Act to maintain a level of funding for special education
Medi-Cal payment.
and related services at least equal to the level of funding the State
þ The department identified
provided in the preceding fiscal year.
approximately $24,000
in MTP claims for fiscal
year 2003–04 that are
Department Action: None.
covered by the Healthy
Families Program, calling The department disagrees with the need to seek more specific
into question whether this
legal authority for 100 percent state funding for functions
program will significantly
associated with implementing the regulations for AB 3632. The
reduce MTP costs in
the future. department asserts that AB 3632 is a mandate and the funding
has been appropriated for this requirement since fiscal
year 1998–99. As a result, the department is taking no action
at this time.
Ü The department’s assertion that the coordination activities it has
fully funded are a state mandate is incorrect. As we indicated on
page 49 of the audit report, the Commission on State Mandates
(commission) is the authority designated by the Legislature
to determine whether a mandate exists. The commission
has not determined that a state mandate exists for the MTP
coordination activities under AB 3632. Further, the department
does not receive an appropriation under the state mandated local
programs portion of its annual budget for this purpose.
290 California State Auditor Report 2005-406 California State Auditor Report 2005-406 291
Finding #2: The department’s estimate of the MTP costs
counties incur to coordinate with special education may not
reflect actual costs.
The department’s formula for determining the number of state-
funded full-time equivalent positions (FTEs) is divided into two
parts. The first part of the formula calculates the number of county
FTEs needed for the coordination duties specified in AB 3632. The
department inputs the county-reported information on planning
areas and therapy units and multiplies it by the number of hours
needed annually for liaison duties. The formula assumes 188 hours
are necessary per year for coordination activities for each planning
area and an additional eight hours per year for each therapy unit.
The department also calculates the number of county therapist
FTEs needed to participate in special education meetings, using the
MTP caseload data each county reports. The department’s formula
assumes that 85 percent of the children enrolled in the MTP are
also receiving services through special education programs and that
it takes an MTP representative 0.115 hours per week per child to
attend special education team meetings. Although the department
developed these workload standards in 1989 to address counties’
initial and continuing obligations, staff at the department told us
that it has not required county MTPs to complete time studies to
validate its workload assumptions.
However, our review revealed that the department’s 85 percent
estimate is not consistent with the data counties reported to
the department. Specifically, in fiscal year 2002–03, counties
reported that about 77 percent of children in the MTP were
also in special education. In fiscal year 2003–04, this number
dropped to 54 percent.
Overall, the department’s formula does not result in a reliable
estimate of the costs counties incur for coordinating the delivery
of MTP services with special education, primarily because the
formula is not based on actual data but rather on estimates of
needed personnel.
We recommended that the department reevaluate its method for
calculating county costs for coordinating the delivery of MTP
services with special education services to ensure that amounts
reasonably reflect actual county efforts.
290 California State Auditor Report 2005-406 California State Auditor Report 2005-406 291
Department Action: Pending.
The department agrees to refine the methodology for
calculating the reimbursement for individual counties for
mandated workload resulting from AB 3632 interagency
regulations. The department is in the process of drafting a
policy letter to counties that will establish more clear and
concise documentation requirements.
Finding #3: The department has not adequately reduced the
State’s MTP costs based on Medi-Cal revenue to the program.
By law, the State and counties must share MTP costs equally,
which also requires equal sharing of MTP revenues that reduce
those costs and come from sources other than the State or
counties, such as the federal portion of Medi-Cal payments.
However, the department’s method of reducing state and county
MTP costs by the amount of Medi-Cal revenue to the program
results in the State paying more than is specifically required
under Section 123940. In particular, the State’s costs for the MTP
were higher than counties’ cost by more than $774,000 during
fiscal year 2002–03 and more than $1.4 million in the preceding
four fiscal years. In order for the State and counties to share
equally in the costs of the MTP, the department needs to reduce
the State’s MTP costs by 75 percent of all Medi-Cal payments
a county receives during a quarter—that is, the General Fund
portion plus half the federal portion of total Medi-Cal payments.
The department contends that Medi-Cal payments should be
viewed as a third-party sources of funds to the program when
determining state and county shares of MTP costs; that is, the
Medi-Cal payments should be deducted from total MTP costs
before determining the State and county share of remaining MTP
costs. However, doing so results in the State paying more than
half the MTP costs, which is not consistent with Section 123940.
We recommended that the department modify its current
method for reducing the State’s costs for the MTP to ensure that
state costs are reduced by an amount equal to the entire General
Fund portion and one-half the federal portion of all Medi-Cal
payments made for MTP services.
292 California State Auditor Report 2005-406 California State Auditor Report 2005-406 293
Department Action: None.
The department’s current policy is to deduct all third-party
payments, including Medi-Cal, from the cost of services
before state and county share of cost is determined. In
addition, the department asserts that our recommendation is
inconsistent with its current interpretation of Section 14000
et seq. of the Health and Safety Code, which provides for
the cost of Medi-Cal services to be shared by the federal
and state governments. The department plans to discuss
this recommendation in the larger context of the California
Performance Review recommendations and will take no
action until that time.
The department continues to misinterpret our recommendation
by stating it would require counties to pay a share of the State’s
Ü
Medi-Cal costs in the MTP. As noted in Table 1 and Figure 2
of the audit report, we recognize that the State’s General Fund
and Title XIX federal funds provide approximately equal shares
of funding for Medi-Cal payments. However, because the State
funds about half of the Medi-Cal payments for MTP services,
our recommendation to the department is that it recognize
the State’s contribution to the MTP through these Medi-Cal
payments and reduce the State’s costs for the MTP in a way that
results in equal costs to the State and counties.
Finding #4: The department did not gather complete data on
Medi-Cal payments by county-organized health system (COHS)
agencies, resulting in greater costs to the State for the MTP.
Until fiscal year 2003–04, the department did not have a reliable
process to collect information on the Medi-Cal payments that
COHS agencies make for MTP services. As previously discussed, the
department needs this information when it calculates quarterly
reimbursements to counties so it can accurately reduce the State’s
share of MTP costs based on any Medi-Cal payments the
counties receive. Because it did not gather all the information
related to Medi-Cal payments made by COHS agencies, the
department did not reduce the State’s MTP costs by a total of
approximately $733,000 over the four-year reporting period
ending in fiscal year 2002–03, based on data four counties reported
to us. The department’s failure to obtain complete data on
Medi-Cal payments made by COHS agencies for MTP services was
particularly detrimental because the department did not reduce the
State’s costs for any portion of these Medi-Cal payments.
292 California State Auditor Report 2005-406 California State Auditor Report 2005-406 293
Although the department asserted that it did not know of the
Medi-Cal payments made by COHS agencies for county MTPs, it
reasonably should have. Specifically, each quarter, the department’s
Medi-Cal federal fiscal intermediary, Electronic Data Systems
Federal Corporation (EDS), sends the department data regarding
MTP claims it processed during the quarter and whether the claims
were paid or denied. A review of this data could have led the
department to question counties about anomalous claims activity.
For example, for fiscal year 2002–03, 97 percent and 98 percent
of MTP claims submitted to EDS by Santa Barbara and San Mateo
counties, respectively, were denied. One of the main reasons these
claims were denied was that the patients were enrolled in managed-
care plans, and COHS agencies rather than EDS should pay for the
services provided to these enrollees. The department asserted that
it was the counties’ responsibility to report Medi-Cal payments for
MTP services made by COHS agencies; however, without having
provided specific instructions requesting the counties to report this
data, the department’s expectation is somewhat questionable.
We recommended that the department require COHS agencies
to report to the department all Medi-Cal payments they make to
counties for MTP services.
Department Action: Pending.
The department agrees with the intent of our recommendation
and is currently drafting a policy letter to the applicable
counties. The department plans to instruct counties to bill their
COHS agencies to recover the MTP costs of services provided
to enrolled clients and outline the procedures for reporting the
revenues received from the COHS agencies.
Finding #5: The department applied an overly broad
modification to its claims-processing system that increased
Medi-Cal payments for MTP services.
Federal law and state Medi-Cal regulations require that if an
individual eligible for Medi-Cal has other health care coverage,
such as Medicare or private insurance, providers must bill the
other health care insurers before billing Medi-Cal. According
to the department, the Medi-Cal claims-processing system is
designed to ensure that Medi-Cal is the payer of last resort.
However, in March 2004, the department implemented a
modification to its Medi-Cal claims-processing system, allowing
294 California State Auditor Report 2005-406 California State Auditor Report 2005-406 295
MTP claims for services to children with other health care
coverage to be paid without attempting to bill the other health
care insurers first.
The department explained its implementation of this
modification based on its interpretation of other federal and
state laws. In particular, the department asserts that according to
the federal Individuals with Disabilities Education Act, children
in special education with therapy identified as a component
of an individualized education program are entitled to a “free
and appropriate” education. According to the department,
billing the child’s other health care insurer could result in the
family incurring a cost for the therapy, such as a deductible or
copayment charged by a private insurance company. Further,
state law provides that children receiving MTP services in public
schools are exempt from financial eligibility standards and
are not required to pay enrollment fees. The department has
interpreted these laws to mean that the MTP is a free program
and other health care insurers should not be billed for MTP
services because of the possible financial burden to the families.
The department’s action was reasonable give the federal law
regarding children receiving MTP services as part of a special
education program. However, because some children enrolled
in the MTP are not in a special education program, the
department’s action was too broad and is not in compliance
with state Medi-Cal and federal Medicaid laws. When asked
about obtaining federal approval, the department acknowledged
it had not obtained approval to modify the system for MTP,
asserting that the federal government had denied a similar
request in the past.
We recommended that the department obtain federal approval
to allow Medi-Cal to pay for MTP services provided to
children who are not in special education without checking
for the existence of other health care coverage. Otherwise,
the department should modify the current Medi-Cal claims
processing system to ensure that other available health care
insurers are charged before Medi-Cal pays for MTP services
provided to children who are not in special education.
294 California State Auditor Report 2005-406 California State Auditor Report 2005-406 295
Department Action: None.
The department does not believe that obtaining the federal
approval described in our recommendation is promising
because, on issues similar to this, the federal Centers for
Medicare and Medicaid Services (CMS) has advised the
department that it would not review a waiver request from
the State because of workload considerations. The department
maintains that it would not be productive to develop and
submit a waiver request to CMS on this issue since CMS
would not consider it. Further, the department states that the
Medi-Cal claims processing system has no access to a database
that would enable the system to determine whether an
individual Medi-Cal beneficiary is covered by the Individuals
with Disabilities Education Act. The department further
believes that the costs of developing such a system would
exceed any foreseeable benefit experienced by the nominal
increase of federal participation.
However, as we state on pages 31 and 32 of the audit report,
not all children in the MTP receive special education
Ü
services. Therefore, the department is improperly allowing
Medi-Cal to pay claims for services to MTP children who
are not in special education without first determining
whether other available health care plans will pay. Lacking
the necessary federal approval to implement its current
process, the department needs to take the appropriate steps
to comply with federal Medicaid requirements. We note
that, as of its October 2004 response to us, the department
has not indicated whether it intends to modify its current
claims-processing system to ensure compliance with federal
Medicaid requirements.
Finding #6: Frequency limits imposed by the Medi-Cal claims-
processing system are a barrier to increased savings to the
State and counties for the MTP.
EDS denied more than 42,500 MTP claims, or 6 percent of MTP
claims denied for Medi-Cal payment in the period we reviewed,
because the number of therapy services provided exceeded that
allowed by the Medi-Cal claims-processing system. State regulations
limit how frequently Medi-Cal will pay for some therapy services.
However, the department admits that some of the current frequency
limits may not be appropriate for the MTP. Generally, counties
echo this sentiment, contending that the chronic nature of the
medical conditions treated in the MTP necessitate more frequent
therapy sessions. Our visits to the counties confirmed that many
296 California State Auditor Report 2005-406 California State Auditor Report 2005-406 297
children in the MTP receive therapy procedures more often than
the Medi-Cal claims-processing system permits. Based on data
provided by EDS, approximately $280,000 to $1.5 million in
Medi-Cal claims were denied due to frequency limits from July 2002
through March 2004. When Medi-Cal does not pay claims for MTP
services, the State and counties must pay more for the program
because they lose the federal funding available under Medi-Cal.
We recommended that the department evaluate whether the
current limits Medi-Cal places on the frequency of certain therapy
procedures are appropriate for MTP services. If the department
determines that the Medi-Cal frequency limits are inappropriate,
it should seek approval to modify these limits accordingly.
Department Action: Pending.
The department agrees that frequency limits on occupational
and physical therapy services in the claims payment system
should be reevaluated. The department is considering
evaluating the appropriateness of authorizing these
procedures as Early and Periodic, Screening, Diagnosis and
Treatment (EPSDT) Supplemental Services and, if deemed
appropriate, will implement. The department believes this
would override frequency limitations for therapy services
provided to CCS clients.
Finding #7: Los Angeles County does not have a process
to follow up on individual MTP claims denied for Medi-Cal
payment.
Los Angeles County provided services to approximately 29 percent
of the MTP caseload statewide according to caseload data counties
reported for fiscal year 2002–03. In contrast to the other three
counties we visited, Los Angeles does not follow up on individual
denied claims. As a result, it may have missed out on $58,000
to $307,000 in Medi-Cal payments from July 2002 through
March 2004 because it did not attempt to resolve and resubmit
roughly 8,800 MTP claims denied for potentially correctable or
preventable errors. For example, 89 percent of the county’s denied
claims were the result of missing documentation or invalid data
on the claim form. The director of the Los Angeles County MTP
said that the county assumed responsibility for billing MTP services
and discontinued using a billing service in 2001. She also indicated
that the county decided at the time not to resubmit individual
denied MTP claims because the county did not have the required
296 California State Auditor Report 2005-406 California State Auditor Report 2005-406 297
knowledgeable staff to follow up on the claims. In addition, the
director told us that the county is currently considering the cost-
effectiveness of reviewing and resubmitting denied claims.
To maximize Medi-Cal payments for MTP services, we recommended
that Los Angeles County and any other counties that do not review
MTP claims denied for Medi-Cal payment should attempt to correct
and resubmit denied MTP claims when it is cost-effective to do so.
Los Angeles County Action: Pending.
Los Angeles County agrees with our finding and provided us
a corrective action plan to implement our recommendation.
The county indicates that it is currently identifying denied
Medi-Cal claims and analyzing the associated potential
revenue. The county states that it intends to determine the
cost-effectiveness of resubmitting correctable denied claims
by late January 2005.
298 California State Auditor Report 2005-406
CALIFORNIA DEPARTMENT OF
CORRECTIONS
More Expensive Hospital Services and
Greater Use of Hospital Facilities Have
Driven the Rapid Rise in Contract Payments
for Inpatient and Outpatient Care
Audit Highlights . . . REPORT NUMBER 2003-125, JULY 2004
California Department of Corrections’ response as of
Our review of the California
Department of Corrections’ February 2005
(Corrections) contracts for
medical services revealed The Joint Legislative Audit Committee (audit committee)
the following:
requested that the Bureau of State Audits (bureau)
þ Corrections’ hospital review the California Department of Corrections’
payments have risen (Corrections) contracts for medical services, including
$59.4 million from fiscal
contracts with Tenet Healthcare Corporation (Tenet).
years 1998–99 through
2002–03, growing at an Specifically, the audit committee asked the bureau to identify
average rate of 21 percent any trends and, to the extent possible, reasons for the trends
per fiscal year.
in the costs Corrections is paying for contracted inpatient and
þ Inpatient hospital outpatient health care services and costs for similar services
payments increased by among hospitals as well as hospital systems. Further, the audit
$38.5 million from fiscal committee asked the bureau to compare the costs Corrections is
years 1998–99 through
paying Tenet for inpatient and outpatient health care services to
2002–03, primarily driven
by increased payments per the costs paid for similar services at other hospitals and, to the
hospital admittance. extent possible and permissible, publicly report the results and
reasons for an differences. Our review revealed the following:
þ Outpatient hospital
payments increased by
$12.7 million from fiscal
Finding #1: Corrections did not have detailed analysis to explain
years 1998–99 through
2002–03, driven by both the reasons behind the overall increase in its hospital payments.
increased payments
per hospital visit and We found that, overall, Corrections’ payments for hospital services
increased numbers of have risen an average of 21 percent annually since fiscal year
hospital visits.
1998–99. The reasons for the growth can primarily be attributed
þ Two institutions attributed to a combination of more expensive health care and Corrections’
their inpatient hospital increased use of contracted hospital facilities. Although Corrections
payment increases, among agreed that the growth in hospital payments occurred, it did not
other reasons, to changes
explain with supporting analysis the reasons behind the dramatic
in contract terms resulting
in hospital payments that overall increase in its payments to hospitals.
were three times as much
as they would have paid
To understand the reasons behind the rising trend in its
previously for the same
inpatient and outpatient hospital payments, Corrections should
inpatient stay.
do the following:
continued on next page . . .
California State Auditor Report 2005-406 299
þ Corrections paid some • Enter complete and accurate hospital-billing and medical
hospitals amounts that procedures data in its health care cost and utilization program
were from two to eight
(HCCUP) database for subsequent comparison and analysis
times the amounts Medicare
by the Health Care Services Division (HCSD) and correctional
would have paid the same
hospitals for the same institutions of the medical procedures that hospitals are
inpatient services, including performing and their associated costs.
a hospital operated
by Tenet Healthcare
• Perform regular analysis of its health care cost and utilization
Corporation, which was
paid eight times the amount data, monitor its hospital payment trends, and investigate
Medicare would have paid. fully the reasons why its costs are rising for the purpose of
implementing cost containment measures.
þ One institution’s outpatient
hospital payments
increased by $821,000 • Investigate the significant and sudden increase in its inpatient
primarily because its hospital payments, beginning in fiscal year 2000–01, for
average payment per
the purpose of determining whether renegotiating contract
emergency room visit,
payment rates, reducing the length of stay in contract hospital
which are paid at a
percentage of the hospital beds, or other cost containment measures can most effectively
bill without a maximum reduce its contract hospital costs.
limit, increased from less
than $950 per visit to more
• Complete its analysis of high-cost cases to determine why
that $3,300 per visit.
the number of high-cost inpatient cases and more-expensive
þ Corrections’ outpatient outpatient visits are rising so that it can identify cost-effective
payment amounts
solutions to its increasing health care costs. For example,
averaged two and one-
half times the amount Corrections should fully investigate the extent to which each
Medicare would have paid of the potential cost drivers it has identified as part of its
for the same services.
analysis of high-cost impatient cases is increasing its hospital
þ A lack of key data being inpatient costs.
entered into Corrections’
database limits analyses • Follow up with all institutions using new hospital contracts
behind causes of increased
to determine if renegotiated contract payment terms are
payments and utilization,
resulting in significantly higher costs, as they did for the two
such as the extent to which
case severity is a cause. institutions that informed us of the significant effect on their
inpatient hospital costs for high-cost cases.
Corrections Action: Pending.
Ü
Corrections stated that it continues to enter data from medical
invoices and has established validation reports to ensure data
is entered appropriately and will perform audits to ensure all
available procedure data is entered. It also reported that it
would establish a peer review program and develop training
plans to improve data integrity. Additionally, Corrections
stated that it hired analysts that are responsible for analyzing
health care cost and utilization data and established a
workgroup to identify reasons for rising costs and to
implement cost containment measures. Further, Corrections
indicated that it revised its utilization management database
300 California State Auditor Report 2005-406 California State Auditor Report 2005-406 301
to connect this data to its cost and utilization database, as well
as add health care guidelines for reviewing patient treatment
and placement, and would transmit reports from these data
to each institution for review and action by appropriate staff.
Corrections indicated it expects to begin reporting on its cost
containment in July 2005.
Corrections also reported that it was gathering contract data
and information on the impact of utilization and contract
provisions. Further, it indicated that it would not investigate
the significant increase in inpatient hospital payments
beginning in fiscal year 2000–01 for the purpose of determining
cost containment measures. Instead, due to limited resources,
it stated it would prospectively analyze current hospital
payments. Additionally, although it analyzed fiscal year 2002–03
high-cost inpatient cases and cited the impact of patient age
on hospital costs as the most striking finding, its analysis
did not first eliminate the effect of contracts renegotiated
in 2001 that became disadvantageous to Corrections. Further,
Corrections reported its analysis of cost and utilization data for
three hospitals and noted increasing costs. However, it did not
indicate whether it had each institution analyze their payments
to hospitals, similar to the two that reported to us, to determine
if renegotiated contract payment terms are resulting in the
higher costs. Instead, Corrections indicated that due to limited
resources, it would prospectively analyze current or existing
hospital payments.
Finding #2: Certain contract provisions resulted in
Corrections paying higher amounts for inpatient and
outpatient health care.
Our review of inpatient hospital payments for selected hospitals
revealed that the terms of some contracts resulted in payments
that were significantly higher than those made by Medicare for
similar hospital services. This effect appeared most pronounced for
hospitals whose contracts include stop-loss provisions, which sets
a dollar threshold for hospital charges per admittance. Typically,
if the charges per admittance exceed the threshold, Corrections
pays a percentage of the total charge, rather than a per diem
or other rate. However, should hospital administrators inflate
charges to take advantage of stop-loss provision, Corrections could
unknowingly pay higher amounts to hospitals than expected
unless Corrections takes additional steps to monitor and investigate
potentially inflated hospital charges. Similarly, Corrections’
outpatient contract provisions base payments on a percentage of
300 California State Auditor Report 2005-406 California State Auditor Report 2005-406 301
the hospitals’ billed charges rather than costs and generally resulted
in Corrections paying on average two to four times the amounts
Medicare would have paid for the same outpatient services.
To control increases in inpatient and outpatient hospital payments
caused by contract payment provisions, Corrections should do
the following:
• Revisit hospital contract provisions that pay a discount on
the hospital-billed charges and consider renegotiating these
contract terms based on hospital costs rather than hospital
charges. Corrections should also reassess hospital contract
provisions that require it to pay a percentage of hospitals’
billed charges for outpatient visits, including emergency room
outpatient visits. To renegotiate contract rates, Corrections
should use either existing cost-based benchmarks, such as
Medicare or Medi-Cal rates, or hospital cost-to-charge ratios to
estimate hospital costs. Further, should Corrections renegotiate
hospital contract payment terms, it should perform subsequent
analysis to quantify and track the realized savings or increased
costs resulting from each renegotiated contract.
• Obtain and maintain updated cost-to-charge ratios for each
contracted hospital, using data from the Centers for Medicare
and Medicaid Services, the Department of Health Services, or
the Office of Statewide Health Planning and Development.
It should use these ratios to calculate estimated hospital costs
for use as a tool in contract negotiations with hospitals and for
monitoring the reasonableness of payments to hospitals.
• Require hospitals to include diagnosis related group (DRG)
codes on invoices they submit for inpatient services to help
provide a standard, along with hospital charges, by which
Corrections can measure its payments to hospital as well as
case complexity.
• Detect abuses of contractual stop-loss provisions by monitoring
the volume and total amounts of hospital payments made
under stop-loss provisions, which are intended to protect
hospitals from financial loss in exceptional cases, not to
become a common method of payment.
Corrections Action: Pending.
Corrections reported that as hospital contracts are renegotiated,
it is requesting the charge description master. Additionally, it
stated that as staff negotiate contracts, they are requesting that
302 California State Auditor Report 2005-406 California State Auditor Report 2005-406 303
rates be tied to a reimbursement benchmark such as Medicare.
In cases where hospitals refuse, Corrections indicated it is
pursuing per diem benchmarked by Medicare rates, as well as
lower maximum caps on outpatient rates that are a percent
of billed charges. Hospitals that insist on a percent of billed
charges rate structure are asked to accept billed charges in line
with their cost-to-charge ratio. If a hospital refuses all its rate
proposals, Corrections indicated it would not contract with that
hospital. According to Corrections, no hospital has agreed to
its proposals. Corrections stated it would report on its progress
in its one-year status report. Further, it reported obtaining
hospital cost-to-charge ratios for use in contract negotiations and
assessing the reasonableness of payments to hospitals.
Corrections further reported that it amended its hospital
contract language to require hospitals to submit DRG
codes on the hospital invoices for all inpatient admissions
and would modify its database to capture these codes. It
indicated that it is using the DRG code to determine what
Medicare would have paid and assessing its payments to
hospitals. Additionally, it stated that it identified those
hospitals that have stop-loss provisions in their contracts
and will renegotiate to tie rates to a reimbursement
benchmark such as Medicare. Corrections indicated that if a
hospital refuses all its rate proposals, it would not contract
with that hospital. For hospitals that provide emergency
services, yet will not negotiate reasonable rates, Corrections
pays Medicare rates per state law.
Finding #3: Increases in hospital admissions and visits
contributed to Corrections’ increased inpatient and
outpatient hospital payments.
An increase in the number of hospital admissions contributed
to 28.9 percent of the increase in inpatient hospital payments,
while 45.7 percent of the increase in outpatient hospital
payments was attributed to an increase in the number of hospital
visits. More striking is the fact that outpatient hospital visits
nearly doubled from 7,547 visits in fiscal year 1998–99 to 14,923
visits in fiscal year 2002–03, even though Corrections’ inmate
population remained relatively constant during this period.
To control rising inpatient and outpatient hospital payments
caused by increases in the numbers of hospital admissions or
visits, Corrections should do the following:
302 California State Auditor Report 2005-406 California State Auditor Report 2005-406 303
• Include in its utilization management quality control process,
a review of how utilization management medical staff
assess and determine medical necessity, appropriateness of
treatment, and need for continued hospital stays.
• Investigate the reasons why the number of outpatient visits by
inmates has nearly doubled even though the inmate population
has remained relatively constant, and implement plans to
correct the significant increase in outpatient hospital visits.
• Continue with its plan to analyze how mentally ill inmates
are affecting inpatient costs and utilization at its institutions.
Corrections Action: Pending.
Ü Corrections indicated that it plans to increase the number
of utilization management staff. Further, Corrections stated
that it has taken additional proactive measures to improve
quality of services. It acquired recognized inpatient care
guidelines to ensure standardized and consistent services.
Using these guidelines, it will focus on conditions associated
with unscheduled admissions, emergency department
use, and high-cost/high-volume procedures. However,
Corrections did not specifically indicate how it would review
utilization management medical staff’s assessments and
determinations of medical necessity, appropriateness of
treatment, and need for continued hospital stays to identify
staff that are ineffective at containing costs while providing
necessary medical services. Further, Corrections indicated
that it formed a subcommittee to identify annual objectives
for quality improvement and costs containment. According
to Corrections, it believes program standardization and
more oversight have increased the denial rate for outpatient
services by 13 percent. However, due to limited resources, it
indicated that it would not investigate why the number of
outpatient visits nearly doubled, but instead would analyze
current outpatient hospital visits. Corrections also reported
that it would refine its utilization management system to
identify the impact of mental health crisis patients and their
effect on cost and use of hospital beds. It stated that this
analysis would be available by July 2005.
304 California State Auditor Report 2005-406
CALIFORNIA DEPARTMENT OF
CORRECTIONS
It Needs to Ensure That All Medical
Service Contracts It Enters Are in the
State’s Best Interest and All Medical
Claims It Pays Are Valid
Audit Highlights . . . REPORT NUMBER 2003-117, APRIL 2004
California Departments of General Services’ and Corrections’
Our review of the California
Department of Corrections’ responses as of October 2004
(Corrections) processes
to contract for health
The Joint Legislative Audit Committee (audit committee)
care services not currently
available within its own requested the Bureau of State Audits (bureau) to examine
facilities concludes that: the process that the California Department of Corrections
(Corrections) uses to contract for health care services not
þ Corrections staff who
negotiate contracts tend currently available within its own facilities. Specifically, the
to rely on a 30-year-old audit committee directed the bureau to examine the process
state policy exemption
Corrections uses to negotiate contracts for outside health care
that allows them to
services, including the different types of agreements it enters,
award contracts for most
medical services without its fees schedules, the roles of headquarters and prisons, and
seeking competitive bids. the qualifications of its negotiation staff. Further, the audit
committee instructed the bureau to select a sample of contracts
þ Corrections’ negotiation
practices are flawed. for outside health care services, including hospitals in both
For example, some of rural and urban areas, to determine whether Corrections
the Health Care Services
negotiated the best value for the services, whether rates in rural
Division’s and prisons’
and urban areas are comparable for similar services, whether
hospital contracts leave
out information vital to rates for similar services are comparable to those under the
ensuring that the State State’s Medicaid Assistance program (Medi-Cal), and whether
receives discounts those
Corrections employs data on trends of volume and average
contracts specify.
use of contracted medical services to obtain price breaks or
þ Corrections is unable to quantity discounts. The audit committee also asked the bureau
justify awarding contracts
to review Corrections’ policies and procedures for processing
for rates above its
and monitoring claims for contracted health care services to
standards, violating this
requirement of Corrections’ determine if Corrections verifies the validity of the claims.
contract manual. Finally, the audit committee requested the bureau to evaluate
Corrections’ implementation of certain recommendations
þ Corrections sometimes
exceeds the authorized outlined in the bureau’s report titled California Department
contract amount and of Corrections: Utilizing Managed Care Practices Could Ensure
fails to obtain proper
More Cost-Effective and Standardized Health Care, issued in
approvals before receiving
January 2000.
nonemergency services.
continued on next page . . .
California State Auditor Report 2005-406 305
þ Corrections’ prisons Finding #1: Corrections’ reliance on a long-standing policy
are not adhering to its exemption to competitive bidding for medical services may
utilization management
not be in the State’s best interest.
program, established to
ensure inmates receive Corrections staff who negotiate contracts tend to rely on a 30-year
quality care at contained
old state policy exemption that allows them to award contracts
costs. Consequently,
prisons are overpaying for most medical services without seeking competitive bids.
for some services,
incurring unnecessary
We recommended that the California Department of General
costs for the State.
Services (General Services) consider removing its long-standing
policy exemption that allows Corrections to award, without
advertising or competitive bidding, medical service contracts
with physicians, medical groups, local community hospitals,
911 emergency ambulance service providers, and an ambulance
service provider serving a single geographical area.
If General Services decides that it is not in the State’s best interest
to remove the long-standing policy exemption, it should
prescribe the methods and criteria for Corrections to use in
determining the reasonableness of contract costs as follows:
• Require Corrections to undertake procedures similar to
those required in the noncompetitively bid (NCB) process.
Specifically, it should require Corrections to conduct a
market survey and prepare a price analysis to demonstrate
that the contract is in the State’s best interest.
• Require Corrections to obtain approval of its market
survey and price analysis from its director before
submitting this information along with its contract to
General Services for approval.
Department Action: Corrective action taken.
General Services completed its analysis of information
obtained through a survey and meetings with various state
departments that have historically used the medical services
bidding exemption to award certain contracts. General
Services has concluded that it is not in the best interest
of the State to retain its long-standing policy exemption.
Specifically, on January 26, 2005, General Services issued
Management Memo number 05-04, which establishes a new
statewide policy and requirements regarding medical services
contracts. The Management Memo directs departments to
employ the competitive bidding process to the maximum
extent possible and requires that the director of General
Services (or his/her designee) determine whether to grant
306 California State Auditor Report 2005-406 California State Auditor Report 2005-406 307
bidding exemptions. The Management Memo does not
require competitive bidding for the following: (1) contracts
for ambulance services (including but not limited to 911)
when there is no competition because contractors are
designated by a local jurisdiction for the specific geographic
region, and (2) contracts for emergency room hospitals, and
medical groups, physicians, and ancillary staff providing
services at emergency room hospitals, when a patient is
transported to a designated emergency room hospital for
the immediate preservation of life and limb and there is
no competition because the emergency room hospital is
designated by a local emergency medical services agency
and medical staffing is designated by the hospital. This
exemption covers only those services provided in response to
the emergency room transport.
Finding #2: Corrections has negotiated and awarded many
hospital contracts that omit schedules to verify hospital
charges are appropriate.
The compensation terms of some hospital contracts we reviewed
do not include the information needed to evaluate potential costs
and determine that hospital charges are consistent with contract
terms. Also, for two contracts that had contract terms stipulating
that the hospitals supply copies of their rate schedules (charge
masters), Corrections staff failed to obtain them.
Beginning July 1, 2004, a new state law will require hospitals to
file copies of their charge masters annually with the Office of
Statewide Health Planning and Development.
We recommended that Corrections work with the Office of
Statewide Health Planning and Development to obtain hospitals’
charge masters, and use this information to negotiate contract
rates and obtain discounts specified in the contracts.
Department Action: Corrective action taken.
Corrections reported that it met with the Office of Statewide
Health Planning and Development and they developed
procedures that will allow Corrections to obtain hospital charge
description masters (CDM) annually, beginning in July 2005,
for each hospital it contracts with. In the interim, Corrections
is requesting CDMs for existing and all renewals of existing
hospital contracts prior to negotiating hospital contracts.
306 California State Auditor Report 2005-406 California State Auditor Report 2005-406 307
Finding #3: Corrections cannot show that it follows
procedures it developed to ensure that rates exceeding its
standard rates are favorable.
The mission of Corrections’ Health Care Services Division
(HCSD) is to manage and deliver to the State’s inmate
population health care consistent with adopted standards for
quality and scope of services within a custodial environment.
The HCSD does not always ensure that prisons negotiate
favorable rates. Until Corrections modifies and enforces its
procedures to evaluate the reasonableness of proposed rates that
exceed its standards, it will continue to undermine the State’s
goal of obtaining favorable rates.
In addition, Corrections lacks procedures to address instances
when HCSD initiates a rate exemption. According to HCSD, its
analysts essentially apply the same standards that prisons must
follow and require the signature of the assistant deputy director.
Yet, we identified four instances of HCSD not providing analyses
to justify its approval of higher rates.
We recommended that Corrections ensure that HCSD enforces
rate exemption requirements, including obtaining and reviewing
documentation to verify prisons’ justification for higher rates.
We also recommended that Corrections establish procedures to
ensure that the rate exemptions initiated by HCSD undergo an
independent review and higher-level approval process.
Department Action: Partial corrective action taken.
Corrections reported that its HCSD is currently enforcing
rate exemption requirements by reviewing all medical
contract rates to ensure they meet rate exemption
requirements. Analysts prepare written documentation
and analysis of rate exemption requests and submit them
for approval from the deputy director, HCSD. The written
analysis addresses the need for the contract, communications
regarding rate negotiations, comparisons with other
contracts statewide, and review of utilization data and
project costs. Corrections also indicated that it is in the
process of developing a new rate approval process to replace
its existing Request for Medical Rate Exemption process.
The new process is being tested to ensure that all elements
required are incorporated into the form and Corrections
plans were to have the new process implemented by
November 2004.
308 California State Auditor Report 2005-406 California State Auditor Report 2005-406 309
Corrections stated it believes its existing approval levels for rate
exemptions initiated by HCSD staff are appropriate and consider
the best interest of the State by providing a review of medical
contracts for fiscal prudence and, equally important, clinical
appropriateness. However, Corrections response is inconsistent
with information Corrections’ representatives presented in the
Assembly Budget Pre-Hearing held in April 2004. Corrections’
staff indicated that it would be possible for staff with accounting
or financial expertise, in a division other than HCSD, to review
the medical contracts for fiscal prudence.
Corrections also reported that it is in the process of contracting
for additional services from an expert in heath care contract
negotiations that will provide financial and technical
expertise to improve contract rates and its negotiation process.
Corrections anticipates that it will have the contract in place by
the end of fiscal year 2004–05.
Finding #4: Corrections cannot demonstrate it uses historical
data when negotiating contracts.
Corrections cannot show that it routinely uses cost and utilization
data to negotiate contract rates. Without documentation to show
that it employed cost and utilization data, it cannot display a
thorough and good-faith effort to protect the State’s interest.
We recommended that Corrections adopt procedures that require
staff to consider cost and utilization data when negotiating
medical service contracts. These procedures should also require
staff to document the use of these data in the contract file.
Department Action: Corrective action taken.
Corrections stated that it verbally instructed the Health
Contracts Services Unit (HCSU) staff in April 2004 to review
utilization data. Also, in July 2004, HCSU initiated a final
written procedure that requires staff that negotiate medical
services contracts to consider utilization data. As part of
the contract request review process, HCSU is required to
routinely review utilization data to determine if the contract
is necessary and cost effective, or if services can be provided
through another existing contract. Further, the procedure
requires that staff document the use of the utilization data in
the contract file. Finally, effective July 2004, HCSU directed
field staff to submit all contract requests to it first for
approval, rather than the Office of Contract Services.
308 California State Auditor Report 2005-406 California State Auditor Report 2005-406 309
Finding #5: Negotiation staff could benefit from
specialized training.
Staff at both HCSD and the prisons have varying degrees of
expertise in negotiating rates in contracts with medical service
providers. Because prison staff who negotiate the terms and
conditions of contracts for medical services at the prisons
have uneven levels of contracting ability, the contracting and
negotiating practices throughout the State are inconsistent.
We recommended that Corrections ensure that HCSD offers
specialized training for its negotiation staff so they can
effectively negotiate favorable rates. HCSD should then share
any strategies and techniques with the prisons’ negotiation staff.
Department Action: Partial corrective action taken.
Corrections reported that its HCSU staff completed analytical
skills training and some staff also completed cost benefit
analysis and negotiation skills workshops. The remainder of
HCSU staff are scheduled to complete these workshops by
April 2005. Further, as previously mentioned, HCSD is in the
process of contracting for additional services from an expert
in heath care contract negotiations.
Finding #6: Corrections’ hospital expenses vary widely
according to the compensation method.
We found that Corrections negotiates various compensation
methods for hospital services, such as per diem rates or
flat percentage discounts. Generally, Corrections can get
substantially better rates when paying a per diem rate than
when paying a flat discount rate.
We recommended that Corrections ensure that HCSD tries
to obtain per diem rates as a compensation method when
negotiating hospital contracts. Additionally, HCSD should
document its attempts to obtain per diem rates.
Department Action: Partial corrective action taken.
Corrections reported that HCSU staff were directed to
document efforts to obtain per diem rates as part of the
negotiation process in each contract file. Corrections plans
to incorporate this directive into the HCSU policy and
procedures scheduled to be developed by July 2005. Also,
310 California State Auditor Report 2005-406 California State Auditor Report 2005-406 311
beginning in January 2005, the HCSU staff will track in
a database efforts to secure per diem rates for new and
renewing hospital contracts.
Finding #7: HCSD and prisons have not submitted many
medical service contracts to Corrections’ Office of Contract
Services’ (Contract Services) Institution Contract Section
(ICS) within required time frames.
We found that prisons and HCSD submitted late contract
or amendment requests for 14 of 56 contracts we reviewed.
Specifically, we found that ICS approved 5 of 14 requests even
though the requests did not appear to meet the criteria allowed
by Corrections’ policy memo. In addition, the policy memo
requires Contract Services to generate a quarterly report card
outlining all late contract and amendment requests and to
distribute a copy of the report card to its division deputies.
However, we found that Contract Services does not use the
report cards, thereby missing an opportunity to use the report
cards to enforce compliance with Corrections’ policy.
We recommended that Corrections direct ICS to evaluate late
requests using the criteria outlined in the policy memorandum.
Additionally, ICS should request HCSD and the prisons to
provide relevant documentation to support their requests.
We also recommended that Corrections continue generating
report cards periodically and establish procedures for staff such
as prisons’ associate wardens to submit corrective action plans to
Contract Services to monitor.
Department Action: Partial corrective action taken.
Corrections reported that the ICS continues to evaluate each
request utilizing the established criteria outlined in the policy
memorandum and approves requests that are substantiated
and deemed to be in the best interest of the State and or/
contractor. If prisons do not provide sufficient information
to support a late justification, ICS will request additional
information. ICS will deny late submittal justifications
that are not substantiated and return them to the prisons’
health care manager with an explanation for the denial and
instructions to direct the contractor to seek payment through
the Board of Control process. ICS will also send a copy of the
denial notification to HCSU. Late submittal justifications that
are substantiated are approved at the section chief level.
310 California State Auditor Report 2005-406 California State Auditor Report 2005-406 311
Corrections stated that the OCS continues to generate the
report cards semi-annually and distributes them to the
chief deputy directors, deputy directors, assistant directors,
Institution and Health Care Services regional administrators,
and wardens. OCS has added a summary displaying data
shared with management for two prior reporting periods.
The additional summary will enable program or institution
management to determine if improvements have been
made or if a pattern of lateness continues. Corrections
has instructed the programs and institutions to utilize
this data to assist in their efforts to reduce late contract
requests. Corrections is currently developing procedures
that include the submission of corrective action plans to
OCS for monitoring. Corrections plans to implement these
procedures by January 31, 2005.
Finding #8: Corrections does not always ensure that
authorized prison spending remains within authorized
contract amounts.
For four contracts, the prisons were given spending authority via
their notice to proceed (NTP) process by ICS that exceeded the
contract amounts by $5.9 million.
We recommended that Corrections ensure that ICS staff review the
master contract and outstanding NTPs before issuing additional
NTPs so that it does not exceed the master contract amount.
Department Action: Corrective action taken.
Corrections reported that it has corrected the errors identified
and modified its procedures. It also stated that ICS would train
staff, on an ongoing basis, to follow guidelines established
in its Master Contract Procedures and would also conduct
random audits of master contracts to ensure compliance with
the procedures.
Finding #9: Some medical services are rendered before
General Services approves the contracts.
We identified five contracts where services were rendered between
15 and 134 calendar days before Corrections obtained General
Services’ approval.
312 California State Auditor Report 2005-406 California State Auditor Report 2005-406 313
We recommended that Corrections evaluate its contract-processing
system to identify ways for HCSD, ICS, and the prisons to
eliminate delays in processing contracts and avoid allowing
contractors to begin work before the contract is approved.
Department Action: Corrective action taken.
Corrections reported that OCS issued a new late submittal
policy for contracts and amendments in June 2004, stressing
the importance of timely submission and the risks involved
when contractors provide services without a contract. ICS
and HCSD continue to meet regularly to develop strategies
to reduce the number of late contracts submitted by prisons.
Corrections also reported that, on an ongoing basis, OCS would
consider alternatives to reduce the number of late contracts.
Finding #10: ICS does not always require prisons to
demonstrate the unavailability of medical registry
contractors before approving their contract requests.
ICS is responsible for awarding and managing medical registry
contracts but does not always verify that the prison made an
effort to obtain the required services from a provider included
in a medical registry contract before approving a prison’s
request for a contract with a nonregistry provider. Failure to
document attempts to contact registry providers exposes the
State to potential lawsuits from registry contractors for breach of
contract terms and hinders ICS’ ability to terminate the registry
provider for nonperformance.
We recommended that Corrections modify its procedures to
require prisons to submit documentation to ICS demonstrating
their attempts to obtain services from registry contractors with
their requests for services from a nonregistry contractor.
We also recommended that Corrections direct ICS to review
prisons’ documentation and ensure that prisons have made
sufficient attempts to obtain services from registry contractors.
ICS should use these data to identify trends of nonperformance
and terminate registry providers, when necessary.
Department Action: Corrective action taken.
Corrections stated that the OCS issued a memorandum in
April 2004 implementing a new policy requiring programs
to submit documentation of their attempts to contact
312 California State Auditor Report 2005-406 California State Auditor Report 2005-406 313
contractors to obtain services before requesting additional
contracts for services covered under existing contracts. OCS
also developed forms to assist prisons in documenting their
contacts and requires prisons to submit this documentation
with their contract requests.
Corrections reported that ICS currently reviews prisons’
documented efforts to obtain services from registry providers to
ensure compliance with contract terms and conditions before
processing additional contracts for services. If prisons do not
provide documentation of their efforts, they are instructed to
contact current registry providers and document efforts before
resubmitting their contract requests. ICS and HCSD collectively
review the documentation to determine if multiple prisons are
being denied services by a contractor and will terminate the
contract if it is deemed in the best interest of the State.
Finding #11: Corrections continues to significantly increase
its use of medical registry contracts.
Corrections’ use of medical registry contracts is the fastest
growing component of contracted medical services. We found
that Corrections has attempted to reduce registry expenditures
by numerous efforts to recruit medical staff and requesting
funding to establish additional positions.
We recommended that Corrections continue to monitor prisons’
registry expenditures on a monthly basis and evaluate their need
for services.
Department Action: Partial corrective action taken.
Corrections reported that it initiated a new process in
July 2004 designed to evaluate usage and need of registries
periodically. Specifically, HCSD’s Financial Management Unit
provides a copy of the vacancies versus registry report to the
Health Care regional administrators and managers each month.
Also, HCSD has established a process to regularly analyze and
discuss the usage of registry contracts with the health care
managers through their monthly budget review process. Due to
the limited amount of data available, any savings that may be
realized will not be available until December 2004.
314 California State Auditor Report 2005-406 California State Auditor Report 2005-406 315
Finding #12: Prisons cannot show that they consistently
perform prospective and concurrent reviews when required.
Our review of invoices requiring prospective and concurrent
reviews revealed that many of the prisons are unable to
demonstrate that they complete the reviews. By not having the
documentation of these reviews, prisons cannot show that they
do not pay for unnecessary medical services.
We recommended that Corrections ensure that the Utilization
Management (UM) nurses adhere to the UM guidelines requiring
them to perform and retain documentation of their prospective
and concurrent reviews.
We also recommended Corrections direct HCSD to establish a
quality control process that includes a monthly review of a sample
of prospective and concurrent reviews performed by the prisons.
Department Action: Partial corrective action taken.
Corrections stated that HCSD is implementing processes to
integrate clinical appropriateness and administrative oversight
into its UM program and expects full implementation in
October 2004. Also, the UM program has begun a process to
review and update its program guidelines and plans to present
the revised guidelines to management in December 2004,
including an implementation schedule for 2005. On the
administrative side, the UM supervising nursing staff have
initiated monitoring and compliance activities. Between
October 2003 and May 2004, the UM program implemented a
new data collection system. The data is collected at the prison
level, appended to a statewide database, and used to generate a
number of reports used by program management. The reports,
as well as the raw data, allow the UM supervisors to monitor
standardization and compliance. The UM staff are also actively
exploring an alternate program structure for management of
UM activities in the field, as well as other means to improve
efficiency of services, and will work through the annual budget
process if resource needs are identified.
Corrections stated that the HCCUP staff are in the process of
contracting with a vendor to perform reviews of medical invoices
and expects to have a contract in place by February 2005. In
addition, the Budget Act of 2004 authorized HCSD to establish
24 additional positions for the HCCUP program. HCSD plans to
fill these positions by January 2005.These additional positions
will allow HCCUP to establish quality control processes, include
reviewing a sample of invoices processed by the program’s
314 California State Auditor Report 2005-406 California State Auditor Report 2005-406 315
field analysts. Corrections anticipates these processes will be in
place by March 2005. In addition, as of August 2004, HCCUP
established and is using 52 validation reports to ensure the
accuracy of data entered by field analysts. Using the validation
reports, HCCUP will begin performing monthly audits of a
sample of invoices submitted by field analysts. These audits will
begin by March 2005. Also, as HCCUP staff identify data entry
errors from the standardized validation checks and development
of reports, it will notify all analysts, on a flow basis, of the
appropriate manner to enter the data. HCCUP staff will also
provide a five-day training for new staff hired and any staff that
do not receive the training scheduled between December 2004
and March 2005. Finally, HCCUP will establish a peer review
program that includes identification of additional data integrity
improvement needs. HCCUP staff will develop a training
plan based upon peer review findings and the training will be
delivered to staff during the annual statewide HCCUP meeting
in May 2005.
Finding #13: With unclear guidelines, prisons inconsistently
perform retrospective reviews.
Corrections has not provided prisons with clear guidance
regarding changes to the retrospective review process resulting
in confusion to the prisons and inconsistent performance of
retrospective reviews.
We recommended that Corrections clarify and update the UM
guidelines for performing retrospective reviews.
Department Action: Pending.
Corrections reported that HCSD continues to explore options
for modifying its retrospective review process, including
outsourcing to a private contractor, obtaining additional
positions, redirection of duties to other clinical staff, or a
proposal for reorganization of the current UM structure.
HCSD continues to emphasize insufficient resources to perform
100 percent retrospective review, and reports that community
standard is less than 100 percent review and varies as a function
of automated systems designed to automatically flag provider
targeted issues. Corrections reported that it lacks such a system
but patterned the community standard by verbally directing
review of 100 percent of noncontract providers and 10 percent
intensive review, via random selection, on all contracted
316 California State Auditor Report 2005-406 California State Auditor Report 2005-406 317
facilities. HCSD is further analyzing the resources needed to
increase its retrospective reviews, and may address this issue
through a future budget process.
Finding #14: Failing to adequately monitor medical service
invoices, prisons sometimes overpay providers, unnecessarily
increasing the State’s medical costs.
Prisons overpaid providers $77,200, did not take discounts
totaling roughly $12,700, incurred late penalties of $5,900,
and could not provide evidence that inmates received medical
services totaling $69,200.
We recommended that Corrections direct HCSD to establish
a quality control process that includes a monthly review of a
sample of the invoices processed by the prisons’ Health Care
Cost and Utilization Program analysts.
We also recommended that Corrections ensure that prisons
recover any overpayments that have been made to providers
for medical service charges. Similarly, prisons should rectify any
underpayments that have been made to providers.
Further, we recommended that Corrections evaluate its payment
process to identify weaknesses that prevent it from complying
with the California Prompt Payment Act.
Department Action: Pending.
Corrections reported that HCCUP and accounting staff met
and discussed alternatives for identifying and recovering
overpayments and underpayments. As previously stated, HCSD
plans to contract with a vendor to review medical invoices. Also,
accounting staff have begun to determine system or process
changes necessary to allow Corrections to readily identify
and provide reports on overpayments and underpayments.
Corrections anticipates that it will be able to provide
management and other staff with reports by January 2005.
316 California State Auditor Report 2005-406 California State Auditor Report 2005-406 317
Corrections stated that in August 2004, staff met to identify
weaknesses that prevent it from complying with the California
Prompt Payment Act. Due to the complexity of some issues,
staff determined that a work group would be established
to identify potential solutions. However, Corrections stated
that its work group meetings were delayed because of unfilled
positions and other priority assignments, including completion
of year-end closing and the development and training
associated with its 2004–05 contract monitoring database.
Corrections anticipates regular monthly meetings to begin in
November 2004 and implementation of procedures by the end
of fiscal year 2004–05.
318 California State Auditor Report 2005-406
DEPARTMENT OF HEALTH SERVICES
It Needs to Better Plan and Coordinate
Its Medi-Cal Antifraud Activities
REPORT NUMBER 2003-112, DECEMBER 2003
Audit Highlights . . .
Department of Health Services’ response as of December 2004
Our review of the Department and Department of Justice’s response as of July 2004
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 2005-406 319
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.
320 California State Auditor Report 2005-406 California State Auditor Report 2005-406 321
Health Services’ Action: Corrective action taken.
Health Services stated that it has improved the coordination
of its antifraud efforts internally and with other departments,
implemented a system to track issues and ideas for appropriate
follow up, and designated the deputy director of audits and
investigations as the person responsible for coordinating
Medi-Cal antifraud activities within Health Services. This
deputy director is also participating in the antifraud and
provider enrollment workgroup the California Health and
Human Services Agency (agency) convened. Health Services
indicated that it was finalizing the Medi-Cal payment error
study for release and that this study would set the benchmark
for evaluating the effectiveness of its antifraud efforts. Health
Services also stated that it would use the study to finalize its
Medi-Cal antifraud strategic plan, targeted for completion in
March 2005, which will encompass all the components of a
model fraud control strategy, and the roles and responsibilities
of Health Services’ programs and its external partners.
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
320 California State Auditor Report 2005-406 California State Auditor Report 2005-406 321
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.
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: Corrective action taken.
Health Services reported that it made beneficiary confirmation
of product receipt an integral part of its error study and
that it is routinely sending beneficiary confirmations to aid
in focusing antifraud efforts. Additionally, Health Services
indicated that the California Department of Justice (Justice)
will become an integral part of the process for identifying
areas for sending beneficiary confirmations. Further, Health
Services stated that it plans to conduct annual error rate
studies and has begun holding meetings to discuss the
methodologies for the next annual study.
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
322 California State Auditor Report 2005-406 California State Auditor Report 2005-406 323
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
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: Corrective action taken.
Health Services stated that it is committed to a continuous
evaluation of antifraud projects over time. It indicated that
it has a new antifraud savings methodology that will be
further refined for use in developing the May 2005 Medi-Cal
estimate. Additionally, Health Services stated that it has
implemented a new time-reporting system to monitor and
track staff time spent on antifraud activities. Health Services
reported that it will be able to compute the cost-benefit of
its antifraud activities through the use of the refined savings
methodology and the time-reporting system.
322 California State Auditor Report 2005-406 California State Auditor Report 2005-406 323
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.
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.
324 California State Auditor Report 2005-406 California State Auditor Report 2005-406 325
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
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
324 California State Auditor Report 2005-406 California State Auditor Report 2005-406 325
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
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 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
326 California State Auditor Report 2005-406 California State Auditor Report 2005-406 327
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.
Health Services’ Action: Corrective action taken.
Health Services stated that it has developed a plan and
implemented procedures that ensure the enrollment
applications are complete or that it gives the appropriate
notice to providers within the required timeframes. Health
Services indicated that it has prioritized risk so that providers
defaulting to provisional status are in its lowest risk pools.
It reported that it has completed an internal workload
analysis, but is hiring a consultant to further study its
provider enrollment business practices and conduct a formal
workload analysis to streamline the application review
process. Health Services also noted that the enrollment
branch and audits and investigations have improved
overall coordination, and cited actions taken to improve
communication and coordination over provider enrollment
and antifraud efforts.
Health Services reported that it developed a form that can
be used by other Health Services programs and by other
departments that enroll Medi-Cal providers. According to
Health Services, the form includes information providers
must disclose for participation or continued participation
in the Medi-Cal program. Health Services will be amending
its agreements with other state departments to require that
the providers they approve for program participation have
disclosure statements on file that meet federal regulatory
requirements. Additionally, Health Services stated that the
agency established an antifraud and provider enrollment
workgroup to develop a proposal for coordinating all
antifraud and enrollment activities within the agency.
Finally, Health Services indicated that it developed a plan
to reenroll all providers, is ensuring that provider numbers
are properly deactivated, and is working with professional
licensing boards to ensure that provider licensing information
is received on a timely basis.
326 California State Auditor Report 2005-406 California State Auditor Report 2005-406 327
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.
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.
328 California State Auditor Report 2005-406 California State Auditor Report 2005-406 329
Health Services’ Action: Corrective action taken.
Health Services stated that it has modified its claim payment
system to delay claim payments and allow more time to
conduct a pre-checkwrite review of claims for potential fraud,
waste, or abuse. It also reported it is randomly selecting
100 claims per week to review for legitimacy before making
the payment. Health Services indicated that it completed a
preliminary assessment of fraud risk in the Medi-Cal program
and that its field audits focus on high-risk provider types.
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 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
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
328 California State Auditor Report 2005-406 California State Auditor Report 2005-406 329
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.
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.
330 California State Auditor Report 2005-406 California State Auditor Report 2005-406 331
Health Services’ Action: Corrective action taken.
Health Services stated that it signed a new agreement with
Justice and has been referring all cases of suspected provider
fraud to Justice.
Justice Action: Corrective action taken.
Justice reported that it successfully executed an agreement
with Health Services that establishes meaningful guidelines
to facilitate a successful and long 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.
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
330 California State Auditor Report 2005-406 California State Auditor Report 2005-406 331
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: Corrective action taken.
Health Services stated that it started a clearinghouse process
through its fraud and abuse steering committee where issues
are assigned and tracked until completed. Additionally,
the agency created an antifraud and provider enrollment
workgroup, which includes all departments within the agency,
to develop a proposal for agency-wide antifraud efforts.
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
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.
332 California State Auditor Report 2005-406 California State Auditor Report 2005-406 333
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: Corrective action taken.
Health Services stated that its contracted vendor was
able to determine that Medi-Cal managed care member
dissatisfaction was at the provider level and not the managed
care plan level. Additionally, Health Services indicated
that it is continuing to assess and develop methods for
enhancing its use of encounter data to monitor managed
care plan performance. Further, Health Services stated it
consulted with its legal office and found no legal authority
for requiring managed care plans to estimate improper
payments, but will review the results of its own error studies
with the managed care plans and discuss what measures the
managed care plans take to verify their provider payments.
332 California State Auditor Report 2005-406 California State Auditor Report 2005-406 333
334 California State Auditor Report 2005-406
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 August 2004
The Joint Legislative Audit Committee requested that we
Audit Highlights . . .
assess the Department of Social Services’ (department)
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
community care facilities, the (child care report), the department has more selectively granted
Department of Social Services: criminal history exemptions and has prioritized and quickly
þ Has been less prompt processed legal actions against facility licensees. However, the
in communicating department could improve in other areas.
exemption decisions.
þ Has not adequately Finding #1: The caregiver background check bureau granted
managed or investigated
exemptions without considering all available information.
subsequent criminal
history reports.
The caregiver background check bureau (CBCB) did not
þ Did not always follow sufficiently consider information other than convictions
its complaint procedures when reviewing five of the 45 approvals we examined. The
or make certain that department’s evaluator manual instructs the CBCB staff to
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
þ Has adequately reviewed demonstrate rehabilitation. However, the CBCB did not always
the counties it contracts
consider all these factors. For example, the CBCB ignored self-
with to license foster
disclosed crimes not appearing on individuals’ criminal history
family homes, but has
not always corrected records (rap sheets) and accepted without question character
identified deficiencies. references that appeared inadequate.
þ Was not always timely,
consistent, and thorough To ensure that criminal history exemptions are not granted to
in its enforcement of individuals who may pose a threat to the health and safety of
legal decisions.
clients in community care facilities, the department should:
• Make certain it has clear policies and procedures for granting
criminal history exemptions.
California State Auditor Report 2005-406 335
• 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: Corrective action taken.
The department reported that it has compiled and is using
an Exemption Analyst Resource Manual, which includes
detailed desk procedures for exemption analysts. In addition,
the department incorporated procedures for reviewing
exemption requests in its Evaluator Manual; however, these
procedures are pending final approval. The department also
reported that it had trained all Community Care Licensing
Division staff on these exemption request procedures.
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.
336 California State Auditor Report 2005-406 California State Auditor Report 2005-406 337
Department Action: Partial corrective action taken.
With the implementation of the clearance before work
component, individuals can no longer start work or be
present in the facility prior to being cleared. The department
states it has also taken steps to ensure that individuals with
non-exemptible crimes are notified in a timely manner.
Moreover, the department has also reprioritized the work
associated with individuals with lesser crimes or infractions,
and now gives this work higher priority so that delays do
not impede individuals’ right to work or licensed facilities’
ability to operate efficiently. However, the department did
not address how it is ensuring that staff meet established
time frames for making exemption decisions.
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: Corrective action taken.
The department stated that it had modified its quality
control procedures and these procedures are in place.
336 California State Auditor Report 2005-406 California State Auditor Report 2005-406 337
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
338 California State Auditor Report 2005-406 California State Auditor Report 2005-406 339
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.
338 California State Auditor Report 2005-406 California State Auditor Report 2005-406 339
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: Corrective action taken.
The department said that it had modified its computer
system to allow for better subrap tracking and has completed
staff training in the system. In addition, the department
has developed and implemented new subrap policies and
procedures. Moreover, the department stated that it has
340 California State Auditor Report 2005-406 California State Auditor Report 2005-406 341
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 convicted of a crime. Finally, the
department reported that new regulations requiring criminal
record clearances before an applicant begins work ensures that
uncleared staff will not be in a facility. For this reason, the
promptness of the department’s notification to a facility that a
criminal history exemption is required becomes less urgent.
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: None.
Ü The department assessed its practices as we recommended,
but reported that it believes requiring additional Federal
Bureau of Investigation checks would be costly and
unnecessary. It indicates that its limited resources will
prohibit it from requiring additional Federal Bureau of
340 California State Auditor Report 2005-406 California State Auditor Report 2005-406 341
Investigation background checks for individuals who become
disassociated from a facility and then return to work within
two years.
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.
342 California State Auditor Report 2005-406 California State Auditor Report 2005-406 343
To address the department’s weaknesses in following required
complaint procedures, we recommended that the department:
• 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: 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. In addition, during
October and November 2003, the department regional
office managers led training discussions to emphasize
complaint investigations as a top priority. The department
also noted that it is making database enhancements to
track complaint completion. The database enhancements
are scheduled for completion in late 2004. Although it had
earlier reported that it would require all supervisors to wait
to sign off on complaints until all plans of correction are
complete, the department now states that this practice is not
appropriate in all cases. Instead, the department is requiring
a supervisor sign off on all serious plans of correction prior
to staff closing the complaints. The department also cited
supervisors’ routine review of staff’s complaint log book
as a way of ensuring plans of correction are complete. The
department has changed 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
342 California State Auditor Report 2005-406 California State Auditor Report 2005-406 343
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.
Department Action: Corrective action taken.
The department reported that it had developed and is
distributing a self-assessment Technical Assistance Guide for
foster family agencies, which provides directions on transfers
between foster family agencies and instructs foster family
agencies on how to review prior histories and verify the
accuracy of certified parents’ statements. It also stated that
it plans to develop regulations requiring disclosure of prior
uncorrected substantiated complaints.
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
344 California State Auditor Report 2005-406 California State Auditor Report 2005-406 345
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.
Department Action: Corrective action taken.
The department reported that it completed its review of its
licensing processes for its four program areas and during
October and November 2003, regional office managers led
training discussions on the application process emphasizing
the need to obtain required documents prior to licensing a care
facility. In November 2003, the department issued a memo
to its staff outlining new visit requirements and emphasizing
post-licensing visit requirements. The department indicates
that licensing program analysts are now meeting the
protocols to complete 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
344 California State Auditor Report 2005-406 California State Auditor Report 2005-406 345
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.
Department Action: Partial corrective action taken.
The department temporarily suspended its QEP evaluations
in offices with severe staffing shortages and reports that it is
reimplementing these evaluations as staffing levels improve.
The department also stated that is had developed a new
training database and instructed staff on its use. Although
the department previously said it was developing a training
need assessment tool, the status of this tool is unclear.
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.
346 California State Auditor Report 2005-406 California State Auditor Report 2005-406 347
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.
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.
346 California State Auditor Report 2005-406 California State Auditor Report 2005-406 347
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.
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.
348 California State Auditor Report 2005-406
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 July 2004
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 current
pharmaceutical costs found practices for containing Medicaid pharmaceutical and
the following:
related expenditures and to assess the extent to which these
þ Health Services may not practices can be or are applied to the Department of Health
fully achieve the roughly Services’ (Health Services) Medi-Cal Fee-for-Service drug program.
$104 million General Fund
As part of the audit, the audit committee asked that we conduct
cost savings it predicted
a survey of selected states’ Medicaid program practices aimed at
for fiscal years 2002–03
and 2003–04 because containing costs. Further, the audit committee requested that
it has been unable to the survey include, but not be limited to, other states’ pharmacy
hire pharmacists, has
reimbursement practices, policies to encourage the use of generic
not considered fully
the consequences of drugs, drug formulary practices, timely collection of rebates from
some planned activities, manufacturers, establishment of disease management programs,
and has presented
and the net costs of drugs. Additionally, we were to compare Health
questionable estimates.
Services’ current practices with the cost containment practices of
þ Although Health Services the California Public Employees’ Retirement System (CalPERS).
employs some cost-saving Using the data obtained from the surveyed states and CalPERS, we
strategies, such as the List
were asked to assess the applicability of the data to Medi-Cal and,
of Contract Drugs, it has
been slow to consider or if applicable, determine the extent to which Health Services uses
adopt others. such practices. Finally, we were asked to assess Health Services’
staffing levels and contracting needs for carrying out its Medi-Cal
þ Its efforts to educate
pharmaceutical functions. Specifically, we found that:
physicians and pharmacists
about inappropriate or
medically unnecessary drug
therapy are limited. Finding #1: Health Services has been unable to hire
needed pharmacists.
þ Health Services has
not sought funding for Health Services has not been able to fill pharmacist positions
disease management
approved during budget negotiations for fiscal years 2001–02
pilot projects that could
and 2002–03 to meet increases in its workload and to implement
potentially benefit the
Medi-Cal population. 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
pharmacists, as of March 2003, it had also been unable to hire the
California State Auditor Report 2005-406 349
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.
350 California State Auditor Report 2005-406 California State Auditor Report 2005-406 351
Health Services’ Action: Partial corrective action taken.
In its original response to our recommendation, Health
Services indicated that it sent flyers to every pharmacist
in the State and placed advertisements in a number of
pharmacy publications. After receiving approval from
the Department of Personnel Administration to offer
pharmacists a recruitment and retention payment of
$2,000 per month, Health Services stated that it was able
to hire four pharmacists in October 2003. However, as of
July 2004, Health Services stated that it still has two vacant
pharmacist positions it anticipates filling before the end
of September 2004. Health Services is considering listing
its pharmacist position as hard-to-fill, which it stated will
allow the recruitment and retention pay to become part
of a pharmacist’s base salary and count toward his or her
retirement. Health Services believes this will help its future
recruitment efforts and reduce pharmacist turnover.
Additionally, Health Services stated it has hired three research
analysts to perform drug cost analyses formerly performed by
the pharmacists. Finally, Health Services also indicated that its
development of an internship position with the University of
Pacific (UOP) in Stockton is ongoing and there has been a new
staff member assigned by UOP to this activity.
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.
350 California State Auditor Report 2005-406 California State Auditor Report 2005-406 351
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.
Health Services’ Action: Corrective action taken.
In October 2003, Health Services indicated that it has increased
the number of pharmacists who can negotiate contracts and
it is making changes so that it can complete new drug reviews
more timely. In November 2004, Health Services provided us a
copy of its Medi-Cal Drug Review Policies and Procedures and
indicated that these new policies are available on its Web site.
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: Corrective action taken.
In October 2003, 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. As of November 2004, Health
Services stated that it has completed four TCRs including
cholesterol-lowering agents, non-sedating antihistamines,
angiotensin-converting enzyme (ACE) inhibitors/angiotension
352 California State Auditor Report 2005-406 California State Auditor Report 2005-406 353
receptor blockers (ARB), and antidepressants. Additionally,
Health Services stated that it has two others in progress—proton
pump inhibitors and nonsteriodal anti-inflammatory drugs.
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
352 California State Auditor Report 2005-406 California State Auditor Report 2005-406 353
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
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
354 California State Auditor Report 2005-406 California State Auditor Report 2005-406 355
prices or average manufacturer price (AMP)—the average 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.
354 California State Auditor Report 2005-406 California State Auditor Report 2005-406 355
• 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: Partial corrective action taken.
Health Services stated that only one manufacturer expressed
an interest in negotiating a contract for generic drug rebates
and it hopes to finalize the agreement in October 2004.
Health Services stated that it has provided limited technical
assistance to the Department of Justice in the development
of Senate Bill 1170 (SB 1170) that creates reporting
requirements for drug manufacturers, principal drug labelers,
and drug wholesalers; however, this legislation has not yet
been enacted. Additionally, as of July 2004, Health Services
indicated it has drafted trailer bill language that defines the
MAIC for generic drugs and imposes penalties on wholesalers
failing to report prices.
In October 2003, 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. As of
May 2004, Health Services indicated that it is in the process
of conducting a review of certain drugs for preferred prior
authorization status. Health Services completed a review of
the drugs used for the treatment of erectile dysfunction and
is releasing rebate contracts. Health Services also stated that it is
in the process of analyzing the drugs used in the treatment
of multiple sclerosis and it intends to have rebate contracts
effective in several months.
Finally, Health Services indicated that the center has issued a
regulation effective January 1, 2004, that allows manufacturers
to make retroactive adjustments to their AMPs or best prices
for a three-year period. Further, the center informally indicated
that state law prohibiting retroactive rebate adjustments would
not supercede the federal rule. Therefore, Health Services is
seeking agreement from the center that the State’s statute
prohibiting any retroactive adjustments of the state
supplemental rebates can be made effective by incorporating
the State’s statute in the language included in the supplemental
rebate contract with the manufacturer.
356 California State Auditor Report 2005-406 California State Auditor Report 2005-406 357
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.
In its October 2003 response, Health Services indicated that
it expected to expand its staff by filling 10 analyst positions
and one manager position by December 2004 in anticipation
of resolving the backlog of disputes by the end of fiscal year
2004–05. In its July 2004 response, Health Services stated
that it has filled the manager’s position and is working on
filling two analyst positions.
356 California State Auditor Report 2005-406 California State Auditor Report 2005-406 357
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
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.
358 California State Auditor Report 2005-406 California State Auditor Report 2005-406 359
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
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: None.
Health Services indicated that ADAP and the Medi-Cal staff
met and discussed the possibility of using RAIS for invoicing
ADAP manufacturers. Although both programs agreed
that the idea was feasible, they determined that the costs
associated with changing systems and adding ADAP to RAIS
was prohibitive. However, Health Services stated that ADAP
has begun using the most recent unit rebate amount provided
by drug manufacturers to more closely estimate rebates owed
to it and believes that this has resulted in less than a 1 percent
difference between the estimated amount invoiced and the
actual rebates owed.
Finally, in its October 2003 response to our recommendations,
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, in its July 2004
response, Health Services explained that, based on an analysis
of rebates invoiced for calendar year 2003, ADAP continues
to be successful in collecting rebate payments due from
drug manufacturers in a timely manner. It also indicated
that proposing legislation imposing interest penalties on
manufacturers for late rebate payments would have limited
benefit and implementing the necessary billing system would
not be cost-effective.
358 California State Auditor Report 2005-406 California State Auditor Report 2005-406 359
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 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.
360 California State Auditor Report 2005-406 California State Auditor Report 2005-406 361
• 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 assigned a pharmacist to
monitor the status of contracts and bring to the attention
of the pharmacy section management those contracts that
will be expiring in the upcoming six months. Management
then assigns pharmacist staff to renew or renegotiate
the contracts. Health Services also indicated that it has
established a review process to ensure that supplemental
rebate contracts are appropriately entered into its contract
tracking database and RAIS.
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. In
October 2003, Health Services indicated that it had begun
evaluating the net cost impact of removing the restrictions
to use brand name drugs on a case-by-case basis and, as of
May 2004, it continues to do so.
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.
360 California State Auditor Report 2005-406 California State Auditor Report 2005-406 361
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.
Health Services’ Action: None.
In October 2003, Health Services indicated that the 2003
Budget Act includes a 5 percent reimbursement reduction
for pharmacies effective January 1, 2003. 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. However, as of November 2004, Health Services
is under a preliminary injunction and cannot implement the
5 percent rate cut. It has appealed the injunction and was
scheduled to provide oral argument in the 9th Circuit Court
of Appeals the week of December 6, 2004. Additionally,
Health Services stated that it is evaluating various beneficiary
cost-sharing proposals as part of the Medi-Cal redesign effort.
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
362 California State Auditor Report 2005-406 California State Auditor Report 2005-406 363
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 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.
362 California State Auditor Report 2005-406 California State Auditor Report 2005-406 363
Health Services’ Action: Pending.
Health Services stated that it has begun using the duration of
therapy hard edits for one drug only and there is significant
concern related to the effect these edits have on its workload.
According to Health Services, it is exploring other processes
such as step therapy that would reduce workload and make
broader implementation of duration of therapy hard edits
possible. Finally, Health Services indicated that it is moving
forward with the first DUR hard edit for early refills. However,
it has not yet established a firm implementation date.
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
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
364 California State Auditor Report 2005-406 California State Auditor Report 2005-406 365
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.
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.
364 California State Auditor Report 2005-406 California State Auditor Report 2005-406 365
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
reductions initiatives. Additionally, Health Services stated that
it will develop prescriber profiles to create general educational
documents for all prescribers and to facilitate its plans to
contact prescribers directly to address their prescribing
practices. In its May 2004 response, Health Services also
indicated that it recently hired research staff and is in the
process of hiring a physician to work on this issue.
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
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.
366 California State Auditor Report 2005-406 California State Auditor Report 2005-406 367
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.
In October 2003, Health Services indicated that CPhA 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. During
April 2004, Health Services indicated it met with CPhA to
discuss the next steps of the diabetes pilot project. CPhA is
preparing a business proposal for Health Services’ review, but
has not yet provided Health Services with a timeframe.
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.
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
366 California State Auditor Report 2005-406 California State Auditor Report 2005-406 367
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 it analyzed the effect of
discontinuing all or a portion of the optional drug categories
on Medi-Cal beneficiaries and on drug expenditures. Health
Services concluded that the savings would be minimal
and the potential for detrimental impact on beneficiaries
could be significant. However, the analysis Health Services
provided did not calculate the amount of the net savings
or loss. Health Services indicated that to perform this
type of analysis would require a long-term or a very large
retrospective study.
368 California State Auditor Report 2005-406
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 2005-406 369
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
370 California State Auditor Report 2005-406 California State Auditor Report 2005-406 371
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.
370 California State Auditor Report 2005-406 California State Auditor Report 2005-406 371
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
372 California State Auditor Report 2005-406 California State Auditor Report 2005-406 373
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.
372 California State Auditor Report 2005-406 California State Auditor Report 2005-406 373
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.
374 California State Auditor Report 2005-406 California State Auditor Report 2005-406 375
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.
374 California State Auditor Report 2005-406 California State Auditor Report 2005-406 375
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.
376 California State Auditor Report 2005-406 California State Auditor Report 2005-406 377
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.
376 California State Auditor Report 2005-406 California State Auditor Report 2005-406 377
378 California State Auditor Report 2005-406
DEPARTMENT OF INSURANCE
It Needs to Make Improvements in
Handling Annual Assessments and
Managing Market Conduct Examinations
REPORT NUMBER 2003-138, JUNE 2004
Department of Insurance’s response as of August 2004
The Joint Legislative Audit Committee (audit committee)
Audit Highlights . . .
requested that we assess the California Department
of Insurance’s (Insurance) effectiveness in improving
Our review of the California
Department of insurance’s consumer services and its Fraud Division activities as a result of
(Insurance) effectiveness the additional funding it received through SB 940 and AB 1050.
in improving consumer
Our audit found Insurance does not ensure that it receives all
services and reducing
annual assessments due under Chapter 1119, Statutes of 1989
organized automobile
activity through the use of (regular automobile fraud program), Chapter 884, Statutes of
SB 940 and AB 1050 funds 1999 (SB 940), and Chapter 885, Statutes of 1999 (AB 1050).
and its market conduct
Further, Insurance spent some annual assessment funds on
examinations found that:
inappropriate activities. The audit committee also requested that
þ Insurance lacks adequate we examine the functions of Insurance’s bureaus that perform
data to know how much
market conduct examinations to determine the efficiency and
it should have received
necessity of having two separate examination bureaus. We
from insurers since the
enactment of SB 940 and found that Insurance would not realize a great deal of time or
AB 1050. Unaudited data cost savings by combining its Field Claims Bureau and two Field
from the Department of
Rating and Underwriting bureaus that perform market conduct
Motor Vehicles indicate
examinations. However, opportunities exist for Insurance to
that Insurance is
collecting revenues for improve management of its market conduct examinations
far less than the number because the Market Conduct Division does not fully utilize
of registered vehicles in
Insurance’s database and cannot report on the time and cost
the State, resulting in
the possible loss of as associated with its examinations.
much as $7 million in
assessments for fiscal
year 2002–03 alone. Finding #1: Insurance has no way of knowing if it receives all
assessments due and lacks sufficient oversight for collecting
þ Insurance has not made
annual assessments.
sufficient efforts to verify
that insurers are remitting
Insurance lacks adequate data to verify that the amounts
all revenues due, even
though it identified insurers remit to it for the three annual automobile assessments
discrepancies in the constitute all amounts due. Currently, it does not collect
number of insured vehicles
complete data on the number of insured vehicles in the State.
reported by them.
Lacking complete information on the number of insured
continued on next page . . . vehicles in the State means that Insurance does not know
how much it should have received since the enactment of
California State Auditor Report 2005-406 379
þ Despite reducing the the regular automobile fraud program, SB 940, and AB 1050.
backlog of cases in its However, it appears that Insurance is collecting assessments for
Investigation Division
far fewer than the number of registered vehicles in the State,
by 51 percent, Insurance
and thus may have missed out on collecting revenues of roughly
can improve how it
reviews and assigns cases $7 million due to it during fiscal year 2002–03 alone.
to ensure they are not
outstanding for long
Insurance has not made sufficient efforts to verify that the
periods of time.
amounts insurers remit are based on the actual number of
þ Insurance cannot easily vehicles they insure. In May 2003, Insurance’s Budget and
demonstrate that its Legal
Revenue Management Bureau analyzed annual assessments
Division used SB 940
received from 349 insurers between calendar years 1998 and
funds for allowable
activities only. 2002 and found that many companies failed to make one
or more quarterly payments over the five-year period and
þ Insurance could not
that some paid annual assessments for fewer total vehicles
demonstrate that all
AB 1050 expenditures in calendar year 2002 than the number of private passenger
were for allowable vehicles they reported having insured to Insurance’s Statistical
activities. Specifically,
Analysis Division. However, Insurance has yet to follow up
Insurance spent $22,000
with most of these insurers to determine whether they actually
on cases that do not meet
the criteria in state law. underpaid their assessments, and if so, to collect additional
amounts that may be due.
þ Insurance does not ensure
that it follows state
laws and regulations We recommended that to ensure it receives all assessments due,
for monitoring district Insurance should do the following:
attorneys’ and the
California Highway Patrol’s
• Move forward in its efforts to make regulatory changes that
use of AB 1050 funds.
will result in capturing more specific data from insurers about
þ Its Market Conduct
the number of vehicles they insure.
Division does not fully
utilize Insurance’s
• Compare the number of private passenger vehicles insurers
database. Therefore,
Insurance cannot report report on their assessment invoices to the number they report
on the time and cost to its Statistical Analysis Division annually and investigate
associated with its
discrepancies.
examinations or measure
the efficiency of its market
conduct operations. • Direct its Field Examination Division to follow up on
the discrepancies identified in the Budget and Revenue
Management Bureau’s analysis.
• Periodically perform analytical reviews of insurers’ data, such
as comparing changes in written premiums to changes in the
assessments insurers remit, and investigate unusual trends.
380 California State Auditor Report 2005-406 California State Auditor Report 2005-406 381
Insurance Action: Partial corrective action taken.
Insurance reported that it filed a Notice of Proposed
Rulemaking to make changes to the existing vehicle
assessment regulations. Due to extensive discussions with
insurance industry representatives, additional revisions
are being made to the proposed regulations. Insurance
expected to have these changes ready for public comment
before December 31, 2004. Insurance also reported that
it established written procedures in September 2004 to
(1) perform a comparison of the number of private passenger
vehicle insurers report on their assessment invoices to
the number they report to its Statistical Analysis Division
annually and investigate discrepancies and (2) periodically
perform analytical reviews of insurers’ data. Finally,
Insurance reported that its Field Examination Division
continues to review the fraud auto assessment filings as
part of the regularly scheduled financial examination of
California domestic insurers. Any discrepancies noted will be
forwarded to the Budget and Revenue Management Bureau
for billing and collection or resolution.
Finding #2: Although Insurance has made improvements to
consumer services, it cannot demonstrate that it spends all
SB 940 funds on allowable activities.
Insurance used the additional staff and resources provided to it
by SB 940 to reduce the backlog of open cases in its Investigation
Division by 1,580 cases, or 51 percent, since the program’s
inception. However, Insurance can improve how it reviews and
assigns cases to ensure that suspected violations of insurance
laws and regulations by agents, brokers, and insurers do not
remain unresolved longer than necessary. Further, Insurance
used SB 940 funds to increase its outreach and communication
efforts related to several automobile insurance programs, and in
doing so, may have increased public awareness of the services
it provides. However, because the case tracking system used by
Insurance’s Legal Division is not linked to its time reporting
system, Insurance’s Legal Division cannot demonstrate that
it used the $9.4 million it received in SB 940 funds for only
allowable activities.
380 California State Auditor Report 2005-406 California State Auditor Report 2005-406 381
To improve its services to consumers and provide appropriate
oversight of SB 940 funds, we recommended that Insurance do
the following:
• Revise its Investigation Division’s policies and procedures
to ensure that cases are not outstanding for long periods
of time. For example, Insurance should assign cases to an
investigator as soon as they are received and establish a goal
that investigators take no more than a year from the date
they receive a case to complete their investigations, barring
extenuating circumstances.
• Review its open cases, both assigned and unassigned, to
determine whether any should be closed.
• Eliminate the Investigation Division’s backlog of unassigned
cases by requiring staff to work a reasonable amount of
overtime or seeking additional staff.
• Link its Legal Division’s case tracking system to its time
reporting system to better document the use of SB 940 funds.
Insurance Action: Corrective action taken.
Insurance reported that it issued a directive to the
Investigation Division staff on September 23, 2004, requiring
investigators to establish a goal completion date when
the initial investigative plan is drafted. During monthly
case reviews, supervisors are to monitor investigations and
determine if they are proceeding in line with the projected
completion date. Insurance also reported that it issued a
directive on June 21, 2004, requiring Investigation Division
staff to review and assess reports of suspected violations
every three months to ensure that the reports are assigned
and closed based on their viability. Further, Insurance
stated that it received approval to establish five additional
investigative positions and that its hiring efforts are in
progress. Insurance plans to monitor the impact that these
new positions have on reducing its backlog and, if necessary,
seek additional resources in fiscal year 2006–07. Finally,
Insurance reported that it implemented a time reporting
system in the Legal Division to track time and activity for
specific cases, including SB 940 cases. All bureaus have
received training in the use of the system and are now using it.
382 California State Auditor Report 2005-406 California State Auditor Report 2005-406 383
Finding #3: Insurance needs to significantly improve its
oversight of AB 1050 funds.
Since its inception, the AB 1050 program has supported a
joint approach to investigating 446 organized automobile
fraud activity cases, which have led to 432 arrests. However,
Insurance used roughly $22,000 in AB 1050 funds to work on
20 cases that do not meet the criteria in state law. Although
some cases were initially investigated as AB 1050 cases and
later transferred to Insurance’s Program for Investigation and
Prosecution of Automobile Insurance Fraud (regular automobile
fraud program), Insurance did not transfer the expenditures it
already incurred on these cases to the regular automobile fraud
program. Further, Insurance does not adequately monitor the
use of AB 1050 funds by district attorneys receiving grants and
by the Department of the California Highway Patrol (California
Highway Patrol). Specifically, Insurance did not receive all
required reports from district attorneys, and does not follow
state regulations that require it to perform a fiscal audit of each
county receiving AB 1050 grant funds at least once every three
years. Moreover, although state law requires the California
Highway Patrol to report annually to Insurance its use of
AB 1050 funds, since the inception of the program, Insurance
has neither requested nor received these reports. Thus, it cannot
ensure that the California Highway Patrol is accurately charging
the salaries and benefits of those investigators working on
allowable activities under AB 1050.
To ensure that it uses AB 1050 funds appropriately, we
recommended that Insurance do the following:
• Transfer the hours and billable expenses it charges to AB 1050
from its organized automobile fraud program when it
transfers cases to the regular automobile fraud program.
• Follow state laws and regulations governing fiscal and
performance audits of counties to ensure that the district
attorneys use AB 1050 funds only for allowable activities and
in the most effective and efficient manner.
• Require the California Highway Patrol to submit annual
reports of its expenditures as state law requires.
382 California State Auditor Report 2005-406 California State Auditor Report 2005-406 383
Insurance Action: Corrective action taken.
Insurance reported that it established new procedures
to follow when there is a need to transfer hours and
expenditures from one fraud program to another. Insurance
stated that it has reorganized the Fraud Grant Audit Unit and
approved the hiring of two additional auditors. Insurance
believes the new audit positions will provide adequate
audit coverage that includes fiscal and performance audits
of county district attorneys who receive AB 1050 funds.
Finally, Insurance reported that it has obtained all annual
expenditure reports from the California Highway Patrol for
fiscal years 2000–01 through 2003–04.
Finding #4: Combining the Market Conduct Division’s
bureaus would not likely result in increased efficiencies, but
opportunities to improve its management of market conduct
examinations exist.
Combining Insurance’s Field Claims and two Field Rating and
Underwriting bureaus would not greatly reduce either the time
or cost to perform market conduct examinations. The objective
of the two examinations—claims examination and rating and
underwriting examinations—is separate and distinct. Further,
the claims examiners and the underwriting examiners possess
separate expertise and experience. Thus, combining the three
bureaus would require all examiners to become knowledgeable
of both types of examinations. However, Insurance could
benefit from preparing an analysis to quantify any savings that
can be generated from combining administrative tasks such as
timekeeping, scheduling and coordinating examinations with
insurers, and preparing reports.
To determine whether it could generate savings from combining
the administrative tasks of the three bureaus, we recommended
that Insurance prepare an analysis and quantify possible savings.
Insurance Action: Partial corrective action taken.
Insurance stated that it has consolidated the timekeeping
of the Field Rating and Underwriting Bureaus and currently
one support staff handles this function in each of its
bureaus. Additionally, one support staff now handles report
publishing for the Market Conduct Division. Insurance
stated it would conduct further reviews to eliminate,
consolidate, or redistribute administrative tasks.
384 California State Auditor Report 2005-406 California State Auditor Report 2005-406 385
Finding #5: Insurance’s Market Conduct Division cannot
measure the efficiency of its operations because it does not
take full advantage of Insurance’s database.
Insurance’s Market Conduct Division does not take full
advantage of Insurance’s database and does not adequately
capture or tally the time or costs associated with its market
conduct divisions; thus, it cannot measure the efficiency of
its operations. Insurance’s database has modules designed
to capture data on insurers licensed to operate in California,
including tracking examinations, staff hours, or how much
to bill insurers. However, the Market Conduct Division has
not taken full advantage of this database’s capabilities and the
other means this division uses to track examination data are
inefficient and do not provide the necessary information.
To ensure that it has sufficient data to assess the efficiency of its
Market Conduct Division, including an analysis of the average
length of time and cost of its examinations, we recommended
that Insurance’s Market Conduct Division should work with its
Information Technology Division to make full use of Insurance’s
database. At a minimum, we recommended that the Market
Conduct Division’s plans should include the following:
• Modifying its examination-tracking module to create an
identification number that allows it to identify multiple
insurers that are under examination using the existing
company identification number.
• Eliminating the need for examiners to manually prepare the
monthly timesheets and billing summaries by allowing them
to enter their hours directly into the timekeeping module.
• Linking its examination tracking, timekeeping, and
accounts receivable modules using the examination
identification number.
Insurance Action: Partial corrective action taken.
Insurance reported that the Information Technology
Division and the Market Conduct Division continue to work
together to improve the examination-tracking module. It
also stated that an examination activity summary form and
an examination team and costs form are under development.
When completed, these forms will allow the Market Conduct
Division to track enforcement activities, remedial action,
384 California State Auditor Report 2005-406 California State Auditor Report 2005-406 385
exam recoveries and penalties, billable expenses, Proposition 103
expenses, and costs to date. Further, Insurance stated that it
completed and tested an interface that will allow the Market
Conduct Division to enter an identification number for each
examination. Finally, Insurance stated that it completed a
timekeeping interface and is working toward automatically
populating billable hours and Proposition 103 hours into a
monthly expense report from the timekeeping system.
386 California State Auditor Report 2005-406
WORKERS’ COMPENSATION FRAUD
Detection and Prevention Efforts Are
Poorly Planned and Lack Accountability
REPORT NUMBER 2002-018, APRIL 2004
Audit Highlights . . .
Department of Insurance, Department of Industrial Relations,
Our review of the State’s and Fraud Assessment Commission responses as of October 2004
program to reduce workers’
compensation fraud Section 1872.83 of the Insurance Code (Chapter 6, Statutes of
revealed that:
2002), requires the Bureau of State Audits (bureau) to evaluate
þ Although employers are the effectiveness of the efforts of the Fraud Assessment
assessed annually to pay Commission (fraud commission), the Department of Insurance
for efforts to reduce fraud in
Fraud Division (fraud division), the Department of Insurance
the workers’ compensation
system—an amount (Insurance), and the Department of Industrial Relations (Industrial
that has averaged about Relations), as well as local law enforcement agencies, including
$30 million per year for the
district attorneys, in identifying, investigating, and prosecuting
past five years—the Fraud
workers’ compensation fraud and employers willful failure to
Assessment Commission
(fraud commission) and secure workers’ compensation benefits for their employees.
the insurance commissioner
have not taken steps
to measure fraud in Finding #1: The fraud commission and the insurance
the system or develop
commissioner cannot be certain that fraud assessment funds
a statewide strategy to
are effectively used to reduce fraud.
reduce it.
þ Neither the fraud The California Constitution authorizes the Legislature to create
commission nor the and enforce a workers’ compensation system that requires
insurance commissioner employers to compensate workers for job-related injuries and
has acted to ensure that the
illnesses. Employers must pay for these benefits to injured
assessments employers pay
workers either by purchasing workers’ compensation insurance
are necessary or are put to
the best use for reducing from an insurer or directly through self-insurance. The total cost
the overall cost that fraud of California’s workers’ compensation system has more than
adds to the workers’
doubled recently—growing from about $9.5 billion in 1995
compensation system.
to about $25 billion in 2002—giving rise to sharp increases in
þ Shortcomings also employers’ workers’ compensation insurance premiums and
exist in the process
prompting several efforts to reform various aspects of the system.
used to distribute fraud
Some of these reform efforts have been targeted at combating
assessment funds to
county district attorneys the fraud alleged to exist in the workers’ compensation system,
in a way that maximizes including fraud perpetrated by workers, medical and legal
their effectiveness in
providers, insurers, and employers.
fighting fraud.
continued on next page . . .
California State Auditor Report 2005-406 387
þ Industrial Relations has One of the reform efforts, Senate Bill 1218 passed in 1991, created
not implemented three an annual assessment collected from employers and paid into a
statutory programs
fund dedicated to increasing the investigation and prosecution
intended to identify
of fraud in the workers’ compensation system. This legislation
and prevent workers’
compensation fraud. also established the fraud commission, which is responsible
for determining the annual assessment after considering the
þ The formulas the
advice and recommendations of the fraud division and the
Department of
Industrial Relations insurance commissioner.
(Industrial Relations)
uses to calculate and
However, neither the fraud commission nor the insurance
collect the workers’
commissioner has acted to ensure that the assessments
compensation fraud
assessment surcharges employers pay are necessary or are put to the best use for
have, in recent years, reducing the overall cost that fraud adds to the workers’
consistently resulted in
compensation system. Specifically, no meaningful steps
insured employers being
overcharged. have been taken to measure the extent and nature of fraud
in the system. Instead, the fraud commission, the insurance
þ Although Industrial
commissioner, and the fraud division rely primarily on
Relations suspects that
anecdotal testimony from stakeholders in the workers’
some insurers do not
report and remit all of the compensation community, unscientific estimates, and
fraud assessments they descriptions of local cases involving fraud included in county
collect from employers,
district attorneys’ applications for antifraud program grants.
it states it does not have
the authority, nor has According to the fraud division chief, lacking the necessary
it established a process, resources and expertise, the fraud division cannot measure the
to verify that insurers
extent and nature of fraud in the workers’ compensation system
remit all of the fraud
or determine the effectiveness of activities to deter it.
assessments they collect
from employers.
Additionally, neither the fraud commission nor the insurance
þ Because the fraud division
commissioner has made a meaningful effort to establish
has not conducted
adequate strategic baselines for measuring the current level of fraud and gauging
planning, it has not met future changes in that level. If baselines were available, it
all its noninvestigative
would be possible to systematically and periodically measure
responsibilities and spends
the level of fraud, using available data, to determine the
a significant portion of
its workers’ compensation effectiveness of programwide strategies in reducing fraud in
antifraud resources the workers’ compensation system. Instead, the fraud division
investigating suspected
collects and publishes discrete statistics showing the number of
fraud referrals that do
investigations, arrests, convictions, and restitutions; revealing
not result in criminal
prosecutions by county only that some sources of fraud may have been removed, not
district attorneys. whether antifraud efforts are cost-effective—that is, whether
þ The fraud division does they have reduced the overall cost that fraud adds to the system
not facilitate an effective by as much or more than what is spent annually to fight it.
system to obtain referrals
of suspected fraud
We recommended that to better determine the assessment to
from insurers and
levy against employers each year for use in reducing fraud in
other state entities
involved in employment the workers’ compensation system, the fraud commission and
related activities. the insurance commissioner should direct the fraud division
to measure the nature and extent of fraud in the workers’
compensation system. To establish benchmarks to gauge the
388 California State Auditor Report 2005-406 California State Auditor Report 2005-406 389
þ The fraud division’s effectiveness of future antifraud activities, these measures
special investigative audit should include analyses of available data from insurers and
unit lacks a program
state departments engaged in employment-related activities,
that effectively targets
such as Industrial Relations and the Employment Development
insurers to achieve
maximum compliance Department. In addition, the insurance commissioner should
with suspected fraud consider reactivating an advisory committee comprising
reporting requirements, a
stakeholders focused on reducing fraud in the workers’
standardized approach to
conducting audits, timely compensation system to contribute to the data analyses,
reports and follow-up, provide input about the effects of fraud, and suggest priorities
and effective penalties to
for reducing it. This advisory committee should meet regularly
promote compliance.
and in an open forum to increase public awareness and the
þ Improvement is needed accountability of the process.
in sharing information
between the Industrial
Relations and the fraud Insurance Action: Pending.
division to identify
potential workers’ Insurance reports that it is preparing a research plan
compensation fraud. to determine the nature of fraud within the workers’
compensation insurance system. This plan will address
emerging trends in fraud schemes and the return-on-
investment of the anti-fraud program in California.
Fraud Commission Action: None.
The fraud commission did not submit the six-month
response to our report that was due on October 29, 2004.
Finding #2: The fraud commission and the insurance
commissioner have no overall strategy for using funds
assessed against employers to most effectively and efficiently
reduce fraud in the workers’ compensation system.
Such a strategy could be translated into the goals and objectives,
priorities, and measurable targets that state and local entities
involved in fraud reduction efforts need to work effectively.
These systemwide goals and priorities could be broken down
into regional elements to accommodate any unique regional
fraud problems. Having a measured level of fraud and a
strategy for combating it could provide the fraud commission
with criteria to use in arriving at the appropriate assessment
to be paid by employers each year and in allocating the fraud
assessment funds to state and local entities that are considered
most effective in the efforts to reduce fraud. As a result, the fraud
commission has limited authority to hold the fraud division or
local district attorneys accountable for their antifraud efforts.
To assure California’s employers that their fraud assessment
has been used effectively to reduce the amount of fraud and
thereby reduce the overall cost of the workers’ compensation
388 California State Auditor Report 2005-406 California State Auditor Report 2005-406 389
system, the fraud commission and the insurance commissioner
need (1) a systematic effort to measure the extent of workers’
compensation fraud in the system and the types of fraudulent
activities most responsible for driving up premiums, (2) an overall
strategy to combat them, and (3) a means to periodically evaluate
the effectiveness of the efforts (at both the State and local level)
to reduce the occurrence of those types of fraud. Neither the
fraud commission nor the insurance commissioner has met these
three requirements. Simply put, they cannot justify the amount
employers are assessed each year to combat fraud. According to
some members of the fraud commission, one of the motivations
behind the chosen funding level is to levy an assessment that
allows both the fraud division and county district attorneys to
maintain their current effort in pursuing workers’ compensation
fraud. However, at the December 2003 meeting to determine the
fiscal year 2004–05 aggregate fraud assessment, one member of
the fraud commission voiced her concern that the commission was
voting without enough information to make an informed decision.
We recommended that once the nature and extent of fraud in the
system has been identified, the fraud commission and the insurance
commissioner and his staff should design and implement a strategy
to reduce workers’ compensation fraud. The strategy should
be systemwide in scope and include objectives, priorities, and
measurable targets that can be effectively communicated to
the fraud division and the county district attorneys participating
in the antifraud program. Efforts to achieve the strategy targets
should be both a condition for receiving awards of fraud assessment
funds and a measure of how well the fraud division and the county
district attorneys pursue the systemwide objectives. The strategy
should clearly define the roles and responsibilities of the
participants in antifraud activities.
In addition, we recommended that the fraud commission
take the following steps to gather the information it needs to
determine the annual amount to assess employers to fight fraud
in the workers’ compensation system:
• Revamp its decision-making process so that it includes the best
information available, including (1) the results of Insurance’s
analyses of the nature and extent of fraud in the workers’
compensation system, once they are completed; (2) analysis of the
effectiveness of efforts by the fraud division and district attorneys
in the prior year to reduce fraud in accordance with their respective
antifraud program objectives; and (3) any newly emerging trends
in fraud schemes that should receive more attention.
390 California State Auditor Report 2005-406 California State Auditor Report 2005-406 391
• Request an annual report from the fraud division that
outlines (1) its objectives from the prior year that are linked
to measurable outcomes and (2) its objectives for the ensuing
year, together with estimates of the expenditures the fraud
division needs to make to accomplish those objectives.
• Request, in addition to the information currently required
of each county district attorney planning to participate in
the antifraud program, a report listing the district attorney’s
accomplishments in achieving the goals and objectives outlined
in the prior year’s application and the goals and objectives for
the ensuing year. The report should also include the estimated
cost of the grant year’s activities to achieve the district attorney’s
goals and objectives and a description of how those goals and
objectives align with the program goals described by the fraud
commission and the insurance commissioner.
If the fraud commission believes that altering the funding
formula from the statutorily required levels—under which
40 percent of fraud assessment funds are automatically awarded
to both the fraud division and the district attorneys—would
increase accountability over the use of antifraud program
funds, we recommended that the fraud commission encourage
legislation that would allow it more discretion in how these
funds are distributed.
Insurance Action: Pending.
Insurance reports that it has been working to develop a strategy
to improve the efficiency, consistency, and accountability
in the decision-making process. Together with the fraud
commission and district attorneys it will work to provide
the best information available on reported fraud and trends,
continue with round-table discussions pertaining to anti-fraud
efforts, and make adjustments to program objectives focused
on reducing fraud.
In addition, Insurance reports that it has formed a Performance
Measurement Committee (committee) with representatives
from the department, county district attorneys, and the fraud
commission. The committee met four times during 2004 and
reviewed the current request for grant fund application, district
attorney program reports, and the workers’ compensation
grant review score sheet. The committee’s recommendations
to change these forms will be forwarded to the insurance
commissioner. Insurance also reported that it planned to meet
in November 2004 to discuss topics that included performance
390 California State Auditor Report 2005-406 California State Auditor Report 2005-406 391
measurements for the workers’ compensation antifraud
program, legal issues and opinions, suspected fraud referral
standards, proposed regulations for special investigative units,
and other regulatory changes.
Insurance reports that it will work closely with the fraud
commission so that its vision, objectives, and priorities align
with the insurance commissioners’ strategic initiatives. To
provide information to the fraud commission, the division
commenced an analysis of its anti-fraud program for fiscal
year 2003–04 to review its achievements and establish a
benchmark for future comparisons. The division will outline
its planned objectives and expenditures for fiscal year 2004–05
and present them to the fraud commission to be used in
funding allocation decisions.
Insurance reports that it intends to amend the regulations
relevant to grants of anti-fraud funds and will be presenting
future guidelines to the fraud commission that focus on
district attorney performance, past and future. The majority
of counties that applied for fiscal year 2004–05 funding
identified goals, objectives, anticipated expenses, and
program accomplishments for fiscal year 2003–04.
Fraud Commission Action: None.
The fraud commission did not provide a six-month response
to our report.
Finding #3: Shortcomings exist in the process used to
distribute fraud assessment funds to county district attorneys
in a way that maximizes their effectiveness in fighting fraud.
A review panel comprising fraud commission members,
representatives of the fraud division and Industrial Relations,
and an independent criminal expert makes recommendations
to the insurance commissioner regarding how to allocate
fraud assessment funds to district attorneys who have applied
for grants. In making its recommendations, the review panel
evaluates grant applications and uses the recommendations
it receives from fraud division staff who also conduct a
review of the grant applications. However, both the fraud
division and the review panel fail to consistently apply
criteria or document the rationale they use in making funding
recommendations. Rather, each review panel member
uses a personal, subjective set of criteria when developing
recommendations for grant awards, without retaining any
evidence of the basis of any decision.
392 California State Auditor Report 2005-406 California State Auditor Report 2005-406 393
Further, the panel members do not share their decision-making
criteria or rationale with the district attorneys or with other
review panel members. Nor does the fraud division retain
documentation showing the reasoning it used to arrive at its
funding recommendations to the review panel. As a result,
neither the review panel nor the fraud division staff can provide
evidence justifying their decisions to recommend specific grant
awards, leaving the process open to the perception that it
may not be equitable. Finally, the review panel did not always
comply with open-meeting requirements when developing
funding recommendations.
To better ensure that fraud assessment funds are distributed to
district attorneys so as to most effectively investigate and prosecute
workers’ compensation fraud and increase their accountability in
using the funds, we recommended that the fraud commission and
the insurance commissioner take the following steps:
• Develop and implement a process for awarding fraud
assessment grants that provides for consistency among those
making funding recommendations by incorporating standard
decision-making criteria and a rating system that supports
funding recommendations.
• Include in the decision-making criteria how well county district
attorneys’ proposals for using fraud assessment funds align with
the strategy and priorities developed by the fraud commission
and the insurance commissioner, as well as the district attorneys’
effectiveness in meeting the prior year’s objectives.
• Document the rationale for making decisions on
recommendations for grant awards.
• Change the past policy of awarding the base portion of fraud
assessment grants to county district attorneys exclusively on
whether they submit a completed application by required
deadlines and instead, make recommendations for total grant
awards, including the base allocations, on evaluations of
county district attorneys’ plans that include how they will use
the funds, as required by Insurance regulations.
• Continue current efforts to establish performance measures
to use in evaluating the effectiveness of the fraud division
and participating district attorneys in reducing workers’
compensation fraud. The measures can also assist in
determining recommendations for grant awards to the county
district attorneys and the fraud division.
392 California State Auditor Report 2005-406 California State Auditor Report 2005-406 393
• Determine whether the Bagley-Keene provisions apply to
the review panel’s meetings to recommend fraud assessment
grants to county district attorneys and, if they do, seek a
specific exemption for discussions of portions of the county
district attorneys’ applications for grant awards that include
confidential criminal investigation information. All other
parts of these meetings should remain open to the public.
Insurance Action: Partial corrective action taken.
Insurance reports that it will adopt amended regulations
that base grant awards on measurable performance criteria.
Insurance reports that during the July 2004 Workers’
Compensation Review Panel (review panel) hearing, the
panel strived for a greater level of consistency and clarity.
The panel required applicants to explain and justify the
data forming the basis for their grant requests and to state
their strategic objectives relative to those articulated by the
insurance commissioner. Insurance and the review panel
could make only limited criteria modifications during
this funding cycle to ensure alignment of district attorney
proposals for the use of grant funds with the insurance
commissioner priorities because regulations need to be
amended to make significant changes.
During an August 2004 hearing, the insurance commissioner
articulated his priorities for the anti-fraud program as high
impact cases involving providers and employer failures
to appropriately secure workers’ compensation coverage,
allocating funds based on performance, building effective
partnerships with state and local agencies, and addressing
bureau recommendations.
However, although three fraud commissioners articulated
their priorities, as of October 29, 2004, the fraud commission
as a whole has not articulated its official strategies and
priorities for the program.
Insurance reports that it is evaluating comments and
recommendations regarding the funds allocation process
from the review panel and its committee to incorporate
them into the appropriate standardized criteria for
allocating funds to be included in amended regulations.
394 California State Auditor Report 2005-406 California State Auditor Report 2005-406 395
Insurance Action: Pending.
Insurance reports that the division is working to develop a
business plan that will align with Insurance’s vision, goals,
and strategic initiatives, and acknowledges it needs to
address performance measures for both investigations and
prosecutions within its business plan and will be working
with the fraud commission, district attorneys, and other
stakeholders to accomplish this result.
Insurance Action: Corrective action taken.
Insurance reports that it has changed the policy of
awarding grant funds to county district attorneys based
exclusively on whether they submitted a completed
application by the required deadline. Rather, these grants
are awarded based on whether the applying county met
criteria based on the evaluation of the county district
attorney’s plans and past performance.
Legal counsel for Insurance has determined that the open
public meeting requirements of the Bagley-Keene Act apply.
Counsel’s opinion encourages communication between
program participants and individual review panel members
and that district attorneys designate information that is
confidential so it can be redacted for public disclosure
Fraud Commission Action: None.
The fraud commission did not provide a six-month response
to our audit report.
Finding #4: Controls intended to restrict how county district
attorneys use their grants of fraud assessment funds to pay
for indirect costs are not always effective.
Insurance regulations allow county district attorneys three
options for charging counties’ indirect costs to fraud assessment
grants; each option is intended to place a limit on these charges.
However, one option is based on cost rate proposals approved
under requirements of the United States Office of Management
and Budget, without any input from the fraud commission or
insurance commissioner, and does not provide the control of
charges of indirect costs provided by the other two options. As a
result, one county district attorney charges county administrative
costs to the grant at a rate equal to 43 percent of the total salaries
and wages charged to the grant.
394 California State Auditor Report 2005-406 California State Auditor Report 2005-406 395
We recommended that Insurance reevaluate its regulations
pertaining to how indirect costs are charged to fraud assessment
grants to determine whether the regulations provide the desired
amount of control. The fraud commission and the insurance
commissioner should also seek changes in the regulations if required
and ensure that all county district attorneys that apply for fraud
assessment grants disclose their methods of charging indirect costs.
Insurance Action: Pending.
Insurance reports that it is in the process of developing amended
regulations to require one standardized methodology for all
counties to use when charging indirect costs to program funds.
Fraud Commission Action: None.
The fraud commission did not provide a six-month response
to our report.
Finding #5: The fraud division has not conducted
adequate strategic planning to ensure it has met all its
noninvestigative responsibilities.
Because the fraud division has not conducted adequate strategic
planning, it has not met all its noninvestigative responsibilities and
spends a significant portion of its workers’ compensation antifraud
resources investigating suspected fraud referrals that do not result
in criminal prosecutions by county district attorneys. The fraud
division pays for its workers’ compensation antifraud activities
using its share of the fraud assessment funds—averaging more than
$13 million per year over the five years ending with fiscal year
2002–03—that are levied on California employers.
Lacking a sound strategic plan, the fraud division dedicates
too few of its workers’ compensation fraud resources to the
noninvestigative activities that its statutory responsibilities
demand. For example, the fraud division has put little effort into
conducting the research necessary to measure the magnitude of
the various types of workers’ compensation fraud, a yardstick
that could help the fraud division guide its antifraud approach
and measure its actions and effectiveness in reducing the fraud
problem. Further, the fraud division has not developed the
information on fraud needed to prepare reports for individuals
and entities overseeing the antifraud program, such as the
insurance commissioner, the Legislature, and the fraud
commission. However, the fraud division’s ability to successfully
identify goals and objectives is somewhat limited because, as
396 California State Auditor Report 2005-406 California State Auditor Report 2005-406 397
previously discussed, the fraud commission and the insurance
commissioner have not established a statewide strategy for the
antifraud program.
In addition, our review of workers’ compensation fraud cases
in its case management database reveals that the fraud division
could manage its investigative efforts more effectively. For
example, 87 percent of the referrals of suspected workers’
compensation fraud the division receives do not end up
in the hands of district attorneys for prosecution. Between
September 2001 and December 2003, the fraud division spent
more than 16 percent of its investigative hours on cases that it
closed and did not submit for prosecution. Moreover, based on
past trends, one-third of the hours charged to open cases as of
December 2003 will probably be spent on cases not submitted to
district attorneys for prosecution. Similarly, during the same time
period, the division closed 83 percent of the high-impact, high-
priority cases referred to it without submitting the cases to district
attorneys, frequently citing insufficient evidence as the reason.
To ensure that it fulfills all aspects of its role in the workers’
compensation antifraud program, the fraud division should take
the following steps:
• Recognize its responsibilities beyond investigating fraud by:
(1) conducting the research needed to advise the fraud
commission and the insurance commissioner on the
optimum aggregate assessment needed by the program annually
to fight workers’ compensation fraud, (2) using documented
past performance and future projections to advise on the
most effective distribution of the funds assessed to investigate
and prosecute workers’ compensation fraud, and (3) reporting
on the economic value of insurance fraud and making
recommendations to reduce it.
• Modify its business plan to meet noninvestigative
responsibilities, including establishing appropriate goals and
objectives, activities, and priorities.
• Establish benchmarks to measure its and the district
attorneys’ performance in meeting goals and objectives and
to determine whether the antifraud program is operating as
intended and resources are appropriately allocated.
• Reevaluate the process it has established for insurers and other
state entities involved in employment-related activities to
report suspected fraud. The fraud division should identify the
396 California State Auditor Report 2005-406 California State Auditor Report 2005-406 397
type of referrals and level of evidence it requires to reduce
the number of hours it spends on referrals that it ultimately
does not pass on to county district attorneys for prosecution.
To justify the use of fraud assessment funds, we recommended
that the fraud commission and the insurance commissioner
require the fraud division to conduct a return-on-investment
analysis for the workers’ compensation antifraud program
as a whole and to annually report the results to the fraud
commission and the insurance commissioner.
Insurance Action: Partial corrective action taken.
Insurance reports that it will allocate resources to address fraud
research, trend analysis, and effective funding disbursement
methods, and improved oversight of county grants. Pending
research will result in a plan that Insurance stated would
address the return-on-investment of the anti-fraud program.
Insurance Action: Pending.
In addition, Insurance reports it is taking steps to meet its
noninvestigative responsibilities, including revising its business
plan and realigning its resources as an advisor regarding the
level of funding and the direction of fraud reduction efforts.
Finding #6: Independent audit reports submitted by county
district attorneys participating in the antifraud program do
not assure the fraud division that the district attorneys use
grants of fraud assessment funds appropriately.
Although an audit unit within Insurance conducts reviews
of district attorneys’ use of workers’ compensation fraud
assessment funds that are effective and have resulted in the
detection and recovery of questionable expenditures, the audit
unit’s limited resources hinder its ability to audit all district
attorneys, including those receiving the largest grants. As a result,
the fraud division cannot verify that county district attorneys
receiving grants use the funds in accordance with state law,
Insurance regulations, and the terms of the grant agreements.
To improve the level of assurance contained in the independent
audit reports submitted by county district attorneys regarding
fraud assessment funds being spent for program purposes, we
recommended that the fraud division do the following:
398 California State Auditor Report 2005-406 California State Auditor Report 2005-406 399
• Clarify its expectations for the independent audits by seeking
a change in Insurance regulations that require audit reports
to provide an opinion on county district attorneys’ level
of compliance with key provisions of the applicable laws,
regulations, and terms of the fraud assessment grants.
• Ensure that county district attorneys comply with the
independent audit requirements and submit their audit
reports in a timely manner.
Insurance Action: Partial corrective action taken.
Insurance reports that it is developing amendments to its
regulations to clarify the independent audit requirements
and ensure that county district attorneys comply with
those requirements.
Finding #7: The fraud division does not offer insurers
an effective system for referring suspected workers’
compensation fraud to the fraud division.
An effective fraud referral system is important to the fraud division
because its ability to investigate is dependent on the number
and quality of referrals it receives. Despite a legal requirement
to investigate suspected fraud and to report cases that show
reasonable evidence of fraud, insurers’ frequency of reporting varies
significantly. In fact, some of the larger insurers in the workers’
compensation system reported no suspected fraud referrals in
2001 and 2002. The chief of the fraud division stated that past
regulations poorly defined when insurers should refer suspected
fraud to the fraud division. Insurance and the fraud division have
recently adopted emergency regulations in an attempt to better
define when reporting is required. Additionally, the fraud division
is currently working to increase and improve its monitoring
of insurers’ special investigative units, which are responsible
for reporting fraud. Included in the fraud division’s planned
improvements is developing a new method for auditing the special
investigative units.
Nonetheless, the fraud division’s efforts to ensure that it
receives referrals of suspected fraud from insurers still have
many internal weaknesses. A lack of strategic planning has left
the fraud division’s special investigative audit unit without a
program that effectively targets insurers to achieve maximum
398 California State Auditor Report 2005-406 California State Auditor Report 2005-406 399
compliance with reporting requirements, a standardized
approach to its audits that will ensure an adequate review,
timely reports and follow-up on audit findings, and effective
penalties to promote compliance.
To ensure that it receives the suspected fraud referrals it needs
from insurers to efficiently investigate suspected fraud, we
recommended that the fraud division continue its efforts to
remove the barriers that prevent insurers from providing the
desired level of referrals. Additionally, Insurance should seek
the necessary legal and regulatory changes in the fraud-reporting
process. Barriers to adequate referrals include the following:
• Lack of a uniform methodology and standards for assessing
and reporting suspected fraud.
• Regulations that poorly define when insurers should report
suspected fraud to the fraud division.
• Perceived exposure to civil actions when criminal
prosecutions of referrals are not successful.
Given the number of referrals of suspected fraud cases by insurers
that the fraud division has decided not to investigate because of
a perceived lack of sufficient evidence, the fraud division should
work with insurers to reduce the number of referrals that are
not likely to result in a successful investigation or prosecution,
thereby preserving limited resources. It should also work to
ensure that the referrals that insurers do make contain the level of
evidence necessary for the fraud division to assess the probability
of a successful investigation and prosecution.
Once the fraud division has determined the level of evidence
included with the suspected fraud referrals it needs from
insurers, it should implement a strategy for its special
investigative audit unit to focus the unit’s limited resources on
determining whether insurers are following the law in providing
the referrals the fraud division needs.
400 California State Auditor Report 2005-406 California State Auditor Report 2005-406 401
Insurance Action: Pending.
Insurance points out that it has certain responsibilities under
existing statutes to investigate reported suspected fraud
and reports that it will evaluate its suspected fraud referral
process and evidence standards within the context of those
existing statutes.
Insurance reports that its special investigative unit
management has analyzed staff duties and classified positions
within this unit to better complete reviews in compliance
with government auditing standards. In addition, special
investigative unit staff now use a policy manual to conduct
reviews of insurers, providing for more consistent, accurate,
and timely reviews, and periodic follow-up on audit findings.
Insurance Action: Partial corrective action taken.
Finally, Insurance reports that it has developed a pilot audit
plan utilizing risk factors such as line of business and market
share to develop a more comprehensive audit plan for future
fiscal years.
Legislative Action: Corrective action taken.
Assembly Bill 1227 was chaptered on September 20, 2004,
to provide authority and an appropriate penalty structure
to increase insurance company compliance with special
investigative unit statutes.
Finding #8: The fraud division’s ability to gather identifying
information of potential workers’ compensation fraud is
hampered by other departments’ failure to share it.
The Division of Labor Standards Enforcement (DLSE) within
Industrial Relations investigates violations of certain labor
laws, including the failure to provide workers’ compensation
insurance and benefits to employees. However, the DLSE
does not routinely refer its findings to the fraud division for
consideration of possible criminal prosecution. During 2003, the
DLSE cited nearly 1,300 employers for failing to provide workers’
compensation insurance and benefits for their employees.
Having information on some of these cases, particularly those
involving repeat offenders, might have alerted the fraud division
of noncompliance with the law and helped it detect potentially
fraudulent activities. The fraud division chief told us he has
sought to improve information sharing between the fraud
division and divisions within Industrial Relations.
400 California State Auditor Report 2005-406 California State Auditor Report 2005-406 401
Also, recent legislation required the DLSE, in conjunction with
the Employment Development Department and the Workers’
Compensation Insurance Rating Bureau, to establish a program
to identify employers that fail to secure workers’ compensation
insurance for their employees. This requirement is similar to a
pilot project that demonstrated that such a program provides
an effective and efficient method for discovering illegally
uninsured employers. Industrial Relations’ Division of Workers’
Compensation (DWC) is also required by recent legislation to
implement a protocol for reporting suspected medical provider
fraud and a program to annually warn employers, claims
adjusters and administrators, medical providers, and attorneys
who participate in the workers’ compensation system against
committing workers’ compensation fraud. Notification of the
legal risks is regarded as an important step in deterring fraud.
To help the fraud division investigate employers that fail to
secure payment for workers’ compensation insurance for their
employees, the DLSE should track employers that do not provide
workers’ compensation insurance for their employees and
report to the fraud division any employer that repeatedly fails to
provide workers’ compensation insurance.
To ensure that it effectively targets employers in industries
with the highest incidence of unlawfully uninsured employers,
we recommended that the DLSE establish a process that uses
data from the Uninsured Employers Fund, the Employment
Development Department, and the Workers’ Compensation
Insurance Rating Bureau, as required by law.
To provide a mechanism to allow reporting of suspected medical
provider fraud, the DWC should implement the fraud-reporting
protocols required by law.
To help deter workers’ compensation fraud, the DWC should
warn participants in the workers’ compensation system of the
penalties of fraud, as required by law.
402 California State Auditor Report 2005-406 California State Auditor Report 2005-406 403
Industrial Relations Action: Partial corrective action taken.
Industrial Relations stated that it has entered into a
memorandum of understanding with Insurance to
exchange information concerning uninsured employers.
Industrial Relations reports that it is in the process of
implementing a mechanism to allow reporting of suspected
medical provider fraud. The mechanism will include a
reporting protocol and report form, an internal process
for receiving and screening reports of suspected provider
fraud and routing them to the appropriate licensing and
disciplinary entities or law enforcement agencies, and
efficient and cost effective ways to broadly disseminate the
protocol to the public upon its completion.
Industrial Relations reports that it is also in the process
of implementing the statutory requirement to warn
participants in the workers’ compensation system of the
penalties of fraud.
Industrial Relations Action: None.
Industrial Relations reports that it has not secured funding
to implement a program where data obtained from the
Uninsured Employers’ Fund, Employment Development
Department, and the Workers’ Compensation Insurance
Rating Bureau can be compared to determine employers
potentially operating without workers’ compensation
insurance coverage.
Finding #9: Improvement is needed in the process used to
collect the fraud assessment funds that finance increased
antifraud activities.
The formulas Industrial Relations uses to calculate the workers’
compensation fraud assessment surcharge rates have, in
recent years, consistently resulted in insured employers being
overcharged. In addition, Industrial Relations suspects that
not all insurers correctly report and remit all the workers’
compensation fraud assessment surcharges they collect from
employers. Industrial Relations estimates that a range of roughly
$8 million to more than $13 million has been unreported and
unremitted during 1999 through 2001. However, Industrial
Relations stated it does not have the authority, nor has it
established a process, to verify that insurers remit all of the fraud
assessment surcharges collected from employers.
402 California State Auditor Report 2005-406 California State Auditor Report 2005-406 403
To avoid overcharging the State’s insured employers for the
workers’ compensation fraud assessment, we recommended
that Industrial Relations work with the Workers’ Compensation
Insurance Rating Bureau to improve the accuracy of the
projected premiums for the current year, which it uses to
calculate the fraud assessment surcharge to be collected from
insured employers.
To make certain that insurers do not withhold any portion of
the fraud assessment surcharge, we recommended that Industrial
Relations seek the authority and establish a method to verify
that insurers report and submit the fraud assessment surcharges
they collect from employers.
Industrial Relations Action: None.
Ü Industrial Relations did not address these recommendations
in its six-month response to our report.
404 California State Auditor Report 2005-406
CALIFORNIA’S WORKERS’
COMPENSATION PROGRAM
Changes to the Medical Payment System
Should Produce Savings Although
Uncertainty About New Regulations
and Data Limitations Prevent a More
Comprehensive Analysis
REPORT NUMBER 2003-108.2, JANUARY 2004
Division of Workers’ Compensation, Department of Industrial
Audit Highlights . . . Relations response as of July 2004
Our analysis of medical claims The Joint Legislative Audit Committee (audit committee)
payment data from the State
requested that we review the medical costs related to the
Compensation Insurance Fund
(State Fund) to determine the workers’ compensation insurance system and the extent
extent to which new reforms to which the payment structure has resulted in unacceptably
would have produced savings in
high reimbursement rates. As the audit committee requested, in
workers’ compensation medical
costs had they been in effect August 2003 the Bureau of State Audits released a report of the
during 2002 revealed that: workers’ compensation medical payment system, titled California’s
Workers’ Compensation Program: The Medical Payment System Does
þ Although data limitations
Not Adequately Control the Costs to Employers to Treat Injured Workers
constrained our analysis,
the data we were able or Allow for Adequate Monitoring of System Costs and Patient Care. To
to analyze showed address the audit committee’s request that we focus on payments
that the reforms would
for workers’ compensation medical services that hospitals and
produce savings in the
form of lower payments surgical centers provided and insurance companies (insurers)
for outpatient surgical paid for, we relied on medical payment data from the State
facilities (surgical centers)
Compensation Insurance Fund (State Fund), which paid more for
and pharmaceuticals.
than a quarter of the medical costs related to California’s insured
þ Our analysis of the employers in 2002. However, State Fund was not able to provide us
$14.5 million in surgical with all the information we sought in order to analyze facility fees
center payments resulted
paid to surgical centers and pharmaceutical payments. Therefore,
in a range of potential
savings with a midpoint of we were unable to present this information in our August 2003
approximately $8.5 million, report. As a result, we presented our analysis of payment data in
or 58 percent.
this follow-up report.
continued on next page . . .
Finding: Changes to the state workers’ compensation medical
payment system will cause payments for outpatient surgical
facility services and prescription drugs to drop sharply, but
savings depend on the careful implementation of the medical
payment fee schedules and monitoring of the medical
payment system.
California State Auditor Report 2005-406 405
þ Under the new reforms, Effective January 1, 2004, Chapter 639, Statutes of 2003,
State Fund would have brought major changes to the workers’ compensation medical
saved $18 million
payment system. The new law requires that payments for
(24 percent) on its
services performed in an outpatient surgical facility outside of a
2002 payments for
pharmaceuticals that hospital setting (surgical center) or an outpatient surgical facility
we were able to analyze. in a hospital not exceed 120 percent of the fee for the same
However, if litigation
procedure under Medicare’s ambulatory payment classification
related to the pricing of
Medi-Cal pharmaceuticals (APC) facility fee schedule. The new law also requires that for
is successful, the savings pharmacy services and drugs that Medicare’s APC fee schedule
would be $14.6 million
does not otherwise cover, payments be limited to 100 percent of
(19 percent).
the relevant Medi-Cal fee schedule. Although data limitations
þ Our analysis was limited constrained our analysis, the data we were able to analyze
because the data entered showed that the recent reforms would produce savings in the
into State Fund’s medical
form of lower payments for fees for the use of facilities (facility
bill review file were often
incomplete, individual fees) at outpatient surgical facilities and for pharmaceuticals.
items were summarized
without retaining their
For this second report, we obtained medical payment data from
unique identifiers, and the
State Fund to determine the extent to which the new legislative
database design prevented
certain detailed analysis. reforms would have produced savings in workers’ compensation
medical costs had they been in effect during 2002. Because of
þ The savings we identified
limitations in State Fund’s data, we were able to analyze only
depend on the careful
implementation of the $14.5 million of the $43 million in identifiable facility fee
newly legislated reforms. payments to surgical centers that State Fund processed through
However, according to
its medical bill review database during 2002. Because these
the Division of Workers’
limitations precluded a comprehensive analysis of the data,
Compensation’s (division)
former administrative we used for our analysis Medicare’s ambulatory surgical center
director, his efforts to (ASC) fee schedule, which has only nine groups of procedure
implement reforms
classifications, rather than Medicare’s APC fee schedule, which
have been hampered
has 569 procedure groups. Because the APC fee schedule is more
by hiring freezes and
budget shortfalls. generous overall than the ASC fee schedule, the potential savings
would have been less if we had used the APC fee schedule.
þ The division continues
to lack a comprehensive
database to monitor Our analysis of the $14.5 million in surgical center payments
workers’ compensation resulted in a range of potential savings with a midpoint of
medical payments.
approximately $8.4 million, or 58 percent. The payments State
Fund made to surgical centers was to compensate providers for
the use of the facilities and to pay for the supplemental supplies
and other services related to medical procedures performed.
The physicians who perform the medical procedures are
compensated according to separate fee schedules. Because of
the limitations in State Fund’s medical bill review database, we
had no basis for calculating whether this level of savings would
have been possible in the remaining $28.5 million in payments
State Fund made to surgical centers or in the unknown amount
of settlements it paid to surgical centers as a result of litigated
payments. Therefore, we cannot reliably conclude that the
406 California State Auditor Report 2005-406 California State Auditor Report 2005-406 407
payments we analyzed are representative of State Fund’s total
payments to surgical centers or that the savings we found are
representative of the savings possible in all of State Fund’s
payments to surgical centers. However, we were able to analyze
approximately $76 million, which represents 83 percent of
the total $91.7 million paid for prescription drug purchases in
2002 for which State Fund recorded sufficient information and
estimated that it would have saved $18 million, or 24 percent,
had the new reforms been in place during that year.
Our analysis was limited for three reasons: (1) the data State
Fund entered into its medical bill review database were often
incomplete, (2) individual items were summarized into general
categories and entered into the system without retaining their
unique identifiers, and (3) the database design is such that
certain detailed analysis is impossible. We could not make a
comprehensive estimate of the potential savings associated with
the change in the maximum facility fee payments to surgical
centers that the new law called for because of the manner in
which State Fund collects and classifies facility fee payments it
makes to surgical centers for supplemental items such as drugs
and supplies in addition to the fee it pays for using the facility.
Also, although State Fund often pays surgical centers less than
the amounts billed when it considers the amounts excessive, it
neither tracks the additional litigated settlement payments it
makes—payments that arise from its capping these charges—nor
links such payments to the original payment amounts in the
medical bill review database to reflect the total amount State
Fund pays the surgical centers. We also encountered limitations
in the data related to payments for pharmacy services and drugs.
Lacking such data, we could not compute all of the potential
savings that would have resulted had the new law already been
in effect during 2002.
Although the condition of the data in State Fund’s medical
bill review file limited our analysis of individual payments
to surgical centers, and to a lesser degree payments for
pharmaceuticals, State Fund contends that its data meets its
business purposes and the needs of other research entities.
According to State Fund’s management, “The State Fund’s
databases were designed to allow the State Fund to carry
out our mission to provide workers’ compensation coverage
to California employers and to provide those benefits
due to their injured employees under California’s workers
compensation law. Our databases were not designed for public
policy research purposes. As we recognize the importance of
406 California State Auditor Report 2005-406 California State Auditor Report 2005-406 407
accurate information to further research and study the workers
compensation system we provide data as well as financial and
manpower support to the California Workers Compensation
Institute, the Workers Compensation Insurance Rating Bureau
and the Workers Compensation Research Institute. Our data has
been consistently and successfully used by each organization in
their studies and reports. State Fund databases are fully sufficient
to the task of making and recording accurate compensation
and medical benefit payments. Difficulties encountered in
completing public policy research must be differentiated from
the process of making accurate benefit payments. We are
currently implementing two major claims systems development
initiatives. Upon completion of these initiatives we will realize
a number of business efficiencies. These improvements will
include improved data capture at the detail level that, while not
altering reimbursement amounts, will further increase the value
of the data for research analysis purposes.”
In our analysis of State Fund’s payments to surgical centers
during 2002, we found a number of instances in which a fee
schedule would have standardized payments and resulted in
savings. For example, the average amount State Fund paid
to individual surgical centers for the use of their facilities
sometimes exceeded 300 percent of the Medicare ASC rate,
adjusted to reflect the highest California wage index. In
addition, the State’s official medical fee schedule in place
during 2002 required that State Fund pay a reasonable fee for
a broad range of items, such as drugs and supplies, associated
with outpatient surgical procedures. In some instances, these
supplemental payments far exceeded the facility fees involved.
Medicare’s APC and ASC fee schedules include such items in the
facility fee and do not require separate payment.
Savings may not be fully realized, however, unless the
administrative director of the Division of Workers’ Compensation
(division) ensures that the new reforms are promptly and
effectively implemented. On December 30, 2003, the division’s
former administrative director posted on the division’s Web site
proposed emergency regulations to implement the medical fee
schedules that the law required. On the same day, the former
administrative director submitted the proposed emergency
regulations to the Office of Administrative Law for review and
approval. These proposed regulations attempt to address the issues
we identify in this report relating to implementing the newly
mandated payment system for services that surgical centers
408 California State Auditor Report 2005-406 California State Auditor Report 2005-406 409
performed, including capping payments at fee schedule amounts
and bundling the amounts that insurers pay for drugs and
supplies into the facility fee.
Nonetheless, the emergency regulations that the administrative
director proposed do not assure the permanent successful
implementation of the workers’ compensation payment
system that the new law mandated. Assuming that the Office
of Administrative Law accepts the regulations as written, the
emergency regulations will remain in effect for only 120 days.
Prior to their expiration, the administrative director must either
provide permanent regulations, along with a statement that the
regulations comply with all regular rule-making procedures, to
the Office of Administrative Law or request that it approve the
readoption of the emergency regulations. Therefore, the savings
that will result from the payment system that the new law requires
will remain unknown until the Office of Administrative Law
finalizes and approves the emergency regulations and providers,
insurers, and claims administrators who participate in the workers’
compensation program interpret and implement them.
Having adequate and reliable medical payment data is critical
to any attempt to analyze and monitor how well the workers’
compensation system delivers quality care to injured workers at
costs that the law allows, as well as to efforts to track the effect of
policy changes on the system’s performance and costs. However,
based on the findings in our first report on California’s workers’
compensation medical payment system and the knowledge we
gained regarding State Fund’s medical bill review database during
this review, we found that California does not have a database
of workers’ compensation medical payments that can provide
detailed and reliable data for such analysis and monitoring. The
division’s former administrative director told us that the State’s
hiring freeze and budget shortfalls have hampered his efforts to
implement workers’ compensation reform.
The division is currently developing a workers’ compensation
database, the Workers’ Compensation Information System,
intended to provide the type of information the division needs
to analyze and monitor system performance. However, both the
division’s survey of insurers and our own analysis of the medical
payment data that State Fund provided revealed that both State
Fund’s and the other insurers’ data files appear to be incomplete
or the data in the files are inaccurately and inconsistently
classified. Therefore, neither the insurers nor the division—once
these data are reported—will be able to use the data to make
informed decisions.
408 California State Auditor Report 2005-406 California State Auditor Report 2005-406 409
We recommended that to fully realize the savings from the new
reforms to the workers’ compensation medical payment system,
the division’s administrative director must continue to provide
the workers’ compensation community with the ongoing
education and guidance that will ensure that the reforms are
promptly and effectively implemented.
The division should ensure that the medical payment data it
collects in the Workers’ Compensation Information System
provides the specific information the division needs to
adequately monitor medical payments for compliance with the
payment system and for the effectiveness of policy decisions.
Specifically, the division should first clearly define the data
elements it requires from insurers and claims administrators;
second, it should obtain the medical payment data using a
standardized reporting instrument, which will ensure that
insurers and claims administrators consistently and completely
report the data in such a way that it will be useful for the
division’s analysis and monitoring.
Department Action: Partially implemented.
The Department of Industrial Relations (department)
reports that it is currently focusing its attention on the
implementation of the reforms from four legislative bills.
Included in those bills are changes regarding the workers’
compensation system’s official medical fee schedule and
medical treatment utilization. In addition, the department
reports that it is implementing standardized billing forms
and electronic billing. The department states that it has
completed formal rulemaking for the official medical fee
schedule and posted the final regulations on the division’s
Web site.
The department reports that it has adopted the interim
medical treatment utilization standards required by
legislative reform and has contracted for a study to identify
a permanent medical treatment utilization schedule. It
anticipates beginning the formal rulemaking process to
adopt a permanent utilization schedule in the fall of 2004. In
addition, the department states that it is continuing its efforts
to implement standardized electronic billing procedures and
expects full implementation by January 1, 2006.
410 California State Auditor Report 2005-406 California State Auditor Report 2005-406 411
The department reports that it is continuing to implement
its workers’ compensation database, the Workers’
Compensation Information System (WCIS), intended to
provide the type of information the division needs to
analyze and monitor system performance. The department
reports that it has met with its advisory committee for the
development of the WCIS to discuss draft regulations. In
addition, it has established a task force to refine the list of
data elements needed to accomplish the goals of the system
and work through technical issues for implementation
of data reporting. The department reports it anticipates
implementing medical data reporting regulations effective
June 30, 2005.
410 California State Auditor Report 2005-406 California State Auditor Report 2005-406 411
412 California State Auditor Report 2005-406
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 October 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 2005-406 413
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
414 California State Auditor Report 2005-406 California State Auditor Report 2005-406 415
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: Corrective action taken.
Industrial Relations notes that the user funding provided
by Chapter 639, Statutes of 2003, and the support of
the governor to properly fund the division through the
budget process are providing the essential resources
needed to implement legislative reforms to the workers’
compensation system.
Industrial Relations states that recent legislative reforms
were designed to address the issues that have been identified
by stakeholder groups and research organizations. Further,
the department states that the current administration is
committed to implementing the reforms, monitoring the
effect of the reforms, and pursuing further legislative change
as the need becomes apparent.
Finally, Industrial Relations states that the Labor and
Workforce Development Agency and the division worked
very closely with the Legislature and the Governor’s Office on
the proposals that were included in the 2003 reforms.
Legislative Action: Legislation passed.
Chapter 639, Statutes of 2003 (Senate Bill 228), eliminates
funding for the administration of the workers’ compensation
program from the General Fund and establishes funding
through surcharges levied on employers.
414 California State Auditor Report 2005-406 California State Auditor Report 2005-406 415
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.
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.
416 California State Auditor Report 2005-406 California State Auditor Report 2005-406 417
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
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 states that the division is awaiting the
completed survey required by Chapter 639, Statutes of
2003, mentioned below. When the division receives the
final results of the survey, it will immediately initiate an
emergency rulemaking action to adopt the utilization
treatment schedule.
Legislative Action: Legislation passed.
Chapter 639, Statutes of 2003 (Senate Bill 228), eliminates
the medical council and requires that the commission survey
and evaluate nationally recognized standards of care and
report to the administrative director its recommendations
for adopting a medical treatment utilization schedule. This
chapter also requires the administrative director to adopt
a medical treatment utilization schedule, based on the
recommendations of the commission that, at a minimum,
provides recommended guidelines for the frequency,
duration, intensity, and appropriateness of treatment for
workers’ injuries or illnesses.
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
416 California State Auditor Report 2005-406 California State Auditor Report 2005-406 417
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
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.
418 California State Auditor Report 2005-406 California State Auditor Report 2005-406 419
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.
Industrial Relations’ Action: Partial corrective action taken.
The department points out that when the division adopts
the new utilization schedule required by Chapter 639,
Statutes of 2003, that statute also mandates that the
schedule will be presumptively correct on the issue of extent
and scope of medical treatment. This Labor Code change
ensures that all insurers and claims adjusters are required
to follow the standardized treatment guidelines and that
treatment guidelines are accepted in judicial proceedings.
The department further states that the division is in the
process of amending its regulations to set parameters for
the establishment and operation of utilization programs to
ensure the standardized treatment guidelines are applied in
an appropriate and timely manner.
Legislative Action: Legislation passed.
Chapter 639, Statutes of 2003 (Senate Bill 228), establishes
that the guidelines in the medical treatment utilization
schedule adopted by the administrative director shall be
presumptively correct on the issue of extent and scope of
medical treatment. This chapter further establishes that this
presumption of correctness is rebuttable and the guidelines
may be deviated from when evidence demonstrates that
alternative treatment is reasonably required to cure and
relieve the effects of workers’ injuries or illnesses. Further,
this chapter requires employers to establish a treatment
utilization review process that contains policies and
procedures to ensure that proposed treatments to cure
and relieve workers’ injuries and illnesses are based on the
medical treatment utilization schedule adopted by the
administrative director.
418 California State Auditor Report 2005-406 California State Auditor Report 2005-406 419
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.
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
420 California State Auditor Report 2005-406 California State Auditor Report 2005-406 421
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:
• 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.
420 California State Auditor Report 2005-406 California State Auditor Report 2005-406 421
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: Corrective action taken.
Industrial Relations points out that legislative reforms
passed in 2003 mandate the payment schedules for medical
treatment and equipment to be provided to injured or ill
workers in the workers’ compensation system. Industrial
Relations further states that the legislative reforms reduced
the existing fee schedule for physician services by 5 percent
and will remain in effect until January 1, 2006, at which
time the division has the authority to adopt a new physician
fee schedule. Industrial Relations states that the division
is recruiting a medical director to manage its medical unit
and assist the division in implementing legislative reforms
and develop further fee schedules to cover all medical services.
Finally, Industrial Relations states that it will study the
feasibility of securing rebates from drug manufacturers for
pharmaceuticals dispensed in workers’ compensation cases.
However, it notes that because workers’ compensation is
not a single-payer system it may be limited in its ability to
negotiate lower pharmaceutical prices.
Legislative Action: Legislation passed.
Chapter 639, Statutes of 2003 (Senate Bill 228), requires that
the administrative director adopt and revise periodically a
medical fee schedule that establishes reasonable maximum
fees for medical services other than physician services,
drugs and pharmaceutical services, and certain other
specified medical services. This chapter further requires the
administrative director to contract with an independent
consulting firm to perform an annual study of access
to medical treatment for injured workers and make
appropriate adjustments to the medical fees schedules to
ensure injured workers’ have sufficient access to quality
health care or products.
422 California State Auditor Report 2005-406 California State Auditor Report 2005-406 423
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,
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
422 California State Auditor Report 2005-406 California State Auditor Report 2005-406 423
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.
Industrial Relations’ Action: Partial corrective action taken.
Industrial Relations reports that the division is continuing
to work with the Industrial Relations’ Information Systems
Unit, the WCIS advisory committee, and a special task force
to refine the list of data elements needed to accomplish the
goals of the system and to work through technical issues
for implementation of data reporting. The division projects
it will implement its regulations for data reporting by
June 20, 2005.
424 California State Auditor Report 2005-406
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 May 2004
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 2005-406 425
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 May 2004, it reported that as of
April 2004 the backlog count was 604. Although the
backlog number is higher than the goal of 400, the State Bar
stated it is working on bringing the backlog number back
to the 250-400 range by the end of the year. As of May 2004,
the State Bar plans office-wide to transfer two investigations
per investigator to the backlog team to assist in reducing the
backlog. In addition, it transferred an investigator position
from the Los Angeles office to the San Francisco office to
assist in lowering the number of cases that “roll-in” to
backlog in the San Francisco office.
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
426 California State Auditor Report 2005-406 California State Auditor Report 2005-406 427
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.
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 complaint files. It also is
continuing the implementation of a computer verification
system. With automation complete for the Intake Unit,
computer verification for the Investigations and Trials units
will be completed with the installment of the new graphical
user interface for the systems. In addition, beginning
November 2003 supervising attorneys have been spot-
checking closures every month to verify that files include
closing letters and detailed closing memos. The State Bar also
continues to employ the internal random review process
twice a year for the appropriateness of file resolutions. In
addition, it continues to utilize the second-look process to
ensure that resolutions are appropriate. The second-look
process is in place for complainants who ask for review of
the closure of their complaint.
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
426 California State Auditor Report 2005-406 California State Auditor Report 2005-406 427
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
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 Action: Corrective action taken.
The State Bar reported that in 2003 it was successful in
obtaining amendments to sections 6086(a) and 6140.5(d)
of the Business and Professions Code to provide that orders
of the California Supreme Court or the State Bar Court
imposing disciplinary costs or reimbursements to the Client
Security Fund may be enforceable as money judgments.
These changes in the law granted to the State Bar inherent
authority to pursue civil remedies in the superior courts
distinct from its reinstatement proceedings. The State Bar
created a working group to establish the processes necessary
to implement these new statutes. The State Bar reported that
the unique nature of its proceedings posed several procedural
and logistical issues. For example, it required consultations
with other state agencies with similar statutory authority to
collect administrative awards as money judgments in the
superior courts. The State Bar also reported that proposed
changes to the California Rules of Court and to the Rules
of Procedures of the State Bar have been drafted and are
awaiting further action pending completion of the 90-day
public comment period. In addition, it is reviewing with
staff of the Supreme Court and Judicial Council other
provisions of the California Rules of Court to determine if
any other amendments will be necessary.
428 California State Auditor Report 2005-406 California State Auditor Report 2005-406 429
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
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.
The State Bar reported that in September 2003 the governor
signed Assembly Bill 1708 (AB 1708) that authorizes the
State Bar to collect up to $390 in annual membership fees
for 2004. This one-year authorization maintained the same
fee level that has been in effect since 2001. The State Bar also
reported that AB 1708 amended an existing statute to restrict
eligibility for member fee scaling when it showed that there
were members with income in six figures who nonetheless
scaled and reduced their 2004 payments on grounds that
this income was not from the practice of law. The State Bar
initially forecast that changes to the scaling provision would
428 California State Auditor Report 2005-406 California State Auditor Report 2005-406 429
generate $1.1 million in additional revenue. However, the
amount was $450,000—less than had been anticipated. The
State Bar performed a random audit of 100 members who
scaled their 2003 fee and found that 9 percent of the sample
either would not submit a copy of their tax return or were
found to be not eligible to scale their fee, and therefore
paid their 2003 fee in full. The State Bar is proposing that
its board of governors authorize another more expansive
audit of members who have scaled in 2004 to determine if
there still exists a significant number of members who may
be abusing the scaling provisions. Also, in deference to the
State’s current dire fiscal condition, the State Bar is currently
seeking a one-year fee bill that would maintain mandatory
dues at $390 for the 2005 billing year.
430 California State Auditor Report 2005-406
CALIFORNIA MILITARY DEPARTMENT
Improper Payments to Employees
ALLEGATION NUMBER I2002-1069 (REPORT I2004-2),
SEPTEMBER 2004
California Military Department response as of July 2004
We investigated and substantiated an allegation
that the California Military Department (Military
Department) improperly granted employees an
Investigative Highlight . . . increase in pay they were not entitled to receive.
Over a two-year period, the
Military Department paid Finding: The Military Department overpaid its
employees at two of its three
employees $128,400.
training centers $128,400
more than they were entitled Between July 1, 2001, and June 30, 2003, 19 employees at two
to receive.
of the Military Department’s three training centers received
increased pay associated with inmate supervision even though
they did not supervise inmates for the minimum number of
hours required to receive the pay. For the two years we reviewed,
the Military Department paid its employees at two of the
training centers approximately $128,400 more than what they
were entitled to receive. We were unable to determine to what
extent, if any, the Military Department’s third training center
also improperly granted its employees the increased pay because
it was not able to provide supporting documents for 23 of the
24 months we requested. At least 10 of its employees received
the pay increase at some time during the two-year period.
Military Department Action: Corrective action taken.
The Military Department agreed with our findings and
reported that it has implemented changes to correct
the problems identified. Specifically, it reported that it
has returned all employees receiving the pay increase to
their original pay level and implemented a policy at all
three training centers for certifying when employees are
eligible for the pay increase. The Military Department also
implemented a policy that requires the training centers to
maintain employee compensation documentation for two
years. Further, the Military Department reported that because
its personnel costs for the training centers are reimbursed by
the United States Property and Fiscal Officer for California
California State Auditor Report 2005-406 431
(USPFO), the State has, in effect, already been reimbursed
for the overpayments; thus it will not pursue reimbursement
from the employees who improperly received the increased
pay. The Military Department provided a copy of our report
to the USPFO, which has the authority to recoup or waive
the overpayments from the State.
432 California State Auditor Report 2005-406
CALIFORNIA UNEMPLOYMENT
INSURANCE APPEALS BOARD
Investigations of Improper Activities by
State Employees, July 2003 Through
December 2003
ALLEGATION I2003-0836 (REPORT I2004-1),
MARCH 2004
California Unemployment Insurance Appeals Board response
as of January 2004
We investigated and substantiated an allegation that
the California Unemployment Insurance Appeals
Investigative Highlight . . . Board (Appeals Board) improperly contracted with
one of its employees.
The Appeals Board violated
state law when it agreed to Finding: In violation of state law, the Appeals Board paid
allow an employee to work
one of its employees $13,579 for interpreting and translating
as a contractor as long as
services she provided between September 2002 and
she performed work on her
own time. July 2003.
In 1998 an Appeals Board official notified other board officials
that employees were not allowed to enter into contracts with the
Appeals Board. Nevertheless, the employee sought and received
permission from her superiors to work as a contractor as long
as she performed the work on her own time. The employee’s
manager told us he had not received the 1998 notification and
was unaware of the prohibition. However, officials are expected
to be aware of the laws they are charged with administering.
Appeals Board Action: Corrective action taken.
The Appeals Board told the employee she would no longer
be able to contract with the State. It also stated that it was
apparent the situation occurred because the employee’s
manager was not aware that employees were prohibited from
contracting with the State. This prohibition is now covered
in the Appeals Board’s mandatory ethics training program.
In addition, the executive director met with the manager to
review office procedures and provided him with a counseling
memorandum regarding the specific breach of rules.
California State Auditor Report 2005-406 433
434 California State Auditor Report 2005-406
CITY OF RICHMOND
Poor Spending Decisions and Weak
Monitoring of Its Finances Caused Its
Financial Decline and Hinder Its Ability
to Recover
REPORT NUMBER 2004-117, DECEMBER 2004
Audit Highlights . . .
City of Richmond’s response as of December 2004
Our review found that the city
of Richmond’s (city) financial In March 2004, during its midyear review of fiscal year
health deteriorated because it:
2003–04, the city of Richmond (city) announced it had spent
þ Significantly increased $14.5 million more than it took in to the general fund during
employee salaries and fiscal year 2002–03 and that it needed $35.2 million in cash to cover
retirement benefits without
negative cash amounts in the general fund and in other funds.
ensuring it would have
adequate funds to pay
for them. The Joint Legislative Audit Committee requested that the Bureau
of State Audits conduct an audit of the financial records and
þ Agreed to increase some
accounting systems of the city, focusing on the factors that
salaries to exceed those
of other cities without contributed to the city’s financial crisis. We found the following:
knowing what the amounts
would be and without
limiting the increases. Finding #1: High-cost agreements with employee unions
forced personnel layoffs and cuts to vital public services.
þ Underestimated how
much it would spend
By agreeing to large increases in employee salaries and benefits,
out of its general fund,
Richmond shrank its financial assets and jeopardized its
sometimes intentionally,
and delayed making financial stability to the extent that major cuts were required
spending reductions. in city services, including fire and police protection. In fact
the city raised salaries by 16 percent to 27 percent for most
þ Relied on inaccurate
reports to monitor and employees between fiscal years 2000–01 and 2002–03 and in
adjust the budget. some cases, retirement benefit costs exceed 30 percent of what
it pays employees in salaries. Between 1998 and 2003, the city
Since March 2004 the city
has taken steps to improve its council agreed to base its salaries for public safety employees
financial health and how it (police officers and firefighters) on the salaries that certain
monitors its finances.
other cities in the Bay Area would be paying at future points
in time. However, Richmond did not know the exact amounts
the other cities would be paying and did not limit how much it
would raise salaries. Moreover, the enhanced retirement benefits
the city council approved drastically increased payments the
city must make to the retirement system both now and in the
foreseeable future. Although the city council was informed of
the impending increases in retirement contribution rates, it
did not take steps to set money aside to stabilize its costs when
California State Auditor Report 2005-406 435
funds were available or require its employees to pay into the
retirement system. Because the city’s costs increased rapidly
while its revenues did not, the city has laid off 250 of its staff
since March 2003, drastically cut funds to some of its programs,
and diminished its reserves.
To ensure that the city has sufficient funds to meet its
operating costs and does not spend more than it can afford, we
recommended that Richmond do the following:
• When negotiating agreements with its employee unions,
consistently analyze salary and benefit increases to determine
the long- and short-term effects the increases will have on the
city’s budget.
• Cease raising salaries based on amounts outside the city’s
control. If the city chooses to continue to base its salaries on
those of other cities, it should ensure that its agreements with
employee unions include limits on the amounts the city will
raise the salaries.
• Evaluate other options the city may have to reduce its
retirement costs, such as offering different retirement benefits
to employees it hires in the future.
• Continue exploring ways to reduce the city’s expenditures as
outlined in its March 2004 corrective action plan, including
having the employees share in the added cost of enhancing
retirement benefits.
We also recommended that the city establish a policy to set funds
aside for fluctuations in its contributions to the retirement system.
This policy should specify the conditions under which the city
contributes to the stabilization fund and when it may use the funds.
City Action: Pending.
Although it did not address corrective action specific to
these recommendations in its response, the city stated it is in
general agreement with the recommendations.
Finding #2: Richmond’s revenue decreased while its
expenditures increased.
Between fiscal years 2000–01 and 2002–03, Richmond’s total
revenue decreased by almost 2 percent and total expenditures
increased by nearly 17 percent. Consequently, Richmond started
436 California State Auditor Report 2005-406 California State Auditor Report 2005-406 437
spending more money out of its general fund than it was
receiving in revenue, beginning in fiscal year 2002–03. By the
time Richmond adopted its fiscal year 2003–04 budget, the city
announced that to operate within the budget and to maintain
current programs required increased revenues. The city’s
expectation that it would achieve adequate revenue increases
in time to pay its increased costs was unreasonable because
significant revenue increases such as an increase to the sales tax,
often require voter approval, making it impossible for the city to
collect the new revenue immediately.
We recommended that to meet the challenges of a budget
deficit, the city should first consider reducing its expenditures,
which is more immediate than increasing its revenues. If the city
creates a new revenue source to eliminate the deficit, it should
match the increases to the period in which they will likely occur.
City Action: Pending.
Although it did not address corrective action specific to
these recommendations in its response, the city stated it is in
general agreement with the recommendations.
Finding #3: Richmond sometimes used one-time revenues
and its reserves to pay for ongoing expenses.
The city’s budget for fiscal year 2004–05 shows that without
$6 million in one-time revenues, the city’s spending would
exceed its revenues. Specifically, Richmond has accelerated the
repayment of the remaining $6 million balance of a loan it made
to the Richmond Redevelopment Agency. The redevelopment
agency paid the entire balance on October 28, 2004, and the city
plans to use those funds for the city’s normal operating expenses
in fiscal year 2004–05. Because the one-time revenue source will
not exist in future years and the city expects certain costs to
increase, the city projects that expenditures will exceed revenues
in its general fund by $6.6 million in fiscal year 2005–06,
assuming that the city receives no new revenues.
Governments often maintain reserves to cover economic
uncertainties or assist with cash flows. Reserves typically act as a
holding account to provide resources for periods of uncertainty
or to help cover unexpected costs, such as damage from a
natural disaster. Richmond has a policy to maintain reserves at
5 percent of the general fund expenditure budget. However, it
has not always enforced this policy and has sometimes used its
436 California State Auditor Report 2005-406 California State Auditor Report 2005-406 437
reserves to pay for ongoing expenses. This is an unsound practice
because it leaves no money either to continue the programs or to
replenish the reserves. The city is currently working on a plan
to accumulate money over time to fund a contingency reserve to
use for items such as infrastructure failures.
Richmond is currently working on ways to increase its
revenues and decrease its expenditures. For example, Richmond
opted to place a half-cent increase in the sales tax on the
November 2004 ballot that the voters approved. Additionally,
in November 2004, the city reached agreements with five of its
six employee unions and is imposing conditions on the sixth
that result in members of all unions paying the entire share of
the employees’ retirement contribution by July 1, 2005.
We recommended that to ensure that the city does not
operate outside its means and that it has funds available for
contingencies, the city should take the following steps:
• Establish a policy that delineates how the city may use
one-time revenues and discourages using them to fund
ongoing operations.
• Reevaluate and reestablish its policy for building and
maintaining reserves for specific purposes, such as
contingencies and economic uncertainties. The policy should
indicate when it is appropriate to use the reserves. Once it
has established a reserves policy, the city should follow it and
continue with its plans to fund the reserve within five years.
City Action: Pending.
Richmond did not address corrective action specific to all the
recommendations in its response. However, the city stated
that a proposal to adopt a policy that one-time revenues will
not be used as a source of funding for continuing programs
and activities was to be presented to the city council for
action at its meeting on November 30, 2004.
Finding #4: Richmond adopted an imperfect budget without
acting to reduce its costs for fiscal year 2003–04.
To balance its budget for fiscal year 2003–04, the city
intentionally underestimated some of its expenditures and
delayed immediate reductions to its costs. Specifically, when
438 California State Auditor Report 2005-406 California State Auditor Report 2005-406 439
the city council adopted the budget for fiscal year 2003–04
on July 1, 2003, the city council and the city manager then in
office discussed that the budget’s spending estimates were not
adequate to sustain the city’s programs at their current levels
and that making significant spending reductions or increasing
revenues was necessary. To help balance the budget, the city
included only 80 percent of what the fire department expected
to spend. However, rather than taking immediate action, such
as laying off public safety personnel, the city council passed the
imperfect budget and planned to revisit the budget six months
later. The city began to reduce its spending in December 2003.
However, those cost-cutting measures came too late because in
fiscal year 2002–03, before the city council adopted the budget,
the city had already spent significantly more than it had.
We recommended that Richmond budget for all likely
expenditures and not knowingly adopt budgets that reflect
inaccurate estimates of expenditures or revenues. If the city
needs to reduce expenditures to balance the budget, it should
promptly take cost-cutting measures.
City Action: Pending.
Although it did not address corrective action specific to
these recommendations in its response, the city stated it is in
general agreement with the recommendations.
Finding #5: Richmond did not budget enough for its
personnel costs, its workers’ compensation insurance and
general liability insurance costs, and bond payments.
Although the city adopted seemingly balanced budgets for fiscal
years 2002–03 and 2003–04, the budgets were flawed because
they contained inaccurate estimates of the city’s personnel costs,
costs for workers’ compensation insurance and general liability
insurance, and bond payments. Because of these inaccuracies,
the adopted budgets did not expose the city’s overspending. The
city used its general fund for expenditures and transfers to other
funds that deviated significantly from the city’s original budget
estimates for fiscal year 2002–03. Consequently, the city spent
more of its general fund than it took in, and the city estimated
in the middle of fiscal year 2003–04 that, without corrective
action, the city would overspend again.
438 California State Auditor Report 2005-406 California State Auditor Report 2005-406 439
To reestablish the value of the budget as an essential planning
tool, we recommended that Richmond take the following steps:
• Continue using its new centralized process to budget for
personnel and periodically comparing the positions on its
position control listing to its current staff.
• When budgeting for the city’s insurance costs, the city should
follow its plan to ensure that it budgets for the total costs of the
insurance, rather than just the cash cost. Additionally, the city
should follow its plan to rebuild its insurance funds’ assets.
• Continue using the payment information in its bond
payment schedules when budgeting for bond payments.
City Action: Pending.
Although it did not address corrective action specific to
these recommendations in its response, the city stated it is in
general agreement with the recommendations.
Finding #6: Richmond’s budget monitoring was inconsistent
and flawed.
The finance department’s quarterly and midyear reports, which
it provides to the city council to monitor the budget, should
have indicated what the budgets did not: that Richmond’s
outflows would exceed its inflows. However, the reports from
the finance department for fiscal year 2002–03 did not disclose
that information. Instead, the updated spending estimates the
finance department reported to the city council incorrectly
showed that the city could afford the increases using reserve
funds. The department’s calculations of the city’s general fund
reserves were incorrect, mostly because they did not include
all outflows, such as transfers from the general fund to other
funds. The quarterly and midyear reports also did not show
other indicators of the city’s financial troubles, such as the cash
position of the city’s individual funds and losses in other funds,
including its workers’ compensation and general insurance
funds. Although Richmond has taken steps to improve its
monitoring procedures, to some extent the problems continued
throughout fiscal year 2003–04.
If the city council members had taken training in public finance,
they might have been better prepared to ask questions about
inconsistencies in the finance department’s reports. However,
440 California State Auditor Report 2005-406 California State Auditor Report 2005-406 441
city council members are not required to have public finance
training. If city council members do not fully understand
information that city management staff present to them in
reports or during council sessions, they could fail to recognize
discrepancies and make decisions based on inaccurate information.
To improve the quality of the financial information that the
city council uses to make budget changes during the year, we
recommended that Richmond’s finance department take the
following steps:
• Monitor the amount of reserves that the city has during the
year, using a method that includes all inflows and outflows.
• Include information on the status of other city funds, not just
the general fund, in its quarterly and midyear reports.
To ensure the city council is prepared to ask questions related
to the information the finance department provides, we
recommended that Richmond consider adopting a policy
requiring city council members to periodically receive training
related to public finance.
City Action: Pending.
Although it did not address corrective action specific to
these recommendations in its response, the city stated it is in
general agreement with the recommendations.
Finding #7: Richmond did not monitor the cash position of
its funds.
Like many other local governments, the city maintains a large
portion of its cash in a pooled cash account. Many of the city’s
funds, including the general fund, operate out of the pooled
cash account. In March 2004, Richmond announced that at the
end of June 2003, several of the city’s funds had negative cash
amounts. Because all the city’s funds, other than the general
fund, have limitations on their use, a fund with a negative
cash amount would look to the general fund to cover any cash
shortage. Therefore, it is important that the city monitor all its
funds’ shares of the pooled cash account. However, Richmond
did not have an adequate process to monitor each fund’s share
of the pooled cash account until May 2004. Prior to that time,
the city’s finance department reconciled the total pooled cash
on its general ledger to the bank statement for each month.
440 California State Auditor Report 2005-406 California State Auditor Report 2005-406 441
These reconciliations were not adequate to monitor the cash
position of the city’s funds for two reasons: The procedures did
not require staff to reconcile each fund’s share of cash to the
pooled cash account, and the city did not consistently reconcile
its pooled cash account within a reasonable amount of time
after the end of the month.
In May 2004 the finance department created reports of cash
balances of the individual funds to show each fund’s claim
on the pooled cash account. These reports clearly show funds
with negative cash amounts. By reviewing this information
frequently, the finance department will know when certain
funds are low in cash and can notify the city council.
We recommended that Richmond’s finance department perform
prompt reconciliations of its pooled cash account. We also
recommended that the finance department regularly review the
report on the cash balances of city funds that the department
created in May 2004 and share this information with the city
council in its updates.
City Action: Pending.
Although it did not address corrective action specific to
these recommendations in its response, the city stated it is in
general agreement with the recommendations.
Finding #8: Late audited financial statements impaired the
city council’s ability to protect Richmond’s financial health.
For fiscal years 2001–02 and 2002–03, the city’s audited financial
statements disclosed its weakened financial condition: The cash
balances of several funds were declining and deficits existed.
However, the city did not have audited financial statements for
fiscal year 2001–02 until 10 months into the next fiscal year,
and audited financial statements for fiscal year 2002–03 were
not completed until more than eight months after the end of
the fiscal year. Lacking timely financial statements, neither city
staff nor the city council had the information regarding deficits
they needed to make the appropriate management decisions
to improve Richmond’s financial condition. As laid out in his
September 2004 assessment of actions needed to stabilize the
city’s fiscal structure, the interim city manager is planning
to implement a policy requiring the city to issue its financial
statements by the end of the calendar year.
442 California State Auditor Report 2005-406 California State Auditor Report 2005-406 443
To ensure that the city council has adequate time to respond to
financial information presented in the audited financial
statements, we recommended it adopt, as a policy, the interim
city manager’s recommendation to issue statements by the end
of the calendar year.
City Action: Pending.
The city stated that a proposal to adopt a policy that the annual
financial audit, for each preceding fiscal year, be completed
by the end of the calendar year was to be presented to the city
council for action at its November 30, 2004, meeting.
442 California State Auditor Report 2005-406 California State Auditor Report 2005-406 443
444 California State Auditor Report 2005-406
LOS ANGELES COUNTY METROPOLITAN
TRANSPORTATION AUTHORITY
It Could Use Certain Recommended
Management Tools to Improve Its
Oversight of Legal Contracts, and Its
Efforts Resulted in the Award of a Large
Construction Contract Within Budget
Audit Highlights . . .
REPORT NUMBER 2003-119, JULY 2004
Our review of the Los Angeles
County Metropolitan Los Angeles County Metropolitan Transportation Authority’s
Transportation Authority’s
response as of October 2004
(MTA) oversight of outside
counsel found that:
The Joint Legislative Audit Committee directed the
þ Its contracts generally Bureau of State Audits to review the Los Angeles County
include recommended
Metropolitan Transportation Authority’s (MTA) legal and
management tools,
such as case plans and procurement practices. Specifically, the audit committee asked
budgets; however, case us to compile and note trends in MTA legal costs, to determine
files often did not contain
the sufficiency of the MTA’s oversight of its outside legal counsel
evidence of them.
and associated costs, and to review the reasonableness of legal
þ Errors related to lack of expense billings.
required documentary
support or to billing
rates amounted to only Finding #1: The MTA does not use certain recommended
1 percent of tested costs.
managements tools in its oversight of legal contracts.
þ A task-based billing
The MTA could improve the oversight of its legal costs by
format would, however,
requiring the county of Los Angeles, Office of the County
aid in the review of
invoices by allowing for Counsel (County Counsel), to fully implement recommended
a quick determination of management tools included in its contracts with outside
how much outside counsel
counsel. County Counsel represents the MTA in transactional
spent on particular efforts.
matters such as drafting and reviewing contracts, provides
þ Finally, there was often advice on all legal issues in outstanding legal cases, and
a lack of written prior
monitors outside counsel—contract lawyers who represent the
approvals for the use and
MTA in a variety of litigation and transactional matters.
cost of consultants and
expert witnesses.
The MTA could benefit from the use of case plans and budgets,
The MTA took actions
which provide a blueprint for the conduct of cases and allow
to award a construction
contract for its Metro Gold an evaluation of the reasonableness of billed legal costs by
Line Eastside Extension project providing cost estimates with which they may be compared.
within budget by revising the
However, most case files relate to legal matters, other than
project scope and reducing
other project costs. workers’ compensation and public liability/property damage,
held no evidence of case plans or budgets covering each phase
California State Auditor Report 2005-406 445
of the case. In addition, most public liability/property damage
cases we tested contained no budget revisions as is required
for cases that exceed their budget. Further, outside counsel for
workers’ compensation cases are not required to submit budgets.
To more effectively monitor outside counsel, the MTA, in
conjunction with County Counsel, should require outside
counsel to prepare flexible case plans and budgets detailed by
phase, as well as budget revisions where outside counsel expect
costs to exceed budgets.
Ü MTA Action: None.
The MTA says that it has found attempts to develop detailed
case management plans and life of the case budgets for large,
complex cases to be a waste of time and money because
it believes it is impossible to predict with any degree of
precision how the case will proceed over an extended period.
Nevertheless, the MTA says that it is willing to consider
attempting to use these tools in large, complex cases where it
appears they will offer some benefit. However, it says that no
new large, complex cases have been filed against it since the
issuance of the audit.
Finding #2: Although outside counsel generally adhered
to billing guidelines, the MTA and county counsel could
improve their oversight in certain areas.
Although legal costs are detailed for legal services and related to
the appropriate cases, a task-based billing format for invoices—
which uses standardized billing codes for legal tasks—would
aid in the analysis of legal fees (costs related to attorneys and
paralegals working on a case). This would allow for a quick
determination of how much outside counsel spent on particular
tasks such as preparing briefs or depositions. A task-based format
can provide for a more meaningful review of legal fees and can
also lead to better-informed discussions with outside counsel,
potentially allowing improved quality of services. Although
we saw no evidence of such a task analysis, both the MTA and
County Counsel appeared to enforce most billing rates and
to thoroughly review invoiced legal expenses (other goods
and services incurred by law firms, such as the costs of expert
witnesses and consultants). Errors related to billing rates or to
a lack of documentary support amounted to only 1 percent of
the legal fees and expenses we tested. The MTA and County
446 California State Auditor Report 2005-406 California State Auditor Report 2005-406 447
Counsel, however, often could not show that outside counsel
received prior approval for the cost and use of consultants and
expert witnesses, as required in contracts with outside counsel.
To more effectively monitor outside counsel, we recommended
that the MTA, in conjunction with County Counsel, consider
requiring outside law firms to submit invoices using a task-based
billing format if they have the ability to do so, and that it ensure
outside counsel receive written prior approval to use consultants
and expert witnesses within an established budget.
Ü MTA Action: None.
The MTA says that it believes it is far more beneficial for
invoices to use the standard chronological billing format
and that if it needs to determine how much was spent on
a particular task it can compile the time billed. Further, the
MTA says that it has not authorized any outside experts
in the cases it manages, but that it is prepared to ensure
that outside counsel receive written approval prior to the
engagement of any expert witness in the future.
446 California State Auditor Report 2005-406 California State Auditor Report 2005-406 447
448 California State Auditor Report 2005-406
COUNTY EMERGENCY MEDICAL
SERVICES FUNDS
Despite Their Efforts to Properly
Administer the Funds, Some Counties
Have Yet to Reach Full Compliance With
State Laws
REPORT NUMBER 2003-101, MARCH 2004
Audit Highlights . . .
Colusa County, Los Angeles County, Marin County, and
Our review of how counties San Mateo County responses as of November 2004
administer their Emergency
Medical Services Funds (EMS The Joint Legislative Audit Committee (audit committee)
Funds) disclosed the following:
requested that we review counties’ administration of
þ Over half the counties Emergency Medical Services Funds (EMS Funds) to
affected by a statutory
ensure that they comply with the laws governing their use. The
requirement that limits
audit committee was concerned that counties are not using
the growth of certain
revenues for their EMS EMS Funds for their intended purposes. We found that, with one
Funds were not aware of possible exception, the courts and counties generally complied
the limitation.
with statutory requirements for EMS Fund revenues. EMS Funds
þ The four counties receive revenue from a portion of additional penalties for
we reviewed either certain criminal offenses and motor vehicle violations, known
did not have all the
as Maddy revenues; from a state Emergency Medical Services
necessary or reasonable
appropriation; and, until recently, from tobacco tax revenues.
controls over EMS Fund
disbursements or made Specifically, we found:
certain unallowable or
questionable payments.
Finding #1: Some counties may not be complying with the
þ Some counties we surveyed
statutory limit on the growth of Maddy revenues.
reported significant
balances remaining in
Statute requires most counties to comply with an annual
the revenue derived from
limitation on the growth of Maddy revenues. However, because
penalty assessments
collected by the courts as some counties were unaware of the limitation, they have not
of June 30, 2002. monitored their Maddy revenues to ensure compliance with the
law. Calculating and enforcing the limitation can be difficult
þ Few counties we surveyed
reported that their EMS for a variety of reasons. The law is unclear about what revenues
Funds were audited for counties should include when calculating the growth limit
any purpose.
of Maddy revenues. One particular area of confusion is the
effect of traffic violator school fees, a new revenue source for
EMS Funds allowed after the growth limit on Maddy revenues
was established. For example, counties unaware of the growth
limit on Maddy revenues may not always have separately
tracked revenues from traffic violator school fees that could
California State Auditor Report 2005-406 449
affect the calculation of the growth limit. Further, we expect
that compiling data to determine the base year and from
all subsequent years for the calculation of the limit would
be difficult for many counties. We attempted to determine
whether the Maddy revenues deposited each year into the
counties’ EMS Funds complied with the statutory limitation in
the counties we reviewed, but were unable to do so because the
counties did not have all the necessary information and the law
itself does not clearly define how to calculate the limitation.
For EMS Funds established after July 1, 1991, counties can deposit
whatever the courts collect as Maddy revenues. According to the
results of our survey, nine counties established their EMS Funds
after this date and therefore are not subject to any limitation on
the amounts of Maddy revenue deposited in their EMS Funds.
To clarify the law governing deposits of Maddy revenues in
counties’ EMS Funds, we recommended that the Legislature
consider taking one of the following actions:
• Change the current statute to require counties to use the
same standards for the amount of Maddy revenues counties
can deposit in their EMS Funds, regardless of when the funds
were established.
• Specify how to calculate the allowable amount of growth in
Maddy revenues from year to year, including which revenue
sources to include and how to account for incomplete data
from the years since June 1, 1991.
Legislative Action: Unknown.
We are unaware of any legislative action implementing this
recommendation.
Finding #2: It is unclear whether counties used the discretionary
portion of their EMS Funds in compliance with the law.
Three counties we visited have indicated that they believe
administrative costs are an appropriate use of discretionary
funds, an interpretation that may be inconsistent with the goal
of the law, which is to provide funding to pay for the provision
of emergency medical services. In addition, about half of the
49 counties we surveyed explicitly reported that they used the
discretionary accounts in their EMS Funds at least in part for
administrative costs. The law requires that, after allocating
450 California State Auditor Report 2005-406 California State Auditor Report 2005-406 451
10 percent of Maddy revenues for administration of their EMS
Funds, the counties must allocate 58 percent of remaining funds
to reimburse physicians providing unreimbursed emergency
medical services, 25 percent to reimburse hospitals, and
17 percent for discretionary emergency medical services purposes.
Our legal counsel has advised us that certain uses of discretionary
funds—such as costs for salaries, budgeting activities, and
supplies—that three counties we visited believe are acceptable
uses may not be consistent with the goal of the law. However,
San Mateo County and the county counsel for Los Angeles County
disagree with our interpretation of the law, subscribing to a broader
interpretation that allows the use of the discretionary portion of
the Maddy revenues to pay for administrative costs and any other
needs of the counties’ emergency medical services programs.
To ensure that counties’ use of EMS Funds is consistent with
legislative intent, we recommended that the Legislature clarify
whether counties may use the discretionary portion of their EMS
Fund to pay for administrative costs.
Legislative Action: Unknown.
We are unaware of any legislative action implementing this
recommendation.
Finding #3: Some counties did not consistently pay physicians’
claims in compliance with certain provisions in the law.
The law requires counties to reimburse physicians a percentage,
not to exceed 50 percent, of amounts they claim. The law also
requires counties to establish a uniform, reasonable level of
reimbursement. The law, however, is not clear as to whether
physicians should be reimbursed at 50 percent of the fee
schedule allowance when the claim amount is lower—essentially
disregarding the physicians’ claims—or at 50 percent of the
lower of the claim amount or the fee schedule allowance.
To ensure that counties are reimbursing physician claims in
accordance with legislative intent, we recommended that the
Legislature consider clarifying whether physician claims should
be reimbursed at 50 percent of county’s fee schedule allowance
when the claimed amount is lower or at 50 percent of the lower
of the physicians’ claims or the fee schedule allowance.
450 California State Auditor Report 2005-406 California State Auditor Report 2005-406 451
Legislative Action: Unknown.
We are unaware of any legislative action implementing this
recommendation.
Finding #4: Counties do not report consistent information to
the Legislature.
State law does not require counties to identify the basis for the
calculations they used in reporting Maddy revenue balances to
the Legislature. Further, counties are not required to explain any
differences in these balances from one fiscal year to the next.
The Emergency Medical Services Authority created the report
format counties are using to report the information required
by the Legislature. However, the reporting format counties
use does not require them to identify the basis they use for
reporting Maddy revenue balances or address differences in their
revenue balances from one year to the next. Because of these
inconsistencies and potential inaccuracies, data reported to the
Legislature may have limited value.
To provide greater consistency in the annual EMS Fund report
that counties submit to the Legislature, we recommended
that the Legislature consider directing the Emergency Medical
Services Authority to revise the report format to specify the
basis—preferably the accrual basis—they must use to report their
fund balances. In addition, the revised format should include a
requirement that counties explain any differences between the
remaining balance of the prior year and the beginning balance
of the year being reported.
Legislative Action: Unknown.
We are unaware of any legislative action implementing this
recommendation.
Finding #5: Colusa County did not recover EMS Funds for
subsequent payments made by patients on claims for which
it had already reimbursed physicians.
In the past, physicians in Colusa County used a billing agent
to process and submit their claims to the county for EMS Fund
reimbursements. Colusa County relied on the physicians’ billing
agent to comply with the law when it submitted physicians’
claims to the county for payment. One requirement specified
in law is that a physician (or the physician’s billing agent) must
452 California State Auditor Report 2005-406 California State Auditor Report 2005-406 453
notify the county of any subsequent payments made by patients
or third-party insurance companies on claims already reimbursed
by the county’s EMS Fund. When notified, the county should
either reduce future reimbursements to the physician from
EMS Funds or be reimbursed by the physician for the payments
received. However, the billing agent did not tell the county it
had received such payments, stating that the payments were rare
and that the small amounts received would be immaterial to the
EMS Fund. Nevertheless, Colusa County needs to work with the
billing agent to recover these payments to reimburse the EMS
Fund and ensure that the county receives future reimbursement
of claims already paid.
To ensure that its EMS Fund is appropriately refunded, we
recommended that Colusa County should work with its physicians’
former billing agent to recoup money that agent received from the
EMS Fund, as required by law.
Colusa County Action: Partial corrective action taken.
Colusa County reports that it has contacted the Colusa Regional
Medical Center to determine the amount to be reimbursed to
the county’s EMS Fund. The Colusa Regional Medical Center has
been unable to provide the information due to a rainstorm that
caused facility damage. As of October 25, 2004, Colusa County’s
EMS Fund has not been reimbursed.
Finding #6: Control over EMS reimbursements to hospitals
has been inadequate in some counties.
The law indicates that the hospital account should be used to
reimburse certain hospitals for the costs of emergency medical
services provided to patients who do not pay.
Marin County used its hospital account to fund some potentially
ineligible activities and services. For example, payments for
copying charges, overhead allocations, and computer equipment
appear to be more appropriately charged to the administrative
account. In fiscal year 2000–01, Marin County also charged
the total costs of a $44,000 study for a new trauma center to its
hospital account. We recognize that the study related to facilities
that could provide emergency medical services to patients
unable to pay, but we believe the costs of such a study are more
appropriate for the discretionary account, which current law
452 California State Auditor Report 2005-406 California State Auditor Report 2005-406 453
allows to pay for capital projects to the extent that expenditures
support the provision of emergency medical services and are
consistent with the intent of the law creating the EMS Fund.
Two other counties we reviewed, Colusa and San Mateo, do
not require hospitals to document their need for the EMS Fund
money they receive or employ alternative procedures themselves
to ensure hospitals incur expenditures at least equal to their
EMS Fund reimbursement. Both of these counties pay flat
amounts to participating hospitals rather than paying individual
claims submitted.
To ensure that the maximum amount of EMS Funds is available
to provide emergency medical services, we recommended that
Marin County use its hospital money only for the costs of
emergency medical services provided to patients who do not
pay, rather than for administrative or discretionary costs.
To ensure controls over disbursements from their EMS Funds,
counties should determine that hospitals’ expenditures at least
equal the payments they receive from EMS Funds either by
asking them to provide support for EMS expenditures or by
establishing procedures to review hospital costs.
Marin County Action: Corrective action taken.
Marin County stated that it has taken corrective action to
ensure that costs are charged to the appropriate accounts.
Accounting records are reviewed closely to ensure that
administrative costs are charged to the administration
fund. Hospital funds are used exclusively to reimburse
for uncompensated emergency services claimed by local
hospitals in Marin County.
San Mateo County Action: Partial corrective action taken.
San Mateo county stated that it will be asking hospitals that
receive Maddy funds to provide support for EMS expenditures
prior to paying these hospitals in fiscal year 2004–05.
Colusa County Action: Partial corrective action taken.
Colusa County stated that it is working with the regional
medical center to develop procedures to accurately identify
and report emergency room costs that are uncompensated.
454 California State Auditor Report 2005-406
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 Los Angeles County Metropolitan Transportation Authority
Authority’s (MTA) response as of December 2004
decentralization of its bus
services into five service sectors,
The Joint Legislative Audit Committee (audit committee)
our review found the following:
requested that we review the Los Angeles County
þ The MTA did not perform Metropolitan Transportation Authority’s (MTA)
any cost-benefit analyses
decentralization of bus operations in the Los Angeles region
or fiscal projections,
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
council meetings are advertised. Finally, the audit committee
MTA’s decentralization of
bus operations. requested that we review the potential for overlapping services
in those areas where municipalities provide transit services. We
þ The MTA lacks a way to
found the following:
determine cost savings and
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 any
areas that limit their ability cost-benefit analyses or fiscal projections, nor did it fully consider
to make service changes:
alternatives to sectors. During the sector creation process, the MTA
the MTA’s consent decree
limited its analysis of the impacts of sectors on bus operations to a
and union contracts.
draft plan that it compiled in March 2002 detailing its vision and
þ Weaknesses in the methods
goals for service sectors. However, this plan lacked any financial
the MTA uses to advertise
analysis. Thus, before embarking on its sector implementation,
governance council
meetings could cause it to the MTA did not develop any estimates as to what the costs of
miss opportunities to use establishing and operating sectors would be and did not establish
these meetings effectively
a baseline that it later could use to determine whether its actual
as a means of improving
costs met its expectations. The MTA’s limited analysis in planning
community input into bus
operations and tailoring for sectors has reduced its ability to measure the effectiveness or
services to local needs. efficiency of its sector implementation.
California State Auditor Report 2005-406 455
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.
The MTA states that if significant organizational restructuring
is considered in the future, MTA management will take into
consideration the recommendations for cost-benefit analysis
based on the implementation timeline for the study.
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
456 California State Auditor Report 2005-406 California State Auditor Report 2005-406 457
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: Partial corrective action taken.
The MTA states that it completes cost-per-hour reports for
each sector and for the bus system on a quarterly basis.
Further, it developed key performance indicators that are
tied to financial reporting, and MTA management, including
sector general managers, are meeting monthly to review
performance reporting and financial reporting as compared
to budget. However, as we discussed in our audit report,
the MTA had problems calculating actual amounts saved
by sectors because the MTA did not allocate the costs of
some support functions to the divisions using the services.
Although during the audit, MTA stated that it planned by
July 2004 to create a new method for allocating these costs,
its December 2004 response does not specifically address this
issue. With respect to our recommendation that the MTA
continue its efforts to improve its computation of boarding
data, the MTA reports that its new advanced transportation
management system is almost completely installed on its bus
fleet. The MTA expects that the passenger counting feature
of this system will improve boarding data. Additionally
it completed a pilot implementation of the universal fare
system at a sector in September 2004. The MTA anticipates
that the universal fare system, which provides validating fare
boxes on buses, also will enhance boarding data.
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:
456 California State Auditor Report 2005-406 California State Auditor Report 2005-406 457
• 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
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: Partial corrective action taken.
The MTA reported that MTA management and sector members
met in June 2004 to discuss roles and responsibilities of the
governance councils, performance and budgetary goals, and
upcoming governance council meetings. Board members
were also invited to attend if available. Additionally, the MTA
reported that in July 2004 a meeting was held between
MTA board members and the governance council chairs.
However, the MTA’s December 2004 response did not specifically
address the extent to which information on limitations
458 California State Auditor Report 2005-406 California State Auditor Report 2005-406 459
relating to the MTA’s problems in calculating sector savings,
as well as information on the consent decree and union
contracts, have been discussed.
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
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
458 California State Auditor Report 2005-406 California State Auditor Report 2005-406 459
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.
The MTA states that based on board review of communications
and sector expenses, advertising revenues were reduced
significantly in the budget for fiscal year 2004–05. The MTA
retains advertising budget to support mandated advertising
of the public meeting notices and for the sector monthly
meetings, but other communication materials were not
budgeted by the sectors. However, the MTA reports that it
has developed links on its Web site for the service sectors and
includes information in the news and information section on
upcoming monthly governance council meetings.
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
460 California State Auditor Report 2005-406 California State Auditor Report 2005-406 461
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: Partial corrective action taken.
The MTA reports that it completed the initial stakeholder
outreach to begin the analysis of bus service restructuring.
This involved the participation of municipal operators,
bus sector governance workshops, community meetings,
and individual meetings with board members and cities
with the county of Los Angeles. The MTA is currently in
the planning phase, which includes the identification of
hubs, service proposals, defining options or alternatives
to baseline services, external review by stakeholders, and
developing the critical path for implementation.
460 California State Auditor Report 2005-406 California State Auditor Report 2005-406 461
462 California State Auditor Report 2005-406
PRISON INDUSTRY AUTHORITY
Although It Has Broad Discretion in
Pursuing Its Statutory Purposes, It Could
Improve Certain Pricing Practices and
Develop Performance Measures
REPORT NUMBER 2004-101, DECEMBER 2004
Youth and Adult Correctional Agency response as of
December 2004
Audit Highlights . . .
The Joint Legislative Audit Committee (audit committee)
Our review of the Prison asked the Bureau of State Audits to identify to the extent
Industry Authority (PIA)
possible the total amount the Prison Industry Authority
revealed the following:
(PIA) has received from its customers for PIA products over the
þ Although state law does past two fiscal years and to determine, for a sample of items,
not require PIA to offer whether the products are priced above the market. Also, the
competitive prices and
audit committee requested that we determine to the extent
its prices can differ from
those of other vendors, possible PIA’s financial impact on the California Department
PIA could improve certain of Corrections (Corrections) and examine PIA’s method for
pricing practices.
measuring its impact on inmates, particularly with regard to
þ PIA has not established their obtaining employment upon release.
participation targets for
the number of inmates it
aims to employ among its Finding #1: PIA lacks accurate product cost figures, does
various enterprises. not document its justification for product prices, and lacks
þ PIA has not demonstrated policies regarding special or discount pricing.
adequately whether and in
The Prison Industry Board (board) has established a pricing
what manner it fulfills its
policy that allows PIA the discretion to establish prices that
statutory purpose to reduce
the operating costs of the do not recover production costs, but it generally expects PIA
California Department of to price each item at a level sufficient to recover the cost of
Corrections.
producing the item. To comply with this expectation, PIA must
þ Although PIA has embarked be able to identify product costs accurately. However, according
upon various activities to PIA’s acting assistant general manager for financial operations,
aimed at enhancing
distributing costs to products consistently and accurately is
the employability of its
difficult because PIA’s cost allocation methodology still relies
participants, it has not
established targets or primarily on the estimated hours an inmate spends making
performance measures to a product and because these hours can fluctuate significantly
track participants’ post-
in a prison environment. Moreover, until recently PIA did not
release success and evaluate
its own performance. allocate certain costs, such as distribution, transportation, and
administrative support, among its various enterprises, let alone
among its individual products. Without accurate product costs,
PIA cannot demonstrate that it considers only applicable costs when
pricing a particular product in accordance with the board’s policy.
California State Auditor Report 2005-406 463
In its pricing policy, the board established that PIA must
base its prices on a profit margin, cost data, market data for
comparable products and prices, and marketing strategies
related to the product or service. Additionally, the policy
requires PIA to review and update prices periodically to reflect
a variety of changes. We expected that PIA would document
the analyses it performed to establish and review its prices in
order to demonstrate how it applied the specific criteria in the
board’s pricing policy in practice. However, when we reviewed
19 products for which PIA had adjusted or established the price
in fiscal year 2002–03, PIA was unable to provide supporting
analyses demonstrating how it arrived at or reviewed the prices
for any of these products. Without documenting the analysis
that supports each price, PIA cannot demonstrate to the board
the consistency of the process it follows when pricing or
reviewing the prices of its products and services.
Although PIA has discretion with regard to pricing, we expected
it to have established policies regarding special or discount
pricing arrangements through which different customers
pay different prices for like items. However, after identifying
certain products for which PIA charged a different price to
different customers in fiscal year 2002–03 and asking PIA for an
explanation, we found that there is no written policy regarding
such arrangements. Without policies defining the circumstances
under which PIA enters into special pricing arrangements
or offers discounts, PIA risks the appearance that its pricing
practices are unfair.
We recommended that PIA develop a method to allocate
administrative support, distribution, and transportation costs
directly to its products and services and ensure that, until it does
so, its allocation of costs to the various enterprises is as accurate
as possible. In addition, we recommended that PIA ensure that
it documents the analyses it conducts to establish, change,
or review its prices. Finally, PIA should establish policies for
entering into special pricing arrangements or offering discounts
and ensure that its customers are aware of such opportunities.
464 California State Auditor Report 2005-406 California State Auditor Report 2005-406 465
PIA Action: Partial corrective action taken.
PIA states that it plans to annually refine its process of
allocating distribution, transportation, and central office
costs among its enterprises, with the objective of continually
improving the accuracy of costs that are allocated to PIA’s
enterprises and allowing PIA to further refine product costing
and pricing strategies as well. PIA also states that in July 2004
a standardized methodology was developed for establishing,
changing, and reviewing pricing for standard products and
a form for documenting competitive pricing research was
also developed. Finally, PIA states that by March 1, 2005,
it will formalize and document internal procedures that
will include guidelines for offering discounts and other
nonstandard pricing strategies to all customers.
Finding #2: PIA has not established inmate participation
targets or related enterprise evaluation criteria.
Although one of PIA’s statutory purposes is to employ inmates,
and the Legislature intended in part that PIA employ inmates
in order to reduce inmate idleness and prison violence, PIA
has not established participation targets for the number of
inmates or percentage of Corrections’ institution population
PIA aims to employ, either overall or by enterprise. Moreover,
although inmates employed in PIA’s enterprises contribute
toward its ability to be self-supporting, this contribution varies
depending on the enterprise. Yet PIA has not established criteria
for evaluating each enterprise’s combined contribution to PIA’s
statutory purposes of being self-supporting and employing
inmates. Without establishing employment targets and routinely
assessing the contribution of each enterprise to profitability as
well as inmate employment against criteria, such as profitability
per inmate, PIA limits decision makers’ ability to assess its
overall performance.
We recommended that PIA establish long-range annual
employment targets overall, for each enterprise, and as a
percentage of Corrections’ institution population. PIA should
include these targets and annual results in meeting them, as
well as explanations when they are not met, in its annual report
to the Legislature. In addition, PIA should establish criteria,
464 California State Auditor Report 2005-406 California State Auditor Report 2005-406 465
such as profitability per inmate, and evaluate its enterprises’
contribution toward its statutory purposes of being self-
supporting and employing inmates relative to such criteria.
PIA Action: Partial corrective action taken.
PIA states that beginning with fiscal year 2005–06, its
annual plan and strategic business plan will include long-
range inmate employment targets and its annual report will
address the success in meeting these targets. PIA indicates
that it has adopted profitability per inmate as an indicator of
performance and is considering other appropriate criteria for
evaluation purposes.
Finding #3: PIA has not demonstrated adequately whether and
in what manner it reduces the operating costs of Corrections.
PIA claims that it provided Corrections $14.1 million in cost
savings in fiscal year 2002–03 by offering a correctional work
or training program (correctional program) for inmates that
Corrections otherwise would have had to fund. However, in
PIA’s absence, Corrections is neither legally obligated nor was it
prepared to reassign all of PIA’s participants in fiscal year 2002–03
to programs other than PIA. Further, PIA bases its calculation on
the particular correctional program components Corrections
sought to expand in a fiscal year 1998–99 unapproved budget
change proposal and did not demonstrate that these programs
represented the only available correctional program options and
associated costs for fiscal year 2002–03. Thus, PIA’s approach
toward claiming cost savings to Corrections for fiscal year 2002–03
is questionable.
A new bridging education program (bridging program)
Corrections initiated in fiscal year 2003–04 provides an
additional option for inmates who wish to participate in a
correctional program and are eligible to reduce their sentences
by one year for each year of participation. As a result, PIA may
be able to claim that it provides Corrections a cost savings
only for those inmates that Corrections, in PIA’s absence,
would reassign into the bridging program and incur related
costs. The bridging program also will reduce or eliminate the
group of inmates whose participation in PIA could result in a
cost avoidance to Corrections due to their earning sentence
reductions credits at a faster rate. Thus, PIA’s ability to claim any
cost avoidance in the future with regard to sentence reduction
credits its participants earn is impaired significantly.
466 California State Auditor Report 2005-406 California State Auditor Report 2005-406 467
To the degree PIA estimates cost savings that result from inmates
participating in PIA, we recommended that PIA ensure that its
analysis considers all the options and associated costs per inmate
that Corrections would have available for reassigning PIA’s
participants into another program in PIA’s absence.
PIA Action: Pending.
PIA states that it will implement our recommendation when
performing future analyses involving cost savings that result
from inmates participating in PIA.
Finding #4: PIA has not established targets or performance
measures to track participants’ post-release success and
evaluate its own performance.
As a result of obtaining data from Corrections and entering
into a contract with the Employment Development
Department, PIA now has the capability to report on two of
the common elements that decision makers use to assess a
correctional program—inmates’ ability to obtain post-release
employment and to avoid returning to prison. However
PIA has not established targets or performance measures to
track participants’ post-release success and evaluate its own
performance. Further, PIA currently lacks the necessary data to
determine whether the specific training or experience it provides
inmates affects the type of job an inmate obtains after release.
For instance, one component of PIA’s inmate employability
program is to offer industry-accredited certifications to
inmates. However, PIA presently cannot identify whether the
certifications have led to post-release employment in the field
in which inmates obtained certification. Despite the challenges
of establishing a direct link between PIA’s activities and inmates’
level of success after release from prison, without measuring
and reporting on how inmates who have participated in its
enterprises fare after release, PIA cannot provide an adequate
perspective on the effectiveness of its pursuit of its statutory
purpose to offer inmates the opportunity to develop effective
work habits and occupational skills. Moreover, without
performance measures or targets, PIA cannot focus its inmate
employability efforts on areas that demonstrate success.
We recommended that PIA establish targets against which
to measure its participants’ post-release success in obtaining
employment and not returning to prison. For instance, PIA
should compare the post-release success of its participants
466 California State Auditor Report 2005-406 California State Auditor Report 2005-406 467
to that of participants in other correctional programs, to
nonparticipants, or to its own expectations. PIA should also
identify whether the specific training or experience inmates
obtain leads to employment in a related field. Corrections
should assist PIA in obtaining any necessary data for comparison
by providing comparable data on other correctional programs
to PIA. To further refine and focus on those activities with a
demonstrated track record, PIA should also track the individuals
participating in unique components of the inmate employability
program to determine whether there is a link between the
components and inmates’ post-release employment, earnings,
and returns to prison.
PIA Action: Pending.
PIA states that it is finalizing a contract with an institution
of higher education to design and conduct a multi-year
research study scheduled to begin in 2005 to measure the
impact of PIA on its participants’ post-release success. PIA
plans to use the study results to determine appropriate
standards for establishing targets relative to post-release
employment and recidivism. PIA also indicates that it will
develop a table similar to the one we recommended to
include in its annual report to demonstrate each enterprise’s
contribution to participants’ post-release success. PIA states
that it will work with Corrections to compare its impact
on post-release employment and recidivism with other
correctional programs and nonparticipants. Finally, PIA
indicates that by March 1, 2005, it will expand current
tracking activities to better assess the impact of discrete
elements of the inmate employability program upon post-
release employment and recidivism.
468 California State Auditor Report 2005-406
CALIFORNIA DEPARTMENT OF
CORRECTIONS
Although Addressing Deficiencies in Its
Employee Disciplinary Practices, the
Department Can Improve Its Efforts
REPORT NUMBER 2004-105, OCTOBER 2004
California Department of Corrections’ response as of
December 2004
The Joint Legislative Audit Committee (audit committee)
Audit Highlights . . . requested that the Bureau of State Audits (bureau)
examine the California Department of Corrections’
Our review of the California
(department) process of handling employee disciplinary
Department of Corrections’
matters. Specifically, the audit committee requested that we
(department) process
of handling employee determine the extent to which the department has established
disciplinary matters revealed uniform policies and procedures for the use of legal services in
that the department:
employment matters and whether the institutions are following
þ Spends an average of those policies and procedures.
285 days to serve an
adverse action or close
a case. Finding #1: The department averages 285 days to deliver an
adverse action or close a case.
þ Can improve its disciplinary
process by simplifying its
On average, the department takes 285 days to deliver a notice
investigative process for
of adverse action against an employee or to close a case, and the
straightforward, uncontested
cases, by eliminating the process occasionally surpasses the one-year deadline for taking
headquarters review of most action against peace officers—leaving the department unable to
adverse actions, and by
correct or punish the employee. We found that the department
taking steps to bring more
often does not meet the guidelines from its operations manual
standardization of penalties.
Further, many disciplinary and a procedural bulletin for completing the various steps
case files were disorganized involved in the disciplinary process. To assist in meeting the
and had key pieces of
overall deadlines, the department should include similar steps in
information missing.
its new procedures and then monitor the procedures to ensure
þ Has disciplinary policies that staff are following them. Unnecessarily lengthy time frames
and procedures that are
between the date an offense is alleged and the date action is
incomplete, out of date,
taken can undermine the process—potentially lessening the
and in need of revision.
effectiveness of any corrective action taken.
þ Uses several redundant
databases to track
We recommended that the department identify, benchmark, and
disciplinary matters and
each system is incomplete monitor for improvement the adverse action timelines for each
and inaccurate. step in the process.
continued on next page . . .
California State Auditor Report 2005-406 469
þ Recently began requiring
Department Action: Partial corrective action taken.
job-specific training for a
key position involved in The department stated that it is in the process of designing and
its disciplinary process;
implementing database systems in which it will identify and
however, it can do more
to require training for benchmark adverse action timelines for each step in the process.
other key positions. The department estimates that the databases will be operational
by March 1, 2005. Until that time, the department is tracking
þ Has yet to implement
each type of case using its existing databases. The department
several audit
recommendations related also reported that the office of civil rights is now closing
to disciplinary matters investigations in an average of 147 days—an improvement since
from audits conducted in
our audit—but still above its goal of 90 days.
2000 and 2001.
Finding #2: The department lacks a formal streamlined
process for straightforward cases and wastes time on
unneeded information requests.
The department can reduce the time it spends on certain
disciplinary matters by simplifying its investigations of
uncontested, straightforward cases and eliminating unnecessary
requests for information, and the transcriptions of interviews.
Additionally, when it implements the disciplinary matrix, which
will prescribe standard penalties within a range for specific
employee offenses, we believe that the need for a review by
headquarters will be limited to those cases that do not fit within
the disciplinary matrix parameters. More efficient use of their
time allows staff involved in the disciplinary process to focus
their efforts on necessary work.
We recommended that the department implement procedures to
allow for expedited investigations and actions for uncontested,
straightforward cases such as driving under the influence;
eliminate headquarters and regional reviews before serving
disciplinary actions that meet the parameters of the disciplinary
matrix; and discontinue the practice of transcribing all interviews
and transcribe only those that are necessary.
Department Action: Partial corrective action taken.
The department reported that its office of civil rights
implemented policy and procedures allowing for expedited
investigations and that it expects to update its operations
manual with the procedures by July 1, 2005. For other cases,
the department is considering a centralized intake process and
other procedural changes, which will facilitate implementation
of our recommendation to expedite straightforward cases. The
department expects to incorporate the new procedures by
470 California State Auditor Report 2005-406 California State Auditor Report 2005-406 471
August 16, 2005. Moreover, the department reported that it
will implement the disciplinary matrix by March 1, 2005, and
it plans to eliminate most, if not all, headquarters and regional
office reviews at that time. Finally, the department stated that
its office of civil rights determined that staff were transcribing
fewer interviews related to its cases in response to its policy
requiring staff to only transcribe those interviews that are
necessary. For all other cases, an attorney will determine the
necessity for transcription of interviews once the department
implements its vertical advocacy model.
Finding #3: The State Personnel Board often modifies or
revokes the department’s adverse actions.
Annually, the State Personnel Board (board), which reviews
roughly 14 percent of the department’s adverse actions, revokes
or modifies approximately 62 percent of those it reviews.
Currently, the department does not analyze its individual and
overall performance statistics concerning cases that go before
the board, nor has it established any benchmarks. We believe it
would be useful to the department to continually monitor these
statistics to measure any improvements and to assist in identifying
training needs. Improving this performance is important to ensure
employee confidence in the process and in management.
We recommended that the department benchmark its individual
program and overall performance statistics for cases that go
before the board and continually monitor these statistics.
Department Action: Pending.
The department reported that it will benchmark and
monitor cases going before the State Personnel Board once it
implements its two new database systems. The department
plans to include the status and timing of these efforts in its
six-month response to our audit.
Finding #4: The process for handling employee misconduct
allegations and discipline are not significantly different, but
consistency can be improved.
Although we did not find significant issues with regard to varying
processes used by institutions and regions, the department could
improve its disciplinary process by eliminating some of the minor
differences in its disciplinary practices and by standardizing
470 California State Auditor Report 2005-406 California State Auditor Report 2005-406 471
penalties at various institutions. For example, each institution
we tested uses a combination of full-time investigators and other
employees at the rank of sergeant or above who do not work
solely for the Investigative Services Unit (investigative services).
These “field investigators” have other duties and are called upon
to handle investigations as needed. The department may want to
consider conducting a workload study to determine the number
of full-time investigators each institution may need and whether
existing resources can be allocated for this purpose.
We also found instances in which the institutions took different
adverse actions for similar offenses. However, the occurrence
of assessing inconsistent penalties may be decreased when the
department implements its discipline matrix, which is designed
to ensure a consistent foundation and common approach
regarding whether and what type of penalty to impose.
However, for the matrix to be fully effective, the department
will need to ensure the wardens are held accountable for their
penalty decisions by requiring them to document their reasons
for any deviations from the prescribed penalty range.
Moreover, although the department’s operations manual
requires that the regional Office of Investigative Services (OIS)
track and audit certain of its cases, we found no evidence that
the auditing or review of the investigation authorization forms
or completed investigative reports occurs at one OIS regional
office. Finally, we found that many disciplinary case files were
disorganized and had key pieces of information missing.
To ensure it completes investigations in a timely manner, the
department should consider conducting a workload study to
determine the number of full-time investigators each institution
may need and whether existing resources can be allocated for
this purpose.
We also recommended that the department should:
• Standardize, as much as possible, adverse-action and
investigative processes, forms, reports, and file checklists for
all types of cases.
• Continue its efforts to implement a disciplinary matrix and
ensure the wardens are held accountable for their penalty
decisions by requiring them to document their reasons for
any deviations from the prescribed penalty range.
472 California State Auditor Report 2005-406 California State Auditor Report 2005-406 473
To allow it to provide feedback and training to investigative
services, the department should ensure that it monitors and
enforces its requirement for its OIS to audit certain investigations.
Department Action: Partial corrective action taken.
The department stated that a team is reviewing the workload
of certain investigations to determine the number of full-time
investigators each institution may need and whether it can
allocate existing resources for that purpose. The team will
develop recommendations by January 2005 and implement
them by July 2005—contingent on funding. Additionally,
the department indicated that in November 2004, its office
of investigative services issued the first of a series of revised
manuals to standardize forms, reports, and file checklists for
investigative staff. The department plans to issue additional
manuals by the end of 2004 and to revise and standardize
its reporting format by March 2005. The office of civil rights
is also taking actions to standardize its forms and case file
maintenance and expects to begin implementation in
January 2005. Moreover, the department reported that it plans
to implement its statewide disciplinary matrix in March 2005
and to develop management and oversight reports, by
November 2005, to monitor the use of the disciplinary matrix.
Finally, the department stated that its office of investigative
services is developing a plan to review certain investigations.
Finding #5: Investigative and other department offices that
handle employee misconduct allegations and discipline can
improve their coordination and communication.
The department has had difficulty coordinating efforts and fostering
effective communication among its various offices and institutions
involved in employee misconduct allegations and discipline. The
overall lack of interaction among the major investigative bodies is
unfortunate: if communication and coordination improved, the
three could coordinate policy development, learning opportunities,
and related investigative work.
For example, the Office of Civil Rights has not always
communicated or reported to the affected institutions when it
discovers departmental policy violations or supervisory issues
during its investigations. As a result, the department may have
missed opportunities to take corrective or punitive action
against the guilty employee.
472 California State Auditor Report 2005-406 California State Auditor Report 2005-406 473
To ensure supervisory issues or policy violations contained
in reports on civil rights investigations are not missed, we
recommended that the Office of Civil Rights consider sending all
unsustained cases to the warden for review.
Department Action: Corrective action taken.
The department reports that its office of civil rights is
currently providing written summaries of all investigations
to the hiring authorities and it plans to continue to assess
this process for adequacy.
Finding #6: The department is implementing a process
requiring its attorneys to become more involved in employee
misconduct allegations.
The department is moving forward with a plan to improve
communication between legal affairs and the institutions to
have its attorneys more involved with employee misconduct
allegations. It will implement a “vertical advocacy” model,
which it believes will ensure competent legal representation
during the employee disciplinary process. Currently, legal affairs’
communication with the institutions seems to be limited.
The vertical advocacy model will involve an attorney early in
the investigative process and should provide additional legal
guidance to the employee relations officers (EROs), as well as
improve the integrity, quality, and timeliness of investigations.
We recommended that the department continue its efforts
to implement a department-wide vertical advocacy model to
allow for greater attorney involvement in adverse action cases,
including equal employment opportunity cases.
Department Action: Pending.
The department stated that it plans to hire staff, train them,
and implement its vertical advocacy model by March 1, 2005.
Once implemented, the department also plans to conduct a
time study to determine the appropriate staffing levels.
474 California State Auditor Report 2005-406 California State Auditor Report 2005-406 475
Finding #7: The department needs to update and follow its
policies on employee misconduct allegations and discipline
and consolidate its policy and process development for all
types of investigations.
The department’s policies and procedures for employment-
related matters are outdated and in need of revision and may
contribute to inconsistencies because they do not require
common practices or forms. The operations manual gives no
clear guidance on how any of the processes should work.
Furthermore, to better standardize institutional and regional
investigation procedures, the department should centralize the
oversight of its various investigatory bodies. Currently, the three
investigative units of the department—the investigative services,
the OIS, and the Office of Civil Rights—rarely work together
and all have different processes. Centralizing policy and process
development for the three types of investigations would allow
the department to create and introduce more standardization
into the processes, the investigative report formats, and the
case files and would foster communication and coordination
among investigators.
We recommended that the department consolidate policy and
procedure development and monitoring for all types of adverse
action investigations under one branch and continue its efforts
to update its employment-related policies and procedures.
Department Action: Pending.
The department reported that its final action related to this
recommendation is dependent upon a proposed reorganization.
The department will share the reorganization plan once it is
approved by the governor. Moreover, as previously discussed in
finding numbers 2 and 4, the department is in the process of
developing new employment-related policies and procedures.
Finding #8: The department can do more to resolve
employee problems short of litigation and adverse actions.
The department can improve its efforts to resolve employment
related disputes without litigation. For example, better
communication regarding the availability and use of a
mediation program could help to resolve disputes before they
escalate into litigation or adverse actions that are heard by the
board. These steps should help the department avoid potentially
time-consuming and costly litigation.
474 California State Auditor Report 2005-406 California State Auditor Report 2005-406 475
We recommended that the department implement its own
or use an outside mediation program such as the one offered
by board, and make the program known and available to all
programs and institutions.
Department Action: Pending.
The department told us that it has initiated contact with
the board to discuss the board’s mediation program and
that it will be making that program known and available to
all programs and institutions. Further, the department also
indicated that its office of civil rights is currently developing
a mediation process to assist with early resolution of
complaints. The department plans to provide us a summary
of its progress with its six-month response to our audit.
Finding #9: The lack of documentation and monitoring
prevent the department from ensuring appropriate adverse
action settlements.
An administrative bulletin discussing department policies for
settling appealed adverse actions exists, and the department
recently implemented training on factors to consider during
settlement negotiations. Unfortunately, the policies are not
completely followed, and the department does not monitor
settlements. As a result, the department cannot ensure it is
settling as effectively or as often as it could.
The department should follow its existing policy or design and
implement a comprehensive new settlement policy, ensure
all pertinent employees are aware of the policy, and monitor
compliance at the headquarters level.
Department Action: Pending.
The department reported that it will include its settlement
policy in the employee relations officer advocacy training
in January 2005. Further, it plans to also provide training to the
new vertical advocates and the hiring authorities by March 2005.
476 California State Auditor Report 2005-406 California State Auditor Report 2005-406 477
Finding #10: The department’s electronic databases do
not allow it to adequately monitor employee misconduct
allegations and discipline.
Gaining an overall understanding of the department’s current
or past employee disciplinary actions is severely hindered by a
lack of cohesive or integrated electronic data systems. One must
currently obtain data from six different computer databases—all
of which track combinations of similar and entirely different
information—to try to piece together a complete picture of
the department’s actions. Further exacerbating this problem,
the four primary systems we tested are incomplete and include
erroneous data because the department does not keep the
databases current. We found that a primary database used to
track compliance with statutory deadlines is missing important
data, including the entire case for 24 of the 127 cases we tested
at six institutions.
Partially as a result of its poor tracking systems and management’s
inaction in using the data it does have, the department does
very little to monitor the disciplinary actions it pursues. In
response to these problems, it is implementing two new
integrated computer databases for disciplinary and legal
matters to replace the six outmoded systems currently in place.
Although the new systems, which include deadline reminders
and management reporting capabilities, appear promising, the
department will need to ensure that it updates and maintains
the systems to realize the benefits.
To ensure that it can appropriately and accurately monitor
and track employment-related actions and outcomes, we
recommended that the department should do the following:
• Complete its implementation of the new computer databases,
eliminate the redundant systems, and consolidate monitoring
of these systems within the information systems division.
• Ensure that staff involved in maintaining the new computer
databases receive proper training, enter data accurately and
consistently, and appropriately update the systems in a
timely manner.
476 California State Auditor Report 2005-406 California State Auditor Report 2005-406 477
Department Action: Partial corrective action taken.
The department is continuing its implementation of both
the case management system (CMS) and its ProLaw system.
The department expects CMS to be fully operational in its
institutions, the office of civil rights, the employment law unit,
and the office of personnel management by August 30, 2005.
The department also expects the ProLaw system to be
operational in the employment law unit by March 1, 2005.
Finally, the department reported that by March 15, 2005, it
will train staff charged with inputting information into CMS
and ProLaw and that it will finalize a plan for monitoring the
accuracy of data entered into these systems.
Finding #11: The department can still do more to train
employees who deal with misconduct allegations and discipline.
It is important to ensure that the employees who administer the
discipline process have the necessary training to do so. Training
is even more important for the employees in five of these
positions—the EROs, the Office of Civil Rights investigators, the
equal employment opportunity coordinators, the investigative
services staff, and the litigation coordinators—because the
positions do not have specific state classifications, which means
these employees did not need to meet minimum qualification
requirements specific to these five positions. The department
appears to be moving in the right direction by appropriately
developing, implementing, and requiring a job-specific training
course for three positions, but it should consider establishing
mandatory job-specific training requirements for the other
positions as well. In recognition of the need to have training
requirements, the Office of Civil Rights completed a proposal in
September 2004 that would make training mandatory for all new
investigators and require annual training for all investigators.
To ensure that it provides adequate training for key positions
involved in the disciplinary process, we recommended that
the department consider establishing job-specific mandatory
training requirements for its litigation and equal employment
opportunity coordinators. Further, the Office of Civil Rights
should continue its efforts to implement mandatory training for
its investigators and ensure its policy is followed, as it already
did for its EROs, investigative services staff, and special agents.
478 California State Auditor Report 2005-406 California State Auditor Report 2005-406 479
Department Action: Pending.
According to the department, the office of civil rights plans to
develop and require new investigative staff to participate in a
two week investigative course along with ongoing on-the-job
training. The office of civil rights also plans to require
semi-annual training for all investigative staff. Moreover, the
department will evaluate the need for job-specific mandatory
training for litigation and equal employment opportunity
coordinators as the vertical advocacy model is implemented
and the roles of those entities in the disciplinary process are
more specifically defined.
Finding #12: The department could save the State money
by filling the employee relations officer positions with
employees who are not peace officers.
The department has taken steps recently that should help to
improve the competency and tenure for those staff filling the
ERO position; however, it should consider the success rates of
the varying levels of staff in this position to determine if one
level is better than others. Using staff other than peace officers
could reduce salary, overtime, and retirement costs and help
relieve the possible shortage of correctional officers to work in
areas for which they are specifically trained.
To determine the most cost-effective level to fill its ERO position,
we recommended that the department track the success rates of
all its EROs, including staff other than peace officers.
Department Action: Pending.
The department reported that once it has completed
implementing CMS in March 2005, it plans to explore
whether it can design special reports from CMS that
provide information as to the success rates for cases with
representation by an attorney, an employee relations officer,
and other classifications.
478 California State Auditor Report 2005-406 California State Auditor Report 2005-406 479
Finding #13: The department has been slow to implement
some changes to improve its employee misconduct allegation
and discipline process.
Despite several prior audits that identified weaknesses in the
department’s employee disciplinary practices and that made
recommendations for improvements, the department has at
times been slow in taking action or has not taken any action at
all. This likely contributed to the ongoing problems we described
throughout our audit report. One reason for implementation
delays is that until May 2004, the department did not have a
centralized division or unit with responsibility for ensuring that
the department addresses external audit recommendations.
Instead, each individual office and division maintained
responsibility for responding to audit recommendations and
tracking their corrective action status.
We recommended that the department ensure that its newly
created division charged with tracking audit recommendations
and corrective action is proactive in doing so.
Department Action: Pending.
The department reported that its final action related to
this recommendation is dependent upon a proposed
reorganization. The department will share the reorganization
plan once it is approved by the governor.
480 California State Auditor Report 2005-406
CALIFORNIA DEPARTMENT OF
CORRECTIONS
Its Plans to Build a New Condemned-
Inmate Complex at San Quentin Are
Proceeding, but Its Analysis of Alternative
Locations and Costs Was Incomplete
Audit Highlights . . .
REPORT NUMBER 2003-130, MARCH 2004
Our review of the California
California Department of Corrections’ response as of
Department of Corrections’
September 2004
(department) plans to build
a new condemned-inmate
complex at San Quentin The Joint Legislative Audit Committee (audit committee)
revealed:
asked the Bureau of State Audits to evaluate the California
þ Current condemned- Department of Corrections’ (department) plans to build
inmate facilities at a new condemned-inmate complex at California State Prison,
San Quentin do not meet
San Quentin (San Quentin). Further, the audit committee asked
many of the department’s
us to determine whether, in developing its plans, the department
standards for maximum-
security facilities. had considered all relevant factors. The audit committee
asked us to review and assess the department’s methodologies
þ The department received
and assumptions in determining that construction of a new
spending authority of
$220 million to build a $220 million complex to house male condemned inmates at
new condemned-inmate San Quentin is an appropriate investment for the State and
complex and estimates
whether the department’s estimate is reasonable and based on
completion by 2007.
adequate support and analysis. In addition, the audit committee
þ The department’s analysis asked us, to the extent possible, to compare San Quentin’s
of where it should house costs to those of California State Prison, Sacramento, in areas
its male condemned
such as operating costs, maintenance costs, and capital costs to
population did not consider
all feasible locations and construct or modify a facility to house condemned inmates.
relevant costs.
þ Because the department’s Finding #1: The department did not include all reasonable
analysis was incomplete,
alternatives in its analysis of other potential sites to house
we can conclude neither
male condemned inmates.
that San Quentin is the
best location for the new
In determining where to house its condemned inmates, the
condemned-inmate facility
nor conclude that a better department considered certain existing prison facilities but
location exists. concluded that most of them would not be appropriate, due
primarily to their remoteness from metropolitan areas. The
þ Benefits and drawbacks
department did conclude that California State Prison, Sacramento,
exist for both the continued
use of San Quentin as a would be an appropriate location but determined that transferring
prison and its reuse for the condemned inmates there would exacerbate the department’s
other purposes.
systemwide shortage of maximum-security beds. However,
California State Auditor Report 2005-406 481
the department limited its consideration to the seven facilities
that currently have 180 housing unit facilities. The department
considered only these prisons because it believes that the
180 housing unit, which is designed for maximum-security inmates,
is the most appropriate facility for this population.
Additionally, although the department has land available at
other prison sites on which to build a condemned-inmate
complex with the 180 housing unit facilities it considers
appropriate for condemned inmates, it did not analyze the
feasibility of building such a complex at other locations. The deputy
director of the department’s facilities management division told
us that the department has land available at many locations to
accommodate 180 housing unit facilities such as the condemned-
inmate complex it plans for San Quentin, although other factors
such as wastewater and water capacity, severe recruitment and
retention difficulties, community opposition, flood plains,
and habitat preservation would limit the feasibility of using
most sites. According to the department, it believed that the
legislative direction it had received was to maintain condemned
inmates at San Quentin. Nonetheless, the department would
have better ensured that the best decision for the State was made
if it had included all reasonable alternatives.
We recommended that if the Legislature decides that it wants a
more complete analysis regarding the optimal location for housing
male condemned inmates, it consider requiring the department
to assess the costs and benefits of relocating the condemned-
inmate complex to each of the current prison locations possessing
either adequate available land for such a facility or an existing
adequate facility, including in its assessment the relative
importance and costs associated with each site’s remoteness.
Additionally, in the future, the department should include all
feasible alternatives when it analyzes locations for any new
prison facilities.
Legislative Action: Unknown.
Department Action: Pending.
The department states that it will continue its practice of
assessing feasible alternatives and appropriate costs when it
analyzes locations for any new prison facilities.
482 California State Auditor Report 2005-406 California State Auditor Report 2005-406 483
Finding #2: The department’s comparison of costs
was incomplete.
Although the department analyzed the costs of relocating its
San Quentin activities, it did not compare the anticipated
annual operating and maintenance costs between San Quentin
and other potential locations. As part of an effort by the
Department of General Services to study San Quentin’s potential
reuses, the department prepared an estimate of the costs
associated with relocating all of its activities from San Quentin,
including housing for its condemned, reception center, and
level I and II inmates. However, the department did not compare
the annual operating and maintenance costs once the condemned
inmates had been relocated to those it could expect to incur at
San Quentin. Such a comparison would have provided more
complete information that would have assisted the department in
ensuring that it made the most cost-effective decision.
We recommended that if the Legislature decides that it wants
a more complete analysis regarding the optimal location for
housing male condemned inmates, it consider requiring the
department to analyze the estimated annual operating and
maintenance costs of a new condemned-inmate complex at other
locations with adequate available land or facilities, compared
to those it expects to incur at San Quentin. Additionally, in the
future, the department should include all appropriate costs when
it analyzes locations for any new prison facilities.
Legislative Action: Unknown.
Department Action: Pending.
The department states that it will continue its practice of
assessing feasible alternatives and appropriate costs when it
analyzes locations for any new prison facilities.
Finding #3: The department’s estimate of future condemned
inmate populations is likely overstated.
Based on past experience, the department estimates that the
condemned-inmate population could grow at a rate of 25 inmates
per year. In arriving at its estimate of the annual increase in the
numbers of condemned inmates, the department considered the
number of male inmates the State sentenced to death each year
since 1978, after the State enacted its current death penalty law.
Based on these numbers, the department concluded that the State
sentences an average of 25 men to death each year. However,
482 California State Auditor Report 2005-406 California State Auditor Report 2005-406 483
this analysis does not consider inmates who leave death row
for various reasons, such as commuted sentences and death, by
natural causes, and by execution. Our review of the department’s
log of condemned inmates, which tracks inmates coming into
and out of death row at San Quentin, showed that as many as
nine inmates left death row in a single year; over a 10 year period
between 1994 and 2003, 48 inmates left death row. Therefore, the
department’s estimate is likely overstated.
Additionally, both the state public defender and the state capital
case coordinator at the Office of the Attorney General told us
that they expect the number of inmates being sentenced to
death to decrease in the coming years. According to the state
public defender, this is due primarily to the expense that the
counties incur in capital cases. She stated that counties are
seeing a sentence of life without parole as a better alternative.
Also, according to the state public defender, lower crime rates
and decreasing support for the death penalty will result in fewer
capital cases. At the same time, both the state public defender
and the state capital case coordinator believe that the number
of executions will increase in the coming years as condemned
inmates begin to exhaust their federal appeals.
We recommended that if the Legislature decides that it wants
a more complete analysis regarding the optimal location for
housing male condemned inmates, it consider requiring the
department, in order to provide more accurate estimates of
future numbers of condemned inmates, to include all relevant
factors in future estimates, such as the number of inmates
who leave death row for various reasons, including commuted
sentences and death.
Legislative Action: Unknown.
484 California State Auditor Report 2005-406
DEPARTMENT OF CORRECTIONS
Investigations of Improper Activities by
State Employees, July 2003 Through
December 2003
ALLEGATION I2003-0896 (REPORT I2004-1),
MARCH 2004
Department of Corrections’ response as of December 2004
We investigated an allegation that the California
Investigative Highlights . . . State Prison-Los Angeles County (Los Angeles
County Prison) of the Department of Corrections
The California State Prison-
(Corrections) mismanaged money collected from television and
Los Angeles County
motion picture production companies that filmed at the prison.
mismanaged money collected
from television and motion
picture production companies
that filmed at the prison as Finding #1: An employee misappropriated state funds by
follows: directing a $1,500 production company payment into an
employee association account.
þ An employee directed
a production company
In violation of state laws, an employee responsible for
to pay $1,500 to an
coordinating with and billing production companies for costs
employee association fund,
rather than reimburse the incurred by Los Angeles County Prison, directed a television
State for its costs. show that filmed at the institution to pay $1,500 to the prison’s
employee association, not to the State’s General Fund (General
þ The Los Angeles County
Prison failed to ensure it Fund), as a reimbursement. The prison established the employee
was reimbursed $1,800 association to promote employee morale by paying for activities
in costs incurred to
such as employee parties and bereavement acknowledgements,
accommodate two film
or by participating in activities involving community-based
production companies.
charities. On July 14, 2002, the television show’s film crew shot
þ The Los Angeles County a segment at the prison. However, we found no evidence that
Prison violated federal
the employee billed the television show for costs the prison
tax laws by improperly
directing $4,150 in incurred to accommodate the film crew or that the television
donations received from show reimbursed the State for these costs. The records provided
production companies
to us indicate that the employee instructed the television show
through an inmate
to make its payment to the employee association and that he
religious account before
transferring the money into handled the payment as a donation. Two days after receiving
the employee association. this payment, the employee association, which had only $254 in
its account beforehand, spent $800 for an employee barbecue.
California State Auditor Report 2005-406 485
Finding #2: The Los Angeles County Prison failed to ensure it
was reimbursed $1,800 in costs it incurred to accommodate
film production companies, thereby violating state laws
prohibiting a gift of public funds.
From October 2001 to July 2003, 12 production crews filmed at
Los Angeles County Prison. Of these 12 productions, six shot
scenes for feature or short films, four filmed documentaries,
and two taped segments for television shows. Although it
received some payments from production companies to offset its
costs, Los Angeles County Prison failed to ensure the State was
reimbursed for $3,300 of those monitoring costs. As previously
discussed, this includes a $1,500 payment associated with a
television production that Los Angeles County Prison did not
return to the State. The remaining $1,800 relates to costs prison
staff incurred while providing security for two films shot in
April and May 2002. Because it could not demonstrate the State
had been reimbursed the $1,800 for these private endeavors,
Los Angeles County Prison violated state law, which prohibits
the State from making a gift of public funds or resources for a
private purpose.
Finding #3: Los Angeles County Prison violated federal
tax laws by improperly routing donations received from
production companies through an inmate religious account
before transferring the money to the employee association.
According to federal tax law, only qualified organizations may
use the charitable contributions it receives for those purposes
for which the organization is created and holds money received
“in trust” for those purposes. Despite these requirements, a
prison official approved a plan to direct $4,150 in donations
received from production companies through an inmate
religious account maintained by Los Angeles County Prison,
which was authorized to receive charitable contributions, before
transferring the money to the employee association, which was
not qualified to accept tax-deductible donations. Los Angeles
County Prison deposited donations of $900, $250, $2,500, and
$500 into the inmate religious account, and then transferred the
money to the employee association. According to the employee
who devised the plan, she asked a subordinate who managed
the inmate religious account to accept these donations. The
employee then had the money transferred to the employee
association, even though the association lacked the authority to
receive tax-deductible donations and intended to use the money
for nonqualifying purposes. The employee association used most
of the money, about $2,900, to purchase exercise equipment
486 California State Auditor Report 2005-406 California State Auditor Report 2005-406 487
for the prison employees’ gym. By improperly receiving and
handling these payments, Los Angeles County Prison violated
the laws governing charitable donations that require the money
be used for the purposes for which it was received.
Department Action: Partial corrective action taken.
As of December 2004, Corrections reported it completed its
investigation of four of six employees involved in this case.
Corrections rescinded the appointment of one employee, who
held a high-level managerial position, and served another
employee, a manager, with an adverse action in the form of
a pay reduction. Corrections has not yet determined what
action it will take against other employees who are still
under investigation.
486 California State Auditor Report 2005-406 California State Auditor Report 2005-406 487
488 California State Auditor Report 2005-406
PUBLIC UTILITIES COMMISSION
Investigations of Improper Activities by
State Employees, February 2003 Through
June 2003
ALLEGATION I2002-753 (REPORT 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 2005-406 489
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
490 California State Auditor Report 2005-406 California State Auditor Report 2005-406 491
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: 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. PUC
terminated the employee effective February 13, 2004.
490 California State Auditor Report 2005-406 California State Auditor Report 2005-406 491
492 California State Auditor Report 2005-406
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.
Our investigation showed that the employee submitted two
Investigative Highlights . . . purchase requests for products the department never received.
The employee arranged for the company to hold these funds
A Caltrans’ employee engaged
from these fictitious purchases and act as the State’s fiscal agent.
in the following improper
governmental activities:
þ Misappropriated Finding: An employee misappropriated state funds.
$622,776 by requesting
The employee misappropriated $622,776 by submitting two
purchases and confirming
the receipt of products that purchase requests. After submitting the purchase requests, the
Caltrans did not receive. employee directed the company to cancel delivery of the items
þ Directed a company to and hold the payments in a company maintained account. In
hold state funds outside addition to initiating the purchase, the employee also verified
the State Treasury and the receipt of the products even though the company never
act as a fiscal agent
sent these items. According to the employee, she directed the
without approval.
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 2005-406 493
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: 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 issued her a letter of
warning. Caltrans added that it contacted the appropriate
law enforcement agencies to investigate any criminal
implications or activity relating to the misappropriation;
however, the district attorney declined to prosecute the case.
Caltrans also reported that it made changes to its procedures
after completing a review of its internal controls related to
approval authorizations and documentation.
494 California State Auditor Report 2005-406
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 2005-406 495
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.
496 California State Auditor Report 2005-406 California State Auditor Report 2005-406 497
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.
496 California State Auditor Report 2005-406 California State Auditor Report 2005-406 497
498 California State Auditor Report 2005-406
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
(REPORT 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 2005-406 499
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
500 California State Auditor Report 2005-406 California State Auditor Report 2005-406 501
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.
500 California State Auditor Report 2005-406 California State Auditor Report 2005-406 501
502 California State Auditor Report 2005-406
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 2005-406 503
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.
504 California State Auditor Report 2005-406
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 2005-406 505
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.
506 California State Auditor Report 2005-406 California State Auditor Report 2005-406 507
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),
506 California State Auditor Report 2005-406 California State Auditor Report 2005-406 507
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.
508 California State Auditor Report 2005-406
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 July 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 2005-406 509
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.
510 California State Auditor Report 2005-406 California State Auditor Report 2005-406 511
• 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
Grant Anticipation Revenue Vehicle (GARVEE) bonds, State
Infrastructure Bank (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.
510 California State Auditor Report 2005-406 California State Auditor Report 2005-406 511
Department and Commission Action: Partial corrective
action taken.
The department states that its cash management team
continues to monitor cash flows and is working to improve
its cash forecasting capabilities. The department reports
that its cash management team also continues to refine
the 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 is continually
adding to the functionality of the internal project-tracking
database to track data at various levels of detail.
The department agrees with our recommendation that
it should continue to cautiously pursue other funding
alternatives. Toward that end, the department has
implemented SIB loans and GARVEE financing, which it is
using for several projects.
The commission also stated that it has not been granted the
authority to rescind unspent allocations.
Legislative Action: Partially implemented.
Two urgency measures were passed by the Legislature and
chaptered since July 1, 2004, that provide for repayment of
the loans made to the General Fund from the TCRF on or
before June 30, 2008.
512 California State Auditor Report 2005-406
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 2003 through December 2004. 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 numbers listed next to
each recommendation.
TABLE A.1
Recommendations Directed to the Legislature
Policy Area/Report Number and Title Page Recommendation
Aging and Long-Term Care
2003-111, Oversight Of Long-term Care Programs: 4 We recommended that to minimize duplication of
Opportunities Exist to Streamline State Oversight Activities effort in adult day health care oversight and potentially
lessen the resulting burden on health care centers, the
Department of Health Services should incorporate
the Department of Aging’s certification review into its
licensing review, combine the licensing and certification
regulations, and coordinate to the extent possible any
Medi-Cal field office oversight activities to occur during
the licensing and certification reviews. If the Department
of Health Services determines a statutory change is
necessary to implement our recommendation, it should
ask the Legislature to consider changing the statutes
governing the adult day health care program.
5 We also recommended that the Legislature should consider
allowing a single license that authorizes all the long-term
care services a PACE provider offers, regardless of the
facility that provides the services.
Agriculture and Water Resources
2003-137, California’s Independent Water Districts: 17 We recommended that the Legislature consider amending
Reserve Amounts Are Not Always Sufficiently Justified, and the California Water Code to require all water districts to
Some Expenses and Contract Decisions Are Questionable develop and implement comprehensive reserve policies
that include the key elements discussed in this report and
outlined in our recommendation to the water districts.
continued on next page
California State Auditor Report 2005-406 513
Policy Area/Report Number and Title Page Recommendation
2002-016, Water Replenishment District of Southern 26 To ensure that the district has sufficient funds to meet its
California: Although the District Has Addressed Many of statutory responsibilities and to show its commitment to
Our Previous Concerns, Problems Still Exist its reserve-funds policy, we recommended that the Water
Replenishment District of Southern California (district) set
its assessment rate at a level that will support the district’s
planned activities and allow it to replenish its reserve funds,
if necessary, and keep them at an appropriate level. We also
recommended that the district reevaluate the assumptions
that underlie the amount it targets to have available as
reserve funds and, if necessary, seek legislative approval to
revise the amount allowed as reserve funds.
28 In addition, to ensure that the district continues to collaborate
with ratepayers on projects, we recommended that the
district pursue its plan to revise its administrative code to
make the technical advisory committee part of its process
for reviewing and approving capital improvement projects.
If the district fails to implement this recommendation, the
Legislature should consider extending the committee at least
until the committee has had the opportunity to participate
in the process of periodically updating the district’s capital
improvement plan.
Appropriations
2004-140, Department of Transportation: Various 65 We recommended that the Legislature require Caltrans
Factors Increased Its Cost Estimates for Toll Bridge Retrofits, to submit quarterly reports within a given time period,
and Its Program Management Needs Improving and that it require Caltrans to certify these reports and
to include additional financial information in them. Also,
in reviewing the options to complete the East Span, we
recommended that the Legislature consider requesting
that Caltrans provide sufficient detail to understand
the financial implications of each option, including a
breakdown of costs for capital outlay, support, and
contingencies at the project and program level.
2003-107, California Department of Education: The 75 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.
77 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.
514 California State Auditor Report 2005-406 California State Auditor Report 2005-406 515
Policy Area/Report Number and Title Page Recommendation
78 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.
79 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.
81 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.
82 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.
85 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.”
2003-106, State Mandates: The High Level of 94 We recommended that the Legislature direct the Commission
Questionable Costs Claimed Highlights the Need for on State Mandates (commission) to amend the parameters
Structural Reforms of the Process 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 State Controller should
amend its claiming instructions accordingly and require local
entities to amend claims already filed.
2002-123.2, Federal Funds: The State of California Takes 100 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.
103 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.
Business and Professions and Governmental Organization
2004-108, California Commission on Teacher 127 We recommended that the Legislature consider giving the
Credentialing: It Could Better Manage Its California Commission on Teacher Credentialing a specific
Credentialing Responsibilities policy directive to obtain and use data on teacher retention
to measure the performance of the process and preparation
programs and provide this information in its annual reports.
continued on next page
514 California State Auditor Report 2005-406 California State Auditor Report 2005-406 515
Policy Area/Report Number and Title Page Recommendation
2004-106, Wireless Enhanced 911: The State Has 137 The Legislature should consider the effects on future
Successfully Begun Implementation, but Better Monitoring of 911 projects when diverting funds from the 911 program.
Expenditures and Wireless 911 Wait Times Is Needed
2003-122, California Gambling Control Commission: 161 If the governor concludes the Gambling Control
Although Its Interpretations of the Tribal-State Gaming Commission’s (Gambling Commission) interpretation and
Compacts Generally Appear Defensible, Some of Its policies do not meet the intended purposes of the compact,
Actions May Have Reduced the Funds Available for the governor should consider renegotiating the compact
Distribution to Tribes with the tribes to clarify the intent of the compact language,
to help resolve disputes over the interpretation of compact
language, and to enable the efficient and appropriate
administration of the trust fund in each of the following areas:
• The maximum number of licensed gaming devices
that all compact tribes in the aggregate may have.
• The offset of quarterly license fees by nonrefundable
one-time prepayments.
• The number of licensed gaming devices for which
each tribe should pay quarterly license fees.
• The date at which tribes should begin paying
quarterly license fees.
• Automatic placement of a tribe into a lower priority
for subsequent license draws.
167 The Gambling Commission should ensure that all staff
are informed of its conflict-of-interest policy. Additionally,
the Gambling Commission should seek clarification of
the law governing the outside financial activities that
commissioners may engage in.
2002-122, State Controller’s Office: Does Not Always 205 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.
2002-112, Statewide Procurement Practices: Proposed 222 We recommended that the Department of General
Reforms Should Help Safeguard State Resources, but the Services should seek a change in the current contracting
Potential for Misuse Remains and procurement laws if it wants to continue to exempt
purchases from competitive bidding requirements
because of special or unique circumstances.
2002-110, California State University: Its Common 241 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 incompatible
activities policy for university employees similar to that
addressed in Government Code, Section 19990.
Education
2004-108, California Commission on Teacher This audit is also included in the Business and Professions
Credentialing: It Could Better Manage Its and Governmental Organization policy area. See that
Credentialing Responsibilities policy area for the wording of our recommendation.
516 California State Auditor Report 2005-406 California State Auditor Report 2005-406 517
Policy Area/Report Number and Title Page Recommendation
2002-032, California’s Education Institutions: A Lack 250 We recommended that the Legislature should consider
of Guidance Results in Their Inaccurate or Inconsistent creating a task force to perform the following functions
Reporting of Campus Crime Statistics to provide additional guidance to California education
institutions for complying with the Clery Act:
• 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.
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.
2002-110, 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
Environmental Safety and Quality and Toxic Materials
2003-113, California Integrated Waste Management 272 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.
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.
Health and Human Services
2004-111, Sex Offender Placement: Departments That 280 To most appropriately provide services and supports to
Are Responsible for Placing Sex Offenders Face Challenges, its consumers, we recommended that the Department of
and Some Need to Better Monitor Developmental Services (Developmental Services) consider
Their Costs seeking legislation to enable it and the regional centers to
identify those consumers who are sex offenders by obtaining
criminal history information from the attorney general. If the
Legislature chooses not to allow access to criminal history
information, Developmental Services should seek to modify
its laws and regulations governing the individual program
plan process to include a question that asks potential
consumers if they must register as sex offenders.
284 To enable the State to measure the success of the
sexually violent predators component of the Conditional
Release Program, we recommended that the Legislature
consider directing the Department of Mental Health to
conduct an evaluation of the program.
continued on next page
516 California State Auditor Report 2005-406 California State Auditor Report 2005-406 517
Policy Area/Report Number and Title Page Recommendation
2003-124, Department of Health Services: Some of Its 290 We recommended that the Department of Health
Policies and Practices Result in Higher State Costs for the Services seek specific statutory authority from the
Medical Therapy Program Legislature to fully fund county personnel whose jobs
include coordinating the MTP with special education
agencies as required by AB 3632. Should the Legislature
decide to reduce the State’s current funding for these
activities, it should consider the implications of such an
action on the State’s responsibility under the federal
Individuals with Disabilities Education Act to maintain a
level of funding for special education and related services
at least equal to the level of funding the State provided in
the preceding fiscal year.
2003-111, Oversight Of Long-term Care Programs: This audit is also included in the Aging and Long-Term
Opportunities Exist to Streamline State Oversight Activities Care policy area. See that policy area for the wording
of our recommendation.
2003-112, Department of Health Services: It Needs to 330 To ensure that the Department of Health Services and the
Better Plan and Coordinate Its Medi-Cal Antifraud Activities 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.
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
2001-015, Statewide Fingerprint Imaging System: 376 We recommend that the Legislature should consider the
The State Must Weigh Factors Other Than Need and pros and cons of repealing the state law requiring fingerprint
Cost-Effectiveness When Determining Future Funding for imaging, including whether the Statewide Fingerprint
the System Imaging 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.
Information Technology
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
518 California State Auditor Report 2005-406 California State Auditor Report 2005-406 519
Policy Area/Report Number and Title Page Recommendation
Jobs, Economic Development, and the Economy
2002-018, Workers’ Compensation Fraud: Detection 391 If the Fraud Assessment Commission believes that altering
and Prevention Efforts Are Poorly Planned and Lack the funding formula from the statutorily required levels—
Accountability under which 40 percent of fraud assessment funds are
automatically awarded to both the fraud division and the
district attorneys—would increase accountability over
the use of antifraud program funds, we recommended
that the fraud commission encourage legislation that would
allow it more discretion in how these funds are distributed.
400 We recommended that the Department of Insurance
should seek the necessary legal and regulatory changes in
the fraud-reporting process. Barriers to adequate referrals
include the following:
• Lack of a uniform methodology and standards for
assessing and reporting suspected fraud.
• Regulations that poorly define when insurers should
report suspected fraud to the fraud division.
• Perceived exposure to civil actions when criminal
prosecutions of referrals are not successful.
404 To make certain that insurers do not withhold any portion
of the fraud assessment surcharge, we recommended that
the Department of Industrial Relations seek the authority and
establish a method to verify that insurers report and submit
the fraud assessment surcharges they collect from employers.
Report Number 2003-108.1, California’s Workers’ 415 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.
418 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 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 428 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
2002-018, Workers’ Compensation Fraud: Detection This audit is also included in the Jobs, Economic
and Prevention Efforts Are Poorly Planned and Lack Development, and the Economy policy area. See that
Accountability policy area for the wording of our recommendation.
continued on next page
518 California State Auditor Report 2005-406 California State Auditor Report 2005-406 519
Policy Area/Report Number and Title Page Recommendation
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
2003-137, California’s Independent Water Districts: This audit is also included in the Agriculture and Water
Reserve Amounts Are Not Always Sufficiently Justified, and Resources policy area. See that policy area for the
Some Expenses and Contract Decisions Are Questionable wording of our recommendation.
2002-016, Water Replenishment District Of Southern This audit is also included in the Agriculture and Water
California: Although the District Has Addressed Many of Resources policy area. See that policy area for the
Our Previous Concerns, Problems Still Exist wording of our recommendation.
2003-101, County Emergency Medical Services Funds: 450 To clarify the law governing deposits of Maddy revenues in
Despite Their Efforts to Properly Administer the Funds, Some counties’ Emergency Medical Services Funds (EMS Funds),
Counties Have Yet to Reach Full Compliance With State Laws we recommended that the Legislature consider taking one of
the following actions:
• Change the current statute to require counties to
use the same standards for the amount of Maddy
revenues counties can deposit in their EMS Funds,
regardless of when the funds were established.
• Specify how to calculate the allowable amount of
growth in Maddy revenues from year to year, including
which revenue sources to include and how to account
for incomplete data from the years since June 1, 1991.
451 To ensure that counties’ use of EMS Funds is consistent with
legislative intent, we recommended that the Legislature
clarify whether counties may use the discretionary portion of
their EMS Fund to pay for administrative costs.
452 To provide greater consistency in the annual EMS Fund report
that counties submit to the Legislature, we recommended
that the Legislature consider directing the Emergency Medical
Services Authority to revise the report format to specify the
basis—preferably the accrual basis—they must use to report
their fund balances. In addition, the revised format should
include a requirement that counties explain any differences
between the remaining balance of the prior year and the
beginning balance of the year being reported.
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.
Privacy and Public Safety
2004-111, Sex Offender Placement: Departments That This audit is also included in the Health and Human Services
Are Responsible for Placing Sex Offenders Face Challenges, policy area. See that policy area for the wording of
and Some Need to Better Monitor Their Costs our recommendation.
2004-106, Wireless Enhanced 911: The State Has This audit is also included in the Business and Professions
Successfully Begun Implementation, but Better Monitoring of and Governmental Organization policy area. See that
Expenditures and Wireless 911 Wait Times Is Needed policy area for the wording of our recommendation.
520 California State Auditor Report 2005-406 California State Auditor Report 2005-406 521
Policy Area/Report Number and Title Page Recommendation
2003-130, California Department of Corrections: 482 We recommended that if the Legislature decides that it
Its Plans to Build a New Condemned-Inmate Complex at wants a more complete analysis regarding the optimal
San Quentin Are Proceeding, but Its Analysis of Alternative location for housing male condemned inmates, it consider
Locations and Costs Was Incomplete requiring the Department of Corrections (department) to
assess the costs and benefits of relocating the condemned-
inmate complex to each of the current prison locations
possessing either adequate available land for such a
facility or an existing adequate facility, including in its
assessment the relative importance and costs associated
with each site’s remoteness.
483 We recommended that if the Legislature decides
that it wants a more complete analysis regarding the
optimal location for housing male condemned inmates,
it consider requiring the department to analyze the
estimated annual operating and maintenance costs of
a new condemned-inmate complex at other locations
with adequate available land or facilities, compared to
those it expects to incur at San Quentin.
484 We recommended that if the Legislature decides
that it wants a more complete analysis regarding
the optimal location for housing male condemned
inmates, it consider requiring the department, in order
to provide more accurate estimates of future numbers
of condemned inmates, to include all relevant factors
in future estimates, such as the number of inmates
who leave death row for various reasons, including
commuted sentences and death.
Revenue and Taxation
2002-126, California Department of Transportation: 511 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.
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.
Transportation
2004-140, Department of Transportation: Various This audit is also included in the Appropriations policy
Factors Increased Its Cost Estimates for Toll Bridge Retrofits, area. See that policy area for the wording of our
and Its Program Management Needs Improving recommendation.
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.
520 California State Auditor Report 2005-406 California State Auditor Report 2005-406 521
522 California State Auditor Report 2005-406
APPENDIX B
Summary of Monetary Benefits Identified In
Audit Reports Released From July 1, 2001,
Through December 31, 2004
We estimate that auditees could have realized more
than $586 million of monetary benefits during the
period July 1, 2001, through December 31, 2004, 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, 2004
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
July 1, 2004 through December 31, 2004
2003-125 California Department of Corrections: More Expensive Hospital Services and Greater *
(July 2004) Use of Hospital Facilities Have Driven the Rapid Rise in Contract Payments for Inpatient and
Outpatient Care
Cost savings—The potential for the Department of Corrections (Corrections) to achieve some
level of annual savings appears significant if it could negotiate cost-based reimbursement
terms, such as paying Medicare rates, in its contracts with hospitals. We estimated potential
savings of at least $20.7 million in Corrections’ fiscal year 2002–03 inmate hospital costs.
Specifically, had Corrections been able to negotiate contracts without its typical stop-loss
provisions that are based on a percent discount from the hospitals’ charges rather than
costs, it might have achieved potential savings of up to $9.3 million in inpatient hospital
payments in fiscal year 2002–03 for the six hospitals we reviewed that had this provision.
Additionally, had Corrections been able to pay hospitals the same rates as Medicare—which
bases its rates on an estimate of hospital resources used and their associated costs—, it might
have achieved potential savings of $4.6 million in emergency room and $6.8 million in
nonemergency room outpatient services at all hospitals in fiscal year 2002–03.
2003-124 Department of Health Services: Some of Its Policies and Practices Result in Higher State Costs $4,600,000
(August 2004) for the Medical Therapy Program
Cost savings— Represents the savings the department would have achieved in fiscal year
2002–03 had it paid only the amount specifically authorized by law for the Medical Therapy
Program. Of the total, $3.6 million relates to the full funding of county positions responsible
for coordinating with services provided by special education programs; $774,000 relates
to the department’s method for sharing Medi-Cal payments with counties; and $254,000
relates to the department’s failure to identify all Medi-Cal payments made to certain counties.
continued on next page
California State Auditor Report 2005-406 523
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
I2004-2 Department of Health Services: Investigations of Improper Activities by State Employees $9,260
(Allegation
Cost Savings—We found that managers and employees at the Department of Health
I2002-0853)
Services’ Medical Review Branch office in Southern California regularly used state vehicles for
(September their personal use. We estimate the Department of Health Services could save an average of
2004) $9,260 each year because its employees no longer use state vehicles for personal use.
I2004-2 California Military Department: Investigations of Improper Activities by State Employees $64,200
(Allegation
Cost Savings—We found that the California Military Department improperly granted
I2002-1069)
employees an increase in pay they were not entitled to receive. Because the California
(September Military Department has returned all the overpaid employees to their regular pay levels, it
2004) should be able to save approximately $64,200 each year.
2004-105 California Department of Corrections: Although Addressing Deficiencies in Its Employee $290,000
(October 2004) Disciplinary Practices, the Department Can Improve Its Efforts
Cost Savings—The Department of Corrections could save as much as $290,000 annually by
using staff other than peace officers to fill its employment relations officer positions.
Annualized carry forward from prior fiscal years: $113,033,000
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
2002-118 Department of Health Services 20,057,000
Totals for July 1, 2004 through December 31, 2004 $117,996,460
July 1, 2003, Through June 30, 2004
2002-121 California Environmental Protection Agency: Insufficient Data Exists on the Number of $1,000,000
(July 2003) Abandoned, Idled, or Underused Contaminated Properties, and Liability Concerns and Funding
Constraints Can Impede Their Cleanup and Redevelopment
Increased revenue—CalEPA received $1 million in revenues after it 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.
524 California State Auditor Report 2005-406 California State Auditor Report 2005-406 525
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
2003-117 California Department of Corrections: It Needs to Ensure That All Medical Service Contracts $95,800
(April 2004) It Enters Are in the State’s Best Interest and All Medical Claims It Pays Are Valid
Cost Savings/Avoidance—Recovery of overpayments to providers for medical service charges
in the amount of $77,200; and the establishment of procedures to avoid lost discounts and
prompt payment penalties totaling $18,600.
2003-138 Department of Insurance: It Needs to Make Improvements in Handling Annual Assessments $7,000,000
(June 2004) and Managing Market Conduct Examinations
Increased Revenue—We estimate a one-time increase of revenue totaling $7 million
from the Department of Insurance’s ability to make regulation changes that will result in
capturing more specific data from insurers about the number of vehicles they insure. Future
increases in revenue are undeterminable.
Annualized carry forward from prior fiscal years: $113,033,000
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
2002-118 Department of Health Services 20,057,000
Totals for July 1, 2003, Through June 30, 2004 $126,229,800
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.
continued on next page
524 California State Auditor Report 2005-406 California State Auditor Report 2005-406 525
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 Medical $911,000
(December 2002) 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 of $29,000,000
(April 2003) 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.
2002-118 Department of Health Services: Its Efforts to Further Reduce Prescription Drug Costs Have *
(April 2003) Been Hindered by Its Inability to Hire More Pharmacists and Its Lack of Aggressiveness in Pursuing
Available Cost-Saving Measures
Cost Savings— For two drugs we found that the net costs of the brand names were higher
than those of the generics because the Department of Health Services (Health Services)
failed either to renegotiate the contract or to secure critical contract terms from the
manufacturer—errors we estimated cost Medi-Cal roughly $57,000 in 2002. Additionally,
Health Services estimated that it could save $20 million annually by placing the responsibility
on the pharmacists to recover $1 copayments they collect from each Medi-Cal beneficiary
filling a prescription. We estimate the State could begin to receive these savings each year
beginning in fiscal year 2003–04.
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
Totals for July 1, 2002, Through June 30, 2003 $94,305,000
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 Expansion $7,500,000
(October 2001) 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.
526 California State Auditor Report 2005-406 California State Auditor Report 2005-406 527
Audit Number/ Monetary
Date Released Audit Title/Basis of Benefit Benefit
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 reasonable to expect CDC to incrementally realize overtime cost savings over a five-year
period starting in fiscal year 2005–06.
2001-120 School Bus Safety II: State Law Intended to Make School Bus Transportation Safer Is Costing $235,800,000
(March 2002) 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 Contracting *
(April 2002) 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 Appear $1,762,000
(June 2002) 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.
Totals for July 1, 2001, Through June 30, 2002 $247,697,000
Totals for July 1, 2001, Through December 31, 2004 $586,228,260
*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.
526 California State Auditor Report 2005-406 California State Auditor Report 2005-406 527
528 California State Auditor Report 2005-406
INDEX
State and Local Entities With Recommendations
From Audits Included in This Special Report
Entity Page Reference
Aging, Department of 3
California State University 229 249
Children and Families Commission, California 145
Commission on State Mandates 89
Commission on Teacher Credentialing, California 125
Corrections, Department of 299 305 469 481 485
Developmental Services, Department of 279 503
Education, Department of 73
Emergency Services, Office of 185 193
Environmental Protection Agency, California 43 275
Finance, Department of 99
Fish and Game, Department of 499
Franchise Tax Board 67 107
Fraud Assessment Commission 387
Gambling Control Commission, California 157
General Services, Department of 135 169 215 305
Health Services, Department of 3 99 287 289 319 349
Heath and Human Services Agency Data Center 213
Highway Patrol, California 135
Homeland Security, Office of 185
Industrial Relations, Department of 67 387 405 413 505
Insurance, Department of 379 387
Integrated Waste Management Board, California 265
Justice, Department of 175 319
Mental Health, Department of 153 279
Military Department, California 431
National Guard, California 185
Postsecondary Education Commission, California 249
Public Utilities Commission 255 259 489
Secretary of State 117
California State Auditor Report 2005-406 529
Entity Page Reference
Social Services, Department of 3 335 369
State and Consumer Services Agency 107
State Bar of California 425
State Controller’s Office 15 89 201
State Water Resources Control Board 275
Teale Data Center, Stephen P. 215
Toxic Substances Control, Department of 275
Transportation Commission, California 509
Transportation, Department of 59 493 509
Unemployment Insurance Appeals Board, California 433 495
University of California 171 249
Veterans Affairs, Department of 9
Veterans Board, California 9
Water Resources, Department of 49
Youth and Adult Correctional Agency 279 463
Local Entities Page Reference
Alameda County Water District 15
City College of San Francisco 249
City of Fresno 265
City of Richmond 435
City of Sacramento 265
County of Colusa 449
County of El Dorado 145
County of Fresno 265
County of Kern 145
County of Los Angeles 145 289 449
County of Marin 449
County of Sacramento 265
County of San Diego 145
County of San Mateo 449
County of Santa Clara 145
Crestline-Lake Arrowhead Water Agency 15
Fiscal Crisis Management Assistance Team 245
Leucadia Wastewater District 15
530 California State Auditor Report 2005-406 California State Auditor Report 2005-406 531
Local Entities Page Reference
Los Angeles County Metropolitan Transportation Authority 445 455
Metropolitan Water District of Southern California 35
Otay Water District 15
San Gabriel Valley Municipal Water District 15
University of Southern California 249
Walnut Valley Water District 15
Water Replenishment District of Southern California 25
Western Municipal Water District 15
Wheeler Ridge-Maricopa Water Storage District 15
530 California State Auditor Report 2005-406 California State Auditor Report 2005-406 531
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
532 California State Auditor Report 2005-406